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Filed Purusuant to Rule 424(b)(3)
Registration Nos. 333-66558,
333-66558-01, 333-66558-02,
333-66558-03, 333-66558-04 and
333-66558-05
[FRESENIUS MEDICAL CARE LOGO]
PROSPECTUS
FRESENIUS MEDICAL CARE CAPITAL TRUST IV
Offer to Exchange any and all of its outstanding 7 7/8% Trust Preferred
Securities (Liquidation Amount $1,000 per Trust Preferred Security), for 7 7/8%
Trust Preferred Securities (Liquidation Amount $1,000 per Trust Preferred
Security and Guaranteed on a Senior Subordinated Basis to the Extent Described
in this Prospectus by Fresenius Medical Care AG) Which Have Been Registered
under the U.S. Securities Act of 1933
FRESENIUS MEDICAL CARE CAPITAL TRUST V
Offer to Exchange any and all of its outstanding 7 3/8% Trust Preferred
Securities (Liquidation Amount E1,000 per Trust Preferred Security), for 7 3/8%
Trust Preferred Securities (Liquidation Amount E1,000 per Trust Preferred
Security and Guaranteed on a Senior Subordinated Basis to the Extent Described
in this Prospectus by Fresenius Medical Care AG) Which Have Been Registered
under the U.S. Securities Act of 1933
- The terms of the trust preferred securities to be issued in the exchange
offers are substantially identical to the outstanding trust preferred
securities, except for transfer restrictions and registration rights
relating to the outstanding trust preferred securities.
- Application will be made to list the trust preferred securities to be
issued in the exchange offers on the Luxembourg Stock Exchange.
THE EXCHANGE OFFER FOR THE 7 7/8% TRUST PREFERRED SECURITIES WILL EXPIRE AT 5:00
P.M.,
NEW YORK CITY TIME, ON OCTOBER 4, 2001, UNLESS EXTENDED.
THE EXCHANGE OFFER FOR THE 7 3/8% TRUST PREFERRED SECURITIES WILL EXPIRE AT 5:00
P.M.,
LONDON TIME, ON OCTOBER 4, 2001, UNLESS EXTENDED.
SEE "RISK FACTORS" ON PAGE 15 FOR INFORMATION THAT SHOULD BE CONSIDERED IN
CONNECTION WITH THIS OFFERING.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this Prospectus is August 29, 2001
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TABLE OF CONTENTS
<Table>
<Caption>
PAGE
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Regulatory Issues Related to the Exchange Offers............ ii
Forward-Looking Statements.................................. iii
Presentation of Financial and Other Information............. iii
Summary..................................................... 1
Risk Factors................................................ 15
The Trusts.................................................. 26
The Note Issuer............................................. 27
Accounting Treatment........................................ 27
Use of Proceeds............................................. 27
Capitalization.............................................. 28
The Exchange Offers......................................... 29
Selected Historical Financial Data of Fresenius Medical Care
AG........................................................ 41
Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Fresenius Medical Care AG.... 43
Selected Historical Financial Data of FMCH.................. 64
Management's Discussion and Analysis of Financial Condition
and Results of Operations -- FMCH......................... 66
Business.................................................... 76
Management of Fresenius Medical Care........................ 115
Security Ownership of Principal Shareholders................ 123
Description of the Trust Preferred Securities............... 128
Description of the Trust Guarantees......................... 147
Description of the Notes.................................... 151
Relationship Among the Trust Preferred Securities, the Notes
and the Trust Guarantees.................................. 182
Description of the Old Securities........................... 184
Plan of Distribution........................................ 184
Tax Considerations.......................................... 186
Service of Process and Enforcement of Civil Liabilities..... 192
Experts..................................................... 192
Legal Matters............................................... 192
Where You Can Find More Information......................... 193
Incorporation of Certain Documents by Reference............. 193
General Information......................................... 194
Index to Financial Statements............................... F-1
</Table>
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Until September 24, 25 days after the date of this prospectus, all dealers
that buy, sell or trade the trust preferred securities, whether or not
participating in this offering, may be required to deliver a prospectus.
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REGULATORY ISSUES RELATED TO THE EXCHANGE OFFERS
Germany. This prospectus may not be publicly distributed in the Federal
Republic of Germany. We acknowledge that the offer of the trust preferred
securities is subject to restrictions provided in the German Securities Selling
Prospectus Act (Wertpapier-Verkaufsprospektgesetz). No German selling prospectus
has been or will be prepared, and there is no public offering in Germany. In
particular, the trust preferred securities may not be offered in Germany other
than under circumstances where the German Securities Selling Prospectus Act or
all other applicable rules and regulations provide for an exemption from the
requirement to publish a selling prospectus in connection with the offering, the
issue, distribution and sale of securities in Germany.
United Kingdom. We have not authorized the trust preferred securities to
be offered to the public in the United Kingdom, within the meaning of the UK
Public Offers of Securities Regulations 1995, as amended, and neither this
prospectus, nor any other document issued in connection with the exchange
offers, may be passed on to any person in the United Kingdom, unless that person
is of a kind described in Article 11(3) of the Financial Services Act 1986
(Investment Advertisements) (Exemptions) Order 1996, as amended, or is a person
to whom the document may otherwise lawfully be issued or passed on. All
applicable provisions of the Financial Services Act 1986 must be complied with
in respect of anything done in relation to the trust preferred securities in,
from or otherwise involving the United Kingdom.
The Netherlands. In connection with the initial offering of trust
preferred securities, the initial purchasers have represented and agreed that
they have not, directly or indirectly, offered or sold and will not, directly or
indirectly, offer or sell in The Netherlands any trust preferred securities
other than to persons who trade or invest in securities in the conduct of a
profession or business (which include banks, stockbrokers, insurance companies,
pension funds, other institutional investors and finance companies and treasury
departments of large enterprises).
Italy. This document has not been submitted to the clearance procedure of
Commissione Nazionale per le Societa e la Borsa ("CONSOB") and, therefore, the
trust preferred securities may not be offered, sold or delivered, nor may copies
of this prospectus or of any other document relating to the trust preferred
securities be distributed in Italy, except to professional investors (operatori
qualificati), as defined in Article 31.2 of CONSOB Regulation No. 11522 of July
1, 1998.
France. The trust preferred securities may not be directly or indirectly
offered or sold to the public, and offers and sales of the trust preferred
securities will only be made in France to qualified investors or to a close
circle of investors, in accordance with Article 6-11 of Ordinance no. 67-833
dated September 28, 1967, as amended, and Decree no. 98-880 dated October 1,
1998. Accordingly, this document has not been submitted to the Commission des
Operations de Bourse. Neither this prospectus nor any other offering material
may be distributed to the public in France.
Les titres ne pourront pas etre offerts ou vendus directement ou
indirectement au public en France et ne pourront l'etre qu'a des investisseurs
qualifies ou a un cercle restreint d'investisseurs au sens de l'Article 6-11 de
l'Ordonnance no. 67-833 du 28 Septembre 1967, telle que modifiee et du Decret
no. 98-880 du 1 Octobre 1998. Par consequent, ce prospectus n'a pas ete soumis
au visa de la Commission des Operations de Bourse. Ni ce document ni aucun autre
document promotionnel ne pourront etre communiques au public en France.
Belgium. The trust preferred securities may not be offered or sold
directly or indirectly by way of a public offering in Belgium. Consequently, in
Belgium, the trust preferred securities will only be available for subscription
pursuant to the offering to registered Belgian credit institutions, European
Economic Area banks having a branch in Belgium, registered Belgian stockbroking
companies, investment funds registered with the Belgian Banking and Finance
Commission or Insurance Companies and pension funds registered with the Belgian
Insurance Control Authority, provided in each case that these institutions are
investing for their own account.
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FORWARD-LOOKING STATEMENTS
This prospectus includes forward-looking statements. All statements other
than statements of historical fact included in this prospectus, including the
statements under the headings "Summary," "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Fresenius Medical Care AG,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- FMCH," "Risk Factors," and "Business" and elsewhere in this
prospectus regarding our financial condition or plans to increase revenues and
statements regarding other future events or prospects, are forward-looking
statements. The words "may," "will," "expect," "anticipate," "believe,"
"future," "continue," "help," "estimate," "plan," "intend," "should," "shall" or
the negative or other variations thereof as well as other statements regarding
matters that are not historical fact, are or may constitute forward-looking
statements. We have based these forward-looking statements on management's
current view with respect to future events and financial performance. These
views reflect the best judgment of our executives but involve a number of risks
and uncertainties which could cause actual results to differ materially from
those predicted in our forward-looking statements and from past results,
performance or achievements. Although we believe that the estimates and the
projections reflected in the forward-looking statements are reasonable, such
estimates and projections may prove to be incorrect, and our actual results may
differ from those described in our forward-looking statements as a result of the
following risks, uncertainties and assumptions, among others:
- our business development, operating development and financial condition;
- our expectations of growth in the patient population regarding renal
dialysis products and services;
- our expansion and acquisition plans and our capital expenditures budget;
- the impact of our expansion on our revenue potential, cost basis and
margins;
- our ability to remain competitive in the markets for our products and
services;
- the effects of regulatory developments, legal proceedings and our
settlement of government investigations into our business;
- possible changes in government reimbursement policies and those of
private payors;
- our significant debt and the impact of exchange rate fluctuations; and
- our ability to meet our obligations and develop and maintain additional
sources of financing.
We do not intend to update or revise any forward-looking statements whether
as a result of new information, future events or otherwise. All subsequent
written or oral forward-looking statements attributable to us or persons acting
on our behalf, are expressly qualified in their entirety by the cautionary
statements contained throughout this prospectus. As a result of these risks,
uncertainties and assumptions, you should not place undue reliance on these
forward-looking statements.
PRESENTATION OF FINANCIAL AND OTHER INFORMATION
CURRENCY
For the purposes of this prospectus, (1) "U.S. dollars" or "$" means the
lawful currency of the United States of America, (2) "DM" or "Deutsche Mark"
means the currency of Germany prior to January 1, 1999 and (3) "E" or "euro"
means the single currency introduced at the start of the third stage of European
Economic and Monetary Union on January 1, 1999 pursuant to the Treaty of Rome
establishing the European Economic Community, as amended by the Treaty on the
European Union, signed at Maastricht on February 7, 1992 and the lawful currency
of Germany on and after January 1, 1999.
Effective January 1, 1999, Germany and ten other member states of the
European Union introduced the euro as their common currency and established
fixed conversion rates between their existing sovereign currencies and the euro.
These countries now form a new "euro zone." The euro is a fully convertible
currency.
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ROUNDING
Some numerical figures included in this prospectus have been subject to
rounding adjustments. Accordingly, numerical figures shown as totals in certain
tables may not be an arithmetic aggregation of the figures which precede them.
In accordance with US GAAP, unless otherwise indicated, our consolidated
financial statements and the consolidated financial statements of Fresenius
Medical Care Holdings, Inc. have been prepared and are presented in $ thousands.
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SUMMARY
You should read this summary together with the more detailed information
regarding Fresenius Medical Care AG, the trust preferred securities, and the
historical consolidated financial statements appearing elsewhere in this
prospectus. You will find the definitions of all capitalized terms used in this
offering circular in the sections entitled "Description of the Trust Preferred
Securities," "Description of the Trust Guarantees," and "Description of the
Notes" as well as elsewhere in this prospectus.
OUR STRATEGY
Our objective is to focus on generating revenue growth that exceeds market
growth of the dialysis industry, measured by growth in the patient population,
while maintaining our leading position in the market and increasing earnings at
a faster pace than revenue growth. We believe that we are well positioned to
meet our objectives by focusing on the following strategies:
- Continuing to provide high standards of patient care;
- Expanding our presence in attractive growth markets worldwide;
- Increasing our spectrum of dialysis services;
- Offering complete dialysis product lines with recurring disposable
products revenue streams; and
- Extending our position as an innovator in product and process technology.
OUR BUSINESS
We are the world's largest kidney dialysis company engaged in both
providing dialysis care and manufacturing dialysis products, based on publicly
reported revenues and patients treated. We provide dialysis treatment to over
102,000 patients at our approximately 1,367 clinics located in 20 countries. In
the United States, we also provide inpatient dialysis services, therapeutic
apheresis, hemoperfusion and other services under contract to hospitals. We also
develop and manufacture a complete range of dialysis equipment, systems and
disposable products, which we sell to customers in over 100 countries. We are
able to use the information we gain when treating patients in developing new and
improved products. We believe that our size, our activities in both dialysis
care and dialysis products and our concentration in specific geographic areas
allow us to operate more cost-effectively than many of our competitors. For the
year ended December 31, 2000, we had revenues of $4.2 billion and EBITDA of $914
million. We derived 73% of our revenues in 2000 from our North America
operations and 27% from our International operations.
The two major dialysis methods commonly used today to treat chronic kidney
failure, also called end-stage renal disease, or ESRD, are hemodialysis and
peritoneal dialysis:
- Hemodialysis removes toxins and excess fluids from the blood outside the
patient's body by passing the blood through a specially designed filter,
called a dialyzer, which functions as an artificial kidney. A
hemodialysis machine controls the blood's movement from the patient,
through the dialyzer and back to the patient. The majority of
hemodialysis patients obtain treatment at outpatient dialysis clinics,
such as ours, where hemodialysis treatments are provided with the
assistance of a nurse or technician under the general supervision of a
physician.
- Peritoneal dialysis removes toxins from the blood by using the
peritoneum, the membrane lining covering the internal organs located in
the abdominal area, to function as a natural filter to remove wastes. The
patient introduces sterile peritoneal dialysis solution into his or her
abdomen through a surgically attached tube and, after a prescribed time
period, drains the solution, excess fluids and wastes through the same
tube. Peritoneal dialysis patients typically administer their own
treatments in their own homes and workplaces.
COMPREHENSIVE RENAL THERAPY SOLUTIONS
Dialysis Care. We are the world's leading provider of dialysis services
for the treatment of ESRD, based on the number of patients treated worldwide. We
provide dialysis services on both an outpatient
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basis at our clinics and under contract at hospitals. We treat approximately 26%
of the dialysis patients in the United States.
We have developed proprietary databases containing clinical information and
outcome analyses for approximately 73,400 ESRD patients that we have treated.
This information helps us improve the dialysis therapy and treatment outcomes at
our clinics, resulting in reduced mortality rates for our patients. We believe
that physicians, hospitals and managed care plans refer their ESRD patients to
our clinics for treatment due to:
- our reputation for quality patient care and treatment;
- our extensive network of dialysis clinics; and
- our technologically advanced products for dialysis treatment.
For the six-month period ended June 30, 2001 dialysis services accounted
for 73% of our total revenue.
Dialysis Products. We are the world's largest manufacturer and distributor
of equipment and related products for hemodialysis and the second largest
manufacturer of peritoneal dialysis products. Our comprehensive product line
includes hemodialysis machines, peritoneal dialysis solutions in plastic bags
with the necessary tubing and connectors, and disposable products. We develop
innovative and technologically advanced dialysis products, including the
Fresenius Medical Care Polysulfone(R) dialyzers, which provide more thorough,
rapid dialysis than dialyzers using other fibers, and the stay-safe(R)
peritoneal dialysis system, which is the first mass-produced peritoneal dialysis
system manufactured primarily with environmentally-friendly plastics. We
continually seek to develop or introduce innovative dialysis products.
For the six-month period ended June 30, 2001, dialysis products accounted
for 27% of our revenue.
THE RENAL CARE INDUSTRY
ESRD is the stage of advanced chronic kidney disease that is characterized
by the irreversible loss of kidney function and requires routine kidney dialysis
treatment or kidney transplantation to sustain life. The scarcity of compatible
kidneys limits transplants. Therefore, most patients suffering from ESRD must
rely on dialysis, which is the removal of toxins and excess fluids from the body
by artificial means.
According to information published by the Centers for Medicare and Medicaid
Services (formerly the Health Care Financing Administration) of the United
States Department of Health and Human Services, the number of patients receiving
chronic dialysis services in the United States grew to approximately 259,500 in
1999. We believe that over the next five to ten years, the number of patients
suffering from ESRD in the United States will continue to grow at a compound
annual rate of approximately 8.4%. The European Dialysis and Transplantation
Association estimated that the total worldwide dialysis patients exceed 920,000
in 1998, growing at annual rates of 7% for hemodialysis patients and 8% for
peritoneal dialysis patients.
Hemodialysis generally is more effective at eliminating toxins than
peritoneal dialysis, but requires capital investments in equipment and higher
ongoing costs. Consequently, hemodialysis is more prevalent in wealthier
countries while peritoneal dialysis is used mostly in developing nations. We
believe that as disposable income in wealthier areas increases, hemodialysis is
likely to replace peritoneal dialysis as the primary method of treatment.
RECENT DEVELOPMENTS
On January 5, 2001, we acquired Everest Healthcare Services Corporation of
Oak Park, Illinois, "Everest," for $354 million, which includes assumed debt and
the issuance of 2.25 million preference shares. 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 in
the United States.
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In June, 2001, we completed offerings pursuant to Rule 144A and Regulation
S under the Securities Act of $225 million aggregate liquidation amount of
dollar-denominated 7 7/8% trust preferred securities due 2011 and E300 million
aggregate liquidation amount of euro-denominated 7 3/8 trust preferred
securities due 2011. The net proceeds of those offerings were approximately $468
million. In connection with those offerings we amended our senior credit
facility, effective June 6, 2001. The amendment eliminated our obligation to
apply the proceeds of our issuance of subordinated debt (which includes the
offerings of trust preferred securities) to prepayments of the term portion of
the facility and increased the amount of subordinated debt we may incur
(exclusive of the 9% notes) from $950 million to $1.2 billion.
On July 2, 2001, our affiliate, Fresenius Medical Care Cardiovascular
Holdings, Inc., purchased Edwards Lifesciences Cardiovascular Resources Inc., a
leading provider of perfusion, autotransfusion and other blood-related
procedures. The purchase price was $45 million, subject to customary closing
adjustments. We own 45% of Fresenius Medical Care Cardiovascular Holdings, Inc.
Institutional investors own the remaining 55%. FMCH will provide management and
staffing for the business.
ORGANIZATION
The following table illustrates our ownership structure and organization,
including our ownership of FMC Trust Finance S.a.r.l. Luxembourg - III, the
issuer of the senior subordinated notes and the common securities of Fresenius
Medical Care Capital Trust IV and Fresenius Medical Care Capital Trust V, the
issuers of the trust preferred securities.
[MEDICAL FLOW CHART]
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THE EXCHANGE OFFERS
The USD Exchange Offer........ Fresenius Medical Care Capital Trust IV, a
statutory business trust organized under the
laws of Delaware, "Trust IV," is offering to
exchange, the "USD exchange offer," up to
$225,000,000 aggregate liquidation amount of
its 7 7/8% trust preferred securities, the "USD
trust preferred securities," which have been
registered under the U.S. Securities Act of
1933, as amended, the "U.S. Securities Act,"
for the same liquidation amount of its
outstanding 7 7/8% trust preferred securities,
the "old USD trust preferred securities." The
principal asset of Trust IV consists of
$225,225,000 aggregate principal amount of
7 7/8% senior subordinated notes of FMC Trust
Finance S.a.r.l. Luxembourg - III, the "note
issuer." In connection with the USD exchange
offer:
- Fresenius Medical Care is offering to
exchange its guarantee with respect to
the USD trust preferred securities, the
"USD trust guarantee," for a like
guarantee in respect of the old USD
trust preferred securities, the "old USD
trust guarantee;"
- The note issuer is offering to exchange
a new issue of U.S. dollar-denominated
7 7/8% senior subordinated notes due
2011, the "USD notes," for the same
aggregate principal amount of its U.S.
dollar-denominated 7 7/8% senior
subordinated notes due 2011, the "old
USD notes;" and
- Fresenius Medical Care and its
subsidiaries, FMCH and FMC Deutschland,
are offering to exchange their joint and
several guaranties of the USD notes, the
"USD note guaranties," for like
guaranties in respect of the old USD
notes, the "old USD note guaranties."
The USD exchange offer consists of this
prospectus, as it may be amended or
supplemented from time to time, and the related
letter of transmittal.
The Euro Exchange Offer....... Fresenius Medical Care Capital Trust V, a
statutory business trust organized under the
laws of Delaware, "Trust V," is offering to
exchange, the "Euro exchange offer," up to
E300,000,000 aggregate liquidation amount of
its 7 3/8% trust preferred securities, the
"Euro trust preferred securities," which have
been registered under the U.S. Securities Act,
for the same liquidation amount of its
outstanding 7 3/8% trust preferred securities,
the "old Euro trust preferred securities." The
principal asset of Trust V consists of
E300,300,000 aggregate principal amount of
7 3/8% senior subordinated notes of the note
issuer. In connection with the Euro exchange
offer:
- Fresenius Medical Care is offering to
exchange its guarantee with respect to
the Euro trust preferred securities, the
"Euro trust guarantee," for a like
guarantee in respect of the old Euro
trust preferred securities, the "old
Euro trust guarantee;"
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- The note issuer is offering to exchange
a new issue of Euro-denominated 7 3/8%
senior subordinated notes due 2011, the
"Euro notes," for the same aggregate
principal amount of its Euro-denominated
7 3/8% senior subordinated notes due
2011, the "old Euro notes;" and
- Fresenius Medical Care, FMCH and FMC
Deutschland, are offering to exchange
their joint and several guaranties of
the Euro notes, the "Euro note
guaranties," for like guaranties in
respect of the old Euro notes, the "old
Euro note guaranties."
The Euro exchange offer consists of this
prospectus, as it may be amended or
supplemented from time to time, and the related
letter of transmittal.
Expiration Dates.............. The USD exchange offer will expire at 5:00 pm,
Eastern Daylight time, on October 4, 2001 and
the Euro exchange offer will expire at 5:00 pm
London time on October 4, 2001. We may extend
the expiration date of either or both exchange
offers and, if we extend the expiration date of
an exchange offer, its expiration date will be
the latest date to which we extend it.
Conditions to the Exchange
Offers........................ The exchange offers are subject to specified
conditions which are described below under the
heading "The Exchange Offers -- Conditions to
the Exchange Offers." There is no minimum
liquidation amount of old USD or old Euro trust
preferred securities that must be tendered in
either exchange offer, and neither exchange
offer is conditioned upon the consummation of
the other exchange offer.
Discretion.................... We may, at any time or from time to time, in
our sole discretion but subject to applicable
law:
- delay our acceptance of old USD or old Euro
trust preferred securities for exchange;
- terminate either or both exchange offers if
specified conditions are not satisfied; and
- extend the expiration date of either or both
exchange offers and retain all old USD or old
Euro trust preferred securities that were
tendered, subject to your right to withdraw
securities that you tendered
Withdrawal Rights............. You may withdraw old USD or old Euro trust
preferred securities that you tendered at any
time on or prior to the expiration date of the
applicable exchange offer. To do so, you must
deliver a withdrawal notice to the appropriate
exchange agent and follow the procedures
described under "The Exchange
Offers -- Withdrawal Rights."
Procedures for Tendering Old
Trust Preferred Securities.... To tender old USD or old Euro trust preferred
securities, you must sign and complete the
appropriate letter of transmittal in accordance
with its instructions and forward the letter of
transmittal by mail, facsimile or hand
delivery, together with any other required
documents, to the exchange agent for the USD
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Exchange Offer or to Euroclear or Clearstream,
in the case of the Euro Exchange Offer. In
addition, you must either include the old USD
or old Euro trust preferred securities you are
tendering together with the letter of
transmittal or, with respect to tenders of old
USD trust preferred securities only, comply
with the guaranteed delivery procedures.
Certain broker, dealers, commercial banks,
trust companies and other nominees who are
making book-entry delivery to an exchange agent
may also tender old USD trust preferred
securities by delivering an agent's message
prior to the expiration date of the applicable
exchange offer. If you hold your old USD or old
Euro trust preferred securities through a
broker, dealer, commercial bank, trust company
or other nominee, you should contact that
person promptly if you wish to tender your
securities in an exchange offer. See "The
Exchange Offers -- Procedures for Tendering Old
Trust Preferred Securities."
Resales of Trust Preferred
Securities.................... We and the trusts are making the exchange
offers in reliance on the position of the staff
of the U.S. Securities and Exchange Commission
set forth in interpretive letters issued to
unrelated parties in other transactions. Based
on these interpretive letters, we believe that
you may offer for resale, resell and otherwise
transfer the USD trust preferred securities or
the Euro trust preferred securities that will
be issued in the exchange offers without
complying with the registration and prospectus
delivery requirements of the U.S. Securities
Act, provided that:
- you are acquiring USD trust preferred
securities or Euro trust preferred
securities in an exchange offer in the
ordinary course of your business;
- you are not participating, you do not
intend to participate, and you have no
arrangement or understanding with any
person to participate, in the
distribution of the USD or the Euro
trust preferred securities that you
receive in an exchange offer;
- you are not a broker or dealer who
purchased the outstanding trust
preferred securities directly from a
trust for resale pursuant to Rule 144A
or any other available exemption under
the U.S. Securities Act; and
- you are not an affiliate of ours.
If you are a broker-dealer that holds old USD
or old Euro trust preferred securities that you
acquired for your own account as a result of
market-making or other trading activities and
you exchange those securities for USD or Euro
trust preferred securities in an exchange
offer, you must deliver a prospectus meeting
the requirements of the U.S. Securities Act in
connection with your resales of the USD or Euro
trust preferred securities that you acquire in
an exchange offer. Based on the interpretive
letters described in the preceding paragraph,
we believe that unless you are an affiliate of
Fresenius Medical Care or a trust, you may
fulfill your prospectus delivery obligation
with this prospectus, as we may amend it from
time to time.
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This does not apply, however, if your old USD
or old Euro trust preferred securities
represent an unsold allotment from the original
offer and sale of the old USD or the old Euro
trust preferred securities.
Neither we nor either trust has sought its own
interpretive letter from the staff, and we
cannot assure you that that staff would make a
similar determination with respect to either or
both exchange offers as it has in prior
interpretive letters to third parties. If our
belief is inaccurate and you transfer any trust
preferred securities without delivering a
prospectus that meets the requirements of the
U.S. Securities Act, or without an exemption
from those requirements, you may incur
liability under that act. While we do not
believe that any such liability should exist,
we do not assume or indemnify you against any
such liability.
We are not making the exchange offers to, and
we will not accept tenders for exchange from,
holders of outstanding trust preferred
securities in any jurisdiction in which the
exchange offers or acceptance of the exchange
offers would not be in compliance with the
securities or blue sky laws of the jurisdiction
in question.
The Exchange Agents........... The exchange agent with respect to the USD
exchange offer is State Street Bank and Trust
Company. The exchange agent with respect to the
Euro exchange offer is Deutsche Bank AG London.
The addresses, telephone numbers and facsimile
numbers of the exchange agents are listed under
"The Exchange Offers -- Exchange Agents."
Use of Proceeds............... Neither we nor either trust will receive any
cash proceeds from the issuance of the USD
trust preferred securities and the Euro trust
preferred securities in the exchange offers.
For information regarding our use of the
proceeds of the original offerings of the old
USD trust preferred securities and the old Euro
trust preferred securities, see "Use of
Proceeds."
Certain Tax Consequences...... Holders of old USD trust preferred securities
and old Euro trust preferred securities should
review the information set forth under "Tax
Considerations" prior to tendering their
securities in the exchange offers.
Additional Information........ In this prospectus, (i) "exchange offers"
refers to the USD exchange offer and the Euro
exchange offer; (ii) "trust preferred
securities" refers to the USD trust preferred
securities and the Euro trust preferred
securities and "old trust preferred securities"
refers to the old USD trust preferred
securities and the old Euro trust preferred
securities; (iii) "trust guarantees" refers to
the USD trust guarantee and the Euro trust
guarantee and "old trust guarantees" refers to
the old USD trust guarantee and the old Euro
trust guarantee; (iv) "notes" refers to the USD
notes and the Euro notes and "old notes" refers
to the old USD notes and the old Euro notes;
and (v) "note guaranties" refers to the USD
note guaranties and the Euro note guaranties
and "old note
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guaranties" refers to the old USD note
guaranties and the old Euro note guaranties.
THE TRUST PREFERRED SECURITIES
The Trusts.................... Trust IV and Trust V are statutory business
trusts under the laws of the State of Delaware.
Substantially all the assets of Trust IV will
consist of the USD notes to be issued by the
note issuer. Substantially all the assets of
Trust V will consist of the Euro notes to be
issued by the note issuer.
Securities Offered............ $225 million in aggregate liquidation amount of
7 7/8% USD trust preferred securities and E300
million in aggregate liquidation amount of
7 3/8% Euro trust preferred securities.
Distributions................. Distributions on the trust preferred securities
will be cumulative, will accrue from the date
of original issuance (June 6, 2001 for the USD
trust preferred securities and June 15, 2001
for the Euro trust preferred securities) and
will be payable at the annual rate of 7 7/8% of
the stated liquidation amount of $1,000 per USD
trust preferred security or the annual rate of
7 3/8% of the stated liquidation amount of
E1,000 per Euro trust preferred security.
Distributions will be payable quarterly in
arrears on each March 15, June 15, September 15
and December 15, commencing September 15, 2001.
Liquidation Preference........ In the event of any liquidation of a trust, you
will be entitled to receive an amount equal to
the aggregate of the stated liquidation amount
of $1,000 per USD trust preferred security or
E1,000 per Euro trust preferred security, as
the case may be, plus any accrued and unpaid
distributions to the date of payment, unless
notes are distributed to you. The holders of
the common securities will be entitled to
receive distributions upon any such liquidation
pro rata with you, except that if an event of
default has occurred and is continuing under
the applicable trust declaration, the trust
preferred securities will have a priority over
the common securities. See "Description of the
Trust Preferred Securities -- Liquidation
Distribution Upon Dissolution."
The Note Issuer............... FMC Trust Finance S.a.r.l. Luxembourg - III, a
private limited company organized under the
laws of Luxembourg, wholly owned by Fresenius
Medical Care AG.
The Notes..................... $225,225,000 aggregate principal amount of
7 7/8% senior subordinated USD notes due 2011
and E300,300,000 aggregate principal amount of
7 3/8% senior subordinated Euro notes due 2011.
The notes will mature on June 15, 2011. The USD
notes will bear interest at the annual rate of
7 7/8% and the Euro notes will bear interest at
the annual rate of 7 3/8%, in each case payable
quarterly in arrears on each March 14, June 14,
September 14 and December 14, commencing
September 14, 2001. The notes will be
subordinate in right of payment to all senior
indebtedness of the note issuer, Fresenius
Medical Care AG and the other note guarantors.
As of March 31, 2001, on a pro forma basis,
after giving effect to the consummation of the
offerings of old
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trust preferred securities and the application
of the net proceeds from these offerings, there
would have been approximately $0.8 billion of
total consolidated senior indebtedness
(excluding the USD notes and the Euro notes and
excluding the 9% notes due 2006, the 7 3/8%
notes due 2008 and the 7 7/8% notes due 2008
that rank equally with the notes on a
consolidated basis and a $209 million
subordinated intercompany note). This
indebtedness would be effectively senior to the
notes and we will have or be permitted to incur
$1.4 billion of total consolidated senior
subordinated indebtedness consisting of:
- the notes; and
- the following senior subordinated notes
issued in connection with prior trust
preferred securities transactions and
ranking equally with the notes:
- $450 million of 7 7/8% senior
subordinated notes due 2008;
- DM300 million of 7 3/8% senior
subordinated notes due 2008; and
- $360 million of 9% senior
subordinated notes due 2006.
The USD notes rank equally with the Euro notes.
The 7 7/8% notes due 2008, the 7 3/8% notes due
2008 and the 9% notes due 2006 rank equally on
a senior subordinated basis with the notes on a
consolidated basis. The notes will have
provisions with respect to interest and other
terms substantially similar or analogous to
those of the trust preferred securities. See
"Description of the Notes."
Mandatory Redemption.......... The trust preferred securities will be subject
to mandatory redemption upon the repayment of
the notes at their stated maturity June 15,
2011, upon acceleration, earlier redemption or
otherwise. See "Description of the Trust
Preferred Securities -- Mandatory Redemption."
Change of Control
Redemption.................... Upon the occurrence of a change of control, you
have the right to require the applicable trust
to redeem all or any part of your trust
preferred securities at a redemption price in
cash equal to 101% of their liquidation amount
plus any accrued and unpaid distributions. Upon
the occurrence of such an event, the trust will
exercise the right to require the note issuer
to redeem the USD or Euro notes in an amount
equal to the trust preferred securities and the
common securities to be redeemed by the holders
of such securities. See "Description of the
Trust Preferred Securities -- Change of Control
Redemption" and "Description of the
Notes -- Change of Control."
Trust Guarantee............... Fresenius Medical Care AG will irrevocably and
unconditionally guarantee, on a senior
subordinated basis and to the extent set forth
in this prospectus, to the extent that each
trust has funds legally available at such time,
the payment in full of:
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- any accumulated and unpaid distributions
required to be paid on the trust
preferred securities;
- the redemption price with respect to the
trust preferred securities called for
redemption; and
- generally, the liquidation amount of the
trust preferred securities to the extent
of the assets of each trust legally
available for distribution to holders of
trust preferred securities.
The trust guarantees will be unsecured and will
be subordinate and junior in right of payment
to all senior indebtedness of the trusts and
Fresenius Medical Care AG and will rank equally
with all other senior subordinated indebtedness
of Fresenius Medical Care AG. See "Description
of the Trust Guarantee -- General."
Note Guaranties............... Fresenius Medical Care AG will unconditionally
guarantee the obligations of the note issuer
under the notes on a senior subordinated basis.
See "Description of the Notes -- Note
Guaranties." Fresenius Medical Care Holdings,
Inc. and Fresenius Medical Care Deutschland
GmbH, both of which are subsidiaries of
Fresenius Medical Care AG, will each
unconditionally guarantee, jointly and
severally, on a senior subordinated basis, the
obligations of the note issuer under the notes.
The guarantees of Fresenius Medical Care AG and
the two subsidiary guarantors will be
subordinate in right of payment to all senior
indebtedness of the note issuer and Fresenius
Medical Care AG and the two subsidiary
guarantors, respectively. Each subsidiary
guaranty will not exceed the maximum amount
that can be guaranteed by the applicable
subsidiary guarantor without rendering the
subsidiary guaranty, as it relates to such
subsidiary guarantor, voidable under applicable
laws affecting the rights of creditors
generally or under applicable law of Germany.
See "Description of the Notes -- Note
Guaranties." Fresenius Medical Care AG and the
subsidiary guarantors have also guaranteed on a
senior subordinated basis $450 million
aggregate principal amount of 7 7/8% notes due
2008, DM300 million aggregate principal amount
of 7 3/8% notes due 2008 and $360 million
aggregate principal amount of 9% notes due
2006, each issued by FMC Trust Finance S.a.r.l.
Luxembourg, a wholly owned subsidiary of
Fresenius Medical Care AG. See "Description of
the Notes -- Ranking and Subordination" in this
prospectus. You can find financial information
regarding the subsidiary guarantors in Note 23
of the notes to consolidated financial
statements of Fresenius Medical Care AG and
Note 10 of the notes to condensed consolidated
financial statements of Fresenius Medical Care
AG.
Voting Rights................. Except in the limited circumstances described
in this prospectus, you will have no voting
rights. See "Description of the Trust Preferred
Securities -- Voting Rights."
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Tax Event or Investment
Company Event Redemption or
Distribution................ Upon the occurrence of a "tax event" or an
"investment company event" affecting a trust,
as those terms are defined under "Description
of the Trust Preferred Securities -- Tax Event
or Investment Company Event Redemption or
Distribution," except in certain limited
circumstances, Fresenius Medical Care AG will
cause the trustees of that trust to liquidate
the trust and distribute USD notes or Euro
notes, as the case may be, to you. In certain
circumstances, the note issuer will have the
right to redeem the USD notes or the Euro notes
in whole (but not in part) at 100% of the
principal amount plus accrued and unpaid
interest, instead of distributing the notes. In
that case, the applicable trust will redeem all
the common and trust preferred securities at
the liquidation amount per trust preferred
security plus accrued and unpaid distributions.
In the case of a tax event, Fresenius Medical
Care AG may also elect to cause the trust
preferred securities to remain outstanding and
cause the note issuer to pay additional
interest on the USD notes or the Euro notes.
See "Description of the Trust Preferred
Securities -- Tax Event or Investment Company
Event Redemption or Distribution."
Form of the Trust Preferred
Securities.................... The trust preferred securities will be
available in book-entry form only. We expect
the trust preferred securities sold in this
offering will be represented by one or more
global certificates in registered form. The
global certificate or certificates representing
the USD trust preferred securities will be
deposited with, or on behalf of, Depository
Trust Company, "DTC", and registered in its
name or the name of its nominee. The global
certificate representing the Euro trust
preferred securities will be deposited with
Deutsche Bank AG London as common depositary
for Morgan Guaranty Trust Company of New York,
Brussels office, operator of the Euroclear
System and Clearstream Banking, societe
anonyme, and registered in the nominee name of
the common depositary.
Beneficial interests in the global certificates
representing the USD trust preferred securities
will be shown on records maintained by DTC and
its participants, and beneficial interests in
the global certificates representing the Euro
trust preferred securities will be shown on
records maintained by Euroclear and
Clearstream, Luxembourg and their participants.
Transfers of interests in the global
certificates will be effected only through the
records of DTC and its participants or
Euroclear and Clearstream, Luxembourg and their
participants, as the case may be. After the
initial issuance of the global certificate,
trust preferred securities in certificated form
will be issued in exchange for the global
certificates only in the limited circumstances
set forth in the trust declaration governing
the trust preferred securities. See
"Description of the Trust Preferred
Securities -- Book-Entry, Delivery and Form."
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Use of Proceeds............... Neither we nor the trusts will receive any cash
proceeds from the issuance of the trust
preferred securities in the exchange offers. In
connection with the exchange offers, the note
issuer will issue USD notes to Trust IV and
Euro notes to Trust V having, in each case, an
aggregate principal amount equal to the
aggregate liquidation amount of USD trust
preferred securities or Euro trust preferred
securities issued in the exchange offer, as the
case may be. Each trust will retire and cancel
the old trust preferred securities surrendered
in exchange for the trust preferred securities.
See "Use of Proceeds."
Listing....................... We intend to list the trust preferred
securities on the Luxembourg Stock Exchange.
RISK FACTORS
Investing in the trust preferred securities involves substantial risks. See
the "Risk Factors" section of this prospectus for a description of risks you
should carefully consider before investing in the trust preferred securities.
ADDITIONAL INFORMATION
Fresenius Medical Care AG is a stock corporation (Aktiengesellschaft)
organized under the laws of Germany. It was incorporated on August 5, 1996.
Fresenius Medical Care AG is registered with the commercial register of the
local court (Amtsgericht) of Hof an der Saale, Germany under HRB 2460. Our
registered office (Sitz) is Hof an der Saale, Germany. Our business address is
Else-Kroner-Strasse 1, 61352 Bad Homburg, Germany, telephone +49(0)6172-609-0.
In this offering circular, (1) Fresenius Medical Care refers to Fresenius
Medical Care AG only and not to any of its subsidiaries, (2) "we," "us" and
"our" refer to Fresenius Medical Care AG and its subsidiaries on a consolidated
basis, (3) "FMCH" refers to Fresenius Medical Care Holdings, Inc., a New York
corporation and its subsidiaries, (4) "FMC Deutschland" refers to Fresenius
Medical Care Deutschland GmbH, a German private limited company, (5) "FMC
Finance, Luxembourg" or "the note issuer" refers to FMC Trust Finance S.a.r.l.
Luxembourg - III, a private limited company (Societe a responsabilite limitee)
organized under the laws of Luxembourg and (6) "NMC" or "National Medical Care"
refers to National Medical Care, Inc., a Delaware corporation and its
subsidiaries.
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SUMMARY SELECTED CONSOLIDATED FINANCIAL INFORMATION OF FRESENIUS MEDICAL CARE
The following table summarizes the consolidated financial information for
our business as of and for each of the years 1998 through 2000 and as of and for
the three-month periods ended March 31, 2000 and 2001. For each of the years
ended, we derived the selected financial information from our consolidated
financial statements. For each of the years ended, we prepared our financial
statements in accordance with US GAAP and KPMG Deutsche Treuhand-Gesellschaft
Aktiengesellschaft Wirtschaftsprufungsgesellschaft, independent accountants,
audited these financial statements. We derived the selected consolidated
financial data as of and for the six-month periods ended June 30, 2001 and 2000
from our unaudited interim consolidated financial statements. We prepared our
unaudited consolidated financial statements on a basis substantially consistent
with our audited consolidated financial statements. You should read this
information together with our consolidated financial statements and the notes to
those statements appearing elsewhere in this prospectus and the information
under "Selected Historical Financial Data of Fresenius Medical Care AG" and
"Management's Discussion and Analysis and Results of Operations -- Fresenius
Medical Care AG."
<Table>
<Caption>
SIX MONTHS
ENDED JUNE 30, YEAR ENDED DECEMBER 31,
--------------- --------------------------
2001 2000 2000 1999(A) 1998(B)
------ ------ ------ ------- -------
(UNAUDITED) (AUDITED)
(IN MILLIONS, EXCEPT RATIOS)
STATEMENT OF OPERATIONS DATA:
Net revenues........................................... $2,361 $2,038 $4,201 $3,840 $3,506
Cost of revenues....................................... 1,561 1,321 2,734 2,463 2,243
------ ------ ------ ------ ------
Gross profit........................................... 800 717 1,467 1,377 1,263
Selling, general and administrative.................... 461 401 814 785 743
Research and development............................... 16 16 32 32 31
Special charge for Settlement(A)....................... -- -- -- 601 --
------ ------ ------ ------ ------
Operating income (loss)................................ 323 300 621 (41) 489
Interest expense, net.................................. 110 112 216 218 220
------ ------ ------ ------ ------
Earnings (loss) before income taxes.................... 213 188 405 (259) 269
Income (loss) from continuing operations before
cumulative effect of change.......................... 116 95 212 (249) 132
Net income (loss)...................................... $ 116 $ 95 $ 212 $ (249) $ 19
====== ====== ====== ====== ======
OTHER DATA:
EBITDA(a).............................................. 484 444 914 844 768
Net cash provided by operating activities.............. 146 171 391 351 268
Net cash used in investing activities.................. 272 300 482 254 280
Net cash provided by (used in) financing activities.... 149 141 156 (79) 13
Depreciation and amortization.......................... 161 143 293 284 279
Capital expenditures................................... 133 91 228 160 159
Rental expenses (operating leases only)................ 107 93 193 161 122
Ratio of EBITDA to net interest expense(b)............. 4.4x 4.0x 4.2x 3.9x 3.5x
Ratio of total debt and trust preferred securities to
EBITDA(c)(d)......................................... 3.1x 3.2x 2.9x 3.0x 3.4x
Ratio of fixed charges to earnings(e).................. 0.4x 0.4x 0.4x -- 0.5x
</Table>
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<Table>
<Caption>
SIX MONTHS
ENDED JUNE 30, YEAR ENDED DECEMBER 31,
--------------- ----------------------------
2001 2000 2000 1999(A) 1998(B)
------ ------ ------ ------- ---------
(UNAUDITED) (AUDITED)
(IN MILLIONS)
BALANCE SHEET DATA:
Cash and cash equivalents............................. $ 77 $ 46 $ 65 $ 35 $ 32
Working capital....................................... 534 149 191 (229) 448
Total assets.......................................... 6,461 5,978 5,979 5,752 5,679
Total debt(f)......................................... 1,096 1,527 1,237 1,228 1,296
Total trust preferred securities...................... 1,419 957 952 964 988
Total liabilities..................................... 3,722 3,603 3,300 3,750 3,322
Shareholders' equity (net assets)..................... 2,739 2,375 2,679 2,002 2,357
</Table>
- ---------------
(A) On January 18, 2000, FMCH, NMC and certain other affiliated companies
executed definitive agreements with the U.S. government to settle (1)
matters concerning violations of federal laws then under investigation and
(2) NMC's claims with respect to outstanding Medicare receivables for
intradialytic parenteral nutrition therapy. We refer to these agreements,
the related payments and our corporate integrity agreement collectively as
the Settlement. Under the Settlement, FMCH made initial cash payments of
approximately $286 million and entered into a note payable for the remainder
of the payment obligations. You can find a more detailed discussion of the
final terms of the Settlement in "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Fresenius Medical Care AG"
and in Note 2 of the notes to our consolidated financial statements.
(B) Includes the effect of an accounting change. See Note 1 of the notes to our
consolidated financial statements.
(a) As used above, EBITDA means earnings before interest, income taxes,
depreciation and amortization and, for 1999, the special charge for the
Settlement. We are not presenting EBITDA here as a measure of our operating
results. Our management believes that presentation of EBITDA is helpful to
investors as a measure of our ability to generate cash and to service debt.
Management also believes that presentation of EBITDA is helpful to investors
because EBITDA is used to determine compliance with some of the covenants in
our senior credit agreement and the indentures relating to both our
outstanding trust preferred securities and the trust preferred securities we
are currently offering. However, you should not construe EBITDA as an
alternative to net earnings determined in accordance with US GAAP or to cash
flow from operations, investing activities or financing activities or as a
measure of cash flows.
(b) In calculating the ratio of EBITDA to net interest expense, we included
distributions on our outstanding trust preferred securities in interest.
(c) As of June 30, 2001 and June 30, 2000, this ratio compares total debt and
trust preferred securities at these dates to EBITDA for the twelve months
ended June 30, 2001 and June 30, 2000.
(d) In calculating the ratio of total debt and trust preferred securities to
EBITDA, total debt includes accounts receivables facilities of $455 million,
$353 million, $445 million, $335 million and $306 million, for the three
months ended June 30, 2001 and 2000 and for the years ended December 31,
2000, 1999 and 1998, respectively.
(e) In calculating the ratio of fixed charges to earnings, earnings consist of
income before taxes plus fixed charges. Fixed charges consist of interest
expense and amortization of deferred financing fees, plus one-third of
rental expense under operating leases, the portion which we consider to be
representative of an interest factor. Earnings were deficient in covering
fixed charges by $260 million for the year ended 1999 due to the one-time
settlement charge.
(f) Total debt includes short-term borrowings from third parties, short-term
borrowings from related parties, note payable related to the Settlement and
long-term debt and capital lease obligations, including current portion.
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RISK FACTORS
An investment in our trust preferred securities involves a high degree of
risk. You should carefully consider the risks described below, together with all
of the other information included in this prospectus before you decide to invest
in our trust preferred securities. If any of the following events actually
occurs, our business, financial condition and results of operations could be
harmed. If our business, financial condition or results of operations are
harmed, the trading price of our trust preferred securities could decline and
you could lose all or part of your investment.
RISKS RELATING TO THE TRUST PREFERRED SECURITIES
WE ARE SUBSTANTIALLY LEVERAGED AND DEPENDENT UPON OUR SUBSIDIARIES FOR
SUBSTANTIALLY ALL OF OUR OPERATING INCOME. IF WE AND OUR SUBSIDIARIES ARE
UNABLE TO GENERATE SUFFICIENT CASH TO ENABLE US TO MAKE INTEREST AND OTHER
PAYMENTS TO THE NOTE ISSUER, THE NOTE ISSUER'S ABILITY TO MAKE INTEREST
PAYMENTS ON THE NOTES WILL BE LIMITED, AND THE TRUST WOULD NOT BE ABLE TO MAKE
PAYMENTS ON THE TRUST PREFERRED SECURITIES
We are substantially leveraged. As of June 30, 2001, after giving effect to
the consummation of our offerings of the old trust preferred securities and the
application of the net proceeds from those offerings, our total consolidated
liabilities were $3.7 billion, including our obligations with respect to all
trust preferred securities of approximately $1.4 billion, our total consolidated
assets were $6.5 billion and our shareholders' equity was $2.7 billion. Our
substantial level of debt presents the risk that we might not generate
sufficient cash to service our indebtedness, including the guarantee of the
notes, or that our leveraged capital structure could limit our ability to
finance the acquisition and development of additional projects, to compete
effectively or to operate successfully under adverse economic conditions. See
"Selected Historical Financial Data of Fresenius Medical Care AG" and
"Capitalization." If we and our subsidiaries were not to make payments on our
obligations to the note issuer, the note issuer would be unable to make payments
on the notes and, as a result, the trust would be unable to make payments on the
trust preferred securities as and when required. In such an event, you would not
be able to rely on the trust guarantee since distributions or other payments on
the trust preferred securities are subject to the trust guarantee only if and to
the extent that the note issuer or a note guarantor has made a payment to the
trust of interest or principal on the notes.
WE OBTAIN SUBSTANTIALLY ALL OF OUR INCOME FROM OUR SUBSIDIARIES, AND OUR
HOLDING COMPANY STRUCTURE MAY LIMIT OUR ABILITY TO REALIZE ON THE ASSETS OF
OUR SUBSIDIARIES
We are a holding company and, consequently we derive substantially all our
operating income from our subsidiaries. Our right to receive any assets of any
of our subsidiaries or other affiliates upon any reorganization or liquidation,
and the right of the holders of the notes to participate in the distribution of
or realize proceeds from those assets, will effectively be subordinated to the
claims of the creditors of those subsidiaries and affiliates, including their
trade creditors and holders of debt they have issued. In addition to our senior
indebtedness, our subsidiaries have significant liabilities which would
effectively be senior to the notes.
THE TRUSTS WILL HAVE NO ASSETS OTHER THAN THE NOTES AND THE NOTE GUARANTIES,
AND NO SOURCE OF INCOME OTHER THAN PAYMENTS ON THE NOTES AND THE NOTE
GUARANTIES
Each trust exists for the exclusive purpose of:
- issuing and selling the trust securities representing undivided
beneficial interests in the assets of the trust;
- investing the proceeds of the trust securities in USD notes or in Euro
notes, as applicable;
- consummating an exchange offer; and
- engaging in only those other activities necessary, convenient or
incidental thereto.
Accordingly, the notes, the trust guarantee, the note guaranties and the
right to reimbursement of expenses under an expense agreement will be a trust's
sole assets, and payments under the notes and the
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expense agreement will be a trust's sole revenue. The note issuer will issue the
notes to each trust and advance or distribute the proceeds of the notes to us
and our subsidiaries. Therefore, the only assets of the note issuer are
intercompany receivables that were created when the note issuer advanced or
distributed the proceeds from the notes to us and our subsidiaries. A trust's
ability to make distributions or other payments on its trust preferred
securities is wholly dependent upon the note issuer making interest and other
payments on the notes as and when required. The note issuer's ability to make
interest and other payments on the notes is wholly dependent upon us and our
subsidiaries making payments on the intercompany obligations that we owe to the
note issuer as and when required.
Each declaration of trust provides that we shall pay for all debts and
obligations, other than with respect to the trust preferred securities, and all
costs and expenses of the trust, including any taxes and all costs and expenses
with respect thereto to which the trust may become subject, except for U.S.
withholding taxes. There is no assurance that we will have sufficient resources
to enable us to pay any such debts, obligations, costs and expenses on behalf of
the trust.
Our senior credit facility includes covenants which, among other things,
restrict or have the effect of restricting our ability and the abilities of our
subsidiaries to dispose of assets, incur debt, pay dividends, create liens or
make capital expenditures, investments or acquisitions, and which may otherwise
limit our activities as well as those of our subsidiaries. Our senior credit
facility also includes certain covenants that will require us to maintain a
minimum consolidated net worth and a minimum consolidated fixed charge ratio
(ratio of EBITDA to fixed charges) and we are subject to a limit on our
consolidated leverage ratio (ratio of consolidated funded debt to EBITDA). The
breach of any of these covenants could result in a default under our senior
credit facility.
THE TRUST GUARANTEES, THE NOTE GUARANTIES AND THE NOTES ARE SUBORDINATE TO OUR
SENIOR INDEBTEDNESS AND THE SENIOR INDEBTEDNESS OF OUR SUBSIDIARIES
Our obligations under the trust guarantees, the note guarantors'
obligations under the note guaranties, and the note issuer's obligations under
the notes are subordinate and junior in right of payment to all present and
future senior indebtedness of each of the note guarantors and the note issuer.
We may not pay principal, including redemption payments, if any, premium, if
any, or interest on the notes if any specified senior indebtedness, or any other
senior indebtedness having an outstanding principal amount at the time of
determination in excess of $25 million, is not paid when due or any other
default on specified senior indebtedness occurs and the maturity of the
specified senior indebtedness is accelerated in accordance with its terms,
unless, in either case, the default has been cured or waived and any such
acceleration has been rescinded or such specified senior indebtedness has been
paid in full. As of June 30, 2001, after the offerings of the old trust
preferred securities and the application of the net proceeds from those
offerings, the note guarantors and the note issuer had $1.0 billion of total
consolidated senior indebtedness (excluding the notes and excluding the 9% notes
due 2006, the 7 3/8% notes due 2008, and the 7 7/8% notes due 2008 that rank
equally with the notes on a consolidated basis and a $68 million subordinated
intercompany note), including liabilities as guarantors under our senior credit
facility. In addition, our subsidiaries that are not note guarantors have
significant additional liabilities which would be effectively senior to the
notes and, after this offering we will have or be permitted to incur
approximately $1.4 billion of total consolidated senior subordinated
indebtedness consisting of:
- the notes;
and
- the following senior subordinated notes issued in connection with prior
trust preferred transactions;
-- $450 million of 7 7/8% senior subordinated notes due 2008;
-- DM300 million of 7 3/8% senior subordinated notes due 2008; and
-- $360 million of 9% senior subordinated notes due 2006.
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We and the note guarantors have guaranteed all the senior subordinated debt
listed above. Although our ability and the ability of our subsidiaries to incur
indebtedness is restricted under the indentures governing the notes and our
senior credit facility, we and our subsidiaries will have the ability to incur
substantial additional indebtedness, which may be senior to the notes.
Each of the note guarantors will unconditionally guarantee, jointly and
severally, on a senior subordinated basis, the note issuer's obligations
pursuant to the notes. Our note guaranties will not be limited in amount. The
note guaranties of FMCH and FMC Deutschland each will be limited to an amount
not to exceed the maximum amount that can be guaranteed by the guarantor party
thereto without rendering such note guaranty, as it relates to such guarantor,
voidable under applicable law relating to fraudulent conveyance or fraudulent
transfer or similar laws affecting the rights of creditors generally or under
applicable law of Germany. If the note guaranty of FMCH or FMC Deutschland were
to be rendered voidable, it could be subordinated by a court to all other
indebtedness (including guarantees and other contingent liabilities) of the
guarantor. Depending on the amount of such indebtedness, such guarantor's
liability on its note guaranty could be reduced to zero as a result of such
subordination. Subject to limitations described under "Description of the Trust
Guarantees," a note guarantor may consolidate with, merge with or into, or
transfer all or substantially all its assets to any other person; provided,
however, that if such other person is not the note issuer, the other person must
expressly assume the note guarantor's obligations under its note guaranties.
However, subject to some limitations, upon the sale or other disposition of all
or substantially all the assets of FMCH or FMC Deutschland, in each case to a
person other than the note issuer or its affiliates, the selling note guarantor
will be released and relieved from all its obligations under its note
guaranties. See "Description of the Notes -- Note Guaranties."
IF THE NOTE ISSUER WERE TO DEFAULT ON ITS OBLIGATIONS UNDER THE NOTES, THE
TRUSTS WOULD LACK AVAILABLE FUNDS FOR THE PAYMENT OF DISTRIBUTIONS OR AMOUNTS
PAYABLE ON REDEMPTION OF THE TRUST PREFERRED SECURITIES OR OTHERWISE, AND IN
SUCH EVENT, YOU WOULD NOT BE ABLE TO RELY UPON THE TRUST GUARANTEES FOR
PAYMENT OF THOSE AMOUNTS
The guarantee trustee will hold the trust guarantees for your benefit. If
the note issuer were to default on its obligations under the notes, the trusts
would lack available funds for the payment of distributions or amounts payable
on redemption of the trust preferred securities or otherwise. In that case, you
would not be able to rely upon the trust guarantees for payment of those
amounts. Instead, you could rely on the enforcement:
- by the preferred trustee of its rights as registered holder of the notes
against the note issuer pursuant to the terms of the notes or against the
note guarantors under the terms of the note guaranties; or
- by a special trustee, elected by 25% in liquidation amount of the trust
preferred securities, of a trust's rights under the notes and the note
guaranties, or
- if the preferred trustee or the special trustee do not enforce the
trust's rights against the note issuer, by you of your right of direct
action against the note issuer on behalf of the trust to enforce payments
on the notes.
The trust declarations provide that, by your acceptance of the trust
declaration, you are deemed to have agreed to the provisions of the applicable
trust guarantee (including the subordination provisions) and the applicable
indenture.
WE MAY NOT BE ABLE TO MAKE A CHANGE OF CONTROL REDEMPTION UPON DEMAND
You have the right to require the applicable trust to redeem all or any
part of your trust preferred securities upon the occurrence of a change of
control at a redemption price equal to 101% of the liquidation amount plus any
accrued and unpaid distributions. In that case, the trust will have and must
exercise its right to require the note issuer to redeem notes in an amount equal
to the trust preferred
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securities and common securities to be redeemed by the holders. The note issuer
and the trusts do not have, and may not in the future have, any assets other
than certain intercompany receivables and the notes, respectively. As a result,
the note issuer's ability to prepay the notes and the ability of the trusts to
prepay the trust securities will depend upon receipts from us and our
subsidiaries. We cannot assure you that if an event that requires us to redeem
the trust securities occurs, we will have, or have access to, sufficient funds
to pay the required purchase price for all of the trust securities and notes
tendered by holders. Our senior credit facility also may preclude us from
purchasing trust securities or notes upon a change of control and provides that
some changes in control would constitute a default under our senior credit
facility.
IN THE EVENT OF A TAX EVENT WHICH RESULTS IN A TRUST BEING TREATED AS AN
ASSOCIATION TAXABLE AS A CORPORATION, THE DISTRIBUTION WOULD LIKELY CONSTITUTE
A TAXABLE EVENT TO HOLDERS OF THE TRUST PREFERRED SECURITIES
We will, except under limited circumstances, cause the trustees to dissolve
a trust upon the occurrence of a tax event or investment company event with
respect to that trust as defined in the covenants contained in the applicable
indenture and, after satisfaction of liabilities to creditors of the trust,
cause the note issuer to distribute the notes, on proportionate basis to the
holders of the trust securities. The note issuer will have the right, in certain
circumstances, to redeem the notes, in whole, but not in part, at 100% of
principal amount plus accrued and unpaid interest, instead of distributing those
notes. In that case, the trust will redeem the trust preferred securities in
whole at the liquidation amount of $1,000 or E1,000 per trust preferred
security, as applicable, plus accrued and unpaid distributions. If a tax event
occurs, we may also elect to cause the trust preferred securities to remain
outstanding and cause the note issuer to pay additional interest on the notes.
Under current U.S. federal income tax law, a distribution of the notes
would not be a taxable event to you. However, if a tax event occurs that results
in the trust being treated as an association taxable as a corporation, the
distribution would likely constitute a taxable event to you. See "Tax
Considerations -- United States -- United States Holders -- Receipt of Notes or
Cash Upon Liquidation of the Issuer."
We can give no assurance as to the market prices for the trust preferred
securities or notes that may be distributed in exchange for trust preferred
securities if a dissolution or liquidation of the trust were to occur.
Accordingly, trust preferred securities that you acquire in this offering or in
the secondary market, or any notes distributed on dissolution and liquidation of
the trust, may trade at a discount to the price that you paid to purchase the
trust preferred securities. Because you may receive notes upon the occurrence of
a tax event or investment company event, as a prospective investor in trust
preferred securities you are also making an investment decision with regard to
the notes and should carefully review all the information regarding the notes
contained in this offering circular.
HOLDERS OF TRUST PREFERRED SECURITIES WILL HAVE LIMITED VOTING RIGHTS
Except in limited circumstances, you will have no voting rights. The right
to vote to appoint, remove or replace the trustees, or increase or decrease
their number, is vested in the holder(s) of the common securities. See
"Description of the Trust Preferred Securities -- Voting Rights."
The trust preferred securities and any old trust preferred securities
issued by each trust which remain outstanding after completion of the exchange
offers will vote together as a single class for purposes of determining whether
holders of the required percentage in outstanding liquidation amount of trust
preferred securities issued by a trust have taken certain actions or exercised
certain rights under the applicable declaration of trust. See "Descriptions of
the Trust Preferred Securities -- Voting Rights," and "-- Modification of the
Declarations."
HOLDERS OF TRUST PREFERRED SECURITIES MAY RECOGNIZE A CAPITAL LOSS
The trust preferred securities may trade at a price that does not fully
reflect the value of accrued but unpaid interest with respect to the underlying
notes. For U.S. federal income tax purposes, if you are a
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United States holder and you dispose of your trust preferred securities between
record dates for payments of distributions, you will nevertheless be required to
recognize accrued but unpaid interest on the notes through the date of
disposition in income as ordinary income, and to add that amount to your
adjusted tax basis in your proportional share of the underlying notes deemed
disposed. To the extent the selling price is less than your adjusted tax basis,
which will include all accrued but unpaid interest, you will recognize a capital
loss. Subject to limited exceptions, capital losses cannot be applied to offset
ordinary income for U.S. federal income tax purposes. See "Tax
Considerations -- United States -- United States Holders -- The Deductibility of
Capital Losses is Subject to Significant Limitations."
THE CHARACTERISTICS OF THE TRUST PREFERRED SECURITIES MAY AFFECT THE TRADING
MARKET FOR THE TRUST PREFERRED SECURITIES AND THE NOTES
There is no existing market for the trust preferred securities. Although
application will be made to list the trust preferred securities on the
Luxembourg Stock Exchange, we can give no assurance as to:
- whether the listing of the trust preferred securities on the Luxembourg
Stock Exchange will occur;
- whether a market for the trust preferred securities will develop;
- the liquidity of any market that may develop for the trust preferred
securities;
- your ability to sell your trust preferred securities, or
- the price at which you would be able to sell your trust preferred
securities.
Future trading prices of the trust preferred securities will depend on many
factors, including, among other things, prevailing interest rates, our operating
results and the market for similar securities. In connection with the original
offerings of the old trust preferred securities, the initial purchasers advised
us that they intend to make a market in the trust preferred securities, subject
to the limits imposed by the Securities Act and the U.S. Securities Exchange Act
of 1934, as amended, the "Exchange Act," and subject to any limits imposed
during the pendency of any registration statement or shelf registration
statement. The initial purchasers are not obligated to make a market in the
trust preferred securities, and may discontinue such market-making at any time
without notice. Therefore, we can give no assurance as to the liquidity of the
trading market for the trust preferred securities. In addition, such
market-making activities may be limited during the exchange offers and/or the
pendency of any shelf registration statement relating to the trust preferred
securities.
THE EXCHANGE OFFERS COULD ADVERSELY AFFECT ANY MARKET FOR OLD TRUST PREFERRED
SECURITIES THAT ARE NOT EXCHANGED
We did not register the old trust preferred securities under the U.S.
Securities Act or any state securities laws and they may not be offered, sold or
otherwise transferred except in compliance with the registration requirements of
the U.S. Securities Act and any other applicable securities laws, or pursuant to
an exemption from the registration requirement or in a transaction that is not
subject to those requirements. Transfer of old trust preferred securities
without registration also requires compliance with certain other conditions and
restrictions. Old trust preferred securities which remain outstanding after
consummation of the exchange offers will continue to bear a legend reflecting
the restrictions on transfer without registration. In addition, subject to
limited exceptions, upon completion of the exchange offers, holders of old trust
preferred securities which remain outstanding will not be entitled to any rights
to have the old trust preferred securities registered under the U.S. Securities
Act or to any similar rights under the registration rights agreements that we
entered into when we issued the old trust preferred securities. We and the
trusts do not intend to register under the U.S. securities act any old trust
preferred securities which remain outstanding after completion of the exchange
offers, subject to limited exceptions if they apply. To the extent that old
trust preferred securities are tendered and accepted in the exchange offers,
your ability to sell old trust preferred securities that remain outstanding
after the exchange offers could be adversely affected.
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Upon completion of the exchange offers, holders of old trust preferred
securities will not be entitled to any increase in the distribution rate on
those securities or to any further registration rights under the registration
rights agreements, except under limited circumstances. See "Description of the
Trust Preferred Securities."
RISKS RELATING TO LITIGATION AND REGULATORY MATTERS IN THE UNITED STATES
IF WE DO NOT COMPLY WITH THE MANY GOVERNMENTAL REGULATIONS APPLICABLE TO OUR
BUSINESS OR WITH THE CORPORATE INTEGRITY AGREEMENT BETWEEN US AND THE U.S.
GOVERNMENT, WE COULD BE EXCLUDED FROM GOVERNMENT HEALTH CARE REIMBURSEMENT
PROGRAMS OR OUR AUTHORITY TO CONDUCT BUSINESS COULD BE TERMINATED, EITHER OF
WHICH WOULD RESULT IN A MATERIAL DECREASE IN OUR REVENUE
Our operations in both our provider business and our products business are
subject to extensive governmental regulation in virtually every country in which
we operate. The applicable regulations, which differ from country to country,
relate in general to the safety and efficacy of medical products and supplies,
the operation of manufacturing facilities, laboratories and dialysis clinics,
the rate of, and accurate reporting and billing for, government and third-party
reimbursement, and compensation of medical directors and other financial
arrangements with physicians and other referral sources. We are also subject to
other laws of general applicability, including antitrust laws.
Fresenius Medical Care Holdings is party to a corporate integrity agreement
with the U.S. government that we entered into in connection with the Settlement.
This agreement requires that FMCH staff and maintain a comprehensive compliance
program, including a written code of conduct, training programs, regulatory
compliance policies and procedures, annual audits and periodic reporting to the
government. The corporate integrity agreement permits the U.S. government to
exclude FMCH and its subsidiaries from participation in U.S. federal health care
programs if there is a material breach of the agreement that FMCH does not cure
within 30 days after FMCH receives written notice of the breach. We derive
approximately 40% of our consolidated revenue from U.S. federal health care
benefit programs. Consequently, if FMCH commits a material breach of the
corporate integrity agreement that results in the exclusion of FMCH or its
subsidiaries from continued participation in those programs, it would
significantly decrease our revenue and have a material adverse effect on our
business, financial condition and results of operations.
While we rely upon our management structure, regulatory and legal
resources, and the effective operation of our compliance program to direct,
manage and monitor these activities, if employees, deliberately or
inadvertently, failed to adhere to these regulations then our authority to
conduct business could be terminated or our operations could be significantly
curtailed. Any such terminations or reductions could materially reduce our
revenues with a resulting adverse impact on our business, financial condition
and results of operations.
A REDUCTION IN U.S. GOVERNMENT REIMBURSEMENT FOR DIALYSIS CARE WOULD
MATERIALLY DECREASE OUR REVENUES
For the twelve months ended December 31, 2000, approximately 40% of our
consolidated revenues resulted from U.S. federal health care benefit programs,
such as Medicare and Medicaid reimbursement. Legislative changes may affect all
Medicare reimbursement rates for the services we provide, as well as the scope
of Medicare coverage. A decrease in Medicare reimbursement rates or covered
services could have a material adverse effect on our business, financial
condition and results of operations.
A CHANGE IN REIMBURSEMENT FOR OR UTILIZATION OF EPO COULD MATERIALLY REDUCE
OUR REVENUE AND OPERATING PROFITS
Reimbursement and revenue from the administration of erythropoetin, or EPO,
accounted for approximately 28% of dialysis care revenue in our North America
segment for the twelve months ended December 31, 2000. EPO is produced by a
single manufacturer, Amgen Inc., which is our sole supplier. Our current
contract with Amgen Inc. covers the period from January 2001 to December 2001
and includes price guarantees and volume and outcome based discounts. A
reduction in reimbursement for
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EPO, a significant change in utilization of EPO, an interruption of supply or an
inability to obtain satisfactory purchase terms for EPO could reduce our
revenues from, or increase our costs in connection with, administration of EPO,
which could materially adversely affect our business, financial condition and
results of operations. Amgen Inc. has announced a 3.9% increase in its
wholesaler acquisition price for EPO effective May 9, 2001. Because our purchase
contract with Amgen Inc. contains pricing protection through December 31, 2001,
our purchase price for EPO will be unaffected by the increase through that date.
CREDITORS OF W.R. GRACE & CO.-CONN. HAVE ASSERTED CLAIMS AGAINST US
We were formed in 1996 as a result of a series of transactions with W.R.
Grace & Co. which we refer to as the Merger. 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 liabilities arising out of product-liability related
litigation, pre-Merger tax claims and other claims unrelated to National Medical
Care, its dialysis business prior to the Merger. In connection with the Merger,
W.R. Grace & Co.-Conn. agreed to indemnify us 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 National Medical Care
operations. Proceedings have been brought against W.R. Grace & Co. and FMCH 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. In addition, the Merger
was consummated as a tax free reorganization. Pre-Merger tax claims or tax
claims that would arise if events were to violate the tax-free nature of the
Merger could be the obligation of FMCH, our principal subsidiary. Subject to
certain representations made by W.R. Grace & Co.-Conn., FMCH and Fresenius AG,
W.R. Grace & Co.-Conn. also agreed to indemnify us against any such tax
liability. W.R. Grace & Co.-Conn. and some of its subsidiaries have filed for
reorganization under Chapter 11 of the U.S. Bankruptcy Code. If the Merger is
determined to be a fraudulent transfer and if material damages are proved by the
plaintiffs, or if W.R. Grace & Co. is unable to satisfy its Merger-related or
pre-Merger tax obligations, and if we are not able to collect on the indemnities
from W.R. Grace & Co. as a result of the bankruptcy proceedings or otherwise,
and if we are unable to collect on the indemnities from any affiliates or former
affiliates of W.R. Grace & Co. or their insurers, and if we are not able to
collect against any party that may have received proceeds from W.R. Grace & Co.,
a judgment could have a material adverse effect on our business, financial
condition and results of operations.
WE ARE DEFENDANTS IN LITIGATION BY PRIVATE INSURANCE COMPANIES ALLEGING
INAPPROPRIATE BILLING PRACTICES
FMCH, NMC and its subsidiaries are defendants in litigation brought by
private payors alleging inappropriate billing practices for nutritional therapy,
diagnostic and clinical laboratory tests and misrepresentations. FMCH, NMC and
its subsidiaries believe that there are substantial defenses to the claims
asserted, have filed counterclaims and intend to vigorously defend the lawsuits.
Other private payors have contacted FMCH and have asserted that NMC received
excess payments and may file their own lawsuit seeking reimbursement and other
damages from NMC. Although we cannot predict the ultimate outcome of these
proceedings, an adverse result could have a material adverse effect on our
business, financial condition and result of operations since an adverse
determination could result in substantial liability or changes in our
reimbursement arrangements with private payors.
IF THE POSITION OF THE U.S. CENTERS FOR MEDICARE AND MEDICAID SERVICES IN THE
OBRA 93 DISPUTE IS ULTIMATELY UPHELD, WE COULD BE OBLIGATED TO REFUND UP TO
$120 MILLION TO MEDICARE
Under the U.S. Omnibus Budget Reconciliation Act of 1993, as initially
interpreted by the U.S. Centers for Medicare and Medicaid Services (formerly
known as the Health Care Financing Administration, or HCFA), which administers
the Medicare and Medicaid programs, employer health plans were the primary payor
for ESRD dual-eligible patients -- i.e., patients age 65 and over who are
eligible for Medicare and covered by an employer health plan. The original
interpretation resulted in increased revenue for NMC because, during the
18-month period, the rate paid by the employer health
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plan was generally higher than the Medicare rate. In April 1995, the U.S. Health
Care Financing Administration announced a new interpretation of the U.S. Omnibus
Budget Reconciliation Act of 1993 which retroactively eliminated the 18-month
period in which the employer health plan was the primary payor for dual eligible
patients. NMC has obtained a permanent injunction against the retroactive
implementation of this revised interpretation. Its motion for a declaratory
judgment against implementation on a going-forward basis, and the government's
motion for a declaratory judgment that the rule was validly applied on a
prospective basis, are both pending. It is not clear at this time whether the
government intends to appeal the rulings. As of July 1, 1995, NMC ceased to
recognize the incremental revenue realized under the original implementation,
but continued to bill employer health plans as primary payors until December 31,
1995. If the government should appeal and be successful in reversing the
rulings, thereby upholding the government's retroactive implementation of its
revised interpretation, NMC may be required to refund the payments received from
employer health plans for services provided after August 10, 1993 under the
original implementation and to rebill Medicare for the same services. This
refunding and rebilling would result in a net loss to NMC of approximately $120
million for billing through December 31, 1995.
AS HEALTH MAINTENANCE ORGANIZATIONS AND OTHER MANAGED CARE PLANS GROW IN THE
UNITED STATES, AMOUNTS PAID FOR OUR SERVICES AND PRODUCTS BY NON-GOVERNMENTAL
PAYORS MAY DECREASE
We obtain a significant portion of our revenues from reimbursement provided
by non-governmental third-party payors in the United States. Although
non-governmental payors generally pay higher reimbursement rates than
governmental payors, managed care plans generally negotiate lower reimbursement
rates than indemnity insurance plans. Some managed care plans also utilize a
capitated fee structure or limit reimbursement for ancillary services.
As managed care programs have increased market share, we have experienced
increased pressure to reduce the amounts paid for our services and products.
These trends may be accelerated if future changes to the U.S. Medicare ESRD
program require private payors to assume a greater percentage of the total cost
of care given to dialysis patients over the term of their illness, or if managed
care plans otherwise significantly increase their enrollment of renal patients.
If substantially more of our patients join managed care plans or such plans
reduce reimbursements, our revenues from non-governmental payors could decrease,
and our financial condition and results of operations could be materially
adversely affected.
PROPOSALS FOR HEALTH CARE REFORM COULD DECREASE OUR REVENUES
Proposals to modify the current health care system in the United States to
improve access to health care and control its costs are continually being
considered by the federal and certain state governments. We anticipate that the
U.S. Congress and state legislatures will continue to review and assess
alternative health care reform proposals, and we cannot predict whether these
reform proposals will be adopted, when they may be adopted or what impact they
may have on us. Any spending decreases or other significant changes in the
Medicare program could reduce our revenues and profitability and have a material
adverse effect on our business, financial condition and results of operations.
Other countries, especially those in western Europe, have also considered
health care reform proposals and could materially alter their
government-sponsored health care programs by reducing reimbursement payments.
Any reduction could affect the pricing of our products and the profitability of
our services, especially as we expand our international business. This potential
development could have a material adverse effect on our business, financial
condition and results of operations.
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RISKS RELATING TO OUR BUSINESS
OUR COMPETITORS COULD DEVELOP SUPERIOR TECHNOLOGY, IMPACT OUR PRODUCT SALES,
OR DRIVE UP ACQUISITION PRICES, WHICH WOULD ADVERSELY AFFECT OUR ABILITY TO
MAKE ACQUISITIONS
We face numerous competitors in both our dialysis services business and our
dialysis products business, some of which may possess substantial financial,
marketing or research and development resources. Competition could materially
adversely affect the future pricing and sale of our products and services. In
particular, technological innovation has historically been a significant
competitive factor in the dialysis products business. The introduction of new
products by competitors could render one or more of our products obsolete.
We are engaged in both manufacturing dialysis products and providing
dialysis services. We compete in the dialysis services business with many
customers of our products business. As a result, independent dialysis clinics,
those operated by other chains and dialysis centers acquired by other products
manufacturers may elect to limit or terminate their purchases of our dialysis
products so as to avoid purchasing products manufactured by a competitor.
Possible purchase reductions could decrease our product revenues, with a
material adverse effect on our business, financial condition and results of
operations.
We also compete with other dialysis products and services companies in
seeking selected acquisitions. If we are not able to continue to effect
acquisitions in the provider business upon reasonable terms, particularly in our
International segment, this could adversely affect the growth of our business
and our future growth prospects.
WE FACE PRODUCTS LIABILITY AND OTHER CLAIMS WHICH COULD RESULT IN SIGNIFICANT
LIABILITY
Health care companies are subject to claims alleging negligence, products
liability, breach of warranty, malpractice and other legal theories that may
involve large claims and significant defense costs whether or not liability is
ultimately imposed. Health care products may also be subject to recalls.
Although liability claims and recalls have not had a material adverse effect on
our businesses in the past, we cannot assure that we will not suffer one or more
significant claims or product recalls in the future. Product liability claims or
recalls could result in judgments against us or significant compliance costs,
which could materially adversely affect our business, financial condition and
results of operations.
While we have been able to obtain liability insurance in the past, it is
possible that such insurance may not be available in the future, either on
acceptable terms or at all. A successful claim in excess of the limits of our
insurance coverage could have a material adverse effect on our results of
operations and financial condition. Liability claims, regardless of their merit
or eventual outcome, also may have a material adverse effect on our business and
reputation, which could in turn reduce our revenues and profitability.
IF PHYSICIANS AND OTHER REFERRAL SOURCES CEASE REFERRING PATIENTS TO OUR
DIALYSIS CLINICS OR CEASE PURCHASING OUR DIALYSIS PRODUCTS, OUR REVENUES WOULD
DECREASE
Our dialysis services business depends upon patients choosing our clinics
as the location for their treatments. Patients may select a clinic based, in
whole or in part, on the recommendation of their physician. We believe that
physicians and other clinicians typically consider a number of factors when
recommending a particular dialysis facility to an ESRD patient, including, but
not limited to, the quality of care at a clinic, the competency of a clinic's
staff, convenient scheduling, and a clinic's location and physical condition.
Clinicians may change their facility recommendations at any time, which may
result in the movement of our existing patients to competing clinics, including
clinics established by the clinicians themselves. At most of our clinics, a
relatively small number of physicians account for the referral of all or a
significant portion of the patient base. If a significant number of physicians
ceased referring their patients to our clinics, this could reduce our dialysis
care revenue and materially adversely affect our overall
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operations. Our operations are also affected by referrals from hospitals,
managed care plans and other sources.
The decision to purchase our dialysis products and other services or
competing dialysis products and other services will be made in some instances by
medical directors and other referring physicians at our dialysis clinics and by
the managing medical personnel and referring physicians at other dialysis
clinics, subject to applicable regulatory requirements. A decline in physician
recommendations or purchases of our products or ancillary services could reduce
our dialysis product and other services revenue, and could materially adversely
affect our business, financial condition and results of operations.
IF WE ARE UNABLE TO ATTRACT AND RETAIN SKILLED MEDICAL, TECHNICAL AND
ENGINEERING PERSONNEL, WE MAY BE UNABLE TO MANAGE OUR GROWTH OR CONTINUE OUR
TECHNOLOGICAL DEVELOPMENT
Our continued growth in the provider business will depend upon our ability
to attract and retain skilled employees, such as highly skilled nurses and other
medical personnel. Competition for those employees is intense. Moreover, we
believe that future success in the provider business will depend significantly
on our ability to attract and retain qualified physicians to serve as medical
directors of our dialysis clinics. Our dialysis products business depends on the
development of new products, technologies and treatment concepts. Competition is
also intense for skilled engineers and other technical research and development
personnel. If we are unable to obtain the services of key personnel, the ability
of our officers and key employees to manage our growth would suffer and our
operations could suffer in other respects. These factors could also preclude us
from integrating acquired companies into our operations, which could increase
our costs and prevent us from realizing synergies from acquisitions. Lack of
skilled research and development personnel could impair our technological
development, which would increase our costs and impair our reputation for
production of technologically advanced products.
WE FACE ADDITIONAL COSTS AND UNCERTAINTIES FROM INTERNATIONAL OPERATIONS
We intend to expand our international presence. As a result, we expect that
revenues from countries other than the United States and Germany will account
for an increasing portion of future revenues.
Revenues from international operations are subject to a number of risks,
including the following:
- Fluctuations in currency exchange rates could adversely affect
profitability;
- We may face difficulties in enforcing and collecting accounts receivable
under some countries' legal systems;
- Local regulations may restrict our ability to obtain a direct ownership
interest in dialysis clinics, operate our clinics or conduct other
operations;
- Political instability, especially in developing countries, could disrupt
our operations;
- Some customers and governments may have longer payment cycles, with
resulting adverse effects on our cash flow; and
- Some countries could impose additional taxes or restrict the import of
our products.
Any one or more of these factors, or any difficulty in integrating
businesses we acquire into our operations, could increase our costs, reduce our
revenues, or disrupt our operations, with possible material adverse effects on
our business, financial condition and results of operations.
OTHER RISKS
BECAUSE WE ARE NOT ORGANIZED UNDER U.S. LAW, WE ARE SUBJECT TO CERTAIN LESS
DETAILED DISCLOSURE REQUIREMENTS UNDER U.S. FEDERAL SECURITIES LAWS
Under pooling agreements that we have entered into for the benefit of
minority holders of our Ordinary shares and holders of our Preference shares, we
have agreed to file quarterly reports with the
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SEC, to prepare annual and quarterly financial statements in accordance with US
GAAP, and to file information with the SEC with respect to annual and general
meetings of our shareholders. However, we are a "foreign private issuer," as
defined in the SEC's regulations, and consequently we are not subject to all of
the same disclosure requirements applicable to U.S. companies. We are exempt
from the SEC's proxy rules, and our annual reports contain less detailed
disclosure than reports of U.S. issuers regarding such matters as management,
executive compensation and outstanding options, beneficial ownership of our
securities and certain related party transactions. Also, our officers, directors
and beneficial owners of more than 10% of our equity securities are exempt from
the reporting requirements and short-swing profit recovery provisions of Section
16 of the Exchange Act. These limits on available information about our company
may adversely affect the market prices for our securities.
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THE TRUSTS
Each trust is a statutory business trust formed under the laws of the State
of Delaware under a declaration of trust executed by Fresenius Medical Care, as
sponsor of the trust, the note issuer and the trustees of the trust, and by the
filing of a certificate of trust with the Secretary of State of the State of
Delaware on February 12, 1998 in the case of Trust IV and June 1, 2001 in the
case of Trust V. In connection with the offerings of the old trust preferred
securities, we acquired common securities of Trust IV in an aggregate
liquidation amount of $225,000 and of Trust V in an aggregate liquidation amount
of E300,000, representing all of each trust's common securities. The common
securities of each trust will rank equally with its trust preferred securities,
except that, if an event of default occurs and is continuing under the trust
declaration, our rights as the holder of the common securities to receive
distributions and payments upon liquidation, redemption and otherwise will be
subordinated to your rights as holders of the trust preferred securities. See
"Description of Trust Preferred Securities -- Subordination of Common
Securities." The assets of each trust will consist of the notes and the note
guaranties. Each trust exists for the exclusive purpose of issuing and selling
the trust securities representing undivided beneficial interests in the assets
of that trust, investing the proceeds of the trust securities in the notes,
consummating an exchange offer and engaging in only those other activities
necessary, convenient or incidental to those purposes. Accordingly, the USD
notes or the Euro notes, a company guarantee, the note guaranties and the right
to reimbursement of expenses under the related expense agreement will be the
sole assets of each trust, and payments under the notes and the related expense
agreement will be the sole revenue of the trust.
Each trust has a term of approximately 29 years, but may be terminated
earlier as provided in its trust declaration. Each trust's business and affairs
are and will be conducted by the trustees, whom we have appointed as sole holder
of the common securities. Under the trust declaration, initially there will be
five trustees. Three of the trustees, the "company trustees," are individuals
who are our employees or officers. The fourth trustee, the preferred trustee, is
a financial institution that is unaffiliated with us. The fifth trustee, the
Delaware trustee, is an entity which maintains its principal place of business
in the State of Delaware. Initially, State Street Bank and Trust Company, a
national banking association duly organized and existing under the laws of
Massachusetts, is the preferred trustee, and First Union Trust Company, N.A., a
Delaware banking corporation, is the Delaware trustee. We, as holders of the
common securities, will be able to remove any of the corporate trustees. State
Street Bank and Trust Company also is the indenture trustee under the trust
guarantees, the "guarantee trustee," and under the indentures, "indenture
trustee." See "Description of the Trust Guarantee" and "Description of the Trust
Preferred Securities."
The preferred trustee will hold title to the notes for your benefit and
will have the power to exercise all rights, powers and privileges under the
indentures as the holder of the notes. In addition, the preferred trustee will
maintain exclusive control of segregated non-interest bearing bank accounts of
each trust, the "property accounts," to hold all payments made in respect of
notes for your benefit. The guarantee trustee will hold the trust guarantees for
your benefit. As the direct or indirect holder of all the common securities, we
will have the right to appoint, remove or replace any of the trustees of each
trust and to increase or decrease the number of trustees, provided that the
number of trustees of each trust must be at least three, a majority of which
must be company trustees. We, as holders of the common securities or, if an
event of default under a declaration of trust has occurred and is continuing,
the holders of a majority in liquidation amount of the trust preferred
securities, will be entitled to appoint, remove or replace the preferred trustee
and/or the Delaware trustee. In no event will you have the right to vote to
appoint, remove or replace the company trustees; only we, as holders of the
common securities may do so. The duties and obligations of each of the trustees
will be governed by the trust declarations. In each trust declaration, we will
agree to pay for all fees and expenses related to the trust, including fees and
expenses of the trustees and any income taxes, duties and other governmental
charges, and all costs and expenses with respect to the trust or to which the
trust may become subject, except for U.S. withholding taxes, and we have also
agreed to pay all fees and expenses related to the offerings of the old trust
preferred
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securities and the exchange offers and to pay, directly or indirectly, all
ongoing costs, expenses and liabilities of each trust. See "Description of the
Notes."
Your rights as holders of the trust preferred securities, including
economic rights, rights to information and voting rights, if any, are set forth
in the applicable trust declaration and the Delaware Business Trust Act, as
amended. See "Description of the Trust Preferred Securities." The trust
declarations, the indentures and the trust guarantees will also incorporate by
reference the terms of the Trust Indenture Act of 1939, as amended. The
declarations of trust, the indentures and the trust guarantees have been
qualified under the Trust Indenture Act in connection with the exchange offers.
The place of business and the telephone number of each trust is 95 Hayden
Avenue, Lexington, Massachusetts, 02173 U.S.A. and (787) 402-9000.
THE NOTE ISSUER
The note issuer is a Luxembourg company and a wholly owned subsidiary of
Fresenius Medical Care. The note issuer exists for the exclusive purpose of:
- issuing and selling the old notes to each trust and the notes in the
exchange offers;
- advancing the proceeds of the notes to us and our subsidiaries;
- becoming a guarantor under our senior credit facility; and
- engaging in only those other activities necessary, convenient or
incidental thereto.
The intercompany receivables created when we and our subsidiaries received
the proceeds of the old notes are the sole assets of the note issuer.
The sole manager of the note issuer is Ms. Gabriele Dux. The place of
business of the note issuer is 7A rue Robert Stumper, L-2557 Luxembourg.
ACCOUNTING TREATMENT
For financial reporting purposes, the trusts will be treated as our
subsidiaries and, therefore, we will include the accounts of the trusts in our
consolidated financial statements. We will present the trust preferred
securities as a separate line item in our consolidated balance sheet entitled
"Company-obligated mandatorily redeemable preferred securities of Fresenius
Medical Care Capital Trusts holding solely Company-guaranteed debentures of
subsidiary," and we will include appropriate disclosures about the trust
preferred securities, the trust guarantees and the notes in the notes to our
consolidated financial statements. For financial reporting purposes, we will
record distributions payable on the trust preferred securities as a financing
charge to earnings in our consolidated statement of operations.
USE OF PROCEEDS
Neither we nor either trust will receive any cash proceeds from the
issuance of the USD trust preferred securities and the Euro trust preferred
securities in the exchange offers. In connection with the exchange offers, the
note issuer will issue USD notes to Trust IV and Euro notes to Trust V having,
in each case, an aggregate principal amount equal to the aggregate liquidation
amount of USD trust preferred securities or Euro trust preferred securities
issued in the applicable exchange offer. Each trust will retire and cancel the
old trust preferred securities surrendered in exchange for the trust preferred
securities.
The net proceeds from the sale of the old trust preferred securities were
approximately $468 million. The trusts invested the proceeds in the old notes
and we used the proceeds of the sale of the old notes to repay outstanding
revolving indebtedness under our senior credit facility, to repay short term
debt, including approximately $120 million of short-term debt to Fresenius AG,
and for general corporate purposes. Revolving borrowings under our senior credit
facility bear interest at the LIBOR rate plus an
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applicable margin determined in accordance with our senior credit facility. At
June 30, 2001 approximately $303.8 million of our revolving borrowings were
outstanding. Our senior credit facility matures on September 30, 2003. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Fresenius Medical Care AG -- Liquidity and Capital Resources."
CAPITALIZATION
The following table presents the unaudited consolidated capitalization of
Fresenius Medical Care as of June 30, 2001, reflecting the sale in June 2001 of
$225 million aggregate liquidation amount of old USD trust preferred securities
due 2011 and E300 million aggregate liquidation amount of old Euro trust
preferred securities due 2011 and our application of the net proceeds from those
offerings to repay revolving indebtedness under our senior credit facility, to
repay short term debt and for other general corporate purposes. For the purpose
of this presentation, we have translated euros into U.S. dollars at an exchange
rate of $0.8480 per E1.00. See "Use of Proceeds."
<Table>
<Caption>
JUNE 30, 2001
(IN MILLIONS)
Cash and cash equivalents................................... $ 77.2
========
Short term debt (including current portion of long term
debt)..................................................... 359.9
Long term debt:
Revolving credit facility................................. 303.8
Term facility............................................. 352.5
Other debt and capital lease obligations.................. 80.1
--------
Total long term debt (excludes trust preferred
securities)......................................... 736.4
Company-obligated mandatorily redeemable preferred
securities of Fresenius Medical Care Capital Trusts holding
solely company-guaranteed debentures of subsidiary:
9% $ Trust Preferred Securities due 2006.................. 360.0
7 7/8% $ Trust Preferred Securities due 2008.............. 450.0
7 3/8% DM Trust Preferred Securities due 2008............. 130.1
7 7/8% $ Trust Preferred Securities due 2011.............. 225.0
7 3/8% E Trust Preferred Securities due 2011.............. 254.4
--------
Total trust preferred securities..................... 1,419.5
Minority interest........................................... 19.5
Total shareholders' equity.................................. 2,739.3
--------
Total capitalization.............................. $5,274.6
========
</Table>
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THE EXCHANGE OFFERS
In this section, where the context requires, descriptions of the voting
rights, the liquidation rights and, the rights to distributions of the trust
preferred securities assume that all of the outstanding old trust preferred
securities will be exchanged for trust preferred securities in the exchange
offers. If any old trust preferred securities are not exchanged and remain
outstanding, the trust declarations provide that the old trust preferred
securities and the trust preferred securities will rank equally in all respects
and will have equal voting rights, liquidation rights and rights to
distributions.
PURPOSE OF THE EXCHANGE OFFERS
On June 6, 2001, Trust IV issued $225 million aggregate liquidation amount
of old USD trust preferred securities. On June 15, 2001 Trust V issued E300
million aggregate liquidation amount of old Euro trust preferred securities. In
connection with the sale of the old trust preferred securities, we, FMCH, FMC
Deutschland, the note issuer and the issuing trust entered into registration
rights agreements with the initial purchasers of the old trust preferred
securities in which we agreed to file with the Securities and Exchange
Commission a registration statement for the exchange of the old trust preferred
securities for the trust preferred securities and to use our reasonable efforts
to cause that registration statement to become effective. We have filed copies
of the registration rights agreements as exhibits to the registration statement
that includes this prospectus, and you can obtain copies of those agreements
from the sources described under "Where You Can Find More Information."
We are making the exchange offers to satisfy our contractual obligations
under the registration rights agreements. The trust preferred securities to be
issued in the exchange offers will have the same form and terms as the old trust
preferred securities except that:
- the trust preferred securities have been registered under the U.S.
Securities Act and will not be subject to the minimum liquidation amount
transfer restriction and certain other restrictions on transfer
applicable to the old trust preferred securities;
- the trust preferred securities will not provide for any increase in their
distribution rate; and
- after completion of the exchange offers, holders of old trust preferred
securities will not be entitled to any further registration rights under
the registration rights agreements, except under limited circumstances.
See "Risk Factors -- The exchange offers could adversely affect any market for
old trust preferred securities that are not exchanged."
We are not making the exchange offers to, and we will not accept tenders
for exchange from, holders of outstanding old trust preferred securities in any
jurisdiction in which the exchange offers or acceptance of the exchange offers
would not be in compliance with the securities or blue sky laws of the
jurisdiction in question.
The following exchanges will take place as soon as practicable following
expiration of the exchange offers:
- each trust will exchange trust preferred securities for its old trust
preferred securities in an amount corresponding to the old trust
preferred securities accepted for exchange;
- we will exchange our old trust guarantees for the trust guarantees;
- the note issuer will exchange notes for a like aggregate principal amount
of old notes corresponding to the liquidation amounts of old trust
preferred securities accepted for exchange; and
- we, FMCH and FMC Deutschland will exchange old note guaranties for the
note guaranties.
The trust preferred securities, trust guarantees, the notes and the note
guaranties have been registered under the Securities Act.
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In the discussion below, unless the context requires otherwise, the term
"holder" with respect to the exchange offers means any person in whose name the
old trust preferred securities are registered on the books of a trust or any
other person who has obtained a properly completed stock power from the
registered holder. Holder also includes:
- in the case of the old USD trust preferred securities, any person whose
old trust preferred securities are held of record by The Depository Trust
Company, "DTC," or its nominee, and
- in the case of old Euro trust preferred securities, any person whose old
Euro trust preferred securities are held of record by Deutsche Bank AG
London or its nominee as common depositary for Clearstream Luxembourg or
Euroclear;
and who, in either case, wishes to deliver old trust preferred securities by
book-entry transfer at DTC, Clearstream Luxembourg or Euroclear, as the case may
be.
TERMS OF THE EXCHANGE OFFERS
Trust IV hereby offers, upon the terms and subject to the conditions set
forth in this prospectus and in the accompanying letter of transmittal, to
exchange up to $225 million aggregate liquidation amount of USD trust preferred
securities for a like aggregate liquidation amount of old USD trust preferred
securities. To accept the USD exchange offer, you must properly tender your old
USD trust preferred securities on or prior to the expiration date and not
withdraw them. Promptly after the expiration date of the USD exchange offer,
Trust IV will issue up to $225 million aggregate liquidation amount of USD trust
preferred securities in exchange for a like aggregate liquidation amount of
outstanding old USD trust preferred securities that are tendered and that we
accept in connection with the USD exchange offer. You may tender your old USD
trust preferred securities in whole or in part in a liquidation amount of not
less than $100,000 or any integral multiple of $1,000 liquidation amount in
excess of $100,000.
Trust V hereby offers, upon the terms and subject to the conditions set
forth in this prospectus and in the accompanying letter of transmittal, to
exchange up to E300 million aggregate liquidation amount of Euro trust preferred
securities for a like aggregate liquidation amount of old Euro trust preferred
securities. To accept the Euro exchange offer, you must properly tender your old
Euro trust preferred securities on or prior to the expiration date and not
withdraw them. Promptly after the expiration date of the Euro exchange offer,
Trust V will issue up to E300 million aggregate liquidation amount of Euro trust
preferred securities in exchange for a like aggregate liquidation amount of
outstanding old Euro trust preferred securities that are tendered and that we
accept in connection with the Euro exchange offer. You may tender your old Euro
trust preferred securities in whole or in part in a liquidation amount of not
less than E100,000 or any integral multiple of E1,000 liquidation amount in
excess of E100,000.
There is no minimum liquidation amount of old USD or old Euro trust
preferred securities that must be tendered in either exchange offer, and neither
exchange offer is conditioned upon the consummation of the other exchange offer.
On the date of this prospectus, $225 million aggregate liquidation amount of old
USD trust preferred securities is outstanding, and E300 million aggregate
liquidation amount of old Euro trust preferred securities is outstanding.
As a holder of old trust preferred securities, you do not have any
appraisal or dissenters' rights in connection with the exchange offers. If you
do not tender your old trust preferred securities or if we do not accept your
tender in connection with the exchange offers, your old trust preferred
securities will remain outstanding and be entitled to the benefits of the
applicable trust declaration. However, you will not have any further
registration rights under the registration rights agreements, except under
limited circumstances. See "Risk Factors -- The exchange offers could adversely
affect any market for old trust preferred securities that are not exchanged."
If we do not accept any tenders of old trust preferred securities for
exchange because of an invalid tender or if certain other events described below
occur, we will return the certificates for any such unaccepted old trust
preferred securities, without expense, to the holders who tendered them promptly
after the expiration date.
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You will not be required to pay brokerage commissions or fees or, subject
to the instructions in the letter of transmittal, transfer taxes with respect to
the tender or exchange of old trust preferred securities in the exchange offer.
See "-- Fees and Expenses" below.
NONE OF FRESENIUS MEDICAL CARE, FMCH, FMC DEUTSCHLAND, THEIR DIRECTORS, OR
ANY TRUSTEE OF EITHER TRUST MAKES ANY RECOMMENDATION TO HOLDERS OF OLD TRUST
PREFERRED SECURITIES WHETHER TO TENDER OR REFRAIN FROM TENDERING ALL OR ANY
PORTION OF YOUR OLD TRUST PREFERRED SECURITIES IN THE EXCHANGE OFFERS, AND WE
HAVE NOT AUTHORIZED ANY PERSON TO MAKE ANY SUCH RECOMMENDATION. YOU MUST MAKE
YOUR OWN DECISION WHETHER TO TENDER PURSUANT TO THE EXCHANGE OFFERS AND, IF YOU
DETERMINE TO TENDER, THE AMOUNT OF OLD TRUST PREFERRED SECURITIES THAT YOU
TENDER, BASED ON YOUR OWN FINANCIAL POSITION AND REQUIREMENTS.
The term "expiration date" means, with respect to the USD exchange offer,
5:00 p.m., Eastern Daylight time, on October 4, 2001 unless we extend the USD
exchange offer and, with respect to the Euro exchange offer, 5:00 pm London time
on October 4, 2001, unless we extend the Euro exchange offer. We may extend the
expiration date of either or both exchange offers and, if we do so, the term
"expiration date" of that exchange offer shall be the latest date and time to
which we extend it.
We reserve the right, in our sole discretion but subject to applicable law,
at any time and from time to time:
- to delay the acceptance of the old trust preferred securities for
exchange;
- to terminate either or both exchange offers, whether or not we have
accepted any old trust preferred securities for exchange before
termination, if we determine, in our reasonable discretion, that any of
the events or conditions referred to under "-- Conditions to the exchange
offers" have occurred or exist or have not been satisfied; and
- to extend the expiration date of either or both exchange offers and
retain all old trust preferred securities that were tendered, subject,
however, to your right to withdraw old trust preferred securities that
you tendered by following the procedures described below under
"-- Withdrawal Rights."
If we amend an exchange offer in a manner we determine constitutes a
material change, or if we waive a material condition of an exchange offer, we
will promptly disclose the amendment or waiver in a prospectus supplement that
we will distribute to you as the holders of the old trust preferred securities.
If any facts or events arise which constitute a fundamental change in the
information in this prospectus or if we make any material changes or material
additions to the Plan of Distribution described in this prospectus, we will file
a post-effective amendment to the registration statement that contains the
applicable information and we will distribute an amended prospectus to holders
of the old trust preferred securities. If on the date that we first give that
prospectus supplement or amended prospectus to holders of old trust preferred
securities, there are less than ten business days until the expiration date, we
will extend either or both exchange offers so that the expiration date will be
not less than ten business days following the date we distribute the prospectus
supplement or amended prospectus. If we impose any delay in acceptance of
tenders or if we extend, terminate or amend the exchange offers, we will give
prompt oral or written notice of any such action to the exchange agents and we
will publicly announce the action. In the case of an extension, we will make the
announcement no later than 9:00 a.m., Eastern Daylight time, on the next
business day after the previously scheduled expiration date. Subject to
applicable law, our sole obligation in making any public announcement will be to
issue a release to an appropriate news agency, but this will not limit the
manner in which we may choose to publish, advertise or otherwise communicate any
public announcement. We will announce the results of the exchange offers in the
Luxembourger Wort.
ACCEPTANCE FOR EXCHANGE AND ISSUANCE OF TRUST PREFERRED SECURITIES
In the discussion below for the USD offer, the exchange agent is State
Street Bank and Trust Company and the clearing agency is DTC and, for the Euro
exchange offer, the exchange agent is Deutsche Bank AG London and the clearing
agencies are Euroclear and Clearstream, Luxembourg.
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Upon the terms and subject to the conditions of each exchange offer, each
trust will exchange and issue to the relevant exchange agent trust preferred
securities for old trust preferred securities that you validly tender and do not
withdraw promptly after the expiration date.
In all cases, we will deliver trust preferred securities in exchange for
old trust preferred securities that we accept for exchange pursuant to the
exchange offers only after the exchange agent (in the case of the USD exchange
offer) or the clearing agencies (in the case of the Euro exchange offer) timely
receive:
- old trust preferred securities, or a book-entry confirmation of a
book-entry transfer of old trust preferred securities into the exchange
agent's account at the clearing agency;
- the letter of transmittal, or a facsimile of the letter of transmittal,
properly completed and duly executed, with any required signature
guarantees, or, in the case of a participant in the book-entry transfer
facility system, an agent's message; and
- any other documents that the letter of transmittal requires.
A book-entry confirmation is a timely confirmation of a book entry transfer
of old trust preferred securities at the applicable clearing agency.
In the case of the Euro exchange offer, old Euro trust preferred securities
will be deemed to have been accepted as validly tendered when, as and if we have
given oral or written notice of acceptance to the Euro exchange agent. The Euro
exchange agent will act as agent for the tendering holders of old Euro trust
preferred securities for the purposes of receiving new Euro trust preferred
securities and delivering the new trust preferred securities to the holders. To
tender in the Euro exchange offer, a holder of old Euro trust preferred
securities must comply with the procedures established by Euroclear and
Clearstream, Luxembourg, as appropriate, for transfer of book-entry interests
through their electronic transfer systems prior to 5:00 p.m. London time on the
expiration date of the Euro exchange offer. For a tender of old Euro trust
preferred securities to be effective, a book-entry interest in the old Euro
trust preferred securities must be transferred through Euroclear and
Clearstream, Luxembourg. The exchange agent for the Euro exchange offer must
receive confirmation of the required book-entry transfer prior to the expiration
date of the Euro exchange offer.
Subject to the terms and conditions of the USD exchange offer, if and when
trust IV gives oral or written notice to the exchange agent for the USD exchange
offer that the trust has accepted old USD trust preferred securities for
exchange pursuant to the exchange offer, trust IV will be deemed to have
accepted for exchange and to have exchanged, validly tendered old USD trust
preferred securities. The exchange agent will act as the trust's agent to
receive tenders of old USD trust preferred securities, letters of transmittal
and related documents, and as your agent to receive old USD trust preferred
securities, letters of transmittal and related documents and to transmit USD
trust preferred securities to you.
We will exchange old trust preferred securities for trust preferred
securities promptly after the expiration date. However, if for any reason
whatsoever:
- we delay accepting old trust preferred securities for exchange;
- we delay exchanging any old trust preferred securities for trust
preferred securities, either before or after our acceptance of old trust
preferred securities for exchange; or
- we extend an exchange offer or we are unable to accept for exchange or
exchange old trust preferred securities that have been tendered in an
exchange offer,
then, without prejudice to our rights under the terms of the exchange offer, we
may instruct the exchange agent, on behalf of the trust, to retain old trust
preferred securities that were tendered. If we do so, subject to applicable law,
you may not withdraw those old trust preferred securities except in accordance
with your withdrawal rights as described below under "-- Withdrawal Rights."
We will announce the results of the exchange offers in the Luxembourg Wort
and notify the Luxembourg Stock Exchange of the results.
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By delivering a letter of transmittal, you will warrant and agree that:
- you have full power and authority to tender, exchange, sell, assign and
transfer old trust preferred securities;
- the trust will acquire good, marketable and unencumbered title to your
tendered old trust preferred securities, free and clear of all liens,
restrictions, charges and encumbrances; and
- the old trust preferred securities that you tendered for exchange are not
subject to any adverse claims or proxies.
In the letter of transmittal, you will also warrant and agree that you
will, upon request, execute and deliver any additional documents which the trust
or the exchange agent believe are necessary or desirable to complete the
exchange, sale, assignment and transfer of the old trust preferred securities
that you tendered. You will also make additional representations and warranties,
as described below under "-- Procedures for Tendering Old Trust Preferred
Securities -- Resale of Trust Preferred Securities."
PROCEDURES FOR TENDERING OLD TRUST PREFERRED SECURITIES
VALID TENDER
Except as described below, you can validly tender your old USD trust
preferred securities in the USD exchange offer by delivering or arranging for
delivery to the exchange agent for the USD exchange offer on or prior to the
expiration date of the USD exchange offer:
- a properly completed and duly signed letter of transmittal, or a
facsimile of the letter of transmittal, including any required signature
guarantees and other required documents, and either the old trust
preferred securities being tendered or a book-entry transfer as described
below; or
- an agent's message.
You can validly tender your old Euro trust preferred securities in the Euro
exchange offer by transferring or arranging for transfer of your beneficial
interests in the old Euro trust preferred securities in accordance with the
standard operating procedures of Euroclear and Clearstream, Luxembourg. For more
information and further instructions on tendering outstanding old Euro trust
preferred securities, you should contact the exchange agent for the Euro
exchange offer at the address provided below under "-- Exchange Agents -- The
Euro Exchange Offer."
In addition, for tenders of old USD trust preferred securities only, you
may tender by following the guaranteed delivery procedures described below.
If you want to tender less than all your old trust preferred securities,
you should fill in the amount of old trust preferred securities you are
tendering in the appropriate box on the letter of transmittal. If you do not
fill in any amount, you will be tendering all your old trust preferred
securities.
The address and telephone and facsimile numbers of each exchange agent are
provided below under "-- Exchange Agents."
THE METHOD YOU USE TO DELIVER CERTIFICATES, THE LETTER OF TRANSMITTAL AND
ALL OTHER REQUIRED DOCUMENTS IS AT YOUR SOLE OPTION AND RISK. YOU WILL NOT HAVE
MADE A VALID DELIVERY UNTIL THE EXCHANGE AGENT FOR THE USD EXCHANGE OFFER OR THE
CLEARING AGENCIES FOR THE EURO TRUST PREFERRED SECURITIES ACTUALLY RECEIVE THESE
DOCUMENTS. IF YOU MAKE DELIVERY BY MAIL, WE RECOMMEND USE OF REGISTERED MAIL,
RETURN RECEIPT REQUESTED, PROPERLY INSURED, OR AN OVERNIGHT DELIVERY SERVICE. IN
ALL CASES, YOU SHOULD ALLOW SUFFICIENT TIME TO ENSURE TIMELY DELIVERY.
BOOK-ENTRY TRANSFER
USD Exchange Offer
The exchange agent will establish an account with respect to the old USD
trust preferred securities at DTC for purposes of the USD exchange offer within
two business days after the date of this prospectus.
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Any financial institution that is a participant in DTC's book-entry transfer
facility system may make a book-entry delivery of old USD trust preferred
securities by causing DTC to transfer the old USD trust preferred securities
into the exchange agent's account at DTC in accordance with DTC's transfer
procedures. Unless the book-entry transfer is made with an agent's message, a
holder who delivers old USD trust preferred securities through book-entry
transfer must also properly complete, execute and deliver to the exchange agent
a letter of transmittal, or a facsimile of the letter of transmittal, together
with any required signature guarantees and other required documents, on or prior
to the expiration date. Alternatively, but solely for tenders of old USD trust
preferred securities, the holder must comply with the guaranteed delivery
procedure set forth below. A holder who is a participant in the book-entry
transfer facility system and transfers the holder's old trust preferred
securities by an agent's message need not transmit the letter of transmittal to
DTC to consummate the exchange. An agent's message is an electronic message from
a book-entry transfer facility that is sent to and received by the exchange
agent and forms a part of a book-entry confirmation. The message states that DTC
has received an express acknowledgement from the participant tendering the old
USD trust preferred securities that the participant has received and agrees to
be bound by the letter of transmittal and/or, solely with respect to tenders of
old USD trust preferred securities, the notice of guaranteed delivery discussed
below.
DELIVERY OF DOCUMENTS TO DTC IN ACCORDANCE WITH DTC'S PROCEDURES DOES NOT
CONSTITUTE DELIVERY TO THE EXCHANGE AGENT FOR THE USD EXCHANGE OFFER.
Euro Exchange Offer
Promptly upon commencement of the exchange offers, the exchange agent for
the Euro exchange offer will notify Euroclear and Clearstream of the
commencement of the Euro exchange offer and will arrange for publication of a
notice regarding the Euro exchange offer to holders of Euro trust preferred
securities through Euroclear and Clearstream. The exchange agent will also
arrange for distribution of this prospectus and the letter of transmittal
through Euroclear and Clearstream. Euroclear and Clearstream will inform their
participants of the Euro exchange offer and will send them copies of the
prospectus, the letter of transmittal and the instruction letter through which
holders of the Euro trust preferred securities may instruct their nominees to
tender their old Euro trust preferred securities. Holders of old Euro trust
preferred securities who wish to tender their securities must confirm their
instructions to Euroclear and Clearstream in accordance with those agencies'
standard procedures. Once Euroclear and Clearstream have received the necessary
confirmation, they will block the relevant securities in their participants'
accounts. On the expiration date for the Euro exchange offer, Euroclear and
Clearstream will confirm the aggregate amount of old Euro trust preferred
securities tendered for exchange to the exchange agent and, subject to our
rights described below under "-- Determination of Validity," we will confirm our
acceptance of the tendered securities. Euro trust preferred securities issued in
exchange for old Euro trust preferred securities will be credited to holders'
accounts as soon as the common depositary for Euroclear and Clearstream receives
the certificate or certificates evidencing the Euro trust preferred securities.
SIGNATURE GUARANTEES
You do not have to endorse certificates for the old trust preferred
securities or provide a signature guarantee on the letter of transmittal unless
your certificate for the old trust preferred securities is registered in
different name than the person surrendering the certificate or you complete the
box entitled "Special Issuance Instructions" or "Special Delivery Instructions"
in the letter of transmittal. If either case exists, the certificates for your
old trust preferred securities must be duly endorsed or accompanied by a
properly executed stock power, and the endorsement or signature on the stock
power and on the letter of transmittal must be guaranteed by a firm or other
entity that is an eligible guarantor institution under Rule 17Ad-15 under the
U.S. Securities Exchange Act of 1934, Eligible guarantor institutions include,
- a bank
- a broker, dealer, municipal securities broker or dealer or government
securities broker or dealer
- a credit union
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- a national securities exchange, registered securities association or
clearing agency
- a savings association that is a participant in a securities transfer
association
These requirements do not apply, however, if the party delivering the old
trust preferred securities is an eligible guarantor institution. See Instruction
1 to the letter of transmittal.
GUARANTEED DELIVERY OF OLD USD TRUST PREFERRED SECURITIES
If you want to tender old USD trust preferred securities pursuant to the
USD exchange offer and your certificates for your old USD trust preferred
securities are not immediately available, time will not permit you to deliver
all required documents to the exchange agent on or prior to the expiration date,
or you cannot complete the procedure for book-entry transfer on a timely basis,
you may still tender your old USD trust preferred securities provided that you
comply with all of the following guaranteed delivery procedures:
- you tender by or through an eligible guarantor institution;
- the eligible guarantor institution delivers a properly completed and duly
executed notice of guaranteed delivery, substantially in the form
accompanying the letter of transmittal or, in the case of a participant
in the book-entry transfer facility system, an agent's message, to the
exchange agent on or prior to the expiration date; and
- the exchange agent receives the certificates (or a book-entry
confirmation) representing your old USD trust preferred securities, in
proper form for transfer, together with a properly completed and duly
executed letter of transmittal (or facsimile thereof), with any required
signature guarantees and any other required documents or, in the case of
a participant in the book-entry transfer facility system, an agent's
message, within three New York Stock Exchange trading days after the date
of the execution of the notice of guaranteed delivery.
You may deliver the notice of guaranteed delivery to the exchange agent by
hand, by facsimile or by mail. It must include a guarantee by an eligible
guarantor institution in the form contained in the notice.
DETERMINATION OF VALIDITY
We will determine, in our sole discretion, all questions as to the form of
documents, validity, eligibility, including time of receipt, and acceptance for
exchange of old trust preferred securities that you tender, and our
determination shall be final and binding on all parties. We reserve the absolute
right, in our sole and absolute discretion, to reject any and all tenders which
we determine not to be in proper form or if our counsel advises us that
accepting the tender or exchange may be unlawful. We also reserve the absolute
right, subject to applicable law, to waive any of the conditions of the exchange
offers described under "-- Conditions to the exchange offers" or any condition
or irregularity in any tender of old trust preferred securities by any
particular holder even if we do not waive similar conditions or irregularities
in tenders by other holders. Our interpretation of the terms and conditions of
the exchange offers, including each letter of transmittal and related
instructions, will be final and binding. A tender of old trust preferred
securities will not be validly made until all irregularities with respect to the
tender have been cured or waived. However, none of Fresenius Medical Care, a
trust, our affiliates, the exchange agents or any other person will be under any
duty to give any notification of any irregularities in tenders or incur any
liability for failure to give any such notification.
If you sign a letter of transmittal, endorsement, stock power, power of
attorney, or any other document required by the letter of transmittal as a
trustee, executor, administrator, guardian, attorney-in-fact, officer of a
corporation or other fiduciary or representative capacity, you so indicate when
signing, and unless we waive this requirement, you must also submit proper
evidence satisfactory to us in our sole discretion, of your authority to act in
that capacity.
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Our accepting for exchange old trust preferred securities that you tender
pursuant to any of the procedures described above will constitute a binding
agreement, between you and the applicable trust, upon the terms and subject to
the conditions of the exchange offers.
If you hold your old trust preferred securities through a broker, dealer,
commercial bank, trust company or other nominee or custodian, you should contact
that entity promptly if you wish to participate in the exchange offers.
RESALES OF TRUST PREFERRED SECURITIES
We are making the exchange offer for the trust preferred securities in
reliance on the position that the staff of the U.S. Securities and Exchange
Commission has expressed in certain interpretive letters addressed to third
parties in other transactions. We have not sought our own interpretive letter
and we cannot assure that the staff would make a similar determination with
respect to the exchange offers as it has in its interpretive letters to third
parties. Based on these interpretations by the staff and subject to the two
immediately following sentences, we believe that, unless you are a
broker-dealer, you may offer for resale, resell and otherwise transfer trust
preferred securities that you receive in the exchange offer without further
compliance with the registration and prospectus delivery requirements of the
U.S. Securities Act, provided that
- you acquire the trust preferred securities in the ordinary course of your
business; and
- you are not participating, and you have no arrangement or understanding
with any person to participate, in a distribution, within the meaning of
the U.S. Securities Act, of those trust preferred securities.
However, if you are an affiliate of Fresenius Medical Care or a trust, if
you intend to participate in the exchange offers for the purpose of distributing
trust preferred securities, or if you are a broker-dealer who purchased old
trust preferred securities from a trust to resell pursuant to Rule 144A under
the U.S. Securities Act or any other available exemption under that act:
- you will not be able to rely on the interpretations of the staff set
forth in the interpretive letters described above;
- you may not tender your old trust preferred securities in the exchange
offers; and
- you must comply with the registration and prospectus delivery
requirements of the U.S. Securities Act in connection with any sale or
other transfer of your old trust preferred securities unless your sale is
made pursuant to an exemption from those requirements.
In addition, if you are a broker-dealer and you acquired your old trust
preferred securities for your own account as a result of market-making or other
trading activities and you exchange those old trust preferred securities for
trust preferred securities, then you must deliver a prospectus meeting the
requirements of the U.S. Securities Act in connection with any resales of your
trust preferred securities. You may use this prospectus for that purpose in
accordance with the conditions described below.
As a condition to exchanging old trust preferred securities for trust
preferred securities in the exchange offers, you must represent that
- you are not an affiliate of Fresenius Medical Care or a trust;
- you are acquiring trust preferred securities in the ordinary course of
your business;
- you have no arrangement or understanding with any person to participate
in a distribution, within the meaning of the U.S. Securities Act, of the
trust preferred securities you will receive; and
- if you are not a broker-dealer, you are not engaged in, and do not intend
to engage in, a distribution, within the meaning of the U.S. Securities
Act, of the trust preferred securities.
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As an additional condition to your eligibility to participate in the
exchange offers, we may require that you furnish to us or to our agent in
writing information as to the number of "beneficial owners" on behalf of whom
you hold the old trust preferred securities to be exchanged in the exchange
offers.
If you are a participating broker-dealer, that is, a broker-dealer who
receives trust preferred securities for your own account in the exchange offers,
you must also acknowledge that you acquired the trust preferred securities for
your own account as the result of market-making activities or other trading
activities, and you must agree that you will deliver a prospectus meeting the
requirements of the U.S. Securities Act in connection with any resale of your
trust preferred securities. The letter of transmittal states that by making that
acknowledgement and by delivering a prospectus, you will not be deemed to admit
that you are an underwriter within the meaning of the U.S. Securities Act. Based
on the position taken by the staff in the interpretive letters mentioned above,
we believe that if you acquired old trust preferred securities for your own
account as a result of market-making activities or other trading activities, you
may fulfill your prospectus delivery requirements with respect to the trust
preferred securities that you receive in the exchange offers by delivering this
prospectus, as amended or supplemented from time to time, during the period
ending on the earlier to occur of:
- 90 days following the expiration date, subject to extension under certain
limited circumstances described below, or,
- the date on which you have disposed of all your trust preferred
securities.
Subject to certain provisions of the registration rights agreements, we
have agreed that as a participating broker-dealer, you may use this prospectus,
as amended or supplemented from time to time, in connection with resales of your
trust preferred securities, during this period. See "Plan of Distribution."
However, if you intend to use this prospectus in connection with the resale of
trust preferred securities you receive in the exchange offers, you must notify
us on or prior to the expiration date that you are a participating
broker-dealer. You may give this notice in the space provided for that purpose
in the letter of transmittal or you may deliver the notice to the exchange agent
at the address indicated below under "-- Exchange Agents." For tenders of old
Euro trust preferred securities, the electronic instructions sent to Euroclear
or Clearstream must contain the character by which the participant acknowledges
its receipt of and agrees to be bound by the letter of transmittal. If you are a
participating broker-dealer who is also an affiliate of Fresenius Medical Care
or a trust or your old trust preferred securities represent an unsold allotment
from the original sale of the old trust preferred securities, you may not rely
on these interpretive letters and you must comply with the registration and
prospectus delivery requirements of the U.S. Securities Act in connection with
any resale transaction.
If you are a participating broker-dealer who surrenders old trust preferred
securities pursuant to the exchange offers and notifies us that you intend to
use this prospectus in connection with your resales of the trust preferred
securities, by executing the letter of transmittal, you will also agree that you
will suspend your sales of trust preferred securities pursuant to this
prospectus if you receive a notice from us that:
- an event has occurred, or we have discovered any fact which makes any
statement contained or incorporated by reference in this prospectus
untrue in any material respect or which causes this prospectus to omit to
state a material fact necessary in order to make the statements contained
or incorporated by reference in this prospectus, in light of the
circumstances under which they were made, not misleading; or
- certain other events specified in the registration rights agreements have
occurred.
If we deliver such a notice, you must suspend your sales of trust preferred
securities until we have amended or supplemented this prospectus to correct the
misstatement or omission and have furnished you with copies of the amended or
supplemented prospectus, or we have notified you that you may resume your sales
of the trust preferred securities, as the case may be. Any notice that we
deliver will extend the 90-day period referred to above during which you and
other participating broker-dealers may use this prospectus in connection with
your resales of trust preferred securities. The extension will last for the
number of days during the 90-day period from and including the date we give the
notice to and including
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the date you receive copies of the amended or supplemented prospectus necessary
to permit resales of the trust preferred securities, or to and including the
date on which we give notice that you may resume your sales of trust preferred
securities, as the case may be.
WITHDRAWAL RIGHTS
Except as otherwise provided herein, you may withdraw your tenders of old
trust preferred securities at any time on or prior to the applicable expiration
date. For your withdrawal to be effective, the exchange agent (in the case of
the USD exchange offer) or Euroclear or Clearstream (in the case of the Euro
exchange offer) must receive your written or faxed withdrawal notice on or prior
to the applicable expiration date. Your withdrawal notice must specify the name
of the person who tendered the old trust preferred securities to be withdrawn,
the aggregate liquidation amount of old trust preferred securities to be
withdrawn and, if you tendered certificates for old trust preferred securities,
the name of the registered holder of the old trust preferred securities as it
appears on the certificates, if that name is different from the name of the
person who tendered the old trust preferred securities. If you tendered
certificates for old trust preferred securities or if the tendered securities
were otherwise identified to the exchange agent or to Euroclear or Clearstream
as the case may be, then prior to the physical release of your old trust
preferred securities, you must submit the serial number shown on the particular
old trust preferred securities to be withdrawn and the signature on the notice
of withdrawal must be guaranteed by an eligible guarantor institution. No
signature guarantee is necessary in the case of old trust preferred securities
tendered for the account of an eligible guarantor institution. If you tendered
old trust preferred securities pursuant to the book-entry transfer procedures
described in "-- Procedures for Tendering Old Trust Preferred Securities," your
notice of withdrawal will be effective if you deliver it to the exchange agent
or to Euroclear or Clearstream as the case may be, in writing or by fax, and
your withdrawal notice must specify the name and number of the account at the
clearing agent to be credited with the withdrawal of old trust preferred
securities.
You may not rescind a withdrawal of tenders of old trust preferred
securities, and any properly withdrawn old trust preferred securities will not
be deemed validly tendered for purposes of the exchange offers. However, you may
retender trust securities that you withdraw at any subsequent time on or prior
to the expiration date by following any of the procedures described above under
"-- Procedures for Tendering Old Trust Preferred Securities."
DISTRIBUTIONS ON TRUST PREFERRED SECURITIES
We will pay the September 15 distributions on the old trust preferred
securities to holders of record on the record date for that distribution and to
holders who tender their old trust preferred securities prior to or on that
record date. Holders of trust preferred securities as of the record date for the
payment of distributions on September 15, 2001, will be entitled to receive
distributions accumulated from and after September 15, 2001.
CONDITIONS TO THE EXCHANGE OFFERS
Notwithstanding any other provision of the exchange offers, or any
extension of the exchange offers, we will not be required to accept for
exchange, or to exchange, any old trust preferred securities for any trust
preferred securities and we may terminate the exchange offers, regardless of
whether any old trust preferred securities are accepted for exchange before
termination, if any of the following conditions have occurred or exist or have
not been satisfied:
- a change occurs in the current staff interpretations which permit you to
offer for resale, resell or otherwise transfer the trust preferred
securities to be issued pursuant to the exchange offer (except for
transfers by broker-dealers and any affiliates of Fresenius Medical Care
or a trust) without compliance with the registration and prospectus
delivery provisions of the U.S. Securities Act as long as you acquired
your trust preferred securities in the ordinary course of your business
and you
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have no arrangement or understanding with any person to participate in a
distribution of your trust preferred securities; or
- any law, statute, rule or regulation is adopted or enacted which, in our
judgment, would reasonably be expected to impair our ability to proceed
with the exchange offers; or
- the U.S. Securities and Exchange Commission or any state securities
authority issues a stop order suspending the effectiveness of the
registration statement for the exchange offers or initiates or to our
knowledge, threatens to initiate proceedings for that purpose, or we do
not obtain any governmental approval which in our reasonable discretion,
we consider deem necessary for the consummation of the exchange offers as
contemplated by this prospectus.
If we determine in our reasonable discretion that any of the foregoing
events or conditions has occurred or exists or has not been satisfied, we may,
subject to applicable law, terminate either or both exchange offers, regardless
of whether we accepted any old trust preferred securities for exchange before
termination, or we may waive the condition or otherwise amend the terms of the
exchange offers in any respect. If we amend the exchange offers in a manner we
determine constitutes a material change, or if we waive a material condition of
an exchange offer, we will promptly disclose the amendment or waiver in a
prospectus supplement that we will distribute to you as the holders of the old
trust preferred securities. If any facts or events arise which constitute a
fundamental change in the information in this prospectus or if we make any
material changes or material additions to the Plan of Distribution described in
this prospectus, we will file a post-effective amendment to the registration
statement that contains the applicable information and we will distribute an
amended prospectus to holders of the old trust preferred securities. If on the
date that we first give that prospectus supplement or amended prospectus to
holders of old trust preferred securities, there are less than ten business days
until the expiration date, we will extend either or both exchange offers so that
the expiration date will be not less than ten business days following the date
we distribute the prospectus supplement or amended prospectus.
EXCHANGE AGENTS
THE USD EXCHANGE OFFER
The exchange agent for the USD exchange offer is State Street Bank and
Trust Company. With respect to the USD exchange offer, you must deliver the
letters of transmittal and any other required documents, and direct any
questions, requests for assistance and requests for additional copies of this
prospectus or the letter of transmittal to State Street Bank and Trust Company,
by registered or certified mail or by hand or overnight delivery:
<Table>
<Caption>
By Mail By Overnight or Hand Delivery
State Street Bank and Trust Company State Street Bank and Trust Company
Corporate Trust Department Corporate Trust Department
P.O. Box 778 2 Avenue de Lafayette
Boston, MA 02102-0778 Corporate Trust Window, 5th Floor
Attn: Ralph Jones Boston, MA 02111-1724
Attn: Ralph Jones
</Table>
By Facsimile
State Street Bank and Trust Company
Attn: Ralph Jones
617-662-1452
To Confirm Receipt: 617-662-1548
Delivery to an address or facsimile number other than those above will not
constitute a valid delivery. IN PARTICULAR, DELIVERY TO DTC OR TO THE EXCHANGE
AGENT FOR THE EURO EXCHANGE OFFER WILL NOT CONSTITUTE A VALID DELIVERY FOR THE
USD EXCHANGE OFFER.
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THE EURO EXCHANGE OFFER
The exchange agent for the Euro exchange offer is Deutsche Bank AG London.
With respect to the Euro exchange offer, you may direct any questions, requests
for assistance and requests for additional copies of this prospectus or the
letter of transmittal to Deutsche Bank AG London, by registered mail or by hand
or overnight delivery:
By Mail, by Overnight or Hand Delivery or by Facsimile
Deutsche Bank AG London
Winchester House
1 Great Winchester Street
London EC2N 2DB England
Attn: Corporate Trust and Agency Services
Fax No.: ++44(0) 207 547-0271
To Confirm Receipt: ++44(0) 207 545-8000
However, to tender your old Euro trust preferred securities in the Euro
exchange offer, you must arrange for transfer of your securities through
Euroclear or Clearstream as described above under "-- Procedures for Tendering
of Old Trust Preferred Securities -- Valid Tender" and "-- Procedures for
Tendering of Old Trust Preferred Securities -- Book-Entry Transfer -- The Euro
Exchange Offer." IN PARTICULAR, DELIVERY TO DTC OR TO EITHER EXCHANGE AGENT WILL
NOT CONSTITUTE A VALID DELIVERY FOR THE EURO EXCHANGE OFFER.
FEES AND EXPENSES
We have agreed to pay the exchange agents their reasonable and customary
fees for their services and will reimburse them for their reasonable
out-of-pocket expenses in connection with the exchange offers. We will also pay
brokerage houses and other custodians, nominees and fiduciaries the reasonable
out-of-pocket expenses they incur in forwarding copies of this prospectus and
related documents to the beneficial owners of old trust preferred securities,
and in handling or tendering for their customers.
You will not be obligated to pay any transfer taxes in connection with your
tender of old trust preferred securities for exchange. However, if:
- you instruct us to deliver trust preferred securities to, or to issue
trust preferred securities in the name of, any person other than the
registered holder of the old trust preferred securities that you tender,
or
- a transfer tax is imposed for any reason other than the exchange of old
trust preferred securities in connection with the exchange offer,
you will be obligated to pay the amount of any such transfer taxes, whether
imposed on the registered holder or any other persons. If you do not submit
satisfactory evidence of payment of these taxes or an exemption from these taxes
with your letter of transmittal, we or the exchange agent will bill you directly
for the amount of the transfer taxes.
We will not make any payment to brokers, dealers or other nominees
soliciting acceptance of the exchange offer.
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SELECTED HISTORICAL FINANCIAL DATA OF FRESENIUS MEDICAL CARE AG
The following table summarizes the consolidated financial information for
our business as of and for each of the years 1996 through 2000 and as of and for
the six-month periods ended June 30, 2001 and June 30, 2000. For each of the
years ended, we derived the selected financial information from our consolidated
financial statements. You should read this information together with the
consolidated financial statements of Fresenius Medical Care and the section
entitled "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Fresenius Medical Care AG." For each of the years
ended, we prepared our financial statements in accordance with US GAAP and KPMG
Deutsche Treuhand-Gesellschaft Aktiengesellschaft
Wirtschaftsprufungsgesellschaft, independent accountants, audited these
financial statements.
We derived the selected consolidated financial data as of and for the
six-month periods ended June 30, 2001 and 2000 from our unaudited interim
consolidated financial statements. We prepared our unaudited consolidated
financial statements on a basis substantially consistent with our audited
consolidated financial statements. In 1999, we recorded a special charge of $601
million ($419 million net of tax) related to the Settlement. In 1998, we
discontinued our homecare and non-renal business. Fiscal years 1996 and 1997
show the effects of the discontinuance of these businesses, as we acquired them
in 1996 in connection with the combination of Fresenius Worldwide Dialysis and
the dialysis business of W.R. Grace, through which we were formed.
<Table>
<Caption>
SIX MONTHS
ENDED JUNE 30, YEAR ENDED DECEMBER 31,
----------------------- --------------------------------------------------------------
2001 2000 2000 1999(A) 1998(B) 1997 1996(C)
---------- ---------- ---------- ---------- ---------- ---------- ----------
(UNAUDITED) (AUDITED)
(IN MILLIONS, EXCEPT SHARE AND PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Net revenues......................... $ 2,361 $ 2,038 $ 4,201 $ 3,840 $ 3,506 $ 2,974 $ 1,419
Cost of revenues..................... 1,561 1,321 2,734 2,463 2,243 1,886 860
---------- ---------- ---------- ---------- ---------- ---------- ----------
Gross profit......................... 800 717 1,467 1,377 1,263 1,088 559
Selling, general and
administrative..................... 461 401 814 785 743 675 344
Research and development............. 16 16 32 32 31 22 14
Special charge for Settlement(A)..... -- -- -- 601 -- -- --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Operating income (loss).............. 323 300 621 (41) 489 391 201
Interest expense, net................ 110 112 216 218 220 184 57
---------- ---------- ---------- ---------- ---------- ---------- ----------
Earnings (loss) before income
taxes.............................. 213 188 405 (259) 269 207 145
Income (loss) from continuing
operations before cumulative effect
of accounting change............... 116 95 212 (249) 132 104 89
Net income (loss).................... $ 116 $ 95 $ 212 $ (249) $ 19 $ 90 $ 88
========== ========== ========== ========== ========== ========== ==========
Weighted average of:
Preference shares outstanding...... 25,962,598 14,990,319 19,002,118 9,023,341 9,023,341 6,506,917 517,808
Ordinary shares outstanding........ 70,000,000 70,000,000 70,000,000 70,000,000 70,000,000 70,000,000 43,907,500
Basic income (loss) from continuing
operations per Ordinary share...... $ 1.20 $ 1.11 $ 2.37 $ (3.15) $ 1.62 $ 1.34 $ 2.00
Fully diluted income (loss)
continuing per Ordinary share...... 1.20 1.11 2.36 (3.15) 1.62 1.34 2.00
Basic income (loss) per Ordinary
share.............................. 1.20 1.11 2.37 (3.15) 0.20 1.16 1.96
Fully diluted income (loss) per
Ordinary share..................... 1.20 1.11 2.36 (3.15) 0.20 1.16 1.96
Basic income (loss) from continuing
operations per Preference share.... 1.23 1.14 2.43 (3.15) 1.78 1.39 2.07
Fully diluted income (loss) from
continuing operations per
Preference share................... 1.23 1.14 2.42 (3.15) 1.78 1.39 2.07
Basic income (loss) per Preference
share.............................. 1.23 1.14 2.43 (3.15) 0.36 1.21 2.03
Fully diluted income (loss) per
Preference share................... 1.23 1.14 2.42 (3.15) 0.36 1.21 2.03
Dividends declared per Ordinary share
(E)(a)............................. -- -- 0.78 0.69 0.59 0.51 --
Dividends declared per Preference
share (E)(a)....................... -- -- 0.84 0.75 0.64 0.56 0.10
</Table>
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<Table>
<Caption>
SIX MONTHS
ENDED JUNE 30, YEAR ENDED DECEMBER 31,
----------------------- --------------------------------------------------------------
2001 2000 2000 1999(A) 1998(B) 1997 1996(C)
---------- ---------- ---------- ---------- ---------- ---------- ----------
(UNAUDITED) (AUDITED)
(IN MILLIONS, EXCEPT SHARE AND PER SHARE DATA)
OTHER DATA:
EBITDA(b)............................ $ 484 $ 444 $ 914 $ 844 $ 768 $ 641 $ 292
Net cash provided by operating
activities......................... 146 171 391 351 268 194 107
Net cash used in investing
activities......................... 272 300 482 254 280 653 (87)
Net cash provided by (used in)
financing activities............... 149 141 156 (79) 13 424 (142)
Depreciation and amortization........ 161 143 293 284 279 250 91
Capital expenditures................. 133 91 228 160 159 209 119
Rental expenses (operating leases
only).............................. 107 93 193 161 122 99 40
Ratio of fixed charges to
earnings(c)........................ 0.4x 0.4x 0.4x -- 0.5x 0.5x 0.3x
BALANCE SHEET DATA:
Cash and cash equivalents............ $ 77 $ 46 $ 65 $ 35 $ 32 $ 38 $ 57
Working capital...................... 534 149 191 (229) 448 548 408
Total assets......................... 6,461 5,978 5,979 5,752 5,679 5,541 5,093
Total debt(d)........................ 1,096 1,527 1,237 1,228 1,296 1,811 1,595
Total Trust Preferred Securities..... 1,419 957 952 964 988 360 360
Total Liabilities.................... 3,722 3,603 3,300 3,750 3,322 3,095 2,937
Shareholders' equity (net assets).... 2,739 2,375 2,679 2,002 2,357 2,446 2,156
</Table>
- ---------------
(A) On January 18, 2000, FMCH, NMC and certain other affiliated companies
consummated the Settlement. Under the Settlement with the U.S. government,
FMCH made initial cash payments of approximately $286 million and entered
into a note payable for the remainder of the payment obligations. You can
find a more detailed discussion of the final terms of the settlement in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Fresenius Medical Care AG" and in Note 2 of the notes to our
consolidated financial statements.
(B) Includes the effect of an accounting change. See Note 1 of the notes to our
consolidated financial statements.
(C) Includes the results of FMCH for the period subsequent to September 30,
1996.
(a) Amounts shown for each year represent dividends paid with respect to such
year. The actual declaration and payment of the dividend was made in the
following year, after approval of the dividend at our general meeting. Our
shareholders approved the dividend for 2000 at our general meeting on May
23, 2001, and the dividend was paid on May 24, 2001.
(b) As used above, EBITDA means earnings before interest, income taxes,
depreciation and amortization and, for 1999, the special charge for the
Settlement. We are not presenting EBITDA here as a measure of our operating
results. Our management believes that presentation of EBITDA is helpful to
investors as a measure of our ability to generate cash and to service debt.
Management also believes that presentation of EBITDA is helpful to
investors because EBITDA is used to determine compliance with some of the
covenants in our senior credit agreement and the indentures relating to
both our outstanding trust preferred securities and the trust preferred
securities we are currently offering. However, you should not construe
EBITDA as an alternative to net earnings determined in accordance with US
GAAP or to cash flow from operations, investing activities or financing
activities or as a measure of cash flows.
(c) In calculating the ratio of fixed charges to earnings, earnings consist of
income before taxes plus fixed charges. Fixed charges consist of interest
expense and amortization of deferred financing fees, plus one-third of
rental expense under operating leases, the portion which we consider to be
representative of an interest factor. Earnings were deficient in covering
fixed charges by $260 million for the year ended 1999 due to the one-time
settlement charge.
(d) Total debt includes short-term borrowings from third parties, short-term
borrowings from related parties, note payable related to the Settlement and
long-term debt and capital lease obligations, including current portion.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS -- FRESENIUS MEDICAL CARE AG
You should read the following discussion and analysis of the results of
operations of Fresenius Medical Care in conjunction with our historical
consolidated financial statements, our historical condensed consolidated
financial statements and related notes contained elsewhere in this offering
circular. Some of the statements contained below, including those concerning
future revenue, costs and capital expenditures and possible changes in our
industry and competitive and financial conditions include forward-looking
statements. Because such statements involve risks and uncertainties, actual
results may differ materially from the results which the forward looking
statements express or imply.
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The tables below, "Fresenius Medical Care AG Segment Data," present segment
information for our company. We prepared the information using a management
approach, consistent with the basis and manner in which our management
internally segments financial information to assist in making internal operating
decisions and evaluating management performance.
This section contains forward-looking statements. We made these
forward-looking statements based on our management's expectations and beliefs
concerning future events which may affect us, but we cannot assure you that
these events will occur or that the results will be as anticipated. Such
statements include the matters that we described in the discussion in this
offering circular entitled "Forward-Looking Statements."
Our businesses operate in highly competitive markets and are subject to
changes in business, economic and competitive conditions. Our business is
subject to:
- intense competition;
- varying degrees of acceptance of new product introductions;
- changes in reimbursement rates;
- technological developments in our industry;
- uncertainties in litigation or investigative proceedings and regulatory
developments in the health care sector;
- foreign exchange rate fluctuations; and
- the availability of financing.
Our business is also subject to other risks and uncertainties that we
describe in this offering circular under "Risk Factors." Developments in any of
these areas could cause our results to differ materially from the results that
we or others have projected or may project.
OVERVIEW
Effective January 1, 1998, we adopted SFAS 131 issued by the U.S. Financial
Accounting Standards Board. Commencing with the period ended March 31, 1999, we
identified three operating segments, North America, International, and Asia
Pacific, that we determined based upon how we manage our businesses. For
reporting purposes, we have aggregated the International and Asia Pacific
segments as "International." We aggregated these segments due to their similar
economic characteristics. These characteristics include same services provided
and same products sold, same type patient population, similar methods of
distribution of products and services and similar economic environments.
Each segment engages primarily in providing kidney dialysis services and
manufacturing and distributing products and equipment for the treatment of
end-stage renal disease. Additionally, the North America segment engages in
performing clinical laboratory testing and renal diagnostic services. The United
States operations of Fresenius Medical Care Deutschland GmbH, which had
previously been
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included in the International segment, are now included in the North America
segment. All prior periods were restated to reflect this change as of January 1,
2001. Our management board member responsible for the profitability and cash
flow of each segment's various businesses supervises the management of each
operating segment. The accounting policies of the operating segments are the
same as those we apply in preparing our consolidated financial statements under
US GAAP.
Our management evaluates each segment using a measure that reflects all of
the segment's controllable revenues and expenses. Our management believes the
most appropriate measure in this regard is earnings before interest and taxes,
or EBIT, which measures our source of earnings. Financing is a corporate
function which segments do not control. Therefore, we do not include interest
cost as a segment measurement. We also regard taxes to be outside the segment's
control. In addition to EBIT, our management also believes that earnings before
interest, taxes, depreciation and amortization, or EBITDA, is helpful for
investors as a measurement of the segment's and our company's ability to
generate cash and to service our financing obligations. EBITDA is also the basis
for determining compliance with some of the covenants contained in our senior
credit agreement, the indentures relating to our outstanding trust preferred
securities and the indenture relating to the offered trust preferred securities.
You should not consider EBITDA to be an alternative to net earnings
determined in accordance with US GAAP or to cash flow from operations, investing
activities or financing activities or as a measure of cash flows. We believe our
EBIT calculation is the functional equivalent of operating income. Because all
companies do not calculate EBITDA and EBIT consistently, the presentation in
this discussion may not be comparable to other similarly titled measures of
other companies.
During 1998, we had discontinued operations because we divested our
homecare and non-renal diagnostics businesses. Our results of operations for
1998 also reflect an accounting change relating to start-up costs because in
that year we adopted Statement of Position No. 98-5, Reporting on the Costs of
Start-up Activities as issued by the Accounting Standards Executive Committee of
the American Institute of Certified Public Accountants. Where appropriate, we
have restated our quarterly financial information for 1998 to show the results
of discontinued operations and to reflect the cumulative effect of the
accounting change.
We obtained approximately 40% of our worldwide revenue for 2000 and for the
six months ended June 30, 2001 from sources subject to regulations under U.S.
government health care programs. In the past, U.S. budget deficit reduction and
health care reform measures have changed the reimbursement rates under these
programs, including the Medicare composite rate, the reimbursement rate for EPO,
and the reimbursement rates for other dialysis and non-dialysis related services
and products, as well as other material aspects of these programs, and they may
change in the future.
We also obtain a significant portion of our net revenues from reimbursement
by non-government payors. Historically, these payors' reimbursement rates
generally have been higher than government program rates in their respective
countries. However, non-governmental payors are imposing cost containment
measures that are creating significant downward pressure on reimbursement levels
that we receive for our services and products.
We believe that our existing credit facilities, cash generated from
operations and other current sources of financing are sufficient to meet our
foreseeable needs, including our 2001 budget for acquisitions and capital
expenditures summarized below in "Business -- Capital Expenditures." However, we
expect from time to time to incur additional senior debt to refinance our
outstanding senior debt and for other purposes. On July 12, 2001, we issued
E108.5 million aggregate principal amount of four-year senior notes in the
European private placement market, of which E80 million bear interest at a fixed
rate of 6.16% per annum and E28.5 million bear interest at a floating rate,
initially 5.837% per annum. We used the proceeds of these notes to refinance
existing senior debt. If cash flows from operations or availability under
existing banking arrangements fall below expectations, we may have to consider
other alternatives to maintain sufficient liquidity. We cannot assure that we
will be able to do so on satisfactory terms, if at all.
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Our discussions relating to our consolidated financial condition and
results of operations for 1999 reflect the effects of the Settlement and costs
incurred in connection with resulting special charge for the settlement cost,
"the special charge." The discussion of the disaggregated results of operations
of the North America segment excludes the effect of the special charge.
OPERATING RESULTS
The following tables summarize our financial performance and certain
operating results by principal business segment for the periods indicated.
Inter-segment sales primarily reflect sales of medical equipment and supplies
from the International segment to the North America segment. We reorganized this
information and reclassified prior period information to conform with our
business segment reporting requirements and to distinguish between continuing
and discontinued operations and the cumulative effect of the accounting change
as previously noted.
FRESENIUS MEDICAL CARE AG
SEGMENT DATA
<Table>
<Caption>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
---------------- --------------------------
2001 2000 2000 1999 1998
------ ------ ------ ------ ------
(UNAUDITED) (AUDITED)
(U.S. DOLLARS IN MILLIONS)
Total revenue
North America............................... $1,770 $1,502 $3,085 $2,811 $2,565
International............................... 603 550 1,155 1,076 986
------ ------ ------ ------ ------
Totals.............................. 2,373 2,052 4,240 3,887 3,551
------ ------ ------ ------ ------
Inter-segment revenue
North America............................... 1 1 2 4 2
International............................... 11 13 37 43 43
------ ------ ------ ------ ------
Totals.............................. 12 14 39 47 45
------ ------ ------ ------ ------
Total net revenue
North America............................... 1,769 1,501 3,083 2,807 2,563
International............................... 592 537 1,118 1,033 943
------ ------ ------ ------ ------
Totals.............................. 2,361 2,038 4,201 3,840 3,506
------ ------ ------ ------ ------
EBITDA
North America............................... 354 317 646 611 549
International............................... 137 130 270 243 228
Special charge for Settlement............... -- -- -- (601) --
Corporate................................... (7) (3) (2) (10) (9)
------ ------ ------ ------ ------
Totals.............................. 484 444 914 243 768
------ ------ ------ ------ ------
Amortization and depreciation
North America............................... 124 110 223 217 215
International............................... 36 32 69 65 62
Corporate................................... 1 1 1 2 2
------ ------ ------ ------ ------
Totals.............................. $ 161 $ 143 $ 293 $ 284 $ 279
------ ------ ------ ------ ------
</Table>
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<Table>
<Caption>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
---------------- --------------------------
2001 2000 2000 1999 1998
------ ------ ------ ------ ------
(UNAUDITED) (AUDITED)
(U.S. DOLLARS IN MILLIONS)
EBIT
North America............................... $ 230 $ 207 $ 423 $ 394 $ 334
International............................... 101 98 201 178 165
Special charge for Settlement............... -- -- -- (601) --
Corporate................................... (8) (4) (3) (12) (10)
------ ------ ------ ------ ------
Totals.............................. 323 301 621 (41) 489
------ ------ ------ ------ ------
Interest income............................... 5 5 9 8 8
Interest expense.............................. (115) (117) (195) (226) (228)
Interest expense on obligation related to
Settlement.................................. (a) (a) (30) -- --
Income tax (expense) benefit.................. (96) (92) (190) 12 (135)
Minority interest............................. (1) (2) (3) (2) (2)
Loss from discontinued operations, net........ -- -- -- -- (106)
Cumulative effect of accounting change, net... -- -- -- -- (7)
------ ------ ------ ------ ------
Net income (loss)............................. $ 116 $ 95 $ 212 $ (249) $ 19
====== ====== ====== ====== ======
</Table>
- ---------------
(a) In 2001, we discontinued separate reporting of Settlement interest in
anticipation of the final payment on the Settlement note, which we made in
June 2001.
SIX MONTHS ENDED JUNE 30, 2001 COMPARED TO SIX MONTHS ENDED JUNE 30, 2000
Net revenues for the six months ended June 30, 2001 increased by 16% (18%
at constant exchange rates) to $2,361 million from $2,038 million for the
comparable period in 2000. Net income for the first six months of 2001 was $116
million, an increase of $21 million from net income of $95 million for the
comparable period in 2000. Earnings per Ordinary share were $1.20 as compared to
$1.11 for the same period in the prior year.
At June 30, 2001 we owned and operated 1,367 clinics compared to 1,351 at
March 31, 2001. During the quarter we acquired 11 clinics with 1,603 patients,
opened 10 clinics and disposed of 5 clinics.
The number of patients treated in clinics that we own and operate increased
to 102,000 at June 30, 2001 from 98,600 at March 31, 2001. Approximately
3,800,000 treatments were provided in the second quarter of this year; an
increase of 20 % from 3,170,000 for the comparable period in 2000. Average
revenue per treatment increased from $230 in the second quarter of last year to
$233 for the same period this year.
The following discussions pertain to our business segments and the measures
we use to manage these segments.
NORTH AMERICA SEGMENT
Revenue. Net revenue for the North America segment for the six months
ended June 30, 2001 grew by 18% from $1,501 million to $1,769 million. This was
a result of a 21% increase in dialysis care revenue from $1,270 to $1,534
million while dialysis products increased 2% from $231 million to $235 million.
The increase in dialysis care revenue resulted primarily from a $78 million (6%)
increase in the number of treatments and an increase in revenue per treatment of
approximately $28 million (3%) as a result of the impact of increased Medicare
reimbursement rates and improved anemia management (EPO utilization) as compared
to 2000. Acquisitions contributed 12% of dialysis care revenue growth. Dialysis
product revenue increased by $4 million (2%) as a result of increased sales
volume offset by decreased prices due to a shift in product mix from reuse
dialyzers to non-reuse.
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EBITDA. EBITDA for the North America segment grew by 12%. The EBITDA
margin decreased 1% to 20%. The main reasons were the lower than planned EBITDA
contribution of Everest and a change in the Dialysis Care revenue mix to a
higher portion of ancillary services which contribute less to earnings than
incremental treatment revenue.
Amortization and Depreciation. Amortization and depreciation decreased
slightly as a percentage of revenue in 2001. This is mainly due to the impact of
internal revenue growth while amortization and depreciation has remained fairly
constant at $124 million compared to $110 million for the comparable period in
2000.
EBIT. EBIT for the North America segment increased by 11% due to the
increase in EBITDA and the positive impact of the decreased rate of amortization
and depreciation to revenue as previously mentioned.
INTERNATIONAL SEGMENT
Revenue. Net revenue for the International segment during the six months
ended June 30, 2001 grew by 10% (18% at constant exchange rates) from $537
million in 2000 to $592 million in 2001. Acquisitions contributed approximately
$53 million. Same store growth during the period was 8% at constant exchange
rates. Including the effects of the acquisitions, Asia Pacific region revenue
increased $12 million or 15% (28% at constant exchange rates), Latin America
region revenue grew $27 million or 29% (36% at constant exchange rates) while
European region revenue increased $16 million, a 4% increase (12% increase at
constant exchange rates). Total dialysis care revenue increased during 2001 by
31% (38% at constant exchange rates) to $199 million in 2001 from $152 million
the prior period. This increase is a result of base business growth, consisting
of an approximately $12 million (8%) increase in the number of dialysis care
treatments and an approximately $4 million (3%) increase in average price per
treatment, offset by approximately $10 million (7%) due to exchange rates.
Acquisitions, mainly TRC, contributed approximately $41 million (27%) to total
dialysis care revenue. Total dialysis product revenue for 2001 increased by 2%
(10% at constant exchange rates) to $393 million. Product volume increased by
approximately $47 million (12%) which was offset by lower average pricing of
approximately $19 million (5%) and approximately $32 million (8%) due to
exchange rates. Acquisitions contributed approximately $12 million (3%) to total
dialysis product revenue growth.
EBITDA. EBITDA for the International segment for 2001 grew by 5% (13% at
constant exchange rates) from $130 million to $137 million primarily due to the
increased revenue noted above. A majority of the EBITDA growth was a result of
increased business in the Latin America region
Amortization and Depreciation. Amortization and depreciation decreased
slightly as a percentage of revenues, increasing from $33 million in 2000 to $36
million in 2001.
EBIT. EBIT for the International segment for 2001 increased by 4% (11% at
constant exchange rates) due to the increased EBITDA mentioned above and the
positive impact of the lower growth rate of amortization and depreciation as
compared to the EBITDA growth rate mentioned above.
The following discussions pertain to our total company costs.
Interest. Interest expense for 2001 decreased compared to the same period
in 2000. Borrowings increased in order to partially fund the Everest
acquisition.
Income Taxes. The effective tax rate for the six month period ending June
30, 2001 was below the 2000 rate as non-deductible amortization of goodwill
relating to acquisitions was lower, as a percentage of taxable income, for 2001
compared to the same period in 2000 and German income tax reform became
effective January 1, 2001.
YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999
Net revenues for the year ended December 31, 2000 increased by 9% (12% at
constant exchange rates) to $4,201 million from $3,840 million for the
comparable period in 1999. Net income for the year
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was $212 million as compared to a net loss of $249 million in 1999. The net loss
of $249 million in 1999 was a result of the special charge of $601 million ($419
million after tax) relating to the Settlement. Excluding the effects of the
special charge during 1999, net income for the year 2000 increased by 24% (34%
at constant exchange rates) or $42 million.
Earnings per Ordinary share in 2000 were $2.37 compared to a loss per
Ordinary share of $3.15 in the prior year. Excluding the effects of the special
charge, earnings per Ordinary share increased by 10% from $2.15 in 1999.
At December 31, 2000 we owned, operated or managed 1,270 clinics compared
to 1,090 clinics at the end of 1999. During 2000, we acquired 133 clinics with a
total of 7,594 patients, opened 67 clinics and disposed of 20 clinics.
The number of patients treated in clinics that we own, operate or manage
increased from approximately 80,000 in 1999 to 91,900 at the end of 2000.
Approximately 12.9 million treatments were provided in the year 2000; an
increase of 13% from 11.4 million treatments for the comparable period in 1999.
Average revenue per treatment remained stable at $228.
The following discussions pertain to our business segments and the measures
we use to manage these segments. THE NORTH AMERICA SEGMENT DISCUSSION EXCLUDES
THE EFFECTS OF THE SPECIAL CHARGE IN 1999.
NORTH AMERICA SEGMENT
Revenue. Net revenue for the North America segment for 2000 grew by 10%
from $2,807 million to $3,083 million.
Dialysis care revenue increased by 12% to $2,608 million, 9% attributable
to base business revenue growth and 3% to acquisitions. The increase in dialysis
care revenue resulted primarily from a $201 million (9%) increase in the number
of treatments, reflecting both base business growth and the impact of 1999 and
2000 acquisitions. Revenue was also favorably impacted by an increase in revenue
per treatment of approximately $72 million (3%) as a result of increased
Medicare reimbursement rates, higher revenue from disease state management
programs and higher revenues in other pharmaceutical sales compared to 1999. For
the years 2000 and 1999 EPO represented approximately 28% of dialysis care
revenue or approximately 22% of total revenue.
The 1.2% increase of the Medicare composite rate for dialysis services (59%
of dialysis care revenue in 2000 resulted from Medicare's ESRD program)
generated an additional $9 million in revenue in 2000. We expect that an
additional 2.4% increase, approved in December 2000, will have a positive impact
on our revenues for 2001. Laboratory testing revenues increased as a result of
higher patient volume.
At the end of 2000 approximately 67,900 patients were treated in the 920
clinics that we own, operate or manage in the North America segment, compared to
approximately 62,000 patients treated in 849 clinics at the end of 1999. The
average revenue per treatment excluding laboratory testing revenue increased
from $253 in 1999 to $261 in 2000. Including laboratory testing the average
revenue per treatment increased from $264 in 1999 to $272 in 2000.
Dialysis products revenue increased 1% to $475 million. Dialysis product
volume revenue increased approximately $8 million or 2% as a result of increased
sales of hemodialysis products, partially offset by decreased sales of
peritoneal products. Product revenue growth was slightly (1%) affected by
decreasing prices. The consolidation process in the dialysis care business also
affected our product business growth. As integrated product and service
providers acquire stand alone dialysis clinics, the external market for products
decreases. The lower revenue in peritoneal products is also a result of a
decreasing external market.
EBITDA. EBITDA for the North America segment grew by 6% due to increased
treatment volume, improved treatment rates, higher earnings in other
pharmaceutical sales, increased earnings from laboratory testing and net foreign
currency transaction gains. These increases were partially offset by costs to
develop new therapies, costs to develop disease state management methodologies,
higher personnel costs due to the
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tight labor market for medical personnel in the United States and an
industry-wide price increase for Epogen, the key drug in anemia management.
Amortization and Depreciation. Amortization and depreciation decreased
slightly as a percentage of revenue in 2000. This was mainly due to the impact
of internal revenue growth while amortization and depreciation has remained
fairly constant at $222 million.
EBIT. EBIT for the North America segment increased by 7% due to the
increase in EBITDA and the positive impact of the decreased percentage of
amortization and depreciation to revenue as previously mentioned.
INTERNATIONAL SEGMENT
Revenue. In 2000 the appreciation of the U.S. dollar against the euro
significantly impacted our International segment. Net revenue for the
International segment increased by 8% (19% at constant exchange rates) from
$1,033 million in 1999 to $1,118 million in 2000. Acquisitions, primarily Total
Renal Care, contributed $88 million, approximately $30 million in the European
region, $46 million in the Latin America region and $12 million in the Asia
Pacific region. Base business growth during the period was 10% at constant
exchange rates. Including the effects of acquisitions, Asia Pacific region
revenue increased $39 million or 29% (26% at constant exchange rates), and Latin
America region revenue increased $65 million or 44% (49% at constant exchange
rates). European region revenue decreased by 3% from $748 million in 1999 to
$728 million in 2000 (12% increase at constant exchange rates) due to the
appreciation of the U.S. dollar against the euro mentioned above. Total dialysis
care revenue increased by 27% (40% at constant exchange rates) from $265 million
in 1999 to $336 million in 2000. Base business growth consisted of approximately
$27 million (10%) increase in the number of dialysis care treatments, offset by
approximately $35 million (13%) due to exchange rate fluctuations. Average
revenue per treatment increased by approximately 3% or $9 million before the
impact of currency fluctuations. Acquisitions, primarily Total Renal Care
Holdings, Inc., contributed approximately $70 million (26%) to total dialysis
care revenue.
At the end of 2000, approximately 24,000 patients were treated at 350
clinics that we own, operate or manage in the International segment compared to
18,000 patients treated at 241 clinics at the end of 1999.
Total dialysis product revenue for 2000 increased by 2% (12% at constant
exchange rates) to $782 million. Product volume increased by approximately $121
million (16%) which was offset by lower average pricing of approximately $48
million (6%) due to the competitive nature of the market. The increase in
product revenues was further offset by approximately $78 million (10%) due to
exchange rate fluctuations. Acquisitions contributed approximately $18 million
(2%) to total product revenue.
EBITDA. EBITDA for the International segment for 2000 grew by 11% (25% at
constant exchange rates) from $243 million to $270 million primarily due to the
increased revenue noted above.
EBIT. EBIT for the International segment for 2000 increased by 13% (27% at
constant exchange rates) from $179 million to $201 million due to the increased
EBITDA mentioned above and stable depreciation and amortization as a percentage
of revenue.
CORPORATE
We do not allocate "corporate costs" to our segments in calculating segment
EBIT and EBITDA. These corporate costs primarily relate to certain headquarter
overhead charges, including accounting and finance, professional services, legal
fees, etc.
Total corporate EBIT was $(3) million in 2000 compared to $(12) million in
1999. EBIT in 2000 was primarily affected by net foreign currency transaction
gains of $12 million related to intercompany financing. Excluding these net
gains, corporate costs would have increased by approximately $3 million,
resulting primarily from increased compensation expense relating to our
international stock option plan.
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THE FOLLOWING DISCUSSIONS PERTAIN TO OUR TOTAL COMPANY COSTS, EXCLUDING THE
EFFECTS OF THE SPECIAL CHARGE IN 1999.
Cost of revenue and operating expenses. Cost of revenue increased as a
percentage of revenue mainly due to costs to develop new therapies, costs to
develop disease state management methodologies, higher personnel cost in the
United States and an industry-wide price increase for EPO. However, the
resulting decrease of our gross profit margin was more than offset by decreased
selling, general and administrative expenses as a percentage of revenue, mainly
due to effective general cost controls and net foreign currency transaction
gains.
Interest. Interest expense for 2000 remained relatively constant compared
to the same period in 1999. Interest expense related to the note payable
associated with the Settlement amounted to approximately $30 million. This
additional interest expense was offset by the reduced interest expense related
to lower other borrowings, resulting from the use of the $557 million net
proceeds received from the Preference share offerings completed during 2000. We
anticipate higher interest expense in 2001 due to the debt increase in
connection with the acquisition of Everest. See "-- Liquidity and Capital
Resources."
Income Taxes. The effective tax rate for the year decreased from 49.5% in
1999 to 46.9% in 2000 due to the capitalization of tax loss carry forwards and
because non-deductible amortization of goodwill relating to acquisitions was
lower, as a percentage of taxable income, for 2000 compared to the same period
in 1999.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Net revenues from continuing operations for the year ended December 31,
1999 increased by 10% (11% at constant exchange rates) to $3,840 million from
$3,506 million for the comparable period in 1998. Net loss for the year was $249
million, a decrease of $268 million from net income of $19 million for the
comparable period in 1998. The loss was a result of the special charge and
related costs of $601 million ($419 million after tax) relating to the
Settlement. Excluding the effects of the special charge net earnings from
continuing operations increased by 29% (32% at constant exchange rates) to $170
million from $132 million in 1998.
The loss per Ordinary share from continuing operations was $3.15. Earnings
per Ordinary share from continuing operations would have been $2.15, excluding
the effects of the special charge, as compared to $1.62 for the same period in
the prior year. Income from continuing operations for 1998 was impacted by the
after tax effects of an accounting change of $7 million and losses on the sale
of discontinued businesses of $106 million. This resulted in net income of $19
million for 1998.
At December 31, 1999 we owned, operated or managed 1,090 clinics compared
to 1,000 clinics at the end of 1998. During 1999 we acquired 36 clinics with a
total of 2,531 patients, opened 71 clinics and disposed of 17 clinics.
The number of patients treated in clinics that we own, operate or manage
increased from 74,200 in 1998 to 80,000 at the end of 1999. Approximately
11,400,000 treatments were given in 1999; an increase of 9% from 10,450,000
treatments for the comparable period in 1998. The respective average revenue per
treatment increased from $226 in 1999 to $228 in 2000.
The following discussions pertain to our business segments and the measures
we use to manage these segments. These discussions are based on continuing
operations unless otherwise indicated. THE NORTH AMERICA SEGMENT DISCUSSION
EXCLUDES THE EFFECTS OF THE SPECIAL CHARGE IN 1999.
NORTH AMERICA SEGMENT
Revenue. Net revenue for the North America segment for 1999 grew by 10%
from $2,563 million to $2,807 million. This resulted from a 10% increase in
dialysis care revenue to $2,335 million and a 5% increase in dialysis products
revenue to $472 million. The increase in dialysis care revenue resulted
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primarily from an 8% increase in treatments, the beneficial impact of the
extension of the Medicare Secondary Payor provision and higher EPO utilization
as compared to 1998. This growth was partially offset by decreased laboratory
testing revenues derived from lower laboratory testing volume during 1999 as
competitors consolidated laboratory activity. Acquisitions contributed 2% of
dialysis care revenue growth. The increase in dialysis product revenue was due
to increased sales of hemodialysis products, partially offset by decreased sales
of peritoneal dialysis products.
At the end of 1999 approximately 62,000 patients were treated in 849
clinics that we own, operate or manage in the North America segment compared to
58,600 patients treated in 782 clinics at the end of 1998.
EBITDA. EBITDA for the North America segment prior to the effects of the
special charge grew by 11% due to the increase in our base business, improved
treatment rates, and increased ancillary services. Product revenue growth,
product mix and improvements in manufacturing efficiencies from increased
production volume also contributed to the increased EBITDA growth. However,
decreased EBITDA in laboratory testing partially offset this growth.
Amortization and Depreciation. Amortization and depreciation decreased
slightly as a percentage of revenue, in 1999. This was mainly due to the impact
of internal revenue growth while amortization and depreciation has remained
fairly constant.
EBIT. EBIT for the North America segment prior to the effects of the
special charge increased by 18% due to the increase in EBITDA and the positive
impact of the decreased rate of amortization and depreciation to revenue as
previously mentioned.
INTERNATIONAL SEGMENT
Revenue. Net revenue for the International segment during 1999 grew by 10%
(14% at constant exchange rates) from $943 million in 1998 to $1,033 million in
1999 as a result of a 4% (8% at constant exchange rates) increase in the
European region, 38% (28% at constant exchange rates) growth in the Asia Pacific
region and a 21% (40% at constant exchange rates) increase in the Latin America
region. Total dialysis care net revenue increased during 1999 by 8% (14% at
constant exchange rates) to $265 million. This increase is a result of base
business growth, as evidenced by the 12% increase in dialysis care treatments.
Total dialysis product net revenue for 1999 increased by 10% (14% at constant
exchange rates) to $769 million. Product volume increased by approximately $123
million which was offset by lower average pricing of approximately $28 million
(4%).
At December 31, 1999 approximately 18,000 patients were treated in 241
clinics that we owned, operated or managed in the International segment compared
to 15,600 patients treated in 218 clinics at the end of 1998.
EBITDA. EBITDA for the International segment for 1999 grew by 7% (11% at
constant exchange rates) primarily as a result of the increased revenue noted
above. During the beginning of 1999 we elected to reduce shipments of equipment,
which would normally have higher EBITDA margins, to some Eastern European
countries due to the economic situation in that region, which partially offset
EBITDA growth in the International segment. We also reduced fiber shipments to
the North America segment during 1999 due to increased fiber production
capabilities in that segment, which also offset EBITDA growth.
Amortization and Depreciation. Amortization and depreciation, as a
percentage of revenue, decreased slightly for 1999. This is mainly due to the
impact of internal revenue growth while straight-line amortization of goodwill
associated with prior years' acquisitions has remained fairly constant.
EBIT. EBIT for the International segment for 1999 increased by 8% (12% at
constant exchange rates) as a result of the increased EBITDA mentioned above and
the positive impact of the decreased rate of amortization and depreciation to
revenue as previously mentioned.
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THE FOLLOWING DISCUSSIONS PERTAIN TO OUR TOTAL COMPANY COSTS
Interest. Interest expense for 1999, remained relatively constant compared
to the same period in 1998 as a result of similar levels of average debt
outstanding during the two periods.
Income Taxes. Excluding the effects of the Settlement, the effective tax
rate was 49.5% for 1999 and 50.2% for 1998. The tax benefit of the Settlement
was limited to $182 million, reflecting the non-deductibility of $101.2 million
in criminal fines included in the net settlement payments. The 1998 effective
income tax rate was reduced primarily by the use of net operating losses that
became realizable after the transfer of ownership of NMC's international
business to the International business segment at the beginning of 1998. As a
result of a reduction of the German federal corporate income tax rate for
undistributed earnings from 45% to 40% effective the first quarter of 1999, our
net deferred taxes and deferred income tax expense during 1999 were reduced by
approximately $1 million.
LIQUIDITY AND CAPITAL RESOURCES
SIX MONTHS ENDED JUNE 30, 2001 COMPARED TO SIX MONTHS ENDED JUNE 30, 2000
We generated cash from operating activities of $146 million in the
six-month period ended June 30, 2001 and $171 million in the comparable period
in 2000. Cash flow for the first half of 2001 is lower than the same period in
the previous year due to higher capital expenditure for de novo clinics and the
worldwide expansion of production capabilities. Additionally, we had temporarily
higher working capital requirements related to acquisitions in the first half of
2001, Cash on hand was $77 million at June 30, 2001 compared to $65 million, at
December 31, 2000.
On January 18, 2000, we executed definitive agreements with respect to the
settlement of the U.S. government investigation. The agreements require net
settlement payments totaling approximately $427 million. Under the definitive
agreements with the U.S. government, we entered into a note payable for the
remainder of the settlement obligation. Installment payments under the note
accrued interest at 6.3% on approximately $51 million of the obligation and at
7.5% annually on the balance, until paid in full.
The note payable was paid in six quarterly installments which began in
April 2000 and ended in June 2001. The first four quarterly installments were
made in the amount of approximately $35 million each, including interest at
7.5%. Of the final two installments of approximately $28 million each, including
interest at 6.3%, the first was paid in April 2001, and the second was paid in
June 2001. The U.S. government remitted the balance of our outstanding Medicare
receivables in four quarterly payments of approximately $5 million each, plus
interest at 7.5%. The last of these payments was received in February 2001. As
of June 30, 2001, the note payable was completely paid.
In connection with the settlement we amended the letter of credit that was
given to the U.S. government in 1996 from $150 million to $190 million and,
under the agreement, the letter of credit was reduced as we continued to make
installment payments to the government. At June 30, 2001, with all the
installment payments made, the letter of credit was cancelled.
In January 2001, we completed the acquisition of Everest. Approximately one
third of the purchase price ($354 million) was funded by the issuance of 2.25
million Fresenius Medical Care AG Preference shares ($99 million) to Everest
stockholders. The remaining purchase price was paid with $120 million cash and
debt assumed ($135 million). This debt was subsequently paid back using our
senior credit facility as described below.
In June 2001 we completed offerings pursuant to Rule 144A and Regulation S
under the Securities Act of 1933 of $225 million aggregate liquidation amount of
dollar-denominated 7 7/8% trust preferred securities due 2011 and E300 million
aggregate liquidation amount of euro-denominated 7 3/8% trust preferred
securities due 2011. The net proceeds of the offerings were approximately $468
million, which we used to repay outstanding revolving indebtedness under our
senior credit facility, to repay short-term debt, including approximately $120
million of short-term debt to Fresenius AG, and for general corporate purposes.
In connection with these offerings, we amended our senior credit facility (i) to
eliminate the
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obligation to apply the proceeds of our issuance of subordinated debt (including
trust preferred securities) to prepayments of the term portion of that facility
and (ii) to increase the amount of subordinated debt we may incur (exclusive of
our 9% senior subordinated notes due 2006) from $950 million to $1.2 billion.
Through June 30, 2001, we had paid approximately $154 million ($144 million
for the North American segment and $10 million for the International segment)
cash for acquisitions consisting primarily of dialysis clinics, including the
cash portion of the purchase price for Everest. Acquisitions for the comparable
period in 2000 were $216 million, $82 million for the North America segment and
$134 million for the International segment. In addition, capital expenditures
for property, plant and equipment were $133 million for the six months ended
June 30, 2001 and $91 million for the comparable period in 2000. In 2001,
capital expenditures in the North America segment were $74 million and $58
million for the International segment. In 2000, capital expenditures in the
North America segment were $45 million and $46 million in the International
segment. The majority of our capital expenditures were used for equipment for
new clinics, improvements to existing clinics and expansion of production
facilities. We believe that an increasing percentage of our dialysis care growth
will be derived from worldwide markets and we envision making acquisitions in
selected international markets. In the U.S., we intend to continue to enhance
our presence in the market by focusing our expansion on the acquisition of
individual or small groups of clinics, expansion of existing clinics, and
opening of new clinics. Nevertheless, we will consider large acquisitions in the
U.S. if suitable opportunities, such as Everest, become available to us.
Total long-term debt, excluding the note payable related to the settlement
of the U.S. government investigation, net of current portion at June 30, 2001,
increased to $736 million from $658 million at year-end 2000. This increase was
mainly due to higher borrowings under our senior credit facility. Short-term
borrowings from related parties decreased from $218 million at December 31, 2000
to $68 million at June 30, 2001 whereas short term borrowings from third parties
increased from $106 million to 129 million. Other liabilities increased by $68
million mainly due to the market value of derivatives now included in the
balance sheet as required by SFAS 133 Accounting for Derivative Instruments and
Hedging Activities and the related amendments of SFAS 138.
Under the terms of our senior credit facility, we have available an
aggregate of $2 billion through two credit facilities: a revolving credit
facility with availability of up to $1 billion and a term loan facility of $1
billion. Both facilities will expire on September 30, 2003. Loans under this
senior credit facility bear interest at a base rate determined in accordance
with the facility or at LIBOR plus, in either case, an applicable margin. We
will permanently reduce the term loan facility through quarterly principal
payments. In addition to these scheduled principal payments, the senior credit
agreement will be reduced by the application of portions of the net cash
proceeds from certain sales of assets, sales of accounts receivable and
issuances of subordinated debt and equity securities. The senior credit facility
contains customary affirmative and negative covenants with respect to us and our
subsidiaries and other payment restrictions, mainly related to dividends.
In January 2000, dollar interest rate swap agreements with a notional
amount of $850 million expired as scheduled. In November 2000, we entered into
additional dollar interest rate swap agreements with a notional amount of $450
million. At the same time, a dollar interest rate collar agreement with a
notional amount of $150 million was closed out. As of June 30, 2001, the
notional volume of dollar interest rate hedging contracts totaled $1,050
million. Those swap agreements, which expire at various dates between 2003 and
2007, effectively fix our variable interest rate exposure on the majority of our
dollar-denominated revolving loans and outstanding obligations under our
accounts receivable securitization program at an interest rate of 6.52%. Under
our senior credit agreement, we have agreed to maintain at least $500 million of
interest rate protection. In March 2000, we entered into a yen interest rate
swap agreement with a notional amount of Japanese Yen 400 million, in line with
a yen-denominated floating-rate borrowing of our Japanese subsidiary. In
September 2000, both the bank borrowing and the notional amount of the interest
rate swap agreement were increased as scheduled to Yen 1,000 million. The bank
borrowing and the notional amount of the swap agreement will always coincide
until March 2009 when the bank debt is completely repaid and the swap expires.
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We believe that our existing credit facilities, cash generated from
operations and other current sources of financing are sufficient to meet our
foreseeable needs. If cash flows from operations or availability under existing
banking arrangements fall below expectations, we may have to consider other
alternatives to maintain sufficient liquidity. We cannot assure that we will be
able to do so on satisfactory terms, if at all.
YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999
We generated cash from operating activities of $391 million in 2000 and
$355 million from continuing operations in the comparable period in 1999. A net
increase in our accounts receivable balance reduced net cash provided by
operating activities. The primary reason was a significant increase in days
sales outstanding resulting from slower payment patterns from third parties
outside of Germany, specifically from managed care plans in the United States.
Days sales outstanding were also negatively impacted by the slowdown of the
certification process for newly opened clinics in the United States.
Furthermore, acquisitions, mainly outside Germany and the United States, and
base business growth in countries where we experience higher days sales
outstanding contributed to this increase. Cash on hand was $65 million at
December 31, 2000 compared to $35 million at December 31, 1999.
On January 18, 2000, we executed definitive agreements with respect to the
Settlement. The agreements require net settlement payments totaling
approximately $427 million, of which $14 million had been paid prior to January
1, 2000. This net amount reflected payments to us of approximately $59 million
for Medicare receivables from the U.S. government. During the year 2000 after
court approval of the Settlement, we made payments of $387 million, including
initial cash payments of $286 million, and we received $54 million from the U.S.
government for our outstanding Medicare receivable claims for intradialytic
parenteral nutrition therapy rendered on or before December 31, 1999. We wrote
off $94 million of these receivables at December 31, 1999 in anticipation of the
final settlement.
Under the definitive agreements with the U.S. government, we entered into a
note payable for the remainder of the Settlement. Installment payments under the
note will accrue interest at 6.3% on approximately $51 million of the obligation
and at 7.5% annually on the balance, until paid in full.
The note is payable in six quarterly installments which began in April 2000
and end in July 2001. The first four quarterly installments have been paid in
the amount of approximately $35 million each, including interest at 7.5%. The
first three of these four payments were made in April, July and October 2000 and
the fourth installment was made in January 2001. The final two installments of
approximately $28 million each, including interest at 6.3%, will be paid in
April and July 2001. At December 31, 2000, the note payable balance was
approximately $86 million. The U.S. government has agreed to remit the balance
of our outstanding Medicare receivables in four quarterly payments of
approximately $5 million each, plus interest at 7.5%. We received the first
three quarterly payments in May, August and October 2000 and the final payment
in February 2001.
We amended the letter of credit that National Medical Care delivered to the
U.S. government in 1996 from $150 million to $190 million and, under the
agreement, the letter of credit will be reduced as we continue to make
installment payments to the government. At December 31, 2000, the letter of
credit was reduced to $89 million.
In December 1999, we and the lenders under our senior credit facility
amended the financial ratios in the senior credit facility to accommodate our
obligations under the settlement agreements and to enable us to continue in
compliance with our senior credit facility as we fulfill the settlement
obligations. On September 21, 2000 the National Medical Care Credit Agreement
was amended in order to increase the facility for accounts receivable
securitization and some other credit facilities. The lenders also agreed that
the proceeds of the Preference share offerings during 2000 did not trigger
repayment obligations on the term loan portion of the facility but may be used
for capital expenditures and acquisitions.
On March 2, 2000, we issued 8,974,359 non-voting Preference shares to a
limited number of institutional and other accredited investors in exchange for
the investors' interests in Franconia Acquisition LLC, an entity formed to
acquire dialysis clinics and other related businesses. Franconia's principal
asset
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at the time of this transaction was $350 million in cash. For financial
reporting purposes, the transaction, which generated net proceeds of $344
million, has been accounted for as a financing at fair value. The investors have
agreed not to effect sales or transfers of the Preference shares for a period of
24 months after issuance, except as permitted by the contribution agreement.
After this time, the investors will have the right to require, under specified
conditions, that we register the Preference shares for sale under the Securities
Act, and provide them with assistance in connection with public offerings of
their Preference shares outside the United States.
On May 31, 2000, we paid a cash dividend of $51 million for 1999 in the
amount of E0.75 on each Preference share, excluding the Preference shares issued
on March 2, 2000, and E0.69 on each Ordinary share. In 1999 we paid dividends
per Preference share of E0.64 and E0.59 per Ordinary share for an aggregate
amount of $48 million. Under the terms of our senior credit agreement, we are
restricted as to the level of dividends we may pay in any calendar year, which
was $78 million for 2000. Annual dividend distributions by our subsidiary,
National Medical Care, in any year, may not exceed 50% of its consolidated net
income of the preceding year as defined in our senior credit agreement. These
payment restrictions do not apply to any of our other subsidiaries.
On June 19, 2000, we purchased substantially all of the international and
non-continental U.S. operations business of Total Renal Care Holdings, Inc. for
$145 million. Additionally, we made a non-refundable deposit, not included in
the purchase price noted above, towards the purchase of the Puerto Rico
operations. The purchase of the Puerto Rico operations is pending, subject to
regulatory approval and third party consents. We are currently managing the
Puerto Rico operations of Total Renal Care Holdings, Inc.
On July 26, 2000, we completed a public offering of 5,000,000 non-voting
Preference shares for net proceeds of approximately $185 million. In addition,
on July 28, 2000, the underwriters of the public offering exercised options to
purchase an additional 750,000 Preference shares increasing the total net
proceeds from the public offering to approximately $213 million.
On October 26, 2000, we increased our accounts receivable facility from
$360 million to $500 million, and extended its maturity to October 25, 2001.
Under the terms of the amended facility, the interest rate is based upon the
commercial paper rate, which was approximately 6.59% at December 31, 2000. At
December 31, 2000, we had received $445 million, and at December 31, 1999, $335
million, pursuant to sales of our receivables under the facility, which are
reflected as reductions to accounts receivable. Under the terms of the facility,
we sell new interests in accounts receivable as collections reduce previously
sold accounts receivable. We expense the cost related to these sales as we incur
them and record the costs as interest expense and related financing costs.
On January 5, 2001, we acquired Everest for $341 million, including
Everest's outstanding debt. One-third of the purchase price was paid through the
issuance of 2,250,000 non-voting Preference shares on January 8, 2001. The
remaining part of the acquisition was financed out of the proceeds of the
Preference share offerings completed during 2000.
Acquisitions during the year 2000 totaled $275 million (excluding
International segment non-cash acquisitions of $14 million), $116 million in the
North America segment and $159 million in the International segment.
Acquisitions for the comparable period in 1999 were $101 million (excluding
International segment non-cash acquisitions of $10 million), $65 million for the
North America segment and $36 million for the International segment. We believe
that we will derive an increasing percentage of our dialysis care growth from
worldwide markets and we envision making acquisitions in selected international
markets. In the United States, we generally intend to continue to enhance our
presence in the market by focusing our expansion on the acquisition of
individual or small groups of clinics, expansion of existing clinics, and
opening of new clinics. Nevertheless, we will consider larger acquisitions in
the United States if suitable opportunities, such as Everest, become available
to us.
In addition, capital expenditures for property, plant and equipment were
$228 million for the year 2000 and $160 million in 1999. In 2000, capital
expenditures in the North America segment were
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$113 million and $115 million for the International segment. In 1999, capital
expenditures in the North America segment were $81 million and $79 million in
the International segment. The majority of our capital expenditures were used
for improvements to existing clinics, equipment for new clinics and expansion of
production facilities.
Total long-term debt, net of current portion at December 31, 2000,
increased to $658 million from $654 million at year-end 1999. We reduced our
short-term borrowings from related parties from $330 million to $218 million at
December 31, 2000. Short-term borrowings from third parties increased from $96
million in 1999 to $107 million in 2000. As of December 31, 2000, the unused
portion of our senior credit facility was approximately $698 million.
In January 2000, dollar interest rate swap agreements with a notional
amount of $850 million expired as scheduled. In November 2000, we entered into
additional dollar interest rate swap agreements with a notional amount of $450
million. At the same time, a dollar interest rate collar agreement with a
notional amount of $150 million was closed out. As of December 31, 2000, the
notional volume of dollar interest rate hedging contracts totaled $1,050
million. Those swap agreements, which expire at various dates between 2003 and
2007, effectively fix our variable interest rate exposure on the majority of our
dollar-denominated revolving loans and outstanding obligations under the
accounts receivable securitization program at an interest rate of 6.52%. Under
our senior credit agreement, we have agreed to maintain at least $500 million of
interest rate protection. In March 2000, we entered into a yen interest rate
swap agreement with a notional amount of Japanese Yen 400 million, in line with
a yen-denominated floating-rate borrowing of our Japanese subsidiary. In
September 2000, both the bank borrowing and the notional amount of the interest
rate swap agreement were increased as scheduled to Yen 1,000 million. The bank
borrowing and the notional amount of the swap agreement will always coincide
until March 2009 when the bank debt is completely repaid and the swap expires.
We believe that our existing credit facilities, cash generated from
operations and other current sources of financing are sufficient to meet our
foreseeable needs, including our 2001 budget for acquisitions and capital
expenditures summarized below in "Business -- Capital Expenditures." If cash
flows from operations or availability under existing banking arrangements fall
below expectations, we may have to consider other alternatives to maintain
sufficient liquidity. We cannot assure that we will be able to do so on
satisfactory terms, if at all.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
We generated cash from operating activities of continuing operations of
$355 million in 1999 and $268 million in the comparable period in 1998. Cash on
hand was $35 million at December 31, 1999 compared to $32 million, at December
31, 1998.
In December 1999, we and the lenders under our senior credit facility,
amended certain covenants in the senior credit facility to accommodate our
obligations under the settlement agreements with the U.S. government and to
enable us to continue in compliance with the covenants upon consummation of the
Settlement.
We declared and paid dividends of E0.64 and E0.56 per Preference share in
1999 and 1998, respectively, and E0.59 and E0.51 per Ordinary share in 1999 and
1998, respectively. We paid aggregate dividends of $48 million and $45 million,
including $1 million in arrearages for 1996, during the second quarter of 1999
and 1998, respectively.
We made acquisitions of $101 million in 1999 (excluding International
segment non-cash acquisitions of $10 million) and $223 million (excluding the
North America segment non-cash acquisitions of $42 million) in 1998. In 1999,
$65 million of acquisitions were made in North America and $36 million of
acquisitions (excluding the non-cash acquisitions) were made in the
International segment. In 1998, $128 million of acquisitions (excluding non-cash
acquisitions) were made in the North America segment and $94 million of
acquisitions were made in the International segment.
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In addition, capital expenditures for property, plant and equipment were
$160 million in 1999 and $159 million in 1998. In 1999, $81 million of capital
expenditures was made in the North America segment and $79 million of capital
expenditures were made in the International segment. In 1998, $75 million of
capital expenditures was made in the North America segment and $84 million of
capital expenditures was made in the International segment. Capital expenditures
were used for automation of production processes and increased production
capacity, internal expansion, improvements, furnishings and equipment. We
believe that an increasing percentage of our dialysis care growth will be
derived from worldwide markets and we envision making acquisitions in selected
international markets. In the United States, we generally intend to continue to
enhance our presence in the market by focusing our expansion on the acquisition
of individual or small groups of clinics, expansion of existing clinics, and
opening of new clinics. Nevertheless, we will consider larger acquisitions in
the United States if suitable opportunities become available to us.
On September 27, 1999, we increased our accounts receivable facility from
$331 million to $360 million, and extended its maturity to September 25, 2000.
Under the terms of the amended facility, the interest rate is based upon the
commercial paper rate, which was approximately 5.90% at December 31, 1999. At
December 31, 1999, we had received $335 million and at December 31, 1998, $305.6
million, pursuant to sales of our receivables under the facility, which are
reflected as reductions to accounts receivable. Under the terms of the facility,
we sell new interests in accounts receivable as collections reduce previously
sold accounts receivable. We expense the costs related to these sales as we
incur them and record the costs as interest expense and related financing costs.
Managed care plans typically remit reimbursement more slowly than
traditional indemnity plans. As a result of an increase in the percentage of net
revenues we derive from managed care plans from 10% in 1998 to 12% in 1999 (an
increase in net revenues of approximately $45 million), there was an increase in
the days sales outstanding for third party payors. In addition, 1999 was the
first full year of the extension of Medicare Secondary Payor regulations that
increased the coverage period for commercial payors from 18 to 30 months,
thereby increasing the average balance of receivables as commercial payors
generally pay at a higher rate than government payment programs. The increase in
days outstanding and the increase in the average receivable amount resulted in a
corresponding increase in our allowance for doubtful accounts as it is
calculated based on a percentage of gross accounts receivable. Any negative
impact to liquidity related to the increase in days sales outstanding is
mitigated by the increase in revenues and the higher reimbursement generally
received from third party payors.
Total long-term debt, net of current portion at December 31, 1999,
decreased to $654 million from $1,081 million at year-end 1998, primarily as a
result of an increase in short-term borrowings from related parties. Short-term
borrowings from related parties increased to $330 million at December 31, 1999
from $60 million at December 31, 1998, with interest rates from 7.06% to 7.44%
and maturities in less than 90 days. Other short-term borrowings decreased by
approximately $13 million from year-end 1998 to $96 million at year-end 1999.
Funds generated from operations were used to fund capital expenditures and
acquisitions as well as dividends. The remainder was used to reduce long-term
debt.
If cash flows from operations or availability under existing banking
arrangements fall below expectations, or if we are unsuccessful in amending our
existing banking agreements, we may be required to consider other alternatives
to maintain sufficient liquidity.
RECENTLY ISSUED ACCOUNTING STANDARDS
The Financial Accounting Standards Board issued SFAS No. 133 which
establishes accounting and reporting standards for financial derivative
instruments, including certain derivative instruments embedded in other
contracts and for hedging activities. SFAS No. 133 requires that an entity
recognize all derivatives as either assets or liabilities in the balance sheet
and measure those instruments at fair value. The statement also provides the
criteria for determining whether a derivative may be specifically designated as
a hedge of a particular exposure with the intent of measuring the effectiveness
of that hedge in the statement of operations. In June 2000, the Financial
Accounting Standards Board issued SFAS No. 138,
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which amended certain provisions of SFAS 133, including amendments allowing
foreign-currency denominated assets and liabilities to qualify for hedge
accounting, permitting the offsetting of certain inter-entity foreign currency
exposures that reduce the need for third party derivatives and redefining the
nature of interest rate risk to avoid sources of ineffectiveness. We are
adopting SFAS 133, and the corresponding amendments under SFAS 138 effective as
of January 1, 2001.
After adoption, we will recognize gains and losses in fair value of
recognized assets and liabilities and firm commitments of operating transactions
as well as gains and losses on derivative financial instruments designated as
fair value hedges of these recognized assets and liabilities and firm
commitments currently in earnings.
After adoption, we will report changes in the value of foreign currency
forward contracts designated and qualifying as cash flow hedges of forecasted
transactions in accumulated other comprehensive income. We will subsequently
reclassify these amounts into earnings, as a component of the forecasted
transaction, in the same period as the forecasted transaction affects earnings.
The adoption of SFAS 133, as amended by SFAS 138, results in the recording
of assets related to forward currency contracts of approximately $13 million.
The offset to this transition adjustment will be recorded to other comprehensive
income at an amount of $1 million and to net income at an amount of $12 million.
Because of corresponding entries concerning the hedged items, the net effect on
earnings will be immaterial. Additionally, we will record a liability for
interest rate swaps of approximately $25 million. The offset will be recorded to
other comprehensive income.
In December 1999, the SEC issued SAB 101. SAB 101 provides the SEC staff's
views in applying generally accepted accounting principles to selected revenue
recognition issues, as well as examples of how the SEC staff applies revenue
recognition guidance to specific circumstances. In June 2000, SAB 101B was
issued by the SEC further delaying the implementation date for SAB 101 until the
fourth quarter of the fiscal year beginning after December 15, 1999. The impact
of the adoption of SAB 101 is not significant.
In May 2000, the Emerging Issues Task Force issued EITF 00-014, Accounting
for Certain Sales Incentives, which establishes accounting for point of sales
coupons, rebates, and free merchandise. This EITF requires that an entity report
these sales incentives that reduce the price paid to be netted directly against
revenues. EITF 00-014 is effective no later than the fourth quarter of the
fiscal year beginning after December 15, 1999. The impact of the adoption of
EITF-00-14 is not significant.
In March 2000, the Financial Accounting Standards Board issued Financial
Accounting Standards Board Interpretation No. 44, an interpretation of APB
Opinion 25. The effects of applying this interpretation are required to be
recognized on a prospective basis from July 1, 2000. The application of this
interpretation did not have a material effect on our financial position or
results of operations.
In September 2000, the Financial Accounting Standards Board issued SFAS No.
140, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities, which replaces SFAS No. 125. SFAS No. 140
provides the accounting and reporting standards for securitizations and other
transfers of financial assets and collateral. These standards are based on
consistent application of a financial-components approach that focuses on
control. This Statement also provides consistent standards for distinguishing
transfers of financial assets that are sales from transfers that are secured
borrowings. SFAS No. 140 is effective for transfers after March 31, 2001 and is
effective for disclosures about securitizations and collateral for fiscal years
ending after December 15, 2000. There is no impact for the adoption of SFAS No.
140.
In July 2001, the Financial Accounting Standards Board issued SFAS No. 141,
Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets.
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
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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.
We are required to adopt the provisions of SFAS 141 immediately, and SFAS
142 effective January 1, 2002. Furthermore, any goodwill and any intangible
asset determined to have an indefinite useful life that are acquired in a
purchase business combination completed after June 30, 2001 will not be
amortized, but will continue to be evaluated for impairment in accordance with
the appropriate pre-SFAS 142 accounting literature. Goodwill and intangible
assets acquired in business combinations completed before July 1, 2001 will
continue to be amortized prior to the adoption of SFAS 142.
SFAS 141 will require upon adoption of SFAS 142, that we evaluate existing
intangible assets and goodwill that were acquired in prior purchase business
combinations, and to 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, we 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, we 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 we 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 we must identify our 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. We 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 we must perform the second step of
the transitional impairment test. In the second step, we 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 our statement of operations.
Because of the extensive effort needed to comply with adopting SFAS 141 and
142, it is currently not practicable to reasonably estimate the impact of
adopting these statements on our 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.
EURO CONVERSION
Germany, our country of domicile, is one of the eleven members of the
European Union who have adopted the euro as their currency. We have changed our
functional currency to euro effective January 1, 1999, but will continue using
the U.S. dollar as our reporting currency. In addition, at our general meeting
on June 2, 1999, our shareholders approved the currency conversion of our share
capital to euro from Deutsche Mark. All internal reporting entities situated in
the eleven member states are submitting their reports in euro. The euro
conversion may affect cross-border competition by creating cross-border price
transparency. In our business, however, patients may not have the luxury to
"shop" cross-border due to the
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nature of their illness, the type of reimbursement program they are enrolled in
and the fact that they maintain a medical relationship with their supplier,
doctor or clinic.
CONTINGENCIES
We are a plaintiff in litigation against the U.S. federal government with
respect to the implementation of the Omnibus Budget Reconciliation Act of 1993.
We are also a defendant in significant commercial insurance litigation relating
to the same alleged practices that were the subject of the recently settled
government investigations. An adverse outcome in any of these matters could have
a material adverse effect on our business, financial condition and results of
operations. Because of the significant complexities and uncertainties associated
with these proceedings, we cannot provide either an estimate of the possible
loss or range of loss we may incur in respect of such matters, and a reserve
based on any such estimate cannot be reasonably made.
INFLATION
The effects of inflation during the periods covered by the consolidated
financial statements have not been significant to our results of operations.
However, most of our net revenues from dialysis care are subject to
reimbursement rates regulated by governmental authorities, and a significant
portion of other revenues, especially revenues from the United States, is
received from customers whose revenues are subject to these regulated
reimbursement rates. Non-governmental payors are also exerting downward pressure
on reimbursement rates. Increased operation costs that are subject to inflation,
such as labor and supply costs, may not be recoverable through price increases
in the absence of a compensating increase in reimbursement rates payable to us
and our customers, and could materially adversely affect our business, financial
condition and results of operations. Amgen Inc. has announced a 3.9% increase in
its wholesaler acquisition price for EPO effective May 9, 2001. Our purchase
contract with Amgen contains pricing protection such that our purchase price for
EPO will be unaffected by the price increase through December 31, 2001.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MANAGEMENT OF CURRENCY AND INTEREST RATE RISKS
We are primarily exposed to market risk from changes in foreign currency
exchange rates and changes in interest rates. In order to manage the risks from
these foreign currency exchange rate and interest rate fluctuations, we enter
into various hedging transactions with investment grade financial institutions
as authorized by the management board. We do not contract for financial
instruments for trading or other speculative purposes.
We conduct our financial instrument activity under the control of a single
centralized department. We have established guidelines for risk assessment
procedures and controls for the use of financial instruments. They include a
clear segregation of duties with regard to execution on one side and
administration, accounting and controlling on the other.
INTEREST RATE RISKS
At June 30, 2001 and December 31, 2000, we had in place interest rate swap
agreements for a notional amount of $1,050 million which we believe to be
adequate to cover our interest rate exposure into the immediate future.
The table below provides information about our foreign exchange forward
contracts at December 31, 2000. The information is provided in U.S. dollar
equivalent amounts. The table presents the notional amounts, the weighted
average contractual foreign currency exchange rates, and the fair values of the
contracts, which show the unrealized net gain (loss) on existing contracts as of
December 31, 2000. All contracts expire within 36 months after the reporting
date.
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<Table>
<Caption>
FOREIGN CURRENCY RISK AT DECEMBER 31, 2000
($ IN THOUSANDS, EXCEPT AVERAGE CONTRACT RATES)
------------------------------------------------------
FAIR VALUE AT
DECEMBER 31,
2001 2002 2003 TOTAL 2000
-------- ------- ------- ------- -------------
FOREIGN CURRENCY FORWARDS
Purchases of currencies against U.S. dollar
Euro
Notional amount.................................... 51,509 321,273 116,856 489,638 22,172
Average contract rate.............................. 0.8820 0.9172
Singapore Dollar
Notional amount.................................... 800 800 2
Average contract rate.............................. 1.7235
-------- ------- ------- ------- ------
Total.................................................. 52,309 321,273 116,856 490,438 22,174
-------- ------- ------- ------- ------
Sales of currencies against U.S. dollar
Canadian Dollar
Notional amount.................................... 4,000 4,000 77
Average contract rate.............................. 1.4699
Euro
Notional amount.................................... 2,591 2,501 (2)
Average contract rate.............................. 0.9300
Singapore Dollar
Notional amount.................................... 335 335 (1)
Average contract rate.............................. 1.7255
-------- ------- ------- ------- ------
Total.................................................. 6,836 0 0 6,836 74
-------- ------- ------- ------- ------
Other sales of currencies against Euro
British Pound
Notional amount.................................... 19,942 3,955 23,897 1,261
Average contract rate.............................. 0.5942 0.5960
Japanese Yen
Notional amount.................................... 11,163 4,634 15,797 1,633
Average contract rate.............................. 92.9869 95.110
Swiss Franc
Notional amount.................................... 8,230 675 8,905 44
Average contract rate.............................. 1.5057 1.4910
Australian Dollar
Notional amount.................................... 7,763 7,763 160
Average contract rate.............................. 1.6459
New Zealand Dollar
Notional amount.................................... 2,947 2,947 (12)
Average contract rate.............................. 2.1246
Singapore Dollar
Notional amount.................................... 1,696 1.696 63
Average contract rate.............................. 1.5516
-------- ------- ------- ------- ------
Total.................................................. 51,741 9,264 0 61,005 3,149
-------- ------- ------- ------- ------
Other purchases of currencies against Euro
Swiss Franc
Notional amount.................................... 6,756 6,756 (87)
Average contract rate.............................. 1.5014
Japanese Yen
Notional amount.................................... 4,607 4,607 (38)
Average contract rate.............................. 106.0397
</Table>
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<Table>
<Caption>
FOREIGN CURRENCY RISK AT DECEMBER 31, 2000
($ IN THOUSANDS, EXCEPT AVERAGE CONTRACT RATES)
------------------------------------------------------
FAIR VALUE AT
DECEMBER 31,
2001 2002 2003 TOTAL 2000
-------- ------- ------- ------- -------------
Australian Dollar
Notional amount.................................... 612 612 (3)
Average contract rate.............................. 1.6714
-------- ------- ------- ------- ------
Total.................................................. 11,975 0 0 11,975 (128)
-------- ------- ------- ------- ------
</Table>
A summary of the high and low exchange rates for the Deutsche Mark to U.S.
dollars and the average exchange rates for the last five years is set forth
below. As the Deutsche Mark was replaced by the euro in the foreign exchange
markets since the beginning of 1999, the table includes the respective rates for
the euro/dollar quotations which were applied to calculate the respective 1999
Deutsche Mark/ U.S. dollar values, using a fixed conversion rate of DM 1.95583 =
E1.
<Table>
<Caption>
YEAR'S YEAR'S YEAR'S YEAR'S
YEAR ENDING DECEMBER 31, HIGH LOW AVERAGE CLOSE
- ------------------------ ------ ------ ------- ------
1996...................................... 0.6979 0.6395 0.6650 0.6432 ($ per DM)
1997...................................... 0.6468 0.5299 0.5764 0.5580 ($ per DM)
1998...................................... 0.6256 0.5395 0.5685 0.5977 ($ per DM)
1999...................................... 0.6028 0.5121 0.5449 0.5136 ($ per DM)
1999...................................... 1.1790 1.0015 1.0658 1.0046 ($ per E)
2000...................................... 0.5311 0.4219 0.4722 0.4758 ($ per DM)
2000...................................... 1.0388 0.8252 0.9236 0.9305 ($ per E)
</Table>
For additional information, see, Note 1(g) to the Notes to our consolidated
financial statements -- "Summary of Significant Accounting
Policies -- Derivative Financial Instruments," and Note 19 to our consolidated
financial statements "-- Financial Instruments."
INTEREST RATE EXPOSURE
We are exposed to changes in interest rates that affect our variable-rate
based borrowings. We enter into debt obligations and into accounts receivable
financings to support our general corporate purposes including capital
expenditures and working capital needs.
Our subsidiary, National Medical Care, has entered into U.S. dollar
interest rate swap agreements with various commercial banks for notional amounts
totaling $1,050 million as of March 31, 2001 and as of December 31, 2000.
National Medical Care entered into all of these agreements for purposes other
than trading.
The U.S. dollar interest rate swaps effectively change National Medical
Care's interest rate exposure on the majority of its variable-rate loans under
our senior credit agreement ($733 million outstanding as of December 31, 2000),
loans extended to us by Fresenius AG ($209 million outstanding as of December
31, 2000), and the drawdowns under our receivables financing facility (drawn as
of December 31, 2000, $445 million) to an average fixed interest rate of 6.52%.
Our accounts receivable financing facility has been reflected in our
consolidated financial statements as a reduction to accounts receivable.
The U.S. dollar interest rate swap agreements expire at various dates
between November 29, 2003 and November 29, 2007. At December 31, 2000, the fair
value of these agreements is $(24.62) million.
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The table below presents principal amounts and related weighted average
interest rates by year of maturity for the various U.S. dollar interest rate
swap agreements and for our significant fixed-rate long-term debt obligations.
U.S. DOLLAR INTEREST RATE EXPOSURE
DECEMBER 31, 2000
(U.S. DOLLARS IN MILLIONS)
<Table>
<Caption>
FAIR
VALUE
DEC. 31,
2001 2002 2003 2004 2005 THEREAFTER TOTALS 2000
---- ---- ---- ---- ---- ---------- ------ --------
PRINCIPAL PAYMENTS ON SENIOR CREDIT AGREEMENT... 150 150 433 0 0 0 733 733
Variable interest rate = 7.63%
INTEREST RATE SWAP AGREEMENTS
Notional amount............................... 600 250 200 1,050
Average fixed pay rate = 6.52%................ 6.58% 6.32% 6.61% (25)
Receive rate = 3-month $LIBOR
COMPANY OBLIGATED MANDATORILY
REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARIES
FRESENIUS MEDICAL CARE CAPITAL TRUSTS
Fixed interest = 9.%.......................... 360 360 346
Fixed interest = 7.875%....................... 450 450 410
Fixed interest rate = 7.375% (denominated in
DM)......................................... 143 143 143
</Table>
Our subsidiary FMC Japan has entered into a Yen interest rate swap
agreement with a commercial bank for a notional amount of JPY 1,000 million as
of December 31, 2000. This swap changes FMC Japan's interest rate exposure on
its variable-rate bank loan (JPY 1,000 million outstanding as of December 31,
2000) to a fixed interest rate of 3.10%. The Yen interest rate swap agreement
expires on March 13, 2009. At December 31, 2000, the fair value of this
agreement is $(0.53) million. The terms of the Yen interest rate swap agreement,
especially the notional amounts outstanding at any specific point of time, match
the terms of the bank loan which has been borrowed from the same bank that is
counterparty in the swap agreement. The bank borrowing and the notional amount
of the swap agreement will always coincide until March 2009 when the bank debt
is completely repaid and the swap expires.
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SELECTED HISTORICAL FINANCIAL DATA OF FMCH
The following table summarizes the consolidated financial information for
FMCH's business as of and for the nine months ended September 30, 1996, the
three month period ended December 31, 1996, the years 1997 through 2000 and as
of and for the six-month periods ending June 30, 2001 and June 30, 2000. For
each of the years, FMCH derived the selected financial information from its
audited consolidated financial statements. You should read this information
together with the consolidated financial statements of FMCH and the section
entitled "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- FMCH." For each of the years 1996 through 2000, FMCH
prepared its financial statements in accordance with US GAAP and KPMG LLP,
independent accountants, audited the financial statements for each of the years
in the five year period ended December 31, 2000.
FMCH derived the selected consolidated financial data as of and for the six
months ended June 30, 2001 and 2000 from its unaudited interim consolidated
financial statements. FMCH's unaudited condensed consolidated financial
statements have been prepared on a basis substantially consistent with its
audited consolidated financial statements. In 1999, FMCH recorded a special
charge of $601 million ($419 million net of tax) related to the Settlement. In
1998, FMCH discontinued its homecare and non-renal business, and restated fiscal
years 1996 and 1997 to show the effects of the discontinuance of these
businesses.
<Table>
<Caption>
SUCCESSOR PREDECESSOR
SIX MONTHS THREE MONTHS NINE MONTHS
ENDED SUCCESSOR ENDED ENDED
JUNE 30, YEAR ENDED DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
----------------- ---------------------------------- ------------ -------------
2001 2000 2000 1999 1998 1997 1996 1996
------- ------- ------ ------ ------ ------ ------------ -------------
(UNAUDITED) (AUDITED) (AUDITED)
(U.S. DOLLARS IN MILLIONS, EXCEPT SHARE AND PER SHARE DATA)
STATEMENT OF OPERATIONS DATA
Continuing Operations
Net sales............................... $ 1,648 $ 1,506 $3,089 $2,815 $2,571 $2,166 $ 505 $1,615
Cost of Sales........................... 1,143 1,020 2,109 1,880 1,707 1,456 340 969
------- ------- ------ ------ ------ ------ ------- ------
Gross Profit............................ 505 486 980 935 864 710 165 646
Selling, general and administrative and
research and development.............. 300 281 560 540 529 452 106 501
Special charge for settlement of
investigation and related costs(a).... -- -- -- 601 -- -- -- --
------- ------- ------ ------ ------ ------ ------- ------
Operating income (loss)................. 205 205 420 (206) 335 258 59 145
Interest expense (net)................ 102 110 187 202 209 178 43 16
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........................ 103 95 203 (408) 126 80 16 129
Income tax (benefit) expense............ 49 47 98 (81) 74 46 11 66
------- ------- ------ ------ ------ ------ ------- ------
Income (loss) from continuing operations
before cumulative effect of change in
accounting for start up costs......... $ 54 $ 48 $ 105 $ (327) $ 52 $ 34 $ 5 $ 63
------- ------- ------ ------ ------ ------ ------- ------
Discontinued Operations
Loss from discontinued operations, net
of income taxes....................... -- -- -- -- (9) (14) (2) --
Loss on disposal of discontinued
operations, net of income tax
benefit............................... -- -- -- -- (97) -- -- --
------- ------- ------ ------ ------ ------ ------- ------
Loss from discontinued operations....... -- -- -- -- (106) (14) (2) --
------- ------- ------ ------ ------ ------ ------- ------
Cumulative effect of change in accounting
for start up costs, net of tax
benefit................................. -- -- -- -- (5) -- -- --
------- ------- ------ ------ ------ ------ ------- ------
Net income (loss)....................... $ 54 $ 48 $ 105 $ (327) $ (59) $ 20 $ 3 $ 63
======= ======= ====== ====== ====== ====== ======= ======
Net Income (loss) Per Common and Common
Equivalent Share:
Continuing Operations................... $ 0.60 $ 0.53 $ 1.16 $(3.64) $ 0.57 $ 0.37 $ 0.06 $ 0.66
Discontinued Operations................. -- -- -- -- (1.18) (0.15) (0.02) --
Cumulative effect of accounting
change................................ -- -- -- -- (0.05) -- -- --
Net Income.............................. 0.60 0.53 1.16 (3.64) (0.66) 0.22 0.04 0.66
</Table>
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<Table>
<Caption>
SUCCESSOR PREDECESSOR
SIX MONTHS THREE MONTHS NINE MONTHS
ENDED SUCCESSOR ENDED ENDED
JUNE 30, YEAR ENDED DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
----------------- ---------------------------------- ------------ -------------
2001 2000 2000 1999 1998 1997 1996 1996
------- ------- ------ ------ ------ ------ ------------ -------------
(UNAUDITED) (AUDITED) (AUDITED)
(U.S. DOLLARS IN MILLIONS, EXCEPT SHARE AND PER SHARE DATA)
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 90,000 90,000 95,188
OTHER DATA:
EBITDA(b)............................... $ 319 $ 315 $ 643 $ 613(a) $ 551 $ 457 $ 108 $ 238
Net cash provided by operating (used in)
activities............................ 139 111 263 249 200 108 (25) 148
Net cash used in investing activities... (78) (128) (220) (147) (171) (630) (38) (182)
Net cash provided by financial
activities............................ (44) 20 (23) (96) (37) (533) (115) 217
Depreciation and amortization........... 114 110 223 218 216 200 49 93
Capital expenditures.................... 58 45 104 81 75 134 34 93
Rental expenses (operating leases
only)................................. 89 75 157 132 104 82 20 67
Ratio of fixed charges to earnings(c)... 0.6x 0.6x 0.6x -- 0.7x 0.7x 0.8x 0.2x
BALANCE SHEET DATA:
Cash and cash equivalents............... $ 49 $ 16 $ 33 $ 13 $ 6 $ 13 $ 22 $ 220
Working capital......................... 156 (310) (154) (456) 294 394 282 506
Total assets............................ 4,569 4,639 4,553 4,645 4,613 4,771 4,370 4,051
Total long term debt and capital lease
obligations........................... 416 785 589 616 1,014 1,622 1,438 2,290
Mandatorily redeemable preferred
securities............................ 382 -- 305 -- -- -- -- --
Total Liabilities....................... 2,432 2,969 2,522 3,023 2,664 2,785 2,828 2,855
Stockholders' equity.................... 1,755 1,670 1,726 1,622 1,949 1,987 1,764 1,196
</Table>
- ---------------
(a) On January 18, 2000, FMCH, NMC and certain other affiliated companies
executed definitive agreements with the U.S. government to effect the
Settlement. Under the Settlement, FMCH made initial cash payments of
approximately $286 million and entered into a note payable for the remainder
of the payment obligations. You can find a more detailed discussion of the
final terms of the Settlement in "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Fresenius Medical Care AG"
and in Note 2 of the notes to Fresenius Medical Care's consolidated
financial statements. In 2001, FMCH discontinued separate reporting of
Settlement interest in anticipation of the final payment on the Settlement
note, which FMCH made in June 2001.
(b) As used above, EBITDA means earnings before interest, income taxes,
depreciation and amortization, and, for 1999, the special charge for the
Settlement. EBITDA for the nine months ended September 30, 1996 excludes
allocations of expenses by W.R. Grace-Conn. to its healthcare business and
the reduction of carrying amounts of assets to estimated fair values, and
also excludes writedowns to foreign operations, additional provisions for
doubtful accounts, and additional provisions for restructuring charges of
approximately $43 million. We are not presenting EBITDA here as a measure of
FMCH's operating results. Our management believes that presentation of
EBITDA is helpful to investors as a measure of FMCH's ability to generate
cash and to service debt. Management also believes that presentation of
EBITDA is helpful to investors because EBITDA is used to determine
compliance with some of the covenants in our senior credit agreement and the
indentures relating to both our outstanding trust preferred securities and
the trust preferred securities we are currently offering. However, you
should not construe EBITDA as an alternative to net earnings determined in
accordance with US GAAP or to cash flow from operations, investing
activities or financing activities or as a measure of cash flows.
(c) In calculating the ratio of fixed charges to earnings, earnings consist of
income before taxes plus fixed charges. Fixed charges consist of interest
expense and amortization of deferred financing fees, plus one-third of
rental expense under operating leases, the portion which FMCH considers to
be representative of an interest factor. Earnings were deficient in covering
fixed charges by $408 million in 1999.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS -- FMCH
OVERVIEW
FMCH is a subsidiary of Fresenius Medical Care AG and the holding company
for its North American operations.
FMCH is primarily engaged in (a) providing kidney dialysis services,
clinical laboratory testing and renal diagnostic services and (b) manufacturing
and distributing products and equipment for dialysis treatment. Throughout
FMCH's history, a significant portion of its 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.
FMCH derives a significant portion of its net revenues from Medicare,
Medicaid and other government health care programs (approximately 55% in 2000).
The reimbursement rates under these programs, including the Composite Rate, the
reimbursement rate for EPO, and the reimbursement rate for other dialysis and
non-dialysis related services and products, as well as other material aspects of
these programs, have in the past and may in the future be changed as a result of
deficit reduction and health care reform measures.
FMCH 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 FMCH receives for its services and products.
The following is a discussion of FMCH's financial condition and results of
operation. You should read this discussion in conjunction with the consolidated
financial statements included elsewhere in this prospectus.
This section contains certain forward-looking statements that are subject
to various risks and uncertainties. These statements include, without
limitation, discussions concerning FMCH's outlook, 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, reimbursement, 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 "Management's Discussions and Analysis of
Financial Condition and Results of Operations -- FMCH" and in the periodic
reports that FMCH files with the Securities and Exchange Commission, could cause
FMCH's results to differ materially from the results that have been or may be
projected by or on behalf of FMCH.
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RESULTS OF OPERATIONS
The following table summarizes certain operating results of FMCH by
principal business unit for the periods indicated. Intercompany eliminations
primarily reflect sales of medical supplies by Dialysis products to Dialysis
services.
<Table>
<Caption>
SIX MONTHS
ENDED JUNE 30, YEAR ENDED DECEMBER 31,
---------------- --------------------------
2001 2000 2000 1999 1998
------ ------ ------ ------ ------
(U.S. DOLLARS IN MILLIONS)
Net revenues
Dialysis services........................... $1,408 $1,278 $2,625 $2,339 $2,116
Dialysis products........................... 368 353 717 707 662
Intercompany eliminations................... (128) (125) (253) (231) (207)
------ ------ ------ ------ ------
Net revenues................................ $1,648 $1,506 $3,089 $2,815 $2,571
====== ====== ====== ====== ======
Operating earnings:
Dialysis services........................... $ 207 $ 203 $ 403 $ 386 $ 344
Dialysis products........................... 66 56 118 126 103
------ ------ ------ ------ ------
Total operating earnings...................... 273 259 521 512 447
------ ------ ------ ------ ------
Other expenses:
General corporate........................... $ 66 $ 52 $ 97 $ 113 $ 108
Research and development.................... 2 2 4 4 4
Interest expense, net....................... 102 110 187 202 209
Interest expense on the Settlement, net..... -- -- 30 -- --
Special charge for the Settlement........... -- -- -- 601 --
------ ------ ------ ------ ------
Total other expenses.......................... 170 164 318 920 321
------ ------ ------ ------ ------
Income (loss) before income taxes and
cumulative effect on change in accounting
for start up costs....................... 103 95 203 (408) 126
------ ------ ------ ------ ------
Provisions for income taxes 49 47 98 (81) 74
------ ------ ------ ------ ------
Income (loss) from continuing operations
before cumulative effect of change in
accounting for start up costs............ $ 54 $ 48 $ 105 $ (327) $ 52
------ ------ ------ ------ ------
Discounted operations:
Net revenues................................ $ -- $ -- $ -- $ -- $ 121
====== ====== ====== ====== ======
Loss before income taxes.................... -- -- -- -- (14)
Benefit for income taxes.................... -- -- -- -- (5)
------ ------ ------ ------ ------
Loss from operations........................ -- -- -- -- (9)
------ ------ ------ ------ ------
Loss on disposal before income taxes........ -- -- -- -- (140)
------ ------ ------ ------ ------
Income tax benefit.......................... -- -- -- -- (43)
------ ------ ------ ------ ------
Loss on disposal............................ -- -- -- -- (97)
------ ------ ------ ------ ------
Loss on discounted operations................. $ -- $ -- $ -- $ -- $ (106)
====== ====== ====== ====== ======
Cumulative effect of change in accounting
for start up costs, net of tax
benefits................................. -- -- -- -- (5)
------ ------ ------ ------ ------
Net income/(loss)........................... $ 54 $ 48 $ 105 $ (327) $ (59)
====== ====== ====== ====== ======
</Table>
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SIX MONTHS ENDED JUNE 30, 2001 COMPARED TO SIX MONTHS ENDED JUNE 30, 2000
Net revenues from operations for the first six months of 2001 increased by
9% ($142 million) over the comparable period in 2000. Net income from operations
for the first six months of 2001 increased by 13% ($6 million) over the
comparable period in 2000 as a result of increased operating earnings and
decreased interest expense partially offset by increased general corporate
expenses.
DIALYSIS SERVICES
Dialysis Services net revenues for the first six months of 2001 increased
by 10% ($130 million) over the comparable period in 2000, primarily as a result
of a 9% increase in the number of treatments provided, the impact of increased
Medicare reimbursement rates, higher revenues in other ancillary services, and
increased laboratory testing revenues. The treatment increase was a result of
base business growth and the impact of 2000 acquisitions. The laboratory testing
revenues increased as a result of higher patient volume.
Dialysis Services operating earnings for the first six months of 2001
increased by 2% ($4 million) over the comparable period of 2000 primarily due to
the increase in treatment volume, the impact of increased Medicare reimbursement
rates, higher earnings in other ancillary services, and increased earnings from
laboratory testing offset by higher personnel costs, increases in the provision
for doubtful accounts, and increases in other operating expenses.
DIALYSIS PRODUCTS
Dialysis Products net revenues for the first six months of 2001 increased
by 4% ($15 million) over the comparable period of 2000. This is primarily due to
increased sales of machines, dialyzers, and other hemo disposable products.
Dialysis Products operating earnings for the first six months of 2001
increased by 18% ($10 million) over the comparable period of 2000. This is a
result of an improvement in gross margin and decreased freight and distribution
expenses.
OTHER EXPENSES
FMCH's other expenses for the first six months of 2001 increased by 4% ($6
million) over the comparable period of 2000. General corporate expenses
increased by $14 million primarily due to a charge of $12 million to form a
natural hedge for currency exposures on intercompany obligations and increased
employee benefits. Interest expense was favorable by $8 million primarily due to
the change in the mix of debt instruments during the first six months of 2001
versus the first six months of 2000.
INCOME TAX RATE
The effective tax rate for the first six months of 2001 (47.9%) is lower
than the rate for the comparable period of 2000 (49.3%) due to higher earnings
in relation to the constant amount of non-deductible merger goodwill.
IMPACT OF INFLATION
A substantial portion of FMCH's net revenue is subject to reimbursement
rates which are regulated by the U.S. 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 FMCH's business and
results of operations. Amgen Inc. has announced a 3.9% increase in its
wholesaler acquisition price for Epogen effective May 9, 2001. FMCH's purchase
contract with Amgen contains pricing protection such that its purchase price for
EPO will be unaffected by such increase through December 31, 2001.
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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FMCH is exposed to market risks due to changes in interest rates and
foreign currency rates. FMCH 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. Periodically, FMCH enters into derivative
instruments with related parties to form a natural hedge from currency exposures
on intercompany obligations. These instruments are reflected in FMCH's balance
sheet at fair value with changes in fair value recognized in earnings.
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.
FMCH enters into foreign exchange contracts that are designated as, and
effective as, hedges for the Euro denominated mandatorily redeemable preferred
stock and for forecasted purchases of raw materials. Also, since FMCH carries a
substantial amount of floating rate debt, FMCH 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.
FMCH defers gains and losses on foreign exchange contracts accounted for as
cash flow hedges in comprehensive income. FMCH recognizes deferred gains and
losses as adjustments to cost of sales when it recognizes the future sales. FMCH
records interest rate swap payments and receipts as part of interest expense.
FMCH reclasses gains and losses from interest rate swaps are deferred in other
comprehensive income into interest expense over the period during which it
recognizes the hedged variable interest rate payments. FMCH recognizes cash
flows from derivatives in the consolidated statement of cash flows in the same
category as the item being hedged.
At June 30, 2001, the fair value of FMCH's interest rate agreements, which
consisted entirely of interest rate swaps, is approximately ($40.6 million) and
the fair value of FMCH's foreign exchange contracts, which consisted entirely of
forward agreements, is valued at approximately $26.2 million. FMCH had
outstanding contracts covering the purchase of 482 million euros at an average
contract price of $0.9115 per euro, for delivery between April 2001 and November
2003.
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 the U.S.
government investigation and related costs, net income from operations increased
by 14% over 1999.
DIALYSIS SERVICES
Dialysis Services net revenues for 2000 increased by 12% ($286 million)
over 1999, primarily as a result of a 9% increase in the number of treatments
provided, the impact of increased Medicare reimbursement rates, improved anemia
management (higher EPO utilization), consolidation of joint ventures, higher
revenues in other pharmaceuticals and increased laboratory testing revenues. The
treatment increase was a result of base business growth and the impact of 1999
and 2000 acquisitions. The laboratory testing revenues increased as a result of
higher patient volume.
Dialysis Services operating earnings for 2000 increased by 4% ($17 million)
over 1999 primarily due to increases in treatment volume, the impact of
increased Medicare reimbursement rates, higher earnings in other
pharmaceuticals, and increased earnings from laboratory testing. These increases
were partially
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75
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
hemodialysis 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 THE SETTLEMENT AND RELATED COSTS
On January 18, 2000, FMCH, NMC and certain affiliated companies executed
definitive agreements with the U.S. government to settle (1) matters concerning
violations of federal laws and (2) NMC's claims with respect to outstanding
Medicare receivables for nutrition therapy.
As a result of the settlement, FMCH recorded, a special pre-tax charge of
$601 million ($419 million net of income taxes) in 1999 which included (1) a
charge of approximately $486 million for settlement payment obligations to the
government; (2) a reserve of approximately $94 million for the resolution of the
FMCH's IDPN accounts receivable; and (3) a reserve for other related costs of
$21 million. The Settlement payment obligations to the U.S. government and the
amounts due to FMCH for outstanding Medicare receivables have been classified in
the balance sheet at their expected settlement date.
OTHER EXPENSES
FMCH's other expenses for 2000 decreased by 1% ($1 million) over the
comparable period of 1999 excluding the special charge for the Settlement.
General corporate expenses decreased by $16 million and operating interest
expense decreased by $15 million primarily due to the change in the mix of debt
instruments. The decreases in general corporate and operating interest expenses
for 2000 were offset by $30 million of increased interest expense related to the
Settlement in January 2000.
INCOME TAXES
FMCH 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.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO DECEMBER 31, 1998
Net revenues from continuing operations for 1999 increased by 10% ($244
million) over 1998. Income from continuing operations for 1999 decreased ($379
million) over 1998 as a result of increased expense relating to the special
charge for the Settlement and related costs ($419 million, after income taxes),
and increases to general corporate expenses, partially offset by increased
operating earnings and reduced interest expense. Excluding the effect of the
special charge for Settlement and related costs recorded in 1999, net income
from operations increased by 78%.
DIALYSIS SERVICES
Dialysis Services net revenues for 1999 increased by 11% ($223 million)
over 1998, primarily as a result of an 8% increase in the number of treatments
provided, the beneficial impact of the extension of the Medicare Secondary Payor
(MSP) provision, higher EPO utilization relative to the comparable 1998 period,
partially offset by decreased laboratory testing revenues. The increase in the
number of treatments
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was a result of base business growth and the impact of 1998 and 1999
acquisitions. The laboratory testing revenue decrease was primarily due to lower
testing volume as competitors continue to consolidate lab activity.
Dialysis Services operating earnings for 1999 increased by 12% ($42
million) over the comparable period of 1998 primarily due to the increase in
treatment volume, the beneficial impact of the extension of the MSP provision
and higher EPO utilization, and the decrease in the provision for doubtful
accounts, partially offset by decreased operating earnings in laboratory
testing. The provision for doubtful accounts decreased due to revisions of
estimates for bad debt cost report recoveries. These recoveries include the
result of FMCH's successful challenge of the Medicare regulation which capped
reimbursement for the bad debts incurred by dialysis facilities in those years.
Accordingly, FMCH has revised its estimate of recoveries for the previously
disallowed bad debt expense associated with this regulation during the year.
DIALYSIS PRODUCTS
Dialysis Products net revenues for 1999 increased by 7% ($45 million) over
the comparable period of 1998. This is due to increased sales of hemo products,
including machines and disposables, partially offset by decrease sales of
peritoneal products.
Dialysis Products operating earnings for 1999 increased by 22% ($23
million) over 1998. This is primarily due to revenue growth and improvements in
gross margin resulting from manufacturing efficiencies from increased production
volume, partially offset by increased freight and distribution costs.
SPECIAL CHARGE FOR THE SETTLEMENT AND RELATED COSTS
On January 18, 2000, FMCH, NMC and certain affiliated companies executed
definitive agreements with the U.S. government to settle (1) the matters covered
in the U.S. government investigation and (2) NMC's claims with respect
outstanding Medicare receivables for nutrition therapy.
As a result of the Settlement, FMCH recorded a special pre-tax charge of
$601 million ($419 million after tax) in 1999 which included (1) a charge of
$486 million for settlement payment obligations to the U.S. government, (2) a
reserve of approximately $94 million for resolution of the FMCH's IDPN accounts
receivable, and (3) a reserve for other related costs of $21 million. The
settlement payment obligations to the U.S. government and the amounts due to
FMCH for the outstanding Medicare receivables have been classified in the
balance sheet at their expected settlement dates. See Note 16 to the notes to
the Financial Statements of Fresenius Medical Care Holdings,
Inc. -- "Commitments and Contingencies -- Legal Proceedings."
OTHER EXPENSES
Excluding the effect of the special charge for the Settlement, FMCH's other
expenses for 1999 decreased by 1% ($2 million) over the comparable period of
1998. General corporate expenses increased by $5 million due to increases in
casualty and insurance expenses. Interest expense decreased by $7 million
primarily due to the reduction of FMCH's funded debt.
INCOME TAXES
FMCH has recorded an income tax benefit of $81 million for 1999 as compared
to an income tax provision of $74 million in 1998. The income tax benefit in
1999 is lower than the statutory tax rate primarily due to the tax effect of the
special charge for the Settlement and related costs. The provision for income
taxes in 1998 is higher than the statutory tax rate primarily due to the
non-deductible merger goodwill.
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LIQUIDITY AND CAPITAL RESOURCES
SIX MONTHS ENDED JUNE 30, 2001 COMPARED TO SIX MONTHS ENDED JUNE 30, 2000
FMCH's cash requirements in 2001, and 2000, including acquisitions and
capital expenditures have historically been funded by cash generated from
operations, additional net intercompany borrowings and net increases in the
receivable financing facility.
Cash from operations increased by $28 million from $111 million for the six
months ended June 30, 2000 to $139 million for the six months ended June 30,
2001. This increase is primarily due to cash inflows from operating assets and
liabilities of $22 million and increases in net income of $6 million.
The movement in operating assets and liabilities includes the collection of
$5 million related to IDPN receivables. Increases in accounts receivable of $75
million in the six month period ended June 30, 2001 are primarily due to the
impact of acquisitions in 2001 and 2000, as well as increases in days sales
outstanding resulting from slower payment patterns from third parties,
specifically non governmental payors. Decreases in accounts payable are
primarily due to the timing of disbursements. Cash on hand was $49 and $33
million at June 30, 2001 and December 31, 2000, respectively. In addition, FMCH
made equity investments totaling $7 million in 2001.
Net cash flows used in investing activities of operations totaled $78
million in 2001 compared to $128 million in 2000. FMCH funded its acquisitions
and capital expenditures primarily through cash flows from operations and
intercompany borrowings. Acquisitions totaled $13 million and $82 million in
2001 and 2000, respectively, net of cash acquired. Capital expenditures of $58
million and $45 million were made for internal expansion, improvements, new
furnishings and equipment in 2001 and 2000, respectively.
Net cash flows used in financing activities of operations totaled $45
million in 2001 compared to net cash flows provided by of $20 million in 2000.
During the first six months of 2001, FMCH made 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 $174 million,
primarily due to the paydown of FMCH's credit facility of $172 million. Proceeds
from financing activities during the first six months included $97.5 million for
the issuance of mandatorily redeemable preferred stock to an affiliated company
and increased borrowings under a receivable financing facility of $9.7 million.
YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999
FMCH'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 was primarily related to an increase
in earnings and the addback of non-cash expenses of $122 million offset by net
decreases in operating assets and liabilities of $108 million. These changes
have been adjusted to exclude the special charge for the Settlement in 1999.
The movement in operating assets and liabilities included 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 Settlement, FMCH 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 U.S. government. During 2000,
FMCH made payments to the U.S. government totaling $387 million and received $54
million from the U.S. government.
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Under the definitive agreements with the U.S. government, FMCH entered into
a note payable for the settlement payment obligations to the U.S. government.
Interest on installment payments to the U.S. 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 U.S.
government has remitted the balance of FMCH's outstanding Medicare receivables
in four quarterly payments of $5.2 million plus interest at 7.5%. The first
three quarterly payments from the U.S. 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. FMCH 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, FMCH made payments to the government of $387 million for the
settlement of the U.S. government investigation. 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 by $110 million. At December 31, 2000 FMCH had additional borrowing
capacity of approximately $698 million under its credit facility and $55 million
under its receivable financing facility.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Net cash flows provided by operating activities of continued operations
totaled $253 million in 1999 compared to $212 million in 1998. Cash on hand was
$13 million at December 31, 1999 compared to $7 million at December 31, 1998.
On January 18, 2000, FMCH reached a final settlement agreement with respect
to the U.S. government investigation. The Settlement requires net settlement
payments totaling approximately $427 million, of which $14 million had
previously been paid. FMCH paid another $286 million after court approval of the
Settlement and will pay an additional $186 million over the next 18 months. As
part of the Settlement, FMCH will receive $59 million over the next 18 months
from the U.S. government against receivable claims of $153 million for
intradialytic parenteral nutrition therapy rendered on or before December 31,
1999. FMCH has amended the letter of credit that was given to the U.S.
government in 1996 from $150 million to $190 million, the balance of which will
be reduced over a period of time as we make installment payments to the U.S.
government.
The net cash obligations of FMCH, related to the special charge are
anticipated to approximate $266 million. This amount reflects the special charge
of $601 million reduced for the resolution of FMCH's intradialytic parenteral
nutrition receivable claims of approximately $153 million, and the estimated
cash savings for the tax effect of the special charge of $182 million. The cash
savings of the tax benefit are expected to be realized over time in relation to
the cash outflows of the Settlement and expenditures for other related costs.
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In December 1999, FMCH and the lenders under the senior credit facility,
amended certain covenants in the senior credit facility to accommodate its
obligations under the Settlement agreements and to enable it to continue in
compliance with the financial covenants upon consummation of the Settlement.
Net cash flows used in investing activities of continued operations totaled
$147 million in 1999 compared to $162 million in 1998. FMCH funded its
acquisitions and capital expenditures primarily through cash flows from
operations. Acquisitions totaled $65 million and $170 million in 1999 and 1998,
respectively, net of cash acquired. Capital expenditures of $81 million and $75
million were made for internal expansion, improvements, new furnishings and
equipment in 1999 and 1998, respectively. FMCH intends to continue to enhance
its presence in the U.S. by focusing its expansion on the acquisition of
individual or small groups of clinics, expansion of existing clinics, and
opening of new clinics.
Net cash flows used in financing activities of continued operations totaled
$96 million in 1999 compared to $35 million in 1998. Due to the improvement in
cash flow from operations, FMCH was able to reduce its total borrowings in 1999
by approximately $97 million. In 1998, FMCH funded its acquisitions and capital
expenditures primarily through proceeds from external short and long-term debt,
proceeds from a receivable financing facility, and proceeds from the sale of the
Non-Renal Diagnostics and Homecare divisions. Additionally in 1998, acquisitions
were also funded through the issuance of investment securities by Fresenius
Medical Care Finance, S.a.r.l. Luxembourg, a Luxembourg subsidiary of ours. In
exchange for such financing, an intercompany account was established between
FMCH and the Luxembourg subsidiary with payables due to Fresenius Medical Care
Finance, S.a.r.l. Luxembourg of $42 million at December 31, 1998.
CONTINGENCIES
FMCH is a plaintiff in litigation against the federal government with
respect to the implementation of OBRA 93 and is a defendant in significant
litigation as described in "Business -- Legal Proceedings." An adverse outcome
in any of these matters, could have a material adverse effect on FMCH's
business, financial condition and results of operations. Because of the
significant complexities and uncertainties associated with these proceedings,
neither an estimate of the possible loss or range of loss that FMCH may incur in
respect of such matters nor a reserve based on any such estimate can be
reasonably made. See -- Note 16 to the notes to the consolidated financial
statements -- FMCH, "Commitments and Contingencies."
FMCH believes that its existing credit facilities, cash generated from
operations and other current sources of financing are sufficient to meet its
foreseeable needs. If cash flows from operations or availability under existing
banking arrangements fall below expectations, FMCH may be required to consider
other alternatives to maintain sufficient liquidity. There can be no assurance
that FMCH will be able to do so on satisfactory terms, if at all. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- FMCH -- Liquidity and Capital Resources."
DIVESTITURES
FMCH sold its Non Renal Diagnostic Services and Homecare divisions on June
26, 1998 and July 29, 1998, respectively. The combined proceeds of these sales
were approximately $100 million in cash and notes.
INFLATION
A substantial portion of FMCH's net revenue is subject to reimbursement
rates which are regulated by the U.S. government and do not automatically adjust
for inflation. Non-governmental payers are also 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 FMCH's business and results of operations.
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RECENTLY ISSUED ACCOUNTING STANDARDS
In September 2000, the Financial Accounting Standards Board issued SFAS No.
140, which replaces SFAS No. 125. SFAS No. 140 provides the accounting and
reporting standards for securitizations and other transfers of financial assets
and collateral. These standards are based on consistent application of a
financial-components approach that focuses on control. This Statement also
provides consistent standards for distinguishing transfers of financial assets
that are sales from transfers that are secured borrowings. SFAS No. 140 is
effective for transfers after March 31, 2001 and is effective for disclosures
about securitizations and collateral for fiscal years ending after December 15,
2000. There is no impact to FMCH for the adoption of SFAS No. 140.
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BUSINESS
We are the world's largest kidney dialysis company engaged in both
providing dialysis care and manufacturing dialysis products, based on publicly
reported revenues and patients treated. We provide dialysis treatment to over
102,000 patients at our approximately 1,367 clinics located in 20 countries. In
the United States, we also provide inpatient dialysis services, therapeutic
apheresis, hemoperfusion and other services under contract to hospitals. We also
develop and manufacture a complete range of equipment, systems and disposable
products, which we sell to customers in over 100 countries. We are able to use
the information we gain when treating patients in developing new and improved
products. We believe that our size, our activities in both dialysis care and
dialysis products and our concentration in specific geographic areas allow us to
operate more cost-effectively than many of our competitors. For the year ended
December 31, 2000, we had revenues of $4.2 billion and EBITDA of $913.7 million.
We derived 73% of our revenues in 2000 from our North America operations and 27%
from our International operations.
RENAL INDUSTRY OVERVIEW
END-STAGE RENAL DISEASE
End-stage renal disease, or ESRD, is the stage 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 that prevents toxin buildup, water overload and the eventual poisoning
of the body. A number of conditions -- diabetes, hypertension,
glomerulonephritis and inherited diseases -- can cause chronic kidney disease.
Nearly 60% of all people with ESRD acquire the disease as a complication of one
or more of these primary conditions.
There are currently only two methods for treating ESRD: dialysis and kidney
transplantation. Scarcity of compatible kidneys limits transplants. According to
data published by the Centers for Medicare and Medicaid Services, or "CMS,"
(formerly known as the Health Care Financing Administration, or HCFA) of the
U.S. Department of Health and Human Services, approximately 13,500 patients, or
4% of the ESRD patient population, received kidney transplants in the United
States during 1999. Transplantation rates vary from country to country in
Europe. According to the European Dialysis and Transplantation Association
Registry Report for 1996, 2% of new ESRD patients age 15 or over received
transplants as the first mode of treatment in Europe in 1995. 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 methods commonly used today, hemodialysis and peritoneal
dialysis. These are described below under "Treatment Options for ESRD."
Generally, an ESRD patient's physician, in consultation with the patient,
chooses the patient treatment method, which is based on the patient's medical
conditions and needs.
Based on the most recent data published by the CMS, the number of patients
in the United States who received dialysis for chronic ESRD grew from
approximately 66,000 in 1982 to approximately 259,500 at December 31, 1999, or a
compound annual rate of 8.4%. We believe that, over the next five to ten years,
the number of patients suffering from ESRD in the United States will continue to
grow at approximately the same rate. The United States Renal Data System
projections to 2010 suggest that the number of both dialysis and transplant
patients will reach levels double those in 1997. According to data from the CMS,
the European Dialysis and Transplantation Association and our own internal
survey, the number of non-U.S. chronic dialysis patients is growing at estimated
annual rates of 7% for patients receiving hemodialysis and 8% for patients
receiving peritoneal dialysis. At the end of 1998, an estimated 920,000 patients
were undergoing dialysis treatment. According to our own market surveys, Japan
is the second largest dialysis market in the world with approximately 188,000
dialysis patients. In the rest of the world, we estimate that at the end of 1998
there were approximately 225,000 dialysis patients in Europe,
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more than 100,000 patients in Asia (excluding Japan) and around 90,000 patients
in Latin America. We believe that the continuing growth in the number of
dialysis patients is principally attributable to:
- increased general life expectancy and the overall aging of the general
U.S. and European populations;
- shortage of donor organs for kidney transplants;
- improved dialysis technology that has expanded the patient population
able to undergo life-prolonging dialysis;
- generally stable or increased reimbursements for treatments in many
countries; and
- better treatment and survival of patients with hypertension, diabetes and
other illnesses that lead to ESRD.
TREATMENT OPTIONS FOR ESRD
Hemodialysis. Hemodialysis removes toxins and excess fluids from the blood
outside the patient's body. In hemodialysis, the blood flows outside the body by
means of plastic tubes known as bloodlines into a specially designed filter,
called a dialyzer. The dialyzer functions as an artificial kidney by separating
waste products and excess water from the blood by diffusion and ultrafiltration.
Dialysis solution flowing through the dialyzer carries away the waste products
and excess water, and the cleansed blood is returned to the patient. A
hemodialysis machine controls the movement of the blood and dialysis solution.
The machine 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.
In addition to standard hemodialysis, hemofiltration is a treatment method
which cleanses an ESRD patient's blood without using dialysis solution. Blood
passes through a semipermeable membrane, which filters out solute particles.
Hemodialfiltration combines the advantages of hemofiltration and hemodialysis,
and provides high elimination rates for small and large molecular weight
substances.
Hemodialysis patients generally receive treatment three times per week,
typically for two and one-half to four hours or longer per treatment. The
majority of hemodialysis patients receive treatment at outpatient dialysis
clinics, such as ours, where hemodialysis treatments are performed with the
assistance of a nurse or dialysis technician under the general supervision of a
physician. Hemodialysis is the only form of treatment, other than
transplantation, currently available to patients who have very low residual or
nonexistent renal function and whose blood is inadequately cleansed using
peritoneal dialysis.
According to data from the CMS, as of December 31, 1999, there were
approximately 3,740 Medicare-certified ESRD treatment clinics in the United
States. Ownership of these clinics is fragmented. We estimate that currently,
the ten largest multi-facility dialysis providers, including ourselves, treat
approximately 68% of patients. We estimate that there are approximately 4,200
dialysis clinics in Europe, of which 60% are government-owned, 30% are privately
owned, and 10% are operated by health care organizations. In Latin America,
privately owned clinics predominate, comprising over 60% of all clinics
providing dialysis care.
According to the CMS, as of December 31, 1999, hemodialysis patients
represented 88% of all dialysis patients in the United States. Our studies
suggest that hemodialysis patients comprise 95% of the ESRD patient population
in Japan, 89% in Europe and 83% in the rest of the world.
Peritoneal Dialysis. Peritoneal dialysis removes toxins from the blood
using the peritoneum, the membrane lining covering the internal organs located
in the abdominal area. Peritoneal dialysis patients administer their own
treatments in their own homes and workplaces, either by a treatment known as
continuous ambulatory peritoneal dialysis or CAPD, or by a treatment we
introduced in 1980 known as continuous cycling peritoneal dialysis or CCPD. In
both of these treatments, a surgically implanted catheter provides access to the
peritoneal cavity. Using this catheter, the patient introduces a sterile
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dialysis solution from a solution bag through a tube into the peritoneal cavity
and the peritoneum operates as the filtering membrane. A typical CAPD peritoneal
dialysis program involves the introduction and disposal of dialysis solution
four times a day. With CCPD a machine "cycles" solution to and from the
patient's peritoneal cavity while the patient sleeps.
In both CAPD and CCPD the patient undergoes dialysis daily, and typically
does not experience the buildup of toxins and fluids which hemodialysis patients
experience on the days they are not treated. In addition, because the patient
need not make frequent visits to a hemodialysis clinic, and can administer the
solution exchanges 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. Some aspects of peritoneal dialysis, however, limit
its use as a long-term therapy for some patients. First, some patients cannot
make the required sterile connections of the peritoneal dialysis tubing to the
catheter, leading to excessive episodes of peritonitis. Peritonitis is 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.
OUR STRATEGY
Our objective is to focus on generating revenue growth that exceeds market
growth of the dialysis industry, measured by growth in the patient population,
while maintaining our leading position in the market and increasing earnings at
a faster pace than revenue growth. Our dialysis services and product sales
businesses have grown faster than the market in terms of revenues over the past
five years, and we believe that we are well positioned to meet our objectives by
focusing on the following strategies:
- Continue to Provide High Standards of Patient Care. We believe that our
reputation for providing the highest standards of patient care is a
competitive advantage. We believe that our proprietary patient
statistical database, which contains clinical and demographic data on
over 290,000 dialysis patients, is the most comprehensive body of
information about dialysis patients in the world. In 1998, we began
developing our European clinical database to develop a comparable body of
data from our European dialysis clinics. We believe that these databases
provide a unique advantage in improving dialysis therapy and treatment
outcomes, improving the quality and effectiveness of dialysis products
and reducing mortality rates. By improving dialysis outcomes and overall
ESRD patient care, we also may be able to contain hospitalization and
other costs of ESRD treatment.
- Expand Presence in Attractive Growth Markets Worldwide. We intend to
continue to take advantage of the reputation and market recognition that
our global product business has created by acquiring and establishing new
dialysis clinics within attractive international markets. We believe that
we will obtain an increasing percentage of our dialysis care growth from
worldwide markets. We believe that increases in per capita income in
developing countries will make general health care benefits, which may
include payment for dialysis treatment, more widely available and present
significant opportunities. During 2000, we acquired 99 clinics and opened
17 new clinics outside the United States. In the first six months of
2001, we acquired 73 clinics, opened 32 new clinics and closed 8 clinics.
By December 31, 2000, we treated approximately 24,000 patients outside
the United States, an increase of approximately 34% over the figure at
December 31, 1999. By June 30, 2001, our patients outside the U.S.
increased to 26,400. To take advantage of the growing trend towards
consolidation outside of the U.S., we envision making additional
acquisitions in selected international markets. Consistent with this
strategy, on June 19, 2000, we acquired substantially all of the
international and non-continental U.S. operations of Total Renal Care
Holdings, Inc. (now called DaVita), consisting of 87 dialysis clinics
treating approximately 5,100 patients in Argentina, Italy, the United
Kingdom, Puerto Rico and Hawaii. We are currently managing the Puerto
Rico operations of Total Renal Care Holdings, Inc. Completion of our
acquisition of the Puerto Rico operations is subject to governmental
approvals and third-party consents. Furthermore, on January 5, 2001, we
acquired Everest which owns, operates or manages approximately 70 clinic
facilities providing therapy to approximately 6,800 patients in the
eastern and central United States.
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Everest also conducts extracorporeal blood services and acute dialysis
businesses which provide acute dialysis, apheresis and hemoperfusion services to
approximately 100 hospitals in the United States. We also expect to continue to
enhance our presence in the United States by acquiring individual or small
groups of dialysis clinics in selected markets, expanding existing
clinics, and opening new clinics, although we will consider larger
acquisitions in the United States if suitable opportunities, such as
Everest, become available to us.
- Increase Our Spectrum of Dialysis Services. One of our objectives is to
continue to expand our role within the broad spectrum of services for
dialysis patients. We have begun to implement this strategy by providing
expanded and enhanced patient services, including laboratory and
diagnostic services, to both our own clinics and those of third parties.
We estimate that our Spectra Renal Management division provides
laboratory services for 40% of the dialysis patients in the United
States. We have developed disease state management methodologies, which
involve total patient care for ESRD patients, that we believe are
attractive to managed care payors. As part of our plans to develop
disease state management, we have formed Optimal Renal Care, LLC, a joint
venture with Southern California Permanente Medical Group, a subsidiary
of Kaiser Permanente, Inc. which has the largest dialysis patient
population of any managed care organization, and we have formed
Renaissance Health Care as a joint venture with participating
nephrologists.
- Offer Complete Dialysis Product Lines with Recurring Disposable Products
Revenue Streams. We offer broad and competitive hemodialysis and
peritoneal dialysis product lines. These product lines enjoy broad market
acceptance and enable us to serve as our customers' single source for all
of their dialysis machines, systems and disposable products. During the
year ended December 31, 2000, we obtained approximately 18% of our
product revenue from machine sales and 82% from sales of disposable
products. These disposable products provide us with a continuing source
of revenue from our installed base of dialysis equipment.
- Extend Our Position as an Innovator in Product and Process
Technology. We are committed to technological leadership in both
hemodialysis and peritoneal dialysis products. We have an approximately
220 member research and development team that focuses 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. We believe that our extensive expertise in patient
treatment and clinical data will further enhance our ability to develop
more effective products and treatment methodologies. Our 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, we have reduced manufacturing costs per unit through
development of proprietary manufacturing technologies that have
streamlined and automated our production processes. We intend to further
improve our proprietary, highly automated manufacturing systems to
continue to reduce product manufacturing costs, concurrently achieving a
high level of quality control and reliability.
DIALYSIS CARE
DIALYSIS SERVICES
We provide dialysis treatment and related laboratory and diagnostic
services at our 1,367 outpatient dialysis clinics, 1,005 of which are in the
United States and 362 of which are in 19 countries outside of the United States.
Our operations outside North America generated 11% of our 2000 dialysis care
revenue. We currently operate dialysis clinics in Argentina, Australia, Brazil,
China, Colombia, Czech Republic, France, Germany, Hungary, Italy, Korea,
Portugal, Spain, Taiwan, Turkey, United Kingdom and Venezuela. Our dialysis
clinics are generally concentrated in areas of high population density. In 2000,
we acquired 133 existing clinics, opened 67 new clinics and closed or sold 20
clinics. The number of patients we treat at our clinics increased by about 15%,
from approximately 80,000 at December 31, 1999 to approximately 91,900 at
December 31, 2000 and further increased to approximately 102,000 at June 30,
2001.
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With our large patient population, we have developed proprietary patient
statistical databases which enable us to improve dialysis treatment outcomes,
and improve the quality and effectiveness of dialysis products, resulting in
reduced mortality rates. In addition to our patient databases, we believe that
local physicians, hospitals and managed care plans refer their ESRD patients to
our clinics for treatment due to:
- our reputation for quality patient care and treatment;
- our extensive network of dialysis clinics, which enables physicians to
refer their patients to conveniently located clinics; and
- our reputation for technologically advanced products for dialysis
treatment.
We treat approximately 26% of the dialysis patients in the United States
and, based on publicly available reports, we believe our next largest competitor
treats approximately 15% of U.S. dialysis patients. For the six-months ended
June 30, 2001, dialysis services accounted for 73% of our total revenue.
At our clinics, we provide hemodialysis treatments 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 clinic 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 our clinics operate two or three patient shifts per
day.
Each of our dialysis clinics is under the general supervision of a Medical
Director and, in some cases, one or more associate Medical Directors, all of
whom are physicians. See "-- Patient, Physician and Other Relationships." Each
dialysis clinic also has an administrator who supervises the day-to-day
operations of the facility and the staff. The staff typically consists of
registered nurses, licensed practical nurses, patient care technicians, a social
worker, a registered dietician, a unit clerk and biomedical technicians.
As part of the dialysis therapy, we provide a variety of services to ESRD
patients in the United States at our dialysis clinics. These services include
administering EPO, a bioengineered protein that stimulates the production of red
blood cells. EPO is used to treat anemia, a medical complication that ESRD
patients frequently experience, and we administer EPO to most of our patients.
Revenues from EPO accounted for approximately 28% of dialysis care revenue in
our North America segment for the twelve months ended December 31, 2000. We
receive a substantial majority of this revenue as reimbursements through the
Medicare and Medicaid programs. Amgen Inc., is the sole manufacturer of EPO in
North America, and any interruption of supply could materially adversely affect
our business, financial condition and results of operations. Our current
contract with Amgen covers the period from January 2001 to December 2001 with
price guarantees and volume and outcome based discounts. Amgen has announced a
3.9% increase in its wholesaler acquisition price for EPO effective May 9, 2001.
Because our purchase contract with Amgen contains pricing protection through
December 31, 2001, our purchase price for EPO will be unaffected by the increase
through that date.
We provide other services to ESRD patients in the United States including:
- administering vitamin D, iron, hepatitis vaccine and blood transfusions;
- providing intradyalitic parenteral nutrition, in which nutrients are
added to the patient's blood during hemodialysis;
- clinical laboratory testing through Spectra Renal Management;
- doppler flow testing of the effectiveness of the patient's vascular
access for dialysis; and
- performing electrocardiograms.
The patient's attending physician must prescribe these tests and other
services.
Our clinics also offer services for home dialysis patients, the majority of
whom receive peritoneal dialysis treatment. For those patients, we provide
materials, training and patient support services, including
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clinical monitoring, supply of EPO, follow-up assistance and arranging for
delivery of the supplies to the patient's residence. See "-- Regulatory and
Legal Matters -- Reimbursement -- United States" for a discussion of billing for
these products and services.
We also provide dialysis services under contract to hospitals in the United
States on an "as needed" basis for hospitalized ESRD patients and for patients
suffering from acute kidney failure. Acute kidney failure can result from trauma
or similar causes, and requires dialysis until the patient's kidneys recover
their normal function. We service these patients either at their bedside, using
portable dialysis equipment, or at the hospital's dialysis site. Contracts with
hospitals provide for payment at negotiated rates that are generally higher than
the Medicare reimbursement rates for chronic in-clinic treatments.
We employ a centralized approach with respect to some administrative
functions common to our operations. For example, each dialysis clinic uses our
proprietary manuals containing our standardized operating and billing
procedures. We believe that centralizing and standardizing these functions
enhances our ability to perform services on a cost-effective basis.
The manner in which each clinic conducts its business depends, in large
part, upon applicable laws, rules and regulations of the jurisdiction in which
the clinic is located, as well as our clinical policies. However, a patient's
attending physician, who may be the clinic's Medical Director or an unaffiliated
physician with staff privileges at the clinic, has medical discretion to
prescribe the particular treatment modality and medications for that patient.
Similarly, the attending physician has discretion in prescribing particular
medical products, although the clinic typically purchases equipment, regardless
of brand, in consultation with the Medical Director through our central
purchasing operations.
LABORATORY SERVICES AND RENAL DIAGNOSTICS
We provide laboratory testing and marketing services through Spectra Renal
Management. Spectra Renal Management is the leading United States 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. Spectra Renal Management
operates three laboratories, located in New Jersey, Northern California, and
Illinois. During the year ended December 31, 2000, Spectra Renal Management
performed approximately 37 million tests for more than 100,000 dialysis patients
across the United States. We plan to expand Spectra Renal Management into
related markets such as hospital dialysis units and physician office practices,
working particularly with nephrologists.
ACQUISITIONS
A significant factor in the growth in our revenue and operating earnings in
prior years has been our ability to acquire health care businesses, particularly
dialysis clinics, on reasonable terms. Worldwide, physicians own many dialysis
clinics that are potential acquisition or joint venture candidates for us. In
the United States, doctors might determine to sell their clinics 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. Outside of the United States, doctors might determine to sell and/or
enter into joint ventures or other relationships with us to achieve the same
goals and to gain a partner with extensive expertise in dialysis products and
services. While price is typically the key factor in securing acquisitions, we
believe that we will be an attractive acquiror or partner to many dialysis
clinic owners due to:
- our reputation for patient treatment;
- our proprietary Patient Statistical Profile and European clinical
databases;
- our comprehensive clinical and administrative systems, manuals and
policies, and our ability to provide ancillary services for dialysis
clinics and patients; and
- our reputation for technologically advanced products.
We paid aggregate consideration of approximately $288 million for
acquisitions of health care facilities and clinical laboratories in 2000 and
approximately $111 million in 1999.
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On June 19, 2000, we purchased substantially all of the international and
non-continental U.S. operations of Total Renal Care Holdings, Inc. (now called
DaVita) for $145 million. These operations consist of 87 dialysis clinics
treating approximately 5,100 patients in Argentina, Italy, the United Kingdom,
Puerto Rico, and Hawaii. Additionally, we made a $10 million non-refundable
deposit, not included in the purchase price noted above, towards the purchase of
the Puerto Rico operations. The purchase of the Puerto Rico operations is
pending subject to regulatory approval and third-party consents.
On January 5, 2001, we acquired Everest for $341 million, which includes
assumed debt and the issuance of 2.25 million non-voting Preference shares.
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 extracorporal blood services and acute dialysis
businesses which provide acute dialysis, apheresis and hemoperfusion services to
approximately 100 hospitals.
We regularly evaluate and hold discussions with various other health care
companies and other businesses regarding acquisitions and joint business
ventures. In 2000, we completed new acquisitions and acquisitions of previously
managed clinics totaling 133 dialysis facilities providing care to approximately
7,594 patients. These acquisitions expand our presence in selected key
geographic areas.
QUALITY ASSURANCE IN DIALYSIS CARE
At each of our U.S. dialysis clinics, a quality assurance committee is
responsible for reviewing quality of care reports that our Patient Statistical
Profile system generates, setting goals for quality enhancement and monitoring
the progress of quality assurance initiatives. We believe that we enjoy a
reputation of providing high quality care to dialysis patients. In 2000, we
developed and implemented a number of programs to assist in achieving our
quality goals. Our Access Intervention Management Program (AIM) detects and
corrects arteriovenous access failure in hemodialysis treatment, which is the
major cause of hospitalization and morbidity. We also developed a
regionalization program to enhance peritoneal dialysis services. Throughout the
United States we initiated a pre-ESRD program to educate patients about
prevention, slowing kidney failure and treatment options. In 2000, we also
completed a patient satisfaction survey which again revealed a high level of
satisfaction among patients visiting our facilities.
In the International segment our quality management program focuses on
consolidation and coordination of medical matters and activities in our
international dialysis clinics to ensure and improve the quality of renal care
offered in these clinics. These clinics receive quality control guidelines to
monitor factors such as water quality, anemia treatment, and laboratory
services, using indices that are accepted worldwide in the dialysis and
scientific communities. Our system includes review and report procedures for
assessing the progress and effectiveness of our quality control activities. We
coordinate the program with internal corporate audits and audits by third
parties such as regulatory authorities. Management uses the audit reports to
further improve our system by defining additional quality control objectives.
During 2000, our continuous improvement efforts within the international
quality management group focused on the management of electronic data. We
implemented computerized tools to streamline the handling of customer
complaints. The documentation of our corporate management system was also put on
an electronic platform. Our organizational units successfully completed all
their regulatory audits in 2000. During 2000, additional clinics in Spain and
Italy were organized in line with the ISO 9002 quality standard, with 44
certified clinics at the end of 2000 compared to 37 clinics in 1999. In 2001, we
will continue to have our facilities in Italy, France, Turkey and Hungary
accredited under ISO standards.
PATIENT DATA COLLECTION AND ANALYSIS
We engage in systematic efforts to measure, maintain and improve the
quality of the services at our dialysis clinics. Each clinic collects and
analyzes quality assurance and patient data, which our division and corporate
management regularly reviews.
Our clinical laboratory results have been a critical element in the
development of our proprietary patient statistical database, which contains
clinical, laboratory and demographic data on over 290,000
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dialysis patients. We use this database to assist physicians in providing
quality care to dialysis patients. In addition, our Patient Statistical Profile
database is a key resource in ongoing research, both within our company and at
outside research institutions, to decrease mortality rates among dialysis
patients and improve their quality of life.
In 1998, we began developing our European clinical database. The database
includes a version in each relevant local language and takes into account the
different health care systems of the various European countries. Compilation and
use of the information in this database are designed to comply with applicable
European standards and restrictions relating to patient privacy. Our database is
user-password protected and patient data are not replicated to our servers and
central database in Bad Homburg. All medical information made available outside
the dialysis unit is done so on a strictly anonymous basis. Our database is
certified by each local authority where it is used.
SOURCES OF U.S. DIALYSIS CARE NET REVENUE
The following table provides information for the years ended December 31,
2000, 1999 and 1998 regarding the percentage of our U.S. dialysis treatment
services net revenues from (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.
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
-----------------------
2000 1999 1998
----- ----- -----
Medicare ESRD Program....................................... 59.1% 60.2% 57.0%
Private/alternative payors.................................. 32.1% 30.3% 33.8%
Medicaid and other government sources....................... 4.2% 4.2% 4.1%
Hospitals................................................... 4.6% 5.3% 5.1%
----- ----- -----
Total....................................................... 100.0% 100.0% 100.0%
===== ===== =====
</Table>
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 specified related
services at 80% of the payment methodology commonly referred to as the Medicare
composite rate. In addition, subject to various restrictions and co-payment
limitations, Medicare pays separately for some dialysis-related diagnostic and
therapeutic services not included in the Medicare composite rate. A secondary
payor is responsible for paying any co-payment, which is typically 20%, other
approved services not paid by Medicare and the annual deductible. The secondary
payor is usually a Medicare supplemental insurer, a state Medicaid program or,
to a lesser extent, the patient or the patient's private insurer. Most of the
states in which we currently operate dialysis clinics provide Medicaid benefits
to qualified recipients to supplement their Medicare entitlement.
Prior to the time at which Medicare becomes the primary payor for a
patient, another third-party payor, such as the patient's private insurer, or
the patient, pays for most dialysis treatments. ESRD patients under age 65 who
have employer health plan coverage must wait 33 months, which comprises 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 a negotiated rate, at our
usual and customary rates, which generally are higher than the rates paid by
governmental payors, such as Medicare, and Medicare is the secondary payor.
We obtain a significant portion of our revenues for dialysis services from
reimbursement provided by non-governmental third-party payors. Some type of
managed care plan, including health maintenance organizations, now furnishes a
substantial portion of third-party health insurance in the United States.
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 contracting with a
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smaller number of selected 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. With capitation, a
provider receives a fixed payment per month for each enrolled patient and bears
the risk of loss if the costs of treating a patient exceed the fixed capitation
payment. These market forces have resulted in pressures to reduce the
reimbursements we receive for our services and products.
Our ability to secure rates with indemnity and managed care plans has
largely been due to the relatively small number of ESRD patients enrolled by any
single health maintenance organization. Regulation has prohibited ESRD patients
from joining a health maintenance organization unless they are otherwise
eligible for Medicare coverage, due to their age or disability, and are members
of a managed care plan when they first experience kidney failure. The CMS has a
pilot program underway for managed care companies to treat Medicare ESRD
patients under capitated contracts. If successful, this program could result in
the elimination of the regulation that precludes ESRD patients from enrolling in
managed care organizations. If Medicare health maintenance organization
enrollments increase and the number of ESRD patients in managed care plans also
increases, managed care plans' ability to negotiate lower rates or reduce the
services we provide to them may increase. In addition, the health maintenance
organization may have contracted with another provider, or may have stricter
controls on access to certain ancillary services that we typically provide to
ESRD patients. Any of these developments could limit our future payments for
such services.
We have formed two joint ventures seeking to contract with managed care
organizations for the care of ESRD patients. Renaissance Health Care, Inc. is a
50/50 joint venture between us and participating nephrologists throughout the
United States. Our other venture, Optimal Renal Care is a 50/50 joint venture
between us and Southern California Permanente Medical Group. We believe a
significant increase in the number of patients enrolled in managed care plans
might also cause these plans to look more closely at outsourcing ESRD care to
ESRD companies such as our disease state management joint ventures.
As managed care programs expand market share and gain greater bargaining
power in relation to health care providers, there will be increasing pressure to
reduce the payments for our services and products. These trends would accelerate
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. We are
presently seeking to expand the portion of our revenues attributable to
non-governmental private payors through such measures as our joint venture with
Southern California Permanente Medical Group. However, we believe that the
historically higher rates of reimbursement nongovernmental payors have paid may
not continue at these high levels. If substantially more patients join managed
care plans or managed care plans reduce reimbursements paid to us, our business
and results of operations could be adversely affected, possibly materially. See
"-- Regulatory and Legal Matters -- Reimbursement" and "-- Anti-Kickback
Statutes, False Claims Act, Stark Law, and Fraud and Abuse Laws."
PATIENT, PHYSICIAN AND OTHER RELATIONSHIPS
We believe that our success in establishing and maintaining dialysis
clinics, both in the U.S. and in other countries, depends significantly on our
ability to obtain the acceptance of and referrals from local physicians,
hospitals and managed care plans. A dialysis patient generally seeks treatment
at a conveniently located clinic at which the patient's nephrologist has staff
privileges. Virtually all of our clinics maintain open staff privileges for
local nephrologists. Our ability to provide quality dialysis care and otherwise
meet the needs of local patients and physicians is central to our ability to
attract nephrologists to our clinics and to receive referrals from such
physicians.
We market the availability, quality and other advantages of our dialysis
clinics to physicians through symposia and other professional meetings. We
supplement our marketing efforts through distribution of literature and
advertisements in professional journals.
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Medicare ESRD program reimbursement regulations require that a Medical
Director generally supervises treatment at a dialysis clinic. Generally, the
Medical Director must be board certified or board eligible in internal medicine
and have at least twelve months of training or experience in the care of
patients at ESRD clinics. Our Medical Directors maintain their own private
practices.
We have written agreements with the physicians who serve as Medical
Directors for our clinics. Our U.S. Medical Director agreements generally have
terms of three years, although some have terms of as long as five to ten years.
Our Medical Directors and other physicians under contract individually negotiate
their compensation, which generally depends upon competitive factors in the
local market, the physician's professional qualifications, experience and
responsibilities, the clinic's size and the services it provides. We fix the
aggregate compensation of Medical Directors and other physicians under contract
in advance for a period of one year or more, based in part on various efficiency
and quality incentives. We believe that compensation is paid at fair market
value. In some countries other than the United States, Medical Director and
physician compensation may include a component based on some measure of the
clinic's financial performance.
Virtually all of our agreements with our Medical Directors in the United
States, as well as the typical contract under which we acquire existing dialysis
clinics, include noncompetition covenants covering specified activities within
specified geographic areas for specified periods of time. They do not prohibit
the physicians from providing direct patient care services at other locations.
As required by law, they also do not require a physician to refer patients to us
or particular clinics 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.
Our major competitors in dialysis services include Gambro AB, DaVita, Inc.
(formerly Total Renal Care), Baxter International Inc., Renal Care Group and the
Kuratorium fur Dialyse und Nierentransplantation e.V. Ownership of dialysis
clinics in the United States is fragmented with a large number of operators each
owning 10 or fewer clinics and a small number of larger multi-clinic providers,
of which we are the largest. Industry consolidation has been ongoing over the
last decade. Many of our dialysis clinics are in urban areas, where there
frequently are many competing clinics in proximity to our clinics. We experience
direct competition from time to time from former Medical Directors, former
employees or referring physicians who establish their own clinics. Furthermore,
other health care providers or product manufacturers, some of who have
significant operations, may decide to enter the dialysis business in the future.
Because in the United States government programs are the primary source of
reimbursement for services to the majority of patients, competition for patients
in the United States is based primarily on quality and accessibility of service
and the ability to obtain admissions from physicians with privileges at the
facilities. However, the extension of periods during which commercial insurers
are primarily responsible for reimbursement and the growth of managed care have
placed greater emphasis on service costs for patients insured with private
insurance. We believe that we compete effectively in all of these areas. In
particular, based upon our knowledge and understanding of other providers of
kidney dialysis, as well as from information obtained from publicly available
sources, we believe that we are among the most cost-efficient providers of
kidney dialysis services. In addition, as a result of our large size relative to
most other dialysis service providers, we believe we enjoy economies of scale in
administrative functions such as purchasing, billing, collections and data
processing.
In most countries other than the United States, we compete primarily
against individual free-standing clinics and hospital-based clinics. In many of
these countries, especially the developed countries, governments directly or
indirectly regulate prices and the opening of new clinics. Providers compete in
all countries primarily on the basis of quality and availability of service and
the development and maintenance of relationships with referring physicians.
Laboratory Services and Renal Diagnostics. Spectra Renal Management
competes in the United States with large nationwide laboratories, dedicated
dialysis laboratories and numerous local and regional
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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. We believe that our services are competitive in these areas. In
addition to laboratory services, Spectra Renal Management competes in the
imaging diagnostic market. While the main competitors are local hospitals,
Spectra Renal Management is competitive based upon the quality and accessibility
of its service.
DIALYSIS PRODUCTS
We are currently the world's largest manufacturer and distributor of
equipment and related products for hemodialysis and the second largest
manufacturer of peritoneal dialysis products, based on publicly reported
revenues, with operations in Germany, the United States and 35 other countries.
We sell our dialysis products directly and through distributors in approximately
100 countries. Most of our customers are dialysis clinics. For the three-months
ended March 31, 2001, dialysis products accounted for 27% of our total revenue.
We manufacture a comprehensive line of kidney dialysis equipment and
related products for each of the hemodialysis and peritoneal dialysis markets.
Our products include:
- hemodialysis machines, peritoneal dialysis cyclers and related equipment;
- dialyzers;
- peritoneal dialysis solutions in flexible plastic bags;
- hemodialysis concentrates and solutions and granulate mixes;
- bloodlines and disposable tubing assemblies; and
- equipment for water treatment in dialysis clinics.
We also distribute other manufacturers' products, including dialyzers,
special blood access needles, heparin, a drug used to prevent blood clotting,
and commodity supplies such as bandages, clamps and syringes.
OVERVIEW
The following table shows the breakdown of our revenues for the last three
years from sales of dialysis products between hemodialysis products and
peritoneal dialysis products.
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------
2000 1999 1998
---------------------- ---------------------- ----------------------
TOTAL TOTAL TOTAL
PRODUCT PRODUCT PRODUCT
REVENUES % OF TOTAL REVENUES % OF TOTAL REVENUES % OF TOTAL
-------- ---------- -------- ---------- -------- ----------
(U.S. DOLLARS IN MILLIONS)
Hemodialysis Products...... $1,060.3 84 $1,033.3 83 $ 922.5 80
Peritoneal Dialysis
Products................. 196.5 16 207.4 17 224.6 20
-------- --- -------- --- -------- ---
Total...................... $1,256.8 100 $1,240.7 100 $1,147.1 100
======== === ======== === ======== ===
</Table>
HEMODIALYSIS PRODUCTS
We offer a comprehensive hemodialysis product line, consisting of
hemodialysis machines, modular accessories for dialysis machines, polysulfone
dialyzers, bloodlines, dialysis solutions and concentrates, fistula needles,
connectors, devices for water treatment, data management systems, dialysis
chairs, machines and supplies for the reuse of dialyzers and other similar
supplies. We believe that our broad range of technologically sophisticated
hemodialysis products makes us a leader in the hemodialysis product field. We
continually strive to expand and improve the capabilities of our hemodialysis
systems to offer an advanced treatment mode at reasonable cost.
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Dialysis Machines. We introduced our first dialysis machine in 1980, and
our dialysis machines are currently in their fifth generation of development. We
sell our dialysis machines as Series 2008H models in North America and Series
4008 models in the rest of the world. Our dialysis machines offer the following
features and advantages:
- Volumetric dialysate balancing and ultrafiltration control system. This
system 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;
- 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 Monitor, 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
FINESSE 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;
- record and analyze trends in medical outcome factors in hemodialysis
patients; and
- Cost-effectively produce infusion solution during treatment with our
ONLINEplus(TM) system for hemofiltration and hemodiafiltration with a
special dialysis solution filter, DIASAFEplus(R), which provides
ultrapure dialysis fluid.
Dialyzers. We manufacture dialyzers using hollow fiber polysulfone
membranes, a synthetic material. We are the leading worldwide producer of
polysulfone dialyzers. While competitors currently sell polysulfone membranes in
the market, we developed and are the only manufacturer with more than 15 years'
experience in applying the technology required to mass produce polysulfone
membranes. We believe
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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 and rapid dialysis, which results 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.
Our full line of polysulfone dialyzers includes the F70NR, F50NR and F7NR
series of single-use polysulfone dialyzers. We also distribute dialyzers
manufactured by others, primarily to our own dialysis clinics. In North America,
we sell dialyzer reprocessing and rinse machines. These machines cleanse
dialyzers after dialysis, permitting multiple usage for the same patient before
disposal of the dialyzer. Over the next two years, we plan to replace dialyzer
reuse at our dialysis centers with single-use dialyzers. We recently announced
that we will increase production of single-use dialyzers at our Ogden, Utah
facility to meet demand for these products.
Other Hemodialysis Products. We manufacture and distribute arterial,
venous, single needle and pediatric bloodlines. We produce both liquid and dry
dialysate concentrates. Liquid dialysate concentrate is mixed with purified
water by the hemodialysis machine to produce dialysis solution, which removes
the toxins and excess water from the patient's blood during dialysis. Dry
concentrate, developed more recently, is less labor-intensive to use, requires
less storage space and may be less prone to bacterial growth than liquid
solutions. We also produce 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 products include solutions for
disinfecting and decalcifying hemodialysis machines, fistula needles,
hemodialysis catheters, and products for acute renal treatment.
PERITONEAL DIALYSIS PRODUCTS
We offer a full line of peritoneal dialysis products. We manufacture
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. We also distribute
other manufacturers' peritoneal dialysis products, primarily to our own dialysis
clinics.
CAPD Systems. We manufacture standard and specialized peritoneal dialysis
solutions. We believe that our 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. Our 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. Our A.N.D.Y.(R) and A.N.D.Y.
Plus(R) systems, which include a special drainage bag and a snap-off
Y-shaped piece connected to the Safe-Lock(R) connector at the catheter,
provide protection from contamination in a dual-bag system;
- suitability for all peritoneal dialysis patients through the Inpersol(R)
product line, which we acquired from Abbott Laboratories in 1993.
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;
- manufacture with Biofine(R), a new environmentally friendly plastic
material for foils, tubings and other parts of peritoneal dialysis
systems. Biofine(R) was developed by Fresenius AG and launched in 1997
and has the following significant benefits:
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- higher biocompatibility through avoidance of plasticisers, which can
leach into dialysis solutions;
- lower gas permeability and less interaction with peritoneal dialysis
solutions, permitting administration of a wide range of solutions,
including bicarbonates;
- disposal with less harm to the environment. Biofine(R) is manufactured
with less material and, when burned, releases only carbon dioxide and
water, rather than dioxins and furans which are released during
incineration of other foils. This should make our products more
attractive, especially in Europe, where disposal of harmful plastics
is highly regulated.
- the benefits of Biofine(R) with protection against contamination through
our new Stay-Safe(R) system, launched in 1997. The system comprises
tubing, connectors and a peritoneal dialysis solution double bag, made
entirely from Biofine(R). It uses a single switching mechanism that
replaces three tubing clamps to control solution drainage, flushing of
tubes that connect solution bags to catheters, and introduction of new
solution. The single switch also provides tight closure of the line and,
to further reduce the possibility of contamination, the switch seals
catheter access and surrounds the catheter adapter with disinfectant;
- higher solution bag volumes with our new Premier twin-bag system which
provides solution container and pre-attached tubing set in one package.
The higher solution volumes permit larger dosages without increasing the
number of required daily solution exchanges performed by the patient; and
- improved biocompatibility with CAPD stay-safe balance, a lactate-buffered
peritoneal dialysis solution that has a pH balance in the human
physiological range.
CCPD Products. We introduced the first peritoneal dialysis cycler machine
in 1980. We believe 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;
- 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.
Our 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:
- the Sleep-Safe(TM) cycler, a new cycler with an extremely compact and
light design, that we began marketing in late 1999. Its pumping mechanism
and disposable cartridge allow exact delivery of the peritoneal dialysis
solution;
- PD-PLUS(R), a variant on CCPD therapy we 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. We believe that PD-PLUS(R)
therapy is less costly and easier to administer than typical CCPD. We
also believe that PD-PLUS(R) therapy improves toxin removal by more than
40% compared to CAPD. By increasing the effectiveness of
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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. We also manufacture and distribute
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(R), 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. We also provide scientific and patient
information products, including support materials, such as brochures, slides,
videos, instructional posters and training manuals.
MARKETING, DISTRIBUTION AND SERVICE
We sell most of our products to hospitals, clinics and specialized
treatment clinics. With our comprehensive product line and years of experience
in dialysis, we believe that we have been able to establish and maintain very
close relationships with our clinic customer base on a global basis. Close
interaction between our sales force and research and development personnel
enables us to integrate concepts and ideas that originate in the field into
product development. We maintain 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 clinics, and
represents us at industry trade shows. We also sponsor medical conferences and
scientific symposia as a means for disseminating product information. Our
clinical nurses provide clinical support, training and assistance to customers
and assist our sales force. We also use outside distributors to provide sales
coverage in countries that our internal sales force does not service.
In our basic distribution system, we ship products from factories to
central warehouses which are frequently located near the factories. From this
central warehouse, we distribute our dialysis products to regional warehouses.
We then distribute peritoneal dialysis products to the patient at home, and ship
hemodialysis products directly to dialysis clinics and other customers. Local
sales forces, independent distributors, dealers and sales agents sell all our
products.
We offer customer service, training and education in the applicable local
language, and technical support such as field service, repair shops,
maintenance, and warranty regulation for each country in which we sell dialysis
products. We provide training sessions on our equipment at our facilities in
Schweinfurt, Germany and Walnut Creek, California and we also maintain regional
service centers that are responsible for day-to-day international service
support. Our Schweinfurt and Walnut Creek facilities also provide training and
act as backups for the regional service centers. We also provide technical
training to employees of hospitals and other health care providers in the use of
our products. We believe our service organizations have a reputation for
reliability and high quality service.
MANUFACTURING OPERATIONS
We operate state-of-the-art production facilities world wide to meet the
demand for machines, cyclers, dialyzers, solutions, concentrates, mixes,
bloodlines, and disposable tubing assemblies and equipment for water treatment
in dialysis clinics. We have invested significantly in developing proprietary
processes, technologies and manufacturing equipment which we believe provide a
competitive advantage in manufacturing our products. We intend to use our
facilities in St. Wendel, Germany and Ogden, Utah as centers of competence for
development and manufacturing and to implement similar technologies at our other
facilities.
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We produce and assemble hemodialysis machines and CCPD cyclers in our
Schweinfurt, Germany and our Walnut Creek, California facilities. We also
maintain facilities at our service and local distribution centers in Argentina,
Egypt, France, Italy, The Netherlands, China, Brazil and Russia for testing and
calibrating dialysis machines manufactured or assembled elsewhere, to meet local
end user market needs.
In 1998, we restructured our Schweinfurt facility to create process units
dedicated to each of the main geographic regions in which we do business. This
market-focused structure enables us to more actively support our worldwide
equipment business with a high level of responsiveness to the needs of different
markets, while realizing economies of scale. The new multi-disciplinary teams
created within this structure have increased productivity, lowered manufacturing
costs by 6% in 1998, 7% in 1999 and 2% in 2000, and improved customer service.
In addition, we were able to increase output of 4008 series hemodialysis
machines by 30% from 9,000 machines in 1999 to 11,700 in 2000. Additionally, we
increased our output of the peritoneal dialysis cycler sleep safe from 200 units
in 1999 to 500 units in 2000. We have implemented just-in-time manufacturing
techniques at this facility and are currently able to produce a hemodialysis
machine in two weeks.
We manufacture and assemble dialyzers and polysulfone membranes in our St.
Wendel, Germany and Ogden, Utah facilities and at production facilities of our
joint ventures in Belarus and Japan.
In 1998, we significantly increased capacity at the St. Wendel facility by
optimizing production processes and by implementing flexible working hours and
in 1999, we further increased capacity by eliminating non-essential
manufacturing at that facility. In 2000 we added another polysulfone hollow
fiber spinning line to satisfy growing demand for the core component of our
dialyzers. Due, in part, to these changes, dialyzer and bloodline production
capacities increased by 6% in 1999 and 25% in 2000. We adapted various
production processes to meet the more technically complex requirements of newly
developed dialyzers. We are currently developing a fully-automated production
line to assure efficient production in future. We also enhanced Polysulfone
dialyzer production at our subsidiaries in France, Saudi Arabia and Belarus. Our
French facility is now the second facility after St. Wendel that can produce our
complete series of polysulfone dialyzers.
The significant rise in demand for foils and tubings made of our
environmentally-friendly Biofine material led to a 77% increase in production of
our Biofine non-polyvinyl chloride foil and a 63% increase in tubing production.
Production of peritoneal dialysis solution bags and dry concentrates were
expanded by more than 50% and 35%, respectively. In 2000, we commenced
production of bloodline systems at our Antalya, Turkey facility, which will be
integrated into our European network in 2001. In our subsidiary in Japan we have
built a production plant for peritoneal dialysis solutions which became
operational in mid 2001.
In the North America segment at our Ogden, Utah facility, we commenced
construction of an additional hollow-fiber spinning line in August 1999. This
was the first step in a five-year expansion plan for that facility. The Ogden
facility now operates as a fully integrated manufacturing and research and
development facility for polysulfone dialyzers. An additional dialyzer assembly
and fiber spinning line is expected to be operational in 2001 and we recently
announced that we plan to increase production of single-use dialyzers at our
Ogden, Utah facility by 200% to meet demand for these products. Over the past
four years we have doubled employment at this facility to 960 employees. In 2000
we also constructed a new manufacturing facility for liquid concentrates in
Coppel, Texas.
Each step in the manufacture of our 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 or the Conformite Europeenne (CE)
certification process, as well as under comprehensive quality management
systems, such as the internationally recognized ISO 9000-9004 standards, which
are mandated by regulatory authorities in the countries in which we operate. In
addition, the St. Wendel and Schweinfurt facilities periodically undergo U.S.
Food and Drug Administration inspection. The St. Wendel facility was last
inspected in September 1998. The Schweinfurt facility was inspected by the U.S.
Food and Drug Administration and by the comparable German authority under the
ISO 9000 standard in mid-1999. No material adverse findings
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were noted at either facility. Our facilities in Ogden, Utah and Reynosa, Mexico
received ISO 9001 certification and approval for CE marking in 1999. In 2000 our
facility in Antalya, Turkey received approval for CE marking and our
manufacturing facility in Walnut Creek, California received ISO 9001
certification.
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. We maintain continuing
quality control and Good Manufacturing Policies education and training programs
for our employees. See "-- Regulatory and Legal Matters."
ENVIRONMENTAL MANAGEMENT
We conduct our operations with a commitment to environmental quality.
Several of our locations have been certified in accordance with ISO 14001, the
international standard for environmental management systems, and the European
Union Eco Audit, a more restrictive audit performed within the European Union.
In 1999, we integrated the existing environmental management systems in our
production plants in St. Wendel and Schweinfurt and our research and development
facilities in Bad Homburg, into our newly created and implemented corporate
environmental management system. An independent certification body has certified
the new system. We will also start the process of securing ISO 14001
certification for our operations in North America and thus continue our global
efforts to improve the environmental compatibility of our products, production
sites and dialysis clinics.
We have also implemented a reporting system for the collection of
environmental data in our certified units enabling us to retrieve the relevant
performance indicators and to identify further improvement potential. For
example a survey of our European clinics showed significant saving possibilities
and provided input for further projects in the field of water consumption. The
results of this "Eco-controlling system" will enable us to establish future
targets which should result in savings in environmentally related costs of
approximately 40% during the next few years, combined with positive impacts for
environmental protection.
Our research and development efforts also focus on environmental
compatibility. For example, our new generation of FX-class dialyzers reduce
weight and volume by 54% and 33% respectively and use an environmentally
improved material composition. Another important project in 2000 was the
development and integration of an environmental management system, based on ISO
14001, into our overall clinic quality management system. A current pilot
project is generating the first implementation experience, and in 2001 we plan
to expand the integration process of this EMS to all our dialysis clinics. We
initiated a total of 13 environmentally related projects in our production plant
in St. Wendel.
Environmentally related efforts in the United States focus on continual
waste minimization programs involving solid, medical and hazardous waste. In
dialysis services, this has been accomplished via quarterly monitoring all
medical waste costs related to the generation of medical waste and proper
segregation and disposal. Regulatory compliance in the environmental area is
accomplished through our internal Environmental Health and Safety Compliance
Audit Program conducted at our locations. Furthermore, we have taken the
initiative of promoting environmentally friendly schemes in the community and
intend to dedicate even stronger focus on waste minimization initiatives in our
dialysis services and our production plant in Ogden, Utah.
SOURCES OF SUPPLY
We purchase raw materials essential to our dialysis products business
worldwide from numerous suppliers and we have not encountered serious shortages
or delays in obtaining raw materials. To assure continuous high quality in the
International segment, we formed a purchasing consulting center in mid
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1998. This group coordinates supplies and enters into global contracts using
benchmarking and systematic analysis of market and price information. Its major
strategy has been to reach global commercial agreements with harmonized net
prices through economies of scale from standardization of parts or materials and
concentration of suppliers. We have supply agreements extending for up to three
years for critical raw materials like polymers, granulates and plastics. These
agreements include dual sourcing, multi-plant agreements or approved second
sources to avoid the risk of bottlenecks in our supply chain. For key production
processes, we have the internal capability to benchmark suppliers and/or assume
manufacturing of key parts for internal needs.
Of 51 supply projects started in 1998 and 29 projects started in 1999 we
have completed 42 fixed agreements. In 2000, we started 31 additional projects,
including projects for other Fresenius affiliates, mainly in the fields of
plastic granulates, packaging materials, injection moldings, clinical materials
and consulting. An interactive information system connects all global projects
to insure standardization and monitoring by the purchasing consulting center.
Markets in 2000 were characterized by significant price-pressure, principally
for oil and paper, due in part to the U.S. dollar/euro exchange rate
fluctuation. We were able to partially offset this development through intensive
negotiations and the optimization of our supply distribution. In 2001 the
purchasing consulting center will focus on global contract pooling with external
partners, and we will initiate a strategic re-evaluation of all supplier
sourcing contracts. We have material purchase commitments of approximately $165
million of materials of which $90 million is committed at December 31, 2000 for
fiscal year 2001. The terms of these agreements run 2-5 years.
The Materials Management Department of our Dialysis Products division in
the North America segment is responsible for planning and procuring of $220
million annually from 150 suppliers. It provides production plans to our
manufacturing locations and manages inventory levels in the distribution network
that delivers supplies to clinics and home patients.
NEW PRODUCT INTRODUCTIONS
Research and development focuses strongly on the development of new
products, technologies and treatment concepts to optimize treatment quality for
dialysis patients, and on process technology for manufacturing our products.
Research and development expenditures were $32 million in 2000, $32 million in
1999, and $31 million in 1998.
We introduced the following new or enhanced products in 2000:
FX-class and Optiflux dialyzers. Both of these dialyzers use
polysulfone-based Helixone membranes, which significantly increase clearance.
FX-class dialyzers provide simplified handling and more secure treatment and
improve waste management, logistics and handling through weight reduction and
environmentally improved materials. Optiflux polysulfone dialyzers deliver small
and middle molecular weightsolute clearance. Both dialyzers have outstanding
biocompatibility, continuing our efforts to provide patient care in the most
biocompatible way.
The 4008 3mix(TM) hemodialysis machine, which is capable of handing three
different dialysis concentrate components instead of the usual two. The 4008
3mix(TM) permits selection of desired sodium and bicarbonate concentrations
directly at the treatment site and provides a high standard of patient safety
through enhanced conductivity monitoring and specifically coded connectors.
The On-line Clearance Monitor, an options module for the 4008 series of
dialysis machines, which provides immediate and online information on urea
clearance and dialysis dose, providing a clear and visible picture of treatment
efficacy and enabling immediate treatment adjustments to be made.
The 2008K hemodialysis machine, introduced in the North American market,
which provides innovative elements such as improved operator interface, an
improved blood pump, level detector and heparin pump modules, and fluid removal
measurement combined with a feedback control mechanism to monitor and avoid
sudden declines in blood pressure and resulting complications.
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Our Infrared Data Acquisition, a receiver/transmitter that can download
data on completion of treatment to a hand-held computer. Data can then be
transferred to a PC or PC-network for further processing or immediate treatment
analysis.
New or improved products for peritoneal dialysis, including:
- Stay-safe(R)balance, a more biocompatible peritoneal dialysis solution in
a dual chamber bag. This product is pH-neutral, which may provide longer
preservation of the peritoneum as a natural dialysis membrane,
- the Premier(TM) Plus Double Bag and the Premier(TM) Transfer Set, and
- upgrades to the Freedom(TM) Cycler PD+ and related software, and new
therapy-planning software.
RESEARCH AND DEVELOPMENT
Our research and development activities aim to improve the quality of
dialysis treatment by matching it more closely with the individual needs of the
patient, while reducing the overall cost for treatment. With our vertical
integration, our research and development department can apply our experience as
the world's largest provider of dialysis treatments to product development. To
maintain and further enhance a continuous stream of product innovations, we had
220 employees working in research and development worldwide at December 31,
2000. Approximately two-thirds of our research and development activities are
based in Germany and one-third are based in North America.
Research and development focuses strongly on the development of new
products, technologies and treatment concepts to optimize treatment quality for
dialysis patients, and on process technology for manufacturing our products.
Research and development expenditures were $31 million in 1998, $32 million in
1999, and $32 million in 2000. For information regarding recent product
introductions, see "-- New Product Introductions."
We intend to continue to maintain our central research and development
operations for disposable products at our St. Wendel, Germany facility and for
durable products at our Schweinfurt and Bad Homburg, Germany facilities. We
expect that as our dialysis products business continues to expand
internationally, research and development activities will rely primarily on the
research and development activities conducted at St. Wendel, Bad Homburg, and
Schweinfurt, which will transfer the production technology they develop to our
production centers. Local activities will continue to focus on cooperative
efforts with those facilities to develop new products and product modifications
for local markets.
In North America, we have concentrated our business development activities
on expanding our products business in three main areas:
- pharmaceutical products utilized in treating our renal patient base,
- innovative products to improve vascular access outcomes for our renal
patients, and
- products and technologies which leverage our core competencies to provide
extracorporeal therapies to treat other diseases.
Our scientific service and consulting activities during 2000 focused both
on product-related scientific issues and providing consultation to the
nephrology community on these issues.
In order to promote the exchange of new ideas in nephrology and dialysis
and to strengthen our role in the international scientific community, we have
established the "International Exchange Program for Young Nephrologists." With
our financial support and close scientific cooperation young scientists
worldwide are given the opportunity to work at renowned European research
institutions. We closely work together with international nephrology experts in
writing treatment recommendations for the most important topics in chronic and
end-stage renal failure. In the beginning of 2000 we published a treatment
recommendation on renal anemia. This was followed by a publication on renal
osteodystrophy and cardiovascular risk factors in the journal "Nephrology,
Dialysis, and Transplantation" in autumn 2000. We
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will translate these recommendations into different languages and distribute
them to our customers. Recommendations on further topics, such as nutrition and
vascular access, will be published in 2001.
PATENTS, TRADEMARKS AND LICENSES
As the owner of or licensee under patents and trademarks throughout the
world, we hold rights under 997 patents and patent applications relating to
dialysis technology in major markets. Patented technologies that relate to
dialyzers include our polysulfone hollow fiber, an in-line sterilization method,
and sterile closures for in-line sterilized medical devices. For dialysis
machines, patents include:
- the location for a filter device for sterile filtering dialysate in the
dialysis machine circuit;
- the safety concept for the ultrafiltration device in a dialysis machine
used for high flux dialysis;
- a process for the on-line preparation of substitution fluid in
hemodiafiltration machines;
- conductivity sensor arrangements in the dialysis machine circuit;
- conductivity sensor devices, mathematical algorithms for using such
devices;
- patents relating to controlled bicarbonate dialysis; and
- patents related to thermal balance during dialysis.
The connector system for our biBag(TM) bicarbonate concentrate powder
container has been patented in the United States, Norway and Europe while
national applications in Japan and Finland are still pending. Further pending
patents include the new generation of DIASAFEplus(R) filters.
Competitors in Europe and Japan have filed oppositions to the patent family
covering Fresenius Medical Care Polysulfone(R) high flux membranes. Our patents
have been upheld in both Europe and Japan. We successfully defended an appeal in
the European Union, but an appeal by the Japanese competitor is still pending.
While we believe that these patents are valid in the relevant jurisdictions, a
successful opposition could have a material adverse effect on our business.
Among our more significant patents, the patent for our polysulfone hollow
fiber expires in 2005 in Germany, 2007 in the United States, and at various
dates in 2005 in other jurisdictions. The patent for our in-line sterilization
method expires in 2010 in Germany, 2010 in the United States, and in 2010 in
other jurisdictions, and the patent for our biBag connector expires in 2013 in
Germany, 2013 in the United States, and in 2013 in other jurisdictions. We
believe that after expiration of these patents, our proprietary know-how for the
manufacture of these products will continue to constitute a significant
competitive advantage.
For peritoneal dialysis, we hold rights on the Safe-Lock(TM) system. For
our non-polyvinyl chloride film, known as Biofine(R), indicated for general use
in intravenous and peritoneal dialysis, we have a grant patent in Germany as
well as pending patent applications in various countries. Further pending
patents describe a special film for a peelable, non-polyvinyl chloride multi
chamber bag for peritoneal dialysis solutions. Fresenius USA's intellectual
property includes the Inpersol(TM) trademark and rights to certain manufacturing
know-how Fresenius USA obtained from Abbott Laboratories, and a paid-up
non-exclusive global sublicense from Baxter, Inc. to certain CAPD and connector
technology.
We believe that our success will depend, in large part, on our technology.
As a standard practice, we obtain legal protections we believe are appropriate
for our intellectual property, but intellectual property is subject to
infringement or invalidation claims. In addition, technological developments in
ESRD therapy could reduce the value of our existing intellectual property. Any
such reduction could be rapid and unanticipated. Other than as disclosed in this
report, we are not dependent to any material extent upon patents, licences or
contracts.
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COMPETITION
The markets in which we sell our dialysis products are highly competitive.
Our competitors in the sale of hemodialysis and peritoneal dialysis products
include Gambro AB, Baxter International Inc., Asahi Medical Co., Ltd., Bellco
S.p.A., a subsidiary of Sorin Biomedica S.p.A., Bieffe Medital S.p.A., which is
an affiliate of Baxter, Inc., B. Braun Melsungen AG, Nissho Corporation,
including Nissho Nipro Corporation Ltd., Nikkiso Co., Ltd., Terumo Medical
Corporation and Toray Medical Co., Ltd. Some of our competitors possess greater
financial, marketing and research and development resources than we do.
We believe 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. We believe our
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 our dialysis products in order to avoid purchasing products manufactured by a
competitor. We believe, however, that customers will continue to consider our
long-term customer relationships and reputation for product quality in making
product purchasing decisions, and we intend to compete vigorously for these
customers.
DISCONTINUED OPERATIONS
Effective June 1, 1998, we classified our homecare/non-renal diagnostics
businesses as discontinued operations. Until 1998, through the homecare division
of NMC, we provided intravenous infusion, respiratory therapies and home medical
equipment in the United States. Through the diagnostic services division of NMC,
we also provided non-renal diagnostic testing at our own imaging clinics and
on-site in physician offices, hospitals and nursing homes. We sold our non-renal
diagnostics business in June 1998 and our homecare business in July 1998. We
retained the assets belonging to the homecare business and the operations
associated with the delivery of intradialytic parenteral nutrition therapy. For
the year ended December 31, 1998, we recorded net losses after tax of $9 million
from operations of discontinued businesses and $97 million from the disposal of
these businesses.
EMPLOYEES
At June 30, 2001, we had 38,623 employees, as compared to 32,669 at June
30, 2000 and 31,094 at December 31, 1999. They are employed in our principal
segments as follows: North America 26,690 employees and International 11,933. A
decline in total employees from the divestiture of the U.S. homecare and
non-renal diagnostics businesses was offset in 1998 by an increase due to
dialysis clinic acquisitions.
We are a member of the Chemical Industry Employers Association in Germany
and we are bound by union agreements negotiated with the respective union
representatives. We are also party to additional shop agreements negotiated with
works councils at individual facilities relating to those facilities. We believe
our relations with our employees are good. During the last two fiscal years, we
have not suffered any labor-related work disruptions. In addition, approximately
1,755 employees, or 6.6% of our U.S. employees are covered by union agreements.
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CAPITAL EXPENDITURES
We invested, by business segment and geographical areas, the following
amounts during the three fiscal years ended December 31, 2000, 1999 and 1998 and
have budgeted the following amounts for the year 2001:
<Table>
<Caption>
ACTUAL
-------------------- BUDGET
2000 1999 1998 2001
---- ---- ---- ------
(U.S. DOLLARS IN MILLIONS)
Acquisitions
North America............................................ $116(a) $ 65 $170
International
Germany............................................... 11 -- --
Rest of World......................................... 161 46 95
---- ---- ---- ----
Total acquisitions............................... $288 $111 $265 $100(a)
==== ==== ==== ====
Capital expenditures for property, plant and equipment
North America............................................ $113 $ 81 $ 75
International
Germany............................................... 24 24 31
Rest of World......................................... 91 55 53
---- ---- ---- ----
Total capital expenditures....................... $228 $160 $159 $270
==== ==== ==== ====
</Table>
- ---------------
(a) Excludes the acquisition of Everest on January 5, 2001 for a purchase price
of approximately $341 million. See "Summary -- Our Business -- Recent
Developments."
In North America major capital expenditures for the year 2001 are planned
for our manufacturing facility in Ogden, Utah. We have made a $65 million
capital commitment to construct two dialyzer assembly lines and two fiber
spinning lines. Production starts are scheduled between the fourth quarter of
2001 and the second quarter of 2002.
Major capital expenditures in Japan scheduled for 2001 include a $14
million investment in a second fiber spinning line in Inukai. At our St. Wendel
plant in Germany we plan to build a dialyzer assembly line for production of the
new generation of FX-class dialyzers at an estimated cost of $10 million and we
plan to invest an additional $7 million in a fourth line to produce peritoneal
dialysis solutions. We finance our capital expenditures through cash flow from
operations or under the existing credit facilities.
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PROPERTY
The table below describes our principal facilities. We do not own the land
and buildings comprising our principal facilities in Germany. Rather, we lease
those facilities on a long-term basis from Fresenius AG or one of its
affiliates. This lease is described under "Certain Relationships and Related
Party Transactions -- Real Property Lease."
<Table>
<Caption>
FLOOR AREA CURRENTLY OWNED OR
(APPROXIMATE LEASED BY FRESENIUS LEASE
LOCATION SQUARE METERS) MEDICAL CARE EXPIRATION USE
- -------- -------------- ------------------- ------------- -----------------------------
Bad Homburg, Germany.... 5,374 Leased December 2006 Corporate headquarters and
administration
St. Wendel, Germany..... 49,732 Leased December 2006 Manufacture of polysulfone
membranes and dialyzers,
bloodines, and peritoneal
dialysis solutions; research
an development
Schweinfurt, Germany.... 15,717 Leased December 2006 Manufacture of hemodialysis
machines and peritoneal
dialysis cyclers; research
and development
L'Arbresle, France...... 13,524 Owned Manufacture of polysulfone
dialyzers and special filters
dry hemodialysis concentrates
Palazzo Pignano, Manufacture of bloodines and
Italy................. 66,550 Owned tubing
Nottinghamshire, United
Kingdom............... 5,110 Owned Manufacture of hemodialysis
concentrate solutions
Barcelona, Spain........ 2,000 Owned Manufacture of peritoneal
dialysis bags and
concentrates
Ankara, Turkey.......... 1,000 Leased February, Manufacture of liquid
2009 hemodialysis concentrate
solutions
Tunisia................. 491 Leased December 2000 Manufacture of liquid
hemodialysis concentrate
solutions
Buenos Aires, Manufacture of hemodialysis
Argentina............. 10,100 Owned concentrate solutions
Rio de Janeiro, Month to Manufacture of hemodialysis
Brazil................ 1,159 Leased Month concentrate solutions
Reynosa, Mexico......... 13,936 Owned Manufacture of bloodines
Oita, Japan(1).......... 24,083 Owned Manufacture of polysulfone
membranes, dialyzers,
dialysis solutions, dialysis
machine components and
assembly of dialysis machines
Hong Kong............... 1,013 Leased February 28, Corporate headquarter and
2003 administration -- Asia-Pacific
Milson Point, June 30, 2003 Administration
Australia............. 557 Leased with no
renewal
option
Smithfield, Australia... 5,350 Owned Manufacture of hemodialysis
concentrate solutions
Warehouse
Auckland, New Zealand... 2,043 Leased March 31, Administration
2001
</Table>
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<Table>
<Caption>
FLOOR AREA CURRENTLY OWNED OR
(APPROXIMATE LEASED BY FRESENIUS LEASE
LOCATION SQUARE METERS) MEDICAL CARE EXPIRATION USE
- -------- -------------- ------------------- ------------- -----------------------------
Pusat, KL, Malaysia..... 4,060 Leased March 15, Administration
2002 with an
additional
extended
2-year
renewal
option to
March 15,
2004 based on
prevailing
market rental
rate
Taipei, Taiwan.......... 5,940 Leased December 2003 Administration
Tokyo, Japan............ 1,153 Leased January 1999 Administration
with 5-year
renewal
option
Inukai, Japan...........
-- Land 24,084 Owned Manufacture of polysulfone
dialyzers and filters
-- Building 2,142 Owned
Buzen, Japan............ 37,094 Owned Manufacture of peritoneal
dialyzers
Seoul, South Korea...... 1,554 Leased August 15, Administration
2001
Lexington, October 2007 Corporate headquarters and
Massachusetts......... 18,581 Leased with 5-year administration -- North
renewal America
option
Walnut Creek, June 2002 Manufacture of hemodialysis
California............ 7,897 Leased with 5-year machines and peritoneal
renewal dialysis cyclers; research
option and development Warehouse
Space -- Machine components
1,625 Leased
Ogden, Utah............. 41,807 Owned Manufacture polysulfone
membranes and dialyzers and
peritoneal dialyzers
solutions; research and
development
Delran, New Jersey...... 3,902 Leased October 2002 Manufacture of liquid
with 5-year hemodialysis concentrate
renewal solutions
option
Perrysburg, Ohio........ 3,252 Leased August 2008 Manufacture of dry
hemodialysis concentrates
Livingston, October 2001 Manufacture of liquid
California............ 2.973 Leased with 5-year hemodialysis concentrates
renewal
option
Chicago, Illinois....... 63 Leased March 2005 Clinical laboratory testing
Freemont, California.... 6,688 Leased July 2003 Clinical laboratory testing
with 5-year
renewal
option
Rockleigh, New Jersey... 7,897 Leased June 2005 Clinical laboratory testing
with two
5-year
renewal
options
</Table>
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<Table>
<Caption>
FLOOR AREA CURRENTLY OWNED OR
(APPROXIMATE LEASED BY FRESENIUS LEASE
LOCATION SQUARE METERS) MEDICAL CARE EXPIRATION USE
- -------- -------------- ------------------- ------------- -----------------------------
Miami, Florida.......... 400 Leased Month to Administration
Month
Irving, Texas........... 6,503 Leased Manufacture of liquid
hemodialysis solution
</Table>
- ---------------
(1) We own 70% of the joint venture that owns the facility.
We lease most of our dialysis clinics, manufacturing, laboratory,
warehousing and distribution and administrative and sales facilities in the
United States and foreign countries on terms which we believe are customary in
the industry. We own those dialysis clinics and manufacturing facilities that we
do not lease.
REGULATORY AND LEGAL MATTERS
REGULATORY OVERVIEW
Our operations are subject to extensive governmental regulation by
virtually every country in which we operate including, most notably, in the
United States, at the federal, state and local levels. Although these
regulations differ from country to country, in general, non-U.S. regulations are
designed to accomplish the same objectives as U.S. regulations regarding the
operation of dialysis clinics, 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 the
United States, some states prohibit ownership of health care providers by
for-profit corporations or establish other regulatory barriers to direct
ownership by for-profit corporations. Outside the United States, each country
has its own payment and reimbursement rules and procedures, and some countries
prohibit ownership of health care providers or establish other regulatory
barriers to direct ownership by foreign companies. In all jurisdictions, we work
within the framework of applicable laws to establish alternative contractual
arrangements to provide services to those facilities.
Any of the following matters could have a material adverse effect on our
business, financial condition and results of operations:
- failure to receive required licenses, certifications or other approvals
for new facilities or significant delays in such receipt;
- loss of various federal certifications or termination of licenses under
the laws of any state or other governmental authority; and
- changes resulting from health care reform or other government actions
that reduce reimbursement or reduce or eliminate coverage for particular
services we provide.
We must comply with all U.S., German and other legal and regulatory
requirements under which we operate, including the U.S. federal Medicare and
Medicaid Fraud and Abuse Amendments of 1977, as amended, generally referred to
as 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. It is
possible that applicable laws or regulations will be amended, or that
enforcement agencies or the courts will make interpretations inconsistent with
ours or the manner in which we conduct our business. Any one of these events
could have a material adverse effect on our business, reputation, financial
condition and results of operations. 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 United States, these laws have been broadly
interpreted by a number of courts, and significant government funds and
personnel have been devoted to enforcing them because enforcement has become a
high priority for the federal government and some states. We, and the health
care industry in general, will continue to be subject to extensive federal,
state and foreign regulation, and we cannot predict the full scope of these
regulations.
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In connection with the Settlement, FMCH has entered into a corporate
integrity agreement with the U.S. government, which requires that FMCH staff and
maintain a comprehensive compliance program, including a written code of
conduct, training programs 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 FMCH 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 FMCH within 30 days after FMCH receives
written notice of the breach.
PRODUCT REGULATION
UNITED STATES
In the United States, the Food and Drug Administration and comparable state
regulatory agencies impose requirements on our subsidiaries that manufacture and
sell medical products and supplies under their jurisdiction. These rules
require:
- compliance with Good Manufacturing Practices in manufacturing medical
products; and
- compliance with Food and Drug Administration rules regulating,
- product design;
- safety;
- advertising and labeling; and
- record-keeping and reporting of adverse events.
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 cell separators) for
human use, we must satisfy mandatory procedures and safety and efficacy
requirements established by the Food and Drug Administration or comparable state
and foreign governmental agencies. These rules generally require that the Food
and Drug Administration approve products as safe and effective for their
intended use prior to being marketed. The Food and Drug Administration has
designated peritoneal dialysis solutions as drugs and, as such, they are subject
to additional Food and Drug Administration regulation under the Food, Drug and
Cosmetic Act of 1938.
The approval process is expensive, time consuming and subject to
unanticipated delays. The Food and Drug Administration 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. We believe
that we have filed for or obtained all necessary approvals for the manufacture
and sale of our products in jurisdictions in which those products are currently
produced or sold. We cannot assure that we will obtain necessary regulatory
approvals or clearances within reasonable time frames, if at all. Any delay or
failure to obtain regulatory approval or clearances could have a materially
adverse effect on our business, financial condition and results of operations.
GERMANY AND OTHER NON-U.S.
Most countries maintain different regulatory regimes for pharmaceutical
products and for medical devices. In each regime, there are regulations
governing manufacturers and distributors, as well as regulations governing the
final products manufactured and distributed. Treaties or other international law
and standards and guidelines under treaties or laws may supplement or supersede
individual country regulations.
Some of our products, such as peritoneal dialysis solutions, are considered
pharmaceuticals. The European Union has issued a directive on pharmaceuticals,
No. 65/65/EWG (January 26, 1965), as amended. Each member of the European Union
is responsible for conforming its law to comply with this
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directive. In Germany, the German Drug Law (Arzneimittelgesetz) which implements
European Union requirements, is the primary regulation applicable to
pharmaceutical products.
The provisions of the German Drug Law are typical of the legal standards in
other European countries. The German Drug Law states the requirements for the
authorization of a company to manufacture pharmaceuticals. A manufacturer must,
among other requirements, appoint pharmacists or physicians to be responsible
for the quality, safety and efficacy of the pharmaceuticals. At least five
responsible persons must be appointed: a marketing manager, a quality control
manager, a manufacturing manager, a safety officer, and a drug information
officer. Each of these persons may be held personally liable under German
criminal laws for violations of the German Drug Law.
International guidelines also govern the manufacture of pharmaceuticals
and, in many cases, overlap with national requirements. In particular, the
Pharmaceutical Inspection Convention, an international treaty, contains rules
which are binding on most countries in which pharmaceuticals are manufactured.
Among other things, the Pharmaceutical Inspection Convention establishes
requirements for Good Manufacturing Practices which are then adopted at the
national level. Another international guideline, which is non-binding, is the
ISO 9000-9004 system for assuring quality control. This system is more detailed
than Good Manufacturing Practices. Compliance entitles the manufacturer to
utilize the CE certification of quality control. In July 1993, we obtained our
first certificates for successfully running full quality management systems
under the ISO 9001 standard.
In addition to regulating the manufacture of pharmaceuticals, countries
directly regulate marketing of the pharmaceuticals produced. A drug needs to be
registered and authorized in every country in which it is distributed. European
Union rules govern the conditions for a registration, such as pre-clinical and
clinical testing.
Historically, medical devices have not been regulated as strictly as
pharmaceuticals, but more stringent regulatory schemes have been adopted during
the last decade. The European Union began to harmonize national regulations
comprehensively for the control of medical devices in Europe in 1993, when it
adopted its Medical Devices Directive. In 1995, Germany implemented this
directive when it adopted the Medical Devices Act (Medizinproduktegesetz), which
is similar in many ways to the German Drug Law. The European Union directive
applies to both the manufacturer's quality control system and the products'
technical design. Depending on the class of medical devices, a manufacturer may
choose alternative regulatory modules to demonstrate compliance with European
Union provisions. To assure and demonstrate the high quality standards and
performance of our operations, we have subjected our entire European business to
the most comprehensive procedural module, which is also the fastest way to
launch a new product in the European Union. This module requires the
certification of a full quality management system by a notified body charged
with supervising the quality management system. A notified body is a group
accredited and monitored by governmental agencies that inspects manufacturing
facilities and quality control systems at regular intervals and is authorized to
carry out unannounced inspections.
When a company receives a European Union certificate for the quality
management system of a particular facility, it may assess whether products
developed and manufactured in the facility satisfy European Union requirements.
European Union requirements for products are laid down in harmonized European
Union standards and include conformity to safety requirements, physical and
biological properties, construction and environmental properties, and
information supplied by the manufacturer. A manufacturer must demonstrate
conformity to these requirements by pre-clinical tests, biocompatibility tests,
qualification of products and packaging, risk analysis and well-conducted
clinical investigations approved by ethics committees.
A manufacturer having a European Union-certified full quality management
system has to declare and document conformity of its products to the harmonized
European standards. If able to do so, the manufacturer must put a "CE" mark on
the products. The CE mark, which stands for Conformite Europeenne, demonstrates
compliance with the relevant European Union requirements. Products subject to
these provisions that do not bear the "CE" mark cannot be imported, sold or
distributed within the European Union.
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The Medical Devices Directive became mandatory on June 15, 1998. Our Series
4008, 4008B, 4008E dialysis machines and their therapy modifications, and our
PD-NIGHT(R) cycler, and our other medical devices distributed in the European
market, as well as our dialysis filters and dialysis tubing systems and
accessories, all bear the "CE" mark. We expect to continue to obtain additional
certificates as they are required.
FACILITIES AND OPERATIONAL REGULATION
UNITED STATES
The Clinical Laboratory Improvement Amendments of 1988 subject virtually
all clinical laboratory testing facilities, including our facilities, to the
jurisdiction of Department of Health and Human Services. That act establishes
national standards for assuring the quality of laboratories based upon the
complexity of testing performed by a laboratory. Some of our operations also
subject us to federal laws governing the repackaging and dispensing of drugs and
the maintenance and tracking of certain life sustaining and life-supporting
equipment.
Our operations 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, our laboratory
operations do generate hazardous waste which is subject to specific disposal
requirements. Our operations are also subject to various air emission and
wastewater discharge regulations.
Federal, state and local regulations require that we meet various standards
relating to, among other things, facilities, management, personnel
qualifications and licensing, maintenance of proper records, equipment, quality
assurance programs, the operation of pharmacies, and dispensing of controlled
substances. All of our operations 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, our dialysis clinics, renal
diagnostic support business and laboratories must have CMS certification. All of
our dialysis clinics and laboratories that furnish Medicare services have the
required certification.
Some of our facilities and 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 we must meet to qualify for payments
under Medicare, Medicaid and other government reimbursement programs. Licenses
and approvals to operate these clinics 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.
Occupational Safety and Health Administration regulations require employers
to provide employees who work with blood or other potentially infectious
materials with prescribed protections against blood-borne and air-borne
infection carriers. The regulatory requirements apply to all health care
facilities, including dialysis clinics, laboratories and renal diagnostic
support businesses, and require that employers determine which employees may be
exposed to blood or other potentially infectious materials and have in effect a
written exposure control plan. In addition, employers are required to provide
hepatitis B vaccinations, personal protective equipment, blood-borne infection
training, post-exposure evaluation and follow-up, waste disposal techniques and
procedures, engineering and work practice controls and other programs required
by the Occupational Safety and Health Administration for blood-borne and
air-borne infection carriers.
Some states in which we operate have certificate of need 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. We currently operate in 13 states and the District
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of Columbia and Puerto Rico that have certificate of need laws applicable to
dialysis clinics. These requirements may provide a barrier to entry to new
companies seeking to provide services in these states, but also may constrain
our own ability to expand our operations in these states.
GERMANY AND OTHER NON-U.S.
Countries outside of the United States possess a wide variety of
operational regulation at disparate levels. Accordingly, our operations are
subject to very different regulations in different countries. Most countries
regulate dialysis clinic operating conditions and product manufacturing.
We are subject to a broad spectrum of regulation. Our operations must
comply with various environmental and transportation regulations in the various
countries in which we operate. Our manufacturing facilities and dialysis clinics
are also subject to various standards relating to, among other things,
facilities, management, personnel qualifications and licensing, maintenance of
proper records, equipment, quality assurance programs, the operation of
pharmacies, the protection of workers from blood-borne diseases and the
dispensing of controlled substances. All of our operations are subject to
periodic inspection by various governmental authorities to determine if the
operations, premises, equipment, personnel and patient care meet applicable
standards. Our dialysis clinic operations and our related activities generally
require licenses, which are subject to periodic renewal and may be revoked for
violation of applicable regulatory requirements.
In addition, many countries impose various investment restrictions on
foreign companies. For instance, government approval may be required to enter
into a joint venture with a local partner. Some countries do not permit foreign
investors to own a majority interest in local companies or require that
companies organized under their laws have at least one local shareholder.
Investment restrictions therefore affect the corporate structure, operating
procedures and other characteristics of our subsidiaries and joint ventures in
these and other countries.
We believe our facilities are currently in compliance in all material
respects with the applicable national and local requirements in the
jurisdictions in which they operate.
REIMBURSEMENT
UNITED STATES
Dialysis Services. Our dialysis clinics provide outpatient hemodialysis
treatment and related services for ESRD patients. In addition, some of our
clinics offer services for the provision of peritoneal dialysis and hemodialysis
treatment at home.
The Medicare program is the primary source of revenue for the North America
segment's dialysis care business. For example, in 2000, approximately 59% of our
dialysis care revenue in the United States or approximately 37% of our revenue
worldwide resulted from Medicare's ESRD program. As described below, the
Medicare program reimburses the North America segment for dialysis treatment and
related laboratory services in accordance with the Medicare composite rate for
some products and services rendered at our dialysis clinics. As described in the
next paragraph, other payment methodologies apply to Medicare reimbursement for
other products and services that we provide at our dialysis clinics and for
products that we sell and support services we furnish to ESRD patients receiving
dialysis treatment at home. 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 us with predictable and recurring revenue per treatment.
When Medicare assumes responsibility as primary payor, as described below
under "Coordination of Benefits," Medicare is responsible for payment of 80% of
the Medicare composite rate set by the CMS for dialysis treatments. The Medicare
composite rate governs the Medicare reimbursement available for a designated
group of dialysis services, including the dialysis treatment, supplies used for
treatment, specified laboratory tests and specified medications. The Medicare
composite rate consists of labor and non-labor components with adjustments made
for regional wage costs, subject to a national payment rate schedule.
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The Medicare composite rate for 2001 was 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 are paid at a higher rate based on specific criteria.
Medicare reimburses us for home dialysis using two methods based on which
supplier is selected to provide dialysis supplies and equipment. In Method I
reimbursement, the dialysis clinic is designated as the supplier. Under Method
I, the clinic provides all dialysis treatment related services, including
equipment and supplies, and is reimbursed using a methodology based on the
Medicare composite rate. In Method II reimbursement, our dialysis products
division is designated as the direct supplier. Under Method II, our dialysis
products division 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 the
U.S. Congress.
Some items and services that we furnish at our dialysis clinics are not
included in the Medicare composite rate and are eligible for separate Medicare
reimbursement, typically on the basis of established fee schedule amounts. These
items and services include specified drugs such as EPO, blood transfusions and
some diagnostic tests.
Medicare payments are subject to change by legislation and pursuant to
deficit reduction measures. The Medicare composite rate was unchanged from
commencement of the Medicare 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. The U.S. 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.
We cannot 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 our dialysis services business. In
addition, because the demand for products is affected by Medicare reimbursement,
a decline in reimbursement rates could also adversely affect our 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 our business and results of operations.
Patients or their third-party insurance carriers, 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. Payment of these amounts -- typically the annual
deductible and 20% co-insurance -- is subject to the specific coverage policies
of the payors. The extent to which we are 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 co-payment or deductibles and the patient is not
eligible for Medicaid, the patient is responsible for paying the co-payments or
the deductible. We frequently do not collect these amounts in full despite
reasonable collection efforts. Under an advisory opinion from the Office of the
Inspector General, subject to specified conditions, we and other similarly
situated providers may make contributions to a non-profit organization that has
volunteered to make premium payments for supplemental medical insurance and/or
medigap insurance on behalf of indigent ESRD patients, including our patients.
Laboratory Tests. Spectra Renal Management obtains a substantial portion
of its net revenue from Medicare, which pays for clinical laboratory services
provided to dialysis patients in two ways.
First, the Medicare composite rate paid to our dialysis clinics includes
payment for some routine tests. For those services, the dialysis clinics obtain
the services from a laboratory and pay the laboratory for the
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services. In accordance with industry practice, Spectra Renal Management usually
provides composite rate 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 Medicare composite rate at the
designated frequencies. In October 1994, the Office of the Inspector General
issued a special fraud alert in which it stated its view that the industry
practice of providing tests covered by the Medicare 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
(Medicare 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, Spectra Renal Management performs laboratory tests for Medicare
beneficiaries that are not included in the Medicare composite rate and are
separately billable directly to Medicare. Medicare pays for these tests at 100%
of the Medicare fee schedule amounts, which are limited by national ceilings on
payment rates, called National Limitation Amounts. The U.S. Congress has
periodically reduced the fee schedule rates and the National Limitation Amounts
with the most recent reductions in the National Limitation Amounts occurring in
January 1998. (As part of the Balanced Budget Act of 1997, the U.S. Congress
lowered the National Limitation Amounts from 76% to 74% effective January 1,
1998.) The U.S. Congress has also approved a five-year freeze on inflation
adjustments based on the Consumer Price Index for 1998-2002.
Medicare insurers have aggressively implemented its Local Medical Review
Policies, which limit coverage for certain clinical laboratory services to an
established list of diagnosis codes supporting medical necessity. These policies
establish criteria under which laboratory tests will be considered medically
necessary only if the patient's condition is reflected in specified diagnosis
codes. They also establish rules limiting the frequency of certain laboratory
tests. Provisions in the Balanced Budget Act of 1997 require the Secretary of
Health and Human Services to adopt uniform coverage and payment policies for
laboratory testing by July 1, 1999. The adoption of additional coverage policies
would reduce the number of covered services and could materially affect our
revenues. Laboratory tests are ordered only by physicians based on their
patients' needs.
Intradialytic parenteral nutrition. Among its other services, Spectra
Renal Management administers intradialytic parenteral nutrition, a form of
nutritional therapy, to chronic dialysis patients who suffer from
gastrointestinal malfunctions. The Medicare program covers these services under
the Medicare parenteral and enteral nutrition benefit, which requires extensive
documentation and individual physician certification of medical necessity for
each patient. Intradialytic parenteral nutrition therapy has been shown to
increase the body content of vital, high biologic value proteins like albumin.
Deficiency of such proteins, on both a long-term and short-term basis, has been
shown to be associated with substantially higher risk of death among dialysis
patients.
Spectra Renal Management has continued to provide intradialytic parenteral
nutrition therapy to malnourished dialysis patients who meet current Medicare
coverage criteria. Analyses of data from our patient statistical profile
database, both internal and as published in peer-reviewed medical journals,
indicate that intradialytic parenteral nutrition is effective in increasing
serum albumin levels -- a recognized measure of malnutrition -- and moderating
mortality risk for malnourished patients with certain low serum albumin levels.
Under our corporate integrity agreement, we agreed to submit claims for
payment of intradialytic parenteral and other nutrition therapy in accordance
with the coverage criteria of the CMS as in effect from time to time.
Erythropoetin. In 1999, the Office of the Inspector General and the
Clinton Administration announced their intention to seek a 10% reduction in
Medicare reimbursement for EPO. Although this
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proposal was not enacted, any of the following could adversely affect our
business, and results of operations, possibly materially:
- 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.
Amgen Inc., our sole supplier of EPO, has announced a 3.9% increase in its
wholesaler acquisition price for EPO effective May 9, 2001. Because our purchase
contract with Amgen contains pricing protection, our purchase price for EPO will
be unaffected by this increase through December 31, 2001.
Coordination of Benefits. Medicare entitlement begins for most patients in
the fourth month after chronic dialysis treatment at a dialysis clinic
commences. During the first three months, considered to be a waiting period, the
patient or the patient's insurance company, Medicaid or a state renal program
are responsible for payment.
Patients who have Medicare coverage and are also covered by an employer
group health plan are subject to a 30-month coordination period during which the
employer group health plan is the primary payor and Medicare is the secondary
payor. During this coordination period the employer group health plan pays a
negotiated rate or, in the absence of such a rate, our standard rate or a rate
defined by the health plan documents. These payments are generally higher than
the Medicare composite rate. Insurance will therefore generally cover a total of
33 months, the three-month waiting period plus the 30-month coordination period.
Patients who already are eligible for Medicare coverage based on age when
they become ESRD patients are dual eligible patients. If these patients have an
employer group health plan 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 employer group health plan 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
frequently to modify the Medicare program by refining the amounts payable to
health care providers. Future legislation or regulations could substantially
modify or reduce the amounts paid for our services and products. It is also
possible that future statutes or regulations may impose additional eligibility
requirements for participation in the federal and state health care programs.
Any such new legislation or regulations may adversely affect our businesses and
results of operations.
GERMANY AND OTHER NON-U.S.
As a global company delivering dialysis care and dialysis products in more
than 100 countries world wide, we face the challenge of addressing the needs of
dialysis patients in widely varying economic and health care environments.
Health care systems and reimbursement structures for ESRD treatment vary by
country. In general, the government pays for health care and finances its
payments through taxes and other sources of government income, from social
contributions, or a combination of those sources. However, not all health care
systems provide for dialysis treatment. In many developing countries, only
limited subsidies from government or charitable institutions are available, and
dialysis patients must finance all or substantially all of the cost of their
treatment. In some countries patients in need of dialysis do not receive
treatment on a regular basis but rather when the financial resources allow it.
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In the major European and British Commonwealth countries, health care
systems are generally based on one of two models. The German model is based on
mandatory employer and employee contributions dedicated to health care
financing. The British model provides a national health care system funded by
taxes, with the result that funds allocated to health care may vary from year to
year. Within these systems provision for the treatment of dialysis has been made
either through allocation of a national budget or a billing system reimbursing
on a fee-for-service basis. The health care systems of Japan, France,
Switzerland and the Netherlands are based on the German model. Canada,
Scandinavia, Italy and Spain established their national health services using
the British model.
Ownership of health care providers and, more specifically dialysis care
providers, varies within the different systems and from country-to-country. In
Europe more than 60% of the clinics providing dialysis care and services are
publicly owned, nearly 30% are privately owned and approximately 10% belong to a
health care organization. It should be noted that health care organizations
treating a significant patient population operate only in Germany, France and
Spain. Publicly run clinics care for almost 100% of the dialysis populations in
Canada and Australia. Within Europe, nearly 100% of the dialysis population is
treated in public clinics in the United Kingdom, the Netherlands and the
Scandinavian countries, while more than 50% of dialysis clinics are privately
owned in Spain and Portugal.
In Latin America and Asia, privately owned clinics predominate,
constituting more than 60% of all clinics providing dialysis care. As in the
United States, only approximately 15% of dialysis clinics in Japan are publicly
operated. Unlike the United States, however, Japan has a premium-based,
mandatory social insurance system, and the structure of its health care system
is more closely comparable to the German system.
Financing policies for ESRD treatment also differ from country-to-country.
In countries with a health care system that includes provisions for ESRD patient
care, treatment is generally financed through a government budget allocation or
on a fee-for-service basis. A few European countries have introduced payment
systems based on fixed fees charged according to the disease related group, an
arrangement similar to capitation. This basis for payment was adopted from the
United States, where it was implemented as a method to curtail costs.
Treatment components included in the cost of dialysis may vary from
country-to-country, depending on the structure and cost allocation principles.
Where treatment is reimbursed on a fee-for-service basis, reimbursement rates
are allocated in accordance with the type of treatment performed. We believe
that it is not possible to calculate a global reimbursement amount, because the
services and costs for which reimbursement is provided in any such global amount
would be likely to bear little relation to the actual reimbursement system in
any one country. Generally, in countries with established dialysis programs,
reimbursements range from $100 to more than $300 per treatment. However, a
comparison from country to country would not be meaningful if made in the
absence of a detailed analysis of the cost components reimbursed, services
rendered and the structure of the dialysis clinic in each country being
compared.
Health care expenditures are consuming an ever increasing portion of the
gross domestic product worldwide. In the developed economies of Europe, Asia and
Latin America, health care spending is in the range of 5%-14% of gross domestic
product. As in the United States, dialysis costs consume a disproportionately
high amount of health care spending and these costs may be considered a target
for implementation of cost containment measures. Today, there is increasing
awareness of the correlation between the quality of care delivered in the
dialysis unit and the total health care expenses incurred by the dialysis
patient. Accordingly, developments in reimbursement policies include higher
reimbursement rates for practices which are believed to improve the overall
state of health of the ESRD patient and reduce the need for additional medical
treatment.
ANTI-KICKBACK STATUTES, FALSE CLAIMS ACT, HEALTH CARE FRAUD, STARK LAW AND FRAUD
AND ABUSE LAWS
Some of our operations are subject to U.S. 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. These laws include the anti-kickback
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statutes, health care fraud statutes, the False Claims Act, the Stark Law, other
U.S. federal fraud and abuse laws and similar state laws. These laws apply
because our Medical Directors and other physicians with whom we have financial
relationships refer patients to our dialysis clinics and other operations and
order diagnostic and therapeutic services from them. As is generally true in the
dialysis industry, at many dialysis facilities 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 clinic that is convenient to the patient
and at which the patient's nephrologist has staff privileges. Virtually all of
our clinics maintain open staff privileges for local nephrologists. Our ability
to provide quality dialysis care and to otherwise meet the needs of patients and
local physicians is central to our ability to expand our dialysis facilities.
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 Office of the Inspector General and other
enforcement authorities are increasing scrutiny of arrangements between
physicians and health care providers for possible violations of the
anti-kickback statutes or other federal laws.
ANTI-KICKBACK STATUTES
The U.S. federal anti-kickback statutes establish criminal prohibitions
against and civil penalties for the knowing and willful solicitation, receipt,
offer or payment of any remuneration, whether direct or indirect, in return for
or to induce the referral of patients or the ordering or purchasing of items or
services payable in whole or in part under Medicare, Medicaid or other U.S.
federal health care programs. Sanctions for violations of the anti-kickback
statutes include criminal and civil penalties, such as imprisonment or criminal
fines of up to $25,000 per violation, and civil penalties of up to $50,000 per
violation, and exclusion from the Medicare or Medicaid programs and other
federal programs. In addition, certain provisions of federal criminal law that
may be applicable provide that if a corporation is found guilty of a criminal
offense it may be fined no more than twice any pecuniary gain to the
corporation, or, in the alternative, no more than $500,000 per offense.
Some states also have enacted statutes similar to the anti-kickback
statutes, which may include criminal penalties, applicable to referrals of
patients regardless of payor source, and may contain exceptions different from
state to state and from those contained in the federal anti-kickback statutes.
FALSE CLAIMS ACT AND RELATED CRIMINAL PROVISIONS
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 reimbursement. Moreover, private individuals may bring qui tam or
"whistle blower" suits against providers under the False Claims Act. In a
"whistle blower" action, the private plaintiff asserts the government's alleged
claims under the False Claims Act, which also authorizes the payment of a
portion of any recovery to the individual bringing suit. Private plaintiffs must
initially file a qui tam action under seal until the Department of Justice
reviews the action. A few federal district courts have recently interpreted the
False Claims Act as applying to claims for reimbursement that violate the
anti-kickback statutes under certain circumstances. The False Claims Act
generally provides for civil penalties of $5,000 to $10,000 per claim and for
treble damages, resulting in the possibility of substantial financial penalties
for small billing errors that are replicated in a large number of claims, as
each individual item within a 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.
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THE HEALTH INSURANCE PORTABILITY AND ACCOUNTABILITY ACT OF 1996
The Health Insurance Portability and Accountability Act of 1996 was enacted
in August 1996 and substantively changed U.S. federal fraud and abuse laws. The
act:
- expanded the reach of fraud and abuse laws to all federal health care
programs;
- established new bases for exclusions from government health programs and
mandated minimum exclusion terms;
- created an additional exception to the anti-kickback penalties for
risk-sharing arrangements;
- required the Secretary of Health and Human Services to issue advisory
opinions;
- increased civil monetary penalties to $10,000 (formerly $2,000) per item
or service and assessments to three times (formerly twice) the amount
claimed;
- created a specific health care offense of health care fraud applicable to
all payors and related health fraud crimes; and
- expanded investigative authority and sanctions applicable to health care
fraud.
The act 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 contained sweeping adjustments to both the
Medicare and Medicaid programs, and further expanded the fraud and abuse laws.
Specifically, the Act 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, these 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 the Secretary of Health and Human Services may deny entry into the
Medicare program to any provider or supplier convicted of any felony if entry is
deemed to be detrimental to the best interests of the Medicare program or its
beneficiaries.
The Balanced Budget Act of 1997 also provides that any person or entity
that arranges or contracts with an individual or entity that has been excluded
from a federally funded health care program will be subject to civil monetary
penalties if the individual or entity "knows or should have known" of the
sanction.
Finally, the Balanced Budget Act of 1997 created a Medicare+Choice Program
that is designed to provide a variety of options to Medicare beneficiaries,
almost all of whom may enroll in a Medicare+Choice Plan. The options include
provider sponsored organizations, coordinated care plans, health maintenance
organizations with and without point of service options involving out-of-network
providers, and medical savings accounts offered as a demonstration project.
STARK LAW
The original Stark Law, known as "Stark I" was enacted as part of the U.S.
Omnibus Budget Reconciliation Act of 1989, and 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 specified 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
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Medicare and Medicaid programs. The Stark Law also prohibits the entity
receiving the referral from filing a claim or billing for services arising out
of the prohibited referral.
Provisions of the U.S. Omnibus Budget Reconciliation Act of 1993, 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 similar Medicaid Designated Health
Services referrals where a financial relationship exists. The provisions of
Stark II generally became effective on January 1, 1995. The additional
Designated Health Services include:
- physical therapy services;
- occupational therapy services;
- radiology services, including magnetic resonance imaging, computer axial
tomography scans and ultrasound services;
- durable medical equipment and supplies;
- parenteral and enteral nutrients, equipment and supplies;
- home health services;
- outpatient prescription drugs; and
- inpatient and outpatient hospital services.
Proposed regulations implementing Stark I and Stark II, published on
January 9, 1998, would specifically exempt EPO as a Designated Health Service if
it is provided to ESRD patients as part of a renal dialysis treatment plan.
Further, the proposed regulations discussing durable medical equipment would
exclude ESRD equipment and supplies from coverage as a Designated Health
Service. Outpatient prescription drugs and in-hospital treatments would also be
excluded because the ESRD benefit is distinguished under Medicare from the
durable medical equipment benefit.
Several states in which we operate have enacted self-referral statutes
similar to the Stark Law. These state self-referral laws may apply to referrals
of patients regardless of payor source and may contain exceptions different from
each other and from those contained in the Stark Law.
OTHER FRAUD AND ABUSE LAWS
Our operations are also subject to a variety of other federal and state
health care 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.
Violations of numerous rules under the applicable 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, trigger various civil
monetary penalty provisions. 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 countries to be a national
priority. In the United States, members of Congress from both parties and the
executive branch are continuing to consider many health care proposals, some of
which are comprehensive and far-reaching in nature. Several states of the United
States and many of the countries in which we do business are also currently
considering health care proposals. We cannot predict 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
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reform may bring radical changes in health care industry financing and
regulation, which could have a material adverse effect on our business,
financial condition and results of operations.
LEGAL PROCEEDINGS
The following section describes material legal actions and proceedings
relating to us and our business. While we believe that it is unlikely that any
pending legal proceedings known to us will have a material adverse effect on our
business, financial condition and results of operations, we can offer no
assurance regarding the ultimate outcome of any pending legal proceedings.
COMMERCIAL LITIGATION
In 1997, FMCH, NMC and certain named NMC subsidiaries were served with a
civil complaint filed by Aetna Life Insurance Company in the U.S. District Court
for the Southern District of New York. The lawsuit alleges inappropriate billing
practices for nutritional therapy, diagnostic and clinical laboratory tests and
misrepresentations. In April 1999, Aetna amended its complaint to include its
affiliate, Aetna U.S. Healthcare, Inc., as an additional plaintiff and to make
certain other limited changes in its pleading. The amended complaint seeks
unspecified damages and costs. Other insurance companies have filed similar
claims seeking unspecified damages and costs. We, FMCH, NMC and its subsidiaries
believe that there are substantial defenses to the claims asserted and intend to
vigorously defend all lawsuits. Other private payors have contacted FMCH 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 we
cannot predict the ultimate outcome on us of these proceedings at this time, an
adverse result could have a material adverse effect on our business, financial
condition and results of operations.
FMCH has filed counterclaims against the plaintiffs in these matters based
on inappropriate claim denials and delays in claim payments.
On September 28, 2000, Mesquita, et al. v. W.R. Grace & Company, et al.
(Sup. Court of Calif., S.F. County, #315465) was filed as a class action by
plaintiffs claiming to be creditors of Grace Chemicals against Grace Chemicals,
FMCH and other defendants, principally alleging that the merger which resulted
in the original formation of Fresenius Medical Care was a fraudulent transfer,
violated the uniform fraudulent transfer act, and constituted a conspiracy. See
"Risk Factors -- Creditors of W.R. Grace & Co. Conn. have asserted claims
against us." An amended complaint (Abner et al. v. W.R. Grace & Company, et al.)
and an additional class action were filed subsequently with substantially
similar allegations; both cases have been subsequently stayed and transferred to
the Delaware bankruptcy court in connection with W.R. Grace's Chapter 11
bankruptcy proceedings. We have requested indemnification from Grace Chemicals
pursuant to the Merger Agreements. If the Merger is determined to have been a
fraudulent transfer, if material damages are proved by the plaintiffs, and if we
are not able to collect, in whole or in part on the indemnity, from W.R. Grace &
Co. or its affiliates or former affiliates or their insurers, and if we are not
able to collect against any party that may have received proceeds from W.R.
Grace & Co., a judgment could have a material adverse effect on our business,
financial condition and results of operations. We are confident that no
fraudulent transfer or conspiracy occurred and we intend 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 CMS 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.
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In April 1995, the 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. The 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 the 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 the
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 the CMS's retroactive application of the April 1995 rule was legally
invalid. The 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 the CMS's retroactive application of the April 1995 rule
legally invalid. Based on its finding, the Court also permanently enjoined the
CMS from enforcing and applying the April 1995 rule retroactively against NMC.
The Court took no action on the CMS's motion for summary judgment pending
completion of the outstanding discovery. On October 5, 1998, NMC filed its own
motion for summary judgment requesting that the Court declare the CMS's
prospective application of the April 1995 rule invalid and permanently enjoin
the CMS from prospectively enforcing and applying the April 1995 rule. The Court
has not yet ruled on the parties' motions. The CMS elected not to appeal the
Court's June 1995 and January 1998 orders. The CMS may, however, appeal all
rulings at the conclusion of the litigation. If the 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's original implementation,
and to re-bill Medicare for the same services, which would result in a loss to
NMC of approximately $120 million attributable to all periods prior to December
31, 1995. Also, in this event, our business, financial condition and results of
operations would be materially adversely affected.
In July, 2000, NMC filed a complaint in the U.S. District Court for the
Eastern District of Virginia (National Medical Care, Inc. and Bio-Medical
Applications of Virginia, Inc. v. Aetna Life Insurance, Co., Inc. Aetna U.S.
Healthcare, Inc. and John Does 1-10) seeking recovery against Aetna U.S.
Healthcare and health plans administered by Aetna U.S. Healthcare for claims
related to primary payor liability for dual eligible ESRD patients under the
Omnibus Budget Reconciliation Act of 1993. On January 16, 2001, the Court stayed
the action pending resolution of the District of Columbia Court action.
OTHER LITIGATION AND POTENTIAL EXPOSURES
From time to time, we are a party to or we may be threatened with other
litigation arising in the ordinary course of our business. Our management
regularly analyzes current information including, as applicable, our defenses
and insurance coverage and, as necessary, provides accruals for probable
liabilities for the eventual disposition of these matters. We do not expect that
the ultimate outcome of these matters will materially affect our financial
position, results of operations or cash flows.
Like other health care providers, we conduct our operations under intense
government regulation and scrutiny. We must comply with regulations which relate
to or govern the safety and efficacy of medical
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products and supplies, the operation of manufacturing facilities, laboratories
and dialysis clinics, and environmental and occupational health and safety. We
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 ours or the manner in which we conduct our
business. In the United States, 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, we expect that our business activities
and practices will continue to be subject to extensive review by regulatory
authorities and private parties, and to continuing inquiries, claims and
litigation relating to our compliance with applicable laws and regulations. We
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.
We operate a large number facilities throughout the United States. In such
a decentralized system, it is often difficult to maintain the desired level of
oversight and control over the thousands of individuals employed by many
affiliate companies. We rely upon our management structure, regulatory and legal
resources, and the effective operation of our compliance program to direct,
manage and monitor the activities of these employees. On occasion, we may
identify instances where employees, deliberately or inadvertently, have
submitted inadequate or false billings. Such persons' actions may subject us and
our subsidiaries to liability under the False Claims Act, among other laws, and
we cannot predict whether law enforcement authorities may use this information
to initiate further investigations of the business practices disclosed or any of
our 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. We have been subject
to these suits due to the nature of our business and we expect that those types
of lawsuits may continue. Although we maintain insurance at a level we believe
is prudent, we cannot assure that our coverage limits will be adequate or that
insurance will cover all claims asserted against us. A successful claim against
us or any of our subsidiaries in excess of insurance coverage could have a
material adverse effect upon us and our results of operations. Any claims,
regardless of their merit or eventual outcome, also may have a material adverse
effect on our reputation and business.
We have also had claims asserted against us and lawsuits filed against us
relating to businesses that we have acquired or divested. These claims and suits
relate both to operation of the businesses and to the acquisition and
divestiture transactions. We have asserted our own claims, and claims for
indemnification. Although we cannot predict the ultimate outcome on us at this
time, an adverse result could have a material adverse effect upon our business,
financial condition and results of operations.
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MANAGEMENT OF FRESENIUS MEDICAL CARE
OUR DIRECTORS AND SENIOR MANAGEMENT
GENERAL
In accordance with the German Stock Corporation Act, we have a supervisory
board and a management board. The two boards are separate and no individual may
simultaneously be a member of both boards.
OUR SUPERVISORY BOARD
Our supervisory board consists of six members who are elected by the
holders of Ordinary shares at our annual general meeting. Pursuant to the
Ordinary shares pooling agreement, dated as of September 27, 1996 among
Fresenius Medical Care AG, our independent directors as agents of the minority
holders of Ordinary shares and us and the Preference shares pooling agreement,
dated as of November 27, 1996 among Fresenius Medical Care AG, our independent
directors as agents of the holders of Preference shares and us, at least
one-third, but no fewer than two, of the members of the supervisory board
elected by the shareholders are required to be independent directors, who are
persons with no substantial business or professional relationship with us,
Fresenius AG or any affiliate of either.
If and when either:
- Fresenius Medical Care AG itself has more than 500 employees; or
- we enter into a domination agreement with a German subsidiary having more
than 500 employees, or if that subsidiary is integrated into Fresenius
Medical Care AG;
the German employees of Fresenius Medical Care AG and our German subsidiaries
will elect one-third of the members of the supervisory board. If and when the
aggregate number of employees of Fresenius Medical Care AG and our German
subsidiaries exceeds 2,000, the supervisory board will increase to 12 persons
and the holders of Ordinary shares and the German employees of Fresenius Medical
Care AG and its German subsidiaries will elect six members each. In that case,
the Chairman of the supervisory board will be selected from the members elected
by the shareholders and will have the tie-breaking vote.
The term of a member of the supervisory board will expire at the end of the
general meeting of shareholders after the fourth fiscal year following the year
in which the member was elected, but not counting the fiscal year in which such
member's term begins. Members of the supervisory board elected by our
shareholders may be removed by a resolution of our general meeting. This
resolution requires a three-fourths majority of the votes cast at that meeting.
The supervisory board ordinarily acts by simple majority vote and the Chairman
has a tie-breaking vote in case of any deadlock.
The principal function of the supervisory board is to appoint and to
supervise the management board and to approve mid-term planning, dividend
payments and matters which are not in the ordinary course of business and are of
fundamental importance to us.
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The table below provides the names and ages of the members of our
supervisory board:
<Table>
<Caption>
AGE AS OF
DECEMBER 31,
NAME 2000
- ---- ------------
Dr. Gerd Krick, Chairman................................ 62
Dr. Dieter Schenk, Deputy Chairman...................... 48
Prof. Dr. Bernd Fahrholz................................ 52
Dr. Theo Spettmann...................................... 56
Walter L. Weisman(1).................................... 65
Stephen M. Peck(1)...................................... 65
</Table>
- ---------------
(1) Independent Director
The term for each member of the supervisory board set forth above will
expire in 2006. Members of the supervisory board are eligible for reelection.
DR. GERD KRICK has been Chairman of our supervisory board since January 1,
1998. Since 1992, he has been Chairman of the Fresenius AG management board.
Prior to 1992, he was a Director of the Medical Systems Division of Fresenius AG
and Deputy Chairman of the Fresenius AG management board. From September 1996
until December 1997, Dr. Krick was Chairman of the management board of Fresenius
Medical Care. Dr. Krick is a member of the Board of Directors of Adelphi Capital
Europe Fund, of the Administrative Board of Dresdner Bank Luxembourg S.A., of
the supervisory board of Vereinte Krankenversicherung AG, of the Advisory Board
of HDI Haftpflichtverband der deutschen Industrie and of the Board of Trustees
of the Donau Universitat Krems. He is also the Chairman of the supervisory
boards of Vamed AG and of Fresenius Kabi AG.
DR. DIETER SCHENK has been Deputy Chairman of our supervisory board since
1996. He is an attorney and tax advisor and has been a partner in the law firm
of Norr Stiefenhofer Lutz since 1986. Dr. Schenk is also a member of the
supervisory board of Fresenius AG and a member and vice-chairman of the
supervisory board of Greiffenberger AG and a member of the supervisory boards of
Schmidt Bank KGaA and Feintechnik Eisfeld GmbH.
PROF. DR. BERND FAHRHOLZ has been a member of our supervisory board since
1998. He is an attorney and has been a member of the management board of
Dresdner Bank AG since 1998 and its Chairman since April 2000. Dr. Fahrholz is
also a member of the supervisory boards of ASTA Medica AG, BMW AG, BNP-Dresdner
European Bank AG, DEGI Deutsche Gesellschaft fur Immobilienfonds mbH, Deutsche
Hypothekenbank Frankfurt-Hamburg AG, Deutsche Schiffsbank AG (Chairman), Diskont
und Kredit AG, Dresdnerbank Investment Management Kapitalanlagegesellschaft mbH,
Dresdner Bank Lateinamerika Aktiengesellschaft (Vice Chairman), Dresdner Capital
International Kapitalanlagegesellschaft mbH, Dresdner Kleinwort Wasserstein
Inc., Dynamit Nobel AG, Kommanditgesellschaft Allgemeine Leasing GmbH & Co.
(Chairman), Oldenburgische Landesbank AG; and Reuschel & Co.
DR. THEO SPETTMAN has been a member of our supervisory board since April 1,
2000. He has been a member of the management board of Sudzucker AG since 1988
and Spokesman of the management board of Sudzucker AG since 1995. Dr. Spettman
also sits on the supervisory boards of VK Muhlen AG, Karlsruher Versicherungen
AG, Gerling Industrie Service AG, Scholler Holding GmbH & Co.KG and is spokesman
of the supervisory board of Berentzen-Group AG.
WALTER L. WEISMAN has been a member of our supervisory board since 1996. He
is a private investor and a former Chairman and Chief Executive Officer of
American Medical International, Inc., which he joined in 1972, was elected
President in 1979 and served as Chief Executive Officer from 1985 to 1988. Mr.
Weisman is a Vice-Chairman of the Board of the California Institute of
Technology,
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Chairman of the Board of the Los Angeles County Museum of Art, Chairman of the
Board of the Sundance Institute, and a trustee of the Samuel A. Kress Foundation
and the Los Angeles Opera.
STEPHEN M. PECK was elected to our supervisory board in 1999. He is a
private investor and a former managing and special partner of Weiss, Peck &
Greer, which was founded in 1970. He served as Chief Investment Officer and
Director of Reliance Insurance Company, Inc. from January 1986 to July 1988. Mr.
Peck is a member of the Board of Directors of Harnischfeger Greyhound Lines,
Inc., OFFIT Investment Funds and Banyan Strategic Realty Trust Grand Union Co.,
where he serves as Non-Executive Chairman of the Board. He also serves as a
member of the Advisory Boards of the Torrey Funds and Brown Simpson Asset
Management. Mr. Peck is presently Chairman of the Board of Trustees and the
Executive Committee of Mount Sinai -- NYU Medical Center and Health System. He
is a member of the Board of Trustees of Mount Sinai School of Medicine, New York
University and The Jewish Theological Seminary.
OUR MANAGEMENT BOARD
Each member of our management board is appointed by the supervisory board
for a maximum term of five years and is eligible for reappointment after such
term. Their terms expire at our annual general meeting in the years listed
below.
The table below provides names, ages, positions and terms of office of the
members of our management board:
<Table>
<Caption>
AGE AS OF YEAR
DECEMBER 31, TERM
NAME 2000 POSITION EXPIRES
- ---- ------------ ------------------------------------------------- -------
Dr. Ben Lipps............ 60 Chairman of the management board, Chief Executive 2005
Officer of our Company and Chief Executive
Officer for North America
Roberto Fuste............ 48 Chief Executive Officer for Asia Pacific 2005
Dr. Emanuele Gatti....... 45 Chief Executive Officer for Europe, Middle East, 2005
Africa and Latin America
</Table>
DR. BEN J. LIPPS has been Chairman of the management board since May 1,
1999 and was Vice Chairman of the management board from September 1998 until May
1, 1999. He has been President and a director of Fresenius Medical Care Holdings
since September 1996 and President, Chief Executive Officer, Chief Operating
Officer and a director of Fresenius USA since October 1989, and he had served in
various capacities with Fresenius USA's predecessor since 1985. Dr. Lipps joined
Dow Chemical Company in 1966 and led the research team that developed the first
hollow fiber dialyzer between 1967 and 1969. Prior to joining Fresenius USA's
predecessor, Dr. Lipps was a Vice President of Research and Development for
Cordis Dow Corporation.
MR. ROBERTO FUSTE was appointed to our management board effective January
1, 1999. Mr. Fuste is responsible for the Asia-Pacific region within the
International segment, for which he assumed responsibility in 1998. Mr. Fuste
joined Fresenius AG in 1991 when Fresenius AG acquired Nephrocontrol S.A., a
Spanish company which he founded in 1985 and of which he was Managing Director
and joint owner. After the company was acquired by Fresenius AG, he continued as
Managing Director. In 1995, he joined the Head Office of Fresenius AG where he
has held various executive positions.
DR. EMANUELE GATTI has been a member of our management board since May 1997
and is President and Chief Executive Officer of Europe, Middle East, Africa and
Latin America within the International segment. Previously he was Executive Vice
President with responsibility for our dialysis business in Southern Europe. Dr.
Gatti joined the Fresenius Group in 1989 when Fresenius AG acquired Sis-ter, an
Italian company of which he was General Manager. He has been working in the
field of dialysis
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since 1981 after leaving the Polytechnic School of Milan where he was involved
in teaching and biomedical research.
The business address of all members of our management board and supervisory
board is Else-Kroner-Strasse 1, 61352 Bad Homburg, Germany.
COMPENSATION OF OUR MANAGEMENT BOARD AND OUR SUPERVISORY BOARD
For the year ended December 31, 2000, we paid aggregate compensation to all
members of the management board of E2,949,237. The aggregate fees paid to all
members of the supervisory board was E315,000, including compensation to Dr.
Krick for his duties as Chairman of the supervisory board. We pay an annual
retainer fee of $60,000 to each member of the supervisory board, with the
Chairman paid twice that amount and the Deputy Chairman paid 150% of that
amount. We reimburse supervisory board members for their reasonable travel and
accommodation expenses incurred with respect to their duties as supervisory
board members. The aggregate compensation reported above does not include
amounts paid as fees for services rendered by certain business or professional
entities with which some of the supervisory board members are associated. Those
fees are described under "Certain Relationships and Related Party Transactions."
During 2000 we awarded 83,000 options at an exercise price of E47.64 to
members of the management board. At December 31, 2000, management board members
held options to acquire 282,600 Preference shares of which options to purchase
49,933 Preference shares were exercisable at a weighted average exercise price
of E36.81.
At December 31, 2000, a loan granted to a member of our management board in
the principal amount of $2,000,000, bearing interest at 6% per annum, was
outstanding.
SHARE OWNERSHIP BY OUR DIRECTORS AND OFFICERS
As of December 31, 2000, members of the supervisory board and the
management board as a group owned 4,367 Ordinary shares (0.01% of total Ordinary
shares outstanding) and 10,700 Preference shares (0.05% of total Preference
shares outstanding). At December 31, 2000 management board members held options
to acquire 282,600 Preference shares of which options to purchase 49,933
Preference shares were exercisable at a weighted average exercise price of
E36.81. Those options expire at various dates between 2008 and 2010. None of the
members of our management board and our supervisory board beneficially owns more
than 1% of our outstanding Ordinary shares or our outstanding Preference shares.
OPTIONS TO PURCHASE OUR SECURITIES
STOCK OPTION PLANS
We have adopted a 1996 Stock Incentive Plan and a 1998 Stock Incentive Plan
for our key management and executive employees and those of our subsidiaries.
Under our stock incentive plans, eligible employees generally have the right to
acquire Preference shares or ADSs. Each ADS represents one-third of a Preference
share. A total of 1,333,333 Preference shares are available for issuance
pursuant to grants under our stock incentive plans. The 1998 Stock Incentive
Plan was amended in 1999 and 2000 to increase the number of Preference shares
available for issuance pursuant to grants under that plan by 450,000 and
660,000, respectively, resulting in a total number of shares available for
issuance of 2,443,333 Preference shares, less the number of Preference shares
issued under the 1996 Stock Incentive Plan. Some eligible employees have
received initial grants intended to cover a three-year period; other grants will
be made annually.
During 2000, there were no grants or awards under our 1996 Stock Incentive
Plan. At December 31, 2000, there were awards for 205,166 ADSs outstanding under
our 1996 Stock Incentive Plan with a weighted average exercise price of $76.03
per underlying Preference share. We do not expect to issue any additional awards
under our 1996 Stock Incentive Plan. During 2000, grants for 653,325 Preference
shares were issued under our 1998 Stock Incentive Plan at a weighted average
exercise price of E46.74.
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Grants under our stock incentive plans are in the form of non-assignable
and non-transferable convertible bonds and a corresponding nonrecourse employee
loan, secured solely by the convertible bonds with respect to which it was made.
The grant of convertible bonds and corresponding employee loans to an eligible
employee is designed to be the functional equivalent of non-qualified employee
stock options. To accomplish this result, as more fully described below, amounts
due and payable on an employee loan are completely offset by amounts due and
payable on the convertible bonds with respect to which the employee loan was
made. We requested rulings from the U.S. Internal Revenue Service to this
effect, and we received a favorable response received with respect to our 1996
Stock Incentive Plan and to our 1998 Stock Incentive Plan.
The convertible bonds have a face amount equal to the calculated nominal
value of a Preference share multiplied by the number of Preference shares into
which the convertible bonds may be converted, either directly or as represented
by ADSs. The interest rate on the convertible bonds is a rate determined by our
management board, who administer our stock incentive plans. Conversion rights
over the convertible bonds generally vest over a three-year period from the date
of grant. Upon vesting, convertible bonds are convertible, subject to
satisfaction of all state regulatory and other legal requirements, as well as
the provisions of the applicable stock incentive plan, for a period of ten years
from the date of grant, unless the recipient's employment terminates prior to
that date. Generally, upon termination, the recipient or his or her
representative will have 90 days to exercise the conversion right. That period
is extended to one year in the case of death or disability. In the case of
termination for cause, conversion rights cease at the time of termination of
employment. Convertible bonds that are not converted within the prescribed time
are mandatorily redeemed for face value. Convertible bonds may be converted in
whole or in part; appropriate adjustment is made to the corresponding employee
loans for partial conversions.
Employee loans have a principal amount equal to the face amount of the
convertible bonds with respect to which the employee loan was made, and bear
interest at the same rate as the convertible bonds. An employee loan is payable
on conversion of the convertible bonds with respect to which it was made, or
upon redemption of the convertible bonds. If the convertible bonds are redeemed,
the proceeds of the convertible bonds and the interest payable on the bond must
be applied against the repayment of the corresponding employee loan and interest
on the loan. Accordingly, for each grant, the terms of the convertible bonds and
the corresponding employee loan are designed to match in all respects, so that
the recipient of the grant receives nothing and pays nothing with respect to the
convertible bonds or the employee loan. We have the right to offset our
obligation on a convertible bond against the obligation on the related employee
loan; therefore, the convertible bond obligations and employee loan receivables
are not reflected in our consolidated financial statements.
The conversion price of convertible bonds issued under our 1996 Stock
Incentive Plan and held by U.S. citizens or residents is the fair market value
of the ADS or Preference shares on the day of the grant. The conversion price of
convertible bonds issued under our 1998 Stock Incentive Plan and held by U.S.
citizens or residents is the fair market value of the Preference shares on the
day following the date of the grant. A portion of the amount paid on conversion
will be used to repay the corresponding employee loan, and interest payable with
respect to the employee loan will be offset by interest payable on the
convertible bonds.
At the time of conversion, an employee who is a U.S. citizen or resident
will be subject to U.S. federal income taxes equal to the value of the ADSs or
Preference shares received and the amount paid for conversion of the convertible
bonds and may be required, as a condition to receiving the ADSs or Preference
shares, to remit to his or her employer company any required withholding and
payroll taxes. Employees may also be required to file with us or our designed
agent, as a protective measure, a form sufficient under German law to elect the
treaty benefit of no withholding on interest under the U.S.-German income tax
treaty. Under current German law, there would be no withholding tax imposed on
these interest payments.
As of December 31, 2000, options for a total of 10,060 Preference shares
have been exercised under our 1998 Stock Incentive Plan.
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We have also adopted the Fresenius Medical Care Stock Option Plan of June
10, 1998. This plan, known as our International Plan, was adopted for:
- members of management board and managerial staff of Fresenius Medical
Care;
- members of management and managerial staff of our German affiliates,
other than Fresenius AG and subsidiaries of Fresenius AG that are not
also our subsidiaries; and
- managerial staff members of our non-German affiliates, other than
subsidiaries of Fresenius AG that are not also our subsidiaries.
We have reserved a total of 2,500,000 Preference shares for issuance upon
exercise of options under our International Plan, of which 500,000 Preference
shares have been reserved for issuance to members of our management board and
2,000,000 shares for other managerial staff.
The exercise price of the options under the International Plan is equal to
the average of the official daily quotation prices of the Preference shares on
the Frankfurt Stock Exchange on the thirty (30) days of trading immediately
prior to the date of grant of the award. One third of an option granted under
the International Plan vests on each of the second, third and fourth anniversary
of the award date, provided that we achieve certain performance criteria for the
full fiscal year following the grant date in comparison to our performance for
the full fiscal year preceding the grant date. The term of the International
Plan is five years, and not more than 20% of the total options available under
the International Plan may be issued in any one year. Options issued under the
International Plan expire 10 years from the date of grant.
At our 2000 annual general meeting, our shareholders approved a resolution
allowing us to exclude from the calculation of the performance criteria under
the International Stock Option Plan the effects of the special charges we took
in 1999 in connection with the settlement of the U.S. government investigation.
Under the International Stock Plan, 1999 performance criteria are used as both
the comparative year to 1997 for options granted in 1998 and as the base year
(which will be compared to 2001) for options granted in 2000. The purpose of
excluding the special charges taken in 1999 is to avoid the distortions created
by the special charges for both purposes.
The International Plan is administered by our management board, except that
the selection of award recipients and other determinations under the
International Plan relating to members of our management board are made by our
supervisory board. Subject to the vesting requirements of the International
Plan, options are exercisable only within 15 working days after publication of
our financial statements for the preceding quarter. Options under the
International Plan are not transferable.
During 2000, we awarded options under the International Plan to purchase
321,204 Preference shares at a weighted average price of E47.64 per share,
including options to purchase 83,000 shares awarded to members of the management
board. During 2000 a total of 7,333 options were exercised. At December 31,
2000, a total of 78,277 options were exercisable under the International Plan.
We have adopted a new stock incentive plan for our key management and
executive employees and those of our subsidiaries and our shareholders approved
the new plan at our 2001 annual general meeting. A total of 4,000,000 non-voting
Preference shares are available for issuance under our new stock incentive plan,
of which up to 500,000 shares may be issued to members of our Management Board.
Participation in the new plan is limited to management staff members, executive
staff members and other employees of Fresenius Medical Care and its affiliates,
other than subsidiaries of Fresenius AG that are not also our subsidiaries. Our
management board will determine eligibility for participation in the new plan
and awards under the new plan, except that our supervisory board will make those
determinations with respect members of the management board.
Grants under our new stock incentive plan will be in the form of
non-assignable and non-transferable convertible bonds and the offer of a
corresponding non-recourse loan, effectively secured solely by the convertible
bonds with respect to which the loan was made. The convertible bonds have a face
amount equal to E2.56 -- the calculated nominal value of a Preference
share -- multiplied by the number of Preference shares into which the bonds may
be converted. The interest rate on the bonds is 5.5% per
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annum. Conversion rights over the convertible bonds generally vest over a
four-year period from the date of grant. Upon vesting, convertible bonds are
convertible, subject to satisfaction of all state regulatory and other legal
requirements, as well as the provisions of the stock incentive plan, for a
period of ten years from the date of grant, unless the recipient's employment
terminates prior to that date. The plan authorizes the management board, with
the consent of the supervisory board or the supervisory board in the case of
grants to members of the management board) to adopt regulations governing
exercise in case of death, occupational disability or incapacity for employment,
retirement or dismissal on operational grounds and in similar exceptional cases.
Convertible bonds that are not converted within the prescribed time are
mandatorily redeemed for face value. Convertible bonds may be converted in whole
or in part; appropriate adjustment is made to any corresponding employee loans
for partial conversions.
Any employee loans made in connection with grants will have a principal
amount equal to the face amount of the convertible bonds with respect to which
the employee loan is made, and will bear interest at the same rate as the
convertible bonds. An employee loan will be payable on conversion of the
convertible bonds with respect to which it was made, or upon redemption of the
convertible bonds. If the convertible bonds are redeemed, the proceeds of the
convertible bonds and the interest payable on the bond must be applied against
the repayment of the corresponding employee loan and interest on the loan.
Accordingly, for each grant that includes an employee loan, the terms of the
convertible bonds and the corresponding employee loan are designed to match in
all respects, so that the recipient of the grant receives nothing and pays
nothing with respect to the convertible bonds or the employee loan. In the case
of grants to North American employees, we expect that the grant of a convertible
bond accompanied by an employee loan will be treated as the functional
equivalent of a non-qualified stock option for U.S. federal income tax purposes.
We obtained rulings to that effect in connection with our 1996 and 1998 Stock
Incentive Plans.
A grant of convertible bonds may, at the election of the plan participant,
be subject to a success target specified in the plan. If a participant does not
elect to receive bonds subject to the success target, the award will be reduced
by 15%. To achieve the success target, the stock exchange price of our
Preference shares must exceed the initial value of the shares by at least 25% or
more for at least one day prior to conversion of the bond. The initial value of
Preference shares issuable upon conversion of the convertible bonds will be the
average stock exchange price during the 30 trading days prior to the grant of
the bond. For this purpose, the stock exchange price is the closing price of the
Preference shares in electronic "Xetra" trading on the Deutsche Borse AG.
The conversion price for convertible bonds granted without a success target
shall be the average stock exchange price of our Preference shares during the 30
trading days prior to the grant, less the face amount of the converted
convertible bond. The conversion price for convertible bonds which are subject
to a success target shall be the stock exchange price of our Preference shares
at the time the success target price is achieved for the first time, less the
face amount of the converted convertible bond. In the case of convertible bonds
issued together with an employee loan, a portion of the amount paid on
conversion will be used to repay the corresponding employee loan, and interest
payable with respect to the employee loan will be offset by interest payable on
the convertible bonds.
In connection with approval of the new plan, we terminated our
International Plan. Our new plan is effective immediately for participants
outside of North America. Our 1996 Stock Incentive Plan and our 1998 Stock
Incentive Plan remain in effect, but our authority to issue Preference shares
upon conversion of convertible bonds issued under those plans expires in
September 2001. At that time, our new plan will also be available for North
American personnel. The termination of our International Plan and the
termination of authority to issue Preference shares under out 1996 and 1998
Stock Incentive Plans do not affect awards currently outstanding under those
plans.
ROLLOVER OPTIONS
In connection with our formation, employees of NMC exchanged options to
purchase W.R. Grace common stock and Fresenius USA employees exchanged options
to purchase Fresenius USA common stock for equivalent options with respect to
our Ordinary shares. When we were formed, German corporate
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law did not allow us to reserve Ordinary shares and issue them upon the exercise
of these rollover options, as is done by U.S. corporations. Instead, we issued
the Ordinary shares issuable upon exercise of the options to Fresenius AG, which
will hold the shares until exercise of the options. Fresenius AG has agreed that
it will not exercise voting power, and will return any dividends paid, with
respect to the Ordinary shares underlying options formerly related to W.R. Grace
common stock. Upon exercise of any of these options, the holder will pay the
option exercise price to us and Fresenius AG will deliver the Ordinary shares to
the depositary for the Ordinary shares against issuance of ADSs representing
Ordinary shares in the name of the option holder. Upon cancellation or
expiration without exercise of options formerly relating to W.R. Grace common
stock, Fresenius AG will transfer the underlying Ordinary shares to us at no
cost. Upon cancellation or expiration without exercise of options formerly
relating to Fresenius USA common stock, the underlying Ordinary shares will
revert to Fresenius AG. All rollover options expire on the same date on which
the previous options to purchase either the W.R. Grace common stock or Fresenius
USA common stock to which such rollover options relate would have expired.
As of December 31, 2000, a total of 182,006 Ordinary ADSs, each
representing one-third of an Ordinary share, were subject to rollover options as
described above at exercise prices ranging from $9.78 to $46.53 per Ordinary
share, all currently exercisable. Members of our supervisory board and our
management board, as a group, held no rollover options.
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SECURITY OWNERSHIP OF PRINCIPAL SHAREHOLDERS
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS OF FRESENIUS MEDICAL CARE
Our outstanding share capital consists of Ordinary shares and non-voting
Preference shares that are issued only in bearer form. Accordingly, unless we
receive information regarding acquisitions of our shares through a filing with
the SEC or through the German statutory requirements referred to below, we have
no way of determining who our shareholders are or how many shares any particular
shareholder owns except as described below with respect to our shares held in
ADR form. Because we are a foreign private issuer under the rules of the SEC,
our directors and officers are not required to report their ownership of our
equity securities or their transactions in our equity securities pursuant to
Section 16 of the Exchange Act. Under the German Securities Exchange Law
(Wertpapierhandelsgesetz), holders of voting securities of a German company
listed on the official market (amtlicher Handel) of a German stock exchange or a
corresponding trading segment of a stock exchange within the European Union are
obligated to notify the company of the level of their holding whenever such
holding reaches, exceeds or falls below certain thresholds, which have been set
at 5%, 10%, 25%, 50% and 75% of a company's outstanding voting rights.
To our knowledge, Fresenius AG is the only entity that beneficially owns
more than 5% of our outstanding Ordinary shares. We have been informed that as
of December 31, 2000, Fresenius AG owned the majority, 50.8%, of our Ordinary
shares. At December 31, 2000 Fresenius AG's Ordinary shares represented
approximately 40% of our total share capital. Morgan Guaranty Trust Company of
New York, our ADR depositary, informed us that as of December 31, 2000
17,521,746 Ordinary ADSs, each representing one-third of an Ordinary share, were
held of record by 8,393 U.S. holders and 3,610,391 Preference ADSs, each
representing one-third of a Preference share, were held of record by six U.S.
holders. Ordinary shares and Preference shares of U.S. holders accounted for
approximately 8% of our Ordinary shares outstanding and 5% of our Preference
shares outstanding as of December 31, 2000.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS OF FRESENIUS AG
Fresenius AG's share capital consists of Ordinary shares and non-voting
Preference shares. Both classes of shares are issued only in bearer form.
Accordingly, Fresenius AG has no way of determining who its shareholders are or
how many shares any particular shareholder owns. However, under the German
Securities Exchange Law, holders of voting securities of a German company listed
on the official market (amtlicher Handel) of a German stock exchange or a
corresponding trading segment of a stock exchange within the European Union are
obligated to notify the company of certain levels of holdings, as described
above.
Fresenius AG has been informed that the Else Kroner-Fresenius-Stiftung owns
68% of the Fresenius AG Ordinary shares. The Else Kroner-Fresenius-Stiftung
serves to promote medical science, primarily in the fields of research and
treatment of illnesses, including the development of apparatuses and
preparations. It may promote only those research projects which make their
results generally accessible to the public. It further serves to promote the
education of physicians or of others concerned with the treatment and care of
sick persons, primarily those working in the field of dialysis, as well as to
promote the education of particularly gifted pupils and students.
Fresenius AG has also been informed that AW Beteiligungsgesellschaft mbH,
which is controlled by Agrar Industrie Holding GmbH, owns 9% of the Fresenius AG
Ordinary shares. Pursuant to a pooling agreement relating to its shares, voting
power over the shares indirectly held by Agrar-Industrie Holding GmbH is held by
the Else Kroner-Fresenius-Stiftung.
In addition, Neunte Herakles Beteiligungs-Gesellschaft mbH & Co. KG
informed Fresenius AG that it owns 9.97% of the Fresenius AG Ordinary shares.
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CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
In connection with the formation of Fresenius Medical Care, and the
combination of the dialysis businesses of Fresenius AG and W.R. Grace, Fresenius
AG and its affiliates and Fresenius Medical Care and its affiliates entered into
several agreements for the purpose of giving effect to the merger and defining
our ongoing relationship. Fresenius AG and W.R. Grace negotiated these
agreements. The information below summarizes the material aspects of certain
agreements, arrangements and transactions between Fresenius Medical Care and
Fresenius AG and their affiliates. Some of these agreements have been previously
filed with the SEC. The following descriptions are not complete and are
qualified in their entirety by reference to the agreements, copies of which have
been filed with the SEC and the New York Stock Exchange. We believe that the
leases, the supply agreements and the services agreements are no less favorable
to us and no more favorable to Fresenius AG than would have been obtained in
arm's-length bargaining between independent parties. The trademark and other
intellectual property agreements summarized below were negotiated by Fresenius
AG and W.R. Grace, and, taken independently, are not necessarily indicative of
market terms.
In the discussion below regarding our contractual and other relationships
with Fresenius AG:
- the term "we (or us) and our affiliates" refers only to Fresenius Medical
Care and its subsidiaries; and
- the term "Fresenius AG and its affiliates" refers only to Fresenius AG
and affiliates of Fresenius AG other than Fresenius Medical Care and its
subsidiaries.
REAL PROPERTY LEASE
We did not acquire the land and buildings in Germany that Fresenius
Worldwide Dialysis used when we were formed. Fresenius AG or its affiliates have
leased part of the real property to us, directly, and transferred the remainder
of that real property to two limited partnerships. Fresenius AG is the sole
limited partner of each partnership, and the sole shareholder of the general
partner of each partnership. These limited partnerships, as landlords, have
leased the properties to us and to Fresenius AG, as applicable, for use in our
respective businesses. The aggregate annual rent payable by us under these
leases is 16.8 million Deutsche mark (approximately E8.6 million), which was
approximately $9.5 million as of December 31, 2000, exclusive of maintenance and
other costs, and is subject to escalation, based upon the German cost of living
index for a four-person employee household. The leases for manufacturing
facilities have a ten-year term, followed by two successive optional renewal
terms of ten years each at our election. The leases for the other facilities
have a term of ten years. Based upon an appraisal, we believe that the rents
under the leases represent fair market value for such properties. For
information with respect to our principal properties in Germany, see
"Business -- Property."
COVENANTS NOT TO COMPETE
Each of Fresenius AG and W.R. Grace has agreed that, for a period of ten
years after our formation, it will not compete with us in any aspect of the
business of supplying renal care-related goods and services, including
laboratories. However, Fresenius AG may continue its home care business.
TRADEMARKS
Fresenius AG continues to own the name and mark "Fresenius" and its "F"
logo. Fresenius AG and FMC Deutschland, our principal German subsidiary, have
entered into agreements containing the following provisions. Fresenius AG has
granted to FMC Deutschland, for our benefit and that of our affiliates, an
exclusive, worldwide, royalty-free, perpetual license to use "Fresenius Medical
Care" in our corporate names, and to use the Fresenius marks, including some
combination marks containing the Fresenius name that were used by Fresenius AG's
dialysis business, and the Fresenius Medical Care name
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as a trade name, in all aspects of the renal business. FMC Deutschland, for our
benefit and that of our affiliates, has also been granted a worldwide,
royalty-free, perpetual license:
- to use the "Fresenius Medical Care" mark in the then current NMC
non-renal business if it is used as part of "Fresenius Medical Care"
together with one or more descriptive words, such as "Fresenius Medical
Care Home Care" or "Fresenius Medical Care Diagnostics";
- to use the "F" logo mark in the National Medical Care non-renal business,
with the consent of Fresenius AG. That consent will not be unreasonably
withheld if the mark using the logo includes one or more additional
descriptive words or symbols; and
- to use "Fresenius Medical Care" as a trade name in both the renal
business and the National Medical Care non-renal business.
We and our affiliates have the right to use "Fresenius Medical Care" as a
trade name in other medical businesses only with the consent of Fresenius AG.
Fresenius AG may not unreasonably withhold its consent. In the United States and
Canada, Fresenius AG will not use "Fresenius" or the "F" logo as a trademark or
service mark, except that it is permitted to use "Fresenius" in combination with
one or more additional words such as "Pharma Home Care" as a service mark in
connection with its home care business and may use the "F" logo as a service
mark with the consent of FMC Deutschland, who will not unreasonably withhold its
consent if the service mark includes one or more additional descriptive words or
symbols. Similarly, in the United States and Canada, Fresenius AG has the right
to use "Fresenius" as a trade name, but not as a mark, only in connection with
its home care and other medical businesses other than the renal business and
only in combination with one or more other descriptive words, provided that the
name used by Fresenius AG is not confusingly similar to our marks and trade
names. After the expiration of Fresenius AG's ten-year covenant not to compete
with us, Fresenius AG may use "Fresenius" in its corporate names if it is used
in combination with one or more additional descriptive word or words, provided
that the name used by Fresenius AG is not confusingly similar to the Fresenius
Medical Care marks or corporate or trade names.
OTHER INTELLECTUAL PROPERTY
Some of the patents, patent applications, inventions, know-how and trade
secrets that Fresenius Worldwide Dialysis used prior to our formation were also
used by other divisions of Fresenius AG. For Biofine(R), the polyvinyl
chloride-free packaging material, Fresenius AG has granted to FMC Deutschland,
for our benefit and for the benefit of our affiliates, an exclusive license for
the renal business and a non-exclusive license for all other fields except other
non-renal medical businesses. FMC Deutschland and Fresenius AG will share
equally any royalties from licenses of the Biofine(R) intellectual property by
either FMC Deutschland or by Fresenius AG to third parties outside the renal
business and the other non-renal medical businesses. In addition, Fresenius AG
has transferred to FMC Deutschland the other patents, patent applications,
inventions, know-how and trade secrets that were used predominantly in Fresenius
AG's dialysis business. In certain cases Fresenius Worldwide Dialysis and the
other Fresenius AG divisions as a whole each paid a significant part of the
development costs for patents, patent applications, inventions, know-how and
trade secrets that were used by both prior to the merger. Where FMC Deutschland
acquired those jointly funded patents, patent applications, inventions, know-how
and trade secrets, our subsidiary licensed them back to Fresenius AG exclusively
in the other non-renal medical businesses and non-exclusively in all other
fields. Where Fresenius AG retained the jointly funded patents, patent
applications, inventions, know-how and trade secrets, Fresenius AG licensed them
to FMC Deutschland exclusively in the renal business and non-exclusively in all
other fields.
SUPPLY AGREEMENTS
We produce most of our products in our own facilities. However, Fresenius
AG manufactures some of our products for us, principally concentrates, at
facilities that, Fresenius AG retained. These facilities are located in Brazil
and France. Conversely, a facility in Italy that Fresenius AG transferred to us
produces products for Fresenius Kabi AG, a subsidiary of Fresenius AG.
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Our local subsidiaries and those of Fresenius AG have entered into supply
agreements for the purchase and sale of products from the above facilities.
Prices under the supply agreements include a unit cost component for each
product and an annual fixed cost charge for each facility. The unit cost
component, which is subject to annual review by the parties, is intended to
compensate the supplier for variable costs such as costs of materials, variable
labor and utilities. The fixed cost component generally will be based on an
allocation of the 1995 fixed costs of each facility, such as rent, depreciation,
production scheduling and quality control. The fixed cost component will be
subject to adjustment by good-faith negotiation every twenty-four months. If the
parties cannot agree upon an appropriate adjustment, the adjustment will be made
based on an appropriate consumer price index in the country in which the
facility is located.
Each supply agreement has a term that is approximately equal to the
estimated average life of the relevant production assets as of September 30,
1996, resulting in terms of four and one-half to five years. Each supply
agreement may be terminated by the purchasing party after specified notice
period, subject to a compensation payment reflecting a portion of the relevant
fixed costs.
The parties may modify existing or enter into additional supply agreements,
arrangements and transactions. Any future modifications, agreements,
arrangements and transactions will be negotiated between the parties and will be
subject to the approval provisions of the pooling agreements and the regulatory
provisions of German law regarding dominating enterprises.
SERVICES AGREEMENT
We obtain administrative and other services from Fresenius AG headquarters
and from other divisions and subsidiaries of Fresenius AG. These services relate
to, among other things, data processing, financial and management accounting and
audit, human resources, risk management, quality control, production management,
research and development, marketing and logistics. For 2000, Fresenius AG
charged us approximately $20 million for these services. Conversely, we have
provided certain services to other divisions and subsidiaries of Fresenius AG
relating to research and development, plant administration, patent
administration and warehousing. For 2000, we charged approximately $10 million
to Fresenius AG's other divisions and subsidiaries for services we rendered to
them.
We and Fresenius AG may modify existing or enter into additional services
agreements, arrangements and transactions. Any such future modifications,
agreements, arrangements and transactions will be negotiated between the parties
and will be subject to the approval provisions of the pooling agreements and the
regulations of German law regarding dominating enterprises.
FINANCING
During the year ended December 31, 2000, aggregate loans outstanding from
Fresenius AG amounted to $216 million, of which $209 million bore interest at
rates varying between 7.35% and 7.38%. The remaining loans bore interest at a
rate of approximately 4%. The borrowed funds were used for general corporate
purposes. Interest paid during 2000 was $18.6 million.
OTHER INTERESTS
Dr. Gerd Krick, who is Chairman of our supervisory board, is also the
Chairman of the management board of Fresenius AG.
During 1999, we granted a member of our management board a five-year
unsecured loan in the amount of $2 million, with interest at 6.0% per annum.
Only interest is due during the first four years of the term, with both
principal and interest due during the fifth year. At any time during the term of
the loan, we may call the loan, and the loan can be repaid without penalty.
Affiliates of Dresdner Bank AG were initial purchasers of the old trust
preferred securities and Dresdner Kleinwort Wasserstein-Grantchester, Inc. was
the co-lead manager of the offering of old USD trust preferred securities. Prof.
Dr. Bernd Fahrholz, a member of our supervisory board, is the chairman of
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the managing board of Dresdner Bank AG, an affiliate of Dresdner Bank AG London
Branch, and Dr. Manfred Schaudwet, the Executive Manager of Dresdner Bank AG, is
a member of the supervisory board of Fresenius AG. Dresdner Bank AG was one of
the joint global coordinators of our offering of Preference shares in 2000 and
received underwriting commissions and fees of E11.1 million ($10.4 million).
Kleinwort Benson Holdings Inc., an affiliate of Dresdner Bank AG, acquired
1,410,256 Preference shares in the Franconia transaction described under
"Management's Discussion of Financial Condition and Results of
Operations -- Fresenius Medical Care AG -- Liquidity and Capital Resources" and
received a financing fee of approximately $589,900 in connection with the
transaction. Kleinwort Benson Holdings, Inc. subsequently sold 1,111,000 of
these shares at cost to an unaffiliated investor. An affiliate of Dresdner
Kleinwort Benson North America LLC is the New York Stock Exchange specialist for
the ADSs evidencing our Ordinary shares. Kleinwort Benson Holdings Inc. and
Dresdner Kleinwort Benson North America LLC are wholly owned subsidiaries of
Dresdner Bank AG. See "-- Security Ownership of Certain Beneficial Owners of
Fresenius AG." Dresdner Bank AG also acts as custodian under the deposit
agreement for the ADSs evidencing the Ordinary shares and under the deposit
agreement for the ADSs evidencing the Preference shares.
WestLB Panmure Limited, an affiliate of Westdeutsche Landesbank
Girozentrale is one of the initial purchasers of the trust preferred securities
in this offering. Mr. Gerhard Roggemann, a member of the managing board of
Westdeutsche Landesbank Girozentrale is a member of the supervisory board of
Fresenius AG.
Dr. Dieter Schenk, Deputy Chairman of our supervisory board and a member of
the supervisory board of Fresenius AG, is a partner in the law firm of Norr
Stiefenhofer Lutz, German counsel to Fresenius AG and Fresenius Medical Care in
connection with this offering of trust preferred securities, prior securities
offerings by us, and other matters. See "-- Security Ownership of Certain
Beneficial Owners of Fresenius AG." Dr. Alfred Stiefenhofer, also a partner of
Norr Stiefenhofer Lutz, is one of the executors of the estate of Mrs. Else
Kroner. The Else Kroner-Fresenius Stiftung, a charitable foundation established
under the will of Mrs. Kroner, owns the majority of the voting shares of
Fresenius AG.
PRODUCTS
During 2000, we recognized $28.1 million of sales to Fresenius AG and its
affiliates. We made purchases from Fresenius AG in the amount of $25.5 million
during 2000.
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DESCRIPTION OF THE TRUST PREFERRED SECURITIES
Fresenius Medical Care Capital Trust IV and Fresenius Medical Care Capital
Trust V will issue the trust preferred securities under their respective
declarations of trust. State Street Bank and Trust Company, a Massachusetts
chartered trust company, is the preferred trustee under each trust declaration.
The trust declarations have been qualified under the Trust Indenture Act of
1939, as amended, incorporate certain provisions of the Trust Indenture Act and,
upon consummation of the exchange offers, the trust declarations will be subject
to and governed by the Trust Indenture Act.
The following description is only a summary of the material provisions of
the trust declarations. We urge you to read the trust declaration governing your
trust preferred securities because it, not this description, defines your rights
as holders of the trust preferred securities. You may request copies of the
trust declarations from us. We have filed the trust declarations as exhibits to
the registration statement that includes this prospectus, and you can obtain
copies of the trust declarations from the sources described under "Where You Can
Find More Information."
GENERAL
The trusts will issue the trust preferred securities in fully registered
form, not in bearer form, without interest coupons.
The USD trust preferred securities represent undivided beneficial ownership
interests in the assets of Trust IV and the Euro trust preferred securities
represent undivided beneficial ownership interests in the assets of Trust V, and
entitle you to a preference, in certain circumstances with respect to
distributions and amounts payable on redemption or liquidation, over the common
securities of the applicable trust.
Neither trust declaration permits a trust to:
- issue any securities other than the old trust preferred securities, the
common securities and the trust preferred securities to be issued by the
trusts in the exchange offers, or
- incur any indebtedness.
We own all of the common securities of each trust. The common securities
rank equally, and payments will be made on the common securities pro rata, with
the trust preferred securities except as described below under "-- Subordination
of Common Securities." The preferred trustee will own the notes and hold them
for your benefit and for our benefit as holder of the common securities of each
trust. Each trust guarantee is a full and unconditional guarantee with respect
to the USD or Euro trust preferred securities, but does not guarantee payment of
distributions or amounts payable on redemption or liquidation of such trust
preferred securities when the relevant trust does not have funds available to
make those payments. See "Description of the Trust Guarantee."
DISTRIBUTIONS
Distributions on the trust preferred securities will be fixed at the rates
per annum of 7 7/8 of the stated liquidation amount of $1,000 per USD trust
preferred security and 7 3/8% of the stated liquidation amount of E1,000 per
Euro trust preferred security. Distributions in arrears for more than one
quarter, and interest on such distributions, will accrue interest, compounded
quarterly, at the same rates. The term "distributions" as used in this
prospectus includes any such distributions payable unless otherwise stated. The
amount of distributions payable for any period will be computed on the basis of
a 360-day year of twelve 30-day months.
Distributions on the trust preferred securities will be cumulative, will
accrue from the date of initial issuance and will be payable quarterly in
arrears on each March 15, June 15, September 15, and December 15, commencing
September 15, 2001, when, as and if available for payment.
Distributions on the trust preferred securities must be paid quarterly on
the dates payable to the extent that the applicable trust has funds available
for the payment of these distributions. The funds
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available for distribution to the holders of the USD or the Euro trust preferred
securities will be limited to payments received from the note issuer on the
notes held by the applicable trust. See "Description of the Notes." Fresenius
Medical Care will guarantee each trust's payment of distributions, to the extent
of available funds of each trust, as set forth under "Description of the Trust
Guarantee."
Distributions on the trust preferred securities will be payable to the
holders of the securities as they appear on the books and records of each trust
on the relevant record dates, which will be 15 days prior to the relevant
payment dates. Subject to any applicable laws and regulations and the provisions
of each trust declaration, each payment will be made as described under "-- Same
Day Settlement and Payment" below. If any date on which distributions are
payable on the trust preferred securities is not a "business day," payment of
the distribution payable on that date will be made on the next succeeding day
which is a business day (without any distribution or other payment in respect of
any such delay) except that, if that business day is in the next succeeding
calendar year, the payment shall be made on the immediately preceding business
day, in each case with the same force and effect as if made on that date. A
business day means
- for the USD trust preferred securities, any day other than a day on which
banking institutions in New York City, Frankfurt am Main or Luxembourg
are authorized or required by law to close, and,
- for the Euro trust preferred securities any day other than a day on which
banking institutions in New York City, London, Frankfurt am Main or
Luxembourg are, or on which the Trans-European Automated Real-Time
Gross-settlement Express Transfer System is, authorized or required by
law to close.
TAX EVENT OR INVESTMENT COMPANY EVENT REDEMPTION OR DISTRIBUTION
If a "tax event", which is defined in the paragraph below, with respect to
a trust occurs and is continuing, we will cause the trustees to dissolve and,
after satisfaction of liabilities to creditors, liquidate that trust. The
dissolving trust will then distribute the USD or Euro notes, as applicable, to
the holders of its trust preferred securities and to us as holder of the common
securities, within 90 days following the occurrence of the tax event. However,
the liquidation and distribution will be conditioned on:
(a) the trustees' receipt of an opinion of nationally recognized
independent tax counsel experienced in such matters to the effect that you
will not recognize any income, gain or loss for U.S. federal income tax
purposes as a result of the liquidation and distribution of the notes, and
(b) the note issuer being unable to avoid the tax event within the
90-day period by taking some ministerial action or pursuing some other
reasonable measure that will have no adverse effect on the trust, the note
issuer or you, and will involve no material cost.
In the event that:
- we receive an opinion of nationally recognized independent U.S. or German
tax counsel or advisors or nationally recognized independent counsel or
advisors of the note issuer's jurisdiction of formation (currently
Luxembourg), that as a result of a tax event, there is more than an
insubstantial risk that the note issuer or we would be precluded from
deducting the interest on notes, for U.S. federal or German income tax
purposes, or for purposes of any income tax imposed by the note issuer's
jurisdiction of formation (currently Luxembourg), even after the notes
were distributed to you upon liquidation of the trust as described above,
or
- tax counsel informs the trustees that it cannot deliver to the trustees
an opinion referred to under (a) above;
the note issuer will have the right, upon not less than 30 nor more than 60
days' notice and within 90 days following the occurrence of the tax event, to
redeem all of its notes, for cash, at 100% of their principal amount plus
accrued and unpaid interest. The trust will then redeem all the common
securities and
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preferred trust securities of the dissolving trust at the liquidation amount of
$1,000 or E1,000 per common security and trust preferred security, as
applicable, plus accrued and unpaid distributions.
However, if the note issuer or the affected trust has the opportunity to
eliminate, within this 90-day period, the tax event by taking some ministerial
action or pursuing some other reasonable measure that will have no adverse
effect on the trust, the note issuer or you, and will involve no material cost,
the trust or the note issuer will pursue that measure instead of redemption. See
"Mandatory Redemption." Instead of the foregoing options, we will also have the
option of causing the USD or Euro trust preferred securities to remain
outstanding and causing the note issuer to pay additional interest. See
"Description of the Notes -- Additional Amounts."
For the purposes of the trust preferred securities and the notes, a "tax
event" occurs when Fresenius Medical Care obtains an opinion of nationally
recognized tax counsel with respect to a trust to the effect that, as a result
of:
- any amendment to, or change (including any announced prospective change)
in, the laws or the underlying regulations pertaining to such laws of the
United States, Germany or the note issuer's jurisdiction of formation
(currently Luxembourg), or any political subdivision or taxing authority
in such jurisdictions (other than any amendment or change implementing,
complying with, or introduced in order to conform to, or otherwise
arising as a result of or in connection with, any European Union
Directive on the taxation of savings implementing the conclusions of the
ECOFIN Council meeting of 26-27 November 2000), or
- any amendment to or change in an interpretation or application of such
laws or regulations by any legislative body, court, governmental agency
or regulatory authority, including the enactment of any legislation and
the publication of any judicial decision or regulatory determination on
or after the date of issuance of the trust preferred securities, but not
including any amendment or change implementing, complying with, or
introduced in order to conform to, or otherwise arising as a result of or
in connection with, any European Union Directive on the taxation of
savings implementing the conclusions of the ECOFIN Council meeting of
26-27 November 2000, which is effective or is announced on or after the
date of issuance of the trust preferred securities, and there is more
than an insubstantial risk that:
- the trust is, or will be within 90 days after the date of opinion of
counsel, subject to U.S. federal or German income tax, or income tax
in the note issuer's jurisdiction of formation (currently Luxembourg),
in each case, with respect to interest received or accrued on the
notes,
- interest payable by the note issuer on the notes is not, or within 90
days after the date of the opinion of counsel, will not be, deductible
by the note issuer or by us, in whole or in part for U.S. federal or
German income tax purposes, or for purposes of any income tax imposed
by the note issuer's jurisdiction of formation (currently Luxembourg),
or
- the trust is, or will be within 90 days after the date of such opinion
of counsel, subject to more than a de minimis amount of other taxes,
duties, assessments or other governmental charges of whatever nature
imposed by the United States, Germany or the note issuer's
jurisdiction of formation (currently Luxembourg), or any other taxing
authority.
If an "investment company event" with respect to a trust occurs and is
continuing, Fresenius Medical Care shall cause the trustees to dissolve and,
after satisfaction of liabilities to creditors, liquidate that trust and have
the USD or Euro notes distributed to holders of the USD or Euro trust preferred
securities as applicable, and to us as holder of the common securities within 90
days following the occurrence of the investment company event.
For purposes of the trust preferred securities and the notes, "investment
company event" means receipt by Fresenius Medical Care of an opinion of counsel,
having a nationally recognized tax and securities practice, with respect to a
trust to the effect that, as a result of the occurrence of a change in
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law or regulation or a change in interpretation or application of law or
regulation by any legislative body, court, governmental agency or regulatory
authority, which change in law becomes effective on or after the date of
issuance of the trust preferred securities, that trust is or will be considered
an "investment company" which is required to be registered under the U.S.
Investment Company Act of 1940.
After the date fixed for any distribution of USD notes or Euro notes:
- the distributing trust's trust preferred securities will no longer be
deemed to be outstanding,
- DTC, or its nominee, as the record holder of the USD global certificates,
or Deutsche Bank AG London, as common depositary for Euroclear and
Clearstream, Luxembourg, or its nominee, as the record holder of the Euro
global certificates, will receive registered global certificates
representing the USD or Euro notes to be delivered upon such
distribution, and
- any certificates representing USD trust preferred securities not held by
DTC or its nominee, or Euro trust preferred securities not held by
Deutsche Bank AG London as common depositary for Euroclear and
Clearstream, Luxembourg or its nominee, will be deemed to represent the
USD or Euro notes, as applicable, having a principal amount equal to the
aggregate of the stated liquidation amount of such trust preferred
securities, with accrued and unpaid interest equal to the amount of
accrued and unpaid distributions on such trust preferred securities,
until such certificates are presented to the note issuer or its agent for
transfer or reissuance.
The distribution by a trust of the USD or Euro notes will effectively
result in the cancellation of the distributing trust's preferred securities.
MANDATORY REDEMPTION
The notes will mature on June 15, 2011 and we may redeem them at any time
in certain circumstances upon the occurrence of a tax event. Upon the repayment
of the USD or Euro notes, whether at maturity, upon redemption, by declaration
or otherwise, after satisfaction of the liabilities of the applicable trust, we
will apply the proceeds from such repayment or redemption simultaneously to
redeem the common securities and preferred trust securities of that trust having
an aggregate liquidation amount equal to the principal amount of notes repaid or
redeemed. However, the trust conducting the redemption will give us, as holder
of the common securities, not less than 30 nor more than 60 days' notice of such
redemption. See "-- Tax Event or Investment Company Event Redemption or
Distribution" and "Description of the Notes -- General."
CHANGE OF CONTROL REDEMPTION
A holder of common securities or preferred trust securities has the right
to require the applicable trust to redeem all or any part of that holder's
common securities or preferred trust securities upon the occurrence of a Change
of Control Triggering Event, as defined under "Description of Notes -- Certain
Definitions," at a redemption price equal to 101% of the liquidation amount plus
any accrued and unpaid distributions. Upon the occurrence of such an event, the
trust will exercise its right to require the note issuer to redeem USD or Euro
notes in an amount equal to the USD or Euro trust preferred securities and
common securities, as applicable, to be redeemed. See "Description of the
Notes -- Change of Control."
REDEMPTION PROCEDURES
A trust will not redeem its trust preferred securities unless all accrued
and unpaid distributions have been paid on such trust preferred securities for
all quarterly distribution periods terminating on or prior to the date of
redemption.
Notice of redemption by a trust in respect of its trust preferred
securities is irrevocable. If a trust gives a notice of redemption in respect of
its trust preferred securities, then by 12:00 noon, New York City time, for the
USD trust preferred securities, or 12:00 noon Central European time for the Euro
trust
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preferred securities, on the redemption date, the trust conducting the
redemption will irrevocably deposit with the paying agent for payment to DTC for
the USD trust preferred securities, or to the common depositary for Euroclear
and Clearstream, Luxembourg, for the Euro trust preferred securities, funds
sufficient to pay the amount payable on redemption. The trust will instruct the
paying agent to give DTC or the common depositary for Euroclear and Clearstream,
Luxembourg, as applicable, irrevocable instructions and authority to pay such
amount in respect of the trust preferred securities which are represented by
global certificates to be redeemed. The trust will irrevocably deposit with the
paying agent for its trust preferred securities funds sufficient to pay that
amount in respect of any certificated trust preferred securities and will give
the paying agent irrevocable instructions and authority to pay that amount to
any holders of certificated trust preferred securities upon surrender of their
certificates.
Notwithstanding the foregoing, each trust will pay, on the relevant record
dates, any distributions payable on or prior to the redemption date for its
trust preferred securities called for redemption. If a trust gives notice of
redemption and deposits funds as required, then upon the date of the deposit,
all rights of the holders of the trust preferred securities called for
redemption will cease, except the right to receive the redemption price and any
distributions payable on or prior to the date of redemption, but without
interest on the redemption price. In the event that any date fixed for
redemption of trust preferred securities is not a business day, then payment of
the amount payable on that date will be made on the next succeeding day which is
a business day (without any interest or other payment in respect of any such
delay), except that, if such business day falls in the next calendar year, such
payment will be made on the immediately preceding business day. In the event
that the conducting the redemption trust improperly withholds or refuses to pay
the redemption price in respect of its trust preferred securities to be
redeemed, distributions on those trust preferred securities will continue to
accrue at the then applicable rate, from the original redemption date to the
date of payment. In that case the actual payment date will be considered the
date fixed for redemption for purpose of calculating the amount payable upon
redemption (other than for purposes of calculating any premium).
The trust conducting the redemption will mail notice of any redemption to
holders of its trust preferred securities and us as holder of its common
securities. In the case of the trust preferred securities, the trust will mail
the notice at least 30 days but not more than 60 days before the date of the
redemption. Unless the note issuer defaults in payment of the redemption price
on the USD or Euro notes, as applicable, on and after the date of the
redemption, interest shall cease to accrue on the USD or Euro notes, as
applicable, or portions thereof (and distributions will cease to accrue on the
related trust preferred securities or portions thereof) called for redemption.
We may at any time and from time to time purchase outstanding trust
preferred securities by tender, in the open market or by private agreement,
subject to our obligations described in this section and under the indentures
for the notes and applicable law including U.S. federal securities laws.
SUBORDINATION OF COMMON SECURITIES
Each trust will make distribution payments and any other payments due upon
redemption or liquidation of its common securities and trust preferred
securities, on a pro rata basis. However, if on any distribution date or
redemption date an event of default under its trust declaration, the indenture
for the USD or Euro notes or the applicable trust guarantee has occurred and is
continuing, a trust will not make any payment of any distribution on, or amount
payable upon redemption of, any common security, and will not make any other
payment on account of the redemption, liquidation or other acquisition of the
common securities, unless it has made payment in full in cash of accumulated and
unpaid distributions on all its outstanding trust preferred securities for all
distribution periods terminating on or prior to the date of payment, or in the
case of payment of the amount payable upon redemption of such trust preferred
securities, it has made or provided for the full amount of such payment in
respect of all its outstanding trust preferred securities, and all funds
available to the preferred trustee shall first be applied to the payment in full
in cash of all distributions on, or the amount payable upon redemption of, its
trust preferred securities then due and payable.
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In the case of any event of default referred to in the previous paragraph
we, as holder of the common securities of a trust, will be deemed to have waived
the event of default until all such events of default with respect to the USD or
Euro trust preferred securities of that trust have been cured, waived or
otherwise eliminated. Until any events of default with respect to such trust
preferred securities have been so cured, waived or otherwise eliminated, the
trustees shall act solely on behalf of the holders of those trust preferred
securities and not on our behalf as holder of the common securities and only the
holders of those trust preferred securities will have the right to direct the
trustees to act on their behalf.
LIQUIDATION DISTRIBUTION UPON DISSOLUTION
In the event of any voluntary or involuntary dissolution, winding up or
termination of a trust, the holders of that trust's trust preferred securities
and we, as holder of its common securities, will be entitled to receive out of
the assets of that trust available for distribution, after satisfaction of
liabilities to creditors of the trust, an amount equal to the aggregate of the
stated liquidation amount of $1,000 per USD trust security or E1,000 per Euro
trust security, plus accrued and unpaid distributions on such trust securities
to the date of payment. You will not be entitled to receive such a distribution
if, in connection with such dissolution, winding up or termination, USD or Euro
notes as applicable, in an aggregate principal amount equal to such distribution
have been given on a pro rata basis to you. If such distribution can be paid
only in part because a trust has insufficient assets available to pay in full
the aggregate distribution, then the amounts payable directly by the dissolving
or terminating trust on its trust preferred securities shall be paid on a pro
rata basis. We, as holder of the common securities of each trust will be
entitled to receive distributions upon each trust's liquidation pro rata with
you, except that if an event of default has occurred and is continuing, the
trust preferred securities shall have a priority over the common securities.
Under each trust declaration, a trust will be dissolved and its affairs
will be wound up upon the earliest to occur of the following:
- December 31, 2030, the expiration of the term of each trust,
- our bankruptcy, liquidation or dissolution,
- the revocation of our charter and the expiration of 90 days after the
date of revocation without a reinstatement of our charter,
- the entry of a decree of judicial dissolution of the trust by a court of
competent jurisdiction,
- the distribution of all of the trust property (as defined in the trust
declaration),
- the written direction from us, as sponsor, to the preferred trustee at
any time to terminate the trust and cause the note issuer to distribute
the USD or Euro notes in exchange for the USD or Euro trust preferred
securities, as applicable,
- the redemption of all of the USD or Euro trust preferred securities in
connection with the redemption of all of the USD or Euro notes, as
applicable,
- subject to conditions specified under "-- Tax Event or Investment Company
Event Redemption or Distribution," the occurrence of a "tax event," and
- the occurrence of an "investment company event."
MERGER, CONSOLIDATION OR AMALGAMATION OF THE TRUSTS
Neither trust may consolidate, amalgamate, merge with or into, or be
replaced by, or convey, transfer or lease its properties and assets
substantially as an entirety to any corporation or other person, except as
described below. A trust may, without your consent, consolidate, amalgamate,
merge with or into, or be
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replaced by, or convey, transfer or lease its properties and assets
substantially as an entirety to, a trust organized as such under the laws of any
state of the United States of America so long as:
(a) if the trust is not the survivor, the successor entity either
(1) expressly assumes all of the obligations of the trust under its
common securities and trust preferred securities, or
(2) substitutes for the trust's common securities and trust
preferred securities other securities ("successor securities") having
substantially the same terms as the common and trust preferred
securities, as long as the successor securities rank the same as the
common securities and trust preferred securities with respect to
distributions and payments upon liquidation, redemption and otherwise,
(b) the note issuer expressly appoints a trustee of the successor
entity that possesses substantially the same powers and duties possessed by
the preferred trustee as the holder of the USD or Euro notes, as
applicable,
(c) the USD or Euro trust preferred securities, as applicable, or any
successor securities are listed, or any successor securities will be listed
upon notification of issuance, on any national securities exchange or other
organization on which the USD or Euro trust preferred securities, as
applicable, are then listed,
(d) the merger, consolidation, amalgamation, replacement, conveyance,
transfer or lease does not cause the USD or Euro trust preferred
securities, as applicable, including any successor securities, to be
downgraded by any nationally recognized statistical rating organization,
(e) the merger, consolidation, amalgamation, replacement, conveyance,
transfer or lease does not adversely affect the rights, preferences and
privileges of the holders of the USD or Euro trust preferred securities, as
applicable or those of the holders of the common securities, including any
successor securities, in any material respect,
(f) the successor entity has a purpose substantially identical to that
of the trust,
(g) we have provided a guarantee to the holders of the successor
securities with respect to the successor entity having substantially the
same terms as the applicable trust guarantee, and
(h) prior to the merger, consolidation, amalgamation, replacement,
conveyance, transfer or lease, the note issuer has received an opinion of
nationally recognized independent counsel to the trust experienced in such
matters to the effect that
(1) the successor entity will be treated as a grantor trust for
U.S. federal income tax purposes or otherwise as an entity that is not
subject to U.S. federal income tax at the entity level and the assets
and income of which are treated for U.S. federal income tax purposes as
held and derived directly by holders of interests in the entity,
(2) following the merger, consolidation, amalgamation, replacement,
conveyance, transfer or lease, neither the trust nor the successor
entity will be required to register as an investment company under the
Investment Company Act and
(3) the merger, consolidation, amalgamation, replacement,
conveyance, transfer or lease will not adversely affect the rights,
preferences, privileges and limited liability of the USD or Euro trust
preferred securities as applicable in any material respect.
Notwithstanding these conditions, a trust will not, except with the consent
of the holders of 100% in liquidation amount of the common securities and USD or
Euro preferred trust securities, as applicable, consolidate, amalgamate, merge
with or into, be replaced by, convey, transfer or lease its properties and
assets substantially as an entirety to, any other entity or permit any other
entity to consolidate, amalgamate, merge with or into or replace it, if such
consolidation, amalgamation, merger, replacement, conveyance, transfer or lease
would cause the trust or the successor entity to be classified as other than a
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grantor trust for U.S. federal income tax purposes or another entity which is
not subject to U.S. federal income tax at the entity level and the assets and
income of which are treated for U.S. federal income tax purposes as held and
derived directly by holders of interests in the entity.
DECLARATION EVENTS OF DEFAULT
An event of default under an indenture, or a default by Fresenius Medical
Care under a trust guarantee constitutes an event of default under the related
trust declaration with respect to the common securities and USD or Euro trust
preferred securities, as applicable. However, under the trust declaration of
each trust, we, as holder of the common securities of a trust, will be deemed to
have waived any event of default under the trust declaration with respect to
such common securities until all events of default under the trust declaration
with respect to the trust preferred securities of the trust have been cured,
waived or otherwise eliminated. Until that time, the preferred trustee will be
deemed to be acting solely on behalf of the holders of the trust preferred
securities of the trust and only the holders of the trust preferred securities
will have the right to direct the preferred trustee with respect to certain
matters under the applicable trust declaration and, therefore, the related
indenture.
If an event of default has occurred and is continuing under a trust
declaration and is attributable to the failure of the note issuer to pay
interest on or principal of the USD or Euro notes on the date such interest or
principal is otherwise payable (including, for the avoidance of doubt, any
failure of the note issuer to pay additional amounts in respect of the notes),
or in the case of redemption, the redemption date, then holders of not less than
25% in liquidation amount of outstanding USD or Euro trust preferred securities,
as applicable, have the right to appoint a special trustee to act on their
behalf. The special trustee appointed in accordance with the preceding sentence
will represent all of the holders of the USD or Euro trust preferred securities,
as applicable, unless the holders of at least a majority in liquidation amount
of such outstanding trust preferred securities appoint an alternative special
trustee in which case the special trustee appointed in accordance with the
preceding sentence will be required to resign as special trustee. At no time can
there be more than one special trustee acting on behalf of the holders of the
USD or Euro trust preferred securities, as applicable. The special trustee will
have the right to directly institute a proceeding against the note issuer for
enforcement of payment of the principal of or interest on the USD or Euro notes,
having a principal amount equal to the aggregate liquidation amount of USD or
Euro trust preferred securities, as applicable. In connection with any such
action, the note issuer will be subrogated to the rights of the holders of the
trust preferred securities under the applicable trust declaration to the extent
of any payment made by the note issuer to those holders in the action. If the
preferred trustee or the special trustee do not enforce such payment
obligations, the holders of the USD or Euro trust preferred securities will have
the right, to the fullest extent permitted by law, to bring an action on behalf
of the applicable trust to enforce the trust's rights under the USD or Euro
notes, as applicable, and the related indenture. The holders of trust preferred
securities will not be able to exercise directly any other remedy available to
the holders of the notes.
Upon the occurrence of an event of default under a trust declaration, the
preferred trustee, as the sole holder of the USD or Euro notes, as applicable,
will have the right under the applicable indenture to declare the principal of
and interest on the USD or Euro notes to be immediately due and payable. The
note issuer and the trusts are each required to file annually with the preferred
trustee an officers' certificate as to its compliance with all conditions and
covenants under the trust declaration.
VOTING RIGHTS
Except as described in this section and under "Description of the Trust
Guarantee -- Amendments and Assignment" and as provided in the Delaware Business
Trust Act and the Trust Indenture Act and as otherwise required by law and the
applicable trust declaration, you will have no voting rights.
Subject to the requirement that the preferred trustee obtain a tax opinion
in certain circumstances set forth in the last sentence of the following
paragraph, the holders of a majority in aggregate liquidation amount of the USD
or Euro trust preferred securities, as applicable, have the right to direct the
time, method and place of conducting any proceeding for any remedy available to
the preferred trustee, or direct
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the exercise of any trust or power conferred upon the preferred trustee under
the applicable trust declaration including the right to direct the preferred
trustee, as holder of the USD or Euro notes, to:
- exercise the remedies available under the applicable indenture with
respect to the USD or Euro notes,
- waive any past event of default that is waivable under the applicable
indenture,
- exercise any right to rescind or annul a declaration that the principal
of all USD or Euro notes will be due and payable, or
- consent to any amendment, modification, or termination of an indenture or
the related notes where such consent will be required.
However, if a consent or action under an indenture would require the consent or
act of the holders of more than a majority of the aggregate principal amount of
the USD or Euro notes affected thereby, only the holders of the percentage of
the aggregate stated liquidation amount of the USD or Euro trust preferred
securities, as applicable, which is at least equal to the percentage required
under the applicable indenture may direct the preferred trustee to give consent
or take action. Also, we cannot amend either indenture in any way which would
cause the applicable trust to fail or cease to be classified for purposes of
U.S. federal income taxation as other than a grantor trust or other entity which
is not subject to U.S. federal income tax at the entity level and the assets and
income of which are treated for U.S. federal income tax purposes as held and
derived directly by holders of interests in the entity. The trustees may not
revoke any action that the holders of the USD or Euro trust preferred securities
previously authorized or approved by their vote except by subsequent vote by
them. If the preferred trustee or the special trustee fails to enforce its
rights under the USD or Euro notes to receive interest or principal on those
notes on the date the interest or principal is otherwise payable (or in the case
of redemption, the redemption date), the holders of USD or Euro trust preferred
securities, as applicable may institute a legal proceeding on behalf of the
applicable trust against the note issuer to enforce the trust's rights under the
notes without first instituting any legal proceeding against the preferred
trustee or any other person or entity. The holders of trust preferred securities
would not be able to exercise directly any other remedies available to the
holders of the notes unless the preferred trustee or the indenture trustee,
acting for the benefit of the preferred trustee, fails to do so. In that case,
the holders of at least 25% in aggregate liquidation amount of outstanding USD
or Euro trust preferred securities, as applicable, to the fullest extent
permitted by law, have a right to institute such proceedings.
The preferred trustee will notify the holders of USD or Euro trust
preferred securities, of any notice of default received from the indenture
trustee with respect to the related notes. The notice will state that the event
of default also constitutes an event of default under the applicable
declaration. Except with respect to directing the time, method and place of
conducting a proceeding for a remedy, the preferred trustee will not take any of
the actions described above unless the preferred trustee has obtained an opinion
of tax counsel to the effect that, as a result of such action, the applicable
trust will not fail to be classified as a grantor trust for U.S. federal income
tax purposes or another entity which is not subject to U.S. federal income tax
at the entity level and the assets and income of which are treated for U.S.
federal income tax purposes as held and derived directly by holders of interests
in the entity.
In the event the consent of the preferred trustee, as the holder of the USD
or Euro notes, is required under the applicable indenture with respect to any
amendment, modification or termination of that indenture, the preferred trustee
shall request the direction of the holders of USD or Euro trust preferred
securities, with respect to that amendment, modification or termination and will
vote with respect to the amendment, modification or termination as directed by a
majority in liquidation amount of the USD or Euro trust preferred securities.
However, if a consent under an indenture would require the consent of the
holders of more than a majority of the aggregate principal amount of the USD or
Euro notes, the preferred trustee may only give that consent at the direction of
the holders of at least the same proportion in aggregate stated liquidation
amount of USD or Euro trust preferred securities. Also, we may not amend either
indenture in any way which would cause the trust under the related declaration
to fail or cease to be
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classified for purposes of U.S. federal income taxation as other than a grantor
trust or other entity which is not subject to U.S. federal income tax at the
entity level and the assets and income of which are treated for U.S. federal
income tax purposes as held and derived directly by holders of interests in the
entity. The preferred trustee will not take any such action in accordance with
the directions of the holders of trust preferred securities unless the preferred
trustee has obtained an opinion of tax counsel to the effect that for the
purposes of U.S. federal income tax the applicable trust will not be classified
as other than a grantor trust or another entity which is not subject to U.S.
federal income tax at the entity level and the assets and income of which are
treated for U.S. federal income tax purposes as held and derived directly by
holders of interests in the entity.
A waiver of an event of default under an indenture will constitute a waiver
of the corresponding event of default under the related trust declaration.
The holders of USD or Euro trust preferred securities may give any required
approval or direction at a separate meeting of holders of those trust preferred
securities convened for such purpose, at a meeting of all of the holders of
common and USD or Euro trust preferred securities or pursuant to written
consent. The trustees will cause a notice of any meeting at which the holders of
trust preferred securities are entitled to vote, or of any matter upon which
action by written consent of those holders is to be taken, to be mailed to each
holder of record of the applicable trust preferred securities. Each notice will
include a statement setting forth the following information:
- the date of such meeting or the date by which the action is to be taken,
- a description of any resolution proposed for adoption at the meeting on
which the holders are entitled to vote or of the matter upon which
written consent is sought, and
- instructions for the delivery of proxies or consents.
No vote or consent of the holders of trust preferred securities will be
required for a trust to redeem and cancel its trust preferred securities or
distribute the USD or Euro notes in accordance with the applicable trust
declaration.
In any case in which the holders of trust preferred securities are entitled
to vote or consent under any of the circumstances described above, any of the
trust preferred securities:
- that we own,
- that any entity that we directly or indirectly control owns, or
- that any entity under direct or indirect common control with us owns,
will not be entitled to vote or consent and will, for purposes of this vote or
consent, be treated as if the trust preferred securities which these persons own
were not outstanding.
The procedures for you to exercise your voting rights are described below.
See "-- Book-Entry, Delivery and Form" below.
You will have no rights to appoint or remove, or increase or decrease the
number of, the trustees, who may be appointed, removed or replaced, increased or
decreased solely by us as the holder of all of the common securities.
MODIFICATION OF THE TRUST DECLARATIONS
The trustees, the note issuer and we may modify a trust declaration.
However, if any proposed amendment provides for, or the trustees, the note
issuer or we otherwise propose to:
(a) take any action that would adversely affect the powers,
preferences or special rights of the common securities and trust preferred
securities issued under a declaration of trust, whether by way of amendment
to the trust declaration or otherwise, or
(b) dissolve, wind up or terminate a trust other than under the terms
of its trust declaration,
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then we, as holder of the common securities, and the holders of the trust
preferred securities of that trust, voting together as a single class will be
entitled to vote on the amendment or proposal and the amendment or proposal will
not be effective except with the approval of at least a majority in liquidation
amount of the common securities and trust preferred securities affected by such
amendment or proposal. However, if any amendment or proposal referred to in
clause (a) above would adversely affect only the preferred securities or the
common securities, as the case may be, of that trust, then only the affected
class will be entitled to vote on the amendment or proposal and the amendment or
proposal will not be effective except with the approval of at least a majority
in liquidation amount of the applicable class of securities.
Notwithstanding the foregoing, no amendment or modification may be made to
a trust declaration if the amendment or modification would:
- cause the applicable trust to be classified for purposes of U.S. federal
income taxation as other than a grantor trust or another entity which is
not subject to U.S. federal income tax at the entity level and the assets
and income of which are treated for U.S. federal income tax purposes as
held and derived directly by holders of interests in the entity,
- reduce or otherwise adversely affect the powers of the trustees, or
- cause the applicable trust, to be deemed an "investment company" which is
required to be registered under the Investment Company Act.
BOOK-ENTRY, DELIVERY AND FORM
The trust preferred securities will be represented by two or more
certificates in registered, global form without interest coupons (the "USD
global certificate" and the "Euro global certificate," respectively, and
collectively, the "global certificates"). The USD global certificate will be
deposited upon issuance with the preferred trustee as custodian for DTC and
registered in the name of DTC or its nominee, for credit to an account of a
direct or indirect participant in DTC as described below. The Euro global
certificate will be deposited upon issuance with Deutsche Bank AG London as
common depositary for Morgan Guaranty Trust Company of New York, Brussels
Office, operator of Euroclear S.A./N.V. and Clearstream Banking societe anonyme,
and registered in the name of BT Globenet Nominees Limited as nominee for the
common depositary, for credit to an account of a direct or indirect participant
in Euroclear or Clearstream, Luxembourg as described below. The Euro trust
preferred securities will not be registered with DTC or any nominee thereof.
Except as described below, the USD global certificate may be transferred,
in whole and not in part, only to another nominee of DTC or to a successor of
DTC or its nominee, and the Euro global certificate may be transferred, in whole
and not in part, only by Euroclear and Clearstream, Luxembourg, to the common
depositary, as the case may be, or by the common depositary to Euroclear and
Clearstream, Luxembourg, respectively, or to another nominee or successor
thereof or a nominee of such successor. Beneficial interests in the global
certificates may not be exchanged for trust preferred securities in certificated
form except in the limited circumstances described below. See "-- Certificated
Securities." Except in the limited circumstances described below, owners of
beneficial interests in the global certificates will not be entitled to receive
physical delivery of trust preferred securities in certificated form.
Transfers of beneficial interests in the USD global certificate will be
subject to the applicable rules of DTC and its direct or indirect participants
(including, if applicable, those of Euroclear and Clearstream, Luxembourg).
Transfers of beneficial interests in the Euro global certificate will be subject
to the applicable rules and procedures of Euroclear and Clearstream, Luxembourg
and their direct or indirect participants (including, if applicable, those of
DTC). In each case, these procedures may change from time to time.
Cross-market transfers of beneficial interests in the USD global
certificate between the participants in DTC, on the one hand, and Euroclear or
Clearstream, Luxembourg participants, on the other hand, will be effected
through DTC in accordance with DTC's rules on behalf of Euroclear or
Clearstream, Luxembourg by its respective depositary; however, such cross-market
transactions will require delivery of instructions to
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Euroclear or Clearstream, Luxembourg by the counterparty in such system in
accordance with the rules and procedures and within the established deadlines
(Brussels time) of such system. Euroclear or Clearstream, Luxembourg will, if
the transaction meets its settlement requirements, deliver instructions to its
respective depositary to take action to effect final settlement on its behalf by
delivering or receiving interests in the relevant global certificate in DTC, and
making or receiving payment in accordance with normal procedures for same-day
funds settlement applicable to DTC. Euroclear participants and Clearstream,
Luxembourg participants may not deliver instructions directly to the
depositories for Euroclear or Clearstream, Luxembourg.
Cross-market transfers of beneficial interests in the Euro global
certificate between the participants in Euroclear and Clearstream, Luxembourg,
on the one hand, and DTC participants, on the other hand, will be effected
through Euroclear and Clearstream, Luxembourg in accordance with Euroclear and
Clearstream, Luxembourg's rules on behalf of DTC; however, such cross-market
transactions will require delivery of instructions to DTC by the counterparty in
such system in accordance with the rules and procedures and within the
established deadlines (New York City time) of such system. DTC will, if the
transaction meets its settlement requirements, take action to effect final
settlement by delivering or receiving interests in the relevant global
certificate in Euroclear and Clearstream, Luxembourg, and making or receiving
payment in accordance with normal procedures for same-day funds settlement
applicable to Euroclear and Clearstream, Luxembourg.
DEPOSITARY PROCEDURES
The following description of the operations and procedures of DTC,
Euroclear and Clearstream, Luxembourg are provided solely as a matter of
convenience. We have obtained the information in these descriptions from sources
we and the trusts believe to be reliable, but neither we nor the trusts takes
responsibility for the accuracy of this information. The operations and
procedures of these clearing systems are solely within the control of the
respective settlement systems. Although DTC, Euroclear and Clearstream,
Luxembourg have agreed to the foregoing procedures to facilitate transfers of
interests in the USD and Euro global certificates between their own participants
and among participants in DTC, Euroclear and Clearstream, Luxembourg, they are
under no obligation to perform or to continue to perform such procedures, and
may discontinue such procedures at any time. Neither we nor the preferred
trustee nor any of our respective agents will have any responsibility for the
performance by DTC, Euroclear or Clearstream or their respective participants or
indirect participants of their respective obligations under the rules and
procedures governing their operations. We urge you to contact the system or
their participants directly to discuss these matters.
DTC PROCEDURES
DTC has advised us that DTC is a limited-purpose trust company created to
hold securities for its participating organizations and to facilitate the
clearance and settlement of transactions in those securities between
participants through electronic book-entry changes in accounts of its
participants. DTC participants include securities brokers and dealers (including
the initial purchasers of the old trust preferred securities), banks, trust
companies, clearing corporations and certain other organizations. Access to
DTC's system is also available to other entities such as banks, brokers, dealers
and trust companies that clear through or maintain a custodial relationship with
a participant, either directly or indirectly; these entities are referred to in
this prospectus as DTC's indirect participants. Persons who are not participants
may beneficially own securities held by or on behalf of DTC only through the
participants or the indirect participants. The ownership interests in, and
transfers of ownership interests in, each security held by or on behalf of DTC
are recorded on the records of its participants and indirect participants.
DTC has also advised us that, pursuant to procedures established by it:
(1) upon deposit of the global USD certificate, DTC will credit the
accounts of its participants with portions of the liquidation amount of the USD
global certificate; and
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(2) ownership of these interests in the global certificate will be shown
on, and the transfer of ownership of these interests will be effected only
through, records maintained by DTC (with respect to the participants) or by the
participants and the indirect participants (with respect to other owners of
beneficial interest in the USD global certificate).
Investors in the USD global certificate who are participants in DTC's
system may hold their interests in the certificates directly through DTC.
Investors in the USD global certificate who are not participants may hold their
interests in the certificate indirectly through organizations (including
Euroclear and Clearstream, Luxembourg) which are DTC participants. Euroclear and
Clearstream, Luxembourg will hold interests in the USD global certificate on
behalf of their participants through customers' securities accounts in their
respective names on the books of their respective depositories, which are Morgan
Guaranty Trust Company of New York, Brussels office, as operator of Euroclear,
and Citibank, N.A., as operator of Clearstream, Luxembourg. All interests in the
USD global certificate, including those held through Euroclear or Clearstream,
Luxembourg, may be subject to the procedures and requirements of DTC. Those
interests held through Euroclear or Clearstream, Luxembourg may also be subject
to the procedures and requirements of those systems. The laws of some states
require that certain persons take physical delivery in definitive form of
securities that they own. Consequently, the ability to transfer beneficial
interests in a global certificate to such persons will be limited to that
extent. Because DTC can act only on behalf of participants, which in turn act on
behalf of indirect participants, your ability to pledge your beneficial interest
in a global certificate to persons that do not participate in the DTC system, or
otherwise take actions in respect of those interests, may be affected by the
lack of a physical certificate evidencing the beneficial interests.
Except as described below you, as an owner of interest in the USD global
certificates will not have USD trust preferred securities registered in your
name, will not receive physical delivery of USD trust preferred securities in
certificated form and will not be considered the registered owner of the USD
trust preferred security under the Trust IV trust declaration for any purpose.
The preferred trustee will act as U.S. paying agent for the USD trust
preferred securities. We have appointed Banque Generale du Luxembourg as
Luxembourg paying agent with respect to any USD trust preferred securities that
are represented by a global certificate subject to transfer restrictions
pursuant to Regulation S under the U.S. Securities Act.
The aggregate amount of payments to DTC, as the registered holder of the
USD trust preferred securities, will correspond to the aggregate liquidation
amount of USD trust preferred securities represented by the USD global
certificates as established by the preferred trustee at the close of business on
the relevant record date, which will be 15 days prior to the relevant payment
dates.
Payments in respect of liquidation amounts and distributions on a USD
global certificate registered in the name of DTC or its nominee will be payable
to DTC in its capacity as the registered holder under the Trust IV trust
declaration. Under the terms of that trust declaration, the preferred trustee
will treat holders of the USD trust preferred securities as the owners of the
USD trust preferred securities for the purpose of receiving payments and for all
other purposes. Trust IV, the preferred trustee or any paying agent will not,
however, have any responsibility or liability for:
(1) any aspect of DTC's records or any participant's or indirect
participant's records relating to or payments made on account of beneficial
ownership interest in the USD global certificate or for maintaining, supervising
or reviewing any of DTC's records or any participant's or indirect participant's
records relating to the beneficial ownership interests in the USD global
certificate; or
(2) any other matter relating to the actions and practices of DTC or any of
its participants or indirect participants.
DTC has advised us that its current practice, upon receipt of any payment
in respect of securities such as the USD trust preferred securities, is to
credit the accounts of the relevant participants with the payment on the payment
date unless DTC has reason to believe it will not receive payment on such
payment date. Each relevant participant is credited with an amount proportionate
to its beneficial
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ownership of an interest in the principal amount or the liquidation amount of
the relevant security as shown on the records of DTC. Payments by DTC's
participants and indirect participants to the beneficial owners of USD trust
preferred securities will be governed by standing instructions and customary
practices and will be the responsibility of those participants and indirect
participants and will not be the responsibility of DTC. Neither we nor the
preferred trustee will be liable for any delay by DTC or any of its participants
in identifying the beneficial owners of the USD trust preferred securities, and
we and the preferred trustee may conclusively rely on and will be protected in
relying on instructions from DTC or its nominee for all purposes.
Transfers of beneficial interests in the USD global certificate between
participants in DTC will be effected in accordance with DTC's procedures, and
will be settled in same-day funds, and transfers between participants in
Euroclear and Clearstream, Luxembourg will be effected in accordance with their
respective rules and operating procedures.
DTC has advised us that it will take any action permitted to be taken by
you as holders of USD trust preferred securities only at the direction of one or
more participants to whose account DTC has credited the interests in the USD
global certificate and only in respect of the portion of the aggregate
liquidation amount of the USD trust preferred securities as to which the
participant or participants has or have given such direction.
EUROCLEAR AND CLEARSTREAM, LUXEMBOURG PROCEDURES
We have been furnished with the following information by Euroclear and
Clearstream, Luxembourg:
- Euroclear and Clearstream, Luxembourg each hold securities for their
account holders and facilitate the clearance and settlement of securities
transactions by electronic book-entry transfer between their respective
account holders. This eliminates the need for physical movements of
certificates and any risks from lack of simultaneous transfers of
securities.
- Euroclear and Clearstream, Luxembourg each provide various services
including safekeeping, administration, clearance and settlement of
internationally traded securities and securities lending and borrowing.
- Each of Euroclear and Clearstream, Luxembourg can settle securities
transactions in any of more than 30 currencies, including the euro.
- Euroclear and Clearstream, Luxembourg each also deal with domestic
securities markets in several countries through established depositary
and custodial relationships.
- Their respective systems enable their respective account holders to
settle trades with each other.
- Account holders in Euroclear and Clearstream, Luxembourg are world-wide
financial institutions including underwriters, securities brokers and
dealers, which may include the initial purchasers, banks, trust companies
and clearing corporations.
- Indirect access to both Euroclear and Clearstream, Luxembourg is
available to other institutions that clear through or maintain a
custodial relationship with an account holder of either system.
- An account holder's overall contractual relations with either Euroclear
or Clearstream, Luxembourg are subject to their respective rules or
operating procedures and any applicable laws.
- Both Euroclear and Clearstream, Luxembourg act under those rules and
operating procedures only on behalf of their respective account holders
and have no record of or relationships with persons holding through their
respective holders.
Upon the issuance of the Euro global certificate, either of Euroclear or
Clearstream, Luxembourg will credit the accounts of persons holding through it
with the respective liquidation amounts represented by the Euro global
certificate. Such accounts shall be limited to persons who have accounts with
Euroclear or Clearstream, Luxembourg, or persons who may hold interests through
such account holders.
Ownership of beneficial interests in a Euro global certificate will be
shown on, and the transfer of that ownership interest will be effected only
through, records maintained by Euroclear or Clearstream,
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Luxembourg (with respect to account holders' interests) and such account holders
(with respect to the owners of beneficial interests in such Euro global
certificates other than account holders). The Euro global certificates will not
be eligible for clearance through DTC, except indirectly through DTC's
participation in Euroclear and Clearstream, Luxembourg.
We expect that investors who hold accounts with Euroclear or Clearstream,
Luxembourg may acquire, hold and transfer security entitlements with respect to
the Euro global certificates against Euroclear or Clearstream, Luxembourg and
their respective property by book-entry to accounts with Euroclear or
Clearstream, Luxembourg, each of which has an account with the common depositary
and subject at all times to the procedures and requirements of Euroclear or
Clearstream, Luxembourg.
In this prospectus, "security entitlement" means the rights and property
interests of an account holder against its securities intermediary under
applicable law in or with respect to a security, including any ownership,
co-ownership, contractual or other rights. Investors who do not have accounts
with Euroclear or Clearstream, Luxembourg may acquire, hold and transfer
security entitlements with respect to the Euro global certificate against the
securities intermediary and its property with which such investors hold accounts
by book-entry to accounts with such securities intermediary, which in turn may
hold a security entitlement with respect to the Euro global certificate through
Euroclear or Clearstream, Luxembourg. Investors electing to acquire security
entitlements with respect to the Euro global certificate through an account with
Euroclear or Clearstream, Luxembourg or some other securities intermediary must
follow settlement procedures of their securities intermediary with respect to
the settlement of new issues of securities. Security entitlements with respect
to the Euro global certificate to be acquired through an account with Euroclear
or Clearstream, Luxembourg will be credited to such account as of the settlement
date against payment in euro for value as of the settlement date. Investors
electing to acquire, hold or transfer security entitlements with respect to a
Euro global certificate through an account with Euroclear or Clearstream,
Luxembourg or some other securities intermediary other than in connection with
the initial distribution of the Euro trust preferred securities must follow the
settlement procedures of their securities intermediary with respect to the
settlement of secondary market transactions in securities.
The laws of some jurisdictions may require that certain purchasers of
securities take physical delivery of such securities in definitive form. These
limits and laws may impair the ability to transfer or pledge beneficial
interests in the Euro global certificate.
We will make distributions on the Euro trust preferred securities
represented by a Euro global certificate in immediately available funds to the
paying agent for payment to the common depositary for Euroclear and Clearstream,
Luxembourg or its nominee, as the sole registered owner and the sole holder of
the Euro global certificate represented thereby for all purposes under the Trust
V declaration of trust.
We expect that Euroclear and Clearstream, Luxembourg, upon receipt of any
distribution on any Euro global certificate, will immediately credit, on their
respective book-entry registration and transfer systems, the accounts of account
holders with payments in amounts proportionate to their respective beneficial
interests in the liquidation amount of such Euro global certificate as shown on
the records of Euroclear and Clearstream, Luxembourg. We also expect that
payments by account holders to owners of beneficial interests in a Euro global
certificate held through such account holders will be governed by standing
instructions and customary practice as is now the case with securities held for
customer accounts registered in "street names" and will be the sole
responsibility of such account holders. We will not have any responsibility or
liability for any aspect of the records relating to, or payments made on account
of, beneficial ownership interests in the Euro global certificate for any Euro
trust preferred security or for maintaining, supervising or reviewing any
records relating to such beneficial ownership interests or for any other aspect
of the relationship between Euroclear and Clearstream, Luxembourg and their
respective account holders, or the relationship between such account holders and
the owners of beneficial interests in the Euro global certificate owning through
such account holders.
Owners of beneficial interests in the Euro global certificate who wish to
receive payment in any currency other than euro must make foreign exchange
conversion arrangements at their own expense.
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Investors may be subject to foreign exchange risks that may have important
economic and tax consequences for them.
So long as a common depositary for Euroclear and Clearstream, Luxembourg or
its nominee is the registered owner of a Euro global certificate, the common
depositary or any successor depositary or such party will be considered the sole
owner or holder of the Euro trust preferred securities represented by that Euro
global certificate for all purposes under the Trust V declaration of trust and
the Euro trust preferred securities. Except as set forth below, owners of
beneficial interests in a Euro global certificate will not be entitled to have
the Euro trust preferred securities represented by such Euro global certificate
registered in their names, will not receive or be entitled to receive physical
delivery of certificated Euro trust preferred securities and will not be
considered to be the owners or holders of any Euro trust preferred securities
for purposes of the Trust V declaration of trust and the Euro trust preferred
securities. Accordingly, each person owning a beneficial interest in a Euro
global certificate must rely on the procedures of Euroclear or Clearstream,
Luxembourg, and if such person is not a participant, on the procedures of the
participant through which such person owns its interest, to exercise any rights
of a holder under the Trust V declaration of trust or with respect to the Euro
trust preferred securities. We understand that under existing industry
practices, in the event that we request any action of holders or that an owner
of a beneficial interest in a Euro global certificate desires to give or take
any action which a holder is entitled to give or take under the Trust V
declaration of trust, Euroclear and Clearstream, Luxembourg would authorize the
account holders holding the relevant beneficial interest to give or take such
action and such account holders would authorize beneficial owners owning through
such account holders to give or take such action or would otherwise act upon the
instructions of beneficial owners owning through them.
CERTIFICATED SECURITIES
Subject to certain conditions, the trust preferred securities represented
by the global certificates are exchangeable for certificated trust preferred
securities of the same series in definitive registered form of like tenor in
denominations of $1,000 or E1,000 as applicable, and integral multiples of
$1,000 or E1,000 if:
- DTC (in the case of the USD global certificate) notifies us or Euroclear
and Clearstream, Luxembourg (in the case of the Euro global certificates)
notify us that they are unwilling or unable to continue as a clearing
agency for the applicable global certificate and we are unable to locate
at least one qualified successor clearing agency within 90 days,
- We in our discretion at any time determine not to have all the USD or
Euro trust preferred securities, as applicable, represented by a global
certificate, or
- A default entitling the holders of the USD or Euro trust preferred
securities to require the trustee to accelerate the maturity of the USD
or Euro notes, as applicable, has occurred and is continuing.
Each declaration of trust requires us to make distributions in respect of
certificated trust preferred securities by mailing a check to each such holder's
registered address. Distribution upon liquidation on a certificated trust
preferred security will be made against surrender of the relevant trust
preferred security at the office of any paying agent.
Any trust preferred security that is exchangeable as described above is
exchangeable for certificated trust preferred securities issuable in authorized
denominations and registered in such names as DTC (in the case of USD trust
preferred securities) or Euroclear and Clearstream, Luxembourg (in the case of
the Euro trust preferred securities) shall direct. Subject to the foregoing,
neither global certificate is exchangeable, except for a global certificate of
the same aggregate liquidation amount to be registered in the name of DTC or its
nominee or Euroclear and Clearstream, Luxembourg or their nominee, as the case
may be.
Upon the issuance of certificated trust preferred securities, holders will
be able to transfer certificated trust preferred securities at the specified
office of the registrar and transfer agent or any paying agent or transfer agent
in Luxembourg upon the surrender of such certificated trust preferred
securities, together with the form of transfer endorsed thereon duly completed
and executed, and otherwise in accordance with
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the provisions of the applicable declaration of trust. In the case of a transfer
or redemption of part only of a certificated trust preferred security, a new
certificated trust preferred security will be issued to the transferee in
respect of the part transferred, and a further new certificated trust preferred
security in respect of the balance of the holding not transferred will be issued
to the transferor. Each new certificated trust preferred security to be so
issued shall be available for delivery within three business days of receipt by
the registrar and transfer agent or any paying agent or transfer agent at its
specified office on the relevant certificated trust preferred security and the
form of transfer.
REGISTRAR AND TRANSFER AGENT
State Street Bank and Trust Company, a Massachusetts chartered trust
company will act as registrar and transfer agent for the USD trust preferred
securities. Deutsche Bank AG London will act as registrar and transfer agent for
the Euro trust preferred securities. Registration of transfers of trust
preferred securities will be made without charge by or on behalf of the
applicable trust, but upon payment (with the giving of such indemnity as such
trust or the note issuer may require) in respect of any tax or other government
charges which may be imposed in relation to it. A trust will not be required to
register or cause to be registered the transfer of trust preferred securities
that have been called for redemption.
CLEARING AND SETTLEMENT
CLEARSTREAM, LUXEMBOURG
Clearstream, Luxembourg is incorporated under the laws of Luxembourg as a
professional depositary. Clearstream, Luxembourg holds securities for its
participating organizations and facilitates the clearance and settlement of
securities transactions between Clearstream, Luxembourg participants through
electronic book-entry changes in accounts of Clearstream, Luxembourg
participants, thereby eliminating the need for physical movement of
certificates. Transactions may be settled in various currencies, including euro.
Clearstream, Luxembourg provides to its participants, among other things,
services for safekeeping, administration, clearance and settlement of
internationally traded securities and securities lending and borrowing. As a
professional depositary, Clearstream, Luxembourg is subject to regulation by the
Luxembourg Commission of Supervision of the Financial Sector (CSSF).
Clearstream, Luxembourg participants are recognized financial institutions
around the world, including underwriters, securities brokers and dealers, banks,
trust companies, clearing corporations and certain other organizations and may
include the initial purchasers. Indirect access to Clearstream, Luxembourg is
also available to others, such as banks, brokers, dealers and trust companies
that clear through or maintain a custodial relationship with a Clearstream,
Luxembourg participant either directly or indirectly. Distributions with respect
to global certificates held beneficially through Clearstream, Luxembourg will be
credited to cash accounts of Clearstream, Luxembourg participants in accordance
with its rules and procedures.
EUROCLEAR
Euroclear was created in 1968 to hold securities for participants of
Euroclear and to clear and settle transactions between Euroclear participants
through simultaneous book-entry delivery against payment, thereby eliminating
the need for physical movement of certificates and any risk from lack of
simultaneous transfers of securities and cash. Transactions may now be settled
in various currencies, including euro. Euroclear includes various other
services, including securities lending and borrowing and interfaces with
domestic markets in several countries. Euroclear is operated by Euroclear Bank
S.A./N.V. (the "Euroclear operator"), under contract with Euroclear Clearance
System S.C., a Belgian cooperative corporation (the "cooperative"). All
operations are conducted by the Euroclear operator, and all Euroclear securities
clearance accounts and Euroclear cash accounts are accounts with the Euroclear
operator, not the cooperative. The cooperative establishes policy for Euroclear
on behalf of Euroclear participants. Euroclear participants include banks
(including central banks), securities brokers and dealers and other professional
financial intermediaries and may include the initial purchasers. Indirect access
to Euroclear is also available to other firms that clear through or maintain a
custodial relationship with a Euroclear participant, either directly or
indirectly.
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The Euroclear operator is the Brussels Branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it is
regulated and examined by the Board of Governors of the U.S. Federal Reserve
System and the New York State Banking Department, as well as the Belgian Banking
Commission.
Securities clearance accounts and cash accounts with the Euroclear operator
are governed by the Terms and Conditions Governing Use of Euroclear and the
related Operating Procedures of the Euroclear System, and applicable Belgian
law. The Euroclear terms and conditions govern transfers of securities and cash
within Euroclear, withdrawals of securities and cash from Euroclear, and
receipts of payments with respect to securities in Euroclear. All securities in
Euroclear are held on a fungible basis without attribution of specific
certificates to specific securities clearance accounts. The Euroclear operator
acts under the Euroclear terms and conditions only on behalf of Euroclear
participants, and has no record of or relationship with persons holding through
Euroclear participants.
Distributions with respect to trust preferred securities held beneficially
through Euroclear will be credited to the cash accounts of Euroclear
participants in accordance with the Euroclear terms and conditions, to the
extent received by the Euroclear operator.
SAME DAY SETTLEMENT AND PAYMENT
We will make payments in respect of the USD trust preferred securities
represented by the USD global certificate by wire transfer of immediately
available funds to the accounts specified by the holders of the USD trust
preferred securities. We will make payments in respect of the Euro trust
preferred securities represented by the Euro global certificate by wire transfer
of immediately available funds to the common depositary for payment to Euroclear
and Clearstream, Luxembourg. We will make all payments of liquidation amounts
and distributions, with respect to certificated trust preferred securities by
wire transfer of immediately available funds to the accounts specified by the
holders of the certificated trust preferred securities or, if no such account is
specified, by mailing a check to each such holder's registered address. Because
DTC, Euroclear and Clearstream, Luxembourg operate same day funds settlement
systems, any permitted secondary market trading activity in trust preferred
securities will be required by DTC, Euroclear and Clearstream, Luxembourg to be
settled in immediately available funds. We expect that secondary trading in any
certificated trust preferred securities will also be settled in immediately
available funds.
Because of time zone differences, the securities account of a DTC
participant purchasing an interest in a Euro global certificate from a
participant in Euroclear and Clearstream, Luxembourg, or a Euroclear and
Clearstream, Luxembourg participant purchasing an interest in a USD global
certificate from a participant in DTC, will be credited, and any such crediting
will be reported to the relevant purchaser, during the securities settlement
processing day (which must be a business day for settlement system in which the
purchaser is a participant) immediately following the settlement date of the
settlement system in which the seller is a participant. DTC has advised us that
cash received in Euroclear or Clearstream, Luxembourg as a result of sales of
interests in a global certificate by or through a Euroclear or Clearstream,
Luxembourg participant to a participant in DTC will be received with value on
the settlement date of DTC but will be available in the relevant Euroclear or
Clearstream, Luxembourg cash account only as of the business day for Euroclear
or Clearstream, Luxembourg following DTC's settlement date. Euroclear and
Clearstream, Luxembourg have advised us that cash received in DTC as a result of
sales of interests in a global certificate by or through a DTC participant to a
participant in Euroclear and Clearstream, Luxembourg will be received with value
on the settlement date of Euroclear and Clearstream, Luxembourg but will be
available in the relevant DTC cash account only as of the business day for DTC
following Euroclear and Clearstream, Luxembourg's settlement date.
GOVERNING LAW
The trust declarations and the trust preferred securities are governed by
and will be construed in accordance with the laws of the State of Delaware.
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LISTING; NOTICES
Application will be made to list the trust preferred securities on the
Luxembourg Stock Exchange.
All notices regarding the trust preferred securities will be published in
the Luxemburger Wort or in any other publication as required by the rules of the
Luxembourg Stock Exchange. Any notice will become effective for all purposes on
the date of its publication.
PAYING AGENTS
If any European Union Directive on the taxation of savings implementing the
conclusions of the ECOFIN Council meeting of 26-27 November 2000 or any law
implementing or complying with, or introduced in order to conform to this
Directive is introduced, we will ensure that we maintain a paying agent in
respect of the trust preferred securities in a European Union member state that
will not be obliged to withhold or deduct for or on account of tax pursuant to
any such Directive or law. As long as any trust preferred securities are listed
on the Luxembourg Stock Exchange, we will maintain a paying agent in Luxembourg.
MISCELLANEOUS
The trustees are authorized and directed to conduct the affairs of and to
operate the trusts in such a way that neither trust will be deemed to be an
"investment company" required to be registered under the Investment Company Act
or characterized as other than a grantor trust for U.S. federal income tax
purposes or otherwise as an entity that is not subject to U.S. federal or German
income tax, or income tax in the jurisdiction of formation of the note issuer,
at the entity level and the assets and income of which are treated for U.S.
federal or German income tax purposes, or for purposes of any income tax imposed
by the jurisdiction of formation of the note issuer, as held and derived
directly by holders of interests in the entity, and so that the notes will be
treated as indebtedness of the note issuer for U.S. federal or German income tax
purposes or for purposes of any income tax imposed by the jurisdiction of
formation of the note issuer. In this connection, the trustees are authorized to
take any action, not inconsistent with applicable law, the certificates of trust
or the trust declarations that the trustees determine in their discretion to be
necessary or desirable for such purposes as long as this action does not
adversely affect your interests.
You have no preemptive rights with respect to any securities of the trusts.
INFORMATION CONCERNING THE PREFERRED TRUSTEE
The preferred trustee, prior to default, undertakes to perform only the
duties specifically set forth in the trust declarations and, after default, will
exercise the same degree of care as a prudent individual would exercise in the
conduct of his or her own affairs. Subject to this provision, the preferred
trustee is under no obligation to exercise any of the powers vested in it by the
trust declarations at the request of any holder of USD trust preferred
securities or Euro trust preferred securities, unless offered reasonable
indemnity by you against the costs, expenses and liabilities which the preferred
trustee might incur by exercising such powers. The preferred trustee is not
required to expend or risk its own funds or otherwise incur personal financial
liability in the performance of its duties if the preferred trustee reasonably
believes that it does not have reasonable assurance of repayment or adequate
indemnity.
INFORMATION CONCERNING THE DELAWARE TRUSTEE
The Delaware trustee is First Union Trust Company, National Association, a
national banking association. The Delaware trustee will be one of the trustees
of the trusts for the sole and limited purpose of fulfilling the requirements of
the Delaware Business Trust Act for a trustee that is either a natural person
who is a resident of Delaware or a legal entity with its principal place of
business in that state.
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DESCRIPTION OF THE TRUST GUARANTEES
Fresenius Medical Care AG will issue the trust guarantees for your benefit.
State Street Bank and Trust Company will act as indenture trustee under the
trust guarantees and will hold the trust guarantees for the benefit of the
holders of the USD or Euro trust preferred securities, as applicable. The
following description is only a summary of the material provisions of the trust
guarantees and does not purport to be complete. We urge you to read the trust
guarantees. You may request a copy of the trust guarantee from the indenture
trustee. In addition, we have filed the trust guarantees as exhibits to the
registration statement that includes this prospectus, and you can obtain copies
of the trust guarantees from the sources described under "Where You Can Find
More Information." The trust guarantees have been qualified under the Trust
Indenture Act.
GENERAL
Under the trust guarantees, Fresenius Medical Care will irrevocably and
unconditionally agree to pay in full, on a senior subordinated basis, the
following payments or distributions with respect to the USD or the Euro trust
preferred securities as applicable, to the extent not paid by or on behalf of a
trust and to the extent that the trust has legally available funds (as discussed
below):
(a) any accumulated and unpaid distributions required to be paid on
the trust preferred securities,
(b) the redemption price with respect to trust preferred securities
called for redemption, and
(c) upon a voluntary or involuntary dissolution, winding up or
liquidation of a trust (unless the USD or Euro notes, as applicable, are
distributed to holders of the related USD or Euro trust preferred
securities), the lesser of
(1) the aggregate of the liquidation amount and all accrued and
unpaid distributions on the trust preferred securities to the date of
payment and
(2) the amount of assets of the trust remaining legally available
for distribution to the holders of the USD or Euro trust preferred
securities, as applicable, upon the liquidation of the trust.
The foregoing payments will be made to the holders of the USD or Euro trust
preferred securities, as applicable, as and when due, regardless of any defense,
right of set-off or counterclaim that the trust may have or assert, other than
the defense of payment.
Fresenius Medical Care's obligation to make a guarantee payment may be
satisfied by our direct payment of the required amounts to the holders of the
USD or Euro trust preferred securities, as applicable, or by causing the
applicable trust to pay such amounts to them.
Each trust guarantee will be an irrevocable and unconditional guarantee on
a senior subordinated basis of a trust's obligations under its trust preferred
securities, but will apply only to the extent that the trust has funds
sufficient to make such payments and is not a guarantee of collection. The trust
guarantees will rank subordinate and junior in right of payment to all of the
senior indebtedness of Fresenius Medical Care. See "-- Status of the Trust
Guarantee."
If the note issuer does not make interest payments on the USD or Euro notes
held by a trust and neither Fresenius Medical Care nor the other note guarantors
makes such payments under the note guaranties, the trust will not be able to pay
distributions on its trust preferred securities and will not have funds legally
available for payment.
Fresenius Medical Care is a non-operating holding company and almost all of
its operating assets and those of our consolidated subsidiaries are owned by
such subsidiaries. Fresenius Medical Care relies primarily on dividends and
other payments from our subsidiaries to meet our obligations for payment of
principal and interest on our outstanding debt obligations and corporate
expenses. Accordingly, the
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obligations of Fresenius Medical Care under the trust guarantees will be
effectively subordinated to all existing and future liabilities of its
subsidiaries.
Fresenius Medical Care has, through the trust guarantees, the trust
declarations, the notes, the note guaranties, the indentures and the expense
agreements described under "-- The Expense Agreements," taken together, fully,
irrevocably and unconditionally guaranteed each trust's obligations under the
trust preferred securities. No single document standing alone or operating in
conjunction with fewer than all of the other documents constitutes such
guarantee. It is only the combined operation of these documents that has the
effect of providing a full, irrevocable and unconditional guarantee of each
trust's obligations under the USD or Euro trust preferred securities. See
"Relationship Among the Trust Preferred Securities, the Notes and the Trust
Guarantees."
Fresenius Medical Care has also agreed separately to irrevocably and
unconditionally guarantee the obligations of each trust with respect to the
common securities to the same extent as the applicable trust guarantee, except
that upon the occurrence and during the continuation of an event of default
under a trust declaration, you will have priority over holders of common
securities with respect to distributions and payments on liquidation,
redemption, or otherwise.
STATUS OF THE TRUST GUARANTEE
The trust guarantees will constitute an unsecured senior subordinated
obligation of Fresenius Medical Care and will rank subordinate and junior in
right of payment to all of its Senior Indebtedness as defined under "Description
of the Notes -- Certain Definitions." The trust guarantees will constitute
guarantees of payment and not of collection (i.e., the guaranteed party may
institute a legal proceeding directly against Fresenius Medical Care to enforce
its rights under the applicable trust guarantee without first instituting a
legal proceeding against any other person or entity). The trust guarantees will
be held for the benefit of the holders of the USD or Euro trust preferred
securities, as applicable. The trust guarantees will not be discharged except by
payment of the guarantee payments thereunder in full to the extent not paid by
the applicable trust out of funds legally available for payment or upon
distribution of the USD or Euro notes to the holders of the USD or Euro trust
preferred securities, as applicable. The trust guarantees place no limitations
on the amount of additional Senior Indebtedness that Fresenius Medical Care may
incur. However, Fresenius Medical Care's ability and the ability of its
subsidiaries to incur indebtedness is restricted under the indentures. Fresenius
Medical Care expects from time to time to incur additional indebtedness
constituting Senior Indebtedness to refinance our Senior Indebtedness and for
other purposes. On July 12, 2001, we issued E108.5 million aggregate principal
amount of senior notes in the European private placement market, guaranteed by
Fresenius Medical Care. We used the proceeds to refinance existing senior debt.
See "Description of the Notes -- Certain Covenants."
Fresenius Medical Care may not make a guarantee payment to holders of trust
preferred securities if:
- any of its Specified Senior Indebtedness as defined under "Description of
the Notes -- Certain Definitions." (or any of its other Senior
Indebtedness having an outstanding principal amount at the time of
determination in excess of $25 million) is not paid when due, or
- any other default on its Specified Senior Indebtedness occurs and the
maturity of such Specified Senior Indebtedness is accelerated in
accordance with its terms, unless, in either case, the default has been
cured or waived and any such acceleration has been rescinded or such
Specified Senior Indebtedness has been paid in full.
However, Fresenius Medical Care may make a guarantee payment without regard
to these restrictions if it and the guarantee trustee receive written notice
approving the payment from a representative of the Specified Senior Indebtedness
with respect to which either of the events set forth in the above paragraphs has
occurred and is continuing. During the continuance of any default (other than a
default described in the bullet-point paragraphs above) with respect to any of
the Specified Senior Indebtedness of Fresenius Medical Care pursuant to which
the maturity of such indebtedness may be accelerated immediately without further
notice (except such notice as may be required to effect such acceleration) or
the
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expiration of any applicable grace periods, Fresenius Medical Care may not make
a guarantee payment to the holders of trust preferred securities for a period, a
"Payment Blockage Period," commencing upon the guarantee trustee's receipt (with
a copy to Fresenius Medical Care) of written notice, a "Blockage Notice," of
such default from the representative of the holders of such Specified Senior
Indebtedness specifying an election to effect a Payment Blockage Period and
ending 179 days thereafter. However, Fresenius Medical Care may make the
guarantee payment earlier if such Payment Blockage Period is terminated:
- by written notice to the guarantee trustee and Fresenius Medical Care
from the representative of the holders of such specified Senior
Indebtedness,
- because the default giving rise to such Blockage Notice is no longer
continuing, or
- because such Specified Senior Indebtedness has been repaid in full.
Notwithstanding the provisions described in the immediately preceding
sentence, unless the holders of such Specified Senior Indebtedness or the
representative of such holders have accelerated the maturity of such Specified
Senior Indebtedness, Fresenius Medical Care may resume guarantee payments after
the end of the Payment Blockage Period. A trust guarantee will not be subject to
more than one Payment Blockage Period in any consecutive 360-day period,
regardless of the number of defaults with respect to Specified Senior
Indebtedness during such period.
Upon any payment or distribution of Fresenius Medical Care's assets upon a
total or partial liquidation or dissolution or reorganization of or similar
proceeding relating to it or its property, the holders of Fresenius Medical
Care's Senior Indebtedness will be entitled to receive payment in full of that
Senior Indebtedness before you are entitled to receive any guarantee payment,
and until that Senior Indebtedness is paid in full, any payment or distribution
to which you would be entitled but for the subordination provisions of the trust
guarantees will be made to holders of our Senior Indebtedness as their interests
may appear. If a distribution is made to you that, due to the subordination
provisions, should not have been made to you, you are required to hold it in
trust for the holders of the Senior Indebtedness of Fresenius Medical Care and
pay it over to them as their interests may appear.
If we make a guarantee payment to you, we or the guarantee trustee will
promptly notify the holders of the Senior Indebtedness of Fresenius Medical Care
or the representative of those holders of the guarantee payment. If any of the
Senior Indebtedness of Fresenius Medical Care is outstanding, we may not pay
such guarantee payment until five business days after the representatives of all
the issues of its Senior Indebtedness receive notice of the guarantee payment
and, thereafter, we may pay the guarantee payment only if the applicable trust
guarantee otherwise permits payment at that time.
AMENDMENTS AND ASSIGNMENT
Except with respect to any changes that do not materially adversely affect
your rights (in which case no vote will be required), Fresenius Medical Care may
not amend a trust guarantee without the prior approval of the holders of not
less than a majority in aggregate liquidation amount of the outstanding USD or
Euro trust preferred securities, as applicable. A description of the manner of
obtaining any such approval appears under "Description of the Trust Preferred
Securities -- Voting Rights." All guarantees and agreements contained in the
trust guarantees will bind the successors, assigns, receivers, trustees and
representatives of Fresenius Medical Care and will inure to the benefit of the
holders of the USD or Euro trust preferred securities, as applicable.
EVENTS OF DEFAULT
An event of default under a trust guarantee will occur upon a failure of
Fresenius Medical Care to perform any of its payment or other obligations under
the trust guarantee. The holders of not less than a majority in aggregate
liquidation amount of the USD or Euro trust preferred securities, as applicable,
have the right to direct the time, method and place of conducting any proceeding
for any remedy available to
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the guarantee trustee in respect of the related trust guarantee or to direct the
exercise of any trust or power conferred upon the guarantee trustee under that
trust guarantee.
Upon the occurrence of a payment default under a trust guarantee, the
holders of the related trust preferred securities may institute a legal
proceeding directly against Fresenius Medical Care to enforce their rights under
that trust guarantee without first instituting a legal proceeding against the
applicable trust, the guarantee trustee or any other persons or entity.
Fresenius Medical Care, as guarantor, is required to file annually with the
guarantee trustee certificates as to whether or not it is in compliance with all
the conditions and covenants applicable to it under the applicable trust
guarantee.
TERMINATION OF THE TRUST GUARANTEES
The trust guarantees will terminate and be of no further force and effect
upon full payment of the redemption price of the USD or Euro trust preferred
securities, as applicable, upon full payment of the amounts payable in
accordance with the applicable trust declaration, upon liquidation of the
applicable trust or upon distribution of the USD or Euro notes to the holders in
exchange for all of the related trust preferred securities. The trust guarantees
will continue to be effective or will be reinstated if at any time holders of
USD or Euro trust preferred securities, as applicable, must restore payment of
any sums paid under those trust preferred securities or the applicable trust
guarantee.
GOVERNING LAW
The trust guarantees will be governed by and construed in accordance with
the laws of the State of New York.
THE EXPENSE AGREEMENTS
Under the expense agreements, Fresenius Medical Care has irrevocably and
unconditionally guaranteed to each person or entity to whom the trusts becomes
indebted or liable, the full payment of any costs, expenses, or liabilities of
the trusts, other than obligations of the trusts to pay the amounts due pursuant
to the terms of their common securities and trust preferred securities, and
other than U.S. withholding taxes.
INFORMATION CONCERNING THE GUARANTEE TRUSTEE
The guarantee trustee, other than during the occurrence and continuance of
a default by Fresenius Medical Care in performance of either trust guarantee,
undertakes to perform only the duties that are specifically set forth in the
applicable trust guarantee and, after default with respect to a trust guarantee,
must exercise the same degree of care and skill as a prudent person would
exercise or use in the conduct of his or her own affairs. Subject to this
provision, the guarantee trustee is under no obligation to exercise any of the
powers vested in it by a trust guarantee at the request of any holder of USD or
Euro trust preferred securities unless it is offered reasonable indemnity
against the costs, expenses and liabilities that it might incur in doing so.
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DESCRIPTION OF THE NOTES
Each trust invested the proceeds of the issuance and sale of the old trust
preferred securities in the old notes. The note issuer will issue the USD notes
under an indenture dated as of June 6, 2001 and the Euro notes under an
indenture dated as of June 15, 2001, each among the note issuer, State Street
Bank and Trust Company, a Massachusetts chartered trust company, as indenture
trustee, Fresenius Medical Care, FMCH and FMC Deutschland, as note guarantors
(the "indentures"). The trusts will exchange their old USD notes or old Euro
notes for USD notes or Euro notes, as applicable, in connection with
consummation of the exchange offers.
Some of the terms used in this description are defined under the subheading
"-- Certain Definitions." The definitions apply to the terms used in this
description even if they are not capitalized in the description. In this
description,
- the term "note issuer" refers only to FMC Finance, Luxembourg, as the
issuer of the notes, and not to Fresenius Medical Care or any other
subsidiary owned or controlled by Fresenius Medical Care AG,
- the term "trust IV" refers to Fresenius Medical Care Capital Trust IV,
- the term "trust V" refers to Fresenius Medical Care Capital Trust V, and
- the term "trusts" refers to trust IV and trust V collectively.
The following description is only a summary of the material provisions of
the indentures. We urge you to read the indentures because this description does
not purport to be complete. You may request copies of the indentures from the
indenture trustee. In addition, we have filed the indentures as exhibits to the
registration statement that includes this prospectus, and you can obtain copies
of the indentures from the sources described under "Where You Can Find More
Information."
The indentures have been qualified under the Trust Indenture Act. The terms
of the USD or Euro notes will include those stated in the applicable indenture
and those made part of each indenture by reference to the Trust Indenture Act.
Under the circumstances specified in each trust declaration and each
indenture involving the dissolution of a trust following the occurrence of a tax
event or investment company event with respect to the trust, the USD or Euro
notes may be distributed to the holders of the related trust preferred
securities in liquidation of that trust.
PRINCIPAL, MATURITY AND INTEREST
The note issuer will issue the USD notes under the applicable indenture
with a maximum aggregate principal amount of $225,225,000. This is equal to the
sum of the aggregate stated liquidation amount of the USD common securities and
the USD trust preferred securities. The note issuer will issue the USD notes in
denominations of $1,000 and any integral multiple of $1,000. The note issuer
will issue the Euro notes under the applicable indenture with a maximum
aggregate principal amount of E300,300,000. This is equal to the sum of the
aggregate stated liquidation amount of the Euro common securities and the Euro
trust preferred securities. The note issuer will issue the Euro notes in
denominations of E1,000 and any integral multiple of E1,000. The notes will
mature on June 15, 2011, at par.
The notes are not entitled to the benefit of any sinking fund.
Interest will accrue on the USD notes at the rate of 7 7/8% per annum and
on the Euro notes at the rate of 7 3/8% per annum and, in each case, will be
payable quarterly in arrears on March 14, June 14, September 14 and December 14,
commencing September 14, 2001. The note issuer will make each interest payment
on the relevant interest payment date to the holders of record of the Notes on
the record date for each interest payment. The record dates are the March 1,
June 1, September 1 and December 1 immediately preceding the interest payment
date. Interest in arrears for more than one-quarter (and interest on such
overdue interest) will accrue interest (compounded quarterly) at the same rate.
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Interest on these notes will accrue from the most recent date on which
interest has been paid or, if no interest has yet been paid, from June 6, 2001,
in the case of the USD notes, and from June 15, 2001, in the case of the Euro
notes. Interest will be computed on the basis of a 360-day year comprised of
twelve 30-day months.
FORM AND TRANSFER
The note issuer will initially issue the notes in fully registered
certificated form. The preferred trustee will initially hold the notes. If a
trust distributes USD or Euro notes to the holders of the related trust
preferred securities upon the dissolution of that trust, the distributed notes
will then be issued as global securities to the extent of any global
certificates at the time representing the related trust preferred securities and
otherwise in fully registered, certificated form. If the notes are issued in
certificated form, they will be issued only in denominations of $1,000 or
E1,000, as applicable, and integral multiples of $1,000 or E1,000, and may be
transferred or exchanged at the offices described below.
Payments on notes issued as global securities will be made in immediately
available funds to DTC as depositary for the USD trust preferred securities or
to the common depositary for the Euro trust preferred securities for payment to
Euroclear and Clearstream, Luxembourg. If the notes are issued in certificated
form, principal and interest will be payable, transfers of the notes will be
registrable and the notes will be exchangeable for notes of other denominations
in the same aggregate principal amount at the corporate trust office of the
indenture trustee in The City of New York. However, unless the notes are held by
the trusts or any successor permissible as described above, the note issuer may
elect to pay interest on the notes by check mailed to the address of the persons
entitled to receive such payments.
REDEMPTION FOR CHANGES IN WITHHOLDING TAXES
The note issuer is entitled to redeem the USD or Euro notes, at its option,
at any time as a whole but not in part, upon not less than 30 nor more than 60
days' notice, at 100% of the principal amount of the notes, plus accrued and
unpaid interest (if any) to the date of redemption (subject to the right of
holders of record on the relevant record date to receive interest due on the
relevant interest payment date), in the event the note issuer has become or
would become obligated to pay, on the next date on which any amount would be
payable with respect to the notes, any additional amounts as a result of:
(a) a change in or an amendment to the laws (including any regulations
promulgated under such laws) of the United States, Germany, the United
Kingdom or the jurisdiction of formation of the note issuer (initially
Luxembourg) (or any political subdivision or taxing authority of or in any
such jurisdiction), or
(b) any change in or amendment to any official position regarding the
application or interpretation of such laws or regulations, which change or
amendment is announced or becomes effective on or after the date of
issuance of the notes,
other than, in either case, any amendment or change implementing, complying
with, or introduced in order to conform to, or otherwise arising as a result of
or in connection with, any European Union Directive on the taxation of savings
implementing the conclusions of the ECOFIN Council meeting of 26-27 November
2000.
NOTE GUARANTIES
Fresenius Medical Care will unconditionally guarantee, jointly and
severally with FMCH and FMC Deutschland, on a senior subordinated basis, the
obligations of the note issuer under the notes, including the repurchase
obligation of the note issuer resulting from a change of control. In this
description, we refer to our guaranties and that of the other note guarantors as
the note guaranties. The note guaranties of Fresenius Medical Care will not be
limited in amount. Each note guaranty of any other note guarantor will be
limited in amount to an amount not to exceed the maximum amount that can be
guaranteed by the note guarantor without rendering that note guaranty, as it
relates to the note guarantor, voidable under
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applicable law relating to the maintenance of the guarantors share capital,
fraudulent conveyance or fraudulent transfer or similar laws affecting the
rights of creditors generally or under applicable law of Germany. If a note
guaranty were to be rendered voidable, a court could subordinate that note
guaranty to all other indebtedness (including guarantees and other contingent
liabilities) of the applicable note guarantor and, depending on the amount of
such indebtedness, a note guarantor's liability on its note guaranty could be
reduced to zero.
Under the indentures, a note guarantor may consolidate with, merge with or
into, or transfer all or substantially all of its assets to any other person
only to the extent described below under "-- Certain Covenants -- Limitation on
Mergers, Acquisitions and Sales of Assets." However, if the other person is not
the note issuer or Fresenius Medical Care, the note guarantor's obligations
under its note guaranties must be expressly assumed by the other person. Upon
the sale or other disposition, including by way of consolidation or merger, of a
note guarantor, or the sale or disposition of all or substantially all the
assets of a note guarantor, in each case other than to the note issuer or
Fresenius Medical Care or any affiliate of either of them, as permitted by the
covenant described under "-- Certain Covenants -- Limitation on Sales of Assets
and Subsidiary Stock," the selling note guarantor will be released and relieved
from all its obligations under its note guaranties.
RANKING AND SUBORDINATION
The indebtedness evidenced by the notes and the note guaranties will be
senior subordinated obligations of the note issuer, Fresenius Medical Care and
the other note guarantors. The payment of the principal of (including any
payments on redemption or repurchase), premium, if any, and interest on the
notes and the payment of any note guaranty will be subordinate in right of
payment to all senior indebtedness of Fresenius Medical Care, the note issuer,
and the relevant note guarantor, whether outstanding on the date the notes are
originally issued or thereafter incurred.
As of June 30, 2001, after giving effect to the consummation of the
offerings of the USD and Euro trust preferred securities and the application of
the net proceeds from these offerings, our total consolidated liabilities were
$3.7 billion, including our obligations respect to all trust preferred
securities of approximately $1.4 billion, our total consolidated assets were
$6.5 billion and our shareholders' equity was $2.7 billion. Fresenius Medical
Care and some of its material subsidiaries, including FMCH and FMC Deutschland,
have guaranteed the obligations of National Medical Care and the other borrowers
under our senior credit facility. National Medical Care has pledged the stock of
100% of its material U.S. subsidiaries and 66% of the stock of its material
non-U.S. subsidiaries to secure obligations under the facility. Fresenius
Medical Care has pledged the stock of its material subsidiaries, including FMCH
and FMC Deutschland, to secure its guarantee of the senior credit facility, and
FMCH has pledged the stock of National Medical Care to secure its guarantee of
the senior credit facility.
Although the indentures contain limitations on the amount of additional
Indebtedness that the note guarantors may incur, under certain circumstances the
amount of such Indebtedness could be substantial and, in any case, that
Indebtedness may be Senior Indebtedness. See "-- Certain Covenants."
Fresenius Medical Care's conducts its operations through its subsidiaries.
Claims of our subsidiaries' creditors, including trade creditors, secured
creditors and creditors holding indebtedness and guarantees issued by our
subsidiaries, and claims of preferred stockholders, if any, of these
subsidiaries generally will have priority with respect to the assets and
earnings of the subsidiaries over the claims of creditors of Fresenius Medical
Care, including, with respect to Fresenius Medical Care's note guaranty, holders
of notes. This will be so even if the subsidiary's obligations do not constitute
Senior Indebtedness. As a result, Fresenius Medical Care's note guaranty will be
effectively subordinated to creditors (including trade creditors) and preferred
stockholders (if any) of its subsidiaries and each other note guarantor's note
guaranty will be effectively subordinated to creditors (including trade
creditors) of subsidiaries of that note guarantor and to preferred stockholders
(if any) of subsidiaries of that note guarantor that are not themselves note
guarantors. None of FMCH's or FMC Deutschland's subsidiaries is a note
guarantor. Although the indentures limit the incurrence of Indebtedness and
Capital Stock of some of our
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subsidiaries, this limitation is subject to a number of significant exceptions
and qualifications. Moreover, the indentures do not impose any limitation on the
ability of these subsidiaries to incur liabilities that are not considered
Indebtedness under the indentures. See "-- Certain Covenants."
Only Indebtedness of the note issuer, Fresenius Medical Care or another
note guarantor that is Senior Indebtedness will rank senior to the notes and the
relevant note guaranty in accordance with the provisions of the indentures. The
notes and each note guaranty will in all respects rank equally with all other
Senior Subordinated Indebtedness of the note issuer and the relevant note
guarantor, respectively. Each note guaranty will rank equally with the
Indebtedness represented by the 9% Notes, the 2008 7 7/8% Notes and the 2008
7 3/8% Notes; the USD and Euro notes will rank equally; and on a consolidated
basis the notes will effectively rank equally with the 9% Notes, the 2008 7 7/8%
Notes and the 2008 7 3/8% Notes. However, the 9% Notes, the 2008 7 7/8% Notes
and the 2008 7 3/8% Notes are not direct liabilities of the note issuer. Our
senior subordinated guaranty of the 9% Notes is secured by a pledge of 100% of
all of the outstanding common stock of FMCH, which is a guarantor of the notes,
the 9% Notes, the 2008 7 7/8% Notes and the 2008 7 3/8% Notes. The security
interest is subordinate to a security interest in the shares that we granted to
secure our obligations under our senior credit facility. The notes will not have
the benefit of a pledge of those shares or any other security interest. The note
issuer and each note guarantor, including us, have agreed in the indentures that
they will not incur, directly or indirectly, any Indebtedness that is
subordinate or junior in ranking in right of payment to Senior Indebtedness
unless such Indebtedness is Senior Subordinated Indebtedness or is expressly
subordinated in right of payment to Senior Subordinated Indebtedness.
The note issuer may not pay principal of, or premium (if any) or interest
on, the notes and may not repurchase, redeem or otherwise retire notes,
collectively, "pay the notes," if:
- any Specified Senior Indebtedness of ours or the note issuer (or any
other Senior Indebtedness of ours or the note issuer having an
outstanding principal amount at the time of determination in excess of
$25 million) is not paid when due, or
- any other default on Specified Senior Indebtedness of ours or the note
issuer occurs and the maturity of that Specified Senior Indebtedness is
accelerated in accordance with its terms, unless, in either case, the
default has been cured or waived and any such acceleration has been
rescinded or the Specified Senior Indebtedness has been paid in full.
However, the note issuer may pay the notes without regard to these
conditions if we, the note issuer and the indenture trustee receive written
notice approving the payment from a representative of the Specified Senior
Indebtedness with respect to which either of the events set forth in the above
two paragraphs has occurred and is continuing. During the continuance of any
default (other than a default described in the second preceding sentence) with
respect to any Specified Senior Indebtedness of ours or the note issuer under
which the maturity of that Specified Senior Indebtedness may be accelerated
immediately without further notice (except such notice as may be required to
effect such acceleration) or the expiration of any applicable grace periods, the
note issuer may not pay the notes for a period -- a "Payment Blockage
Period" -- commencing upon the indenture trustee's receipt (with a copy to the
note issuer and us) of written notice, a "Blockage Notice," of the default from
the representative of the holders of that specified Senior Indebtedness
specifying an election to effect a Payment Blockage Period and ending 179 days
thereafter. The Payment Blockage Period will end earlier if the Payment Blockage
Period is terminated:
- by written notice to us, the indenture trustee, and the note issuer from
the representative of the holders of the Specified Senior Indebtedness,
- because the default giving rise to such Blockage Notice is no longer
continuing, or
- because the Specified Senior Indebtedness has been repaid in full.
Notwithstanding the provisions described in the immediately preceding
sentence, unless the holders of such Specified Senior Indebtedness or the
representative of such holders have accelerated the maturity of
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such Specified Senior Indebtedness (and such Specified Senior Indebtedness
remains outstanding), the note issuer may resume payments on the notes issued
under the indentures after the end of the Payment Blockage Period. The notes
issued under the indentures will not be subject to more than one Payment
Blockage Period in any consecutive 360-day period, irrespective of the number of
defaults with respect to specified Senior Indebtedness during such period.
Upon any payment or distribution of the assets of the note issuer upon a
total or partial liquidation or dissolution or reorganization of or similar
proceeding relating to the note issuer or its property:
- the holders of our Senior Indebtedness and the Senior Indebtedness
of the note issuer will be entitled to receive payment in full of
the Senior Indebtedness before the holders of notes are entitled to
receive any payment, and
- until our Senior Indebtedness and the Senior Indebtedness of the
note issuer are paid in full, any payment or distribution to which
holders of notes would be entitled but for the subordination
provisions of the indentures will be made to holders of the Senior
Indebtedness as their interests may appear.
If a distribution is made to holders of notes that, due to the
subordination provisions, should not have been made to them, the holders are
required to hold it in trust for the holders of our Senior Indebtedness and the
Senior Indebtedness of the note issuer and pay it over to them as their
interests may appear.
If payment of any notes is accelerated because of an Event of Default with
respect to the notes, we, the note issuer or the indenture trustee shall
promptly notify the holders of our Senior Indebtedness and the Senior
Indebtedness of the note issuer or the representative of such holders of the
acceleration. If any Senior Indebtedness is outstanding, neither the note issuer
nor we or any other note guarantor may pay the notes those until five Business
Days after the representatives of all the issues of Senior Indebtedness receive
notice of such acceleration and, thereafter, may pay those notes only if the
applicable indenture otherwise permits payment at that time.
The obligations of a note guarantor (including Fresenius Medical Care)
under its note guaranty are senior subordinated obligations. As such, the rights
of holders of notes to receive payment by a note guarantor pursuant to its note
guaranty of the notes will be subordinated in right of payment to the rights of
holders of Senior Indebtedness of the note guarantor. The terms of the
subordination provisions described above with respect to the note issuer's
obligations in respect of the notes apply in substantially the same manner to us
and the other note guarantors and the obligations of us and such other note
guarantors under their respective note guaranties.
By reason of the subordination provisions contained in the indentures, in
the event of insolvency, creditors of the note issuer or a note guarantor
(including us) who are holders of Senior Indebtedness of the note issuer or the
note guarantor, may recover more, ratably, than the holders of notes, and
creditors of the note issuer or a note guarantor who are not holders of Senior
Indebtedness may recover less, ratably, than holders of Senior Indebtedness and
may recover more, ratably, than the holders of notes.
SUSPENSION OF COVENANTS DURING ACHIEVEMENT OF INVESTMENT GRADE STATUS
If during any period the notes have achieved and continue to maintain
Investment Grade Status and no Event of Default has occurred and is continuing
(such period is referred to herein as an "Investment Grade Status Period"), then
upon notice by Fresenius Medical Care to the trustee by the delivery of an
officers' certificate that it has achieved Investment Grade Status and that no
Event of Default has occurred and is continuing, some of the covenants described
under "-- Certain Covenants" will be suspended and will not during that period
be applicable to Fresenius Medical Care and its subsidiaries. As a result,
during any Investment Grade Status Period, the notes will lose the full covenant
protection initially provided under the indentures. No action taken during an
Investment Grade Status Period or prior to an Investment Grade Status Period in
compliance with the covenants then applicable will require reversal or
constitute a default under the notes in the event that suspended covenants are
subsequently reinstated or suspended, as the case may be. An Investment Grade
Status Period will not commence until
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Fresenius Medical Care has delivered the officers' certificate referred to above
and will terminate immediately upon the failure of the notes to maintain
Investment Grade Status. Fresenius Medical Care will promptly notify the trustee
in writing of any failure of the notes to maintain Investment Grade Status.
ADDITIONAL AMOUNTS
All payments made under or with respect to the notes under the indentures
must be made free and clear of and without withholding or deduction for or on
account of any present or future tax, duty, levy, impost, assessment or other
governmental charge (including penalties, interest and other liabilities related
thereto) imposed or levied by or on behalf of the United States, Germany, the
United Kingdom or the jurisdiction of formation of the note issuer, or any note
guarantor or of any territory thereof or by any authority or agency therein or
thereof having power to tax, collectively, "Taxes," unless the note issuer or
any note guarantor is required to withhold or deduct Taxes by law or by the
interpretation or administration thereof by the relevant government authority or
agency. If the note issuer or any note guarantor is so required to withhold or
deduct any amount for or on account of Taxes from any payment made under or with
respect to the notes, the note issuer or the note guarantors, as the case may
be, will be required to pay such amount -- "Additional Amounts" -- as may be
necessary so that the net amount (including Additional Amounts) received by each
Holder after such withholding or deduction will not be less than the amount such
Holder would have received if such Taxes had not been withheld or deducted. The
note issuer will also make such withholding or deduction and remit the full
amount deducted or withheld to the relevant authority as and when required in
accordance with applicable law. The note issuer will furnish to the holders,
within 30 days after the date the payment of any Taxes is due under applicable
law, certified copies of tax receipts evidencing such payment by the note
issuer.
If a trust would be required to pay any taxes, duties, assessments or
governmental charges of whatever nature (other than withholding taxes) imposed
by the United States, or any other taxing authority, then, in any such case, the
note issuer will pay as additional interest -- "Additional Interest" -- such
amounts as will be necessary so that the net amounts received and retained by
such trust after paying any such taxes, duties, assessments or governmental
charges will be not less than the amounts such trust would have received had no
such taxes, duties, assessments or governmental charges been imposed. All
references in this offering circular to "Additional Amounts" will include
"Additional Interest."
These obligations will survive any termination, defeasance or discharge of
the applicable Indenture.
CERTAIN COVENANTS
The indentures provide that certain of the following restrictive covenants
and other obligations will be suspended during any Investment Grade Status
Period. The covenants and obligations that will be suspended during any
Investment Grade Status Period include "-- Limitation on Restricted Payments,"
"-- Limitation on Incurrence of Indebtedness," "-- Limitation on Restrictions on
Distributions from Subsidiaries," "-- Limitation on Sales of Assets and
Subsidiary Stock," clause (1) of "-- Senior Subordinated Indebtedness; Liens"
and clause (4)(B) of the second paragraph of "-- Limitation on Mergers,
Acquisitions and Sales of Assets."
In the discussion below, "the Company" refers to Fresenius Medical Care.
LIMITATION ON RESTRICTED PAYMENTS
(a) The Company will not, and will not permit any Subsidiary to, directly
or indirectly, make any Restricted Payment if at the time the Company or such
Subsidiary makes such Restricted Payment:
(1) a Default has occurred and is continuing (or would result
therefrom);
(2) the Company is not able to Incur an additional $1.00 of
Indebtedness pursuant to paragraph (a) of the covenant described under
"-- Limitation on Incurrence of Indebtedness"; or
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(3) the aggregate amount of such Restricted Payment and all other
Restricted Payments since the Issue Date would exceed the sum of:
(A) 50% of the Consolidated Net Income accrued during the period
(treated as one accounting period) from January 1, 2000 to the end of
the Company's most recently ended fiscal quarter for which internal
financial statements are available at the time of such Restricted
Payment (or, in case such Consolidated Net Income is a deficit, minus
100% of such deficit);
(B) the aggregate Net Cash Proceeds received by the Company from
the issuance or sale of its Capital Stock (other than Disqualified
Stock) subsequent to January 1, 2000 (other than an issuance or sale to
a Subsidiary and other than an issuance or sale to an employee stock
ownership plan or to a trust established by the Company or any of its
Subsidiaries for the benefit of their employees); and
(C) the amount by which Indebtedness of the Company is reduced on
the Company's balance sheet upon the conversion or exchange (other than
by a Subsidiary), subsequent to January 1, 2000 of any Indebtedness of
the Company convertible or exchangeable for Capital Stock (other than
Disqualified Stock) of the Company (less the amount of any cash, or the
fair value of any other property, distributed by the Company upon such
conversion or exchange).
(b) The provisions of the foregoing paragraph (a) will not prohibit:
(1) any purchase or redemption of Capital Stock or Subordinated
Obligations of the Company made by exchange for, or out of the proceeds of
the substantially concurrent sale of, Capital Stock of the Company (other
than Disqualified Stock and other than Capital Stock issued or sold to a
Subsidiary or an employee stock ownership plan or to a trust established by
the Company or any of its Subsidiaries for the benefit of their employees);
provided, however, that (A) such purchase or redemption shall be excluded
in the calculation of the amount of Restricted Payments and (B) the Net
Cash Proceeds from such sale shall be excluded from the calculation of
amounts under clause (3)(B) of paragraph (a) above;
(2) any purchase, repurchase, redemption, defeasance or other
acquisition or retirement for value of Subordinated Obligations made by
exchange for, or out of the proceeds of the substantially concurrent sale
of, Indebtedness of the Company which is permitted to be Incurred pursuant
to the covenant described under "Limitation on Indebtedness"; provided,
however, that such purchase, repurchase, redemption, defeasance or other
acquisition or retirement for value shall be excluded in the calculation of
the amount of Restricted Payments; or
(3) dividends paid within 60 days after the date of declaration of
that dividend if at such date of declaration such dividend would have
complied with this covenant and at the time of payment of such dividend, no
other Default shall have occurred and be continuing or result from the
dividend payment. That dividend shall be included in the calculation of the
amount of Restricted Payments.
LIMITATION ON INCURRENCE OF INDEBTEDNESS
(a) The Company shall not, and shall not permit any Subsidiary to, Incur,
directly or indirectly, any Indebtedness unless, on the date of such Incurrence
(and after giving effect thereto), the Consolidated Coverage Ratio exceeds 2.5
to 1.
(b) The foregoing limitations contained in paragraph (a) do not apply to
the Incurrence of any of the following Indebtedness:
(1) Indebtedness under the Credit Agreements;
(2) Indebtedness owed to and held by a Wholly Owned Subsidiary;
provided, however, that any subsequent issuance or transfer of any Capital
Stock that results in any such Wholly Owned Subsidiary ceasing to be a
Wholly Owned Subsidiary or any subsequent transfer of such Indebtedness
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(other than to another Wholly Owned Subsidiary) shall be deemed, in each
case, to constitute the Incurrence of such Indebtedness by the Company;
(3) Indebtedness in respect of the notes, and the related guaranties
by the Company and the note guarantors of the notes, the 9% Notes, the 2008
7 7/8% Notes and the 2008 7 3/8% Notes;
(4) Capital Lease Obligations and Indebtedness incurred, in each case,
to provide all or a portion of the purchase price or cost of construction
of an asset or, in the case of a sale/leaseback transaction, to finance the
value of such asset owned by the Company or a Subsidiary, in an aggregate
principal amount which, together with all other such Capital Lease
Obligations and Indebtedness outstanding on the date of such Incurrence
(other than Indebtedness permitted by paragraph (a) or clause (2) or (9) of
this paragraph (b)), does not exceed $200 million;
(5) Indebtedness in respect of Receivables Financings in an aggregate
principal amount which, together with all other Indebtedness in respect of
Receivables Financings outstanding on the date of such Incurrence (other
than Indebtedness permitted by paragraph (a) or clause (2) or (9) of this
paragraph (b)), does not exceed 85% of the sum of (1) the total amount of
accounts receivables shown on the Company's most recent consolidated
quarterly balance sheet, plus (2) without duplication, the total amount of
accounts receivable already subject to a Receivables Financing;
(6) Refinancing Indebtedness in respect of Indebtedness Incurred
pursuant to paragraph (a) or pursuant to clause (3), (4) or (5) of this
paragraph (b);
(7) Hedging Obligations permitted under the NMC Credit Agreement as in
effect on the Issue Date;
(8) customer deposits and advance payments received from customers for
goods purchased in the ordinary course of business; and
(9) Indebtedness in an aggregate principal amount which, together with
all other Indebtedness of the Company and its Subsidiaries outstanding on
the date of such Incurrence (other than Indebtedness permitted by paragraph
(a) or clauses (1) through (8) of this paragraph (b)), does not exceed $400
million.
(c) Notwithstanding the foregoing, the Company shall not, and shall not
permit any Subsidiary to, incur, directly or indirectly, any Indebtedness:
(1) that is subordinate or junior in ranking in right of payment to
its Senior Indebtedness unless such Indebtedness is Senior Subordinated
Indebtedness or is expressly subordinated in right of payment to Senior
Subordinated Indebtedness, or
(2) pursuant to paragraph (b) above if the proceeds thereof are used,
directly or indirectly, to Refinance any Subordinated Obligations unless
such Indebtedness shall be subordinated to the notes to at least the same
extent as such Subordinated Obligations.
(d) For purposes of determining compliance with the foregoing covenant:
(1) in the event that an item of Indebtedness meets the criteria of
more than one of the types of Indebtedness described above, the Company, in
its sole discretion, will classify such item of Indebtedness and only be
required to include the amount and type of such Indebtedness in one of the
above clauses, and
(2) an item of Indebtedness may be divided and classified in more than
one of the types of Indebtedness described above.
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LIMITATION ON RESTRICTIONS ON DISTRIBUTIONS FROM SUBSIDIARIES
The Company will not, and will not permit any Subsidiary to, create or
otherwise cause or permit to exist or become effective any consensual
encumbrance or restriction on the ability of any Subsidiary:
(a) to pay dividends or make any other distributions on its Capital
Stock to the Company or any other Subsidiary or pay any Indebtedness owed
to the Company or any other Subsidiary,
(b) to make any loans or advances to the Company or any other
Subsidiary or
(c) to transfer any of its property or assets to the Company or any
other Subsidiary, except:
(1) any encumbrance or restriction pursuant to an agreement in
effect at or entered into on the Issue Date;
(2) any encumbrance or restriction with respect to a Subsidiary
pursuant to an agreement relating to any Indebtedness Incurred by such
Subsidiary on or prior to the date on which such Subsidiary was acquired
by the Company (other than Indebtedness Incurred as consideration in, or
to provide all or any portion of the funds or credit support utilized to
consummate the transaction or series of related transactions pursuant to
which such Subsidiary became a Subsidiary or was acquired by the
Company) and outstanding on such date;
(3) any encumbrance or restriction pursuant to an agreement
effecting a Refinancing of Indebtedness Incurred pursuant to an
agreement referred to in clause (1) or (2) above or this clause (3) or
contained in any amendment to an agreement referred to in clause (1) or
(2) above or this clause (3); provided, however, that the encumbrances
and restrictions with respect to such Subsidiary contained in any such
refinancing agreement or amendment are no less favorable to the holders
of Notes than encumbrances and restrictions with respect to such
Subsidiary contained in such agreements;
(4) any such encumbrance or restriction consisting of customary
non-assignment provisions in leases governing leasehold interests or in
licensing agreements to the extent such provisions restrict the transfer
of the lease or the property leased thereunder or the licensing
agreement or the rights licensed thereunder;
(5) in the case of clause (c) above, restrictions contained in
security agreements or mortgages securing Indebtedness of a Subsidiary
to the extent such restrictions restrict the transfer of the property
subject to such security agreements or mortgages; and
(6) any restriction with respect to a Subsidiary imposed pursuant
to an agreement entered into for the sale or disposition of all or
substantially all the Capital Stock or assets of such Subsidiary pending
the closing of such sale or disposition.
LIMITATION ON SALES OF ASSETS AND SUBSIDIARY STOCK
(a) The Company will not, and will not permit any Subsidiary to, directly
or indirectly, consummate any Asset Disposition unless:
(1) the Company or such Subsidiary receives consideration at the time
of such Asset Disposition at least equal to the fair market value
(including as to the value of all non-cash consideration), as determined in
good faith by the Board of Directors of the Company or such Subsidiary, as
the case may be, of the shares and assets subject to such Asset Disposition
and at least 70% of the consideration thereof received by the Company or
such Subsidiary is in the form of cash or cash equivalents; and
(2) an amount equal to 100% of the Net Available Cash from such Asset
Disposition is applied by the Company (or such Subsidiary, as the case may
be);
(A) first, to the extent the Company elects (or is required by the
terms of any Senior Indebtedness), to prepay, repay, redeem or purchase
Senior Indebtedness or Indebtedness (other
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than any Disqualified Stock) of a Wholly Owned Subsidiary (in each case
other than Indebtedness owed to the Company or an Affiliate of the
Company) within one year from the later of the date of such Asset
Disposition or the receipt of such Net Available Cash;
(B) second, to the extent of the balance of such Net Available Cash
after application in accordance with clause (A), to the extent the
Company elects, to acquire Additional Assets within one year from the
later of the date of such Asset Disposition or the receipt of such Net
Available Cash;
(C) third, to the extent of the balance of such Net Available Cash
after application in accordance with clauses (A) and (B), to cause FMC
Trust Finance S.a.r.l. Luxembourg to make an offer to the holders of the
9% Notes to purchase the 9% Notes pursuant to and subject to the
conditions contained in the 9% Indenture;
(D) fourth, to the extent of the balance of such Net Available Cash
after application in accordance with clauses (A), (B) and (C), to cause
FMC Trust Finance S.a.r.l. Luxembourg to make an offer to the holders of
the 2008 7 7/8% Notes or the 2008 7 3/8% Notes, as the case may be, to
purchase the 2008 7 7/8% Notes or the 2008 7 3/8% Notes pursuant to and
subject to the conditions contained in the 2008 7 7/8% Indenture or the
2008 7 3/8% Indenture, as the case may be;
(E) fifth, to the extent of the balance of such Net Available Cash
after application in accordance with clauses (A), (B),(C) and (D), to
cause the note issuer to make an offer to the holders of the USD notes
on a pro rata basis to purchase the USD notes pursuant to and subject to
the conditions contained in the indenture for the USD notes; and
(F) sixth, to the extent of the balance of such Net Available Cash
after application in accordance with clauses (A), (B), (C), (D) and (E),
to cause the note issuer to make an offer to the holders of the Euro
notes on a pro rata basis to purchase the Euro notes pursuant to and
subject to the conditions contained in the indenture for the Euro notes;
provided, however, that in connection with any prepayment, repayment or purchase
of Indebtedness pursuant to clause (A), (C), (D), (E) or (F) above, the Company
or such Subsidiary shall retire such Indebtedness and shall cause the related
loan commitment (if any) to be permanently reduced in an amount equal to the
principal amount so prepaid, repaid or purchased.
Notwithstanding the foregoing provisions of this covenant, the Company and
the Subsidiaries will not be required to apply any Net Available Cash in
accordance with this covenant except to the extent that the aggregate Net
Available Cash from all Asset Dispositions which are not applied in accordance
with this covenant exceeds $20 million. Pending application of Net Available
Cash pursuant to this covenant, such Net Available Cash will be invested in
Permitted Investments.
For the purposes of this covenant, the following are deemed to be cash or
cash equivalents:
(1) the assumption of Indebtedness of the Company or any Subsidiary
and the release of the Company or such Subsidiary from all liability on
such Indebtedness in connection with such Asset Disposition; and
(2) securities received by the Company or any Subsidiary from the
transferee that are promptly converted by the Company or such Subsidiary
into cash.
(b) In the event of an Asset Disposition that requires the purchase of the
notes pursuant to clause (a)(2)(E) or clause (a)(2)(F) above, the note issuer
will be required to purchase the USD or Euro notes, as applicable, tendered
pursuant to an offer by the note issuer for such notes at a purchase price of
100% of the principal amount thereof (without premium), plus accrued but unpaid
interest, in accordance with the procedures (including prorating in the event of
oversubscription) set forth in the applicable indenture. The note issuer shall
not be required to make such an offer to purchase notes pursuant to this
covenant if the Net Available Cash available therefor is less than $20 million
(which
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lesser amount shall be carried forward for purposes of determining whether such
an offer is required with respect to any subsequent Asset Disposition).
(c) The note issuer will comply, to the extent applicable, with the
requirements of Section 14(e) of the Exchange Act and any other securities laws
or regulations in connection with the repurchase of notes under this covenant.
To the extent that the provisions of any securities laws or regulations conflict
with provisions of this covenant, the note issuer will comply with the
applicable securities laws and regulations and will not be deemed to have
breached its obligations under this clause by virtue thereof.
LIMITATION ON AFFILIATE TRANSACTIONS
(a) The Company will not, and will not permit any Subsidiary to, enter into
any transaction (including the purchase, sale, lease or exchange of any
property, employee compensation arrangements or the rendering of any service)
with any Affiliate of the Company (an "Affiliate Transaction") unless the terms
thereof:
(1) are no less favorable to the Company or such Subsidiary than those
that could be obtained at the time of such transaction in arm's length
dealings with a Person who is not such an Affiliate,
(2) if such Affiliate Transaction involves an amount in excess of $5
million, (i) are set forth in writing and (ii) have been approved by a
majority of the members of the Board of Directors of the Company or such
Subsidiary having no personal stake in such Affiliate Transaction; and
(3) if such Affiliate Transaction involves an amount in excess of $15
million, have been determined by a nationally recognized investment banking
firm or, in appropriate circumstances, an internationally recognized
engineering firm, to be fair from a financial standpoint to the Company and
its Subsidiaries.
(b) The provisions of paragraph (a) above shall not prohibit
(1) any Restricted Payment permitted to be paid pursuant to the
covenant described under "Limitation on Restricted Payments,"
(2) transactions or payments pursuant to any employee arrangements or
employee or director benefit plans entered into by the Company or any of
its Subsidiaries in the ordinary course of business of the Company or such
Subsidiary, and
(3) any Affiliate Transaction between the Company and a Wholly Owned
Subsidiary or between Wholly Owned Subsidiaries.
SENIOR SUBORDINATED INDEBTEDNESS; LIENS
The Company will not, and will not permit any Subsidiary to, Incur:
(1) any Indebtedness if such Indebtedness is subordinate or junior in
ranking in any respect to any Senior Indebtedness unless such Indebtedness
is Senior Subordinated Indebtedness or is expressly subordinated in right
of payment to Senior Subordinated Indebtedness or
(2) any Secured Indebtedness that is not Senior Indebtedness, unless
(A) contemporaneously therewith effective provision is made to
secure the notes equally and ratably with such Secured Indebtedness for
so long as such Secured Indebtedness is secured by a Lien,
(B) such Secured Indebtedness is permitted by clause (1), (4), (5)
or (7) of paragraph (b) of the covenant described under "Limitation on
Incurrence of Indebtedness,"
(C) such Secured Indebtedness is Incurred by a Subsidiary pursuant
to a revolving credit agreement as in effect on the Issue Date, or
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(D) such Secured Indebtedness is Refinancing Indebtedness in
respect of Secured Indebtedness Incurred by a Subsidiary pursuant to a
revolving credit agreement as in effect on the Issue Date.
LIMITATION ON MERGERS, ACQUISITIONS AND SALES OF ASSETS
The Indentures provide that the note issuer may not consolidate or merge
with or into (whether or not the note issuer is the Surviving Person), or sell,
assign, transfer, lease, convey or otherwise dispose of all or substantially all
of its properties and assets in one or more related transactions, to another
Person unless:
(1) the Surviving Person is a corporation organized and existing under
the laws of (i) in the case of the indenture for the USD notes, Germany,
the United Kingdom or Luxembourg, (ii) in the case of the indenture for the
Euro notes, any member state of the European Union (other than Greece or
Portugal) or Switzerland, or, (iii) in all cases the United States of
America, or any state thereof or the District of Columbia, or the
jurisdiction of formation of the note issuer;
(2) the Surviving Person (if other than the note issuer) assumes all
the obligations of the note issuer under the indentures and the notes
issued thereunder pursuant to a supplemental indentures in a form
reasonably satisfactory to the Indenture trustee;
(3) at the time of and immediately after such transaction, no Default
or Event of Default shall have occurred and be continuing;
(4) such consolidation, merger, conveyance, transfer or lease is
permitted under the applicable trust declaration and does not give rise to
any breach or violation of that trust declaration; and
(5) the note issuer delivers to the indenture trustee an Officers'
Certificate and an Opinion of Counsel, each stating that such
consolidation, merger or transfer and such supplemental indenture, if any,
comply with the applicable Indenture.
The Company will not and will not permit any other note guarantor to
consolidate with or merge with or into, or convey, transfer, lease, sell,
assign, or otherwise dispose of, in one transaction or a series of transactions,
all or substantially all of its properties and assets to any Person unless:
(1) the Surviving Person shall be a Person organized and existing
under the laws of Germany, the United Kingdom, the United States of
America, or any state thereof, or the District of Columbia, except in a
transaction or series of transactions involving the Company, the
jurisdiction of formation of the note issuer or, if the Surviving Person is
a corporation organized and existing under the laws of any other
jurisdiction, the note issuer delivers to the indenture trustee a written
opinion of legal counsel reasonably acceptable to the Indenture trustee to
the effect that the rights of the holders of the USD or Euro notes, as
applicable, would not be affected adversely as a result of the law of the
jurisdiction of organization of the Surviving Person, insofar as such law
affects the ability of the Surviving Person to pay and perform its
obligations and undertakings in connection with its note guaranty or the
ability of the Surviving Person to obligate itself to pay and perform such
obligations and undertakings or the ability of the holders to enforce such
obligations and undertakings;
(2) the Surviving Person (if other than the Company or such other note
guarantor) shall expressly assume, (A) in a transaction or series of
transactions involving the Company, by a supplemental indenture in a form
satisfactory to the indenture trustee, all of the obligations of the
Company under the applicable indenture and the Company's note guaranty, or
(B) in a transaction or series of transactions not involving the Company,
by a Guaranty Agreement, in a form satisfactory to the Indenture trustee,
all the obligations of such note guarantor, if any, under its note
guaranty;
(3) at the time of, and immediately after giving effect to, such
transaction or transactions on a pro forma basis (and treating any
Indebtedness which becomes an obligation of the resulting, surviving or
transferee Person as a result of such transaction as having been issued by
such Person at the time of such transaction), no Default shall have
occurred and be continuing;
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(4) in the case of a transaction or series of transactions involving
the Company, (A) the Surviving Person will have Consolidated Net Worth
(immediately after the transaction) equal to or greater than the
Consolidated Net Worth of the Company immediately preceding the transaction
and (B) at the time of such transaction and after giving pro forma effect
to such transaction, the Surviving Person would be permitted to incur at
least $1.00 of additional Indebtedness pursuant to paragraph (a) of the
covenant described under "-- Limitation on Incurrence of Indebtedness;" and
(5) the note issuer and the Company or such other note guarantor
delivers to the indenture trustee an Officers' Certificate and an Opinion
of Counsel, each stating that such consolidation, merger conveyance,
transfer, assignment, sale, lease or other disposition and such
supplemental indenture and Guaranty Agreement, if any, comply with the
applicable indenture.
SUCCESSOR TO NOTE ISSUER
The Company or a Wholly Owned Subsidiary, a "Successor," may assume the
obligations of the note issuer under the USD or Euro notes, as applicable, by
executing and delivering to the indenture trustee:
(a) a supplemental indenture which subjects such person to all of the
provisions of the applicable indenture as an issuer under that indenture;
and
(b) an Opinion of Counsel to the effect that such supplemental
indenture has been duly authorized and executed by such Person, and
constitutes the legal, valid, binding and enforceable obligation of such
Person, subject to customary exceptions; provided,
(1) the Successor is formed under the laws of (i) the United States
of America, or any state thereof, or the District of Columbia, (ii) in
the case of a Successor under the USD notes, Germany, the United Kingdom
or any other member state of the European Union or (iii) in the case of
a Successor under the Euro notes, any member state of the European Union
(other than Greece or Portugal), Switzerland, or the jurisdiction of the
formation of the note issuer;
(2) no Additional Amounts would be or become payable with respect
to the applicable notes at the time of such assumption, or as a result
of any change in the laws of the jurisdiction of formation of such
Successor that was reasonably foreseeable at such time;
(3) the assumption of such obligations by the Successor will not
cause the applicable trust to fail or cease to be classified for U.S.
federal income tax purposes as a grantor trust or another entity which
is not subject to U.S. federal income tax at the entity level and the
assets and income of which are treated for U.S. federal income tax
purposes as held and derived directly by holders of interests in such
trust; and
(4) if a Wholly Owned Subsidiary is the Successor, the Company will
continue to unconditionally guarantee, on a senior subordinated basis,
the obligations assumed by such Successor. The Successor will succeed
to, and be substituted for, and may exercise every right and power of,
the note issuer under the applicable indenture with the same effect as
if it were the note issuer thereunder, and the former note issuer will
be discharged from all obligations and covenants under that indenture
and the related notes.
REPORTS
Whether or not required by the rules and regulations of the SEC, so long as
any notes are outstanding, the Company will provide the indenture trustee and
the holders with:
(1) all annual financial information that would be required to be
contained in a filing with the SEC on Form 20-F as if the Company were
required to file reports on such Form; and
(2) quarterly financial statements as of and for the period from the
beginning of each year to the close of each quarterly period (other than
the fourth quarter), together with comparable information for the
corresponding period of the preceding year, including, in each case, a
"Management's
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Discussion and Analysis of Financial Condition and Results of Operations"
and, with respect to the annual information only, a report thereon from the
Company's certified independent public accountants. In addition, whether or
not required by the rules and regulations of the SEC, the Company will file
a copy of all such information and reports with the SEC for public
availability and make such information and reports available to securities
analysts and prospective investors upon request.
The Company will also make the reports available at the office of the
Luxembourg paying agent.
OWNERSHIP OF THE TRUSTS AND THE NOTE ISSUER
The Company will continue:
(1) to directly or indirectly maintain 100% ownership of the common
securities of each trust; provided, however, that any permitted successor
of the Company under an Indenture may succeed to the Company's ownership of
the related common securities; and
(2) to use its reasonable efforts to cause each trust:
(A) to remain a statutory business trust, except in connection with
the distribution of notes to the holders of common securities and trust
preferred securities in liquidation of the applicable trust, the
redemption of all of the common securities and trust preferred
securities, or certain mergers, consolidations or amalgamations, each as
permitted by the applicable trust declaration; and
(B) to otherwise continue to be classified for U.S. federal income
tax purposes as a grantor trust or another entity which is not subject
to U.S. federal income tax at the entity level and the assets and income
of which are treated for U.S. federal income tax purposes as held and
derived directly by holders of interests in the entity.
The Company will continue to directly or indirectly maintain 100% ownership
of the Capital Stock of the note issuer, provided, that any permitted successor
of the Company under the indentures may succeed to the Company's ownership of
such Capital Stock.
The Company will cause the note issuer to engage only in those activities
that are necessary, convenient or incidental to:
(1) issuing and selling the old notes and any additional Senior
Subordinated Indebtedness permitted by the indentures, and advancing or
distributing the proceeds thereof to the Company and its subsidiaries and
performing its obligations relating to the notes and any such additional
Senior Subordinated Indebtedness, pursuant to the terms thereof and of the
indentures and any other applicable indenture;
(2) conducting or participating in the exchange offers and issuing the
USD notes and the Euro notes; and
(3) guaranteeing the Company's senior credit facility.
CHANGE OF CONTROL
Each holder of the notes, upon the occurrence of a Change of Control
Triggering Event, will have the right to require that the note issuer repurchase
such holder's USD or Euro notes, as applicable, at a purchase price in cash
equal to 101% of the principal amount thereof plus accrued and unpaid interest,
if any, to the date of purchase (subject to the right of holders of record on
the relevant record date to receive interest due on the relevant interest
payment date).
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Within 30 days following a Change of Control Triggering Event, the note
issuer will mail a notice to each holder with a copy to the indenture trustee
stating:
(1) that a Change of Control Triggering Event has occurred and that
such holder has the right to require the note issuer to purchase such
holder's USD or Euro notes, as applicable, at a purchase price in cash
equal to 101% of the principal amount thereof plus accrued and unpaid
interest, if any, to the date of purchase (subject to the right of holders
of record on the relevant record date to receive interest on the relevant
interest payment date);
(2) the circumstances and relevant facts regarding such Change of
Control Triggering Event (including information with respect to pro forma
historical income, cash flow and capitalization after giving effect to such
Change of Control);
(3) the repurchase date (which shall be no earlier than 30 days nor
later than 60 days from the date such notice is mailed);
(4) that each USD or Euro note will be subject to repurchase only in
the amount of $1,000 or E1,000, as applicable, or integral amounts thereof;
and
(5) the instructions determined by the note issuer, consistent with
the covenant described hereunder, that a holder must follow in order to
have its notes purchased.
The note issuer will comply, to the extent applicable, with the
requirements of Section 14(e) of the Exchange Act and any other securities laws
or regulations in connection with the repurchase of Notes pursuant to this
covenant. To the extent that the provisions of any securities laws or
regulations conflict with the provisions of this covenant, the note issuer will
comply with the applicable securities laws and regulations and will not be
deemed to have breached its obligations under this covenant by virtue thereof.
The Change of Control purchase feature is a result of negotiations between
the Company and the initial purchasers in connection with our issuing the old
trust preferred securities. We have no present intention to engage in a
transaction involving a Change of Control, although it is possible that we would
decide to do so in the future. Subject to the limitations discussed below, we
could, in the future, enter into certain transactions, including acquisitions,
refinancings or other recapitalizations, that would not constitute a Change of
Control under the indentures, but that could increase the amount of Indebtedness
outstanding at such time or otherwise affect our capital structure or credit
ratings. Restrictions on our ability to incur additional Indebtedness are
contained in the covenants described under "-- Certain Covenants -- Limitation
on Incurrence of Indebtedness." These restrictions can only be waived with the
consent of the holders of a majority in principal amount of the USD and Euro
notes then outstanding under the indentures. Except for the limitations
contained in such covenants, however, the indentures will not contain any
covenants or provisions that may afford holders of the notes protection in the
event of a highly leveraged transaction.
The note issuer's ability to repurchase notes upon a Change of Control may
be limited by a number of factors. The occurrence of some of the events that
constitute a Change of Control could constitute a default under our senior
credit facility. In addition, the 9% Indenture, the 2008 7 7/8% Indenture and
the 2008 7 3/8% Indenture contain covenants similar to this "Change of Control"
covenant which, in the event of a Change of Control, could make it difficult for
the note issuer to repurchase the notes. Our future indebtedness may contain
prohibitions on the occurrence of certain events that would constitute a Change
of Control or require such indebtedness to be repurchased upon a Change of
Control. Moreover, the exercise by the holders of their right to require the
note issuer to repurchase the notes could cause a default under such
indebtedness, even if the Change of Control itself does not, due to the
financial effect of such repurchase on us. Finally, the note issuer's ability to
pay cash to the holders of notes following the occurrence of a Change of Control
may be limited by our then existing financial resources. We cannot assure you
that sufficient funds will be available when necessary to make any required
repurchases. The provisions under the indentures relating to the note issuer's
obligation to make an offer to repurchase notes as a result of a Change of
Control may be waived or modified with the written consent of the holders of a
majority in principal amount of the notes issued under the applicable indenture.
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EVENTS OF DEFAULT
The indentures provide that any one or more of the following described
events, which has occurred and is continuing, constitutes an "Event of Default"
with respect to the USD or Euro notes issued under the applicable indenture:
(1) failure for 30 days to pay interest on the applicable notes,
including any Additional Amounts in respect thereof, when due; or
(2) failure to pay principal of or premium, if any, on the applicable
notes when due, whether at maturity, upon redemption, by declaration or
otherwise; or
(3) failure to observe or perform any other covenant contained in the
applicable indenture for 90 days after notice as provided in that
indenture; or
(4) default under any mortgage, indenture or instrument under which
there may be issued or by which there may be secured or evidenced any
indebtedness for money borrowed by us or any of our Subsidiaries (or the
payment of which is guaranteed by us), whether such Indebtedness or
Guarantee now exists or is incurred after the issue date, if (A) such
default results in the acceleration of such Indebtedness prior to its
express maturity or will constitute a default in the payment of such
Indebtedness and (B) the principal amount of any such Indebtedness that has
been accelerated or not paid at maturity, when added to the aggregate
principal amount of all other such Indebtedness, at such time, that has
been accelerated or not paid at maturity, exceeds $25 million; or
(5) the dissolution, winding up or termination of the applicable
trust, except in connection with the distribution of USD or Euro notes to
the holders of the related trust preferred securities in liquidation of the
trust and in connection with certain mergers, consolidations or
amalgamations permitted by the applicable trust declaration; or
(6) certain events in bankruptcy, insolvency or reorganization of the
note issuer or Fresenius Medical Care.
The indenture trustee or the holders of not less than 25% in aggregate
outstanding principal amount of the USD or Euro notes, as applicable, may
declare the principal of and interest (including any Additional Amounts) on the
applicable notes due and payable immediately on the occurrence of an Event of
Default; provided, however, that, after such acceleration, but before a judgment
or decree based on acceleration, the holders of a majority in aggregate
principal amount of the outstanding USD or Euro notes, as applicable, may, under
certain circumstances, rescind and annul the acceleration if all Events of
Default, other than the nonpayment of accelerated principal, have been cured or
waived as provided in the related indenture. For information as to waiver of
defaults, see "-- Modification of the Indenture."
The preferred trustee is the initial holder of the notes. However, while
the trust preferred securities are outstanding, the preferred trustee has agreed
under the trust declarations not to waive an Event of Default with respect to
the USD or Euro notes, as applicable, without the consent of holders of a
majority in aggregate liquidation amount of the related trust preferred
securities then outstanding.
A default under any of our or any Subsidiary's other indebtedness or that
of any of our respective joint ventures or the trust would not constitute an
Event of Default under the notes.
Subject to the provisions of the indentures relating to the duties of the
indenture trustee, in case an event of default shall occur and be continuing,
the indenture trustee will be under no obligation to exercise any of its rights
or powers under an indenture at the request or direction of any holders of USD
or Euro notes issued under that indenture unless such holders shall have offered
to the indenture trustee reasonable indemnity. Subject to the provisions for the
indemnification of the indenture trustee, the holders of a majority in aggregate
principal amount of the USD or Euro notes then outstanding will have the right
to direct the time, method and place of conducting any proceeding for any remedy
available to such indenture trustee, or exercising any trust or power conferred
on the indenture trustee.
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No holder of any USD or Euro note will have any right to institute any
proceeding with respect to the related indenture or for any remedy thereunder,
unless the holder will have previously given to the indenture trustee written
notice of a continuing Event of Default and, if the preferred trustee is not the
holder of the USD or Euro notes, as applicable, unless the holders of at least
25% in aggregate principal amount of those notes then outstanding will also have
made written request, and offered reasonable indemnity, to the indenture trustee
to institute such proceeding as indenture trustee, and the indenture trustee
will not have received from the holders of a majority in aggregate principal
amount of the outstanding USD or Euro notes, as applicable, a direction
inconsistent with such request and shall have failed to institute such
proceeding within 60 days. However, these limitations do not apply to a suit
instituted by a holder of a note for enforcement of payment of the principal of
and premium, if any, or interest on such note on or after the respective due
dates expressed in such note.
The holders of a majority in aggregate outstanding principal amount of the
USD or Euro notes, as applicable, affected thereby may, on behalf of the holders
of all those notes waive any past default, except a default in the payment of
principal, premium, if any, or interest or a default in respect of a covenant or
provision that cannot be modified or amended without consent of the holder of
each affected USD or Euro note. The note issuer is required to file annually
with the Indenture trustee and the trustees a certificate as to whether or not
we and the note issuer are in compliance with all the conditions and covenants
under the indentures.
MODIFICATION OF THE INDENTURES
Each indenture contains provisions permitting the note issuer and the
indenture trustee, with the consent of the holders of not less than a majority
in principal amount of the USD or Euro notes issued under that indenture, to
modify that indenture or any supplemental indenture, provided that, without the
consent of the holder of each outstanding USD or Euro note affected thereby such
modification may not:
(1) extend the Stated Maturity of any such note, or reduce the
principal amount thereof, or reduce the rate or extend the time of payment
of interest thereon, or reduce any premium payable upon the redemption
thereof,
(2) change the place or currency of payment of principal of, or any
premium or interest on, any such note,
(3) impair the right to institute suit for the enforcement of any
payment on or with respect to any such note,
(4) modify the subordination provisions in a manner adverse to the
holders of such notes, or
(5) reduce the percentage in principal amount of notes whose holders
are required to consent to any modification or amendment of the applicable
indenture.
In addition, the note issuer and the indenture trustee may execute, without
the consent of any holder of notes, any supplemental indenture to cure any
ambiguities, comply with the Trust Indenture Act and for certain other customary
purposes.
GOVERNING LAW
The indentures and the notes are governed by, and will be construed in
accordance with, the laws of the State of New York.
INFORMATION CONCERNING THE INDENTURE TRUSTEE
The indenture trustee, prior to default, undertakes to perform only such
duties as are specifically set forth in the indentures and, after default, shall
exercise the same degree of care as a prudent individual would exercise in the
conduct of his or her own affairs. Subject to such provision, the indenture
trustee is under no obligation to exercise any of the powers vested in it by the
indentures at the request of any holder of USD or Euro notes, unless offered
reasonable indemnity by such holder against the costs,
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expenses and liabilities which might be incurred thereby. The indenture trustee
is not required to expend or risk its own funds or otherwise incur personal
financial liability in the performance of its duties if the indenture trustee
reasonably believes that repayment or adequate indemnity is not reasonably
assured to it.
CERTAIN DEFINITIONS
In the discussion below, the "Company" refers to Fresenius Medical Care.
As used in the indenture:
"Additional Assets" means:
(1) any property or assets (other than Indebtedness and Capital Stock)
in a Related Business,
(2) the Capital Stock of a Person that becomes a Subsidiary as a
result of the acquisition of such Capital Stock by the Company or another
Subsidiary, or
(3) Capital Stock constituting a minority interest in any Person that
at such time is a Subsidiary; provided, however, that any such Subsidiary
described in this clause or clause (2) above is primarily engaged in a
Related Business.
"Affiliate" of any specified Person means:
(1) any other Person, directly or indirectly, controlling or
controlled by, or
(2) under direct or indirect common control with such specified
Person,
provided, however, that an Affiliate of the Company shall not be deemed to
include the trusts, Fresenius Medical Care Capital Trust, Fresenius Medical Care
Capital Trust II or Fresenius Medical Capital Trust III, or any business trust
organized and operated on such similar terms. For the purposes of this
definition, "control" when used with respect to any Person means the power to
direct the management and policies of such Person, directly or indirectly,
whether through the ownership of voting securities, by contract or otherwise;
and the terms "controlling" and controlled" have meanings correlative to the
foregoing.
For purposes of the provisions described under "-- Certain
Covenants -- Limitation on Restricted Payments," "-- Certain
Covenants -- Limitation on Affiliate Transactions" and "-- Certain Covenants --
Limitations on Sales of Assets and Subsidiary Stock" only, "Affiliate" shall
also mean any beneficial owner of Capital Stock representing 5% or more of the
total voting power of the Voting Stock (on a fully diluted basis) of the Company
or of rights or warrants to purchase such Capital Stock (whether or not
currently exercisable) and any Person who would be an Affiliate of any such
beneficial owner pursuant to the first sentence hereof.
"Asset Disposition" means any sale, lease, transfer or other disposition
(or series of related sales, leases, transfers or dispositions) by the Company
or any Subsidiary, including any disposition by means of a merger, consolidation
or similar transaction (each referred to for the purposes of this definition as
a "disposition"), of:
(1) any shares of Capital Stock of any Subsidiary (other than
directors qualifying shares or shares required by applicable law to be held
by a Person other than the Company or a Subsidiary),
(2) all or substantially all the assets of any division or line of
business of the Company or any Subsidiary, or
(3) any other assets of the Company or any Subsidiary outside of the
ordinary course of business of the Company or such Subsidiary,
other than, in the case of (1), (2) and (3) above,
(A) a disposition by a Subsidiary to the Company or by the Company or
a Subsidiary to a Wholly Owned Subsidiary, and
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(B) for purposes of the covenant described under "-- Certain
Covenants -- Limitation on Sales of Assets and Subsidiary Stock" only, a
disposition that constitutes a Restricted Payment permitted by the covenant
described under "-- Certain Covenants -- Limitation on Restricted
Payments").
"Average Life" means, as of the date of determination, with respect to any
Indebtedness or Preferred Stock, the quotient obtained by dividing:
(1) the sum of the products of numbers of years from the date of
determination to the dates of each successive scheduled principal payment
of such Indebtedness or redemption or similar payment with respect to such
Preferred Stock multiplied by the amount of such payment by
(2) the sum of all such payments.
"Board of Directors" means, with respect to the note issuer, the Company or
a Subsidiary, as the case may be, the Board of Directors (or other body
performing functions similar to any of those performed by a Board of Directors
including those performed, in the case of a German corporation, by the Managing
Board or the Supervisory Board) of such person or any committee thereof duly
authorized to act on behalf of such Board (or other body).
"Business Day" means any day other than:
(1) a Saturday or Sunday,
(2) a day on which banking institutions in New York City, London,
Frankfurt am Main, or Luxembourg are authorized or required by law or
executive order to remain closed,
(3) with respect to the Euro trust preferred securities only, a day on
which the Trans-European Automated Real-Time Gross-settlement Express
Transfer System is authorized or required by law to close, or
(4) a day on which the corporate trust office of the indenture
trustee, or, with respect to the trust preferred securities, the principal
office of the preferred trustee under the trust declarations, is closed for
business.
"Capital Lease Obligations" means an obligation that is required to be
classified and accounted for as a capital lease for financial reporting purposes
in accordance with GAAP, and the amount of Indebtedness represented by such
obligation shall be the capitalized amount of such obligation determined in
accordance with GAAP; and the Stated Maturity thereof shall be the date of the
last payment of rent or any other amount due under such lease prior to the first
date upon which such lease may be terminated by the lessee without payment of a
penalty.
"Capital Stock" of any Person means any and all shares, interests, rights
to purchase, warrants, options, participations or other equivalents of or
interests in (however designated) equity of such Person, including any Preferred
Stock, but excluding any debt securities convertible into such equity.
"Change of Control" means any transaction or series of transactions in
which any Person or group (within the meaning of Rule 13d-5 under the Exchange
Act and Section 13(d) and 14(d) of the Exchange Act) other than Fresenius AG and
its subsidiaries:
(1) acquires all or substantially all of the Company's assets, or
(2) becomes the direct or indirect "beneficial owner" (as defined in
Rule 13d-3 under the Exchange Act), by way of merger, consolidation, other
business combination or otherwise, of greater than 50% of the total voting
power (on a fully diluted basis as if all convertible securities had been
converted and all options and warrants had been exercised) entitled to vote
in the election of directors of the Company or the Surviving Person (if
other than the Company).
"Change of Control Triggering Event" means the occurrence of both a Change
of Control and a Rating Decline.
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"Consolidated Coverage Ratio" as of any date of determination means the
ratio of (x) the aggregate amount of EBITDA for the Company's most recently
ended four full fiscal quarters for which internal financial statements are
available immediately preceding the date of such determination to (y)
Consolidated Interest Expense for such four fiscal quarters; provided, however,
that:
(1) if the Company or any Subsidiary has Incurred any Indebtedness
since the beginning of such period that remains outstanding or if the
transaction giving rise to the need to calculate the Consolidated Coverage
Ratio is an Incurrence of Indebtedness, or both, EBITDA and Consolidated
Interest Expense for such period shall be calculated after giving effect on
a pro forma basis to such Indebtedness as if such Indebtedness had been
Incurred on the first day of such period and the discharge of any other
Indebtedness repaid, repurchased, defeased or otherwise discharged with the
proceeds of such new Indebtedness as if such discharge had occurred on the
first day of such period,
(2) if since the beginning of such period the Company or any
Subsidiary shall have made any Asset Disposition, the EBITDA for such
period shall be reduced by an amount equal to the EBITDA (if positive)
directly attributable to the assets which are the subject of such Asset
Disposition for such period, or increased by an amount equal to the EBITDA
(if negative), directly attributable thereto for such period and
Consolidated Interest Expense for such period shall be reduced by an amount
equal to the Consolidated Interest Expense directly attributable to any
Indebtedness of the Company or any Subsidiary repaid, repurchased, defeased
or otherwise discharged with respect to the Company and its continuing
Subsidiaries in connection with such Asset Disposition for such period (or,
if the Capital Stock of any Subsidiary is sold, the Consolidated Interest
Expense for such period directly attributable to the Indebtedness of such
Subsidiary to the extent the Company and its continuing Subsidiaries are no
longer liable for such Indebtedness after such sale),
(3) if since the beginning of such period the Company or any
Subsidiary (by merger or otherwise) shall have made an Investment in any
Subsidiary (or any Person which becomes a Subsidiary) or an acquisition of
assets, including any acquisition of assets occurring in connection with a
transaction requiring a calculation to be made hereunder, which constitutes
all or substantially all of an operating unit of a business, EBITDA and
Consolidated Interest Expense for such period shall be calculated after
giving pro forma effect thereto (including the Incurrence of any
Indebtedness) as if such Investment or acquisition occurred on the first
day of such period, and
(4) if since the beginning of such period any Person (that
subsequently became a Subsidiary or was merged with or into the Company or
any Subsidiary since the beginning of such period) shall have made any
Asset Disposition, any Investment or acquisition of assets that would have
required an adjustment pursuant to clause (2) or (3) above if made by the
Company or a Subsidiary during such period, EBITDA and Consolidated
Interest Expense for such period shall be calculated after giving pro forma
effect thereto as if such Asset Disposition, Investment or acquisition
occurred on the first day of such period.
For purposes of this definition, whenever pro forma effect is to be given to an
acquisition of assets, the amount of income or earnings relating thereto and the
amount of Consolidated Interest Expense associated with any Indebtedness
Incurred in connection therewith, the pro forma calculations shall be determined
in good faith by a responsible financial or accounting officer of the Company.
If any Indebtedness bears a floating rate of interest and is being given pro
forma effect, the interest of such Indebtedness shall be calculated as if the
rate in effect on the date of determination had been the applicable rate for the
entire period (taking into account any Interest Rate Agreement applicable to
such Indebtedness if such Interest Rate Agreement has a remaining term in excess
of 12 months).
"Consolidated Interest Expense" means, for any period, the total interest
expense of the Company and its consolidated Subsidiaries, plus, to the extent
not included in such total interest expense, and to the extent incurred by the
Company or its Subsidiaries,
(1) interest expense attributable to capital leases,
(2) amortization of debt discount and debt issuance cost,
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(3) capitalized interest,
(4) non-cash interest expenses,
(5) commissions, discounts and other fees and charges owed with
respect to letters of credit and bankers' acceptance financing,
(6) net costs associated with Hedging Obligations (including
amortization of fees),
(7) Preferred Stock dividends in respect of all Preferred Stock held
by Persons other than the Company or a Wholly Owned Subsidiary,
(8) interest incurred in connection with Investments in discontinued
operations,
(9) interest accruing on any Indebtedness of any other Person to the
extent such Indebtedness is Guaranteed by the Company or any Subsidiary,
and
(10) the cash contributions to any employee stock ownership plan or
similar trust to the extent such contributions are used by such plan or
trust to pay interest or fees to any Person (other than the Company) in
connection with Indebtedness Incurred by such plan or trust.
"Consolidated Net Income" means, for any period, the net income of the
Company and its consolidated Subsidiaries; provided, however, that there shall
not be included in such Consolidated Net Income:
(1) any net income of any Person if such Person is not a Subsidiary,
except that (A) subject to the exclusion contained in clause (4) below, the
Company's equity in the net income of any such Person for such period shall
be included in such Consolidated Net Income up to the aggregate amount of
cash actually distributed by such Person during such period to the Company
or a Subsidiary as a dividend or other distribution (subject, in the case
of a dividend or other distribution paid to a Subsidiary, to the
limitations contained in clause (3) below) and (B) the Company's equity in
a net loss of any such Person for such period shall be included in
determining such Consolidated Net Income,
(2) any net income (or loss) of any Person acquired by the Company or
a Subsidiary in a pooling of interests transaction for any period prior to
the date of such acquisition,
(3) any net income of any Subsidiary that is not a Wholly Owned
Subsidiary if such Subsidiary is subject to contractual, governmental or
regulatory restrictions, directly or indirectly, on the payment of
dividends or the making of distributions by such Subsidiary, directly or
indirectly, to the Company, except that (A) subject to the exclusion
contained in clause (4) below, the Company's equity in the ]net income of
any such Subsidiary for such period shall be included in such Consolidated
Net Income up to the aggregate amount of cash actually distributed by such
Subsidiary during such period to the Company or another Subsidiary as a
dividend or other distribution (subject, in the case of a dividend or other
distribution paid to another Subsidiary that is not a Wholly Owned
Subsidiary, to the limitation contained in this clause) and (B) the
Company's equity in a net loss of any such Subsidiary for such period shall
be included in determining such Consolidated Net Income,
(4) any gain (but not loss) realized upon the sale or other
disposition of any assets of the Company or its consolidated Subsidiaries
(including pursuant to any sale and leaseback arrangement) that is not sold
or otherwise disposed of in the ordinary course of business and any gain
(but not loss) realized upon the sale or other disposition of any Capital
Stock of any Person,
(5) extraordinary gains or losses, and
(6) the cumulative effect of a change in accounting principles.
"Consolidated Net Worth" means the total of the amounts shown on the
balance sheet of the Company and its consolidated Subsidiaries, determined on a
consolidated basis in accordance with GAAP, as of the end of the Company's most
recently ended fiscal quarter for which internal financial statements
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are available prior to the taking of any action for the purpose of which the
determination is being made, as:
(1) the par or stated value of all outstanding Capital Stock of the
Company plus
(2) paid-in capital or capital surplus relating to such Capital Stock
plus
(3) any retained earnings or earned surplus less (A) any accumulated
deficit and (B) any amounts attributable to Disqualified Stock.
"Credit Agreements" means the NMC Credit Agreement and the Other Bank
Agreements; provided, that the aggregate principal amount of Indebtedness that
may be outstanding, at any one time, under such agreements does not exceed $2.5
billion.
"Currency Agreement" means any foreign currency exchange contract, currency
swap agreement or other similar agreement or arrangement designed and entered
into to protect the Company or any Subsidiary against fluctuations in currency
exchange rates.
"Default" means any event that is, or after notice or passage of time or
both would be, an Event of Default (as defined herein).
"Disqualified Stock" means, with respect to any Person, any Capital Stock
that by its terms (or by the terms of any security into which it is convertible
or for which it is exchangeable) or upon the happening of any event:
(1) matures or is mandatorily redeemable pursuant to a sinking fund
obligation or otherwise,
(2) is convertible or exchangeable for Indebtedness or Disqualified
Stock, or
(3) is redeemable at the option of the holder thereof, in whole or in
part.
In each case on or prior to the first anniversary of the Stated Maturity of the
notes; provided, however, that any Capital Stock that would not constitute
Disqualified Stock but for provisions thereof giving holders thereof the right
to require such Person to repurchase or redeem such Capital Stock upon the
occurrence of an "asset sale" or "change of control" occurring prior to the
first anniversary of the Stated Maturity of the notes shall not constitute
Disqualified Stock if the "asset sale" or "change of control" provisions
applicable to such Capital Stock are not more favorable to the holders of such
Capital Stock than the provisions described under "-- Certain
Covenants -- Limitation on Sales of Assets and Subsidiary Stock" and "-- Change
of Control."
"EBITDA" for any period means the sum of Consolidated Net Income, plus
Consolidated Interest Expense plus the following to the extent deducted in
calculating such Consolidated Net Income:
(1) all income tax expense of the Company and its Subsidiaries,
(2) depreciation expense, and
(3) amortization expense, in each case for such period.
Notwithstanding the foregoing, the provision for taxes based on the income or
profits of, and the depreciation and amortization of, a Subsidiary that is not a
Wholly Owned Subsidiary shall be added to Consolidated Net Income to compute
EBITDA only to the extent (and in the same proportion) that the net income of
such Subsidiary was included in calculating Consolidated Net Income and only if
a corresponding amount would be permitted at the date of determination to be
dividended to the Company by such Subsidiary without prior approval (that has
not been obtained), pursuant to the terms of its charter and all agreements,
instruments, judgments, decrees, orders, statutes, rules and governmental
regulations applicable to such Subsidiary or its stockholders.
"E" or "euro" means the euro, the common currency of the European Monetary
Union.
"Exchange Act" means the U.S. Securities Exchange Act of 1934, as amended.
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"GAAP" means generally accepted accounting principles in the United States
of America as in effect as of the Issue Date, including those set forth:
(1) in the opinions and pronouncements of the Accounting Principles
Board of the American Institute of Certified Public Accountants,
(2) statements and pronouncements of the Financial Accounting
Standards Board,
(3) in such other statements by such other entity as approved by a
significant segment of the accounting profession, and
(4) the rules and regulations of the SEC governing the inclusion of
financial statements (including pro forma financial statements) in periodic
reports required to be filed pursuant to Section 13 of the Exchange Act,
including opinions and pronouncements in staff accounting bulletins and
similar written statements from the accounting staff of the SEC.
"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness or other obligation of any
Person and any obligation, direct or indirect, contingent or otherwise, of such
Person:
(1) to purchase or pay (or advance or supply funds for the purchase or
payment of) such Indebtedness or other obligation of such Person (whether
arising by virtue of partnership arrangements, or by agreements to
keep-well, to purchase assets, goods, securities or services, to take-
or-pay or to maintain financial statement conditions or otherwise), or
(2) entered into for the purpose of assuring in any other manner the
obligee of such Indebtedness or other obligation of the payment thereof or
to protect such obligee against loss in respect thereof (in whole or in
part);
provided, however, that the term "Guarantee" shall not include endorsements for
collection or deposit in the ordinary course of business. The term "Guarantee"
used as a verb has a corresponding meaning. The term "Guarantor" shall mean any
Person Guaranteeing any obligation.
"Guaranty Agreement" means, in the context of a consolidation, merger or
sale of all or substantially all of the assets of a note guarantor, an agreement
by which the Surviving Person from such a transaction expressly assumes all of
the obligations of such note guarantor under its note guaranty.
"Hedging Obligations" of any Person means the obligations of such Person
pursuant to any Interest Rate Agreement or Currency Agreement.
"Incur" means issue, assume, Guarantee, incur or otherwise become liable
for; provided, however, that any Indebtedness or Capital Stock of a Person
existing at the time such Person becomes a Subsidiary (whether by merger,
consolidation, acquisition or otherwise) shall be deemed to be Incurred by such
Subsidiary at the time it becomes a Subsidiary. The term "Incurrence" when used
as a noun shall have a correlative meaning. The accretion of principal of a
non-interest bearing or other discount security shall be deemed the Incurrence
of Indebtedness.
"Indebtedness" means, with respect to any Person on any date of
determination (without duplication):
(1) the principal of and premium (if any) in respect of (A)
indebtedness of such Person for money borrowed and (B) indebtedness
evidenced by notes, debentures, bonds or other similar instruments for the
payment of which such Person is responsible or liable,
(2) all Capital Lease Obligations of such Person,
(3) all obligations of such Person issued or assumed as the deferred
purchase price of property or services, all conditional sale obligations of
such Person and all obligations of such Person under any title retention
agreement (other than (x) customary reservations or retentions of title
under agreements with suppliers entered into in the ordinary course of
business, (y) trade debt incurred in the ordinary course of business and
due within six months of the incurrence thereof and
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(z) obligations incurred under a pension, retirement or deferred
compensation program or arrangement regulated under the Employee Retirement
Income Security Act of 1974, as amended, or the laws of a foreign
government),
(4) all obligations of such Person for the reimbursement of any
obligor on any letter of credit, bank guaranty, banker's acceptance or
similar credit transaction (other than obligations with respect to letters
of credit and bank Guarantees (A) not made under the NMC Credit Agreement
and (B) securing obligations (other than obligations described in (1)
through (3) above) entered into in the ordinary course of business of such
Person to the extent such letters of credit are not drawn upon or, if and
to the extent drawn upon, such drawing is reimbursed no later than the
tenth Business Day following receipt by such Person of a demand for
reimbursement following payment on the letter of credit),
(5) the amount of all obligations of such Person with respect to the
redemption, repayment or other repurchase of any Disqualified Stock or,
with respect to any subsidiary of such Person, any Preferred Stock (but
excluding, in each case, any accrued dividends),
(6) all obligations of the type referred to in clauses (1) through (5)
of other Persons and all dividends of other Persons for the payment of
which, in either case, such Person is responsible or liable, directly or
indirectly, as obligor, guarantor or otherwise, including by means of any
Guarantee,
(7) all obligations of the type referred to in clauses (1) through (6)
of other Persons secured by any Lien on any property or asset of such
Person (whether or not such obligation is assumed by such Person), the
amount of such obligation being deemed to be the lesser of the value of
such property or assets or the amount of the obligation so secured, and
(8) to the extent not otherwise included in this definition, Hedging
Obligations of such Person.
The amount of Indebtedness of any Person at any date shall be the outstanding
balance at such date of all unconditional obligations as described above and the
maximum liability, upon the occurrence of the contingency giving rise to the
obligation, of any contingent obligations at such date.
"Interest Rate Agreement" means any interest rate swap agreement, interest
rate cap agreement or other financial agreement or arrangement designed and
entered into to protect the Company or any Subsidiary against fluctuations in
interest rates.
"Investment" in any Person means any direct or indirect advance, loan
(other than advances to customers in the ordinary course of business that are
recorded as accounts receivable on the balance sheet of such Person) or other
extensions of credit (including by way of Guarantee or similar arrangement) or
capital contribution to (by means of any transfer of cash or other property to
others or any payment for property or services for the account or use of
others), or any purchase or acquisition of Capital Stock, Indebtedness or other
similar instruments issued by such Person.
"Investment Grade" means a rating of BBB- or higher by S&P and Baa3 or
higher by Moody's or the equivalent of such ratings by S&P or Moody's and the
equivalent in respect of Rating Categories of any Rating Agencies substituted
for S&P or Moody's.
"Investment Grade Status" exists as of any time if at such time (i) the
rating assigned to the notes by Moody's is at least Baa3 (or the equivalent) or
higher and (ii) the rating assigned to the notes by S&P is at least BBB- (or the
equivalent) or higher.
"Issue Date" means the date on which the notes are originally issued.
"Lien" means any mortgage, pledge, security interest, encumbrance, lien or
charge of any kind (including any conditional sale or other title retention
agreement or lease in the nature thereof).
"Moody's" means Moody's Investors Service, Inc. and its successors.
"Net Available Cash" from an Asset Disposition means cash payments received
therefrom (including any cash payments received by way of deferred payment of
principal pursuant to a note or installment
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receivable or otherwise, but only as and when received, but excluding any other
consideration received in the form of assumption by the acquiring Person of
Indebtedness or other obligations relating to such properties or assets or
received in any other non-cash form) in each case net of:
(1) all legal, title and recording tax expenses, commissions and other
fees and expenses incurred, and all federal, state, provincial, foreign and
local taxes required to be accrued as a liability under GAAP, as a
consequence of such Asset Disposition,
(2) all payments made on any Indebtedness which is secured by any
assets subject to such Asset Disposition, in accordance with the terms of
any Lien upon or other security agreement of any kind with respect to such
assets, or which must by its terms, or in order to obtain a necessary
consent to such Asset Disposition, or by applicable law be, repaid out of
the proceeds from such Asset Disposition,
(3) all distributions and other payments required to be made to
minority interest holders in Subsidiaries or joint ventures as a result of
such Asset Disposition, and
(4) the deduction of appropriate amounts provided by the seller as a
reserve, in accordance with GAAP, against any liabilities associated with
the property or other assets disposed in such Asset Disposition and
retained by the Company or any Subsidiary after such Asset Disposition.
"Net Cash Proceeds" with respect to any issuance or sale of Capital Stock,
means the cash proceeds of such issuance or sale net of attorneys' fees,
accountants' fees, underwriters' or placement agents' fees, discounts or
commissions and brokerage, consultant and other fees actually incurred in
connection with such issuance or sale and net of taxes paid or payable as a
result thereof.
"9% Indenture" means the Senior Subordinated Indenture dated as of November
27, 1996, as amended by the Supplemental Indenture dated as of February 19, 1998
and the Second Supplemental Indenture dated as of November 30, 1998, by and
between FMC Trust Finance S.a.r.l. Luxembourg, Fleet National Bank (as
predecessor to State Street Bank and Trust Company), as trustee, the Company and
the other note guarantors with respect to the issuance of the 9% Senior
Subordinated Notes of FMC Trust Finance S.a.r.l. Luxembourg due December 1, 2006
in the aggregate principal amount of $360,360,000, as it may be further amended,
modified or otherwise supplemented from time to time.
"9% Notes" means the 9% Senior Subordinated Notes due December 1, 2006
issued pursuant to the 9% Indenture.
"NMC Credit Agreement" means the Credit Agreement, dated as of September
27, 1996, among National Medical Care, Inc., certain subsidiaries and affiliates
thereof, the lenders referred to in such Credit Agreement, NationsBank, N.A., as
paying agent, and The Bank of Nova Scotia, The Chase Manhattan Bank, Dresdner
Bank AG and NationsBank, N.A., as managing agents, including any related notes,
guarantees, collateral documents, instruments and agreements executed in
connection with such Credit Agreement, in each case as amended, modified,
renewed, refunded, replaced, restated or refinanced from time to time; provided
that such amendment, modification, renewal, refunding, replacement, restatement
or refinancing:
(1) does not cause the aggregate principal amount of Indebtedness that
may be outstanding under such Credit Agreement to exceed $2.5 billion
except to the extent that such additional principal amount of Indebtedness
could be incurred under clause (9) of "Certain Covenants -- Limitation on
Incurrence of Indebtedness," and
(2) does not contain, with respect to any Subsidiary, any encumbrances
or restrictions of the type described in clauses (a), (b) and (c) of the
covenant described under "Certain Covenants -- Limitation on Restrictions
on Distributions from Subsidiaries" that are less favorable to the holders
of notes than the encumbrances and restrictions with respect to such
Subsidiary contained in such Credit Agreement prior thereto.
"Note Guarantor" means each of the Company, FMCH and FMC Deutschland GmbH.
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"Note Guaranty" means the Guarantee by a Note Guarantor of the Note
Issuer's obligations with respect to the Notes.
"Other Bank Agreements" means any credit agreement or other agreement for
loans, letters of credit, bank Guarantees or other financial accommodations (and
any related notes, guarantees, collateral documents, instruments and agreements
executed in connection therewith) entered into by the Company or any Subsidiary
with any bank; provided, that the aggregate principal amount of Indebtedness
that may be outstanding thereunder does not exceed $500 million, except to the
extent that such additional principal amount of Indebtedness could be incurred
under clause (9) of "Certain Covenants -- Limitation on Incurrence of
Indebtedness."
"Permitted Investment" means: an Investment by the Company or any
Subsidiary in:
(1) a Person that will, upon the making of such Investment, be or
become a Subsidiary; provided, however, that the primary business of such
Subsidiary is a Related Business,
(2) a Person if as a result of such Investment such other Person is
merged or consolidated with or into, or transfers or conveys all or
substantially all its assets to, the Company or a Subsidiary; provided,
however, that such Person's primary business is a Related Business,
(3) Temporary Cash Investments,
(4) any demand deposit account with an Approved Lender,
(5) receivables owing to the Company or any Subsidiary if created or
acquired in the ordinary course of business and payable or dischargeable in
accordance with customary trade terms; provided, however, that such trade
terms may include such concessionary trade terms as the Company or any such
Subsidiary deems reasonable under the circumstances,
(6) payroll, travel and similar advances to cover matters that are
expected at the time of such advances ultimately to be treated as expenses
for accounting purposes and that are made in the ordinary course of
business,
(7) loans or advances to employees made in the ordinary course of
business consistent with past practices of the Company or such Subsidiary,
(8) stock, obligations or securities received in settlement of debts
created in the ordinary course of business and owing to the Company or any
Subsidiary or in satisfaction of judgments,
(9) any Person to the extent such Investment represents the non-cash
portion of the consideration received for an Asset Disposition as permitted
pursuant to the covenant described under "Certain Covenants -- Limitation
on Sales of Assets and Subsidiary Stock", and
(10) any Affiliate (the primary business of which is a Related
Business) that is not a Subsidiary (other than Fresenius AG), provided,
that the aggregate of all such Investments outstanding at any one time
under this clause (x) shall not exceed $125 million.
"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, unincorporated organization, government
or any agency, instrumentality or political subdivision thereof, or any other
entity.
"Preferred Stock", as applied to the Capital Stock of any corporation,
means Capital Stock of any class or classes (however designated) which is
preferred as to the payment of dividends, or as to the distribution of assets
upon any voluntary or involuntary liquidation or dissolution of such
corporation, over shares of Capital Stock of any other class of such
corporation.
"principal" of a Note means the principal of such Note plus the premium, if
any, payable on such Note which is due or overdue or is to become due at the
relevant time.
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"Rating Agencies" means:
(1) S&P and
(2) Moody's, or
(3) if S&P or Moody's or both shall not make rating of the notes
publicly available, a nationally recognized securities rating agency or
agencies, as the case may be, selected by the Company, which shall be
substituted for S&P or Moody's or both, as the case may be.
"Rating Category" means:
(1) with respect to S&P, any of the following categories: BB, B, CCC,
CC, C and D (or equivalent successor categories),
(2) with respect to Moody's, any of the following categories: Ba, B,
Caa, Ca, C and D (or equivalent successor categories), and
(3) the equivalent of any such category of S&P or Moody's used by
another Rating Agency. In determining whether the rating of the notes has
decreased by one or more gradations, gradations within Rating Categories (+
and - for S&P, 1, 2 and 3 for Moody's; or the equivalent gradations for
another Rating Agency) shall be taken into account (e.g., with respect to
S&P, a decline in a rating from BB+ to BB, as well as from BB- to B+, will
constitute a decrease of one gradation).
"Rating Date" means the date which is 90 days prior to the earlier of (1) a
Change of Control and (2) public notice of the occurrence of a Change of Control
or of the intention by the Company or any Person to effect a Change of Control.
"Rating Decline" means the occurrence on or within 90 days after the date
of the first public notice of the occurrence of a Change of Control or of the
intention by the Company to effect a Change of Control (which period shall be
extended so long as the rating of the Notes is under publicly announced
consideration for possible downgrade by any of the Rating Agencies) of: (1) in
the event the Notes are rated by either Moody's or S&P on the Rating Date as
Investment Grade, a decrease in the rating of the notes by both Rating Agencies
to a rating that is below Investment Grade, or (2) in the event the Notes are
rated below Investment Grade by both Rating Agencies on the Rating Date, a
decrease in the rating of the Notes by either Rating Agency by one or more
gradations (including gradations within Rating Categories as well as between
Rating Categories).
"Receivables Financings" means:
(1) the accounts receivable financing facility of National Medical
Care, Inc. contemplated by the Receivables Purchase Agreement dated as of
August 28, 1997 by and between National Medical Care, Inc., as Seller, and
NMC Funding Corporation, as Purchaser and the Amended and Restated Transfer
and Administration Agreement dated 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, as each such
agreement may be amended or supplemented from time to time, and
(2) any financing transaction or series of financing transactions that
have been or may be entered into by the Company or a Subsidiary pursuant to
which the Company or a Subsidiary may sell, convey or otherwise transfer to
a Subsidiary or Affiliate, or any other Person, or may grant a security
interest in, any receivables or interests therein secured by the
merchandise or services financed thereby (whether such receivables are then
existing or arising in the future) of the Company or such Subsidiary, as
the case may be, and any assets related thereto, including without
limitation, all security interests in merchandise or services financed
thereby, the proceeds of such receivables, and other assets which are
customarily sold or in respect of which security interests are customarily
granted in connection with securitization transactions involving such
assets.
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"Refinance" means, in respect of any Indebtedness, to refinance, extend,
renew, refund, repay, prepay, redeem, defease or retire, or to issue other
Indebtedness in exchange or replacement for, such Indebtedness. "Refinanced" and
"Refinancing" shall have correlative meanings.
"Refinancing Indebtedness" means Indebtedness that Refinances any
Indebtedness of the Company or any Subsidiary existing on the Issue Date or
Incurred in compliance with the Indenture including Indebtedness that Refinances
Refinancing Indebtedness; provided, however, that:
(1) such Refinancing Indebtedness has a Stated Maturity no earlier
than the Stated Maturity of the Indebtedness being Refinanced,
(2) such Refinancing Indebtedness has an Average Life at the time such
Refinancing Indebtedness is Incurred that is equal to or greater than the
Average Life of the Indebtedness being Refinanced, and
(3) such Refinancing Indebtedness has an aggregate principal amount
(or if Incurred with original issue discount, an aggregate issue price)
that is equal to or less than the aggregate principal amount (or if
Incurred with original issue discount, the aggregate accredit value) then
outstanding or committed (plus fees and expenses, including any premium and
defeasance costs) under the Indebtedness being Refinanced; provided
further, however, that Refinancing Indebtedness shall not include (x)
Indebtedness of a Subsidiary that Refinances Indebtedness of the Company or
(y) Indebtedness of the Company or a Subsidiary (other than National
Medical Care or a Subsidiary of National Medical Care) that Refinances
Indebtedness of another Subsidiary.
"Related Business" means any business related, ancillary or complementary
to the businesses of the Company and its Subsidiaries on the Issue Date.
"Restricted Payment" with respect to any Person means:
(1) the declaration or payment of any dividends or any other
distributions of any sort in respect of its Capital Stock (including any
payment in connection with any merger or consolidation involving such
Person) or similar payment to the direct or indirect holders of its Capital
Stock (other than dividends or distributions payable solely in its Capital
Stock (other than Disqualified Stock)) and dividends or distributions
payable solely to the Company or a Subsidiary, and other than pro rata
dividends or other distributions made by a Subsidiary that is not a Wholly
Owned Subsidiary to minority stockholders (or owners of an equivalent
interest in the case of a Subsidiary that is an entity other than a
corporation)),
(2) the purchase, redemption or other acquisition or retirement for
value of any Capital Stock of the Company held by any Person or of any
Capital Stock of a Subsidiary held by any Affiliate of the Company (other
than a Subsidiary), including the exercise of any option to exchange any
Capital Stock (other than into Capital Stock of the Company that is not
Disqualified Stock),
(3) the purchase, repurchase, redemption, defeasance or other
acquisition or retirement for value, prior to scheduled maturity, scheduled
repayment or scheduled sinking fund payment of any Subordinated Obligations
(other than the purchase, repurchase or other acquisition of Subordinated
Obligations purchased in anticipation of satisfying a sinking fund
obligation, principal installment or final maturity, in each case due
within one year of the date of acquisition), or
(4) the making of any Investment in any Person (other than a Permitted
Investment).
"SEC" means the U.S. Securities and Exchange Commission.
"Secured Indebtedness" means any Indebtedness of the note issuer or the
Company secured by a Lien.
"Senior Indebtedness" means, with respect to the note issuer or a note
guarantor, as the case may be:
(1) Indebtedness of such Person, whether outstanding on the Issue Date
or thereafter incurred and
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(2) accrued and unpaid interest (including interest accruing on or
after the filing of any petition in bankruptcy or for reorganization
relating to such Person, whether or not the claim for such interest is
allowed as a claim after such filing) in respect of (A) any Indebtedness of
such Person under the NMC Credit Agreement, (B) Indebtedness of such Person
for money borrowed and (C) Indebtedness evidenced by notes, debentures,
bonds or other similar instruments for the payment of which such Person is
responsible or liable unless, in the instrument creating or evidencing the
same or pursuant to which the same is outstanding, it is provided that such
obligations are subordinate in right of payment to the notes.
However, Senior Indebtedness shall not include:
(1) any obligation of such Person to any subsidiary or parent of such
Person,
(2) any liability for federal, state, local or other taxes owed or
owing by such Person,
(3) any accounts payable or other liability to trade creditors arising
in the ordinary course of business (including guarantees thereof or
instruments evidencing such liabilities),
(4) any Indebtedness of such Person (and any accrued and unpaid
interest in respect thereof) which is expressly subordinate or junior in
any respect to any other Indebtedness or other obligation of such Person,
including Senior Subordinated Indebtedness, or
(5) that portion of any Indebtedness which at the time of incurrence
is incurred in violation of the indenture.
"Senior Subordinated Indebtedness" means the 9% Notes, the 2008 7 7/8%
Notes, the 2008 7 3/8% Notes, the Notes and any Indebtedness of the Company or
the note issuer that specifically provides that such Indebtedness is to rank
pari passu with the Company's and the note issuer's respective obligations with
respect to the notes in right of payment and is not subordinated by its terms in
right of payment to any Indebtedness or other obligation of the Company or the
note issuer that is not Senior Indebtedness.
"S&P" means Standard & Poor's Corporation and its successors.
"Specified Senior Indebtedness" means, with respect to the note issuer or a
Note Guarantor, as the case may be:
(1) any Indebtedness of such Person under the NMC Credit Agreement,
(2) any Refinancing Indebtedness of such Person in respect of
Indebtedness specified in clause (1) above, and
(3) after all Indebtedness specified in clauses (1) and (2) above is
no longer outstanding, any other Senior Indebtedness of such Person
permitted under the indenture the outstanding principal amount of which is
more than $25 million at the time of determination and that has been
designated by such Person as "Specified Senior Indebtedness."
"Stated Maturity" means, with respect to any security, the date specified
in such security as the fixed date on which the final payment of principal of
such security is due and payable, including pursuant to any mandatory redemption
provision (but excluding any provision providing for the repurchase of such
security at the option of the holder thereof upon the happening of any
contingency unless such contingency has occurred).
"Subordinated Obligation" means any Indebtedness of the note issuer or the
Company (whether outstanding on the Issue Date or thereafter Incurred) that is
subordinate or junior in right of payment to the notes pursuant to a written
agreement to that effect.
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"Subsidiary" means, with respect to any Person, any corporation, limited
liability company, association, partnership or other business entity of which
more than 50% of the total voting power of shares of Voting Stock is at the time
owned or controlled, directly or indirectly, by:
(1) such Person;
(2) such Person and one or more Subsidiaries of such Person; or
(3) one or more Subsidiaries of such Person.
"Surviving Person" means, with respect to any Person involved in any
merger, consolidation or other business combination or the sale, assignment,
transfer, lease, conveyance or other disposition of all or substantially all of
such Person's assets, the Person formed by or surviving such transaction or the
Person to which such disposition is made.
"Temporary Cash Investments" means any of the following:
(1) securities issued or directly and fully guaranteed or insured by
(i) the United States of America or any agency or instrumentality thereof
(provided that the full faith and credit of the United States of America is
pledged in support thereof) and (ii) the governments of Germany and the
United Kingdom, having in each case maturities of not more than twelve
months from the date of acquisition,
(2) time deposits and certificates of deposit, Eurodollar time
deposits and Eurodollar certificates of deposit of (i) any lender under the
NMC Credit Agreement, or (ii) any United States, German, United Kingdom or
Swiss commercial bank of recognized standing (y) having capital and surplus
in excess of $500 million and (z) whose short-term commercial paper rating
from S&P is at least A-1 or the equivalent thereof or from Moody's is at
least P-1 or the equivalent thereof (any such bank being an "Approved
Lender"), in each case with maturities of not more than 270 days from the
date of acquisition,
(3) commercial paper and variable or fixed rate notes issued by an
Approved Lender (or by the parent company thereof) and maturing within six
months of the date of acquisition,
(4) repurchase agreements entered into by a Person with a bank or
trust company (including any of the lenders under the NMC Credit Agreement)
or recognized securities dealer having capital and surplus in excess of
$500 million for (i) direct obligations issued or fully guaranteed by the
United States of America, (ii) time deposits or certificates of deposit
described under subsection (2) above, or (iii) commercial paper or other
notes described under subsection (3) above, in which, in each such case,
such bank, trust company or dealer shall have a perfected first priority
security interest (subject to no other Liens) and having, on the date of
purchase thereof, a fair market value of at least 100% of the amount of the
repurchase obligations,
(5) obligations of any state of the United States or any political
subdivision thereof, the interest with respect to which is exempt from
federal income taxation under Section 103 of the U.S. Internal Revenue
Code, having a long term rating of at least AA- or Aa-3 by S&P or Moody's,
respectively, and maturing within three years from the date of acquisition
thereof,
(6) Investments in municipal auction preferred stock (i) rated AAA (or
the equivalent thereof) or better by S&P or Aaa (or the equivalent thereof)
or better by Moody's and (ii) with dividends that reset at least once every
365 days, and
(7) Investments, classified in accordance with GAAP as current assets,
in money market investment programs (i) registered under the Investment
Company Act of 1940, as amended, or (ii) operated by an investment company
in Germany or the United Kingdom and subject to regulations under the laws
of such jurisdiction, in each case which are administered by reputable
financial institutions having capital of at least $100 million and the
portfolios of which are limited to Investments of the character described
in clauses (1), (2), (3), (4), (5) and (6) above.
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"2008 7 3/8% Indenture" means the Senior Subordinated Indenture dated as of
February 19, 1998 by and among FMC Trust Finance S.a.r.l. Luxembourg, State
Street Bank and Trust Company as trustee, the Company and the other Note
Guarantors with respect to the issuance of 7 3/8% Senior Subordinated Notes of
FMC Trust Finance S.a.r.l. Luxembourg due February 1, 2008 in the aggregate
principal amount of DM 300,300,000, as it may amended, supplemented or otherwise
modified from time to time.
"2008 7 3/8% Notes" means the 7 3/8% Senior Subordinated Notes due February
1, 2008 issued pursuant to the 2008 7 3/8% Indenture.
"2008 7 7/8% Indenture" means the Senior Subordinated Indenture dated as of
February 19, 1998 by and among FMC Trust Finance S.a.r.l. Luxembourg, State
Street Bank and Trust Company as trustee, the Company and the other note
guarantors with respect to the issuance of 7 7/8% Senior Subordinated Notes of
FMC Trust Finance S.a.r.l. Luxembourg due February 1, 2008 in the aggregate
principal amount of $450,450,000, as it may be amended, supplemented or
otherwise modified from time to time.
"2008 7 7/8% Notes" means the 7 7/8% Senior Subordinated Notes due February
1, 2008 issued pursuant to the 2008 7 7/8% Indenture.
"Voting Stock" of a Person means all classes of Capital Stock or other
interests (including partnership interests) of such Person then outstanding and
normally entitled (without regard to the occurrence of any contingency) to vote
in the election of directors, managers or trustees thereof.
"Wholly Owned Subsidiary" means a Subsidiary all the Capital Stock of which
(other than (1) directors' qualifying shares and shares held by other Persons to
the extent such shares are required by applicable law to be held by a Person
other than the Company or a Subsidiary and (2) shares of Preferred Stock of
FMCH) is owned by the Company or by one or more Wholly Owned Subsidiaries, or by
the Company and one or more Wholly Owned Subsidiaries.
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RELATIONSHIP AMONG THE TRUST PREFERRED SECURITIES,
THE NOTES AND THE TRUST GUARANTEES
FULL AND UNCONDITIONAL TRUST GUARANTEES
We have irrevocably guaranteed payments of distributions and other amounts
due on each trust's preferred securities, to the extent the trust has funds
legally available for payment of these amounts, as described under "Description
of the Trust Guarantees." Taken together, our obligations under the indentures,
our note guaranties, the trust declarations, the expense agreements and the
trust guarantees provide a full, irrevocable and unconditional guarantee of
payments of distributions and other amounts due on the trust preferred
securities of each trust. No single document standing alone or operating in
conjunction with fewer than all of the other documents constitutes such a
guarantee. If and to the extent that the note issuer does not make payments on
the USD or Euro notes, as applicable, the related trust will not pay
distributions or other amounts due on its trust preferred securities. The trust
guarantees do not cover payment of distributions when a trust does not have
sufficient funds legally available to pay such distributions. In that event,
your remedy would be to institute a legal proceeding directly against the note
issuer on behalf of the applicable trust for enforcement of the note issuer's
obligations on the USD or Euro notes, as applicable. Our obligations under the
trust guarantees are subordinate and junior in right of payment to all of our
senior indebtedness.
SUFFICIENCY OF PAYMENTS
As long as payments of interest and other payments are made when due on the
notes, such payments will be sufficient to cover distributions and other
payments due on the trust preferred securities, primarily because:
- the aggregate principal amount of the notes will be equal to the sum of
the aggregate stated liquidation amount of the related trust preferred
securities and common securities;
- the interest rate and interest and other payment dates on the notes will
match the distribution rate and distribution and other payment dates for
the related trust preferred securities;
- each trust declaration provides that we will pay all and any costs,
expenses and liabilities of the trust except the trust's obligations to
you; and
- each trust declaration further provides that the applicable trust will
not engage in any activity that is not consistent with the limited
purposes of the trust.
Regardless of anything to the contrary in the indentures, we have the right
to set-off any payment we are otherwise required to make under an indenture with
and to the extent we have previously made, or are concurrently on the date of
such payment making, a payment under the related trust guarantee.
ENFORCEMENT RIGHTS OF HOLDERS OF TRUST PREFERRED SECURITIES
If an event of default under a trust declaration has occurred and is
continuing and is attributable to the failure of the note issuer to make
payments on the USD or Euro notes, then holders of not less than 25% in
liquidation amount of outstanding USD or Euro trust preferred securities, as
applicable, have the right to appoint a special trustee to act on behalf of all
such holders. The special trustee appointed in accordance with the preceding
sentence will represent the holders of all such trust preferred securities,
unless the holders of at least a majority in liquidation amount of those
outstanding trust preferred securities appoint an alternative special trustee in
which case the special trustee appointed in accordance with the preceding
sentence will be required to resign as special trustee. At no time can there be
more than one special trustee acting on behalf of the holders of the trust
preferred securities. The special trustee will have the right to directly
institute a proceeding for enforcement of payment of the principal of or
interest on the USD or Euro notes, as applicable, having a principal amount
equal to the aggregate liquidation amount of such USD or Euro trust preferred
securities outstanding on or after the respective due date specified in the
unpaid notes. You would not be able to exercise directly any other remedies
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available to the holders of the notes unless the preferred trustee or the
special trustee, acting for the benefit of the preferred trustee, fails to do
so. In such event, the holders of at least 25% in aggregate liquidation amount
of outstanding USD or Euro trust preferred securities, as applicable, would, to
the fullest extent permitted by law, have a right to institute such proceedings.
In addition, if the note issuer fails to make interest or other payments on the
notes when due, and the preferred trustee fails to enforce its rights under the
notes, the indentures provide that a holder of USD or Euro trust preferred
securities, as applicable, may institute legal proceedings directly against the
note issuer to enforce the preferred trustee's rights under the related notes
without first instituting a legal proceeding against the preferred trustee, the
applicable trust or any other person or entity.
If we fail to make a payment under a trust guarantee, a holder of USD or
Euro trust preferred securities, as applicable, may institute a legal proceeding
directly against us to enforce the holders' rights under the related trust
guarantee without first instituting a legal proceeding against the guarantee
trustee, the applicable trust or any other person or entity. If we fail to make
payments in respect of a trust's costs and expenses as required by the
applicable trust declaration, a creditor of that trust may institute a legal
proceeding directly against us to enforce such payments.
A default or event of default under any senior indebtedness of ours would
not constitute a default or event of default. However, in the event of payment
defaults under, or acceleration of, senior indebtedness of ours, the
subordination provisions of the indentures provide that no payments may be made
in respect of the notes, until such senior indebtedness has been paid in full or
any payment default thereunder has been cured or waived. Failure to make
required payments on the notes would constitute an event of default.
LIMITED PURPOSE OF THE TRUSTS
The trust preferred securities evidence beneficial interests in the trusts,
and the trusts exist for the sole purpose of issuing the USD or Euro trust
preferred securities and their common securities and investing the proceeds of
these securities in the related notes. A principal difference between your
rights and the rights of a holder of a note is that a holder of a note is
entitled to receive from the note issuer the principal amount of and interest
accrued on such notes held, while you are entitled to receive distributions from
the applicable trust (or from us under a trust guarantee) if and to the extent
such trust has funds available for the payment of such distributions.
RIGHTS UPON TERMINATION
Upon any voluntary or involuntary dissolution, winding-up or liquidation of
a trust involving the liquidation of the notes held by that trust, holders of
the USD or Euro trust preferred securities, as applicable, will be entitled to
receive, out of assets held by trust, a liquidation distribution in cash. Upon
our voluntary or involuntary liquidation or bankruptcy, the preferred trustee,
as holder of our note guaranties, would be a senior subordinated creditor of
ours, subordinated in right of payment to all our senior indebtedness, but
entitled to receive payment in full of principal and interest on the notes under
our trust guarantees before any of our shareholders or our creditors
subordinated to our note guaranties, if any, receive payments or distributions.
Since we are the guarantor under the trust guarantees and have agreed to pay for
all costs, expenses and liabilities of the trusts (other than the trust's
obligations to you), your position and that of a holder of the related notes
relative to our other creditors and to our stockholders in the event of our
liquidation or bankruptcy are expected to be substantially the same.
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DESCRIPTION OF THE OLD SECURITIES
The terms of the old USD and the old Euro trust preferred securities are
identical in all material respects to the USD and Euro trust preferred
securities, except that:
- the old trust preferred securities were not registered under the
Securities Act and are entitled to certain rights under the registration
rights agreements. However, these rights will terminate when we
consummate the exchange offers, except under limited circumstances;
- the trust preferred securities will not contain the minimum liquidation
amount transfer restriction and certain other restrictions on transfer
applicable to the old trust preferred securities;
- the trust preferred securities will not provide for any increase in the
rate of distributions thereon those securities;
- the notes will not contain the minimum principal amount transfer
restriction; and
- the notes will not provide for any increase in their interest rate.
Accordingly, you should review the information described under "Risk
Factors -- The exchange offers could adversely affect any market for old trust
preferred securities that are not exchanged," as well as under "Description of
Trust Preferred Securities," "Description of the Trust Guarantees," Description
of the Notes," and "Relationship Among the Trust Preferred Securities, the Notes
and the Trust Guarantees."
PLAN OF DISTRIBUTION
If you are a broker-dealer that receives trust preferred securities for
your own account in connection with the exchange offers you must acknowledge
that you will deliver a prospectus when you resell those trust preferred
securities. Subject to certain provisions of the registration rights agreements,
we have agreed that participating broker-dealers who acquired trust preferred
securities for their own accounts as a result of market-making or other trading
activities may use this prospectus, as amended or supplemented from time to
time, in connection with resales of the trust preferred securities during the
period ending on the earlier to occur of:
- 90 days following the expiration date, or
- the date on which they have disposed of all their trust preferred
securities.
This period may be extended under the circumstances described under "The
Exchange Offers -- Resales of Trust Preferred Securities." However, if you are a
participating broker-dealer who intends to use this prospectus in connection
with your resale of trust preferred securities that you receive in the exchange
offers, you must notify us, on or prior to the expiration date, that you are a
participating broker-dealer. You may give that notice in the space provided for
that purpose in the letter of transmittal or you may be send to the appropriate
exchange agent at its address or facsimile number appearing under "The Exchange
Offers -- Exchange Agents." See "The Exchange Offers -- Resales of Trust
Preferred Securities."
Neither we nor either trust will receive any cash proceeds from the
issuance of the trust preferred securities in the exchange offers.
Broker-dealers who receive trust preferred securities for their own accounts in
connection with the exchange offers from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
writing options on the trust preferred securities or a combination of these
methods of resale. The sales may take place at market prices prevailing at the
time of resale, at prices related to the prevailing market prices or at
negotiated prices. They may resell the trust preferred securities directly to
purchasers or to or through brokers or dealers who may receive compensation in
the form of commissions or concessions from any such broker-dealer, from the
purchasers of the trust preferred securities, or both.
Any broker-dealer that resells trust preferred securities that it received
for its own account in the exchange offers and any broker or dealer that
participates in a distribution of those trust preferred
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securities may be deemed to be an "underwriter" within the meaning of the U.S.
Securities Act, and any profit on any those resales, as well as any commissions
or concessions received by any of those persons may be deemed to be underwriting
compensation under the U.S. Securities Act. However, the letter of transmittal
states that by acknowledging that it has an obligation to deliver and will
deliver a prospectus, a broker-dealer will not be deemed to admit that it is an
underwriter within the meaning of the U.S. Securities Act.
In reselling trust preferred securities, you must comply with all
applicable laws and regulations in force in any jurisdiction in which you offer
or sell the trust preferred securities or distribute this prospectus or any part
of it. You must also obtain any consent, approval or permission required for
your offers or sales under the laws and regulations in force in any jurisdiction
that you are subject to or in which you make offers or sales. Except as
described above with respect to the use of this prospectus, we do not have any
responsibility for your compliance with any of those laws and regulations.
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TAX CONSIDERATIONS
FEDERAL REPUBLIC OF GERMANY
GENERAL
Under current German laws regarding taxation
- Distributions on the trust preferred securities (except as described
below) will be payable without deduction or withholding for or on account
of any taxes or duties imposed or levied by the Federal Republic of
Germany or any district municipality or other political subdivision or
taxing authority therein or thereof;
- No stamp, issue, registration or similar tax or duty is or will be
payable in Germany in connection with the creation, issue, offering or
redemption of the trust preferred securities, or, in respect of the
execution, delivery or enforcement (except for court fees) of the
declaration of trust or the indenture;
- A holder of the trust preferred securities who is neither resident nor
deemed to be resident in Germany nor deemed to hold the trust preferred
securities through a German permanent establishment or agent will not be
subject to German taxes or duties on payment of distributions in respect
of the trust preferred securities;
- No gift, estate or inheritance tax arises in Germany in respect of the
trust preferred securities on a gift of the trust preferred securities
by, or on the death of, a holder who is neither resident nor deemed to be
resident in Germany unless the trust preferred securities are or are
deemed to be attributable to a permanent establishment in Germany; and
- No taxation of capital gains will arise in Germany on the disposition of
trust preferred securities by a holder who is not resident nor deemed to
be resident in Germany unless such trust preferred securities are
attributable to a permanent establishment in Germany.
Distributions on the trust preferred securities effected in Germany will be
subject to a withholding tax at a rate of 30% of the gross amount of interest.
Fresenius Medical Care or a German financial institution, including a German
branch of a foreign financial institution (but excluding a foreign branch of a
German financial institution), upon paying the interest is obligated to deduct
this withholding tax unless the holder gives proof that (1) the holder is not
resident in Germany and (2) the interest income is not effectively connected
with a German permanent establishment or agent of such holder. If we pay
interest to a non-German financial institution, including a foreign branch of a
German financial institution, which pays the distribution to the holders, no
German withholding tax will become due.
PROPOSED EU INFORMATION REPORTING/WITHHOLDING TAX DIRECTIVE
The European Union is currently considering proposals for a new directive
regarding the taxation of savings income. A new draft directive was promulgated
on July 18, 2001. Subject to a number of important conditions being met, it is
proposed that member states will be required to provide to the tax authorities
of another member state details of payments of interest or other similar income
paid by a person within its jurisdiction to an individual resident, as well as
to other forms of organizations such as partnerships and trusts, in that other
member state, subject to the right of certain member states to opt instead for a
withholding system for a transitional period in relation to such payments.
Luxembourg has opted to adopt a withholding system for a period of seven years
for payments made to individual beneficial owners of securities (which may
include, for example, individuals who hold interests through forms of
organizations such as partnerships and trusts, among others) who are resident in
a member state of the European Union that is different from the member state of
the issuer of the securities or the member state of any paying agent (which
could, for these purposes, include a person making payment in respect of the
securities on behalf of the issuer or on behalf of the holder). Thus, if the
directive is adopted, payments made at the latest on or after January 1, 2004 by
a Luxembourg issuer of securities or through a
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Luxembourg paying agent in respect of instruments issued after March 1, 2001
could be subject to withholding tax under the directive. There can be no
assurance that the directive will be adopted as proposed or as to the final
terms of such directive. See "Description of the Trust Preferred Securities --
Paying Agents."
UNITED STATES
GENERAL
The following is a summary of certain of the material U.S. federal income
tax consequences of the purchase, ownership and disposition of the trust
preferred securities. This summary is based on the Internal Revenue Code of
1986, as amended (the "Code"), Treasury regulations thereunder and
administrative and judicial interpretations of the Code, as of the date of this
offering circular. The Code, interpretations thereof, and judicial authorities
are subject to change and any such change in law or interpretation may be
applied retroactively. For a discussion of certain German and European Union tax
matters see "Federal Republic of Germany." For a discussion of certain
Luxembourg tax matters see "Luxembourg Taxation."
TREATMENT BY THE NOTE ISSUER
The note issuer intends to treat the notes as debt for U.S. federal income
tax purposes and each holder of trust preferred securities as the owner of an
undivided interest in the notes. The note issuer and the trusts will therefore
report any payments on the notes to the Internal Revenue Service in a manner
consistent with such characterization. The notes will be issued without original
issue discount. The discussion that follows assumes that the notes will be
treated as debt for U.S. federal income tax purposes.
CLASSIFICATION OF THE TRUSTS
In connection with the issuance of the trust preferred securities,
O'Melveny & Myers LLP, counsel to Fresenius Medical Care AG, will render its
opinion generally to the effect that, under then current law and assuming full
compliance with the terms of the respective declarations of trust (and certain
other documents), and based on certain facts and assumptions contained in such
opinion, the trusts will continue to be classified for U.S. federal income tax
purposes as a grantor trust and not as an association taxable as a corporation.
UNITED STATES HOLDERS
Unless otherwise stated, this summary deals only with the trust preferred
securities held as capital assets by United States Holders ("U.S. Holders") who
purchase the trust preferred securities upon original issuance. It also does not
deal with special classes of U.S. Holders such as banks, thrifts, real estate
investment trusts, regulated investment companies, insurance companies, dealers
in securities or currencies, traders in securities that elect to mark to market,
persons engaging in straddles, conversion and hedging transactions, tax-exempt
investors, or persons that will hold the trust preferred securities as other
than a capital asset. This summary also does not address the tax consequences to
persons that have a functional currency other than the U.S. dollar or the tax
consequences to shareholders, partners or beneficiaries of a U.S. Holder of
trust preferred securities. Further, it does not include any description of any
alternative minimum tax consequences or the tax laws of any state or local
government or of any foreign government that may be applicable to the trust
preferred securities.
As used herein, a U.S. Holder is generally a citizen or resident of the
United States, a corporation, partnership or other entity created or organized
in or under the law of the United States or any political subdivision thereof,
an estate the income of which is subject to U.S. federal income taxation
regardless of its source, a trust if a U.S. court can exercise primary
supervision over the administration of the trust and one or more United States
persons have authority to control all substantial decisions of the trust, or any
other person whose world-wide income is otherwise subject to U.S. federal income
taxation on a net basis.
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Exchange Offers
Neither the exchange of old trust preferred securities for trust preferred
securities nor the exchange of old notes for notes pursuant to the exchange
offers should be a taxable event to U.S. Holders of the old trust preferred
securities. Consequently, exchanging U.S. Holders should not recognize any
taxable gain or loss as a result of consummation of the exchange offers. A U.S.
Holder's tax basis and holding period for the old trust preferred securities
will carry over to the trust preferred securities the U.S. holder receives in
the exchange offers.
Payment of Interest
For U.S. federal income tax purposes, each U.S. Holder of trust preferred
securities generally will be considered the owner of an undivided interest in
the notes held by the applicable trust. Accordingly, each U.S. Holder will be
required to include in its gross income any interest paid or accrued with
respect to its allocable share of the notes, in accordance with its method of
accounting. U.S. Holders of Euro trust preferred securities should also see the
discussion below under the caption "-- Currency Exchange Gain or Loss for Euro
Denominated Trust Preferred Securities."
Receipt of Notes or Cash Upon Liquidation of the Note Issuer
Under certain circumstances, as described under the caption "Description of
the Trust Preferred Securities -- Tax Event or Investment Company Event
Redemption or Distribution," notes held by a trust may be distributed to holders
in exchange for the trust preferred securities and in liquidation of the
distributing trust. For U.S. federal income tax purposes, such a distribution to
U.S. Holders would be treated as a nontaxable event, and each U.S. Holder would
receive an aggregate tax basis in the notes equal to such U.S. Holder's
aggregate tax basis in its trust preferred securities. A U.S. Holder's holding
period in the notes so received would include the period during which such
holder held the trust preferred securities.
Under certain circumstances described herein, the notes may be redeemed for
cash and the proceeds of such redemption distributed to holders in redemption of
their related trust preferred securities. For U.S. federal income tax purposes,
such a redemption would constitute a taxable disposition of the redeemed trust
preferred securities and a U.S. Holder would recognize gain or loss as if it had
sold such redeemed trust preferred securities for cash. See "-- Sale of Trust
Preferred Securities," below.
Sale of Trust Preferred Securities
A U.S. Holder that sells trust preferred securities will recognize gain or
loss equal to the difference between the amount realized on the sale of the
trust preferred securities and the U.S. Holder's adjusted tax basis in such
trust preferred securities. A U.S. Holder's adjusted tax basis in the trust
preferred securities generally will be its initial purchase price. Such gain or
loss will be a capital gain or loss and will be a long-term capital gain or loss
if the trust preferred securities have been held for more than one year at the
time of sale. Under current law, any net long-term capital gains for individuals
are subject to a maximum U.S. federal income taxation at preferential rates if
specified minimum holding periods are met. The deductibility of capital losses
is subject to significant limitations. A sale of the Euro trust preferred
securities will also result in foreign currency exchange gain or loss under the
rules discussed below under the heading "-- Currency Exchange Gain or Loss for
Euro Denominated Trust Preferred Securities."
Deductibility of Capital Losses Subject to Significant Limitations
The trust preferred securities may trade at a price that does not fully
reflect the value of accrued but unpaid interest with respect to the underlying
notes. A U.S. Holder that disposes of its trust preferred securities between
record dates for payments of distributions will nevertheless be required to
include in income accrued but unpaid interest on the notes through the date of
disposition, and to add that amount to its adjusted tax basis in its
proportional share of the underlying notes deemed disposed. Accordingly, such a
U.S. Holder will recognize a capital loss to the extent the selling price (which
may not fully reflect
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the value of accrued but unpaid interest) is less than that U.S. Holder's
adjusted tax basis (which will include accrued but unpaid interest). Subject to
certain limited exceptions, capital losses cannot be applied to offset ordinary
income for U.S. federal income tax purposes. Therefore, it is possible that a
U.S. Holder will not be able to offset such accrued but unpaid interest against
any such capital loss (although such capital loss could be used to offset
capital gains of such U.S. Holder).
Market Discount and Bond Premium
U.S. Holders of trust preferred securities other than U.S. Holders who
purchased the trust preferred securities upon original issuance may be
considered to have acquired their undivided interest in the notes with "market
discount" or "acquisition premium" as such phrases are defined for U.S. federal
income tax purposes. Such holders are advised to consult their tax advisors as
to the income tax consequences of the acquisition, ownership and disposition of
the trust preferred securities.
Currency Exchange Gain or Loss For Euro Denominated Trust Preferred
Securities
- Purchase of Trust Preferred Securities: A U.S. Holder of Euro
trust preferred securities will have a tax basis in the trust
preferred securities, based on the spot rate of euros in effect on
the date of purchase. A U.S. Holder who converts U.S. dollars into
euros and immediately uses the euros to purchase the Euro trust
preferred securities will ordinarily not recognize any currency
exchange gain or loss in connection with the conversion and
purchase. If the U.S. Holder uses euros that were already owned,
the U.S. Holder would recognize currency exchange gain or loss
equal to the difference between such U.S. Holder's tax basis in the
euros and the U.S. dollar fair market value of the Euro trust
preferred securities, based on the spot rate in effect on the date
of purchase. Any currency exchange gain or loss is treated as
ordinary income or loss.
- Interest Payments -- Cash Basis: A U.S. Holder of Euro trust
preferred securities will have to convert euro denominated interest
into U.S. dollars, based on its method of accounting. A cash basis
U.S. Holder will include in income as interest the U.S. dollar
value of the interest payment, based on the spot rate in effect on
the date of receipt of the interest payment, regardless whether the
payment in fact is converted into U.S. dollars on that date.
However, such a U.S. Holder will not have any currency exchange
gain or loss as a result of the interest payment. Upon a subsequent
disposition of the euros received, the U.S. Holder will have
currency exchange gain or loss measured by the change in the
exchange rate between the date of receipt and the date of
disposition.
- Interest Payments -- Accrual Basis: Unlike a cash method U.S.
Holder, an accrual method U.S. Holder must report currency exchange
gain or loss attributable to accrued interest. Generally, an
accrual basis U.S. Holder will include in income as interest the
U.S. dollar value of the accrued amounts, based on the average spot
rate in effect for each business day during the interest accrual
period (unless an election is made pursuant to Treasury regulations
to use a different exchange rate). Such U.S. dollar value for each
accrual period will be the U.S. Holder's tax basis in the euros.
Upon receipt of an interest payment, the accrual basis U.S. Holder
will recognize gain or loss, measured by the difference between the
U.S. dollar value of an interest payment, based on the spot rate in
effect on the date of receipt, and the U.S. Holder's tax basis in
the euros for the accrual period or periods to which such interest
payment relates.
- Principal Payments: A U.S. Holder who disposes of, or has
redeemed, Euro trust preferred securities will have currency
exchange gain or loss. The amount of currency exchange gain or loss
will be the difference between (1) the U.S. dollar amount
determined by converting the euros received into U.S. dollars,
based on the spot rate on the date of payment or the date of
disposition, and (2) the U.S. dollar amount
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determined by converting the liquidation amount of the Euro trust
preferred securities on the date of acquisition.
UNITED STATES ALIEN HOLDERS
As used herein, a "United States Alien Holder" is any corporation,
individual, partnership, estate or trust that is, as to the United States, a
foreign corporation, a non-resident alien individual, a foreign partnership, or
a nonresident fiduciary of a foreign estate or trust. A United States Alien
Holder will not be subject to any United States (a) federal income tax on the
interest paid or accrued on the notes, unless the interest is effectively
connected with the conduct by the United States Alien Holder of a trade or
business in the United States, and (b) withholding tax on such interest income.
A United States Alien Holder will not be subject to U.S. federal income tax
on any gain realized on the sale or disposition of the trust preferred
securities unless (1) the gain is effectively connected with the conduct by the
United States Alien Holder of a trade or business in the United States, or (2)
the United States Alien Holder is an individual who has been in the United
States for 183 days or more in the taxable year of the sale or disposition.
Effectively connected income of a United States Alien Holder that is a
corporation may in certain circumstances be subject to additional "branch
profits tax" at a 30% rate or, if applicable a lower treaty rate.
INFORMATION REPORTING AND BACKUP WITHHOLDING
United States Holders
Subject to the qualifications discussed below, income on the trust
preferred securities will be reported to U.S. Holders on Forms 1099, which forms
should be mailed to U.S. Holders of trust preferred securities by January 31
following each calendar year.
With respect to the USD trust preferred securities, Trust IV will be
obligated to report annually to DTC, as holder of record of the USD trust
preferred securities, the interest related to the USD trust preferred securities
that accrued during the year. Trust IV currently intends to report such
information on Form 1099 prior to January 31 following each calendar year even
though Trust IV is not legally required to report to record holders until April
15 following each calendar year. The initial purchasers of the old USD trust
preferred securities have indicated to Trust IV that, to the extent that they
hold USD trust preferred securities as nominees for United States beneficial
holders, they currently expect to report to such beneficial holders on Forms
1099 by January 31 following each calendar year. Under current law, holders of
USD trust preferred securities who hold as nominees for beneficial holders will
not have any obligation to report information regarding the beneficial holders
to Trust IV. Trust IV, moreover, will not have any obligation to report to
beneficial holders who are not also record holders. Thus, United States
beneficial holders of USD trust preferred securities who hold their USD trust
preferred securities through the initial purchasers will receive Forms 1099
reflecting the income on their USD trust preferred securities from such nominee
holders rather than Trust IV.
The initial purchasers of the old Euro trust preferred securities have
indicated to Trust V that, to the extent that they hold Euro trust preferred
securities as nominees for United States beneficial holders, they currently
expect to report the interest related to the Euro trust preferred securities
that accrued during the year to such beneficial holders on Forms 1099 by January
31 following each calendar year. Under current law, holders of Euro trust
preferred securities who hold as nominees for beneficial holders will not have
any obligation to report information regarding the beneficial holders to Trust
V. Trust V, moreover, will not have any obligation to report to beneficial
holders who are not also record holders. Thus, United States beneficial holders
of Euro trust preferred securities who hold their Euro trust preferred
securities through the initial purchasers will receive Forms 1099 reflecting the
income on their Euro trust preferred securities from such nominee holders rather
than Trust V.
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Payments made on, and proceeds from the sale of, the trust preferred
securities may be subject to a "backup" withholding tax of 30.5% for 2001
(gradually reducing to 28% by the year 2006) unless the U.S. Holder complies
with certain requirements relating to the identification of the holder,
including the provision of an accurate taxpayer identification number (or
provides a certificate of non-U.S. status). Any withheld amounts will be allowed
as a credit against the holder's U.S. federal income tax, provided the required
information is provided to the Internal Revenue Service. Certain exempt
recipients (such as corporations) are not subject to these information reporting
requirements. U.S. Holders who are required to establish their exempt status
generally must file IRS Form W-9 ("Request for Taxpayer Identification Number
and Certification").
United States Alien Holders
Under current law, United States Alien Holders are generally not subject to
U.S. information reporting or backup withholding. However, such United States
Alien Holders may be required to provide certification of non-U.S. status in
connection with payments they receive in the United States or through certain
U.S.-related financial institutions.
United States Alien Holders receiving payments from non-U.S. paying agents
and United States Alien beneficial holders receiving payments from non-U.S.
nominee holders will not be subject to the information reporting rules
applicable to United States Holders. However, such United States Alien Holders
may be required to provide certification of non-U.S. status in connection with
payments received in the United States or through certain U.S.-related financial
institutions.
THE UNITED STATES FEDERAL INCOME TAX DISCUSSION SET FORTH ABOVE IS INCLUDED
FOR GENERAL INFORMATION ONLY AND MAY NOT BE APPLICABLE DEPENDING UPON A HOLDER'S
PARTICULAR SITUATION. HOLDERS SHOULD CONSULT THEIR TAX ADVISORS WITH RESPECT TO
THE TAX CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF THE
TRUST PREFERRED SECURITIES, INCLUDING THE TAX CONSEQUENCES UNDER STATE, LOCAL,
FOREIGN AND OTHER TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES IN UNITED STATES
FEDERAL OR OTHER TAX LAWS.
LUXEMBOURG
The note issuer intends to treat the notes as debt for all Luxembourg tax
purposes and will report payments made on the notes in a manner consistent with
such characterization. The following summary assumes such treatment will be
confirmed by Luxembourg tax authorities. The note issuer will apply to the
Luxembourg tax authorities for a confirmation.
Under existing Luxembourg law, all payments of interest under the notes to
a holder of the notes who is not currently, and has never been, a Luxembourg
citizen or resident, will be free of withholding tax or any similar taxes of
whatsoever nature.
No income tax and capital tax will be due on interest received or profits
realized upon disposition of any notes by a holder, provided such holder is not
currently, and has never been, a Luxembourg citizen or resident, and such holder
has no permanent establishment in Luxembourg and the notes are not effectively
connected with such permanent establishment.
No net wealth tax will be due in respect of the notes and no estate or
inheritance taxes will arise in Luxembourg on the transfer of any notes by way
of gift, or on death of a holder, provided such holder is not currently, and has
never been, a Luxembourg citizen or resident, and such holder has no permanent
establishment in Luxembourg.
THE LUXEMBOURG TAX DISCUSSION SET FORTH ABOVE IS INCLUDED FOR GENERAL
INFORMATION ONLY AND MAY NOT BE APPLICABLE DEPENDING UPON A HOLDER'S PARTICULAR
SITUATION. HOLDERS SHOULD CONSULT THEIR TAX ADVISORS WITH RESPECT TO THE TAX
CONSEQUENCES TO THEM OF THE PURCHASE,
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OWNERSHIP AND DISPOSITION OF THE TRUST PREFERRED SECURITIES, INCLUDING THE TAX
CONSEQUENCES UNDER STATE, LOCAL, FOREIGN AND OTHER TAX LAWS AND THE POSSIBLE
EFFECTS OF CHANGES IN LUXEMBOURG OR OTHER TAX LAWS.
SERVICE OF PROCESS AND ENFORCEABILITY OF CIVIL LIABILITIES
We are a German corporation. Some of our directors and executive officers
and certain of the experts named in this offering circular are residents of
Germany. A substantial portion of our assets and those of such individuals is
located outside the United States. As a result, it may be difficult or
impossible for investors to effect service of process upon such persons within
the United States with respect to matters arising under the U.S. federal
securities laws or to enforce against them in U.S. courts judgments of such
courts predicated upon the civil liability provisions of such federal securities
laws. We have been advised by our German counsel, Norr Stiefenhofer Lutz, that
there may be doubt as to the enforceability in Germany, in original actions, of
liabilities predicated on the U.S. federal securities laws and that in Germany
both recognition and enforcement of court judgments with respect to civil
liability provisions of U.S. federal securities laws are solely governed by the
provisions of the German Civil Procedure Code ("Zivilprozessordnung"). In some
cases, especially when according to the German statutory provisions the
international jurisdiction of the U.S. court will not be recognized or the
judgment conflicts with basic principles (e.g., the restriction to compensatory
damages and limited pre-trial discovery) of German law, the U.S. judgment might
not be recognized by a German court. The service of process in U.S. proceedings
on persons in Germany is regulated by a multilateral treaty guaranteeing service
of writs and other legal documents in civil cases if the current address of the
defendant is known.
EXPERTS
The consolidated financial statements for Fresenius Medical Care
Aktiengesellschaft as of December 31, 2000 and 1999, and for each of the years
in the three-year period ended December 31, 2000, have been included herein and
in the registration statement in reliance upon the report of KPMG Deutsche
Treuhand-Gesellschaft Aktiengesellschaft Wirtschaftsprufungsgesellschaft,
independent accountants, appearing elsewhere herein, and upon the authority of
said firm as experts in accounting and auditing.
The consolidated financial statements of Fresenius Medical Care Holdings,
Inc. as of December 31, 2000 and 1999 and for each of the years in the
three-year period ended December 31, 2000, have been included herein and in the
registration statement in reliance upon the report of KPMG LLP, independent
certified public accountants, appearing elsewhere herein, and upon the authority
of said firm as experts in accounting and auditing.
LEGAL MATTERS
The validity of the notes, the trust guarantees and the note guaranties
will be passed upon for Fresenius Medical Care by O'Melveny & Myers LLP and
certain matters under German law with respect to Fresenius Medical Care and FMC
Deutschland will be passed upon by Norr Stiefenhofer Lutz. Certain matters under
Luxembourg law with respect to the note issuer will be passed upon by Wildgen &
Partners. Certain matters of Delaware law relating to the trusts and the
validity of the trust preferred securities will be passed upon for the trusts by
Richards, Layton & Finger, special Delaware counsel to the trusts. Dr. Dieter
Schenk, a member of the firm of Norr Stiefenhofer Lutz, is the Deputy Chairman
of the Supervisory Board of Fresenius Medical Care. Dr. Alfred Stiefenhofer, a
member of the firm of Norr Stiefenhofer Lutz, is one of the executors of the
estate of Mrs. Else Kroner.
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WHERE YOU CAN FIND MORE INFORMATION
We file periodic reports and information with the SEC and the New York
Stock Exchange. You may inspect a copy of these reports without charge at the
Public Reference Room of the SEC at Room 1024, 450 Fifth Avenue, N.W.,
Washington, D.C. 20549 or at the SEC's regional offices at Seven World Trade
Center, 13th Floor, New York, New York 10048 and 500 West Madison Street, Suite
1400, Chicago, Illinois 60661. The public may obtain information on the
operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The
SEC also maintains an Internet site that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the SEC. The SEC's World Wide Web address is http://www.sec.gov. As a
foreign private issuer, we are not obligated to file registration statements and
reports with the SEC in electronic form; however, commencing with our report on
Form 6-K filed November 20, 2000 we have voluntarily chosen to do so.
Accordingly, our report for the nine months ended September 30, 2000, our Annual
Report on Form 20-F for the year ended December 31, 2000 and our reports for
subsequent periods may be obtained from any source authorized to store and make
available electronically filed reports.
The New York Stock Exchange currently lists American Depositary Shares
representing our Preference shares and American Depositary Shares representing
our Ordinary shares. As a result, we are subject to the periodic reporting
requirements of the Exchange Act, and we file reports and other information with
the SEC. These reports and other information and the registration statement and
exhibits and schedules thereto may be inspected without charge at, and copies
thereof may be obtained at prescribed rates from, the public reference
facilities of the SEC and the electronic sources listed in the preceding
paragraph. In addition, these materials are available for inspection and copying
at the offices of the New York Stock Exchange, 20 Broad Street, New York, New
York 10005, USA.
We prepare annual and quarterly reports, which are then distributed to our
shareholders. Our annual reports contain financial statements examined and
reported upon, with opinions expressed by our independent auditors. We prepare
the consolidated financial statements of Fresenius Medical Care included in
these annual reports in conformity with US GAAP. Our annual and quarterly
reports to our shareholders are posted on our website at http://www.fmc-ag.com.
In furnishing our web site address in this prospectus, however, we are not
incorporating by reference any information on our web site into this prospectus,
and you should not consider any information on our web site to be part of this
prospectus.
You may inspect the documents referred to in this prospectus which relate
to us as well as our annual and interim reports, at our offices,
Else-Kroner-Strasse 1, 61346 Bad Homburg, Germany.
You should rely only on the information appearing in this prospectus,
including the documents we incorporate by reference into this prospectus. We
have not authorized anyone to provide you with information different from the
information contained in this prospectus or the incorporated documents. The
information that appears in this prospectus is accurate only as of the date of
this prospectus, regardless of the time of delivery of this prospectus or any
sale of trust preferred securities.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following reports filed with the Securities and Exchange Commission
pursuant to the Securities Exchange Act of 1934, as amended, are hereby
incorporated by reference into this prospectus:
- Fresenius Medical Care's Annual Report on Form 20-F for the fiscal year
ended December 31 2000
- Fresenius Medical Care's report on Form 6-K dated May 21, 2001
- Fresenius Medical Care's report on Form 6-K dated August 22, 2001
- FMCH's Annual Report on Form 10-K for the fiscal year ended December 31,
2000
- FMCH's Quarterly Report on Form 10-Q for the three months ended March 31,
2001 filed May 15, 2001
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- FMCH's Quarterly Report on Form 10-Q for the six months ended June 30,
2001 filed August 14, 2001
- FMCH's definitive Information Statement for its 2001 Annual Meeting of
Shareholders filed April 30, 2001.
All annual reports we file with the Commission pursuant to the Securities
Exchange Act of 1934, as amended, on Form 20-F and all annual and other reports
that FMCH files with the Commission pursuant to Sections 13(a), 13(c), 14 or
15(d) of that Act, in each case after the date of this prospectus and prior to
the termination of this offering shall be deemed to be incorporated by reference
into this prospectus and to be part of this prospectus from the date of filing
of the report. We may incorporate by reference any Form 6-K that we subsequently
submit to the Commission by identifying in that Form that we are incorporating
it by reference into this prospectus. Any statement in this prospectus or in a
document incorporated by reference or deemed to be incorporated by reference
into this prospectus shall be deemed to be modified or superseded for purposes
of this prospectus to the extent that any statement contained in this
prospectus, or in any other document we subsequently file that also is or is
deemed to be incorporated by reference into this prospectus, modifies or
replaces the original statement. Any statement that we modify or supersede in
this manner shall not be deemed, except as so modified or replaced, to
constitute a part of this prospectus.
We shall undertake to provide without charge to each person who receives a
copy of this prospectus, upon written or oral request to us, a copy of any or
all of the documents referred to above that have been or may be incorporated
into this prospectus by reference, including exhibits to such documents, unless
the exhibits are specifically incorporated by reference to the documents You
should direct your requests for copies of the documents to Fresenius Medical
Care AG, Else-Kroner Str. 1, 61346 Bad Homburg, Germany, Attention: Controlling
Department, telephone 011-49-6172-609-0.
GENERAL INFORMATION
Application will be made to list the trust preferred securities to be
issued in the exchange offers on the Luxembourg Stock Exchange. We have
appointed Banque Generale Du Luxembourg as the initial Listing Agent for the
Luxembourg Stock Exchange. Prior to the listing of the trust preferred
securities, the constitutional documents of Fresenius Medical Care and the
trusts, and the legal notices relating to the trust preferred securities will be
registered with the Registrar of the District Court in Luxembourg (Greffier en
Chef du Tribunal d'Arrondissement de et a Luxembourg), where copies of these
documents may be obtained upon request. The Listing Agent will act as
intermediary between Fresenius Medical Care and the trusts, as issuers, and the
holders of the trust preferred securities.
Copies of this prospectus, our constitutional documents, our latest annual
report, our quarterly interim unaudited financial information, the annual profit
and loss accounts and balance sheet of the note issuer, the other note
guarantors' constitutional documents, the note issuer's constitutional
documents, the indentures, the trust guarantees and the declarations of trust,
will be obtainable during usual business hours at the principal offices of
Fresenius Medical Care, State Street Bank and Trust Company and the Listing
Agent so long as any of the trust preferred securities remain outstanding.
According to Chapter VI, Article 3, point A/11/2 of the Rules and
Regulations of the Luxembourg Stock Exchange, the preferred securities shall be
freely transferable and therefore no transactions made on the Luxembourg Stock
Exchange shall be cancelled. There has been no material adverse change in our
financial condition since December 31, 2000. There are no pending legal
proceedings relating to the offerings of the trust preferred securities.
The USD trust preferred securities represented by the global certificate
have been accepted for clearing through DTC under CUSIP number 35802Q AB 4 and
have been assigned ISIN number US35802QAB41. The Euro trust preferred securities
represented by the global certificate have been accepted for clearance through
Euroclear and Clearstream, Luxembourg under Common Code number 013439818 and
have been assigned ISIN number X50134398188.
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INDEX OF FINANCIAL STATEMENTS
<Table>
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PAGE
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FRESENIUS MEDICAL CARE AG
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidated Statements of Earnings for the
six months ended June 30, 2001 and 2000 (unaudited)... F-2
Condensed Consolidated Balance Sheets at June 30, 2001
(unaudited) and December 31, 2000 (audited)........... F-3
Condensed Consolidated Statements of Cash Flows for the
six months ended June 30, 2001 and 2000 (unaudited)... F-5
Condensed Consolidated Statements of Shareholders'
Equity for the six months ended June 30, 2001
(unaudited)........................................... F-6
Notes to Condensed Consolidated Financial Statements... F-7
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report........................... F-25
Consolidated Statements of Operations for the years
ended December 31, 2000, 1999 and 1998................ F-26
Consolidated Balance Sheets at December 31, 2000 and
1999.................................................. F-27
Consolidated Statements of Cash Flows for the years
ended December 31, 2000, 1999 and 1998................ F-28
Consolidated Statements of Shareholders' Equity for the
years ended December 31, 2000, 1999 and 1998.......... F-30
Notes to Consolidated Financial Statements............. F-31
FRESENIUS MEDICAL CARE HOLDINGS, INC.
UNAUDITED, CONSOLIDATED FINANCIAL STATEMENTS
Unaudited, Consolidated Statements of Operations for
the six months ended June 30, 2001 and 2000........... F-77
Unaudited, Consolidated Statements of Comprehensive
Income for the six months ended June 30, 2001......... F-78
Consolidated Balance Sheets at June 30, 2001
(unaudited) and December 31, 2000 (audited)........... F-79
Unaudited, Consolidated Statements of Cash Flows for
the six months ended June 30, 2001 and 2000........... F-80
Notes to Unaudited, Consolidated Financial
Statements............................................ F-82
CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Auditors......................... F-92
Consolidated Statements of Operations for the Years
Ended December 31, 2000, 1999 and 1998................ F-93
Consolidated Statements of Comprehensive Income for the
Years Ended December 31, 2000, 1999 and 1998.......... F-94
Consolidated Balance Sheets as of December 31, 2000 and
1999.................................................. F-95
Consolidated Statements of Cash Flows for the Years
Ended December 31, 2000, 1999 and 1998................ F-96
Consolidated Statements of Changes in Equity for the
Years Ended December 31, 2000, 1999 and 1998.......... F-98
Notes to Consolidated Financial Statements............. F-99
</Table>
F-1
201
FRESENIUS MEDICAL CARE AG
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND 2000
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<Table>
<Caption>
2001 2000
---------- ----------
Net revenue:
Dialysis Care............................................. $1,732,543 $1,422,506
Dialysis Products......................................... 628,227 615,514
---------- ----------
2,360,770 2,038,020
Cost of revenue:
Dialysis Care............................................. 1,216,356 977,325
Dialysis Products......................................... 344,533 343,242
---------- ----------
1,560,889 1,320,567
Gross profit................................................ 799,881 717,453
Operating expenses:
Selling, general and administrative....................... 460,609 401,264
Research and development.................................. 16,336 15,650
---------- ----------
Operating income............................................ 322,936 300,539
Other (income) expense:
Interest income........................................... (5,376) (5,062)
Interest expense.......................................... 114,893 117,210
---------- ----------
Income before income taxes and minority interest............ 213,419 188,391
Income tax expense.......................................... 96,499 91,883
---------- ----------
Income before minority interest............................. 116,920 96,508
Minority interest........................................... 798 1,513
---------- ----------
Net income.................................................. $ 116,122 $ 94,995
========== ==========
Basic income per Ordinary share............................. $ 1.20 $ 1.11
========== ==========
Fully diluted income per Ordinary share..................... $ 1.20 $ 1.11
========== ==========
Basic income per Preference share........................... $ 1.23 $ 1.14
========== ==========
Fully diluted income per Preference share................... $ 1.23 $ 1.14
========== ==========
</Table>
F-2
202
FRESENIUS MEDICAL CARE AG
CONDENSED CONSOLIDATED BALANCE SHEETS
AT JUNE 30, 2001 AND DECEMBER 31, 2000
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<Table>
<Caption>
JUNE 30, DECEMBER 31,
2001 2000
----------- ------------
(UNAUDITED)
Assets
Current assets:
Cash and cash equivalents................................. $ 77,237 $ 64,577
Trade accounts receivable, less allowance for doubtful
accounts of $118,209 in 2001 and $111,185 in 2000...... 890,600 753,674
Accounts receivable from related parties.................. 50,424 46,117
Inventories............................................... 347,858 320,234
Prepaid expenses and other current assets................. 279,428 214,526
IDPN accounts receivable.................................. -- 5,189
Deferred Taxes............................................ 132,760 177,094
---------- ----------
Total current assets...................................... 1,778,307 1,581,411
Property, plant and equipment, net.......................... 797,397 738,993
Intangible assets, including goodwill, net.................. 3,720,430 3,475,056
Deferred taxes.............................................. 21,037 27,205
Other assets................................................ 144,216 156,288
---------- ----------
Total assets.............................................. $6,461,387 $5,978,953
========== ==========
Liabilities and shareholders' equity
Current liabilities:
Accounts payable.......................................... $ 200,452 $ 203,374
Accounts payable to related parties....................... 92,226 77,823
Accrued expenses and other current liabilities............ 428,227 391,640
Note payable related to Settlement........................ -- 85,920
Short-term borrowings..................................... 129,439 106,592
Short-term borrowings from related parties................ 67,527 218,333
Current portion of long-term debt and capital lease
obligations............................................ 162,970 168,231
Income tax payable........................................ 141,008 117,572
Deferred taxes............................................ 22,077 20,967
---------- ----------
Total current liabilities................................. 1,243,926 1,390,452
Long-term debt and capital lease obligations, less current
portion................................................... 736,426 657,832
Other liabilities........................................... 99,802 31,464
Pension liabilities......................................... 70,628 69,970
Deferred taxes.............................................. 132,247 176,487
Company-obligated mandatorily redeemable preferred
securities of subsidiary Fresenius Medical Care Capital
Trusts holding solely Company-guaranteed debentures of
subsidiary................................................ 1,419,471 952,727
Minority interest........................................... 19,548 21,271
---------- ----------
Total liabilities......................................... 3,722,048 3,300,203
</Table>
F-3
203
<Table>
<Caption>
JUNE 30, DECEMBER 31,
2001 2000
----------- ------------
(UNAUDITED)
Shareholders' equity:
Preference shares, no par, euro 2.56 nominal value,
45,497,700 shares authorized, 26,030,913 issued and
outstanding at June 30, 2001; 23,765,093 issued and
outstanding at December 31, 2000.......................... $ 69,180 $ 63,644
Ordinary shares, no par, euro 2.56 nominal value, 70,000,000
shares authorized, issued and outstanding at June 30, 2001
and December 31, 2000..................................... 229,494 229,494
Additional paid-in capital.................................. 2,731,237 2,634,606
Retained deficit............................................ (5,685) (56,024)
Accumulated other comprehensive loss........................ (284,887) (192,970)
---------- ----------
Total shareholders' equity.................................. 2,739,339 2,678,750
---------- ----------
Total liabilities and shareholders' equity.................. $6,461,387 $5,978,953
========== ==========
</Table>
F-4
204
FRESENIUS MEDICAL CARE AG
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND 2000
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<Table>
<Caption>
2001 2000
--------- ---------
Operating Activities:
Net income................................................ $ 116,122 $ 94,995
Adjustments to reconcile net income to cash and cash
equivalents provided by (used in) operating activities:
Depreciation and amortization.......................... 161,201 143,604
Change in deferred taxes, net.......................... 23,533 30,564
Loss (gain) on sale of fixed assets.................... 212 (681)
Compensation expense related to stock options.......... 2,077 --
Changes in assets and liabilities, net of amounts from
businesses acquired or disposed of:
Trade accounts receivable, net......................... (113,851) (100,633)
Inventories............................................ (34,330) (21,067)
Prepaid expenses, other current and non-current
assets................................................ (32,016) 10,110
Accounts receivable from/payable to related parties.... 8,804 14,402
Accounts payable, accrued expenses and other current
and non-current liabilities........................... (18,821) (32,068)
Income taxes payable................................... 32,641 31,523
--------- ---------
Net cash provided by operating activities............ 145,572 170,749
--------- ---------
Investing Activities:
Purchases of property, plant and equipment................ (132,669) (90,889)
Proceeds from sale of property, plant and equipment....... 14,791 7,072
Acquisitions, net of cash acquired........................ (154,408) (216,317)
--------- ---------
Net cash used in investing activities................ (272,286) (300,134)
--------- ---------
Financing Activities:
Proceeds from short-term borrowings....................... 54,958 29,032
Repayments of short-term borrowings....................... (27,471) (18,911)
Proceeds of short-term borrowings from related parties.... 20,588 11,659
Repayments of short-term borrowings from related
parties................................................ (171,069) (59,300)
Payments on obligation related to Settlement.............. (85,920) (319,253)
Proceeds from long-term debt.............................. 344,172 215,813
Principal payments of long-term debt and capital lease
obligations............................................ (400,995) (27,014)
Proceeds from issuance of trust preferred securities...... 470,598 --
Proceeds from issuance of preference shares............... -- 344,215
Increase of accounts receivable securitization program.... 10,868 17,192
Proceeds from exercise of stock options................... 611 120
Dividends paid............................................ (65,782) (51,229)
Change in minority interest............................... (1,546) (966)
--------- ---------
Net cash provided by financing activities............ 149,012 141,358
--------- ---------
Effect of exchange rate changes on cash and cash
equivalents............................................... (9,638) (940)
--------- ---------
Cash and Cash Equivalents:
Net increase in cash and cash equivalents................. 12,660 11,033
Cash and cash equivalents at beginning of period.......... 64,577 34,760
--------- ---------
Cash and cash equivalents at end of period................ $ 77,237 $ 45,793
========= =========
</Table>
F-5
205
FRESENIUS MEDICAL CARE AG
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2001
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<Table>
<Caption>
PREFERENCE SHARES ORDINARY SHARES ACCUMULATED
-------------------- --------------------- ADDITIONAL OTHER
NUMBER OF NO PAR NUMBER OF NO PAR PAID IN RETAINED COMPREHENSIVE
SHARES VALUE SHARES VALUE CAPITAL DEFICIT LOSS TOTAL
---------- ------- ---------- -------- ---------- -------- ------------- ----------
Balance at December 31, 2000
(audited)................... 23,765,093 $63,644 70,000,000 $229,494 $2,634,606 $(56,024) $(192,970) $2,678,750
Issuance of preference
shares...................... 2,250,000 5,498 -- -- 93,981 -- -- 99,479
Proceeds from exercise of
stock options............... 15,820 38 -- -- 573 -- -- 611
Compensation expense related
to stock options............ -- -- -- -- 2,077 -- -- 2,077
Dividends paid................ -- -- -- -- -- (65,782) -- (65,782)
Comprehensive income (loss):
Net income.................. -- -- -- -- -- 116,121 -- 116,121
Other comprehensive income
(loss) related to cash
flow hedges............... -- -- -- -- -- -- (24,401) (24,401)
Foreign currency translation
adjustment................ -- -- -- -- -- -- (67,516) (67,516)
----------
Comprehensive income
(loss):..................... -- -- -- -- -- -- -- 24,204
---------- ------- ---------- -------- ---------- -------- --------- ----------
Balance at June 30, 2001...... 26,030,913.. $69,180 70,000,000 $229,494 $2,731,237 $ (5,685) $(284,887) $2,739,339
========== ======= ========== ======== ========== ======== ========= ==========
</Table>
The changes in the other comprehensive income (loss) related to SFAS 133
are as follows:
<Table>
<Caption>
FOR THE SIX MONTHS ENDING JUNE 30, 2001
----------------------------------------
PRETAX TAX EFFECT NET
---------- ------------ ----------
Net gains (losses) on derivatives hedging variability of
cash flows:
Unrealized derivative gains (losses)..................... $(40,043) $16,117 $(23,926)
Reclassification adjustments for gains (losses) included
in net income.......................................... (686) 211 (475)
-------- ------- --------
Net derivative gains (losses)............................ $(40,729) $16,328 $(24,401)
======== ======= ========
</Table>
F-6
206
FRESENIUS MEDICAL CARE AG
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. THE COMPANY AND BASIS OF PRESENTATION
THE COMPANY
Fresenius Medical Care AG ("FMC" or the "Company") is a German stock
corporation (Aktiengesellschaft). The Company is primarily engaged in (i)
providing kidney dialysis services, clinical laboratory testing and renal
diagnostic services and (ii) manufacturing and distributing products and
equipment for dialysis treatment.
BASIS OF PRESENTATION
a) BASIS OF CONSOLIDATION
The condensed consolidated financial statements at June 30, 2001 and for
the six-month periods ended June 30, 2001 and 2000 in this report are unaudited
and should be read in conjunction with the consolidated financial statements in
the Company's 2000 Annual Report on Form 20-F. Such financial statements reflect
all adjustments that, in the opinion of management, are necessary for a fair
presentation of the results of the periods presented. All such adjustments are
of a normal recurring nature.
The results of operations for the six-month period ended June 30, 2001 are
not necessarily indicative of the results of operations for the fiscal year
ending December 31, 2001.
b) CLASSIFICATIONS
Certain items in prior years' unaudited condensed consolidated financial
statements have been reclassified to conform with the current year's
presentation.
2. SETTLEMENT OF INVESTIGATIONS AND RELATED COSTS
On January 18, 2000, Fresenius Medical Care Holdings, Inc. ("FMCH"),
National Medical Care, Inc. ("NMC") and certain other affiliated companies
executed definitive agreements with the United States Government to settle (i)
matters concerning violations of federal laws then under investigation and (ii)
National Medical Care, Inc.'s claims with respect to outstanding Medicare
receivables for intradialytic parenteral nutrition therapy (collectively, the
"Settlement").
During the six months ended June 30, 2001, the FMCH made final payments to
the U.S. Government of $85.9 million pursuant to the Settlement. In addition,
FMCH received a final payment of $5.2 million in the first quarter of 2001 from
the U.S. Government, related FMCH's claims for outstanding Medicare receivables.
3. ACQUISITIONS
In January 2001, the Company acquired Everest Healthcare Services
Corporation ("Everest") for $354 million including debt assumed amounting to
$135 million. Approximately one third of the purchase price ($99 million) was
funded by the issuance of 2.25 million Fresenius Medical Care AG Preference
shares to the Everest shareholders. The remaining purchase price was paid with
$120 million cash.
Through June 30, 2001, the Company had paid approximately $154 million cash
for acquisitions consisting primarily of dialysis clinics including the $120
million cash portion for Everest.
F-7
207
FRESENIUS MEDICAL CARE AG
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
4. INVENTORIES
As of June 30, 2001 and December 31, 2000, inventories consisted of the
following (in thousands):
<Table>
<Caption>
JUNE 30, DECEMBER 31,
2001 2000
-------- ------------
Raw materials and purchased components............... $ 73,144 $ 73,244
Work in process...................................... 21,325 22,231
Finished goods....................................... 177,385 160,358
Health care supplies................................. 76,004 64,401
-------- --------
Inventories........................................ $347,858 $320,234
======== ========
</Table>
4. SHAREHOLDERS' EQUITY
On January 5, 2001, the Company issued 2,250,000 Preference shares as a
portion of the purchase price for the Everest acquisition. (see Note 3).
Cash dividends of $66 million for 2000 in the amount of E0.84 on each
Preference share and E0.78 on each Ordinary share were paid on May 24, 2001.
During the six months ended June 30, 2001, 10,224 FMC Rollover Plan options
were exercised by employees. In connection therewith, Fresenius AG transferred
3,408 Ordinary shares to employees and remitted approximately $91,000 to the
Company. During the same period, no Rollover Plan options were canceled. These
funds have been accounted for as a capital contribution within additional
paid-in capital.
During the six months ended June 30, 2001, 15,506 Preference shares were
issued upon exercise of stock options under FMC 98 Plan 1. The $507,000 proceeds
were accounted for as an increase in capital. Under FMC 98 Plan 2, 314
Preference shares were issued upon exercise of stock options. The $13,000
proceeds were accounted for as an increase in capital. During the same period,
25,876 and 3,107 stock options were cancelled under FMC 98 Plan 1 and FMC 98
Plan 2, respectively.
F-8
208
FRESENIUS MEDICAL CARE AG
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
The following table is a reconciliation of the numerators and denominators
of the basic and diluted earnings per share computations for each of the six
month periods ending June 30, 2001 and 2000, respectively.
<Table>
<Caption>
FOR THE SIX MONTHS
ENDED JUNE 30,
--------------------------------
2001 2000
-------------- --------------
(IN THOUSANDS, EXCEPT SHARE AND
PER SHARE DATA)
Numerators:
Income............................................ $ 116,122 $ 94,995
less:
Preference on Preference shares................... 693 431
----------- -----------
Income available to Preference shares only........ 693 431
Income available to all classes of shares......... $ 115,429 $ 94,564
=========== ===========
Denominators:
Weighted average number of:
Ordinary shares outstanding....................... 70,000,000 70,000,000
Preference shares outstanding..................... 25,962,598 14,990,319
----------- -----------
Total weighted average shares outstanding......... 95,962,598 84,990,319
Potentially dilutive Preference shares............ 375,027 256,973
----------- -----------
Total weighted average shares outstanding assuming
dilution........................................ 96,337,625 85,247,292
Total weighted average Preference shares
outstanding assuming dilution................... 26,337,625 15,247,292
Basic income per Ordinary share................... $ 1.20 $ 1.11
Plus preference per Preference shares............. 0.03 0.03
----------- -----------
Basic income per Preference share................. $ 1.23 $ 1.14
=========== ===========
Basic income per Ordinary share................... $ 1.20 $ 1.11
Plus preference per Preference share assuming
dilution........................................ 0.03 0.03
----------- -----------
Fully diluted income per Preference share......... $ 1.23 $ 1.14
=========== ===========
</Table>
6. COMMITMENTS AND CONTINGENCIES
LEGAL PROCEEDINGS
COMMERCIAL LITIGATION
In 1997, the FMCH, NMC, and certain named NMC subsidiaries, were served
with a civil complaint filed by Aetna Life Insurance Company in the U.S.
District Court for the Southern District of New York. The lawsuit alleges
inappropriate billing practices for nutritional therapy, diagnostic and clinical
laboratory tests and misrepresentations. In April 1999, Aetna amended its
complaint to include its affiliate, Aetna U.S. Healthcare, Inc., as an
additional plaintiff, and to make certain other limited changes in its pleading.
The amended complaint seeks unspecified damages and costs. Other insurance
companies have filed similar claims seeking unspecified damages and costs. The
Company, FMCH, NMC and its subsidiaries believe that there are substantial
defenses to the claims asserted, and intend to vigorously defend all lawsuits.
Other private payors have contacted the Company and may assert that NMC received
excess
F-9
209
FRESENIUS MEDICAL CARE AG
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
payment 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 result of operations. The
Company intends to defend the claims vigorously.
FMCH has filed counterclaims against the plaintiffs in these matters based
on inappropriate claim denials and delays in claim payments.
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, FMCH 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." 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 an additional class action were filed subsequently with
substantially similar allegations; both cases have been subsequently stayed and
transferred to the Delaware bankruptcy court in connection with Grace's Chapter
11 proceedings. The Company has requested indemnification from Grace Chemicals
pursuant to the Merger agreements (see "Indemnification by W.R. Grace & Co.").
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. or its affiliates or
former affiliates or their insurers, and if the Company is not able to collect
against any party that may have received distributions from W.R. Grace & Co., a
judgment could have a material adverse effect on the Company's business,
financial condition and results of operations. The Company is confident that no
fraudulent transfer or conspiracy occurred and intends to defend the cases
vigorously.
OBRA 93
The Omnibus Budget Reconciliation Act of 1993 affected the payment of
benefits under Medicare and employer health plans for dual-eligible ESRD
patients. In July 1994, the Centers for Medicare and Medicaid Services (CMS)
(formerly known as the Health Care Financing Administration, or HCFA) issued an
instruction to Medicare claims processors to the effect that Medicare benefits
for the patients affected by that act would be subject to a new 18-month
"coordination of benefits" period. This instruction had a positive impact on
NMC's dialysis revenues because, during the 18-month coordination of benefits
period, patients' employer health plans were responsible for payment, which was
generally at rates higher than those provided under Medicare.
In April 1995, CMS issued a new instruction, reversing its original
instruction in a manner that would substantially diminish the positive effect of
the original instruction on NMC's dialysis business. CMS further proposed that
its new instruction be effective retroactive to August 1993, the effective date
of the Omnibus Budget Reconciliation Act of 1993.
NMC ceased to recognize the incremental revenue realized under the original
instruction as of July 1, 1995, but it continued to bill employer health plans
as primary payors for patients affected by the Omnibus Budget Reconciliation Act
of 1993 through December 31, 1995. As of January 1, 1996, NMC commenced billing
Medicare as primary payor for dual eligible ESRD patients affected by the act,
and then began to re-bill in compliance with the revised policy for services
rendered between April 24 and December 31, 1995.
On May 5, 1995, NMC filed a complaint in the U.S. District Court for the
District of Columbia (National Medical Care, Inc. and Bio-Medical Applications
of Colorado, Inc. d/b/a Northern Colorado
F-10
210
FRESENIUS MEDICAL CARE AG
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
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.
OTHER LITIGATION AND POTENTIAL EXPOSURES
From time to time, the Company is a party to or may be threatened with
other litigation arising in the ordinary course of its business. Management
regularly analyzes current information including, as applicable, the Company's
defenses and insurance coverage and, as necessary, provides accruals for
probable liabilities for the eventual disposition of these matters. The ultimate
outcome of these matters is not expected to materially affect the Company's
financial position, results of operations or cash flows.
The Company, like other health care providers, conducts its operations
under intense government regulation and scrutiny. The Company must comply with
regulations which relate to or govern the safety and efficacy of medical
products and supplies, the operation of manufacturing facilities, laboratories
and dialysis clinics, and environmental and occupational health and safety. The
Company must also comply with the U.S. anti-kickback statute, the False Claims
Act, the Stark Law, and other federal and state fraud and abuse laws. Applicable
laws or regulations may be amended, or enforcement agencies or courts may make
interpretations that differ from the Company's or the manner in which the
Company conduct its business. In the U.S., enforcement has become a high
priority for the federal government and some states. In addition, the provisions
of the False Claims Act authorizing payment of a portion of any recovery to the
party bringing the suit encourage private plaintiffs to commence "whistle
blower" actions. By virtue of this regulatory environment, as well as our
corporate integrity agreement with the government,
F-11
211
FRESENIUS MEDICAL CARE AG
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
the Company expects that its business activities and practices will continue to
be subject to extensive review by regulatory authorities and private parties,
and continuing inquiries, claims and litigation relating to its compliance with
applicable laws and regulations. The Company may not always be aware that an
inquiry or action has begun, particularly in the case of "whistle blower"
actions, which are initially filed under court seal.
The Company operates a large number facilities throughout the U.S. In such
a decentralized system, it is often difficult to maintain the desired level of
oversight and control over the thousands of individuals employed by many
affiliated companies. The Company relies upon its management structure,
regulatory and legal resources, and the effective operation of its compliance
program to direct, manage and monitor the activities of these employees. On
occasion, the Company may identify instances where employees, deliberately or
inadvertently, have submitted inadequate or false billings. The actions of such
persons may subject the Company and its subsidiaries to liability under the
False Claims Act, among other laws, and the Company cannot predict whether law
enforcement authorities may use such information to initiate further
investigations of the business practices disclosed or any of its other business
activities.
Physicians, hospitals and other participants in the health care industry
are also subject to a large number of lawsuits alleging professional negligence,
malpractice, product liability, worker's compensation or related claims, many of
which involve large claims and significant defense costs. The Company has been
subject to these suits due to the nature of its business and the Company expects
that those types of lawsuits may continue. Although the Company maintains
insurance at a level which it believes to be prudent, the Company cannot assure
that the coverage limits will be adequate or that insurance will cover all
asserted claims. A successful claim against the Company or any of its
subsidiaries in excess of insurance coverage could have a material adverse
effect upon the Company and the results of its operations. Any claims,
regardless of their merit or eventual outcome, also may have a material adverse
effect on the Company's reputation and business.
The Company has also had claims asserted against it and has had lawsuits
filed against it relating to businesses that it has acquired or divested. These
claims and suits relate both to operation of the businesses and to the
acquisition and divestiture transactions. The Company has asserted its own
claims, and claims for indemnification. Although the ultimate outcome on the
Company cannot be predicted at this time, an adverse result could have a
material adverse effect upon the Company's business, financial condition, and
results of operations.
INDEMNIFICATION BY W.R. GRACE & CO.
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 FMCH 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
"Commercial Litigation" above. In addition, the Merger was consummated as a
tax-free reorganization. Pre-merger tax claims or tax claims that would arise if
events were to violate the tax-free nature of the Merger could be the obligation
of FMCH. Subject to certain representations made by W.R. Grace & Co.-Conn., FMCH
and Fresenius AG,
F-12
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FRESENIUS MEDICAL CARE AG
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
W.R. Grace & Co.-Conn. also agreed to indemnify the Company against any such tax
liability. W.R. Grace & Co.-Conn. and certain of its subsidiaries have filed for
reorganization under Chapter 11 of the U.S. Bankruptcy Code. If the Merger is
determined to be a fraudulent transfer and if material damages are proved by the
plaintiffs, or if W.R. Grace & Co. is unable to satisfy its Merger related or
pre-merger tax obligations, and if the Company is not able to collect on the
indemnities from W. R. Grace & Co. as a result of the bankruptcy proceedings or
otherwise, and if the Company is not able to collect on the indemnities from any
affiliates or former affiliates of W.R. Grace & Co. 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.
7. FINANCIAL INSTRUMENTS
ADOPTION OF SFAS 133 -- TRANSITION
The Company adopted SFAS 133 Accounting for Derivative Instruments and
Hedging Activities and the related amendments of SFAS 138, on January 1, 2001.
Upon adoption of this Statement, the Company recorded a net transition
adjustment loss of $14.1 million (net of income tax benefit of $9.6 million) in
accumulated other comprehensive income. In addition the company recorded a net
transition adjustment gain of $7.0 million (net of income tax expense of $4.6
million) in net income. Because of corresponding entries concerning the hedged
items, the net effect on earnings was immaterial.
MARKET RISK
The Company is exposed to market risk from changes in interest rates and
foreign exchange rates. In order to manage the risk of interest rate and
currency exchange rate fluctuations, the Company enters into various hedging
transactions with investment grade financial institutions as authorized by the
Company's Management Board. The Company does not use financial instruments for
trading purposes.
The company conducts its financial instrument activity under the control of
a single centralized department. The company established guidelines for risk
assessment procedures and controls for the use of financial instruments. They
include a clear segregation of duties with regard to execution on one side and
administration, accounting and controlling on the other.
As of June 30, 2001, the notional volume of dollar interest rate hedging
contracts totaled $1,050 million. Those swap agreements, which expire at various
dates between 2003 and 2007, effectively fix the Company's variable interest
rate exposure on the majority of the dollar-denominated revolving loans and
outstanding obligations under the accounts receivable securitization program at
an interest rate of 6.52%. Under the senior credit agreement, the Company has
agreed to maintain at least $500 million of interest rate protection. In March
2000, the Company entered into a yen-denominated interest rate swap agreement
with a notional amount of Japanese Yen 400 million, in line with a
yen-denominated floating-rate borrowing of a Japanese subsidiary. In September
2000, both the bank borrowing and the notional amount of the interest rate swap
agreement were increased as scheduled to Yen 1,000 million. The bank borrowing
and the notional amount of the swap agreement will always coincide until March
2009 when the bank debt is completely repaid and the swap expires.
FOREIGN CURRENCY RISK MANAGEMENT
The Company conducts its business on a global basis in several major
international currencies, although its operations are located principally in
Germany and the United States. For financial reporting purposes, the Company has
chosen the U.S. dollar as its reporting currency. Therefore, changes in the rate
F-13
213
FRESENIUS MEDICAL CARE AG
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
of exchange between the U.S. dollar, the euro and the local currencies in which
the financial statements of the Company's international operations are
maintained, affect its results of operations and financial position as reported
in its consolidated financial statements. The Company has consolidated the
balance sheets of its non-U.S. dollar denominated operations into U.S. dollars
at the exchange rates prevailing at the balance sheet date. Revenues and
expenses are translated at the average exchange rates for the period.
The Company's exposure to market risk for changes in foreign exchange rates
relates to transactions such as sales and purchases, lendings and borrowings,
including intercompany borrowings. The Company sells significant amounts of
products from its manufacturing facilities in Germany to its other international
operations. In general, the German sales are denominated in euro. This exposes
the subsidiaries to fluctuations in the rate of exchange between the euro and
the currency in which their local operations are conducted. The Company employs,
to a limited extent, forward contracts and options to hedge its currency
exposure. The Company's policy, which has been consistently followed, is that
forward currency contracts and options be used only for purposes of hedging
foreign currency exposures. The Company has not used such instruments for
purposes other than hedging.
INTEREST RATE MANAGEMENT
The Company enters into derivatives, particularly interest rate swaps, to
protect interest rate exposures arising from long-term and short-term borrowings
and accounts receivable securization programs at floating rates by effectively
swapping them into fixed rates. Under interest rate swaps, the Company agrees
with other parties to exchange, at specified intervals, the difference between
fixed-rate and floating-rate interest amounts calculated by reference to an
agreed notional amount.
FAIR VALUE HEDGES
Gains and losses in fair value of recognized assets and liabilities and
firm commitments of operating transactions as well as gains and losses on
derivative financial instruments designated as fair value hedges of these
recognized assets and liabilities and firm commitments are recognized currently
in earnings.
CASH FLOW HEDGES
The Company enters into interest rate swaps agreements that are designated
as cash flow hedges effectively converting certain variable interest rate
payments into fixed interest rate payments. After taxes losses of $24 million
($41 million pretax) for the six months ended June 30, 2001, were deferred in
other comprehensive income during the quarter. Interest payable and interest
receivable under the swap terms are accrued and recorded as an adjustment to
interest expense at each reporting date.
Changes in the value of foreign currency forward contracts designated and
qualifying as cash flow hedges of forecasted transactions will be reported in
accumulated other comprehensive income. These amounts will subsequently be
reclassified into earnings, as a component of the forecasted transaction, in the
same period as the forecasted transaction affects earnings.
During the six-month period ended June 30, 2001 the company reclassified
$686,000 of net losses (net of income tax $475,000) from Accumulated other
comprehensive income into the statement of income because the underlying
transactions to which the reclassified amounts relate were recognized.
It is anticipated that $12,000 of net losses (net of income taxes $6,000)
included in accumulated other comprehensive income at June 30, 2001 will be
reclassified into earnings during the next year. As of June 30, 2001, the
Company had purchased derivative financial instruments with a maximum maturity
of 15 months to hedge its exposure to the variability in future cash flows
associated with foreign currency forecasted transactions.
F-14
214
FRESENIUS MEDICAL CARE AG
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
8. BUSINESS SEGMENT INFORMATION
The Company has identified three segments, North America, International,
and Asia Pacific, which were determined based upon how the Company manages its
businesses. All segments are primarily engaged in providing kidney dialysis and
manufacturing and distributing products and equipment for the treatment of
end-stage renal disease. Additionally, the North America segment engages in
performing clinical laboratory testing and renal diagnostic services. The
Company has aggregated the International and Asia Pacific operating segments as
"International". The segments are aggregated due to their similar economic
characteristics. These characteristics include the same products sold, the same
type patient population, similar methods of distribution of products and
services and similar economic environments. The United States operations of
Fresenius Medical Care Deutschland GmbH, which had previously been included in
the International segment, are now included in the North America segment. All
prior periods were restated to reflect this change as of January 1, 2001.
Management evaluates each segment using a measure that reflects all of the
segment's controllable revenues and expenses. Management believes that the most
appropriate measure in this regard is earnings before interest and taxes (EBIT).
In addition to EBIT, management believes that earnings before interest, taxes,
depreciation and amortization (EBITDA) is helpful for investors as a measurement
of the segment's and the Company's ability to generate cash and to service its
financing obligations. EBITDA is also the basis for determining compliance with
certain covenants contained in the Company's senior bank credit agreement and
indentures relating to the Company's trust preferred securities.
EBITDA should not be construed as an alternative to net earnings determined
in accordance with generally accepted accounting principles or to cash flow from
operations, investing activities or financing activities or as a measure of cash
flows. The Company believes its EBIT calculation is the functional equivalent of
operating income. Because EBITDA and EBIT are not calculated consistently by all
companies, the presentation herein may not be comparable to other similarly
titled measures of other companies.
Approximately 40% of the Company's worldwide revenue is derived from
sources subject to regulations under U.S. governmental programs.
F-15
215
FRESENIUS MEDICAL CARE AG
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
Information pertaining to the Company's business segments for the six-month
periods ended June 30, 2001 and 2000 is set forth below:
<Table>
<Caption>
NORTH
AMERICA INTERNATIONAL CORPORATE TOTAL
---------- ------------- --------- ----------
Six months ended June 30, 2001
Net revenue external customers........... $1,768,999 $ 591,771 $ -- $2,360,770
Inter-segment revenue.................... 574 11,145 (11,719) --
---------- ---------- -------- ----------
Total net revenue........................ 1,769,573 602,916 (11,719) 2,360,770
---------- ---------- -------- ----------
EBITDA................................... 354,269 137,279 (7,411) 484,137
Depreciation and amortization............ (124,442) (35,823) (936) (161,201)
---------- ---------- -------- ----------
EBIT..................................... 229,827 101,456 (8,347) 322,936
---------- ---------- -------- ----------
Segment assets........................... 5,003,166 1,401,312 56,909 6,461,387
Capital expenditures and
acquisitions(1)....................... 218,334 68,023 720 287,077
Six months ended June 30, 2000
Net revenue external customers........... $1,500,817 $ 537,203 $ -- $2,038,020
Inter-segment revenue.................... 1,661 12,778 (14,439) --
---------- ---------- -------- ----------
Total net revenue........................ 1,502,478 549,981 (14,439) 2,038,020
---------- ---------- -------- ----------
EBITDA................................... 316,946 130,477 (3,280) 444,143
Depreciation and amortization............ (110,109) (32,651) (844) (143,604)
---------- ---------- -------- ----------
EBIT..................................... 206,837 97,826 (4,124) 300,539
---------- ---------- -------- ----------
Segment assets(2)........................ 4,578,386.. 1,368,209 32,358 5,978,953
Capital expenditures and
acquisitions(3)....................... 127,823... 179,347 36 307,206
</Table>
<Table>
<Caption>
SIX MONTHS ENDED JUNE 30,
--------------------------
2001 2000
----------- -----------
Reconciliation of measures to consolidated totals.
Total EBITDA of reporting segments................. $ 491,548 $ 447,423
Total depreciation and amortization................ (161,201) (143,604)
Corporate expenses................................. (7,411) (3,280)
Interest expense................................... (114,893) (117,210)
Interest income.................................... 5,376 5,062
--------- ---------
Total income before income taxes and minority
interest........................................ $ 213,419 $ 188,391
========= =========
Total EBIT of reporting segments................... 331,283 304,663
Corporate expenses................................. (8,347) (4,124)
Interest expense................................... (114,893) (117,210)
Interest income.................................... 5,376 5,062
--------- ---------
Total income before income taxes and minority
interest........................................ $ 213,419 $ 188,391
========= =========
Depreciation and amortization
Total depreciation and amortization of reporting
segments........................................ 160,265 142,760
Corporate depreciation and amortization............ 936 844
--------- ---------
Total depreciation and amortization.................. $ 161,201 $ 143,604
========= =========
</Table>
F-16
216
FRESENIUS MEDICAL CARE AG
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
9. SUPPLEMENTARY CASH FLOW INFORMATION
The following additional information is provided with respect to the
condensed consolidated statements of cash flows:
<Table>
<Caption>
2001 2000
-------- --------
(IN THOUSANDS)
Supplementary cash flow information:
Cash paid for interest............................... $110,123 $102,036
-------- --------
Cash paid for income taxes........................... $ 14,939 $ 16,641
-------- --------
Supplemental disclosures of cash flow information:
Details for acquisitions:
Assets acquired...................................... $441,651 $258,095
Liabilities assumed.................................. 48,905 37,109
Notes assumed in connection with acquisition......... 138,799 44
Preference shares issued in connection with
acquisition....................................... 99,479 --
-------- --------
Cash paid............................................ 154,468 220,942
Less cash acquired................................... 60 4,625
-------- --------
Net cash paid for acquisitions....................... $154,408 $216,317
======== ========
</Table>
10. SUBSEQUENT EVENTS
On July 2, 2001, Fresenius Medical Care Cardiovascular Resources Holding,
Inc. ("FMC-CVR") completed the acquisition of Edwards Lifesciences
Cardiovascular Resources, Inc., a leading provider of perfusion and related
cardiovascular services in the United States. FMC-CVR is an affiliate owned 45%
by the Company. Fresenius Medical Care North America will provide the management
and staffing of the company.
11. SUPPLEMENTAL CONDENSED COMBINING INFORMATION
FMC Trust Finance S.a.r.l. Luxembourg and FMC Trust Finance S.a.r.l.
Luxembourg-III, each of which is a wholly-owned subsidiary of FMC, are the
obligors on senior subordinated debt securities which are fully and
unconditionally guaranteed, jointly and severally, on a senior subordinated
basis, by FMC and by Fresenius Medical Care Deutschland GmbH ("D-GmbH"), a
wholly-owned subsidiary of FMC, and by FMCH, a substantially wholly-owned
subsidiary of FMC (D-GmbH and FMCH being "Guarantor Subsidiaries"). The
following combining financial information for the Company is as of June 30, 2001
and December 31, 2000 and for the six months ended June 30, 2001 and 2000,
segregated between FMC, D-GmbH, FMCH and each of the Company's other businesses
(the "Non-Guarantor Subsidiaries"). For purposes of the condensed combining
information, FMC and the Guarantor Subsidiaries carry their investments under
the equity method. Other (income) expense includes income (loss) related to
investments in consolidated subsidiaries recorded under the equity method for
purposes of the condensed combining information. In addition, other (income)
expense includes income and losses from profit and loss transfer agreements as
well as dividends received. Separate financial statements and other disclosures
concerning D-GmbH are not presented herein because management believes that they
are not material to investors. FMCH is currently subject to the periodic
reporting requirements of the United States Securities Exchange Act of 1934, as
amended, and in accordance therewith files consolidated financial statements
with the United States Securities and Exchange Commission.
F-17
217
FRESENIUS MEDICAL CARE AG
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
Additionally dividends from FMCH, a wholly-owned subsidiary, are limited as
a result of a restriction on dividends from its subsidiary, National Medical
Care, Inc., and its subsidiaries. As a result of this restriction, parent
company only financial information is presented under the column FMC AG.
F-18
218
FRESENIUS MEDICAL CARE AG
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA)
<Table>
<Caption>
FOR THE SIX MONTH PERIOD ENDED JUNE 30, 2001
-----------------------------------------------------------------------------
GUARANTOR SUBSIDIARIES
----------------------- NON-GUARANTOR COMBINING COMBINED
FMC AG D-GMBH FMCH SUBSIDIARIES ADJUSTMENT TOTAL
--------- ---------- ---------- ------------- ---------- ----------
Net revenue................................ $ -- $288,797 $ -- $2,369,187 $(297,214) $2,360,770
Cost of revenue............................ -- 174,654 -- 1,681,199 (294,964) 1,560,889
--------- -------- -------- ---------- --------- ----------
Gross profit............................. -- 114,143 -- 687,988 (2,250) 799,881
--------- -------- -------- ---------- --------- ----------
Operating expenses:
Selling, general and administrative...... 6,663 45,097 -- 410,327 (1,478) 460,609
Research and development................. -- 13,127 -- 3,209 -- 16,336
--------- -------- -------- ---------- --------- ----------
Operating (loss) income.................... (6,663) 55,919 -- 274,452 (772) 322,936
--------- -------- -------- ---------- --------- ----------
Other (income) expense:
Interest, net............................ 1,655 2,032 29,356 83,625 (7,151) 109,517
Other, net............................... (144,619) 31,696 (71,427) -- 184,350 --
--------- -------- -------- ---------- --------- ----------
Income before income taxes and minority
interest................................. 136,301 22,191 42,071 190,827 (177,971) 213,419
Income tax expense....................... 20,179 20,667 (11,742) 78,558 (11,163) 96,499
--------- -------- -------- ---------- --------- ----------
Income before minority interest............ 116,122 1,524 53,813 112,269 (166,808) 116,920
Minority interest.......................... -- -- -- -- 798 798
--------- -------- -------- ---------- --------- ----------
Net income................................. $ 116,122 $ 1,524 $ 53,813 $ 112,269 $(167,606) $ 116,122
========= ======== ======== ========== ========= ==========
</Table>
F-19
219
<Table>
<Caption>
FOR THE SIX MONTH PERIOD ENDED JUNE 30, 2000
-----------------------------------------------------------------------------
GUARANTOR SUBSIDIARIES
----------------------- NON-GUARANTOR COMBINING COMBINED
FMC AG D-GMBH FMCH SUBSIDIARIES ADJUSTMENT TOTAL
--------- ---------- ---------- ------------- ---------- ----------
Net revenue................................ $ -- $276,086 $ -- $2,003,740 $(241,806) $2,038,020
Cost of revenue............................ -- 158,689 -- 1,397,851 (235,973) 1,320,567
--------- -------- -------- ---------- --------- ----------
Gross profit............................. -- 117,397 -- 605,889 (5,833) 717,453
--------- -------- -------- ---------- --------- ----------
Operating expenses:
Selling, general and administrative...... 4,284 46,260 -- 352,138 (1,418) 401,264
Research and development................. -- 12,336 -- 3,314 -- 15,650
--------- -------- -------- ---------- --------- ----------
Operating (loss) income.................... (4,284) 58,801 -- 250,437 (4,415) 300,539
--------- -------- -------- ---------- --------- ----------
Other (income) expense:
Interest, net............................ (512) 3,417 29,348 79,895 -- 112,148
Other, net............................... (131,481) 33,350 (65,872) -- 164,003 --
--------- -------- -------- ---------- --------- ----------
Income (loss) before income taxes and
minority interest........................ 127,709 22,034 36,524 170,542 (168,418) 188,391
Income tax expense (benefit)............. 24,596 23,718 (11,739) 79,326 (24,017) 91,883
--------- -------- -------- ---------- --------- ----------
Income (loss) before minority interest..... 103,113 (1,683) 48,263 91,216 (144,401) 96,508
Minority interest.......................... -- -- -- -- 1,513 1,513
--------- -------- -------- ---------- --------- ----------
Net income (loss).......................... $ 103,113 $ (1,683) $ 48,263 $ 91,216 $(145,914) $ 94,995
========= ======== ======== ========== ========= ==========
</Table>
F-20
220
FRESENIUS MEDICAL CARE AG
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<Table>
<Caption>
AT JUNE 30, 2001
-------------------------------------------------------------------------------
GUARANTOR SUBSIDIARIES
----------------------- NON-GUARANTOR COMBINING COMBINED
FMC AG D-GMBH FMCH SUBSIDIARIES ADJUSTMENT TOTAL
---------- --------- ----------- ------------- ----------- ----------
Current assets:
Cash and cash equivalents............ $ 15 $ 330 $ -- $ 76,892 $ -- $ 77,237
Trade accounts receivable, less
allowance for doubtful accounts... -- 74,034 -- 816,566 -- 890,600
Accounts receivable from related
parties........................... 278,670 180,557 60,850 532,684 (1,002,337) 50,424
Inventories.......................... -- 76,225 -- 304,384 (32,751) 347,858
Prepaid expenses and other current
assets............................ 12,626 28,503 -- 236,875 1,424 279,428
Deferred taxes....................... 315 -- -- 118,706 13,739 132,760
---------- -------- ---------- ---------- ----------- ----------
Total current assets......... 291,626 359,649 60,850 2,086,107 (1,019,925) 1,778,307
Property, plant and equipment, net..... 155 48,141 -- 765,237 (16,136) 797,397
Intangible assets, including goodwill,
net.................................. 1,164 4,754 -- 3,714,512 -- 3,720,430
Investments in unconsolidated
subsidiaries......................... 2,914,454 922 2,638,312 (41,009) (5,496,930) 15,749
Loans to related parties............... 78,218 -- 185,529 953,421 (1,216,561) 607
Deferred taxes......................... -- -- -- 10,637 10,400 21,037
Other assets........................... 13,989 10,203 9,943 93,725 -- 127,860
Other assets........................... 3,006,661 11,125 2,833,784 1,006,137 (6,713,491) 144,216
---------- -------- ---------- ---------- ----------- ----------
Total assets................. $3,299,606 $423,669 $2,894,634 $7,582,630 $(7,739,152) $6,461,387
========== ======== ========== ========== =========== ==========
Current liabilities:
Accounts payable..................... $ 134 $ 12,546 $ -- $ 187,772 $ -- $ 200,452
Accounts payable to related
parties........................... 86,491 197,329 294,519 498,720 (984,833) 92,226
Accrued expenses and other current
liabilities....................... 8,699 55,635 -- 359,509 4,384 428,227
Short-term borrowings................ -- 212 -- 129,227 -- 129,439
Short-term borrowings from related
parties........................... -- -- 17,504 67,527 (17,504) 67,527
Current portion of long-term debt and
capital lease obligations......... -- 121 -- 162,849 -- 162,970
Income tax payable................... 89,008 -- -- 52,000 -- 141,008
Deferred taxes....................... -- 3,954 -- 16,005 2,118 22,077
---------- -------- ---------- ---------- ----------- ----------
Total current liabilities.... 184,332 269,797 312,023 1,473,609 (995,835) 1,243,926
Long term debt and capital lease
obligations, less current portion.... 248,911 1,512 827,099 749,750 (1,090,846) 736,426
Long term borrowings from related
parties.............................. 125,932 -- -- (217) (125,715) --
Other liabilities...................... -- 1,838 -- 93,184 4,780 99,802
Pension liabilities.................... 329 23,991 -- 46,308 -- 70,628
Deferred taxes......................... 763 2,572 -- 128,912 -- 132,247
Company obligated mandatorily
redeemable preferred securities of
subsidiary Fresenius Medical Care
Capital Trusts holding solely Company
guaranteed debentures of
subsidiary........................... -- -- -- 1,419,471 -- 1,419,471
Minority interest...................... -- -- 16,318 -- 3,230 19,548
---------- -------- ---------- ---------- ----------- ----------
Total liabilities............ 560,267 299,710 1,155,440 3,911,017 (2,204,386) 3,722,048
Shareholders' equity:.................. 2,739,339 123,959 1,739,194 3,671,613 (5,534,766) 2,739,339
---------- -------- ---------- ---------- ----------- ----------
Total liabilities and
shareholders' equity....... $3,299,606 $423,669 $2,894,634 $7,582,630 $(7,739,152) $6,461,387
========== ======== ========== ========== =========== ==========
</Table>
F-21
221
FRESENIUS MEDICAL CARE AG
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<Table>
<Caption>
AT DECEMBER 31, 2000
-------------------------------------------------------------------------------
GUARANTOR SUBSIDIARIES
----------------------- NON-GUARANTOR COMBINING COMBINED
FMC AG D-GMBH FMCH SUBSIDIARIES ADJUSTMENT TOTAL
---------- --------- ----------- ------------- ----------- ----------
Current assets:
Cash and cash equivalents............ $ 137 $ 100 $ -- $ 64,340 $ -- $ 64,577
Trade accounts receivable, less
allowance for doubtful accounts... -- 72,775 -- 680,899 -- 753,674
Accounts receivable from related
parties........................... 132,463 193,640 51,487 531,874 (863,347) 46,117
Inventories.......................... -- 67,988 -- 286,199 (33,953) 320,234
Prepaid expenses and other current
assets............................ 2,539 20,237 -- 190,326 1,424 214,526
IDPN accounts receivable............. -- -- -- 5,189 -- 5,189
Deferred taxes....................... 388 1,945 -- 156,732 18,029 177,094
---------- -------- ---------- ---------- ----------- ----------
Total current assets......... 135,527 356,685 51,487 1,915,559 (877,847) 1,581,411
Property, plant and equipment, net..... 205 49,460 -- 705,353 (16,025) 738,993
Intangible assets, including goodwill,
net.................................. 789 6,006 -- 3,468,261 -- 3,475,056
Loans to related parties............... 78,206 -- 185,529 827,099 (1,090,834) --
Deferred taxes......................... -- 3,011 -- 13,949 10,245 27,205
Other assets........................... 2,681,199 12,119 2,589,842 117,641 (5,244,513) 156,288
---------- -------- ---------- ---------- ----------- ----------
Total assets................. $2,895,926 $427,281 $2,826,858 $7,047,862 $(7,218,974) $5,978,953
========== ======== ========== ========== =========== ==========
Current liabilities:
Accounts payable..................... $ 506 $ 16,356 $ -- $ 186,512 $ -- $ 203,374
Accounts payable to related
parties........................... 113,406 180,997 257,566 372,978 (847,124) 77,823
Accrued expenses and other current
liabilities....................... 9,740 52,916 -- 328,395 589 391,640
Note payable related to settlement... -- -- -- 85,920 -- 85,920
Short-term borrowings................ 627 465 -- 105,500 -- 106,592
Short-term borrowings from related
parties........................... -- -- -- 218,333 -- 218,333
Current portion of long-term debt and
capital lease obligations......... -- 516 -- 167,715 -- 168,231
Income tax payable................... 87,277 -- -- 30,295 -- 117,572
Deferred taxes....................... 223 6,102 -- 11,902 2,740 20,967
---------- -------- ---------- ---------- ----------- ----------
Total current liabilities.... 211,779 257,352 257,566 1,507,550 (843,795) 1,390,452
Long term debt and capital lease
obligations, less current portion.... 4,206 1,882 843,322 915,479 (1,107,057) 657,832
Other liabilities...................... -- 3,688 -- 23,312 4,464 31,464
Pension liabilities.................... 327 24,682 -- 44,961 -- 69,970
Deferred taxes......................... 864 5,238 -- 170,385 -- 176,487
Company obligated mandatorily
redeemable preferred securities of
subsidiary Fresenius Medical Care
Capital Trusts holding solely Company
guaranteed debentures of
subsidiary........................... -- -- -- 952,727 -- 952,727
Minority interest...................... -- -- 16,318 -- 4,953 21,271
---------- -------- ---------- ---------- ----------- ----------
Total liabilities............ 217,176 292,842 1,117,206 3,614,414 (1,941,435) 3,300,203
Shareholders' equity:.................. 2,678,750 134,439 1,709,652 3,433,448 (5,277,539) 2,678,750
---------- -------- ---------- ---------- ----------- ----------
Total liabilities and
shareholders' equity....... $2,895,926 $427,281 $2,826,858 $7,047,862 $(7,218,974) $5,978,953
========== ======== ========== ========== =========== ==========
</Table>
F-22
222
FRESENIUS MEDICAL CARE AG
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<Table>
<Caption>
FOR THE SIX MONTH PERIOD ENDED JUNE 30, 2001
----------------------------------------------------------------------------
GUARANTOR SUBSIDIARIES
----------------------- NON-GUARANTOR COMBINING COMBINED
FMC AG D-GMBH FMCH SUBSIDIARIES ADJUSTMENT TOTAL
--------- ---------- ---------- ------------- ---------- ---------
Operating Activities:
Net income.................................. $ 116,122 $ 1,524 $ 53,813 $ 40,842 $(96,179) $ 116,122
Adjustments to reconcile net (loss) income
to net cash and cash equivalents provided
by (used in) operating activities:
Equity affiliate income..................... (84,869) -- (71,427) 71,427 84,869 --
Depreciation and amortization............. 936 9,214 -- 153,265 (2,214) 161,201
Change in deferred taxes, net............. (200) 750 -- 14,029 8,954 23,533
Gain on sale of fixed assets.............. -- (359) -- 571 -- 212
Compensation expense related to stock
options................................ 2,077 -- -- -- -- 2,077
Changes in assets and liabilities, net of
amounts from businesses acquired or
disposed of:
Trade accounts receivable, net............ -- (8,169) -- (105,682) -- (113,851)
Inventories............................... -- (15,112) -- (19,850) 632 (34,330)
Prepaid expenses and other current and
non-current assets..................... (16,652) (10,683) 746 (15,269) 9,199 (32,659)
Accounts receivable from/payable to
related parties........................ (34,478) 30,884 28,870 (3,573) (12,256) 9,447
Accounts payable, accrued expenses and
other current and non-current
liabilities............................ (5,179) 4,412 -- (23,180) 5,126 (18,821)
Income taxes payable...................... 10,030 -- (11,742) 34,353 -- 32,641
--------- -------- -------- --------- -------- ---------
Net cash provided by operating
activities........................... (12,213) 12,461 260 146,933 (1,869) 145,572
--------- -------- -------- --------- -------- ---------
Investing Activities:
Purchases of property, plant and
equipment................................. (720) (12,037) -- (122,245) 2,333 (132,669)
Proceeds from sale of property, plant and
equipment................................. 24 696 -- 14,071 -- 14,791
Loans to related parties.................... (245,000) -- -- 245,000 -- --
Acquisitions and investments, net of cash
acquired.................................. (52,570) (57) -- (150,555) 48,774 (154,408)
--------- -------- -------- --------- -------- ---------
Net cash used in investing
activities........................... (298,266) (11,398) -- (13,729) 51,107 (272,286)
--------- -------- -------- --------- -------- ---------
Financing activities:
Short-term borrowings, net.................. (605) (224) -- (122,165) -- (122,994)
Payments on obligation related to
settlement................................ -- -- -- (85,920) -- (85,920)
Long-term debt and capital lease
obligations, net.......................... 373,279 (586) -- (429,516) -- (56,823)
Increase of accounts receivable
securitization program.................... -- -- -- 10,868 -- 10,868
Proceeds from exercise of options........... 611 -- -- -- -- 611
Proceeds from issuance of trust preferred
securities................................ -- -- -- 477,590 (6,992) 470,598
Capital Increase of
Non-Guarantor-Subsidiaries................ -- -- -- 48,560 (48,560) --
Dividends paid.............................. (65,782) -- (260) (4,713) 4,973 (65,782)
Change in minority interest................. -- -- -- -- (1,546) (1,546)
--------- -------- -------- --------- -------- ---------
Net cash provided by financing
activities........................... 307,503 (810) (260) (105,296) (52,125) 149,012
--------- -------- -------- --------- -------- ---------
Effect of exchange rate changes on cash and
cash equivalents............................ 2,854 (23) -- (15,356) 2,887 (9,638)
Cash and Cash Equivalents:
Net increase in cash and cash equivalents..... (122) 230 -- 12,552 -- 12,660
Cash and cash equivalents at beginning of
period...................................... 137 100 -- 64,340 -- 64,577
--------- -------- -------- --------- -------- ---------
Cash and cash equivalents at end of period.... $ 15 $ 330 $ -- $ 76,892 $ -- $ 77,237
========= ======== ======== ========= ======== =========
</Table>
F-23
223
FRESENIUS MEDICAL CARE AG
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<Table>
<Caption>
FOR THE SIX MONTH PERIOD ENDED JUNE 30, 2000
----------------------------------------------------------------------------
GUARANTOR SUBSIDIARIES
----------------------- NON-GUARANTOR COMBINING COMBINED
FMC AG D-GMBH FMCH SUBSIDIARIES ADJUSTMENT TOTAL
--------- ---------- ---------- ------------- ---------- ---------
Operating Activities:
Net income (loss)............................ $ 103,113 $ (1,683) $ 48,263 $ 91,216 $(145,914) $ 94,995
Adjustments to reconcile net income (loss) to
net cash and cash equivalents provided by
(used in) operating activities:
Equity affiliate income...................... (66,585) -- (65,872) -- 132,457 --
Depreciation and amortization.............. 844 10,350 -- 133,828 (1,418) 143,604
Change in deferred taxes, net.............. (3,255) (1,728) -- 34,155 1,392 30,564
Gain (loss) on sale of fixed assets........ -- (1,174) -- 493 -- (681)
Changes in assets and liabilities, net of
amounts from businesses acquired or
disposed of:
Trade accounts receivable, net............. -- (601) -- (100,032) -- (100,633)
Inventories................................ -- (12,832) -- (11,676) 3,441 (21,067)
Prepaid expenses and other current and non-
current assets.......................... (5,416) (7,489) 746 19,572 2,697 10,110
Accounts receivable from/payable to related
parties................................. 463 14,020 27,961 (32,370) 4,328 14,402
Accounts payable, accrued expenses and
other current and non-current
liabilities............................. 1,262 13,977 -- (48,278) 971 (32,068)
Income taxes payable....................... 18,072 63 (11,739) 25,127 -- 31,523
--------- -------- -------- --------- --------- ---------
Net cash provided by (used in) operating
activities............................ 48,498 12,903 (641) 112,035 (2,046) 170,749
--------- -------- -------- --------- --------- ---------
Investing Activities:
Purchases of property, plant and equipment... (37) (10,897) -- (81,376) 1,421 (90,889)
Proceeds from sale of property, plant and
equipment.................................. -- 2,096 -- 4,976 -- 7,072
Acquisitions and investments, net of cash
acquired................................... (2,741) (2,804) -- (212,844) 2,072 (216,317)
Repayment of loans by related parties........ 8,524 -- -- (8,524) -- --
--------- -------- -------- --------- --------- ---------
Net cash used in investing activities...... 5,746 (11,605) -- (297,768) 3,493 (300,134)
--------- -------- -------- --------- --------- ---------
Financing activities:
Short-term borrowings, net................... (345,133) (25) -- 307,638 -- (37,520)
Payments on obligation related to
settlement................................. -- -- -- (319,253) -- (319,253)
Long-term debt and capital lease obligations,
net........................................ -- (1,067) 901 188,965 -- 188,799
Proceeds from issuance of preference
shares..................................... 344,215 -- -- -- -- 344,215
Proceeds from increase of accounts receivable
securitization program..................... -- -- -- 17,192 -- 17,192
Proceeds from exercise of options............ 120 -- -- -- -- 120
Capital Increase of
Non-Guarantor-Subsidiaries................. -- -- -- 741 (741) --
Dividends paid............................... (51,229) -- -- -- -- (51,229)
Change in minority interest.................. -- -- (260) -- (706) (966)
--------- -------- -------- --------- --------- ---------
Net cash (used in) provided by financing
activities.............................. (52,027) (1,092) 641 195,283 (1,447) 141,358
--------- -------- -------- --------- --------- ---------
Effect of exchange rate changes on cash and
cash equivalents............................. (1,735) 18 -- 777 -- (940)
Cash and Cash Equivalents:
Net increase in cash and cash equivalents...... 482 224 -- 10,327 (0) 11,033
Cash and cash equivalents at beginning of
period....................................... 155 37 -- 34,568 -- 34,760
--------- -------- -------- --------- --------- ---------
Cash and cash equivalents at end of period..... $ 637 $ 261 $ -- $ 44,895 $ (0) $ 45,793
========= ======== ======== ========= ========= =========
</Table>
F-24
224
INDEPENDENT AUDITORS' REPORT
To the Shareholders
Fresenius Medical Care Aktiengesellschaft
Hof an der Saale, Germany:
We have audited the accompanying consolidated balance sheets of Fresenius
Medical Care Aktiengesellschaft and subsidiaries (the "Company") as of December
31, 2000 and 1999 and the related consolidated statements of operations, cash
flows and shareholders' equity for each of the years in the three-year period
ended December 31, 2000. In connection with our audits of the consolidated
financial statements, we have also audited the financial statement schedule as
listed in the accompanying index. These consolidated financial statements and
the financial statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements and the financial statement schedule 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 financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the Company
as of December 31, 2000 and 1999, and the results of their operations and their
cash flows for each of the years in the three-year period ended December 31,
2000, in conformity with accounting principles generally accepted in the United
States of America. Also in our opinion, the related financial statement
schedule, when considered in relation to the consolidated financial statements
taken as a whole, presents fairly, in all material respects, the information set
forth therein.
Frankfurt am Main, Germany
March 23, 2001, except as to paragraphs 16 and 17 of Note 18, as to which the
date is April 5, 2001
/s/ KPMG
Deutsche Treuhand-Gesellschaft
Aktiengesellschaft
Wirtschaftsprufungsgesellschaft
F-25
225
FRESENIUS MEDICAL CARE AG
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(IN THOUSANDS, EXCEPT SHARE DATA)
<Table>
<Caption>
2000 1999 1998
---------- ---------- ----------
Net revenue:
Dialysis Care......................................... $2,944,625 $2,599,688 $2,358,577
Dialysis Products..................................... 1,256,713 1,240,741 1,147,099
---------- ---------- ----------
4,201,338 3,840,429 3,505,676
Cost of revenue:
Dialysis Care......................................... 2,040,627 1,776,604 1,614,266
Dialysis Products..................................... 693,966 686,551 628,672
---------- ---------- ----------
2,734,593 2,463,155 2,242,938
Gross profit............................................ 1,466,745 1,377,274 1,262,738
Operating expenses:
Selling, general and administrative................... 813,997 784,572 742,610
Research and development.............................. 31,935 32,488 31,150
Special charge for Settlement......................... -- 601,000 --
---------- ---------- ----------
Operating income (loss)................................. 620,813 (40,786) 488,978
Other (income) expense:
Interest income....................................... (9,411) (8,094) (8,641)
Interest expense...................................... 195,569 226,218 228,182
Interest expense on obligation related to
Settlement......................................... 29,947 -- --
---------- ---------- ----------
Income (loss) from continuing operations before income
taxes, minority interest and cumulative effect of
accounting change..................................... 404,708 (258,910) 269,437
Income tax expense (benefit)............................ 189,772 (12,744) 135,366
Minority interest....................................... 2,861 2,378 2,454
---------- ---------- ----------
Income (loss) from continuing operations before
cumulative effect of accounting change................ 212,075 (248,544) 131,617
Loss from discontinued operations, net.................. -- -- (105,897)
Cumulative effect of accounting change, net............. -- -- (6,589)
---------- ---------- ----------
Net income (loss)....................................... $ 212,075 $ (248,544) $ 19,131
========== ========== ==========
Basic income (loss) from continuing operations before
cumulative effect of accounting change per Ordinary
share................................................. $ 2.37 $ (3.15) $ 1.62
========== ========== ==========
Fully diluted income (loss) from continuing operations
before cumulative effect of accounting change per
Ordinary share........................................ $ 2.36 $ (3.15) $ 1.62
========== ========== ==========
Basic income (loss) per Ordinary share.................. $ 2.37 $ (3.15) $ 0.20
========== ========== ==========
Fully diluted income (loss) per Ordinary share.......... $ 2.36 $ (3.15) $ 0.20
========== ========== ==========
Basic income (loss) from continuing operations before
cumulative effect of accounting change per Preference
share................................................. $ 2.43 $ (3.15) $ 1.78
========== ========== ==========
Fully diluted income (loss) from continuing operations
before cumulative effect of accounting change per
Preference share...................................... $ 2.42 $ (3.15) $ 1.78
========== ========== ==========
Basic income (loss) per Preference share................ $ 2.43 $ (3.15) $ 0.36
========== ========== ==========
Fully diluted income (loss) per Preference share........ $ 2.42 $ (3.15) $ 0.36
========== ========== ==========
</Table>
See accompanying notes to consolidated financial statements
F-26
226
FRESENIUS MEDICAL CARE AG
CONSOLIDATED BALANCE SHEETS
AT DECEMBER 31, 2000 AND 1999
(IN THOUSANDS, EXCEPT SHARE DATA)
<Table>
<Caption>
2000 1999
---------- ----------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 64,577 $ 34,760
Trade accounts receivable, less allowance for doubtful
accounts of $111,185 in 2000 and $101,262 in 1999....... 753,674 667,739
Accounts receivable from related parties.................. 46,117 49,129
Inventories............................................... 320,234 301,302
Prepaid expenses and other current assets................. 214,526 179,392
IDPN accounts receivable.................................. 5,189 53,962
Deferred taxes............................................ 177,094 254,925
---------- ----------
Total current assets...................................... 1,581,411 1,541,209
Property, plant and equipment, net.......................... 738,993 642,121
Intangible assets, including goodwill, net.................. 3,475,056 3,438,756
Deferred taxes.............................................. 27,205 25,121
Non-current IDPN accounts receivable........................ -- 5,189
Other assets................................................ 156,288 99,987
---------- ----------
Total assets....................................... $5,978,953 $5,752,383
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 203,374 $ 193,120
Accounts payable to related parties....................... 77,823 89,453
Accrued expenses and other current liabilities............ 391,640 415,061
Accrued Settlement........................................ -- 386,815
Note payable related to Settlement........................ 85,920 --
Short-term borrowings..................................... 106,592 96,383
Short-term borrowings from related parties................ 218,333 330,000
Current portion of long-term debt and capital lease
obligations............................................. 168,231 147,484
Income tax payable........................................ 117,572 78,438
Deferred taxes............................................ 20,967 33,438
---------- ----------
Total current liabilities................................. 1,390,452 1,770,192
Long-term debt and capital lease obligations, less current
portion................................................... 657,832 653,776
Accrued Settlement.......................................... -- 85,920
Other liabilities........................................... 31,464 24,686
Pension liabilities......................................... 69,970 61,578
Deferred taxes.............................................. 176,487 168,037
Company-obligated mandatorily redeemable preferred
securities of subsidiary Fresenius Medical Care Capital
Trusts Holding solely Company-guaranteed debentures of
subsidiary................................................ 952,727 964,103
Minority interest........................................... 21,271 21,774
---------- ----------
Total liabilities.................................. 3,300,203 3,750,066
SHAREHOLDERS' EQUITY:
Preference shares, no par, E2.56 nominal value, 45,497,700
shares authorized, 23,765,093 issued and outstanding...... 63,644 27,623
Ordinary shares, no par, E2.56 nominal value, 70,000,000
shares authorized, issued and outstanding................. 229,494 229,494
Additional paid-in capital.................................. 2,634,606 2,097,480
Retained deficit............................................ (56,024) (216,870)
Accumulated other comprehensive loss........................ (192,970) (135,410)
---------- ----------
Total shareholders' equity......................... 2,678,750 2,002,317
---------- ----------
Total liabilities and shareholders' equity......... $5,978,953 $5,752,383
========== ==========
</Table>
See accompanying notes to consolidated financial statements
F-27
227
FRESENIUS MEDICAL CARE AG
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(IN THOUSANDS)
<Table>
<Caption>
2000 1999 1998
--------- --------- ---------
Operating Activities:
Net income (loss)..................................... $ 212,075 $(248,544) $ 19,131
Adjustments to reconcile net income (loss) to cash
flows provided by (used in) operating activities:
Cumulative effect of accounting change............. -- -- 6,589
Depreciation and amortization...................... 292,854 284,208 278,984
Loss from discontinued operations.................. -- -- 105,897
Write-off of IDPN accounts receivable.............. -- 94,349 --
Change in deferred taxes, net...................... 76,934 (89,925) 23,586
(Gain) loss on sale of fixed assets................ (289) 991 213
Compensation expense related to stock options...... 3,980 -- --
Changes in assets and liabilities, net of amounts from
businesses acquired or disposed of:
Trade accounts receivable, net..................... (174,333) (136,262) (160,051)
Inventories........................................ (23,007) (15,754) (39,304)
Prepaid expenses, other current and non-current
assets........................................... (8,285) (36,718) (37,295)
Accounts receivable from/ payable to related
parties.......................................... (18,801) (14,946) 3,174
Accounts payable, accrued expenses and other
current and non-current liabilities.............. (20,689) 488,696 (6,336)
Income taxes payable............................... 50,827 28,662 73,669
--------- --------- ---------
Net cash provided by operating activities of
continuing operations......................... 391,266 354,757 268,257
--------- --------- ---------
Net cash used in operating activities of
discontinued operations....................... -- (3,782) (257)
--------- --------- ---------
Net cash provided by operating activities........ 391,266 350,975 268,000
--------- --------- ---------
Investing Activities:
Purchases of property, plant and equipment............ (228,037) (160,276) (158,695)
Proceeds from sale of property, plant and equipment... 20,724 7,130 26,179
Acquisitions and investments, net of cash acquired.... (274,530) (101,326) (222,935)
Proceeds from disposition of businesses............... -- -- 82,500
--------- --------- ---------
Net cash used in investing activities of
continuing operations......................... (481,843) (254,472) (272,951)
--------- --------- ---------
Net cash used in investing activities of
discontinued operations....................... -- -- (7,315)
--------- --------- ---------
Net cash used in investing activities............ (481,843) (254,472) (280,266)
--------- --------- ---------
</Table>
F-28
228
<Table>
<Caption>
2000 1999 1998
--------- --------- ---------
Financing Activities:
Proceeds from short-term borrowings................... 38,416 79,580 54,954
Repayments of short-term borrowings................... (32,609) (80,946) (44,795)
Proceeds from short-term borrowings from related
parties............................................ 26,000 270,000 60,000
Repayments of short-term borrowings from related
parties............................................ (141,000) -- (66,428)
Proceeds from long-term debt.......................... 255,224 26,895 60,150
Principal payments of long-term debt and capital lease
obligations........................................ (221,739) (310,476) (640,497)
Payments on obligation related to Settlement.......... (386,815) -- --
Retirement of convertible investment securities....... -- (47,664) (61,725)
Proceeds from issuance of mandatorily redeemable
preferred securities............................... -- -- 597,810
Proceeds from issuance of Preference shares........... 556,958 -- --
Proceeds from increase of accounts receivable
securitization program............................. 111,402 29,400 105,600
Proceeds from exercise of stock options............... 885 1,719 1,047
Dividends paid........................................ (51,229) (48,404) (49,214)
Distributions on convertible investment securities.... -- -- (2,752)
Change in minority interest........................... 139 578 717
--------- --------- ---------
Net cash provided by (used in) financing
activities of continuing operations........... 155,632 (79,318) 14,867
--------- --------- ---------
Net cash used in financing activities of
discontinued operations....................... -- -- (2,107)
--------- --------- ---------
Net cash provided by (used in) financing
activities.................................... 155,632 (79,318) 12,760
--------- --------- ---------
Effect of exchange rate changes on cash and cash
equivalents........................................... (35,238) (14,292) (6,445)
--------- --------- ---------
Cash and Cash Equivalents:
Net increase (decrease) in cash and cash
equivalents........................................ 29,817 2,893 (5,951)
Cash and cash equivalents at beginning of period...... 34,760 31,867 37,818
--------- --------- ---------
Cash and cash equivalents at end of period............ $ 64,577 $ 34,760 $ 31,867
========= ========= =========
</Table>
See accompanying notes to consolidated financial statements
F-29
229
FRESENIUS MEDICAL CARE AG
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(IN THOUSANDS, EXCEPT SHARE DATA)
<Table>
<Caption>
PREFERENCE SHARES ORDINARY SHARES ACCUMULATED
-------------------- ---------------------- CONVERTIBLE ADDITIONAL RETAINED OTHER
NUMBER OF NO PAR NUMBER OF NO PAR INVESTMENT PAID IN EARNINGS COMPREHENSIVE
SHARES VALUE SHARES VALUE SECURITIES CAPITAL (DEFICIT) LOSS
---------- ------- ----------- -------- ----------- ---------- --------- -------------
Balance at December 31,
1997..................... 9,023,341 $27,623 70,000,000 $229,494 $ 67,584 $2,098,776 $ 108,875 $ (86,387)
Proceeds from exercise of
options.................. -- -- -- -- -- 1,047 -- --
Retirement of convertible
investment securities.... -- -- -- -- (67,584) -- -- --
Distributions on
convertible investment
securities............... -- -- -- -- -- -- (2,752) --
Distributions to Fresenius
AG....................... -- -- -- -- -- (4,062) -- --
Dividends paid............. -- -- -- -- -- -- (45,176) --
Comprehensive income:
Net income............... -- -- -- -- -- -- 19,131 --
Foreign currency
translation
adjustment............. -- -- -- -- -- -- -- 10,397
Comprehensive income....... -- -- -- -- -- -- -- --
---------- ------- ----------- -------- -------- ---------- --------- ---------
Balance at December 31,
1998..................... 9,023,341 27,623 70,000,000 229,494 $ -- $2,095,761 $ 80,078 $ (75,990)
Proceeds from exercise of
options.................. -- -- -- -- -- 1,719 -- --
Dividends paid............. -- -- -- -- -- -- (48,404) --
Comprehensive loss:
Net loss................. -- -- -- -- -- -- (248,544) --
Foreign currency
translation
adjustment............. -- -- -- -- -- -- -- (59,420)
Comprehensive loss......... -- -- -- -- -- -- -- --
---------- ------- ----------- -------- -------- ---------- --------- ---------
Balance at December 31,
1999..................... 9,023,341 $27,623 70,000,000 $229,494 $ -- $2,097,480 $(216,870) $(135,410)
Issuance of Preference
shares................... 14,724,359 35,980 -- -- -- 532,302 -- --
Proceeds from exercise of
options.................. 17,393 41 -- -- -- 844 -- --
Compensation expense
related stock options.... -- -- -- -- -- 3,980 -- --
Dividends paid............. -- -- -- -- -- -- (51,229) --
Comprehensive income:
Net income............... -- -- -- -- -- -- 212,075 --
Foreign currency
translation
adjustment............. -- -- -- -- -- -- -- (57,560)
Comprehensive income:...... -- -- -- -- -- -- -- --
---------- ------- ----------- -------- -------- ---------- --------- ---------
Balance at December 31,
2000..................... 23,765,093 $63,644 70,000,000 $229,494 $ -- $2,634,606 $ (56,024) $(192,970)
========== ======= =========== ======== ======== ========== ========= =========
<Caption>
TOTAL
----------
Balance at December 31,
1997..................... $2,445,965
Proceeds from exercise of
options.................. 1,047
Retirement of convertible
investment securities.... (67,584)
Distributions on
convertible investment
securities............... (2,752)
Distributions to Fresenius
AG....................... (4,062)
Dividends paid............. (45,176)
Comprehensive income:
Net income............... 19,131
Foreign currency
translation
adjustment............. 10,397
----------
Comprehensive income....... 29,528
----------
Balance at December 31,
1998..................... $2,356,966
Proceeds from exercise of
options.................. 1,719
Dividends paid............. (48,404)
Comprehensive loss:
Net loss................. (248,544)
Foreign currency
translation
adjustment............. (59,420)
----------
Comprehensive loss......... (307,964)
----------
Balance at December 31,
1999..................... $2,002,317
Issuance of Preference
shares................... 568,282
Proceeds from exercise of
options.................. 885
Compensation expense
related stock options.... 3,980
Dividends paid............. (51,229)
Comprehensive income:
Net income............... 212,075
Foreign currency
translation
adjustment............. (57,560)
----------
Comprehensive income:...... 154,515
----------
Balance at December 31,
2000..................... $2,678,750
==========
</Table>
F-30
230
FRESENIUS MEDICAL CARE AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Fresenius Medical Care AG and subsidiaries ("FMC" or the "Company"), is an
integrated provider of kidney dialysis products and dialysis care. Fresenius
Medical Care AG ("FMC AG") was created by conversion of Sterilpharma GmbH, a
limited liability company incorporated in 1975, into a stock corporation
(Aktiengesellschaft). The resolutions for this conversion were adopted by a
shareholder meeting on April 17, 1996. On September 30, 1996, Fresenius Medical
Care AG initiated a series of transactions to consummate an Agreement and Plan
of Reorganization entered into on February 4, 1996 by Fresenius AG and W.R.
Grace & Co. ("W.R. Grace"). Pursuant to that Agreement, Fresenius AG contributed
Fresenius Worldwide Dialysis or FWD, its global dialysis business, including its
controlling interest in Fresenius USA, Inc. ("FUSA"), in exchange for Fresenius
Medical Care AG Ordinary shares. Thereafter, FMC acquired:
(i) all of the outstanding Common stock of W.R. Grace, whose sole
business at the time of the transaction consisted of National Medical Care,
Inc., its global dialysis business, in exchange for Ordinary shares; and
(ii) the publicly-held minority interest of Fresenius USA, Inc., in
exchange for Ordinary shares.
BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America ("U.S. GAAP").
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include all material companies in
which the Company has legal or effective control. All significant intercompany
transactions and balances have been eliminated. The equity method of accounting
is used for investments in associated companies (20% to 50% owned). All other
investments are accounted for at cost.
For business combinations accounted for under the purchase method, all
assets acquired and liabilities assumed are recorded at fair value. An 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.
b) CLASSIFICATIONS
Certain items in prior years' consolidated financial statements have been
reclassified to conform with the current year's presentation.
c) CASH AND CASH EQUIVALENTS
Cash and cash equivalents represent cash and certificates of deposit with
original maturity dates of three months or less at origination.
d) INVENTORIES
Inventories are stated at the lower of cost (determined by using the
average or first-in, first-out method) or market value.
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FRESENIUS MEDICAL CARE AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
e) PROPERTY, PLANT AND EQUIPMENT
Property, plant, and equipment are stated at cost. Significant improvements
are capitalized; repairs and maintenance costs that do not extend the useful
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 sold or otherwise disposed are removed from the accounts, and any
resulting gain or loss is included in income when the assets are disposed.
Depreciation on property, plant and equipment is calculated using the
straight-line method over the estimated useful lives of the assets ranging from
5 to 50 years for buildings and improvements with a weighted average life of 11
years and 3 to 15 years for machinery and equipment with a weighted average life
of 7 years. Equipment held under capital leases and leasehold improvements are
amortized using the straight-line method over the shorter of the lease term or
the estimated useful life of the asset.
The Company capitalizes interest on borrowed funds during construction
periods. Interest capitalized during 2000, 1999, and 1998 was, $1,205, $224, and
$221, respectively.
f) INTANGIBLE ASSETS
The Company has adopted the following useful lives and amortizes intangible
assets using the straight-line method: goodwill -- 20 to 40 years with weighted
average life of 37 years; tradename and patents -- 6 to 40 years with weighted
average life of 33 years; patient relationships, distribution rights and other
intangible assets -- over the estimated period to be benefited, generally from 5
to 40 years with a weighted average life of 8 years.
g) DERIVATIVE FINANCIAL INSTRUMENTS
The Company utilizes derivative financial instruments including forward
currency contracts and interest rate swaps.
Forward currency contracts -- Gains and losses on forward currency
contracts that are designated and effective as hedges of existing assets or
liabilities are included in the carrying amount of those hedged items. Foreign
currency forward contracts hedging firm commitments are deferred and recognized
along with the effects of the hedged transaction. Gains and losses on other
forward currency contracts not qualifying for hedge accounting are recognized as
selling, general and administrative expenses or cost of revenues in the period
in which the gain or loss occurs.
Interest rate swaps -- Interest rate agreements that are designated as a
hedge of a debt or other long-term obligations are accounted for on an accrual
basis. That is, the interest payable and interest receivable under the terms of
the swaps are accrued and recorded as an adjustment to the interest or related
expense of the designated liability or obligation.
Amounts due from and payable to the counterparties of interest rate swaps
are recorded on an accrual basis at each reporting date on amounts computed by
reference to the respective interest rate swap contract. Realized gains and
losses that occur from the early termination or expiration of contracts are
deferred and recorded in income over the remaining period of the original swap
agreement. Gains and losses arising from interest differential on contracts that
hedge specific borrowings are recorded as a component of interest expense over
the life of the contract. In the event the hedged asset or liability is
terminated, sold, or otherwise disposed of, the timing of the gain or loss on
the interest rate swap would be matched with the offsetting gain or loss of the
related item. For information regarding the adoption of
F-32
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FRESENIUS MEDICAL CARE AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
SFAS 133 Accounting for Derivative Instruments and Hedging Activities, as
amended by SFAS 138, see "s) RECENT PRONOUNCEMENTS AND ACCOUNTING CHANGES."
h) FOREIGN CURRENCY TRANSLATION
For purposes of these consolidated financial statements, the U.S. dollar is
the reporting currency. The Company follows the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 52, Foreign Currency Translation.
Substantially all assets and liabilities of the Company and all non-U.S.
subsidiaries are translated at year end exchange rates, while revenues and
expenses are translated at exchange rates prevailing during the year.
Adjustments for foreign currency translation fluctuations are excluded from
earnings and are included in other comprehensive income.
Gains and losses resulting from the translation of intercompany borrowings,
which are not considered equity investments, are included in selling, general
and administrative expense. Transaction gains (losses) amounted to $18,370,
$2,299 and $366 for 2000, 1999 and 1998, respectively.
i) REVENUE RECOGNITION POLICY
Health care revenues are recognized on the date services and related
products are provided and the payor is obligated to pay at amounts estimated to
be received under reimbursement arrangements with these third party payors.
Medicare and Medicaid programs are billed at pre-determined net realizable rates
per treatment that are established by statute or regulation. Most
non-governmental payors, including contracted managed care payors, are billed at
our standard rates for services net of contractual allowances to reflect the
estimated amounts to be received under reimbursement arrangements with these
payors.
Product revenues are recognized when title to the product passes to the
customers either at the time of shipment, upon receipt by the customer or upon
any other terms that clearly define passage of title. As product returns are not
typical, no return allowances are established. In the event a return is
required, the appropriate reductions to sales, accounts receivables and cost of
sales are made.
j) RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses are expensed as incurred.
k) INCOME TAXES
In accordance with SFAS No. 109, Accounting for Income Taxes, deferred tax
assets and liabilities are recognized for the future consequences attributable
to differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax basis. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. Prior to the German tax law change in 2000, deferred taxes
in Germany were calculated using the "undistributed earnings" tax rate. (see
Note 12)
l) 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
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FRESENIUS MEDICAL CARE AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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
amount of the assets exceeds 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.
m) DEBT ISSUANCE COSTS
Costs related to the issuance of debt are amortized over the term of the
related obligation.
n) SELF INSURANCE PROGRAMS
A major subsidiary of 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 are made for both
reported and incurred but not reported claims.
o) 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 that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
p) CONCENTRATION OF CREDIT RISK
The Company is engaged in the manufacture and sale of products for all
forms of kidney dialysis, principally to health care providers throughout the
world, and in providing kidney dialysis treatment, clinical laboratory testing
and other medical ancillary services. 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.
q) EARNINGS PER PREFERENCE SHARE AND ORDINARY SHARE
Basic net income (loss) per Preference share and basic net income (loss)
per Ordinary share for all years presented have been calculated using the
two-class method required under U.S. GAAP based upon the weighted average number
of Ordinary and Preference shares outstanding. Basic earnings per share are
computed by dividing net income less preference amounts and distributions earned
by convertible investment securities by the weighted average number of Ordinary
shares and Preference shares outstanding during the year. Diluted earnings per
share include the effect of all potentially dilutive Ordinary shares and
Preference shares that would have been outstanding during the year.
The convertible investment securities (see Note 16) and awards granted
under the FMC stock incentive plans (see Note 17), are potentially dilutive
equity instruments.
r) STOCK OPTION PLANS
The Company accounts for its stock option plans in accordance with the
provisions of Accounting Principles Board ("APB") Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations. As such, compensation
expense is recorded only if the current market price of the
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FRESENIUS MEDICAL CARE AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
underlying stock exceeds the exercise price on the measurement date. For stock
incentive plans which are performance based, the Company recognizes compensation
expense over the vesting periods, based on the then current market values of the
underlying stock. In addition, the Company has adopted the disclosure only
provisions required by SFAS No. 123, Accounting for Stock-Based Compensation.
s) RECENT PRONOUNCEMENTS AND ACCOUNTING CHANGES
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging
Activities, which establishes accounting and reporting standards for financial
derivative instruments, including certain derivative instruments embedded in
other contracts and for hedging activities. SFAS No. 133 requires that an entity
recognize all derivatives as either assets or liabilities in the balance sheet
and measure those instruments at fair value. The statement also provides the
criteria for determining whether a derivative may be specifically designated as
a hedge of a particular exposure with the intent of measuring the effectiveness
of that hedge in the statement of operations. In June 2000, the Financial
Accounting Standards Board issued SFAS No. 138, which amended certain provisions
of SFAS 133, including allowing foreign-currency denominated assets and
liabilities to qualify for hedge accounting, permitting the offsetting of
certain inter-entity foreign currency exposures that reduce the need for third
party derivatives and redefining the nature of interest rate risk to avoid
sources of ineffectiveness. The Company is adopting SFAS 133, and the
corresponding amendments under SFAS 138 effective as of January 1, 2001.
After adoption, gains and losses in fair value of recognized assets and
liabilities and firm commitments of operating transactions as well as gains and
losses on derivative financial instruments designated as fair value hedges of
these recognized assets and liabilities and firm commitments will be recognized
currently in earnings.
After adoption, changes in the value of foreign currency forward contracts
designated and qualifying as cash flow hedges of forecasted transactions will be
reported in accumulated other comprehensive income. These amounts will
subsequently be reclassified into earnings, as a component of the forecasted
transaction, in the same period as the forecasted transaction affects earnings.
The adoption of SFAS 133, as amended by SFAS 138, results in the recording
of assets related to forward currency contracts of approximately $13,072. The
offset to this transition adjustment will be recorded to other comprehensive
income at an amount of $1,465 and to net income at an amount of $11,607. Because
of corresponding entries concerning the hedged items, the net effect on earnings
will be immaterial. Additionally a liability for interest rate swaps of
approximately $25,146 will be recorded. The offset will be recorded to other
comprehensive income.
In December 1999, the United States Securities and Exchange Commission
("SEC") issued Staff Accounting Bulletin 101, Revenue Recognition in Financial
Statements ("SAB 101"). SAB 101 provides the SEC staff's views in applying
generally accepted accounting principles to selected revenue recognition issues,
as well as examples of how the SEC staff applies revenue recognition guidance to
specific circumstances. In June 2000, SAB 101B was issued by the SEC further
delaying the implementation date for SAB 101 until the fourth quarter of the
fiscal year beginning after December 15, 1999. The impact of the adoption of SAB
101 is not significant.
In May 2000, the Emerging Issues Task Force ("EITF") issued EITF 00-014,
Accounting for Certain Sales Incentives, which establishes accounting for point
of sales coupons, rebates, and free merchandise. This EITF requires that an
entity report these sales incentives that reduce the price paid to be netted
directly against revenues. EITF 00-014 is effective no later than the fourth
quarter of the fiscal year beginning after December 15, 1999. The impact of the
adoption of EITF-00-14 is not significant.
F-35
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FRESENIUS MEDICAL CARE AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
In March 2000, the Financial Accounting Standards Board issued Financial
Accounting Standards Board Interpretation No. 44, Accounting for Certain
Transactions Involving Stock Compensation, an interpretation of APB Opinion 25.
The effects of applying this interpretation are required to be recognized on a
prospective basis from July 1, 2000. The application of this interpretation did
not have a material effect on our financial position or results of operations.
In September 2000, the Financial Accounting Standards Board issued SFAS No.
140, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities, which replaces SFAS No. 125. SFAS No. 140
provides the accounting and reporting standards for securitizations and other
transfers of financial assets and collateral. These standards are based on
consistent application of a financial-components approach that focuses on
control. This Statement also provides consistent standards for distinguishing
transfers of financial assets that are sales from transfers that are secured
borrowings. SFAS No. 140 is effective for transfers after March 31, 2001 and is
effective for disclosures about securitizations and collateral for fiscal years
ending after December 15, 2000. There is no impact for the adoption of SFAS No.
140.
In April 1998, Statement of Position No. 98-5, Reporting on the Costs of
Start-up Activities ("SOP 98-5"), was issued by the Accounting Standards
Executive Committee (AcSEC) of the AICPA and was adopted by the Company,
effective January 1, 1998. SOP 98-5 requires that the costs of start-up
activities, including organization costs, which have been previously
capitalized, should be expensed as incurred. As a result of the adoption of SOP
98-5, deferred start-up activities in the amount of $11,279 as of January 1,
1998, have been recognized as a cumulative effect of a change in accounting, net
of related tax benefit of $4,690, in the consolidated statements of earnings for
the year ended December 31, 1998. Costs for start-up activities are expensed as
incurred beginning in 1998.
2. SPECIAL CHARGE FOR THE SETTLEMENT
On January 18, 2000, Fresenius Medical Care Holdings, Inc. ("FMCH"),
National Medical Care, Inc. and certain other affiliated companies executed
definitive agreements with the United States Government to settle (i) matters
concerning violations of federal laws then under investigation and (ii) National
Medical Care, Inc.'s claims with respect to outstanding Medicare receivables for
intradialytic parenteral nutrition therapy (collectively, the "Settlement").
Under the Settlement with the U.S. government, FMCH made initial cash
payments of approximately $286 million and entered into a note payable for the
remainder of the payment obligations. Interest on installment payments to the
U.S. government will accrue at 6.3% on approximately $51 million of the
obligation and at 7.5% annually on the balance, until paid in full. The note
payable to the U.S. government and the amounts due to the Company for the
outstanding Medicare receivables have been classified in the balance sheet based
on their expected settlement dates.
Under the terms of the note payable, the remaining obligation is payable in
six quarterly installments that began in April 2000 and end in July 2001. The
first four quarterly installments were paid in the amount of approximately $35
million each, including interest at 7.5%. The first three of these four payments
were made in April, July and October 2000 and the fourth installment was made in
January 2001. The final two installments of approximately $28 million each,
including interest at 6.3%, will be paid in April and July 2001, respectively.
In addition, the Company received approximately $59 million from the U.S.
government related to the Company's claims for outstanding Medicare receivables.
The Company received $54 million in 2000 and a final payment of $5 million in
February 2001.
In connection with the Settlement, the Company amended the letter of credit
that National Medical Care delivered to the U.S. government in 1996 from $150
million to $190 million and, under the
F-36
236
FRESENIUS MEDICAL CARE AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Settlement, the letter of credit will be reduced as installment payments are
made to the Government. At December 31, 2000, the letter of credit was reduced
to $89 million.
3. RELATED PARTY TRANSACTIONS
a) SHARED SERVICES
Fresenius AG, the majority shareholder, historically provided services to
and incurred costs on behalf of the Company. The Company entered into service
agreements with Fresenius AG and certain affiliates of Fresenius AG to continue
to receive services, including, but not limited to: administrative services,
management information services, employee benefit administration, legal and
environmental consultation and administration insurance, central purchasing, tax
services, treasury services, and accounting and reporting. In the opinion of
management, such expenses are indicative of the actual expenses that would have
been incurred if the Company had been operating as an independent entity.
For the years 2000, 1999 and 1998, amounts charged from Fresenius AG to FMC
under the terms of the agreement are $19,947, $16,387 and $21,298, respectively.
FMC also provides certain services to FAG and certain affiliates of FAG,
including research and development, plant administration, patent administration
and warehousing. FMC charged amounts of $9,984, $6,821 and $5,233 for services
rendered to Fresenius AG in 2000, 1999 and 1998, respectively.
Related party transactions pertaining to services performed between
affiliated entities are recorded as accounts receivable or payable to related
parties. At December 31, 2000 and 1999 FMC had accounts receivable from related
parties of $46,117 and $49,129, respectively. The FMC accounts payable to
related parties at December 31, 2000 and 1999 were $77,823 and $89,453,
respectively.
Under operating lease agreements entered into in conjunction with the
formation of Fresenius Medical Care, FMC will pay Fresenius AG approximately
DM16,800 (E8,590) per year. The lease amounts escalate annually, based upon
published indices in Germany. Converted to USD, this amounts to approximately,
$9,472, $10,642 and $10,101 during 2000, 1999 and 1998, respectively. The leases
expire in 2005 with options for renewal.
b) FINANCING PROVIDED BY FRESENIUS AG
At December 31, 2000, the Company had short-term loans outstanding of
$215,934, of which $209,000 bore interest at rates varying between 7.35% and
7.38%. The remaining loans bore interest at a rate of approximately 4%. At
December 31, 1999, the Company had short-term loans outstanding of $330,000 at
varying interest rates between 7.06% and 7.44%. The funds were used primarily to
reduce long-term debt. At December 31, 2000, the loans were due at various dates
throughout the first quarter of 2001 and have subsequently been extended to
various dates through June 6, 2001. Interest expense on these borrowings was,
$18,571, $13,037 and $1,096 for the years 2000, 1999 and 1998, respectively.
c) PRODUCTS
During the years ended December 31, 2000, 1999, and 1998, the Company
recognized sales of $28,076, $28,563 and $13,237, respectively, to non-FMC
businesses of Fresenius AG. During 2000, 1999 and 1998, the Company made
purchases from Fresenius AG and affiliates in the amount of $25,547, $30,056 and
$29,822, respectively.
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FRESENIUS MEDICAL CARE AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
d) OTHER
During 1999, the Company granted to a member of the Management Board a five
year unsecured loan of $2,000 with interest at 6.0% per annum. Only interest is
due during the first four years of the term, with both principal and interest
due in the fifth year. The Company may call the loan at any time and can be
repaid without penalty, at any time during the period of the loan.
A member of the Company's Supervisory board is a partner in a law firm
which provided services to the Company. The Company paid the law firm
approximately $580, $107, and $254 in 2000, 1999 and 1998, respectively.
A member of the Company's Supervisory Board is the chairman of the
management board of a bank that served as one of two joint global coordinators
of a public offering of Preference shares conducted by the Company in 2000. The
Company paid the bank a total of $10,438 in underwriting discounts and
commissions.
The Chairman of the Company's Supervisory Board and former Chief Executive
Officer of FMC are members of the Management Board of Fresenius AG, the majority
holder of FMC's Ordinary shares.
4. ACQUISITIONS
The Company acquired certain health care facilities and clinical
laboratories for a total consideration of $288,144, $110,788, and $264,740 in
2000, 1999 and 1998, respectively. In 2000, consideration consisted of cash of
$274,530 and notes for $13,614. Acquisitions in 2000 include the purchase of
substantially all of the international and non-continental U.S. operations of
Total Renal Care Holdings, Inc. ("TRC"). The purchase price for these operations
was $145,000. Additionally the Company agreed to acquire TRC's Puerto Rico
operations. That acquisition is subject to regulatory approval and third party
consents. In connection with the Puerto Rico acquisition the Company paid a $10
million non-refundable deposit. In 1999, consideration consisted of cash of
$101,326 and notes for $9,462. In 1998, the consideration consisted of cash of
$222,935 and convertible investment securities of $41,805. 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 the tangible net assets acquired
was $196,000, $94,000 and $243,000 for 2000, 1999 and 1998, respectively.
5. DISCONTINUED OPERATIONS
Effective June 1, 1998, the Company classified its Homecare/Non-renal
Diagnostics businesses as discontinued operations. The sale of the Non-renal
Diagnostics business was completed on June 26, 1998 while the sale of the
Homecare business was completed on July 29, 1998. In connection with the sale of
Homecare, the Company retained the assets and the operations associated with the
delivery of IDPN and recorded, for accounting purposes, its activity as part of
discontinued operations for the periods through June 30, 1998. Subsequent to
June 30, 1998, the Company has recorded no IDPN revenues and any incidental
expenses have been included in continuing operations. Since it has exited this
business, the Company provides those services only to existing physicians'
patients for whom this therapy is prescribed. The Company has recorded net after
tax losses of $9,000 from operations of discontinued businesses and $97,000 from
the disposal of these businesses for the year ended December 31, 1998. The net
loss on the disposal of these businesses and their results of operations have
been accounted for as discontinued operations.
IDPN receivables of $153,500 which had been included in the retained assets
of discontinued operations were resolved as part of the settlement agreements
with the U.S. Government relating to the OIG investigations (see Note 2). As a
result, a $94,300 write off was taken against these receivables. The
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238
FRESENIUS MEDICAL CARE AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
remaining receivables have been classified separately on the balance sheet and
were collected from the U.S. Government.
DISCONTINUED OPERATIONS -- RESULTS OF OPERATIONS
The revenue and results of operations of the discontinued operations in
1998 were as follows:
<Table>
<Caption>
1998
---------
Net revenue................................................. $ 120,940
Cost of revenue............................................. 73,950
---------
Gross profit.............................................. 46,990
Selling, general and administrative......................... 61,202
---------
Loss from operations of discontinued businesses before
income tax benefit........................................ (14,212)
Income tax benefit.......................................... (5,543)
---------
Loss from operations of discontinued businesses............. (8,669)
---------
Loss on disposal before income tax benefit.................. (140,000)
Income tax benefit.......................................... (42,772)
---------
Loss on disposal............................................ (97,228)
---------
Loss from discontinued operations........................... $(105,897)
=========
</Table>
6. SALE OF ACCOUNTS RECEIVABLE
National Medical Care, Inc. ("NMC"), a subsidiary of 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 125. The amount of
the accounts receivable facility was last amended on October 26, 2000, when the
Company increased the accounts receivable facility to $500,000, and extended its
maturity to October 25, 2001.
At December 31, 2000 and 1999, $445,000 and $335,000, 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 6.59% at year-end 2000. Under the
terms of the agreement, new interests in accounts receivable are sold as
collections reduce previously sold accounts receivable. The costs related to
such sales are expensed as incurred and recorded as interest expense and related
financing costs. There were no gains or losses on these transactions.
F-39
239
FRESENIUS MEDICAL CARE AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
7. INVENTORIES
As of December 31, inventories consisted of the following:
<Table>
<Caption>
2000 1999
-------- --------
Raw materials and purchased components................. $ 73,244 $ 61,624
Work in process........................................ 22,231 21,834
Finished goods......................................... 160,358 168,193
Health care supplies................................... 64,401 49,651
-------- --------
Inventories.......................................... $320,234 $301,302
======== ========
</Table>
Under the terms of certain (unconditional) purchase agreements, the Company
is obligated to purchase approximately $165,000 of materials, of which $90,000
is committed at December 31, 2000 for fiscal year 2001. The terms of these
agreements run 2 to 5 years. Inventories as of December 31, 2000 include
approximately $25,800 of EPO which is supplied by a single source supplier in
the United States. Delays, stoppages, or interruptions in the supply of EPO
could adversely affect the operating results of the Company. In 2000, revenues
from EPO accounted for approximately 22% of total revenue in the North America
segment and approximately 23% of dialysis care revenue world-wide.
8. PROPERTY, PLANT AND EQUIPMENT
As of December 31, property, plant and equipment consisted of the
following:
<Table>
<Caption>
2000 1999
---------- ----------
Land and improvements............................... $ 21,477 $ 9,717
Buildings and improvements.......................... 386,568 336,782
Machinery and equipment............................. 691,607 620,024
Machinery, equipment and rental equipment under
capitalized leases................................ 17,507 24,001
Construction in progress............................ 90,184 48,832
---------- ----------
1,207,343 1,039,356
Accumulated depreciation and amortization........... (468,350) (397,235)
---------- ----------
Property, plant and equipment, net................ $ 738,993 $ 642,121
========== ==========
</Table>
Depreciation and amortization expense for property, plant and equipment
amounted to $130,278, $131,623, and $130,628 for the years ended December 31,
2000, 1999, and 1998, respectively.
Included in property, plant and equipment as of December 31, 2000, 1999 and
1998 were $36,853, $36,015 and $36,996, respectively, of peritoneal dialysis
cycler machines which the Company leases to customers with end-stage renal
disease on a month-to-month basis and hemodialysis machines which the Company
leases to physicians under operating leases. Identification of the rental income
from the Company's leasing activities is not practicable as the Company's return
on the machines is received through contractual arrangements whereby a premium
is charged for other support equipment sold during the life of the lease.
Accumulated depreciation related to machinery, equipment and rental
equipment under capital leases was $7,358, $14,330 and $10,785 at December 31,
2000, 1999 and 1998, respectively.
F-40
240
FRESENIUS MEDICAL CARE AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
9. INTANGIBLE ASSETS
As of December 31, intangible assets consisted of the following:
<Table>
<Caption>
2000 1999
---------- ----------
Goodwill............................................ $3,252,335 $3,114,063
Patient relationships............................... 198,147 180,067
Patents............................................. 252,336 252,923
Distribution rights................................. 7,619 4,349
Other............................................... 387,589 354,400
---------- ----------
4,098,026 3,905,802
Accumulated amortization............................ (622,970) (467,046)
---------- ----------
Intangible assets, net.............................. $3,475,056 $3,438,756
========== ==========
</Table>
Amortization expense for intangible assets amounted to $160,604, $151,735,
and $147,616 for the years ended December 31, 2000, 1999, and 1998,
respectively.
10. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
As at December 31, accrued expenses and other current liabilities consisted
of the following:
<Table>
<Caption>
2000 1999
-------- --------
Accrued operating expenses............................. $ 49,012 $ 68,599
Accrued legal and compliance costs..................... 3,314 12,991
Accrued insurance...................................... 47,074 54,518
Accrued salaries and wages............................. 87,016 75,163
Accounts receivable credit balances.................... 38,215 48,932
Accrued interest....................................... 26,926 25,429
Accrued restructuring.................................. 3,450 2,472
Accrued physician compensation......................... 17,649 17,721
Bonus and incentive plan compensation.................. 2,489 2,746
Withholding tax and VAT................................ 24,138 17,294
Commissions............................................ 12,231 10,406
Deferred income........................................ 6,764 5,770
Bonuses and rebates.................................... 7,331 9,303
Accrued other costs related to Settlement.............. 4,986 20,577
Other.................................................. 61,045 43,140
-------- --------
Total accrued expenses and other current liabilities... $391,640 $415,061
======== ========
</Table>
11. DEBT AND CAPITAL LEASE OBLIGATIONS
Short-term borrowings from third parties of $106,592, and $96,383 at
December 31, 2000, and 1999, respectively, represent amounts borrowed by certain
of the Company's subsidiaries under lines of credit with commercial banks. The
average interest rates on these borrowings at December 31, 2000, and 1999 was
6.0% and 4.6%, respectively. For information regarding short-term borrowings
from affiliates, see Note 3b.
F-41
241
FRESENIUS MEDICAL CARE AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Excluding amounts available under the senior credit agreement (as described
below), at December 31, 2000, FMC had $24,291 available under such commercial
bank agreements. These lines of credit are generally secured by the Company's
accounts receivable and contain various covenants including, but not limited to,
requirements for maintaining defined levels of working capital, net worth,
capital expenditures and various financial ratios.
As of December 31, long-term debt and capital lease obligations consisted
of the following:
<Table>
<Caption>
2000 1999
--------- ---------
Senior credit agreement.............................. $ 732,500 $ 738,150
Capital leases....................................... 6,808 8,067
Other................................................ 86,755 55,043
--------- ---------
826,063 801,260
Less current maturities.............................. (168,231) (147,484)
--------- ---------
$ 657,832 $ 653,776
========= =========
</Table>
SENIOR CREDIT AGREEMENT
The Company is party to a bank agreement dated September 27, 1996
(hereafter "senior credit agreement") with the Bank of America, N.A., The Bank
of Nova Scotia, The Chase Manhattan Bank, Dresdner Bank Aktiengesellschaft and
certain other lenders (collectively, the "Lenders"), as amended, pursuant to
which the Lenders have made available to the Company and certain subsidiaries
and affiliates an aggregate of $2,000,000 through two credit facilities:
- a revolving credit facility of up to $1,000,000 (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) for up to seven years expiring on
September 30, 2003
- a term loan facility of $1,000,000 for up to seven years, also expiring
September 30, 2003. The terms of the senior credit agreement relating to
the term loan facility require payments that permanently reduce the term
loan facility. The repayment began in the fourth quarter of 1999 and will
continue quarterly until the final maturity of the agreement in 2003.
Loans under this senior credit agreement bear interest at a base rate
determined in accordance with the agreement, or at LIBOR, plus in either case an
applicable margin. A fee is payable to the Lenders equal to a percentage per
annum (initially 0.375%) of the portion of the senior credit agreement not used.
In addition to scheduled principal payments, the senior credit agreement
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. Prepayments are permitted at any time without penalty,
except in certain defined periods. The senior credit agreement contains
customary affirmative and negative covenants with respect to the Company and its
subsidiaries and other payment restrictions, mainly related to dividends. Under
the terms of the agreement the Company is restricted as to the level of
dividends that can be paid in any calendar year, which was $78,000 in 2000. The
Company's dividend distribution in 2000 was $51,229. Dividends from Fresenius
Medical Care Holdings, Inc., a wholly owned subsidiary, are limited as a result
of a restriction on dividends from its subsidiary, National Medical Care, Inc,
and its subsidiaries. The restriction limits National Medical Care dividends to
50% of its consolidated net income of the preceding year. National Medical Care
had losses in 1999 as a result of a special charge (see Note 2) and losses in
1998 from discontinued operations (see Note 5).
F-42
242
FRESENIUS MEDICAL CARE AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
In December 1999, the Company amended certain covenants including, among
other things, financial ratios contained in its senior credit facility that
would have been affected by the impact of the Settlement (see Note 2). At
December 31, 2000 the Company was in compliance with all such covenants.
On September 21, 2000 the senior credit agreement was amended in order to
increase the facility for accounts receivable securitization and some other
facilities. The Lenders also agreed that the proceeds of the Preference share
offerings during 2000 (see Note 16) did not trigger repayment obligations on the
term loan, but maybe used for capital expenditures and acquisitions.
At December 31, 2000, the Company had approximately $698,000 of additional
borrowing capacity available under the revolving credit facility of the senior
credit agreement, including approximately $103,000 for additional letters of
credit. No further borrowings are available under the term loan facility.
On January 18, 2000, the Company increased the amount of the letter of
credit that National Medical Care delivered to the U.S. Government in 1996 from
$150,000 to $190,000. Under the Settlement agreement, the letter of credit will
be reduced as installment payments are made to the government. At December 31,
2000, the letter of credit was $89,000.
Aggregate annual payments applicable to the senior credit agreement, term
loan, capital leases and other borrowings for the five years subsequent to
December 31, 2000 (excluding borrowings underlying the Company's trust preferred
securities (see Note 14) are:
<Table>
2001........................................................ $168,231
2002........................................................ 159,474
2003........................................................ 439,950
2004........................................................ 8,100
2005........................................................ 7,632
Thereafter.................................................. 42,676
--------
$826,063
========
</Table>
12. INCOME TAXES
Income (loss) from continuing operations before income taxes, minority
interest, and cumulative effect of accounting change is attributable to the
following geographic locations:
<Table>
<Caption>
2000 1999 1998
-------- --------- --------
Germany........................................... $106,475 $ 93,653 $ 70,877
United States..................................... 220,176 (408,060) 118,574
Other............................................. 78,058 55,497 79,986
-------- --------- --------
$404,708 $(258,910) $269,437
======== ========= ========
</Table>
F-43
243
FRESENIUS MEDICAL CARE AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Income tax expense (benefit) for the years ended December 31, consisted of
the following:
<Table>
<Caption>
2000 1999 1998
-------- -------- --------
Current:
German corporation and trade income taxes........ $ 66,754 $ 43,876 $ 23,990
United States income taxes....................... 23,132 12,088 54,600
Other income taxes............................... 29,971 28,797 22,246
-------- -------- --------
119,857 84,761 100,836
======== ======== ========
Deferred:
Germany.......................................... (14,902) 791 15,281
United States.................................... 81,553 (92,907) 16,800
Other income taxes............................... 3,264 (5,389) 2,449
-------- -------- --------
69,915 (97,505) 34,530
-------- -------- --------
$189,772 $(12,744) $135,366
======== ======== ========
</Table>
In 2000, the German government enacted new tax legislation which, among
other changes, will reduce the Company's statutory corporate tax rate for German
companies from 40% on retained earnings and 30% on distributed earnings to a
uniform 25%, effective for the Company's year beginning January 1, 2001. In
1999, various changes to the German corporation tax law were made effective,
including the reduction of the tax rate applied to undistributed earnings from
45% to 40%. The effects of the reductions in the tax rate and other tax law
changes on the deferred tax assets and liabilities of the Company's German
companies were recognized in the year of enactment and resulted in deferred tax
benefit for 2000 and 1999 of $2,227 and $850, respectively.
Prior to the 2000 tax law changes becoming effective, German corporation
tax law applied a split rate imputation system to the income taxation of a
corporation and its shareholders. Upon distribution of retained earnings in the
form of a dividend, shareholders subject to German tax received a credit for
corporation taxes paid by the corporation on such distributed earnings. In
addition, the corporation received a tax refund to the extent such earnings had
been initially subjected to a corporation income tax in excess of 30%. The tax
refund was also distributable to the shareholder.
In general, prior to 2001 retained (undistributed) German corporate income
was initially subject to a federal corporation income tax currently at a rate of
40% for 2000 (40% for 1999 and 45% for 1998) plus a surcharge of 5.5% for each
year on federal corporate taxes payable. Giving effect to the surcharge, the
federal corporate tax rate was 42.2% for 2000 (42.2% in 1999 and 47.475% in
1998). Upon distribution of certain retained earnings generated in Germany to
stockholders, the corporate income tax rate on the earnings was adjusted to 30%,
plus a solidarity surcharge of 5.5%, for a total of 31.65% for each year, by
means of a refund for taxes previously paid. Under the new German corporate tax
system, during a 15 year transition period beginning on January 1, 2001, the
Company will continue to receive a refund or pay additional taxes on the
distribution of retained earnings which existed as of December 31, 2000.
The income tax expense reflects the actual amount of distribution of that
year's earnings of the German operations. As such, the refund of tax described
above is reflected in the income tax expense reconciliation presented below.
For the years ended December 31, 2000, 1999, and 1998 income tax expense
differed from the amounts computed by applying the German federal corporation
income tax rate of 42.2% for both 2000
F-44
244
FRESENIUS MEDICAL CARE AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
and 1999 and 47.475% for 1998 to income before income taxes, minority interest
and cumulative effect of accounting change as a result of the following:
<Table>
<Caption>
2000 1999 1998
-------- --------- --------
Computed "expected" income tax (benefit) expense
at the undistributed earnings rate.............. $170,786 $(109,260) $127,929
Dividend distributions credit..................... (9,077) -- --
Trade income taxes, net of German federal
corporation income tax benefit.................. 12,688 8,758 8,351
Amortization of non-tax deductible goodwill....... 28,380 28,057 30,999
Foreign tax rate differential..................... (20,811) (2,687) (27,799)
Non-deductible portion of special charge for
Settlement...................................... -- 71,622 --
Other............................................. 7,805 (9,234) (4,114)
-------- --------- --------
Provision for income taxes........................ $189,772 $ (12,744) $135,366
======== ========= ========
Effective tax rate................................ 46.9% (4.9)% 50.2%
======== ========= ========
</Table>
The tax effects of the temporary differences that give rise to deferred tax
assets and liabilities at December 31 are presented below:
<Table>
<Caption>
2000 1999
-------- --------
Deferred tax assets:
Accounts receivable, primarily due to allowance for
doubtful accounts.................................... $ 28,083 $ 27,844
Inventory, primarily due to additional costs
capitalized for tax purposes, and inventory reserve
accounts............................................. 23,479 21,427
Accrued expenses and other liabilities for financial
accounting purposes, not currently tax deductible.... 119,439 141,123
Capital leases, principally due to capitalization of
costs for tax purposes............................... 955 1,839
Settlement............................................. 5,302 92,469
Net operating loss carryforwards....................... 30,546 21,807
Other.................................................. 5,821 1,895
-------- --------
Total deferred tax assets.............................. $213,625 $308,404
Less: valuation allowance.............................. (9,292) (6,360)
-------- --------
Net deferred tax assets................................ $204,333 $302,044
-------- --------
</Table>
F-45
245
FRESENIUS MEDICAL CARE AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<Table>
<Caption>
2000 1999
-------- --------
Deferred tax liabilities:
Accounts receivable, primarily due to allowance for
doubtful accounts.................................... $ 3,526 $ 4,553
Inventory, primarily due to inventory reserve accounts
for tax purposes..................................... 5,329 6,262
Accrued expenses and other liabilities deductible for
tax prior to financial accounting recognition........ 31,037 40,365
Plant and equipment, principally due to differences in
depreciation......................................... 154,605 169,813
Other.................................................. 2,991 2,480
-------- --------
Total deferred tax liabilities......................... 197,488 223,473
-------- --------
Net deferred tax asset................................. $ 6,845 $ 78,571
======== ========
</Table>
During 2000 and 1999, the valuation allowance increased by $2,932 and
$1,020, respectively, primarily attributable to losses, principally arising in
Japan, and partially offset by utilization of operating losses.
At December 31, 2000 the Company had approximately $83,607 of net operating
losses, of which $3,568 will expire in 2001, $4,395 in 2002, $5,002 in 2003,
$4,387 in 2004, $13,746 in 2005, $14,336 in 2018, $3,812 in 2019 and $3,352 in
2020. Substantially all of the remaining $31,009 of net operating losses are not
subject to an expiration period.
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities and projected future taxable
income in making this assessment. Based upon the level of historical taxable
income and projections for future taxable income over the periods which the
deferred tax assets are deductible, management believes it is more likely than
not the Company will realize the benefits of these deductible differences, net
of the existing valuation allowances at December 31, 2000.
Provision has not been made for additional taxes on approximately $102,000
undistributed earnings of foreign subsidiaries. The majority of these earnings
have been, and will continue to be, reinvested. The earnings could become
subject to additional tax if remitted or deemed remitted as dividends. The
Company estimates that the distribution of these earnings would result in $6,396
of additional withholding and corporation income taxes.
INTRAPERIOD TAX ALLOCATION
Income tax expense was allocated among the following items as follows:
<Table>
<Caption>
2000 1999 1998
-------- -------- --------
Continuing operations.............................. $189,772 $(12,744) $135,366
Operations of discontinued operations.............. -- -- (5,543)
Disposal of discontinued businesses................ -- -- (42,772)
-------- -------- --------
Total income tax expense........................... $189,772 $(12,744) $ 87,051
======== ======== ========
</Table>
F-46
246
FRESENIUS MEDICAL CARE AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
13. EMPLOYEE BENEFIT PLANS
DEFINED BENEFIT PENSION PLANS
Plan benefits are generally based on employee years of service and final
salary. Consistent with normal business custom in the Federal Republic of
Germany, FMC's pension obligations in Germany are unfunded. In the United
States, substantially all U.S. employees are covered by National Medical Care's
non-contributory, defined benefit pension plan. Each year, National Medical Care
contributes to this plan at least the minimum amount required by law. Plan
assets consist principally of publicly traded common stock, fixed income
securities and cash equivalents. In addition, National Medical Care also
sponsors a supplemental executive retirement plan to provide certain key
executives with benefits in excess of normal pension benefits.
The following provides a reconciliation of benefit obligations, plan
assets, and funded status of the plans. Benefits paid as shown in the
reconciliation of plan assets include only benefit payments from the Company's
funded benefit plans.
<Table>
<Caption>
2000 1999 1998
-------- -------- --------
Change in benefit obligation:
Benefit obligation at beginning of year............ $111,753 $111,832 $ 88,713
Translation loss (gain)............................ (1,748) (3,611) 1,432
Service cost....................................... 11,465 10,040 8,905
Interest cost...................................... 8,148 7,300 6,418
Amendments......................................... -- (5) --
Transfer of plan participants...................... (6) 3,706 28
Actuarial loss (gain).............................. 5,940 (15,826) 9,400
Divestitures....................................... -- -- (1,717)
Benefits paid...................................... (3,103) (1,683) (1,347)
-------- -------- --------
Benefit obligation at end of year.................. $132,451 $111,753 $111,832
======== ======== ========
Change on plan assets:
Fair value of plan assets at beginning of year..... $ 86,794 $ 77,019 $ 65,088
Actual return on plan assets....................... (2,098) 11,179 13,218
Benefits paid...................................... (2,748) (1,404) (1,287)
-------- -------- --------
Fair value of plan assets at end of year........... $ 81,948 $ 86,794 $ 77,019
======== ======== ========
Funded Status...................................... $(50,503) $(24,961) $(34,813)
Unrecognized net gain.............................. (12,593) (31,441) (11,821)
Unrecognized prior service cost.................... (4) (4) --
Unrecognized transition obligation................. 226 326 475
-------- -------- --------
Accrued benefit costs.............................. $(62,875) $(56,079) $(46,159)
======== ======== ========
Weighted -- average assumptions as of December 31,
Discount rate...................................... 7.30% 7.28% 6.59%
Expected return of plan assets..................... 9.70% 9.70% 9.70%
Rate of compensation increase...................... 4.90% 4.60% 4.60%
</Table>
F-47
247
FRESENIUS MEDICAL CARE AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<Table>
<Caption>
2000 1999 1998
-------- -------- --------
Components of net period benefit cost:
Service cost....................................... $ 11,465 $ 10,040 $ 8,905
Interest cost...................................... 8,148 7,300 6,418
Expected return on plan assets..................... (8,345) (7,401) (6,430)
Amortization of transition obligation.............. 75 87 56
Amortization unrealized losses..................... -- 61 --
Amortization of prior service cost................. (1) (1) --
Recognized net (gain)/loss......................... (2,429) (520) (857)
Curtailment net gain............................... -- -- (1,717)
-------- -------- --------
Net periodic benefit costs......................... $ 8,913 $ 9,566 $ 6,375
======== ======== ========
</Table>
In addition to the principal pension plans, certain of the Company's other
subsidiaries offer separate retirement plans. The total accrued pension cost for
these plans was $7,095, $5,499, and $3,600 at December 31, 2000, 1999 and 1998,
respectively. The Company does not provide any postretirement benefits to its
employees other than those provided under its pension plans and supplemental
executive retirement plan.
DEFINED CONTRIBUTION PLANS
National Medical Care and FUSA sponsor defined contribution plans. Total
contributions for the years ended December 31, 2000, 1999 and 1998 were $8,786,
$7,298 and $7,195, respectively.
14. MANDATORILY REDEEMABLE TRUST PREFERRED SECURITIES
In November 1996, the Company, through Fresenius Medical Care Capital Trust
(the "1996 Trust"), a statutory business trust organized under the laws of the
State of Delaware, issued $360,000 of 9% Trust Preferred Securities (the "Trust
Securities"). FMC owns all of the common securities of the 1996 Trust. The sole
asset of the Trust is $360,360 aggregate principal amount of 9% Senior
Subordinated Debentures due 2006 of FMC Trust Finance S.a.r.l. Luxembourg, a
wholly owned subsidiary of the Company ("Luxco"), and related guarantees by the
Company, Fresenius Medical Care Deutschland GmbH ("D-GmbH") and Fresenius
Medical Care Holdings, Inc. ("FMCH"); D-GmbH and FMCH being the "Subsidiary
Guarantors". (See Note 23 "Supplemental Condensed Combining Information.") The
Trust Securities are guaranteed by FMC through a series of undertakings by the
Company and the Subsidiary Guarantors.
The Trust Securities entitle the holders to distributions payable at an
annual rate of 9% of the stated amount and are mandatorily redeemable on
December 1, 2006. The holders of the Trust Securities are entitled upon
liquidation of the 1996 Trust to a distribution equal to the stated amount of
the Trust Securities. Except in limited circumstances, the holders of the Trust
Securities have no voting rights.
Luxco has the right to redeem the 9% Senior Subordinated Debenture, in
whole or in part, at any time or from time to time after December 1, 2001, at
specified redemption prices plus accrued and unpaid interest. In connection with
any such redemption, the 1996 Trust must redeem a like amount of Trust
Securities.
In February 1998, the Company, through Fresenius Medical Care Capital Trust
II ("Trust II") and Fresenius Medical Care Capital Trust III ("Trust III", and
collectively with Trust II, "the 1998 Trusts"), statutory business trusts
created under the laws of the State of Delaware, issued $450,000 of 7 7/8% USD
Trust Preferred Securities (the "Trust II Securities") and DM300,000 of 7 3/8%
DM Trust Preferred
F-48
248
FRESENIUS MEDICAL CARE AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Securities (the "Trust III Securities" and, together with the Trust II
Securities, the "Trust Preferred Securities"). FMC owns all of the common
securities of the 1998 Trusts. The sole asset of Trust II is $450,450 aggregate
principal amount of Luxco 7 7/8% USD Senior Subordinated Debentures due 2008 and
related guarantees by the Subsidiary Guarantors. The sole asset of Trust III is
DM300,300 aggregate principal amount of Luxco 7 3/8% DM Senior Subordinated
Debentures due 2008 and related guarantees by the Subsidiary Guarantors. (See
Note 23 "Supplemental Condensed Combining Information.") The Trust Preferred
Securities are guaranteed by FMC through a series of undertakings by the Company
and the Subsidiary Guarantors.
The Trust II and Trust III Securities entitle the holders to distributions
payable at the annual rate of 7 7/8% and 7 3/8%, respectively, of the stated
amount, and are mandatorily redeemable on February 1, 2008. The holders of the
Trust Preferred Securities are entitled, upon liquidation of the 1998 Trusts, to
a distribution equal to the stated amount of the Trust Preferred Securities. The
Senior Subordinated Debentures issued by Luxco to the 1998 Trusts are not
redeemable prior to February 1, 2008, except under specified circumstances.
Except in limited circumstances, the holders of the Trust Preferred Securities
have no voting rights.
15. MINORITY INTERESTS
At December 31, minority interests were as follows:
<Table>
<Caption>
2000 1999
------- -------
FMCH Preferred Stock:
Preferred Stock, $100 par value
-- 6% Cumulative; 40,000 shares authorized; 36,460
outstanding......................................... $ 3,646 $ 3,646
-- 8% Cumulative Class A; 50,000 shares authorized;
16,176 outstanding.................................. 1,618 1,618
-- 8% Noncumulative Class B; 40,000 shares authorized;
21,483 outstanding.................................. 2,148 2,148
Preferred Stock, $0.10 par value
-- Noncumulative Class D; 100,000,000 shares
authorized; 89,062,316 outstanding.................. 8,906 8,906
------- -------
Sub-total FMCH minority interest......................... 16,318 16,318
Other minority interest.................................. 4,953 5,456
------- -------
Total minority interest.................................. $21,271 $21,774
======= =======
</Table>
In conjunction with the formation of FMC, each holder of W.R. Grace common
stock received one share of a Class D Preferred stock of Fresenius Medical Care
Holdings for each share of stock previously held. The Class D Preferred stock
entitles the holder to receive a one-time special dividend if (but only if) the
cumulative adjusted cash flow to ordinary shareholders (defined as net income
plus depreciation and amortization) from January 1, 1997 through December 31,
2001 exceeds $3.7 billion. If cumulative adjusted cash flow meets that
threshold, 44.8% of any amount exceeding $3.7 billion will be distributed as a
special dividend on the Fresenius Medical Care Holdings Class D Preferred
Shares. Fresenius Medical Care Holdings must make a public announcement of the
amount, if any, of the special dividend by May 1, 2002. Payment of a special
dividend on the Class D Preferred Shares would commence in October 2002. For the
period from January 1, 1997 through the end of 2000, cumulative adjusted cash
flow for the purpose of the Class D Preferred Shares special dividend
calculation was approximately $1.2 billion. Based upon the Company's cumulative
adjusted cash flow at December 31, 2000 and its historical trend, the
F-49
249
FRESENIUS MEDICAL CARE AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Company believes that it is unlikely that any special dividend will be paid. The
Company has no obligation to contribute any amount to Fresenius Medical Care
Holdings to enable it to pay any special dividend.
16. SHAREHOLDERS' EQUITY
By resolution of the general meeting on June 10, 1998, our share capital
was conditionally increased by up to DM 12,500, divided into 2,500,000 new
non-voting Preference shares. This conditional capital increase may be effected
only upon exercise of subscription rights granted under the FMC 98 Plan 2.
The Company requested and received approval from its shareholders at the
annual shareholder meeting on June 2, 1999, to change the currency of the
Company's share capital from Deutsche Mark (DM) to euro to prepare for the
transition by the European Community to euro which began January 1, 1999 and is
scheduled for completion by mid 2002. The exchange rate for DM to euro was set
at DM 1.95583 to E1. As a result, the per share nominal value of the Company's
Preference shares and Ordinary shares changed from DM 5 per share to E2.55646
per share. For convenience, shareholders approved an increase to the nominal
value to E2.56 resulting in a Capital Stock increase of E280 ($290). The
increase in value of capital stock was offset by a decrease in additional
paid-in-capital. No new shares were issued for this revaluation. The effect of
the conversion has been recognized retroactively in the shareholders' equity
accounts on the balance sheets as of December 31, 1997 and in the consolidated
financial statements. Shareholders' equity accounts have been restated to
reflect the reclassification of an amount equal to the nominal value of the
increase in Ordinary shares from additional paid in capital.
In addition, the Company's shareholders approved a change in the dividend
premium for the Preference shares from a percentage of the nominal value per
share to an absolute amount. If dividends are declared, the Preference
shareholder will receive E0.06 per share more than the dividend for an Ordinary
share, but no less than E0.12 per share. In another matter approved by the
shareholders, the Company's shares have been changed to no par value.
On March 2, 2000, the Company issued 8,974,359 non-voting Preference shares
to a limited number of institutional and other accredited investors in exchange
for the investors' interests in Franconia Acquisition LLC, an entity formed to
acquire dialysis clinics and other related businesses. For financial reporting
purposes, the transaction, which generated net proceeds of approximately
$344,000, has been accounted for as a financing at fair value. The investors
have agreed not to effect sales or transfers of the Preference shares for a
period of 24 months after issuance except as permitted by the contribution
agreement. After this period, the investors will have rights to require, under
specific conditions, that the Company register these Preference shares for sale
under the Securities Act of 1933, as amended, and that the Company provide
assistance to them in connection with public offerings of their Preference
shares outside the United States.
After giving effect to the issuance of 8,974,359 non-voting Preference
shares in the Franconia transaction the remaining Approved Capital II amounted
to E29,533.
By resolution of the annual general meeting on May 30, 2000, the
authorization of the remaining Approved Capital I and Approved Capital II
described above was revoked, however, the management board, with the approval of
the supervisory board, was authorized to increase share capital by a maximum
amount of:
- E30,720,000, corresponding to 12,000,000 Preference shares, by issuing
new non-voting Preference shares for cash, new Approved Capital I.
- E20,480,000, corresponding to 8,000,000 Preference shares, by issuing new
non-voting Preference shares for cash or against contributions in kind,
new Approved Capital II.
F-50
250
FRESENIUS MEDICAL CARE AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The authorizations of Approved Capital I and Approved Capital II are
effective until May 29, 2005. Statutory preemptive rights will generally be
available in connection with the issuance of Preference shares utilizing
Approved Capital I, except for fractional amounts required to provide for a
round issue amount and a subscription ratio without fractional amounts. The
Company may exclude statutory preemptive rights in connection with the issuance
of Preference shares using Approved Capital II if the shares are issued against
a contribution in kind to acquire a company or an interest in a company or if
the shares are issued for cash and the issue price is not materially lower than
the price of the shares on the stock exchange.
Under the German Stock Corporation Act, the shareholders of a stock
corporation may empower the Management Board to issue shares in a specified
aggregate nominal value not exceeding 50% of the issued share capital at the
time of the passing of the resolution, in the form of Conditional Capital
(bedingtes Kapital) or Approved Capital (genehmigtes Kapital). The authorization
for the issuance of Approved Capital is limited for a period not exceeding five
years from the date the shareholders' resolution becomes effective.
On July 26, 2000, the Company completed a public offering of 5,000,000
Preference shares for net proceeds of approximately $185 million. In addition,
on July 28, 2000, the underwriters of the public offering exercised options to
purchase an additional 750,000 Preference shares, resulting in total net
proceeds from the public offering of approximately $213 million.
At December 31, 2000, after giving effect to the issuance of 5,750,000
Preference shares in the offering described above the remaining Approved Capital
II amounted to E5,760. After giving effect to the issuance of 2,250,000
Preference shares in the Everest acquisition (see Note 22), no additional
Preference shares are available for issuance under Approved Capital II.
Cash dividends of $51,229 for 1999 in the amount of E0.75 on each
Preference share, excluding the Preference shares issued on March 2, 2000, and
E0.69 on each Ordinary share, were paid on May 31, 2000.
Under the German Stock Corporation Act, the amount of dividends available
for distribution to shareholders is based upon the unconsolidated retained
earnings of Fresenius Medical Care AG as reported in its balance sheet
determined in accordance with the German Commercial Code (Handelsgesetzbuch).
If no dividend is declared for two consecutive years after the year for
which the Preference shares are entitled to dividends, then the holders of such
Preference shares will be entitled to the same voting rights as holders of
Ordinary shares until all arrearages are paid. In addition, the payment of
dividends by FMC is subject to limitations under the senior credit agreement
(see Note 11).
In accordance with a contribution agreement between the Company and
Fresenius AG, which was entered into in connection with the Agreement and Plan
of Reorganization (See Note 1), the Company distributed $4,062 during the year
ending December 31, 1998, to Fresenius AG. These funds represented earnings of
the former Fresenius Worldwide Division (FWD), prior to the contribution of FWD
by Fresenius AG to the Company, as part of the formation of the FMC. These
earnings were not distributed at the time of the formation of FMC due to the
application of local generally accepted accounting principles in determining the
amount of pre-formation earnings and the legal requirement of a shareholder
declaration to remit those earnings. In anticipation of a determination of the
amount and a positive shareholder declaration, an estimate of the amount that
would be due was made. The estimated amount was loaned by the Company to
Fresenius AG with any distribution of earnings to be utilized to reduce the
receivable from Fresenius AG. During 1998, the $4,062 distribution of earnings
was subsequently applied against the receivable by the Company.
F-51
251
FRESENIUS MEDICAL CARE AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
In connection with certain acquisitions made during 1997, a subsidiary of
the Company issued convertible investment securities (Wandel-GenuSSrechte) with
a nominal value of $67,584. The convertible investment securities, which were
non-voting, carried a cumulative dividend rate between 6.12% and 6.25% payable
only out of legally available earnings of FMC AG and were redeemable ten years
from the date of issuance. The Company and the convertible investment security
holders also entered into agreements which permitted the Company to exchange,
and under certain circumstances permitted the convertible investment security
holders to request that the Company exchange, the convertible investment
securities solely at the Company's option, for cash or for Preference shares or
other specified securities of equal value. As the Company had the unilateral
ability to exchange the convertible investment securities for Preference shares
and the Preference shares represent permanent equity, the Company had classified
the convertible investment securities within shareholders' equity. During the
year ended December 31, 1998, a decision was made to redeem a portion of these
securities for cash rather than exchange such securities for Preference shares.
A total of approximately $61,725 nominal amount of these securities was redeemed
during the year ended December 31, 1998. Approximately $5,859 nominal amount of
these securities remained outstanding at year-end 1998. At December 31, 1998, it
was the intent of the Company to redeem the remaining securities for cash during
1999 and therefore the Company reclassified such amounts as liabilities. These
securities were subsequently redeemed for cash during the fourth quarter of
1999.
The following table is a reconciliation of the numerators and denominators
of the basic and diluted earnings per share computations. Stock options granted
under the FMC 1998 Plan 2 are subject to performance criteria. At December 31,
1999, the performance criteria for the 1998 and 1999 stock options granted had
not been met. Therefore, the stock options granted have been excluded from the
diluted earnings per share computations. On May 30, 2000, the Company's
shareholders approved a change to the FMC 98 Plan 2 whereby the impact of the
special charge for the Settlement (see Note 2) was excluded from the Company's
performance criteria relative to the EBIT growth requirements in the plan.
Therefore, at December 31, 2000, the performance criteria had been met and the
stock options granted are included in the diluted earnings per share computation
for 2000.
<Table>
<Caption>
2000 1999 1998
----------- ----------- -----------
Numerators:
Income (loss) from continuing operations before
cumulative effect of accounting change................ $ 212,075 $ (248,544) $ 131,617
less:
Distributions on convertible investment securities.... -- -- (2,752)
Dividend arrearages on Preference shares for 1996,
declared and paid in 1998.......................... -- -- (974)
Preference on Preference shares....................... (1,056) -- (513)
----------- ----------- -----------
Income (loss) available to Preference shares only....... (1,056) -- (1,487)
Income (loss) from continuing operations before
cumulative effect of accounting change available to
all class of shares................................... $ 211,019 $ (248,544) $ 127,378
=========== =========== ===========
Loss from discontinued operations, net.................. -- -- (105,897)
Cumulative effect of accounting change.................. -- -- (6,589)
</Table>
F-52
252
FRESENIUS MEDICAL CARE AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<Table>
<Caption>
2000 1999 1998
----------- ----------- -----------
Denominators:
Weighted average number of:
Ordinary shares outstanding........................... 70,000,000 70,000,000 70,000,000
Preference shares outstanding......................... 19,002,118 9,023,341 9,023,341
----------- ----------- -----------
Total weighted average shares outstanding............. 89,002,118 79,023,341 79,023,341
Potentially dilutive Preference shares................ 302,824 -- 2,522
----------- ----------- -----------
Total weighted average shares outstanding assuming
dilution........................................... 89,304,942 79,023,341 79,025,863
Total weighted average Preference shares outstanding
assuming dilution.................................. 19,304,942 9,023,341 9,025,863
Basic income (loss) from continuing operations before
cumulative effect of accounting change per Ordinary
share................................................. $ 2.37 $ (3.15) $ 1.62
Plus Preference and declared dividend arrearages per
Preference share...................................... 0.06 0.00 0.16
----------- ----------- -----------
Basic income (loss) from continuing operations before
cumulative effect of accounting change per Preference
share................................................. $ 2.43 $ (3.15) $ 1.78
=========== =========== ===========
Fully diluted income (loss) from continuing operations
before cumulative effect of accounting change per
Ordinary share........................................ 2.36 (3.15) 1.62
Plus Preference and declared dividend arrearages per
Preference share assuming dilution.................... 0.06 0.00 0.16
----------- ----------- -----------
Fully diluted income (loss) from continuing operations
before cumulative effect of accounting change per
Preference share...................................... $ 2.42 $ (3.15) $ 1.78
=========== =========== ===========
Basic and fully diluted loss from discontinued
operations per Ordinary and Preference share.......... 0.00 0.00 (1.34)
Basic and fully diluted accumulative effect of
accounting change per Ordinary and Preference share... 0.00 0.00 (0.08)
</Table>
17. STOCK OPTIONS
In connection with the formation of Fresenius Medical Care in 1996, certain
options outstanding under stock option plans of W.R. Grace and FUSA were
exchanged, for equivalent options with respect to FMC Ordinary shares (the "FMC
Rollover Plan").
The resulting total number of shares issuable upon exercise of options
under the FMC Rollover Plan at the formation of FMC, September 30, 1996, was
approximately 333,000. No additional Ordinary shares are available for granting
of options under the FMC Rollover Plan. The Ordinary shares issuable upon
exercise of FMC Rollover options were issued to Fresenius AG which is holding
the shares pending exercise of the options. Fresenius AG has agreed, with
respect to the Ordinary shares underlying options related to W.R. Grace common
stock, to not exercise voting power over such Ordinary shares and to return any
dividends paid. Upon exercise of any of the FMC Rollover options, the exercise
price will be paid to the Company and Fresenius AG will deliver the Ordinary
shares to the option holder. Upon cancellation or expiration without exercise of
options formerly relating to W.R. Grace common stock, the underlying Ordinary
shares held by Fresenius AG will be transferred to FMC at no cost to it. Upon
cancellation or expiration without exercise of options formerly relating to FUSA
common stock, the underlying Ordinary shares will revert to Fresenius AG.
During the year ended December 31, 2000, 34,337 FMC Rollover Plan options
were exercised by employees. In connection therewith, Fresenius AG transferred
11,446 Ordinary shares to employees and
F-53
253
FRESENIUS MEDICAL CARE AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
remitted $247 to the Company. During the same period, 7,643 options were
canceled. At December 31, 2000, the $247 has been accounted for as a capital
contribution within additional paid in capital. Rollover plan options for
182,006 Ordinary ADSs were exercisable as of December 31, 2000 at an weighted
average exercise price of $7.88.
FMC PLAN
Immediately prior to the formation of Fresenius Medical Care, FMC adopted a
stock incentive plan (the "FMC Plan") for FMC's key management and executive
employees. Under the FMC Plan, eligible employees will have the right to acquire
Preference shares of the Company. Awards under the FMC Plan are 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 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 the Company's consolidated financial
statements. The bonds mature in ten years and are generally fully convertible
after three or five years. Each convertible bond, which is DM denominated,
entitles the holder thereof, upon payment of a conversion price equal to the
fair market value of the Preference shares on the award date, to convert the
bond into a number of ADSs representing Preference shares equal to the face
amount of the bond divided by the Preference shares' nominal value (DM5 per
Preference share).
The following table shows the number of Preference shares available and the
average price range (in $) for the FMC Plan.
<Table>
<Caption>
AVERAGE
SHARES PRICE RANGE
-------------- --------------
(IN THOUSANDS)
FMC Plan
Balance at December 31, 1997................... 827 $55.59 - 78.33
Forfeited................................. 723 55.59 - 78.33
--- --------------
Balance at December 31, 1998................... 104 55.59 - 78.33
Forfeited................................. 10 55.59 - 78.33
--- --------------
Balance at December 31, 1999................... 94 55.59 - 78.33
--- --------------
Forfeited................................. 26 55.59 - 78.33
--- --------------
Balance at December 31, 2000................... 68 $55.59 - 78.33
=== ==============
Exercisable at December 31, 2000............... 68 $55.59 - 78.33
=== ==============
</Table>
FMC 98 PLAN 1 AND PLAN 2
During 1998, the Company adopted two new stock incentive plans ("FMC 98
Plan 1" and "FMC 98 Plan 2") for FMC's key management and executive employees.
Under FMC 98 Plan 1, eligible employees have the right to acquire Preference
shares of the Company. Grants for these rights (the "Grants") under FMC 98 Plan
1 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 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. Each convertible bond, which
is DM denominated, entitles the holder thereof, upon payment of a conversion
price equal to the fair market value of the Preference shares one day after the
grant date,
F-54
254
FRESENIUS MEDICAL CARE AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
to convert the bond into a number of Preference shares equal to the face amount
of the bond divided by the Preference shares' nominal value (DM5 per Preference
share). FMC 98 Plan 1 was subsequently amended 1999 and 2000 to increase the
number of Preference shares available for issuance pursuant to grants under FMC
98 Plan 1 by 450,000 and 660,000 shares, respectively. The maximum number of
Preference shares that may be issued under this plan is 2,443,333 less any
shares issued, or subject to issue, under the FMC Plan. Any shares available due
to forfeiture of Grants under the FMC Plan would be considered available under
FMC 98 Plan 1 as long as the total Preference shares issued under both plans
does not exceed the 2,443,333 shares noted above.
Under FMC 98 Plan 2, eligible employees have the right to acquire
Preference shares (the "Options") of the Company. The share price of the
Preference share shall be equal to the average of the official daily quotation
prices of the Preference shares on the Frankfurt Stock Exchange on the thirty
days (30) of trading immediately prior to the date of grant of the award. One
third of an option vests on each of the second, third and fourth anniversary of
the award date, provided that the Company achieves certain performance criteria
for the full fiscal year following the grant date in comparison to its
performance for the full fiscal year preceding the grant date. On May 30, 2000,
the Company's shareholders approved a change to the FMC 98 Plan 2 whereby the
impact of the special charge for Settlement (see Note 2) was excluded from the
Company's performance criteria relative to the EBIT growth requirements in the
plan. The term of FMC 98 Plan 2 is five years and not more than 20% of the total
options available under the plan may be issued in any year. Options granted
under FMC 98 Plan 2 have a 10-year term. The maximum number of Preference shares
that may be issued under this plan is 2,500,000 shares, of which 500,000 are
designated for Management Board members and 2,000,000 are for other managerial
staff. Each option is exercisable into one Preference share.
The following table shows the number of Preference shares available and the
average price range (in $ and E) for FMC 98 Plan 1 and FMC 98 Plan 2.
<Table>
<Caption>
AVERAGE AVERAGE
SHARES PRICE RANGE PRICE RANGE
-------------- -------------- --------------
(IN THOUSANDS)
FMC 98 Plan 1
Balance at December 31, 1997........... --
Granted.............................. 1,024 E42.44 - 56.24 $39.49 - 52.33
----- -------------- --------------
Balance at December 31, 1998........... 1,024 42.44 - 56.24 39.49 - 52.33
----- -------------- --------------
Granted.............................. 572 32.90 30.61
Forfeited............................ 140 32.90 - 56.24 30.61 - 52.33
----- -------------- --------------
Balance at December 31, 1999........... 1,456 32.90 - 56.24 30.61 - 52.33
----- -------------- --------------
Granted.............................. 653 40.70 - 49.00 37.87 - 45.59
Exercised............................ 10 32.90 - 42.44 30.61 - 39.49
Forfeited............................ 303 32.90 - 56.24 30.61 - 52.33
----- -------------- --------------
Balance at December 31, 2000........... 1,796 E32.90 - 56.24 $30.61 - 52.33
===== ============== ==============
Exercisable at December 31, 2000....... 660 E32.90 - 56.24 $30.61 - 52.33
===== ============== ==============
</Table>
F-55
255
FRESENIUS MEDICAL CARE AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<Table>
<Caption>
AVERAGE AVERAGE
SHARES PRICE RANGE PRICE RANGE
-------------- -------------- --------------
(IN THOUSANDS)
FMC 98 Plan 2
Balance at December 31, 1997........... --
Granted.............................. 258 E 44.66 $ 41.56
----- -------------- --------------
Balance at December 31, 1998........... 258 44.66 41.56
----- -------------- --------------
Granted.............................. 297 32.41 30.16
Forfeited............................ 5 32.41 - 44.66 30.16 - 41.56
Balance at December 31, 1999........... 550 32.41 - 44.66 30.16 - 41.56
----- -------------- --------------
Granted.............................. 321 47.64 44.33
Exercised............................ 7 44.66 41.56
Forfeited............................ 40 32.41 - 47.64 30.16 - 44.33
----- -------------- --------------
Balance at December 31, 2000........... 824 E32.41 - 47.64 $30.16 - 44.33
===== ============== ==============
Exercisable at December 31, 2000....... 78 E 44.66 $ 41.56
===== ============== ==============
</Table>
Proceeds totaling $638 from exercise of 17,393 shares under FMC 98 Plan 1
and FMC 98 Plan 2 in 2000 were recorded as a capital contribution.
FAIR VALUE STOCK OPTIONS
The per share weighted-average fair value of stock options granted during
2000, 1999 and 1998 was $16.76, $13.06 and $14.20, respectively, on the date of
the grant using the Black-Scholes option-pricing model with the weighted-average
assumptions presented below.
<Table>
<Caption>
2000 1999 1998
--------- --------- ---------
Weighted-average assumptions:
Expected dividend yield.......................... 1.50% 1.00% 1.75%
Risk-free interest rate.......................... 5.50% 5.56% 4.26%
Expected volatility.............................. 40.00% 35.00% 35.00%
Expected life of option.......................... 5.3 years 5.3 years 5.3 years
</Table>
F-56
256
FRESENIUS MEDICAL CARE AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The Company applies APB Opinion No. 25 in accounting for stock compensation
and, accordingly, recognized compensation expense of approximately $3,980 for
stock options granted in 2000,1999 and 1998. No compensation cost has been
recognized in 1998 and 1997 for stock options in the consolidated financial
statements. Prior to 1998, no stock options had been granted which would have
resulted in significant compensation costs under SFAS No. 123. Had the Company
determined compensation cost based on the fair value at the grant date for its
stock options under SFAS No. 123, the Company's net income would have been
reduced to the pro forma amounts indicated below:
<Table>
<Caption>
2000 1999 1998
-------- --------- -------
Net income (loss)
As reported...................................... $212,075 $(248,544) $19,131
Effect of FMC Plan benefit (expense)............. (295) (247) 1,726
Effect of FMC 98 Plans (expense)................. (3,581) (2,253) (2,967)
Effect of 1999 option grants..................... 25 (615)
Effect of 2000 option grants..................... (4,242)
-------- --------- -------
Pro forma........................................ $203,982 $(251,659) $17,890
Basic net income (loss) per:
Ordinary share
As reported................................... $ 2.37 $ (3.15) $ 0.20
Pro forma..................................... $ 2.28 $ (3.19) $ 0.18
Preference share
As reported................................... $ 2.43 $ (3.15) $ 0.36
Pro forma..................................... $ 2.34 $ (3.19) $ 0.34
Fully diluted net income (loss) per:
Ordinary share
As reported................................... $ 2.36 $ (3.15) $ 0.20
Pro forma..................................... $ 2.27 $ (3.19) $ 0.18
Preference share
As reported................................... $ 2.42 $ (3.15) $ 0.36
Pro forma..................................... $ 2.33 $ (3.19) $ 0.34
</Table>
The Company revised its estimates of compensation costs for the FMC Plan
due to the large amount of forfeitures and cancellations that occurred in 1998.
This resulted in a significant reduction in the pro forma compensation cost for
1998 relating to the FMC Plan. The pro forma compensation cost relating to
options still outstanding at December 31, 1998 was $348. This amount has been
included in determining the total compensation benefit for the FMC Plan for
1998.
18. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company leases buildings and machinery and equipment under various
lease agreements expiring on dates through 2010. Rental expense recorded for
operating leases for the years ended December 31, 2000, 1999, and 1998 was
$192,910, $160,624, and $122,459, respectively.
In September 2000, FMCH entered into an amended operating lease agreement
with a bank that covers approximately $65,165 of equipment in its dialyzer
manufacturing facility in Ogden, Utah. The agreement has a basic term expiration
date of January 1, 2010, renewal options and a purchase option at the greater of
20% of the original cost or the fair market value.
F-57
257
FRESENIUS MEDICAL CARE AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Future minimum rental payments under noncancelable operating leases for the
five years succeeding December 31, 2000 are:
<Table>
2001...................................................... $129,883
2002...................................................... 109,491
2003...................................................... 96,331
2004...................................................... 122,673
2005...................................................... 57,534
Thereafter................................................ 110,935
--------
$626,847
========
</Table>
LEGAL PROCEEDINGS
COMMERCIAL INSURER LITIGATION
In 1997, FMCH, NMC, and certain named NMC subsidiaries were served with a
civil complaint filed by Aetna Life Insurance Company in the U.S. District Court
for the Southern District of New York. The lawsuit alleges inappropriate billing
practices for nutritional therapy, diagnostic and clinical laboratory tests and
misrepresentations. In April 1999, Aetna amended its complaint to include its
affiliate, Aetna U.S. Healthcare, Inc., as an additional plaintiff, and to make
certain other limited changes in its pleading. The amended complaint seeks
unspecified damages and costs. In February 2000, FMCH was served with a similar
complaint filed by Connecticut General Life Insurance Company, Equitable Life
Assurance Society for the United States, Cigna Employee Benefits Services, Inc.
and Guardian Life Insurance Company of America, Inc. (Connecticut General Life
Insurance Company et al v. National Medical Care et al, 00-Civ-0932) seeking
unspecified damages and costs. The Company, FMCH, NMC and its subsidiaries
believe that there are substantial defenses to the claims asserted, and intend
to vigorously defend both lawsuits. Other private payors have contacted FMCH and
may assert that NMC received excess payment and, similarly, may join either
lawsuit or file their own lawsuit seeking reimbursement and other damages.
FMCH has filed counterclaims against the plaintiffs in these matters based
on inappropriate claim denials and delays in claim payments.
Although the ultimate outcome on the Company of these proceedings cannot be
predicted at this time, an adverse result could have a material adverse effect
on the Company's business, financial condition and result of operations.
OBRA 93
The Omnibus Budget Reconciliation Act of 1993 affected the payment of
benefits under Medicare and employer health plans for dual-eligible ESRD
patients. In July 1994, the Health Care Financing Administration issued an
instruction to Medicare claims processors to the effect that Medicare benefits
for the patients affected by that act would be subject to a new 18-month
"coordination of benefits" period. This instruction had a positive impact on
National Medical Care's dialysis revenues because, during the 18-month
coordination of benefits period, patients' employer health plans were
responsible for payment, which was generally at rates higher than those provided
under Medicare.
In April 1995, the Health Care Financing Administration issued a new
instruction, reversing its original instruction in a manner that would
substantially diminish the positive effect of the original instruction on
National Medical Care's dialysis business. The Health Care Financing
Administration further proposed that its new instruction be effective
retroactive to August 1993, the effective date of the Omnibus Budget
Reconciliation Act of 1993.
F-58
258
FRESENIUS MEDICAL CARE AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
National Medical Care 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, National Medical Care commenced billing Medicare as the 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, National Medical Care filed a complaint in the U.S.
District Court for the District of Columbia (National Medical Care, Inc. and
Bio-Medical Applications of Colorado, Inc. d/b/a Northern Colorado Kidney Center
v. Shalala, C.A. No.95-0860 (WBB)) seeking to preclude the Health Care Financing
Administration from retroactively enforcing its April 24, 1995 implementation of
the Omnibus Budget Reconciliation Act of 1993 provision relating to the
coordination of benefits for dual eligible ESRD patients. On May 9, 1995,
National Medical Care moved for a preliminary injunction to preclude the Health
Care Financing Administration from enforcing its new policy retroactively, that
is, to billing for services provided between August 10, 1993 and April 23, 1995.
On June 6, 1995, the court granted National Medical Care's request for a
preliminary injunction and in December of 1996, National Medical Care moved for
partial summary judgment seeking a declaration from the Court that the Health
Care Financing Administration's retroactive application of the April 1995 rule
was legally invalid. The Health Care Financing Administration cross-moved for
summary judgement on the grounds that the April 1995 rule was validly applied
prospectively. In January 1998, the court granted National Medical Care's motion
for partial summary judgment and entered a declaratory judgment in favor of
National Medical Care, holding the Health Care Financing Administration's
retroactive application of the April 1995 rule legally invalid. Based on its
finding, the Court also permanently enjoined the Health Care Financing
Administration from enforcing and applying the April 1995 rule retroactively
against National Medical Care. The Court took no action on the Health Care
Financing Administration's motion for summary judgement pending completion of
the outstanding discovery. On October 5, 1998, National Medical Care filed its
own motion for summary judgement requesting that the Court declare the Health
Care Financing Administration's prospective application of the April 1995 rule
invalid and permanently enjoin the Health Care Financing Administration from
prospectively enforcing and applying the April 1995 rule. The Court has not yet
ruled on the parties' motions. The Health Care Financing Administration elected
not to appeal the Court's June 1995 and January 1998 orders. The Health Care
Financing Administration may, however, appeal all rulings at the conclusion of
the litigation. If the Health Care Financing Administration should successfully
appeal so that the revised interpretation would be applied retroactively,
National Medical Care may be required to refund the payments received from
employer health plans for services provided after August 10, 1993 under the
Health Care Financing Administration's original implementation, and to re-bill
Medicare for the same services, which could result in a loss to National Medical
Care of approximately $120 million attributable to all periods prior to December
31, 1995. Also, in this event, the business, financial condition and results of
operations would be materially adversely affected.
OTHER LITIGATION AND POTENTIAL EXPOSURES
From time to time, the Company is a party to or may be threatened with
other litigation arising in the ordinary course of its business. Management
regularly analyzes current information including, as applicable, the Company's
defenses and insurance coverage and, as necessary, provides accruals for
probable liabilities for the eventual disposition of these matters. The ultimate
outcome of these matters is not expected to materially affect the Company's
financial position, results of operations or cash flows.
The Company, like other health care providers, conducts its operations
under intense government regulation and scrutiny. The Company must comply with
regulations which relate to or govern the safety and efficacy of medical
products and supplies, the operation of manufacturing facilities, laboratories
and
F-59
259
FRESENIUS MEDICAL CARE AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
dialysis clinics, and environmental and occupational health and safety. The
Company must also comply with the U.S. anti-kickback statute, the False Claims
Act, the Stark Law, and other federal and state fraud and abuse laws. Applicable
laws or regulations may be amended, or enforcement agencies or courts may make
interpretations that differ from the Company's or the manner in which the
Company conduct its business. In the U.S., enforcement has become a high
priority for the federal government and some states. In addition, the provisions
of the False Claims Act authorizing payment of a portion of any recovery to the
party bringing the suit encourage private plaintiffs to commence "whistle
blower" actions. By virtue of this regulatory environment, as well as our
corporate integrity agreement with the government, the Company expects that its
business activities and practices will continue to be subject to extensive
review by regulatory authorities and private parties and continuing inquiries,
claims and litigation relating to its compliance with applicable laws and
regulations. The Company may not always be aware that an inquiry or action has
begun, particularly in the case of "whistle blower" actions, which are initially
filed under court seal.
The Company operates a large number of facilities throughout the U.S. In
such a decentralized system, it is often difficult to maintain the desired level
of oversight and control over the thousands of individuals employed by many
affiliate companies. The Company relies upon its management structure,
regulatory and legal resources, and the effective operation of its compliance
program to direct, manage and monitor the activities of these employees. On
occasion, the Company may identify instances where employees, deliberately or
inadvertently, have submitted inadequate or false billings. The actions of such
persons may subject the Company and its subsidiaries to liability under the
False Claims Act, among other laws, and the Company cannot predict whether law
enforcement authorities may use such information to initiate further
investigations of the business practices disclosed or any of its other business
activities.
Physicians, hospitals and other participants in the health care industry
are also subject to a large number of lawsuits alleging professional negligence,
malpractice, product liability, worker's compensation or related claims, many of
which involve large claims and significant defense costs. The Company has been
subject to these suits due to the nature of its business and the Company expects
that those types of lawsuits may continue. Although the Company maintains
insurance at a level which it believes to be prudent, the Company cannot assure
that the coverage limits will be adequate or that insurance will cover all
asserted claims. A successful claim against the Company or any of its
subsidiaries in excess of insurance coverage could have a material adverse
effect upon the Company and the results of its operations. Any claims,
regardless of their merit or eventual outcome, also may have a material adverse
effect on the Company's reputation and business.
The Company has also had claims asserted against it and has had lawsuits
filed against it relating to businesses that it has acquired or divested. These
claims and suits relate both to operation of the businesses and to the
acquisition and divestiture transactions. The Company has asserted its own
claims, and claims for indemnification. Although the ultimate outcome on the
Company cannot be predicted at this time, an adverse result could have a
material adverse effect upon the Company's business, financial condition, and
results of operations.
CONTINGENT NON-NMC LIABILITIES OF W. R. GRACE & CO. (NOW KNOWN AS FRESENIUS
MEDICAL CARE HOLDINGS, INC.)
The Company was formed as a result of a series of transactions pursuant to
the Agreement and Plan of Reorganization (the "Merger") dated as of February 4,
1996 by and between W.R. Grace & Co. ("Grace") and Fresenius AG. In connection
with the Merger, W.R. Grace & Co.-Conn. ("Grace Chemicals") agreed to indemnify
the Company and NMC against all liabilities of the Company and its successors,
whether relating to events occurring before or after the Merger, other than
liabilities arising
F-60
260
FRESENIUS MEDICAL CARE AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
from or relating to NMC operations. The Company may be contingently liable for
certain liabilities with respect to pre-Merger matters that are not related to
NMC operations. Grace Chemicals has filed for reorganization under Chapter 11 of
the U.S. Bankruptcy Code. If Grace Chemicals' indemnity obligation is terminated
or limited as a result of this bankruptcy proceeding, and the Company is held
liable for pre-Merger obligations of Grace Chemicals, the Company's business,
financial condition, and results of operations may be adversely affected.
On September 28, 2000, Mesquita, et al. v. W. R. Grace & Company, et al.
(Sup. Court of Calif., S.F. County, #315465) was filed by plaintiffs claiming to
be creditors of Grace Chemicals as a class action against Grace Chemicals,
certain U.S. affiliates of the Company, and other defendants, principally
alleging that the Merger was a fraudulent transfer, violated the uniform
fraudulent transfer act, and constituted a conspiracy. An amended complaint
(Abner et al. v. W. R. Grace & Company, et al.) and an additional class action
(Woodward v. Sealed Air Corporation, et al, USDC Boston, No. 01 10547 PBS), were
filed subsequently with substantially similar allegations. The Company has
requested indemnification from Grace Chemicals pursuant to the Merger agreement.
If the Merger is determined to have been a fraudulent transfer, if material
damages are proved by the plaintiff, and if the Company is not able to collect,
in whole or in part on the indemnity, a judgment could have a material adverse
effect on the Company's business, financial condition and results of operations.
The Company believes that no fraudulent transfer or conspiracy occurred and
intends to defend the case vigorously.
Were events to violate the tax-free nature of the Merger, the resulting tax
liability would be the obligation of the Company. Subject to representations by
Grace Chemicals, the Company and Fresenius AG, Grace Chemicals has agreed to
indemnify the Company for such a tax liability. If the Company was not able to
collect on the indemnity, the tax liability would have a material adverse effect
on the Company's business, the financial condition of the Company and the
results of operations.
19. FINANCIAL INSTRUMENTS
MARKET RISK
The Company is exposed to market risk from changes in interest rates and
foreign exchange rates. In order to manage the risk of interest rate and
currency exchange rate fluctuations, the Company enters into various hedging
transactions with investment grade financial institutions as authorized by the
Company's Management Board. The Company does not use financial instruments for
trading purposes.
FOREIGN EXCHANGE RISK MANAGEMENT
The Company conducts business on a global basis in several international
currencies. As such, it is exposed to movements in foreign currency exchange
rates. The Company enters into foreign exchange forward and option contracts to
reduce certain currency exposures. The Company hedges only those currency
exposures associated with certain nonfunctional currency assets and liabilities.
Gains and losses on the contracts are included in selling, general and
administrative expenses and offset foreign exchange gains or losses from the
revaluation of intercompany balances or other assets and liabilities denominated
in currencies other than the functional currency of the reporting entity. The
Company's forward currency contracts generally range from 1 to 36 months in
original maturity. Foreign
F-61
261
FRESENIUS MEDICAL CARE AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
exchange contracts outstanding, their unrealized gains and losses and the
related credit exposure of all contracts with unrealized gains as of December
31, 2000 are summarized as follows:
<Table>
<Caption>
CONTRACT UNREALIZED CREDIT
AMOUNT GAIN/(LOSS) EXPOSURE
-------- ----------- --------
Purchases of currencies against U.S. dollar........ $490,438 $22,174 $22,174
Sales of currencies against U.S. dollar............ 6,836 74 77
Sales of other currencies against euro............. 61,005 3,149 3,180
Purchases of other currencies against euro......... 11,975 (128) 1
-------- ------- -------
Total.............................................. $570,254 $25,269 $25,432
======== ======= =======
</Table>
The Company's foreign exchange contracts contain credit risk in that its
bank counterparties may be unable to meet the terms of the agreements. The
potential risk of loss with any one party resulting from this type of credit
risk is monitored. Management does not expect any material losses as a result of
default by other parties.
INTEREST RATE RISK MANAGEMENT
The Company enters into derivatives, particularly interest rate swaps, to
protect interest rate exposures arising from long-term and short-term borrowings
and accounts receivable securitization programs at floating rates by effectively
swapping them into fixed rates. Under interest rate swaps, the Company agrees
with other parties to exchange, at specified intervals, the difference between
fixed-rate and floating-rate interest amounts calculated by reference to an
agreed notional amount.
Interest rate hedging contracts outstanding as of December 31, 2000 and
1999 are summarized in the following table.
<Table>
<Caption>
2000 1999
---------------------- ----------------------
NOTIONAL CREDIT NOTIONAL CREDIT
AMOUNT EXPOSURE AMOUNT EXPOSURE
---------- -------- ---------- --------
U.S. dollar interest rate swaps................ $1,050,000 $0 $1,350,000 $3,766
Forward starting dollar interest rate
derivatives.................................. $ 0 $0 $ 250,000 $7,612
Yen interest rate swap......................... $ 8,703 $0 $ 0 $ 0
</Table>
The notional amounts of derivatives do not represent amounts exchanged by
the parties and, thus, are not a measure of credit exposure. The amounts
exchanged are determined by reference to the notional amounts and the other
terms of the derivatives.
FMC is exposed to credit-related losses in the event of nonperformance by
counterparties to financial instruments but does not expect any counterparties
to fail to meet their obligations. The current credit exposure of derivatives is
represented by the fair value of contracts with a positive fair value at the
reporting date.
The Company had receive-variable/pay-fixed swaps with nominal amounts of
$1,050,000 and Japanese Yen 1,000,000 with average pay rates of 6.52% and 3.10%,
respectively, as of December 31, 2000.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying amounts and fair values of the
Company's financial instruments at December 31, 2000 and 1999. FASB Statement
No. 107, Disclosures about Fair Value of Financial Instruments, defines the fair
value of a financial instrument as the amount at which the
F-62
262
FRESENIUS MEDICAL CARE AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
instrument could be exchanged in a current transaction between willing parties,
other than in a forced or liquidation sale.
<Table>
<Caption>
2000 1999
-------------------- --------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- --------
Nonderivatives
Assets
Cash and cash equivalents..................... $ 64,577 $ 64,577 $ 34,760 $ 34,760
Receivables................................... 753,674 753,674 667,739 667,739
IDPN receivables.............................. 5,189 5,189 59,151 59,151
Liabilities
Accounts payable................................ 281,197 281,197 282,573 282,573
Income taxes payable.......................... 117,572 117,572 78,438 78,438
Debt.......................................... 826,063 826,063 801,260 801,260
Trust Preferred Securities.................... 952,727 897,827 964,103 944,044
Derivatives:
Foreign exchange contracts.................... 12,197 25,269 (4,384) (14,783)
U.S. dollar interest rate hedges.............. 0 (24,619) 0 9,242
Yen interest rate hedges...................... 0 (527) 0 0
</Table>
The carrying amounts in the table are included in the statement of
financial position under the indicated captions, except for derivative asset
amounts, which are included in other assets.
ESTIMATION OF FAIR VALUES
The significant methods and assumptions used in estimating the fair values
of financial instruments are as follows:
Short-term financial instruments are valued at their carrying amounts
included in the statement of financial position, which are reasonable estimates
of fair value due to the relatively short period to maturity of the instruments.
This approach applies to cash and cash equivalents, receivables, accounts
payable and income taxes payable.
Because the Company's long-term bank debt represents borrowings from a
syndicated bank credit facility, the long-term bank debt is valued at its
carrying amount because the actual drawings under the facility carry interest on
a variable basis which reflects actual money market conditions, plus specific
margins which represent Company-related performance ratios as well as the entire
set of terms and conditions including covenants as determined in the credit
agreement.
The fair value of the Trust Preferred Securities is based upon market
quotes.
The fair value of derivatives generally reflects the estimated amounts that
the Company would receive or pay to terminate the contracts at the reporting
date, thereby taking into account the current unrealized gains or losses of open
contracts. Dealer quotes are available for all of the Company's derivatives.
20. BUSINESS SEGMENT INFORMATION
Effective January 1, 1998, Fresenius Medical Care AG (1) reorganized its
reporting structure to conform to the manner in which the Company is managed and
(2) adopted SFAS No. 131, Disclosures about Segments of an Enterprise and
Related Information. SFAS No. 131 establishes the standards for
F-63
263
FRESENIUS MEDICAL CARE AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
reporting information about operating segments in annual financial statements
and requires selected information about operating segments in interim financial
reports issued to stockholders. It also establishes standards for related
disclosures about products and services, and geographic areas. Operating
segments are defined as components of an enterprise about which separate
financial information is available that is evaluated regularly by the chief
operating decision maker, or decision making group, in deciding how to allocate
resources and in assessing performance. FMC's chief operating decision maker is
the Chief Executive Officer. The accounting policies of the operating segments
are the same as those the Company uses in preparing its consolidated financial
statements.
Commencing with the period ended March 31, 1999, the Company has identified
three segments, North America, International, and Asia Pacific, which were
determined based upon how the Company manages its businesses. All segments are
primarily engaged in providing kidney dialysis and manufacturing and
distributing products and equipment for the treatment of end-stage renal
disease. Additionally, the North America segment engages in performing clinical
laboratory testing and renal diagnostic services. The Company has aggregated the
International and Asia Pacific operating segments as "International." The
segments are aggregated due to their similar economic characteristics. These
characteristics include the same products sold, the same type patient
population, similar methods of distribution of products and services and similar
economic environments.
Management evaluates each segment using a measure that reflects all of the
segment's controllable revenues and expenses. Management believes that the most
appropriate measure in this regard is earnings before interest and taxes (EBIT).
In addition to EBIT, management believes that earnings before interest, taxes,
depreciation and amortization (EBITDA) is helpful for investors as a measurement
of the segment's and the Company's ability to generate cash and to service its
financing obligations. EBITDA is also the basis for determining compliance with
certain covenants contained in the Company's principal senior bank credit
agreement and indentures relating to the Trust Preferred Securities. Management
has excluded the effects of the special charge in the calculation of EBIT and
EBITDA in 1999.
EBITDA should not be construed as an alternative to net earnings determined
in accordance with generally accepted accounting principles or to cash flow from
operations, investing activities or financing activities or as a measure of cash
flows. The Company believes its EBIT calculation is the functional equivalent of
operating income. Because EBITDA and EBIT are not calculated consistently by all
companies, the presentation herein may not be comparable to other similarly
titled measures of other companies.
Approximately 40% of the Company's worldwide revenue is derived from
sources subject to regulations under U.S. governmental programs.
Information pertaining to the Company's two business segments is set forth
below:
<Table>
<Caption>
NORTH
AMERICA INTERNATIONAL CORPORATE TOTAL
---------- ------------- --------- ----------
2000
Net revenue external customers..................... $3,083,095 $1,118,243 $ -- $4,201,338
Inter-segment revenue.............................. 2,226 36,677 (38,903)
---------- ---------- -------- ----------
Total net revenue.................................. 3,085,321 1,154,920 (38,903) 4,201,338
---------- ---------- -------- ----------
</Table>
F-64
264
FRESENIUS MEDICAL CARE AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<Table>
<Caption>
NORTH
AMERICA INTERNATIONAL CORPORATE TOTAL
---------- ------------- --------- ----------
EBITDA............................................. $ 645,549 $ 269,943 $ (1,825) $ 913,667
Depreciation and amortization...................... (222,495) (68,733) (1,626) (292,854)
---------- ---------- -------- ----------
EBIT............................................... 423,054 201,210 (3,451) 620,813
---------- ---------- -------- ----------
Segment assets..................................... 4,571,069 1,375,526 32,358 5,978,953
Capital expenditures and acquisitions(1)........... 228,177 274,290 100 502,567
1999
Net revenue external customers..................... $2,807,186 $1,033,243 $ -- $3,840,429
Inter-segment revenue.............................. 4,195 42,853 (47,048) --
---------- ---------- -------- ----------
Total net revenue.................................. 2,811,381 1,076,096 (47,048) 3,840,429
---------- ---------- -------- ----------
EBITDA............................................. 611,478 243,373 (10,429) 844,422
Depreciation and amortization...................... (217,584) (64,674) (1,950) (284,208)
---------- ---------- -------- ----------
EBIT............................................... 393,894 178,699 (12,379) 560,214
---------- ---------- -------- ----------
Segment assets..................................... 4,653,058 1,064,108 35,217 5,752,383
Capital expenditures and acquisitions(2)........... 146,498 114,774 330 261,602
1998
Net revenue external customers..................... $2,562,603 $ 943,073 $ -- $3,505,676
Inter-segment revenue.............................. 2,159 43,476 (45,635) --
---------- ---------- -------- ----------
Total net revenue.................................. 2,564,762 986,549 (45,635) 3,505,676
---------- ---------- -------- ----------
EBITDA............................................. 548,986 227,789 (8,813) 767,962
Depreciation and amortization...................... (214,940) (62,362) (1,682) (278,984)
---------- ---------- -------- ----------
EBIT............................................... 334,046 165,427 (10,495) 488,978
---------- ---------- -------- ----------
Segment assets..................................... 4,630,168 961,972 87,279 5,679,419
Capital expenditures and acquisitions(3)........... 202,983 177,886 761 381,630
</Table>
- ---------------
(1) International acquisitions exclude $13,614 of non-cash acquisitions for 2000
(2) International acquisitions exclude $9,462 of non-cash acquisitions for 1999
(3) North America acquisitions exclude $41,805 of non-cash acquisitions for 1998
F-65
265
FRESENIUS MEDICAL CARE AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<Table>
<Caption>
2000 1999 1998
--------- --------- ---------
Reconciliation of measures to consolidated
totals
Total EBITDA of reporting segments............ $ 915,492 $ 854,851 $ 776,775
Total depreciation and amortization........... (292,854) (284,208) (278,984)
Special charge for Settlement................. -- (601,000) --
Corporate expenses............................ (1,825) (10,429) (8,813)
Interest expense.............................. (195,569) (226,218) (228,182)
Interest expense on obligation related to
Settlement................................. (29,947) -- --
Interest income............................... 9,411 8,094 8,641
--------- --------- ---------
Total income (loss) from continuing operations
before income taxes, minority interest and
cumulative effect of accounting change..... $ 404,708 $(258,910) $ 269,437
========= ========= =========
Total EBIT of reporting segments.............. 624,264 572,593 499,473
Special charge for Settlement................. -- (601,000) --
Corporate expenses............................ (3,451) (12,379) (10,495)
Interest expense.............................. (195,569) (226,218) (228,182)
Interest expense on obligation related to
Settlement................................. (29,947) -- --
Interest income............................... 9,411 8,094 8,641
--------- --------- ---------
Total income (loss) from continuing operations
before income taxes, minority interest and
cumulative effect of accounting change..... $ 404,708 $(258,910) $ 269,437
========= ========= =========
Depreciation and amortization
Total depreciation and amortization of
reporting segments......................... 291,228 282,258 277,302
Corporate depreciation and amortization....... 1,626 1,950 1,682
--------- --------- ---------
Total depreciation and amortization........... $ 292,854 $ 284,208 $ 278,984
========= ========= =========
</Table>
For the geographic presentation, revenues are attributed to specific
countries based on the end user's location for products and the country in which
the service is provided. Information with respect to the Company's geographic
operations is set forth in the table below:
<Table>
<Caption>
UNITED
STATES AND REST OF
GERMANY CANADA THE WORLD TOTAL
-------- ---------- --------- ----------
2000
Net revenue external customers............... $193,857 $3,083,095 $924,386 $4,201,338
Long-lived assets............................ 79,670 520,614 294,997 895,281
1999
Net revenue external customers............... $213,209 $2,807,186 $820,034 $3,840,429
Long-lived assets............................ 83,384 483,872 180,041 747,297
1998
Net revenue external customers............... $203,886 $2,562,603 $739,187 $3,505,676
</Table>
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266
FRESENIUS MEDICAL CARE AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
21. SUPPLEMENTARY CASH FLOW INFORMATION
The following additional information is provided with respect to the
Consolidated Financial Statement of Cash Flows:
<Table>
<Caption>
2000 1999 1998
-------- -------- --------
Supplementary cash flow information
Cash paid for interest........................... $222,826 $215,836 $207,944
-------- -------- --------
Cash paid for income taxes, net.................. $ 44,715 $ 27,954 $ (1,250)
-------- -------- --------
Supplementary schedule of non-cash investing and
financing activities
Issuance of debt................................. $ 13,613 $ 9,462 $ --
-------- -------- --------
Issuance of convertible investment securities for
acquisitions.................................. $ -- $ -- $ 41,805
-------- -------- --------
Supplemental disclosures of cash flow information
Details for acquisitions:
Assets acquired.................................. $346,378 $124,598 $286,413
Liabilities assumed.............................. 52,843 13,186 14,331
Notes issued in connection with acquisition...... 13,613 9,462 41,805
-------- -------- --------
Cash paid........................................ 279,922 101,950 230,277
Less cash acquired............................... 5,392 624 7,342
-------- -------- --------
Net cash paid for acquisitions................... $274,530 $101,326 $222,935
======== ======== ========
</Table>
22. SUBSEQUENT EVENTS
On January 5, 2001, the Company acquired Everest Healthcare Services
Corporation ("Everest"), Oak Park, Illinois through a merger of Everest into a
subsidiary of the Company for $343 million including Everest's outstanding debt.
One third of the purchase price was paid by the issuance of 2,250,000 Preference
shares on January 5, 2001. The remainder of the purchase price was paid using
the proceeds from the Preference share offerings completed during 2000.
23. SUPPLEMENTAL CONDENSED COMBINING INFORMATION
FMC Trust Finance S.a.r.l. Luxembourg, a wholly-owned subsidiary of FMC AG,
has assumed or issued senior subordinated debt securities which were fully and
unconditionally guaranteed, jointly and severally, on a senior subordinated
basis, by FMC AG and by D-GmbH, a wholly-owned subsidiary of FMC AG, and by
FMCH, a substantially wholly-owned subsidiary of FMC AG (D-GmbH and FMCH being
the "Guarantor Subsidiaries"). The following is combining financial information
for the Company as of December 31, 2000 and 1999 and for the years ended
December 31, 2000, 1999 and 1998, segregated between FMC AG, D-GmbH, FMCH and
each of the Company's other businesses (the "Non-Guarantor Subsidiaries"). For
purposes of the condensed combining information, FMC AG and the Guarantor
Subsidiaries carry their investments under the equity method. Other (income)
expense includes income (loss) related to investments in consolidated
subsidiaries recorded under the equity method for purposes of the condensed
combining information. In addition, other (income) expense includes income and
losses from profit and loss transfer agreements as well as dividends received.
Separate financial statements and other disclosures concerning D-GmbH are not
presented herein because management believes that they are not material to
investors. FMCH is currently subject to the periodic reporting requirements of
the
F-67
267
FRESENIUS MEDICAL CARE AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
United States Securities Exchange Act of 1934, as amended, and in accordance
therewith files consolidated financial statements with the United States
Securities and Exchange Commission.
Additionally, as discussed in Note 11, dividends from Fresenius Medical
Care Holdings, Inc., a wholly owned subsidiary, are limited as a result of a
restriction on dividends from its subsidiary, National Medical Care, Inc., and
its subsidiaries. As a result of this restriction, parent company only financial
information is presented under the column FMC AG.
F-68
268
FRESENIUS MEDICAL CARE AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<Table>
<Caption>
FOR THE YEAR ENDED DECEMBER 31, 2000
----------------------------------------------------------------------------
GUARANTOR SUBSIDIARIES
---------------------- NON-GUARANTOR COMBINING COMBINED
FMC AG D-GMBH FMCH SUBSIDIARIES ADJUSTMENT TOTAL
--------- --------- ---------- ------------- ---------- ----------
Net revenue............................... $ -- $552,747 $ -- $4,141,565 $(492,974) $4,201,338
Cost of revenue........................... -- 320,287 -- 2,891,592 (477,286) 2,734,593
--------- -------- --------- ---------- --------- ----------
Gross profit............................ -- 232,460 -- 1,249,973 (15,688) 1,466,745
--------- -------- --------- ---------- --------- ----------
Operating expenses:
Selling, general and administrative..... 15,519 88,923 -- 714,751 (5,196) 813,997
Research and development................ -- 25,902 -- 6,033 -- 31,935
--------- -------- --------- ---------- --------- ----------
Operating (loss) income................. (15,519) 117,635 -- 529,189 (10,492) 620,813
--------- -------- --------- ---------- --------- ----------
Other (income) expense:
Interest, net........................... (2,501) 5,917 58,681 155,118 (1,110) 216,105
Other, net.............................. (286,260) 60,173 (140,459) 38,118 328,428 --
--------- -------- --------- ---------- --------- ----------
Income before income taxes and minority
interests............................... 273,242 51,545 81,778 335,953 (337,810) 404,708
Income tax expense (benefit)............ 61,167 46,019 (23,472) 155,909 (49,851) 189,772
--------- -------- --------- ---------- --------- ----------
Income before minority interests.......... 212,075 5,526 105,250 180,044 (287,959) 214,936
Minority interests........................ -- -- -- -- 2,861 2,861
--------- -------- --------- ---------- --------- ----------
Net income................................ $ 212,075 $ 5,526 $ 105,250 $ 180,044 $(290,820) $ 212,075
========= ======== ========= ========== ========= ==========
</Table>
<Table>
<Caption>
FOR THE YEAR ENDED DECEMBER 31, 1999
----------------------------------------------------------------------------
GUARANTOR SUBSIDIARIES
---------------------- NON-GUARANTOR COMBINING COMBINED
FMC AG D-GMBH FMCH SUBSIDIARIES ADJUSTMENT TOTAL
--------- --------- ---------- ------------- ---------- ----------
Net revenue............................... $ -- $556,354 $ -- $3,733,213 $(449,138) $3,840,429
Cost of revenue........................... -- 348,923 -- 2,548,748 (434,516) 2,463,155
--------- -------- --------- ---------- --------- ----------
Gross profit............................ -- 207,431 -- 1,184,465 (14,622) 1,377,274
--------- -------- --------- ---------- --------- ----------
Operating expenses:
Selling, general and administrative..... 13,701 74,149 -- 701,719 (4,998) 784,572
Research and development................ -- 24,527 -- 7,961 -- 32,488
Special charge for settlement of
investigations and related costs..... -- -- -- 601,000 -- 601,000
--------- -------- --------- ---------- --------- ----------
Operating (loss) income................. (13,701) 108,754 -- (126,215) (9,624) (40,786)
--------- -------- --------- ---------- --------- ----------
Other (income) expense:
Interest, net........................... 171 5,604 58,382 153,967 -- 218,124
Other, net.............................. 188,727 56,364 291,998 -- (537,089) --
--------- -------- --------- ---------- --------- ----------
Income (loss) before income taxes and
minority interests...................... (202,599) 46,786 (350,380) (280,182) 527,465 (258,910)
Income tax expense (benefit)............ 36,562 43,654 (23,353) (24,309) (45,298) (12,744)
--------- -------- --------- ---------- --------- ----------
Income (loss) before minority interests... (239,161) 3,132 (327,027) (255,873) 572,763 (246,166)
Minority interests........................ -- -- -- -- 2,378 2,378
--------- -------- --------- ---------- --------- ----------
Net (loss) income......................... $(239,161) $ 3,132 $(327,027) $ (255,873) $ 570,385 $ (248,544)
========= ======== ========= ========== ========= ==========
</Table>
See accompanying notes to consolidated financial statements
F-69
269
FRESENIUS MEDICAL CARE AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<Table>
<Caption>
FOR THE YEAR ENDED DECEMBER 31, 1998
----------------------------------------------------------------------------
GUARANTOR SUBSIDIARIES
---------------------- NON-GUARANTOR COMBINING COMBINED
FMC AG D-GMBH FMCH SUBSIDIARIES ADJUSTMENT TOTAL
--------- --------- ---------- ------------- ---------- ----------
Net revenue............................... $ -- $500,794 $ -- $3,366,884 $(362,002) $3,505,676
Cost of revenue........................... -- 295,748 -- 2,305,855 (358,664) 2,242,938
--------- -------- --------- ---------- --------- ----------
Gross profit............................ -- 205,046 -- 1,061,029 (3,338) 1,262,738
--------- -------- --------- ---------- --------- ----------
Operating expenses:
Selling, general and administrative..... 8,043 87,945 -- 648,527 (1,905) 742,610
Research and development................ -- 24,902 -- 6,248 -- 31,150
--------- -------- --------- ---------- --------- ----------
Operating (loss) income................. (8,043) 92,199 -- 406,255 (1,433) 488,978
--------- -------- --------- ---------- --------- ----------
Other (income) expense:
Interest, net........................... (2,683) 5,461 54,693 162,070 -- 219,541
Other, net.............................. (172,085) 49,804 (84,653) -- 206,934 --
--------- -------- --------- ---------- --------- ----------
Income from continuing operations before
income taxes, minority interests and
cumulative effect of accounting
change............................... 166,725 36,934 29,960 244,185 (208,367) 269,437
Income tax expense........................ 28,431 37,570 (21,877) 115,468 (24,226) 135,366
--------- -------- --------- ---------- --------- ----------
Income (loss) from continuing operations
before minority interests and
cumulative effect of accounting
change............................... 138,294 (636) 51,837 128,717 (184,141) 134,071
Minority interests........................ -- -- -- -- 2,454 2,454
--------- -------- --------- ---------- --------- ----------
Income (loss) from continuing operations
before cumulative effect of
accounting change.................... 138,294 (636) 51,837 128,717 (186,595) 131,617
--------- -------- --------- ---------- --------- ----------
Discontinued operations
Loss from operations of discontinued
businesses, net...................... (8,669) -- (8,669) (8,669) 17,338 (8,669)
Loss on disposal of discontinued
businesses, net...................... (97,228) -- (97,228) (97,228) 194,456 (97,228)
--------- -------- --------- ---------- --------- ----------
Loss from discontinued operations,
net.................................. (105,897) -- (105,897) (105,897) 211,794 (105,897)
--------- -------- --------- ---------- --------- ----------
Cumulative effect of accounting change,
net..................................... (6,589) (706) (4,890) (5,883) 11,479 (6,589)
Net income (loss)......................... $ 25,808 $ (1,342) $ (58,950) $ 16,937 $ 36,678 $ 19,131
========= ======== ========= ========== ========= ==========
</Table>
See accompanying notes to consolidated financial statements
F-70
270
FRESENIUS MEDICAL CARE AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<Table>
<Caption>
AT DECEMBER 31, 2000
-------------------------------------------------------------------------------
GUARANTOR SUBSIDIARIES
----------------------- NON-GUARANTOR COMBINING COMBINED
FMC AG D-GMBH FMCH SUBSIDIARIES ADJUSTMENT TOTAL
---------- --------- ----------- ------------- ----------- ----------
Current assets:
Cash and cash equivalents............ $ 137 $ 100 $ -- $ 64,340 $ -- $ 64,577
Trade accounts receivable, less
allowance for doubtful accounts... -- 72,775 -- 680,899 -- 753,674
Accounts receivable from related
parties........................... 132,463 193,640 51,487 531,874 (863,347) 46,117
Inventories.......................... -- 67,988 -- 286,199 (33,953) 320,234
Prepaid expenses and other current
assets............................ 2,539 20,237 -- 190,326 1,424 214,526
IDPN accounts receivable............. -- -- -- 5,189 -- 5,189
Deferred taxes....................... 388 1,945 -- 156,732 18,029 177,094
---------- -------- ---------- ---------- ----------- ----------
Total current assets......... 135,527 356,685 51,487 1,915,559 (877,847) 1,581,411
Property, plant and equipment, net..... 205 49,460 -- 705,353 (16,025) 738,993
Intangible assets, including goodwill,
net.................................. 789 6,006 -- 3,468,261 -- 3,475,056
Loans to related parties............... 78,206 -- 185,529 827,099 (1,090,834) --
Deferred taxes......................... -- 3,011 -- 13,949 10,245 27,205
Other assets........................... 2,681,199 12,119 2,589,842 117,641 (5,244,513) 156,288
---------- -------- ---------- ---------- ----------- ----------
Total assets................. $2,895,926 $427,281 $2,826,858 $7,047,862 $(7,218,974) $5,978,953
========== ======== ========== ========== =========== ==========
Current liabilities:
Accounts payable..................... $ 506 $ 16,356 $ -- $ 186,512 $ -- $ 203,374
Accounts payable to related
parties........................... 113,406 180,997 257,566 372,978 (847,124) 77,823
Accrued expenses and other current
liabilities....................... 9,740 52,916 -- 328,395 589 391,640
Note payable related to settlement... -- -- -- 85,920 -- 85,920
Short-term borrowings................ 627 465 -- 105,500 -- 106,592
Short-term borrowings from related
parties........................... -- -- -- 218,333 -- 218,333
Current portion of long-term debt and
capital lease obligations......... -- 516 -- 167,715 -- 168,231
Income taxes payable................. 87,277 -- -- 30,295 -- 117,572
Deferred taxes....................... 223 6,102 -- 11,902 2,740 20,967
---------- -------- ---------- ---------- ----------- ----------
Total current liabilities.... 211,779 257,352 257,566 1,507,550 (843,795) 1,390,452
Long term debt and capital lease
obligations, less current portion.... 4,206 1,882 843,322 915,479 (1,107,057) 657,832
Other liabilities...................... -- 3,688 -- 23,312 4,464 31,464
Pension liabilities.................... 327 24,682 -- 44,961 -- 69,970
Deferred taxes......................... 864 5,238 -- 170,385 -- 176,487
Company obligated mandatorily
redeemable preferred securities of
subsidiary Fresenius Medical Care
Capital Trusts holding solely Company
guaranteed debentures of
subsidiary........................... -- -- -- 952,727 -- 952,727
Minority interest...................... -- -- 16,318 -- 4,953 21,271
---------- -------- ---------- ---------- ----------- ----------
Total liabilities............ 217,176 292,842 1,117,206 3,614,414 (1,941,435) 3,300,203
Shareholders' equity:.................. 2,678,750 134,439 1,709,652 3,433,448 (5,277,539) 2,678,750
---------- -------- ---------- ---------- ----------- ----------
Total liabilities and
shareholders' equity....... $2,895,926 $427,281 $2,826,858 $7,047,862 $(7,218,974) $5,978,953
========== ======== ========== ========== =========== ==========
</Table>
See accompanying notes to consolidated financial statements
F-71
271
FRESENIUS MEDICAL CARE AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<Table>
<Caption>
AT DECEMBER 31, 1999
-------------------------------------------------------------------------------
GUARANTOR SUBSIDIARIES
----------------------- NON-GUARANTOR COMBINING COMBINED
FMC AG D-GMBH FMCH SUBSIDIARIES ADJUSTMENT TOTAL
---------- --------- ----------- ------------- ----------- ----------
Current assets:
Cash and cash equivalents............... $ 155 $ 37 $ -- $ 34,568 $ -- $ 34,760
Trade accounts receivable, less
allowance for doubtful accounts...... -- 81,686 -- 586,053 -- 667,739
Accounts receivable from related
parties.............................. 135,878 226,351 32,586 351,445 (697,131) 49,129
Inventories............................. -- 61,951 -- 270,379 (31,028) 301,302
Prepaid expenses and other current
assets............................... 8,691 11,094 -- 159,607 -- 179,392
IDPN accounts receivable................ -- -- -- 53,962 -- 53,962
Deferred taxes.......................... 703 4,079 -- 233,832 16,311 254,925
---------- -------- ---------- ---------- ----------- ----------
Total current assets............ 145,427 385,198 32,586 1,689,846 (711,848) 1,541,209
Property, plant and equipment, net........ 236 51,473 -- 600,084 (9,672) 642,121
Intangible assets, including goodwill,
net..................................... 1,124 2,894 -- 3,434,738 -- 3,438,756
Loans to related parties.................. 127,155 -- 185,529 987,963 (1,300,647) --
Deferred taxes............................ 11 3,667 -- 14,471 6,972 25,121
Non-current IDPN accounts receivable...... -- -- -- 5,189 -- 5,189
Other assets.............................. 1,947,133 10,460 2,428,224 66,320 (4,352,150) 99,987
---------- -------- ---------- ---------- ----------- ----------
Total assets.................... $2,221,086 $453,692 $2,646,339 $6,798,611 $(6,367,345) $5,752,383
========== ======== ========== ========== =========== ==========
Current liabilities:
Accounts payable........................ $ 30 $ 16,923 $ -- $ 176,167 $ -- $ 193,120
Accounts payable to related parties..... 151,914 205,213 181,857 393,142 (842,673) 89,453
Accrued expenses and other current
liabilities.......................... 4,879 45,343 -- 363,265 1,574 415,061
Short-term accrued settlement........... -- -- -- 386,815 -- 386,815
Short-term borrowings................... 960 26 -- 95,397 -- 96,383
Short-term borrowings from related
parties.............................. -- -- -- 330,000 -- 330,000
Current portion of long-term debt and
capital lease obligations............ -- 2,754 -- 144,730 -- 147,484
Income taxes payable.................... 49,064 -- -- 29,374 -- 78,438
Deferred taxes.......................... 13,898 9,188 -- 9,165 1,187 33,438
---------- -------- ---------- ---------- ----------- ----------
Total current liabilities....... 220,745 279,447 181,857 1,928,055 (839,912) 1,770,192
Long term debt and capital lease
obligations, less current portion....... 4,541 635 842,421 961,284 (1,155,105) 653,776
Long-term accrued settlement.............. -- -- -- 85,920 -- 85,920
Other liabilities......................... 290 3,794 -- 16,331 4,271 24,686
Pension liabilities....................... -- 23,819 -- 37,759 -- 61,578
Deferred taxes............................ 1,182 6,862 -- 159,993 -- 168,037
Company obligated mandatorily redeemable
preferred securities of subsidiary
Fresenius Medical Care Capital Trusts
holding solely Company guaranteed
debentures of subsidiary................ -- -- -- 964,103 -- 964,103
Minority interest......................... -- -- 16,318 -- 5,456 21,774
---------- -------- ---------- ---------- ----------- ----------
Total liabilities............... 226,758 314,557 1,040,596 4,153,445 (1,985,290) 3,750,066
Shareholders' equity:..................... 1,994,328 139,135 1,605,743 2,645,166 (4,382,055) 2,002,317
---------- -------- ---------- ---------- ----------- ----------
Total liabilities and
shareholders' equity.......... $2,221,086 $453,692 $2,646,339 $6,798,611 $(6,367,345) $5,752,383
========== ======== ========== ========== =========== ==========
</Table>
See accompanying notes to consolidated financial statements
F-72
272
FRESENIUS MEDICAL CARE AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<Table>
<Caption>
FOR THE YEAR ENDED DECEMBER 31, 2000
---------------------------------------------------------------------------
GUARANTOR SUBSIDIARIES
---------------------- NON-GUARANTOR COMBINING COMBINED
FMC AG D-GMBH FMCH SUBSIDIARIES ADJUSTMENT TOTAL
--------- --------- ---------- ------------- ---------- ---------
Operating activities:
Net income (loss).............................. $ 212,075 $ 5,526 $ 105,250 $ 180,044 $(290,820) $ 212,075
Adjustments to reconcile net income (loss) to
net cash and cash equivalents provided by
(used in) operating activities:
Equity affiliate income........................ (87,521) -- (140,459) 38,118 189,862 --
Depreciation and amortization................ 1,625 19,512 -- 274,841 (3,124) 292,854
Change in deferred tax....................... (12,514) (1,298) -- 93,049 (2,303) 76,934
(Gain) loss on sale of fixed assets.......... (40) (1,239) -- 990 -- (289)
Gain on sale of investments.................. (66,189) -- -- -- 66,189 --
Compensation expense related to stock
options................................... 3,980 -- -- -- -- 3,980
Changes in assets and liabilities, net of
amounts from businesses acquired or disposed
of:
Trade accounts receivable, net............... -- 2,865 -- (177,198) -- (174,333)
Inventories.................................. -- (10,527) -- (17,945) 5,465 (23,007)
Prepaid expenses and other current and
non-current assets........................ 5,241 (11,377) 1,491 (4,272) 632 (8,285)
Accounts receivable from/ payable to related
parties................................... (56,306) 6,884 56,809 (44,492) 18,304 (18,801)
Accounts payable, accrued expenses and other
current and non-current liabilities....... 5,716 14,285 -- (39,895) (795) (20,689)
Income taxes payable......................... 52,846 -- (23,472) 21,453 -- 50,827
--------- -------- --------- --------- --------- ---------
Net cash provided by (used in) operating
activities.............................. 58,913 24,631 (381) 324,693 (16,590) 391,266
--------- -------- --------- --------- --------- ---------
Investing activities:
Purchases of property, plant and equipment..... (100) (23,992) -- (213,466) 9,521 (228,037)
Proceeds from sale of property, plant and
equipment.................................... 49 2,352 -- 18,323 -- 20,724
Acquisitions and investments, net of cash
acquired..................................... (314,421) (2,619) -- (268,028) 310,538 (274,530)
Disbursement of loans to related parties,
net.......................................... (240,139) -- -- -- 240,139 --
--------- -------- --------- --------- --------- ---------
Net cash used in investing activities..... (554,611) (24,259) -- (463,171) 560,198 (481,843)
--------- -------- --------- --------- --------- ---------
Financing activities:
Short-term borrowings, net..................... (6,577) 441 -- (103,057) -- (109,193)
Long-term debt and capital lease obligations,
net.......................................... -- (740) 901 257,858 (224,534) 33,485
Payments on obligation related to settlement... -- -- -- (386,815) -- (386,815)
Proceeds from issuance of preference shares.... 556,958 -- -- -- -- 556,958
Proceeds from increase of accounts receivable
securitization program....................... -- -- -- 111,402 -- 111,402
Proceeds from exercise of options.............. 885 -- -- -- -- 885
Capital increase of
Non-Guarantor-Subsidiaries................... -- -- -- 312,352 (312,352) --
Dividends paid................................. (51,229) -- -- (6,385) 6,385 (51,229)
Changes in minority interest................... -- -- (520) -- 659 139
--------- -------- --------- --------- --------- ---------
Net cash provided by (used in) financing
activities.............................. 500,037 (299) 381 185,355 (529,842) 155,632
--------- -------- --------- --------- --------- ---------
Effect of exchange rate changes on cash and cash
equivalents.................................... (4,357) (10) -- (17,105) (13,766) (35,238)
Cash and cash equivalents:
Net (decrease) increase in cash and cash
equivalents.................................... (18) 63 -- 29,772 -- 29,817
Cash and cash equivalents at beginning of
period......................................... 155 37 -- 34,568 -- 34,760
--------- -------- --------- --------- --------- ---------
Cash and cash equivalents at end of period....... $ 137 $ 100 $ -- $ 64,340 $ -- $ 64,577
========= ======== ========= ========= ========= =========
</Table>
See accompanying notes to consolidated financial statements
F-73
273
FRESENIUS MEDICAL CARE AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<Table>
<Caption>
FOR THE YEAR ENDED DECEMBER 31, 1999
---------------------------------------------------------------------------
GUARANTOR SUBSIDIARIES
---------------------- NON-GUARANTOR COMBINING COMBINED
FMC AG D-GMBH FMCH SUBSIDIARIES ADJUSTMENT TOTAL
--------- --------- ---------- ------------- ---------- ---------
Operating Activities:
Net income (loss).............................. $(239,161) $ 3,132 $(327,027) $(255,873) $ 570,385 $(248,544)
Adjustments to reconcile net (loss) income to
net cash and cash equivalents provided by
(used in) operating activities:
Equity affiliate loss.......................... 305,430 -- 291,998 -- (597,428) --
Depreciation and amortization................ 2,981 22,330 -- 264,005 (5,108) 284,208
Write-off of IDPN accounts receivable........ -- -- -- 94,349 -- 94,349
Change in deferred tax....................... (3,276) 119 -- (81,956) (4,812) (89,925)
Loss on sale of fixed assets................. 163 -- -- 828 -- 991
Changes in assets and liabilities, net of
amounts from businesses acquired or disposed
of:
Trade accounts receivable, net............... -- (18,485) -- (117,777) -- (136,262)
Inventories.................................. -- (562) -- (22,145) 6,953 (15,754)
Prepaid expenses and other current and
non-current assets........................ (5,578) (4,062) 1,491 (35,243) 6,674 (36,718)
Accounts receivable from/payable to related
parties................................... (30,345) (6,391) 56,560 (35,540) 770 (14,946)
Accounts payable, accrued expenses and other
current and non-current liabilities....... 1,340 28,778 -- 455,438 3,140 488,696
Income taxes payable......................... 23,936 -- (23,353) 28,079 -- 28,662
--------- -------- --------- --------- --------- ---------
Net cash provided by (used in) operating
activities of continuing operations..... 55,490 24,859 (331) 294,165 (19,426) 354,757
--------- -------- --------- --------- --------- ---------
Net cash used in operating activities of
discontinued operations................. -- -- -- (3,782) -- (3,782)
--------- -------- --------- --------- --------- ---------
Net cash provided by (used in) operating
activities.............................. 55,490 24,859 (331) 290,383 (19,426) 350,975
--------- -------- --------- --------- --------- ---------
Investing Activities:
Purchases of property, plant and equipment..... (326) (23,611) -- (140,208) 3,869 (160,276)
Proceeds from sale of property, plant and
equipment.................................... 92 1,065 -- 5,973 -- 7,130
Acquisitions and investments, net of cash
acquired..................................... (9,002) -- -- (100,288) 7,964 (101,326)
--------- -------- --------- --------- --------- ---------
Net cash used in investing activities..... (9,236) (22,546) -- (234,523) 11,833 (254,472)
--------- -------- --------- --------- --------- ---------
Financing activities:
Short-term borrowings, net..................... (3,595) (456) -- 272,685 -- 268,634
Long-term debt and capital lease obligations,
net.......................................... 4,817 (1,836) 851 (286,948) (465) (283,581)
Retirement of convertible investment
securities................................... -- -- -- (47,664) -- (47,664)
Proceeds from increase of accounts receivable
securitization program....................... -- -- -- 29,400 -- 29,400
Proceeds from exercise of FMC Rollover
options...................................... 1,719 -- -- -- -- 1,719
Capital Increase of
Non-Guarantor-Subsidiaries................... -- -- -- 8,556 (8,556) --
Dividends paid................................. (48,404) -- -- (15,516) 15,516 (48,404)
Changes in minority interest................... -- -- (520) -- 1,098 578
--------- -------- --------- --------- --------- ---------
Net cash (used in) provided by financing
activities.............................. (45,463) (2,292) 331 (39,487) 7,593 (79,318)
--------- -------- --------- --------- --------- ---------
Effect of exchange rate changes on cash and cash
equivalents.................................... (1,665) (6) -- (12,621) -- (14,292)
Cash and Cash Equivalents:
Net (decrease) increase in cash and cash
equivalents.................................... (874) 15 -- 3,752 -- 2,893
Cash and cash equivalents at beginning of
period......................................... 1,029 22 -- 30,816 -- 31,867
--------- -------- --------- --------- --------- ---------
Cash and cash equivalents at end of period....... $ 155 $ 37 $ -- $ 34,568 $ -- $ 34,760
========= ======== ========= ========= ========= =========
</Table>
See accompanying notes to consolidated financial statements
F-74
274
FRESENIUS MEDICAL CARE AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<Table>
<Caption>
FOR THE YEAR ENDED DECEMBER 31, 1998
---------------------------------------------------------------------------
GUARANTOR SUBSIDIARIES
---------------------- NON-GUARANTOR COMBINING COMBINED
FMC AG D-GMBH FMCH SUBSIDIARIES ADJUSTMENT TOTAL
--------- --------- ---------- ------------- ---------- ---------
Operating Activities:
Net income (loss)............................... $ 25,808 $ (1,342) $ (58,950) $ 16,937 $ 36,678 $ 19,131
Adjustments to reconcile net income to net cash
and cash equivalents provided by (used in)
operating activities:
Equity affiliate income......................... (93,715) -- (84,653) -- 178,368 --
Cumulative effect of accounting change........ 6,589 706 4,890 5,883 (11,479) 6,589
Depreciation and amortization................. 2,908 22,099 -- 253,977 -- 278,984
Loss from operations of discontinued
businesses................................. 8,669 -- 8,669 8,669 (17,338) 8,669
Loss on disposition of businesses............. 97,228 -- 97,228 97,228 (194,456) 97,228
Change in deferred tax........................ 19,383 (834) -- 5,755 (718) 23,586
Loss on sale of fixed assets.................. -- -- -- 213 -- 213
Changes in assets and liabilities, net of
amounts from businesses acquired or disposed
of:
Trade accounts receivable, net................ (2,650) (11,891) -- (145,510) -- (160,051)
Inventories................................... -- 160 -- (39,615) 151 (39,304)
Prepaid expenses and other current and
non-current assets......................... (10,717) (5,696) (13,671) (7,673) 462 (37,295)
Accounts receivable from/ payable to related
parties.................................... (90,095) 23,543 68,622 1,104 -- 3,174
Accounts payable, accrued expenses and other
current and non-current liabilities........ (2,330) 5,654 -- (9,660) -- (6,336)
Income taxes payable.......................... 12,131 (4,027) (21,877) 87,442 -- 73,669
--------- -------- --------- ----------- --------- ---------
Net cash (used in) provided by operating
activities of continuing operations...... (26,791) 28,372 258 274,750 (8,332) 268,257
--------- -------- --------- ----------- --------- ---------
Net cash used in operating activities of
discontinued operations.................. -- -- -- (257) -- (257)
--------- -------- --------- ----------- --------- ---------
Net cash (used in) provided by operating
activities............................... (26,791) 28,372 258 274,493 (8,332) 268,000
--------- -------- --------- ----------- --------- ---------
Investing Activities:
Purchases of property, plant and equipment...... (126) (30,372) -- (129,424) 1,227 (158,695)
Proceeds from sale of property, plant and
equipment..................................... 617 2,776 -- 22,786 -- 26,179
Acquisitions and investments, net of cash
acquired...................................... (100,805) (16) (250,000) (153,208) 281,094 (222,935)
Proceeds from disposition of businesses......... -- -- -- 82,500 -- 82,500
--------- -------- --------- ----------- --------- ---------
Net cash used in investing activities of
continuing operations.................... (100,314) (27,612) (250,000) (177,346) 282,321 (272,951)
--------- -------- --------- ----------- --------- ---------
Net cash used in investing activities of
discontinued operations.................. -- -- -- (7,315) -- (7,315)
--------- -------- --------- ----------- --------- ---------
Net cash used in investing activities...... (100,314) (27,612) (250,000) (184,661) 282,321 (280,266)
--------- -------- --------- ----------- --------- ---------
Financing activities:
Short-term borrowings, net...................... 4,481 505 -- (1,255) -- 3,731
Long-term debt and capital lease obligations,
net........................................... 172,483 (2,754) 250,000 (1,000,076) -- (580,347)
Retirement of convertible investment
securities.................................... -- -- -- (61,725) -- (61,725)
Proceeds from issuance of mandatorily redeemable
preferred securities.......................... -- -- -- 597,810 -- 597,810
Proceeds from increase of accounts receivable
securization program.......................... -- -- -- 105,600 -- 105,600
Proceeds from exercise of FMC Rollover
options....................................... 1,047 -- -- -- -- 1,047
Capital Increase of Non-Guarantor
Subsidiaries.................................. -- -- -- 275,226 (275,226) --
Dividends paid.................................. (45,176) -- -- (4,038) -- (49,214)
Distributions on convertible investment
securities.................................... -- -- -- (2,752) -- (2,752)
--------- -------- --------- ----------- --------- ---------
</Table>
F-75
275
FRESENIUS MEDICAL CARE AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<Table>
<Caption>
FOR THE YEAR ENDED DECEMBER 31, 1998
---------------------------------------------------------------------------
GUARANTOR SUBSIDIARIES
---------------------- NON-GUARANTOR COMBINING COMBINED
FMC AG D-GMBH FMCH SUBSIDIARIES ADJUSTMENT TOTAL
--------- --------- ---------- ------------- ---------- ---------
Changes in minority interest.................... -- -- (520) -- 1,237 717
Net cash provided by (used in) financing
activities of continuing operations...... 132,835 (2,249) 249,480 (91,210) (273,989) 14,867
--------- -------- --------- ----------- --------- ---------
Net cash used in financing activities of
discontinued operations.................. -- -- -- (2,107) -- (2,107)
--------- -------- --------- ----------- --------- ---------
Net cash provided by (used in) financing
activities............................... 132,835 (2,249) 249,480 (93,317) (273,989) 12,760
--------- -------- --------- ----------- --------- ---------
Effect of exchange rate changes on cash and cash
equivalents..................................... (4,794) 29 262 (1,942) -- (6,445)
Cash and cash equivalents:
Net (decrease) increase in cash and cash
equivalents..................................... 936 (1,460) -- (5,427) -- (5,951)
Cash and cash equivalents at beginning of
period.......................................... 93 1,482 -- 36,243 -- 37,818
--------- -------- --------- ----------- --------- ---------
Cash and cash equivalents at end of period........ $ 1,029 $ 22 $ -- $ 30,816 $ -- $ 31,867
========= ======== ========= =========== ========= =========
</Table>
See accompanying notes to consolidated financial statements
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FRESENIUS MEDICAL CARE HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED, CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<Table>
<Caption>
SIX MONTHS ENDED
JUNE 30,
------------------------
2001 2000
---------- ----------
NET REVENUES
Health care services...................................... $1,400,288 $1,270,670
Medical supplies.......................................... 248,142 235,169
---------- ----------
1,648,430 1,505,839
---------- ----------
EXPENSES
Cost of health care services.............................. 969,285 848,649
Cost of medical supplies.................................. 173,982 170,703
General and administrative expenses....................... 150,394 141,437
Provision for doubtful accounts........................... 33,308 27,307
Depreciation and amortization............................. 113,716 110,156
Research and development.................................. 2,247 2,198
Interest expense, net and related financing costs
including $53,717 and $53,985 of interest with
affiliates............................................. 102,214 110,238
---------- ----------
1,545,146 1,410,688
---------- ----------
INCOME BEFORE INCOME TAXES.................................. 103,284 95,151
PROVISION FOR INCOME TAXES.................................. 49,471 46,888
---------- ----------
NET INCOME.................................................. $ 53,813 $ 48,263
========== ==========
Basic and fully dilutive net income per share............... $ 0.60 $ 0.53
</Table>
See accompanying Notes to Unaudited, Consolidated Financial Statements.
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FRESENIUS MEDICAL CARE HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES
UNAUDITED, CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(DOLLARS IN THOUSANDS)
<Table>
<Caption>
SIX MONTHS ENDED
JUNE 30,
-------------------
2001 2000
-------- -------
NET INCOME.................................................. $ 53,813 $48,263
Other comprehensive income
Foreign currency translation adjustments.................. (116) 141
Derivative instruments.................................... (23,895) --
-------- -------
Total other comprehensive income.......................... (24,011) 141
-------- -------
COMPREHENSIVE INCOME........................................ $ 29,802 $48,404
======== =======
</Table>
See accompanying Notes to Unaudited, Consolidated Financial Statements.
F-78
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FRESENIUS MEDICAL CARE HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<Table>
<Caption>
JUNE 30, DECEMBER 31,
2001 2000
----------- ------------
(UNAUDITED)
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 49,380 $ 33,327
Accounts receivable, less allowances of $78,847 and
$80,466................................................. 351,427 318,391
Inventories............................................... 205,189 191,699
Deferred income taxes..................................... 97,164 123,190
Other current assets...................................... 168,944 139,082
Accounts receivable from affiliates....................... 7,267 --
IDPN accounts receivable.................................. -- 5,189
----------- ----------
Total Current Assets............................... 879,371 810,878
----------- ----------
Properties and equipment, net............................... 473,742 456,936
----------- ----------
Other Assets:
Excess of cost over the fair value of net assets acquired
and other intangible assets, net of accumulated
amortization of $636,061 and $564,880................... 3,167,357 3,222,044
Other assets and deferred charges......................... 48,405 63,500
----------- ----------
Total Other Assets................................. 3,215,762 3,285,544
----------- ----------
Total Assets....................................... $ 4,568,875 $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............................................. 150,251 151,268
Current portion of borrowing from affiliates.............. 173,209 341,643
Accounts payable.......................................... 131,165 139,754
Accrued liabilities....................................... 232,869 228,025
Accounts payable to affiliates............................ -- 6,317
Accrued income taxes...................................... 35,094 11,525
----------- ----------
Total Current Liabilities.......................... 722,588 964,452
Long-term debt.............................................. 415,300 588,526
Non-current borrowings from affiliates...................... 1,064,078 786,865
Capitalized lease obligations............................... 808 911
Deferred income taxes....................................... 101,832 122,946
Other liabilities........................................... 127,150 58,188
----------- ----------
Total Liabilities.................................. 2,431,756 2,521,888
----------- ----------
Mandatorily Redeemable Preferred Securities................. 381,607 305,500
----------- ----------
Equity:
Preferred stock, $100 par value........................... 7,412 7,412
Preferred stock, $.10 par value........................... 8,906 8,906
Common stock, $1 par value; 300,000,000 shares authorized;
outstanding 90,000,000.................................. 90,000 90,000
Paid in capital............................................. 1,942,387 1,942,387
Retained deficit............................................ (269,420) (322,973)
Accumulated comprehensive income (loss)..................... (23,773) 238
----------- ----------
Total Equity....................................... 1,755,512 1,725,970
----------- ----------
Total Liabilities and Equity....................... $,4,568,875 $4,553,358
=========== ==========
</Table>
See accompanying Notes to Unaudited, Consolidated Financial Statements.
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FRESENIUS MEDICAL CARE HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES
UNAUDITED, CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<Table>
<Caption>
SIX MONTHS ENDED
JUNE 30,
----------------------
2001 2000
--------- ---------
Cash Flows from Operating Activities:
Net Income................................................ $ 53,813 $ 48,263
Adjustments to reconcile net earnings to net cash from
operating activities:
Depreciation and amortization.......................... 113,716 110,156
Provision for doubtful accounts........................ 33,308 27,307
Deferred income taxes.................................. 21,241 31,706
Loss on disposal of properties and equipment........... 465 135
Changes in operating assets and liabilities, net of effects
of purchase acquisitions and foreign exchange:
Increase in accounts receivable........................... (75,572) (94,092)
Increase in inventories................................... (13,464) (4,166)
Increase in other current assets.......................... (29,836) (8,047)
Decrease in IDPN accounts receivable...................... 5,189 43,584
Decrease in other assets and deferred charges............. 21,337 4,215
Decrease in accounts payable.............................. (9,502) (23,024)
Increase in accrued income taxes.......................... 23,569 8,986
Increase (decrease) in accrued liabilities................ 4,842 (40,072)
Increase in other long-term liabilities................... 6,745 4,005
Net changes due to/from affiliates........................ (13,584) 1,680
Other, net................................................ (3,114) 29
--------- ---------
Net cash provided by operating activities................... 139,153 110,665
--------- ---------
Cash Flows from Investing Activities:
Capital expenditures...................................... (58,260) (45,421)
Payments for acquisitions, net of cash acquired........... (12,986) (82,405)
Increase in other investments............................. (7,246) --
--------- ---------
Net cash used in investing activities....................... (78,492) (127,826)
--------- ---------
Cash flows from Financing Activities:
Payments on settlement of investigation................... (85,920) (319,253)
Net increase in borrowings from affiliates................ 108,778 146,727
Cash dividends paid....................................... (260) (260)
Proceeds from receivable financing facility............... 9,700 17,800
Proceeds from mandatorily redeemable preferred
securities............................................. 97,500 --
Net increase (decrease) on debt and capitalized leases.... (174,346) 175,009
--------- ---------
Net cash (used in)/provided by financing activities......... (44,548) 20,023
--------- ---------
Effects of changes in foreign exchange rates................ (60) 137
--------- ---------
Change in cash and cash equivalents......................... 16,053 2,999
--------- ---------
Cash and cash equivalents at beginning of period............ 33,327 12,563
--------- ---------
Cash and cash equivalents at end of period.................. $ 49,380 $ 15,562
========= =========
</Table>
See accompanying Notes to Unaudited, Consolidated Financial Statements.
F-80
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FRESENIUS MEDICAL CARE HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED, CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<Table>
<Caption>
SIX MONTHS ENDED
JUNE 30,
--------------------
2001 2000
-------- --------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest............................................... $100,070 $106,400
Income taxes paid, net................................. 5,704 6,736
Details for Acquisitions:
Assets acquired........................................... 13,901 82,405
Liabilities assumed....................................... 915 --
-------- --------
Net cash paid for acquisitions............................ $ 12,986 $ 82,405
======== ========
</Table>
See accompanying Notes to Unaudited Consolidated Financial Statements
F-81
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FRESENIUS MEDICAL CARE HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO UNAUDITED, CONSOLIDATED INTERIM FINANCIAL STATEMENTS -- (CONTINUED)
(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 June 30, 2001 and
2000 and for the three and six month periods then ended are unaudited and should
be read in conjunction with the consolidated financial statements in the
Company's 2000 report on Form 10-K. Such interim financial statements reflect
all adjustments that, in the opinion of management, are necessary for a fair
presentation of the results of the interim periods presented. Certain amounts in
the prior periods' consolidated financial statements have been reclassified to
conform to the current periods' basis of presentation.
The results of operations and cash flows for the three and six month
periods ended June 30, 2001 are not necessarily indicative of the results of
operations and cash flows for the fiscal year ending December 31, 2001.
All intercompany transactions and balances have been eliminated in
consolidation.
EARNINGS PER SHARE
Basic earnings per share are computed by dividing net income available to
common shareholders by the weighted-average number of common shares outstanding
during the year. Diluted earnings per share includes the effect of all dilutive
potential common shares that were outstanding during the year. The number of
shares used to compute basic and diluted earnings per share was 90,000 in all
periods as there were no potential common shares and no adjustments to income to
be considered for purposes of the diluted earnings per shares calculation.
<Table>
<Caption>
SIX MONTHS ENDED
JUNE 30,
----------------
2001 2000
------ ------
The weighted average number of shares of Common Stock were
as follows............................................... 90,000 90,000
====== ======
</Table>
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282
Income used in the computation of earnings per share were as follows:
<Table>
<Caption>
SIX MONTHS ENDED
JUNE 30,
------------------
2001 2000
------- -------
CONSOLIDATED
Net income............................................... $53,813 $48,263
Dividends paid on preferred stock........................ (260) (260)
------- -------
Income used in per share computation of earnings......... $53,553 $48,003
======= =======
Basic and fully dilutive earnings per share.............. $ 0.60 $ 0.53
======= =======
</Table>
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 taxes losses of $24 million ($41 million pretax) for the six
months ended June 30, 2001, were deferred in other comprehensive income during
the quarter. 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
$0.1 million ($0.3 million pretax) for the six months ended June 30, 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 offset against gains and losses resulting from the underlying
exposures. Ineffective amounts had no material impact on earnings for the three
and six months ended June 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.
FMC-AG 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 $354 million, which
included assumed debt and the issuance of 2.25 million FMC preference shares.
Everest owns, operates or manages approximately 70 clinic facilities providing
therapy to approximately 6,800 patients in the United States. Everest also
operates extracorporeal blood services and acute dialysis businesses that
provide acute dialysis, apheresis and hemoperfusion services to approximately
100 hospitals. The Company has entered into agreements with Everest where it
provides certain management services on behalf of FMC.
F-83
283
The Company sells dialysis products and provides laboratory services to
Everest. Net revenues for sales to Everest were approximately $15.4 million for
the six months ended June 30, 2001. In addition, the Company provides financing
to Everest. At June 30, 2001, the Company has trade and intercompany receivables
of $78.8 million, intercompany interest of $8.3 million and a net loan
receivable of $188.1 million. The intercompany receivables and net loan
receivable are recorded in the current portion of borrowings from affiliates.
NEW PRONOUNCEMENTS
In September 2000, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities, which replaces SFAS No. 125 and rescinds SFAS
No. 127. SFAS No. 140 provides the accounting and reporting standards for
securitizations and other transfers of financial assets and collateral. These
standards are based on consistent application of a financial-components approach
that focuses on control. This Statement also provides consistent standards for
distinguishing transfers of financial assets that are sales from transfers that
are secured borrowings. SFAS No. 140 is effective for transfers after March 31,
2001 and is effective for disclosures about securitizations and collateral for
fiscal years ending after December 15, 2000. There is no impact for the adoption
of SFAS No. 140.
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 is required to adopt the provisions of SFAS 141 immediately,
and SFAS 142 effective January 1, 2002. Furthermore, any goodwill and any
intangible asset determined to have an indefinite useful life that are acquired
in a purchase business combination completed after June 30, 2001 will not be
amortized, but will continue to be evaluated for impairment in accordance with
the appropriate pre-SFAS 142 accounting literature. Goodwill and intangible
assets acquired in business combinations completed before July 1, 2001 will
continue to be amortized prior to the adoption of SFAS 142.
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 to 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
F-84
284
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 141 and
142, it is currently not practicable to reasonably estimate the impact of
adopting these statements 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.
NOTE 2. INVENTORIES
<Table>
<Caption>
JUNE 30, DECEMBER 31,
2001 2000
-------- ------------
Inventories:
Raw materials...................................... $ 42,193 $ 44,787
Manufactured goods in process...................... 11,132 10,516
Manufactured and purchased inventory available for
sale............................................ 89,866 80,520
-------- --------
143,191 135,823
Health care supplies............................... 61,998 55,876
-------- --------
Total........................................... $205,189 $191,699
======== ========
</Table>
NOTE 3. DEBT
<Table>
<Caption>
JUNE 30, DECEMBER 31,
2001 2000
-------- ------------
Notes payable and Long-term debt to outside parties
consists of:
NMC Credit Facility.................................. $561,300 $732,500
Note payable for settlement.......................... -- 85,920
Other................................................ 4,062 7,120
-------- --------
565,362 825,540
Less amounts classified as current................... 150,062 237,014
-------- --------
$415,300 $588,526
======== ========
</Table>
F-85
285
Non current net borrowings from affiliates consists of:
<Table>
<Caption>
JUNE 30, DECEMBER 31,
2001 2000
---------- ------------
Fresenius Medical Care AG non-current borrowings
primarily at interest rates approximating
4.61%............................................ $ 179,971 $ 18,850
Fresenius AG non-current borrowing at interest
rates approximating 4.48%........................ 67,500 209,000
Fresenius Medical Care Trust Finance S.a.r.l. at
interest rates of 4.6% and 9.25%................. 1,135,239 786,524
Franconia Acquisition, LLC at interest rates
approximating 6.87%.............................. 113,121 113,121
Everest Healthcare Holdings, Inc. net borrowings... (259,615) --
Other.............................................. 1,071 1,013
---------- ----------
1,237,287 1,128,508
Less amounts classified as current................. 173,209 341,643
---------- ----------
Total.............................................. $1,064,078 $ 786,865
========== ==========
</Table>
NOTE 4. MANDATORILY REDEEMABLE PREFERRED SECURITIES
During the fourth quarter of 2000, a wholly-owned subsidiary of the Company
issued to NMC 1,000 shares of Series A Preferred Stock and 1,700 shares of
Series C Preferred Stock that were then transferred to FMC for proceeds of
$113,500 and $192,000. These securities are identical in substance except that
the Series A shares rank prior to the Series C shares both as to dividends and
liquidation, dissolution or winding-up of the subsidiary.
During the second quarter of 2001, a wholly-owned subsidiary of the Company
issued to NMC 870 shares of Series D Preferred Stock (together with the Series A
and C Preferred Stock, the "Redeemable Preferred Securities") that were then
transferred to FMC for proceeds of $97,500.
The Redeemable Preferred Securities have a par value of $.01 per share. The
holders of the Redeemable Preferred Securities are entitled to receive dividends
in amount of dollars per share equal to approximately 8% of the share issuance
price. The dividends will be declared and paid in cash at least annually.
Upon liquidation or dissolution or winding up of the 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 an amount equal to Euros 341,385 plus any
accrued and unpaid dividends. Accordingly, the Redeemable Preferred Securities
are deemed to be a Euro liability and the risk of foreign currency fluctuations
are hedged through forward currency contracts.
The holders of the Redeemable Preferred Securities have the same
participation rights as the holders of all other classes of capital stock of the
issuing subsidiary.
NOTE 5. SETTLEMENT OF INVESTIGATION WITH THE U.S. GOVERNMENT
During the six months ended June 30, 2001, the Company made final payments
to the U.S. Government of $137.1 million, pursuant to the January 2000
settlement agreement with the U.S. Government.
F-86
286
In addition, the Company received a 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.
NOTE 6. COMMITMENTS AND CONTINGENCIES
LEGAL PROCEEDINGS
COMMERCIAL LITIGATION
In 1997, the Company, NMC, and certain named NMC subsidiaries, were served
with a civil complaint filed by Aetna Life Insurance Company in the U.S.
District Court for the Southern District of New York. The lawsuit alleges
inappropriate billing practices for nutritional therapy, diagnostic and clinical
laboratory tests and misrepresentations. In April 1999, Aetna amended its
complaint to include its affiliate, Aetna U.S. Healthcare, Inc., as an
additional plaintiff, and to make certain other limited changes in its pleading.
The amended complaint seeks unspecified damages and costs. Other insurance
companies have filed similar claims seeking 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. Other private
payors have contacted the Company and may assert that NMC received excess
payment 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
result of operations. The Company intends to defend the claims vigorously.
The Company has filed counterclaims against the plaintiffs in these matters
based on inappropriate claim denials and delays in claim payments.
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." 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 an additional class action were filed subsequently
with substantially similar allegations; both cases have been subsequently stayed
and transferred to the Delaware bankruptcy court in connection with Grace's
Chapter 11 proceeding. The Company has requested indemnification from Grace
Chemicals pursuant to the Merger agreements (see "Indemnification by W.R. Grace
& Co."). 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. or its
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
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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.
OTHER LITIGATION AND POTENTIAL EXPOSURES
From time to time, the Company is a party to or may be threatened with
other litigation arising in the ordinary course of its business. Management
regularly analyzes current information including, as applicable, the Company's
defenses and insurance coverage and, as necessary, provides accruals for
probable liabilities for the eventual disposition of these matters. The ultimate
outcome of these matters is not expected to materially affect the Company's
financial position, results of operations or cash flows.
The Company, like other health care providers, conducts its operations
under intense government regulation and scrutiny. The Company must comply with
regulations which relate to or govern the safety and efficacy of medical
products and supplies, the operation of manufacturing facilities, laboratories
and dialysis clinics, and environmental and occupational health and safety. The
Company must also comply
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with the U.S. anti-kickback statute, the False Claims Act, the Stark Law, and
other federal and state fraud and abuse laws. Applicable laws or regulations may
be amended, or enforcement agencies or courts may make interpretations that
differ from the Company's or the manner in which the Company conduct its
business. In the U.S., enforcement has become a high priority for the federal
government and some states. In addition, the provisions of the False Claims Act
authorizing payment of a portion of any recovery to the party bringing the suit
encourage private plaintiffs to commence "whistle blower" actions. By virtue of
this regulatory environment, as well as our corporate integrity agreement with
the government, the Company expects that its business activities and practices
will continue to be subject to extensive review by regulatory authorities and
private parties, and continuing inquiries, claims and litigation relating to its
compliance with applicable laws and regulations. The Company may not always be
aware that an inquiry or action has begun, particularly in the case of "whistle
blower" actions, which are initially filed under court seal.
The Company operates a large number facilities throughout the U.S. In such
a decentralized system, it is often difficult to maintain the desired level of
oversight and control over the thousands of individuals employed by many
affiliated companies. The Company relies upon its management structure,
regulatory and legal resources, and the effective operation of its compliance
program to direct, manage and monitor the activities of these employees. On
occasion, the Company may identify instances where employees, deliberately or
inadvertently, have submitted inadequate or false billings. The actions of such
persons may subject the Company and its subsidiaries to liability under the
False Claims Act, among other laws, and the Company cannot predict whether law
enforcement authorities may use such information to initiate further
investigations of the business practices disclosed or any of its other business
activities.
Physicians, hospitals and other participants in the health care industry
are also subject to a large number of lawsuits alleging professional negligence,
malpractice, product liability, worker's compensation or related claims, many of
which involve large claims and significant defense costs. The Company has been
subject to these suits due to the nature of its business and the Company expects
that those types of lawsuits may continue. Although the Company maintains
insurance at a level which it believes to be prudent, the Company cannot assure
that the coverage limits will be adequate or that insurance will cover all
asserted claims. A successful claim against the Company or any of its
subsidiaries in excess of insurance coverage could have a material adverse
effect upon the Company and the results of its operations. Any claims,
regardless of their merit or eventual outcome, also may have a material adverse
effect on the Company's reputation and business.
The Company has also had claims asserted against it and has had lawsuits
filed against it relating to businesses that it has acquired or divested. These
claims and suits relate both to operation of the businesses and to the
acquisition and divestiture transactions. The Company has asserted its own
claims, and claims for indemnification. Although the ultimate outcome on the
Company cannot be predicted at this time, an adverse result could have a
material adverse effect upon the Company's business, financial condition, and
results of operations.
INDEMNIFICATION BY W. R. GRACE & CO.
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. In addition, the Merger was consummated as a tax-free
reorganization. Pre-merger tax claims or tax claims that would
F-89
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arise if events were to violate the tax-free nature of the Merger could be the
obligation of the Company. Subject to certain representations made by W.R. Grace
& Co.-Conn., the Company and Fresenius AG, W.R. Grace & Co.-Conn. also agreed to
indemnify the Company against any such tax liability. W.R. Grace & Co.-Conn. and
certain of its subsidiaries have filed for reorganization under Chapter 11 of
the U.S. Bankruptcy Code. If the Merger is determined to be a fraudulent
transfer and if material damages are proved by the plaintiffs, or if W.R. Grace
& Co. is unable to satisfy its Merger related or pre-merger tax obligations, and
if the Company is not able to collect on the indemnities from W. R. Grace & Co.
as a result of the bankruptcy proceedings or otherwise, and if the Company is
not able to collect on the indemnities from any affiliates or former affiliates
of W.R. Grace & Co. 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.
NOTE 7. INDUSTRY SEGMENTS INFORMATION
The Company's reportable segments are Dialysis Services and Dialysis
Products. For purposes of segment reporting, the Dialysis Services Division and
Spectra Renal Management are combined and reported as Dialysis Services. These
divisions are aggregated because of their similar economic classifications.
These include the fact that they are both health care service providers whose
services are provided to a common patient population, and both receive a
significant portion of their net revenue from Medicare and other government and
non-government third party payors. The Dialysis Products segment reflects the
activity of the Dialysis Products Division only.
The table below provides information for the three and six months ended
June 30, 2001 and 2000 pertaining to the Company's two industry segments.
<Table>
<Caption>
LESS
DIALYSIS DIALYSIS INTERSEGMENT
SERVICES PRODUCTS SALES TOTAL
---------- -------- ------------ ----------
NET REVENUES
Six Months Ended 6/30/01................... $1,408,431 $368,470 $128,471 $1,648,430
Six Months Ended 6/30/00................... 1,278,327 353,357 125,845 1,505,839
OPERATING EARNINGS
Six Months Ended 6/30/01................... $ 206,519 $ 66,812 -- $ 273,331
Six Months Ended 6/30/00................... 202,696 56,345 -- 259,041
TOTAL ASSETS
6/30/01.................................. $2,251,701 $655,380 -- $2,907,081
12/31/00................................. 2,176,055 644,853 -- 2,820,908
</Table>
Total assets of $4,568,875 is comprised of total assets for reportable
segments, $2,907,081; intangible assets not allocated to segments, $1,898,480;
receivable financing facility ($455,000); and other corporate assets $218,314.
F-90
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The table below provides the reconciliations of reportable segment
operating earnings to the Company's consolidated totals.
<Table>
<Caption>
SIX MONTHS ENDED
JUNE 30,
----------------------
SEGMENT RECONCILIATION 2001 2000
- ---------------------- --------- ---------
INCOME BEFORE INCOME TAXES:
Total operating earnings for reportable segments.......... $ 273,331 $ 259,041
Corporate G&A............................................. (65,586) (51,454)
Research and development expense.......................... (2,247) (2,198)
Net interest expense...................................... (102,214) (110,238)
--------- ---------
Income Before Income Taxes.................................. $ 103,284 $ 95,151
========= =========
</Table>
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REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of
Fresenius Medical Care Holdings, Inc.
We have audited the accompanying consolidated balance sheets of Fresenius
Medical Care Holdings, Inc. and its subsidiaries (the "Company") as of December
31, 2000 and 1999 and the related consolidated statements of operations,
comprehensive income, changes in equity and cash flows for each of the years in
the three year period ended December 31, 2000. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the Company
as of December 31, 2000 and 1999, and the consolidated results of their
operations and their cash flows for the three years then ended in conformity
with accounting principles generally accepted in the United States of America.
/s/ KPMG LLP
February 9, 2001, except as to paragraph 14 of Note 16, as to which the date is
April 2, 2001
Boston, MA
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FRESENIUS MEDICAL CARE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<Table>
<Caption>
TWELVE MONTHS ENDED DECEMBER 31,
--------------------------------------
2000 1999 1998
---------- ---------- ----------
NET REVENUES
Health care services................................. $2,609,108 $2,324,322 $2,100,422
Medical supplies..................................... 480,067 490,911 470,984
---------- ---------- ----------
3,089,175 2,815,233 2,571,406
---------- ---------- ----------
EXPENSES
Cost of health care services......................... 1,768,914 1,542,965 1,390,321
Cost of medical supplies............................. 339,908 336,749 317,122
General and administrative expenses.................. 269,574 276,408 253,920
Provision for doubtful accounts...................... 62,949 42,243 54,709
Depreciation and amortization........................ 222,870 217,952 216,214
Research and development............................. 4,127 4,065 4,060
Interest expense, net, and related financing costs
including $110,746, $88,679 and $77,705 interest
with affiliates................................... 187,315 201,915 208,776
Interest expense on settlement of investigation,
net............................................... 29,947 -- --
Special charge for settlement of investigation and
related costs..................................... -- 601,000 --
---------- ---------- ----------
2,885,604 3,223,297 2,445,122
---------- ---------- ----------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME
TAXES AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
FOR START UP COSTS................................... 203,571 (408,064) 126,284
PROVISION (BENEFIT) FOR INCOME TAXES................... 98,321 (81,037) 74,447
---------- ---------- ----------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR START
UP COSTS............................................. $ 105,250 $ (327,027) $ 51,837
---------- ---------- ----------
DISCONTINUED OPERATIONS
Loss from discontinued operations, net of income
taxes............................................. -- -- (8,669)
Loss on disposal of discontinued operations, net of
income tax benefit................................ -- -- (97,228)
---------- ---------- ----------
Loss from discontinued operations.................... $ -- $ -- $ (105,897)
---------- ---------- ----------
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR START UP
COSTS, NET OF TAX BENEFIT............................ -- -- (4,890)
---------- ---------- ----------
NET INCOME (LOSS)...................................... $ 105,250 $ (327,027) $ (58,950)
========== ========== ==========
Basic and fully dilutive (loss) earnings per share
Continuing operations................................ $ 1.16 $ (3.64) $ 0.57
Loss from discontinued operations.................... $ -- $ -- $ (0.10)
Loss on disposal of discontinued operations.......... $ -- $ -- $ (1.08)
Cumulative effect of accounting change............... $ -- $ -- $ (0.05)
Net Income (loss).................................... $ 1.16 $ (3.64) $ (0.66)
</Table>
See accompanying Notes to Consolidated Financial Statements
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FRESENIUS MEDICAL CARE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(DOLLARS IN THOUSANDS)
<Table>
<Caption>
TWELVE MONTHS ENDED DECEMBER 31,
---------------------------------
2000 1999 1998
-------- --------- --------
NET INCOME (LOSS)......................................... $105,250 $(327,027) $(58,950)
Other comprehensive income
Foreign currency translation adjustments................ (174) (625) 1,872
-------- --------- --------
Total other comprehensive income........................ (174) (625) 1,872
-------- --------- --------
COMPREHENSIVE INCOME (LOSS)............................... $105,076 $(327,652) $(57,078)
======== ========= ========
</Table>
See accompanying Notes to Consolidated Financial Statements
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FRESENIUS MEDICAL CARE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<Table>
<Caption>
DECEMBER 31,
------------------------
2000 1999
---------- ----------
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 33,327 $ 12,563
Accounts receivable, less allowances of $80,466 and
$63,012................................................ 318,391 295,235
Inventories............................................... 191,699 183,112
Deferred income taxes..................................... 123,190 219,454
Other current assets...................................... 139,082 130,771
IDPN accounts receivable.................................. 5,189 53,962
---------- ----------
Total Current Assets.............................. 810,878 895,097
---------- ----------
Properties and equipment, net............................... 456,936 428,793
---------- ----------
Other Assets:
Excess of cost over the fair value of net assets acquired
and other intangible assets, net of accumulated
amortization of $564,880 and $424,704.................. 3,222,044 3,265,491
Other assets and deferred charges......................... 63,500 49,998
Non-current IDPN accounts receivable...................... -- 5,189
---------- ----------
Total Other Assets................................ 3,285,544 3,320,678
---------- ----------
Total Assets...................................... $4,553,358 $4,644,568
========== ==========
LIABILITIES AND EQUITY
Current Liabilities:
Note payable for settlement of investigation.............. $ 85,920 $ --
Current portion of long-term debt and capitalized lease
obligations............................................ 151,268 142,110
Current portion of borrowing from affiliates.............. 341,643 372,949
Accounts payable.......................................... 139,754 133,337
Accrued settlement........................................ -- 386,815
Accrued liabilities....................................... 228,025 291,358
Net accounts payable to affiliates........................ 6,317 12,361
Accrued income taxes...................................... 11,525 12,433
---------- ----------
Total Current Liabilities......................... 964,452 1,351,363
Long-term debt.............................................. 588,526 615,065
Non-current borrowings from affiliates...................... 786,865 788,506
Capitalized lease obligations............................... 911 1,190
Deferred income taxes....................................... 122,946 134,310
Accrued settlement.......................................... -- 85,920
Other liabilities........................................... 58,188 46,153
---------- ----------
Total Liabilities................................. 2,521,888 3,022,507
---------- ----------
Mandatorily Redeemable Preferred Securities................. 305,500 --
---------- ----------
Equity:
Preferred stock, $100 par value........................... 7,412 7,412
Preferred stock, $.10 par value........................... 8,906 8,906
Common stock, $1 par value; 300,000,000 shares authorized;
outstanding 90,000,000................................. 90,000 90,000
Paid in capital........................................... 1,942,387 1,943,034
Retained deficit.......................................... (322,973) (427,703)
Accumulated comprehensive income.......................... 238 412
---------- ----------
Total Equity...................................... 1,725,970 1,622,061
---------- ----------
Total Liabilities and Equity...................... $4,553,358 $4,644,568
========== ==========
</Table>
See accompanying Notes to Consolidated Financial Statements.
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FRESENIUS MEDICAL CARE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<Table>
<Caption>
TWELVE MONTHS ENDED DECEMBER 31,
---------------------------------
2000 1999 1998
--------- --------- ---------
Cash Flows from Operating Activities:
Net income (loss)......................................... $ 105,250 $(327,027) $ (58,950)
Adjustments to reconcile net income to net cash from
operating activities:
Depreciation and amortization.......................... 222,870 217,952 216,214
Write-off of receivables relating to settlement of
investigation........................................ -- 94,349 --
Loss on disposition of businesses...................... -- -- 97,228
Loss from discontinued operations...................... -- -- 8,669
Cumulative effect of change in accounting.............. -- -- 4,890
Provision for doubtful accounts........................ 62,949 42,243 54,709
Deferred income taxes.................................. 84,900 (93,124) 16,734
Loss on disposal of properties and equipment........... 970 713 402
Changes in operating assets and liabilities, net of
effects of purchase acquisitions and foreign exchange:
Increase in accounts receivable........................ (194,772) (112,095) (159,228)
Increase in inventories................................ (7,472) (12,606) (30,979)
(Increase) decrease in other current assets............ (6,025) (21,300) 3,890
Decrease in IDPN receivables........................... 53,962 -- --
(Increase) decrease in other assets and deferred
charges.............................................. (3,025) 1,646 (19,554)
Increase (decrease) in accounts payable................ 5,976 25,855 (11,705)
(Decrease) increase in accrued income taxes............ (908) 22 74,395
(Decrease) increase in accrued liabilities............. (65,227) 356,539 (31,040)
Increase in other long-term liabilities................ 12,035 102,795 3,560
Net changes due to/from affiliates..................... (6,044) (5,605) 22,777
Other, net............................................. (2,126) (17,088) 19,614
--------- --------- ---------
Net cash provided by operating activities of continued
operations............................................. 263,313 253,269 211,626
--------- --------- ---------
Net cash used in operating activities of discontinued
operations............................................. -- (3,782) (11,947)
--------- --------- ---------
Net cash provided by operating activities................. 263,313 249,487 199,679
--------- --------- ---------
Cash Flows from Investing Activities:
Capital expenditures................................... (104,199) (81,330) (74,653)
Payments for acquisitions, net of cash acquired........ (115,601) (65,235) (170,137)
Proceeds from disposition of businesses................ -- -- 82,500
--------- --------- ---------
Net cash used in investing activities of continued
operations............................................. (219,800) (146,565) (162,290)
--------- --------- ---------
Net cash used in investing activities of discontinued
operations............................................. -- -- (8,925)
--------- --------- ---------
Net cash used in investing activities..................... (219,800) (146,565) (171,215)
--------- --------- ---------
</Table>
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FRESENIUS MEDICAL CARE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
<Table>
<Caption>
TWELVE MONTHS ENDED DECEMBER 31,
---------------------------------
2000 1999 1998
--------- --------- ---------
Cash Flows from Financing Activities:
Payments on settlement of investigation................ (386,815) -- --
(Decrease) increase in borrowings from affiliates...... (32,947) 172,455 445,447
Cash dividends paid.................................... (520) (520) (520)
Proceeds from mandatorily redeemable preferred
securities........................................... 305,500 -- --
Proceeds from issuance of debt......................... -- 37 16,385
Proceeds from receivable financing facility............ 110,300 29,400 105,600
Payments on debt and capitalized leases................ (17,660) (298,587) (599,714)
Other, net............................................. (647) 799 (2,027)
--------- --------- ---------
Net cash used in financing activities of continued
operations............................................. (22,789) (96,416) (34,829)
--------- --------- ---------
Net cash used in financing activities of discontinued
operations............................................. -- -- (2,107)
--------- --------- ---------
Net cash used in financing activities..................... (22,789) (96,416) (36,936)
--------- --------- ---------
Effects of changes in foreign exchange rates................ 40 (522) 1,997
--------- --------- ---------
Change in cash and cash equivalents......................... 20,764 5,984 (6,475)
Cash and cash equivalents at beginning of period............ 12,563 6,579 13,054
--------- --------- ---------
Cash and cash equivalents at end of period.................. $ 33,327 $ 12,563 $ 6,579
========= ========= =========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest............................................... $ 223,847 $ 216,647 $ 194,141
Income taxes (received)/paid, net...................... 14,882 8,344 (19,149)
Details for Acquisitions:
Assets acquired........................................... 117,935 65,256 172,511
Liabilities assumed....................................... (2,334) (21) (2,374)
--------- --------- ---------
Cash paid................................................. 115,601 65,235 170,137
Less cash acquired........................................ -- -- --
--------- --------- ---------
Net cash paid for acquisitions............................ $ 115,601 $ 65,235 $ 170,137
========= ========= =========
</Table>
See accompanying Notes to Consolidated Financial Statements
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FRESENIUS MEDICAL CARE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<Table>
<Caption>
PREFERRED STOCKS COMMON STOCK CAPITAL IN RETAINED OTHER
-------------------- -------------------- EXCESS EARNINGS COMPREHENSIVE
SHARES AMOUNT SHARES AMOUNT OF PAR VALUE (DEFICIT) INCOME TOTAL EQUITY
---------- ------- ---------- ------- ------------ --------- ------------- ------------
BALANCE, DECEMBER 31,
1997.................... 89,136,435 $16,318 90,000,000 $90,000 $1,921,853 $ (40,686) $ (835) $1,986,650
Net Loss.................. -- -- -- -- -- (58,950) -- (58,950)
Cash dividends on
preferred stock......... -- -- -- -- -- (520) -- (520)
Tax benefit on
International transfer.. -- -- -- -- 20,382 -- -- 20,382
Other comprehensive
income.................. -- -- -- -- -- -- 1,872 1,872
---------- ------- ---------- ------- ---------- --------- ------ ----------
BALANCE, DECEMBER 31,
1998.................... 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
========== ======= ========== ======= ========== ========= ====== ==========
</Table>
See accompanying Notes to Consolidated Financial Statements
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FRESENIUS MEDICAL CARE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
NOTE 1. THE COMPANY
Fresenius Medical Care Holdings, Inc., a New York corporation ("the
Company") is a subsidiary of Fresenius Medical Care AG, a German corporation
("FMC" or "Fresenius Medical Care"). The Company conducts its operations through
five principal subsidiaries, National Medical Care, Inc., ("NMC"); Fresenius USA
Marketing Inc., Fresenius USA Manufacturing Inc., and SRC Holding Company, Inc.,
("SRC"), all Delaware corporations and Fresenius USA Inc., a Massachusetts
corporation.
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries, NMC, FUSA, and SRC and those financial
statements where the Company controls professional corporations in accordance
with Emerging Issues Task Force Issue 97-2.
The Company is primarily engaged in (i) providing kidney dialysis services,
clinical laboratory testing and renal diagnostic services, and (ii)
manufacturing and distributing products and equipment for dialysis treatment.
Effective January 1, 1998, the Company transferred legal ownership of
substantially all of its international operations to FMC. The transfer of
contributed capital of $199 million was accounted for on the cost basis.
BASIS OF PRESENTATION
BASIS OF CONSOLIDATION
The consolidated financial statements in this report at December 31, 2000,
1999 and 1998, respectively, reflect all adjustments that, in the opinion of
management, are necessary for the fair presentation of the consolidated results
for all periods presented.
All intercompany transactions and balances have been eliminated in
consolidation.
EARNINGS PER SHARE
Basic earnings per share are computed by dividing net income available to
common shareholders by the weighted-average number of common shares outstanding
during the year. Diluted earnings per share includes the effect of all dilutive
potential common shares that were outstanding during the year. The number of
shares used to compute basic and diluted earnings per share was 90,000 in all
periods as there were no potential common shares and no adjustments to income to
be considered for purposes of the diluted earnings per shares calculation.
<Table>
<Caption>
TWELVE MONTHS ENDED DECEMBER 31,
--------------------------------
2000 1999 1998
-------- -------- --------
The weighted average number of shares of Common Stock were
as follows............................................... 90,000 90,000 90,000
-------- -------- --------
</Table>
F-99
299
FRESENIUS MEDICAL CARE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
Net income (loss) used in the computation of earnings per share is as
follows:
<Table>
<Caption>
TWELVE MONTHS ENDED DECEMBER 31,
---------------------------------
2000 1999 1998
-------- --------- --------
CONSOLIDATED
Net income (loss)......................................... $105,250 $(327,027) $(58,950)
Dividends paid on preferred stocks........................ (520) (520) (520)
-------- --------- --------
Income (loss) used in per share computation of earnings... $104,730 $(327,547) $(59,470)
-------- --------- --------
Basic and fully dilutive earnings (loss) per share........ $ 1.16 $ (3.64) $ (0.66)
======== ========= ========
</Table>
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions affecting the reported
amounts of assets and liabilities (including disclosed amounts of contingent
assets and liabilities) at the dates of the consolidated financial statements
and the reported revenues and expenses during the reporting periods. Actual
amounts could differ from those estimates.
CASH EQUIVALENTS
Cash equivalents consist of highly liquid instruments with maturities of
three months or less when purchased.
DERIVATIVE FINANCIAL INSTRUMENTS
Foreign currency contracts -- Gains and losses on foreign currency
contracts that are designated and effective as hedges of existing assets,
liabilities (including borrowings) and firm commitments are deferred and
recorded as an adjustment to general and administrative expenses or cost of
goods sold in the period in which the related transaction is consummated. Gains
and losses on other foreign currency contracts are recognized at each reporting
period.
Interest rate swaps -- Interest rate agreements that are designated and
effective as a hedge of a debt or other long-term obligations are accounted for
on an accrual basis. That is, the interest payable and interest receivable under
the swaps terms are accrued and recorded as an adjustment to interest expense of
the designated liabilities or obligations.
Amounts due from and payable to the counterparties of interest rate swaps
are recorded on an accrual basis at each reporting date on amounts computed by
reference of the respective interest rate swap contract. Realized gains and
losses that occur from the early termination or of foreign currency contracts
and interest rate swaps are recorded in the consolidated statement of operations
over the remaining period of the original agreement. Gains and losses arising
from the interest differential on contracts that hedge specific borrowings are
recorded as a component of interest expense over the life of the contract.
The effectiveness of the hedge is measured by a historical and probable
future high correlation of changes in the fair value of the hedging instruments
with changes in the value of the hedged item. If correlation ceases to exist,
hedge accounting will be terminated and gains on losses recorded in other
income. To date, high correlation has always been achieved.
F-100
300
FRESENIUS MEDICAL CARE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
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 2000 and 1999 include $54.5 million
and $36.0 million, respectively, of net revenues for machines sold to a third
party leasing company which are utilized by the dialysis services division to
provide services to our customers. The profits on these sales are deferred and
amortized to earnings over the lease terms.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method) or
market.
PROPERTIES AND EQUIPMENT
Properties and equipment are stated at cost. Significant improvements are
capitalized; repairs and maintenance costs that do not extend the lives of the
assets are charged to expense as incurred. The cost and accumulated depreciation
of assets sold or otherwise disposed of are removed from the accounts, and any
resulting gain or loss is included in income when the assets are disposed.
The cost of properties and equipment is depreciated over estimated useful
lives on a straight-line basis as follows: buildings -- 20 to 40 years,
equipment and furniture -- 3 to 10 years, and leasehold improvements -- the
shorter of the lease term or useful life. For income tax purposes, depreciation
is calculated using accelerated methods to the extent permitted.
EXCESS OF COST OVER THE FAIR VALUE OF NET ASSETS ACQUIRED AND OTHER INTANGIBLE
ASSETS
The Company has adopted the following useful lives and methods to amortize
intangible assets: trade name, 40 years; goodwill -- 25 to 40 years on a
straight-line basis; acute care agreements -- over the term of the agreement,
generally from 1 to 2 years; patient relationships and other intangible
assets -- over the estimated period to be benefited, generally from 5 to 6 years
on a straight line basis.
Goodwill is the excess of the purchase price over the fair value of
identifiable net assets acquired on business combinations accounted for as a
purchase.
DEBT ISSUANCE COSTS
Costs related to the issuance of debt are amortized over the term of the
related obligation using a straight line method.
SELF INSURANCE PROGRAMS
The Company is self insured for professional, product and general
liability, auto and worker's compensation claims up to predetermined amounts
above which third party insurance applies. Estimates include ultimate costs for
both reported and incurred but not reported claims.
F-101
301
FRESENIUS MEDICAL CARE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
IMPAIRMENT
In accordance with Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of ", the Company reviews the carrying value of its long-lived
assets for impairment whenever events or changes in circumstances indicate that
the carrying amount of assets may not be recoverable. The Company considers
various valuation factors including discounted cash flows, fair values and
replacement costs to assess any impairment of goodwill and other long lived
assets.
FOREIGN CURRENCY TRANSLATION
The Company follows the provisions of Statement of Financial Accounting
Standards No. 52, "Foreign Currency Translation". Substantially all assets and
liabilities of the Company's foreign subsidiaries are translated at year end
exchange rates, while revenue and expenses are translated at exchange rates
prevailing during the year. Adjustments for foreign currency translation
fluctuations are excluded from net earnings and are deferred in the cumulative
translation adjustment component of equity. In addition, the translation of
certain intercompany borrowings denominated in foreign currencies, which are
considered foreign equity investments, is included in the cumulative translation
adjustment.
Gains and losses resulting from the translation of revenues and expenses
and intercompany borrowings, which are not considered equity investments, are
included in general and administrative expense. Translation gains amounted to
$5,927, $58 and $766 for the twelve months ended December 31, 2000, 1999 and
1998, respectively.
INCOME TAXES
Deferred income taxes are provided for temporary differences between the
reporting of income and expense for financial reporting and tax return purposes.
Deferred tax liabilities or assets at the end of each period are determined
using the tax rates then in effect for the periods when taxes are actually
expected to be paid or recovered. Accordingly, income tax expense provisions
will increase or decrease in the period in which a change in tax rates is
enacted.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred.
COMPREHENSIVE INCOME
The Company has adopted the provisions of SFAS No. 130, Reporting
Comprehensive Income. This statement requires that all items that are required
to be recognized under accounting standards as components of comprehensive
income be reported in a financial statement that is displayed with the same
prominence as other financial statements. This statement further requires that
the Company classify items of other comprehensive income by their nature in a
financial statement and display the accumulated balance of other comprehensive
income separately from retained earnings and additional paid-in capital in the
equity section of a statement of financial position.
PENSION AND OTHER POSTRETIREMENT BENEFITS
Effective December 31, 1998, the Company adopted SFAS No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits". The provisions of
SFAS No. 132 revise employers' disclosures about pension and other post
retirement benefit plans. It does not change the measurement or
F-102
302
FRESENIUS MEDICAL CARE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
recognition of these plans. It standardized the disclosure requirements for
pensions and other post retirement benefits to the extent practicable.
NEW PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for
Derivative Instruments and Hedging Activities ("SFAS 133"). SFAS 133 requires
the recognition of the fair value of all derivative instruments on the balance
sheet. Subsequent to the issuance of SFAS 133, the FASB received many requests
to clarify certain issues causing difficulties in implementation.
In June 2000, the FASB issued SFAS 138, which responds to those requests by
amending certain provisions of SFAS 133. These amendments include allowing
foreign-currency denominated assets and liabilities to qualify for hedge
accounting, permitting the offsetting of certain inter-entity foreign currency
exposures that reduce the need for third party derivatives and redefining the
nature of interest rate risk to avoid sources of ineffectiveness. The Company is
adopting SFAS 133, and the corresponding amendments under SFAS 138 effective as
January 1, 2001. The adoption of SFAS 133, as amended by SFAS 138, results in
the recording of assets related to forward currency contracts of approximately
$12.9 million and a liability for interest rate swaps off approximately $24.6
million. The offset to each of these transition adjustments will be recorded to
other comprehensive income. The Company expects that approximately $2.0 million
deferred gains on foreign currency contracts will be recognized to earnings
during fiscal year 2000.
In December 1999, the United States Securities and Exchange Commission
("SEC") issued Staff Accounting Bulletin 101, Revenue Recognition in Financial
Statements ("SAB 101"). SAB 101 provides the staff's views in applying generally
accepted accounting principles to selected revenue recognition issues, as well
as examples of how the staff applies revenue recognition guidance to specific
circumstances. In June 2000, SAB 101B was issued by the SEC further delaying the
date of SAB 101 until the fourth quarter of the fiscal year beginning after
December 15, 1999. The impact of the adoption of SAB 101 is not significant.
In May 2000, the Emerging Issues Task Force ("EITF") issued EITF 00-014,
Accounting for Certain Sales Incentives, which establishes accounting for point
of sales coupons, rebates, and free merchandise. This EITF requires that an
entity report these sales incentives that reduce the price paid to be netted
directly against revenues. EITF 00-014 is effective no later than the second
quarter of 2000. The impact of the adoption of EITF-00-14 is not significant.
In September 2000, the Financial Accounting Standards Board issued SFAS No.
140, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities, which replaces SFAS No. 125 and rescinds SFAS
No. 127. SFAS No. 140 provides the accounting and reporting standards for
securitizations and other transfers of financial assets and collateral. These
standards are based on consistent application of a financial-components approach
that focuses on control. This Statement also provides consistent standards for
distinguishing transfers of financial assets that are sales from transfers that
are secured borrowings. SFAS No. 140 is effective for transfers after March 31,
2001 and is effective for disclosures about securitizations and collateral for
fiscal years ending after December 15, 2000. There is no impact for the adoption
of SFAS No. 140.
1996 RESTRUCTURING COSTS
In 1996, the Company accrued approximately $50,000 for restructuring costs
relating to the closing of certain renal products manufacturing and distribution
operations as well as the closing of certain clinics of
F-103
303
FRESENIUS MEDICAL CARE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
the Homecare Division. These restructuring costs primarily relate to severance
payments and lease commitments. Through the period ended December 31, 2000
approximately $49,000 in payments and other charges have been applied against
these restructuring costs. The restructuring plan has been completed and the
remaining outstanding balance will be used primarily for the remaining lease
commitments for closed production facilities.
RECLASSIFICATION
Certain 1999 and 1998 amounts have been reclassified to conform with the
2000 presentation.
NOTE 3. ACQUISITIONS
The Company acquired certain health care facilities, and clinical
laboratories, for a total consideration of $115,601, $65,235 and $170,137 for
the twelve months ended December 31, 2000, 1999 and 1998, respectively. These
acquisitions have been accounted for as purchase transactions and, accordingly,
are included in the results of operations from the dates of acquisition. The
excess of the total acquisition costs over the fair value of tangible net assets
acquired was $93,417, $62,376 and $157,836 for the twelve months ended December
31, 2000, 1999 and 1998, respectively.
Had the acquisitions that occurred during the twelve months ended December
31, 2000 been consummated on January 1, 1999, unaudited proforma net revenues
for the twelve months ended December 31, 2000 and 1999 would have been
$3,139,406 and $2,929,550, respectively. Unaudited proforma income (loss) from
continuing operations before cumulative effect of change in accounting for start
up costs would have been $106,505 and ($325,648) for the twelve months ended
December 31, 2000 and 1999, respectively.
Had the acquisitions that occurred during the twelve months ended December
31, 1999 been consummated on January 1, 1998, unaudited proforma net revenues
for the twelve months ended December 31, 1999 and 1998 would have been
$2,829,989 and $2,606,856, respectively. Unaudited proforma income from
continuing operations before cumulative effect of change in accounting for start
up costs would have been ($328,167) and $49,676 for the twelve months ended
December 31, 1999 and 1998, respectively.
NOTE 4. OTHER BALANCE SHEET ITEMS
<Table>
<Caption>
DECEMBER 31,
------------------------
2000 1999
---------- ----------
INVENTORIES
Raw materials............................................. $ 44,787 $ 41,045
Manufactured goods in process............................. 10,516 8,748
Manufactured and purchased inventory available for sale... 80,520 90,748
---------- ----------
135,823 140,541
Health care supplies...................................... 55,876 42,571
---------- ----------
Total............................................. $ 191,699 $ 183,112
========== ==========
</Table>
Under the terms of certain purchase commitments, the Company is obligated
to purchase raw materials and health care supplies during 2001 amounting to
$55,483.
F-104
304
FRESENIUS MEDICAL CARE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
<Table>
OTHER CURRENT ASSETS
Miscellaneous accounts receivable......................... $ 98,668 $ 91,042
Deposits and prepaid expenses............................. 40,414 39,729
---------- ----------
Total............................................. $ 139,082 $ 130,771
========== ==========
EXCESS OF COST OVER THE FAIR VALUE OF NET ASSETS ACQUIRED
AND OTHER INTANGIBLE ASSETS:
Goodwill, less accumulated amortization of $302,757 and
$228,426............................................... $2,701,281 $2,713,385
Patient relationships, less accumulated amortization of
$116,856 and $87,169................................... 72,662 92,898
Other intangible assets, less accumulated amortization of
$145,267 and $109,109.................................. 448,101 459,208
---------- ----------
Total............................................. $3,222,044 $3,265,491
========== ==========
ACCRUED LIABILITIES
Accrued operating expenses................................ $ 36,062 $ 46,019
Accrued insurance......................................... 47,021 54,702
Accrued legal and compliance costs........................ 1,601 9,441
Accrued salaries and wages................................ 50,988 53,371
Accounts receivable credit balances....................... 38,215 48,932
Accrued interest.......................................... 14,974 19,125
Accrued other............................................. 16,529 21,669
Accrued physician compensation............................ 17,649 17,721
Accrued other related costs for OIG investigation......... 4,986 20,378
---------- ----------
Total............................................. $ 228,025 $ 291,358
========== ==========
</Table>
Accounts receivable credit balances principally reflect overpayments from
third party payors and are in the process of repayment.
NOTE 5. SALE OF ACCOUNTS RECEIVABLE
On September 27, 1997, NMC established a new $204,000 receivable financing
facility (the "A/R Facility") with NationsBank, N.A. (now known as Bank of
America, N.A.) to replace its former facility with CitiCorp. The A/R Facility
was amended on February 27, 1998 to increase the commitment amount to $331,500.
It was further amended on September 27, 1999 to increase the commitment amount
to $360,000 and to add WestDeutsche Landesbank Girozentrale, New York Branch, as
an additional Administrative Agent. On October 26, 2000, the amount was
increased to $500,000 and Bayerische Landesbank, New York Branch, became an
additional Administrative Agent.
The current agreement carries an effective interest rate based on
commercial paper, which was approximately 6.59% at December 31, 2000, and
matures on October 25, 2001. At December 31, 2000 and 1999, $445,300 and
$335,000 had been received pursuant to such sales, respectively; these amounts
are reflected as reductions to accounts receivable. Under the terms of the
agreement, new interests in accounts receivable are sold as collections reduce
previously sold accounts receivable. The costs related to such sales are
expensed as incurred and recorded as interest expense and related financing
costs. There were no gains or losses on these transactions.
F-105
305
FRESENIUS MEDICAL CARE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 6. DEBT
Long-term debt to outside parties consists of:
<Table>
<Caption>
DECEMBER 31,
--------------------
2000 1999
-------- --------
NMC Credit Facility.................................... $732,500 $738,150
Note payable for settlement of investigation........... 85,920 --
Other.................................................. 7,120 17,454
-------- --------
825,540 755,604
Less amounts classified as current..................... 237,014 140,539
-------- --------
$588,526 $615,065
======== ========
</Table>
In September 1996, NMC entered into a credit agreement with a group of
banks (collectively, the "Lenders"), pursuant to which the Lenders made
available to NMC and certain specified subsidiaries and affiliates an aggregate
of $2,000,000 through two credit facilities (collectively, the "NMC Credit
Facility"). The NMC Credit Facility, as amended, includes: (i) a revolving
credit facility of up to $1,000,000 for up to seven years (of which up to
$250,000 is available for letters of credit, up to $450,000 is available for
borrowings in certain non-U.S. currencies, up to $50,000 is available as swing
lines in U.S. dollars and up to $20,000 is available as swing lines in certain
non-U.S. currencies) ("Facility 1") and (ii) a term loan facility of $1,000,000
for up to seven years ("Facility 2").
Loans under the NMC Credit Facility bear interest at one of the following
rates, at either (i) LIBOR plus an applicable margin or (ii) a base rate equal
to the sum of (1) the higher from time to time of (A) the prime rate of Bank of
America, N.A. or (B) the federal funds rate plus 0.50% and (2) an applicable
margin. A commitment fee is payable to the Lenders equal to a percentage per
annum applied against the unused portion of the NMC Credit Facility.
In addition to scheduled quarterly principal payments under Facility 2, the
NMC Credit Facility will be reduced by certain portions of the net cash proceeds
from certain sales of assets, sales of accounts receivable and the issuance of
subordinated debt and equity securities. All borrowings outstanding under
Facility 1 are due and payable at the end of the seventh year. Prepayments are
permitted at any time without penalty, except in certain defined periods. The
NMC Credit Agreement contains certain affirmative and negative covenants with
respect to the Company, NMC and its subsidiaries, customary for this type of
agreement. In December 1999, the Company successfully amended certain covenants
including, among other things, financial ratios contained in its NMC Credit
Facility that would have been affected by the impact of the settlement related
to the U.S. Government investigation. At December 31, 2000, the Company was in
compliance with all such covenants.
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 2000 and 1999 to $1,577,500 and $1,716,250, respectively.
At December 31, 2000 and 1999 the Company had available $698,000 and $777,000,
respectively, of additional borrowing capacity under the NMC Credit Facility
including $103,000 and $49,000 respectively, available for additional letters of
credit.
F-106
306
FRESENIUS MEDICAL CARE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
Borrowings from affiliates consists of:
<Table>
<Caption>
DECEMBER 31,
------------------------
2000 1999
---------- ----------
Fresenius Medical Care AG, borrowings at interest
rates approximating 7.75%......................... $ 18,850 $ 42,949
Fresenius AG, borrowings at interest rates
approximating 7.34 - 7.38%........................ 209,000 330,000
Fresenius Medical Care Trust Finance S.a.r.l.,
borrowings at interest rates of 8.43% and 9.25%... 786,524 786,524
Fresenius Acquisition, LLC at interest rates
approximating 6.87%............................... 113,121 --
Other............................................... 1,013 1,982
---------- ----------
1,128,508 1,161,455
Less amounts classified as current.................. 341,643 372,949
---------- ----------
Total............................................... $ 786,865 $ 788,506
========== ==========
</Table>
Scheduled maturities of long-term debt and borrowings from affiliates are
as follows:
<Table>
2001..................................................... $ 578,657
2002..................................................... 151,985
2003..................................................... 150,000
2004..................................................... 282,500
2005..................................................... 0
2006 and thereafter...................................... 790,865
----------
Total.................................................... $1,954,007
==========
</Table>
NOTE 7. SPECIAL CHARGE FOR SETTLEMENT OF INVESTIGATION AND RELATED COSTS
On January 18, 2000, the Company, NMC and certain affiliated companies
executed definitive agreements (the "Settlement Agreements") with the United
States Government (the "Government") to settle (i) matters concerning violations
of federal laws and (ii) NMC's claims with respect to outstanding Medicare
receivables for nutrition therapy (collectively, the "Settlement").
Under the Settlement with the Government, the Company entered into a note
payable for the settlement payment obligations to the Government. Interest on
installment payments to the Government will accrue at 6.3% on $51.2 million of
the obligation and at 7.5% annually on the balance, until paid in full.
In February 2000, the Company made initial payments to the Government
totaling $286.4 million. The remaining obligations is payable in six quarterly
installments which began in April 2000 and will end in July 2001. The first four
quarterly installments were made in the amount of $35.4 million including
interest at 7.5%. The first three of these four payments were made in April,
July, and October 2000 to the Government totaling $106.2 million including
interest. The fourth installment was made in January 2001. The remaining two
installments of $27.8 million including interest at 6.3% will be made in April
and July 2001, respectively.
F-107
307
FRESENIUS MEDICAL CARE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
In addition, the Company received approximately $59.2 million from the
Government related to the Company's claims for outstanding Medicare receivables.
The Company received $54.0 million in 2000 and a final payment of $5.2 million
in February 2001.
NOTE 8. DISCONTINUED OPERATIONS
Effective June 1, 1998, the Company classified its non-renal diagnostic
services business ("Non-Renal Diagnostic Services") and homecare business
("Homecare") as discontinued operations. The Company disposed of its Non-Renal
Diagnostic Services division and its Homecare division on June 26, 1998 and July
29, 1998, respectively. In connection with the sale of Homecare, the Company
retained the assets and the operations associated with the delivery of IDPN. The
Company recorded a net after tax loss of $97 million in 1998 on the sale of
these businesses. The net loss on the disposal of these businesses and their
results of operations have been accounted for as discontinued operations.
IDPN receivables of $153.5 million, that had been included in net assets of
discontinued operations were resolved as part of the Settlement Agreements with
the Government as part of the OIG Investigation. As a result, a $94.3 million
write-off was taken against these receivables. The remaining receivables were
reclassified to other current and non-current IDPN receivables on the balance
sheet. The Company has collected approximately $54.0 million from the
Government, and the remaining portion will be collected on February 2001.
Operating results of discontinued operations are presented below:
DISCONTINUED OPERATIONS -- RESULTS OF OPERATIONS
The revenues and results of operations of the discontinued operations of
Non Renal Diagnostic Services and Homecare divisions were as follows:
<Table>
<Caption>
TWELVE MONTHS ENDED DECEMBER 31,
--------------------------------
2000 1999 1998
-------- -------- --------
NET REVENUES....................................... $ -- $ -- $120,940
-------- -------- --------
Loss from operations before income tax benefit..... -- -- (14,212)
Income tax benefit................................. -- -- (5,543)
-------- -------- --------
Loss from operations............................... -- -- (8,669)
-------- -------- --------
Loss on disposal before income tax benefit......... -- -- (140,000)
Income tax benefit................................. -- -- (42,772)
-------- -------- --------
Loss on disposal................................... -- -- (97,228)
-------- -------- --------
Loss from discontinued operations.................. -- -- (105,897)
======== ======== ========
</Table>
NOTE 9. INCOME TAXES
Income (loss) from continuing operations before income taxes are as
follows:
<Table>
<Caption>
TWELVE MONTHS ENDED DECEMBER 31,
---------------------------------
2000 1999 1998
-------- --------- --------
Domestic.......................................... $201,305 $(410,034) $126,347
Foreign........................................... 2,266 1,970 (63)
-------- --------- --------
Total income (loss)..................... $203,571 $(408,064) $126,284
======== ========= ========
</Table>
F-108
308
FRESENIUS MEDICAL CARE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
The provision (benefit) for income taxes was as follows:
<Table>
<Caption>
TWELVE MONTHS ENDED DECEMBER 31,
---------------------------------
2000 1999 1998
-------- --------- --------
Current tax expense Federal.......................... $ 2,616 $ 1,545 $44,777
State.............................................. 10,195 9,916 12,406
Foreign............................................ 610 626 530
------- -------- -------
Total current.............................. 13,421 12,087 57,713
Deferred tax (benefit) expense Federal............... 79,858 (87,926) 14,642
State.............................................. 4,712 (4,981) 2,092
Foreign............................................ 330 (217) --
------- -------- -------
Total deferred tax (benefit)............... 84,900 (93,124) 16,734
------- -------- -------
Total provision (benefit).................. $98,321 $(81,037) $74,447
======= ======== =======
</Table>
Deferred tax liabilities (assets) are comprised of the following:
<Table>
<Caption>
DECEMBER 31,
----------------------
2000 1999
--------- ---------
Allowance for doubtful accounts...................... $ (22,928) $ (26,345)
Insurance liability.................................. (388) (21,125)
Legal liability...................................... (11,461) (13,109)
Deferred and incentive compensation.................. (8,547) (9,055)
Pension and benefit accruals......................... (19,623) (19,424)
Accrued interest..................................... (47,259) (36,181)
Inventory reserves................................... (6,099) (5,236)
Accrued expenses..................................... (7,033) (13,643)
Other temporary differences.......................... (4,392) (4,653)
Government settlement................................ (5,302) (92,469)
Loss carry forwards.................................. (11,222) (5,301)
--------- ---------
Gross deferred tax assets.......................... (144,254) (246,541)
Deferred tax assets valuation........................ 2,622 5,029
--------- ---------
Deferred tax assets................................ (141,632) (241,512)
--------- ---------
Depreciation and amortization........................ 140,864 156,113
Other temporary differences.......................... 524 255
--------- ---------
Gross deferred tax liabilities..................... 141,388 156,368
--------- ---------
Net deferred tax (asset) liabilities............... $ (244) $ (85,144)
========= =========
</Table>
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FRESENIUS MEDICAL CARE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
The provision (benefit) for income taxes for the twelve months ended
December 31, 2000, 1999, and 1998 differed from the amount of income taxes
determined by applying the applicable statutory federal income tax rate to
pretax earnings as a result of the following differences:
<Table>
<Caption>
TWELVE MONTHS ENDED DECEMBER 31,
---------------------------------
2000 1999 1998
------ ------- ------
Statutory federal tax rate (benefit)..................... 35.0% (35.0)% 35.0%
State income taxes, net of federal tax benefit........... 4.7 0.8 7.5
Amortization of goodwill................................. 10.2 5.1 16.6
Government Settlement.................................... (2.3) 8.7 --
Foreign losses and taxes................................. 0.6 (0.1) 0.4
Other.................................................... 0.1 0.6 (0.6)
---- ----- ----
Effective tax rate (benefit)............................. 48.3% (19.9)% 58.9%
==== ===== ====
</Table>
The net (decrease) increase in the valuation allowance for deferred tax
assets was $(2,407), $(311) and $1,972 for the twelve months ended December 31,
2000, 1999, and 1998, respectively. It is the Company's expectation that it is
more likely than not to generate future taxable income to utilize its net
deferred tax asset. The changes for all three years relate to activities
incurred by foreign subsidiaries.
At December 31, 2000, there were approximately $6,750 of foreign net
operating losses, the majority of which expire within seven years. The Company
also has $21,500 of Federal net operating losses which will begin to expire in
the year 2018.
Provision has not been made for additional federal, state, or foreign taxes
on $5,509 of undistributed earnings of foreign subsidiaries. Those earnings have
been, and will continue to be reinvested. The earnings could be subject to
additional tax if they were remitted as dividends, if foreign earnings were
loaned to the Company or a U.S. affiliate or if the Company should sell its
stock in the subsidiaries. The Company estimates that the distribution of these
earnings would result in $ 2,166 of additional foreign withholding and federal
income taxes.
NOTE 10. PROPERTIES AND EQUIPMENT
<Table>
<Caption>
DECEMBER 31,
----------------------
2000 1999
--------- ---------
Land and improvements................................ $ 5,135 $ 5,205
Buildings............................................ 63,937 68,812
Capitalized lease property........................... 3,312 6,668
Leasehold improvements............................... 235,096 201,405
Equipment and furniture.............................. 403,701 363,244
Construction in progress............................. 38,176 25,028
--------- ---------
749,357 670,362
Accumulated depreciation and amortization............ (292,421) (241,569)
--------- ---------
Properties and equipment, net........................ $ 456,936 $ 428,793
========= =========
</Table>
Depreciation expense relating to properties and equipment amounted to
$80,034, $80,803 and $81,683 for the years ended December 31, 2000, 1999 and
1998, respectively.
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FRESENIUS MEDICAL CARE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
Included in properties and equipment as of December 31, 2000, and 1999 were
$26,816 and $25,355, respectively, of peritoneal dialysis cycler machines which
the Company leases to customers with end-stage renal disease on a month-to-month
basis. Rental income for the peritoneal dialysis cycler machines was $12,472,
$8,762, and $7,679 for the twelve months ended December 31, 2000, 1999 and 1998,
respectively.
LEASES
In September 2000, the Company entered into an amended operating lease
arrangement with a bank that covers approximately $65,165 of equipment in its
dialyzer manufacturing facility in Ogden, Utah. The agreement has a basic term
expiration date of January 1, 2010, renewal options and a purchase option at the
greater of 20% of the original cost or the fair market value.
Future minimum payments under noncancelable leases (principally for clinics
and offices) as of December 31, 2000 are as follows:
<Table>
<Caption>
OPERATING LEASES CAPITAL LEASES TOTAL
---------------- -------------- --------
2001........................................ $136,936 $ 342 $137,278
2002........................................ 117,394 300 117,694
2003........................................ 104,414 284 104,698
2004........................................ 130,577 230 130,807
2005........................................ 55,153 292 55,445
2006 and beyond............................. 131,552 -- 131,552
-------- ------ --------
Total minimum payments............ $676,026 $1,448 $677,474
======== ========
Less interest and operating costs........... 323
------
Present value of minimum lease Payments
($215 payable in 2001).................... $1,125
------
</Table>
Rental expense for operating leases was $157,335, $132,248 and $103,838 for
the years ended December 31, 2000, 1999 and 1998, respectively. Amortization of
properties under capital leases amounted to $369, $852, and $968 for the years
ended December 31, 2000, 1999 and 1998, respectively.
Lease agreements frequently include renewal options and require that the
Company pay for utilities, taxes, insurance and maintenance expenses. Options to
purchase are also included in some lease agreements, particularly capital
leases.
NOTE 11. MANDATORILY REDEEMABLE PREFERRED SECURITIES
During the fourth quarter of 2000, a wholly-owned subsidiary of the Company
issued to NMC 1,000 shares of Series A Preferred Stock and 1,700 shares of
Series C Preferred Stock that were then transferred to FMC for proceeds of
$113,500 and $192,000, respectively ("Redeemable Preferred Securities"). The
Redeemable Preferred Securities are identical in substance except that the
Series A shares rank prior to the Series C shares both as to dividends and
liquidation, dissolution or winding-up of the subsidiary.
The Redeemable Preferred Securities have a par value of $.01 per share. The
holders of the securities are entitled to receive dividends in amount of dollars
per share equal to approximately 8% of the share issuance price. The dividends
will be declared and paid in cash at least annually.
Upon liquidation or dissolution or winding up of the subsidiary, the
holders of the Redeemable Preferred Securities are entitled to an amount equal
to the liquidation preference for each share of stock plus an amount equal to
all accrued and unpaid dividends thereon through the date of distribution. The
F-111
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FRESENIUS MEDICAL CARE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
liquidation preference is the sum of the issuance price plus, for each year or
portion thereof an amount equal to one-half of one percent of the issue price,
not to exceed 5%.
The Redeemable Preferred Securities will be sold to the Company in two
years for an amount equal to Euros 341,385 plus any accrued and unpaid
dividends. Accordingly, the mandatorily redeemable preferred securities are
deemed to Euro liability and the risk of foreign currency fluctuations are
hedged through forward currency contracts.
The holders of the Redeemable Preferred Securities have the participation
rights of the holders of all other classes of capital stock of the subsidiary.
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.
<Table>
<Caption>
TWELVE MONTHS ENDED DECEMBER 31,
--------------------------------
2000 1999 1998
-------- -------- --------
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year.................... $ 87,737 $ 87,464 $ 72,025
Service Cost............................................... 9,987 8,212 7,416
Interest Cost.............................................. 6,713 5,966 5,217
Amendments................................................. -- (5) --
Actuarial (gain)/loss...................................... 3,752 (12,496) 5,810
Divestures................................................. -- -- (1,717)
Benefits Paid.............................................. (2,748) (1,404) (1,287)
-------- -------- --------
Benefit obligation at end of year.......................... $105,441 $ 87,737 $ 87,464
-------- -------- --------
CHANGE ON PLAN ASSETS
Fair value of plan assets at beginning of year............. 86,794 77,019 65,088
Actual return on plan assets............................... (2,098) 11,179 13,218
Employee contribution...................................... -- -- --
Benefits paid.............................................. (2,748) (1,404) (1,287)
-------- -------- --------
Fair value of plan assets at end of year................... $ 81,948 $ 86,794 $ 77,019
-------- -------- --------
Funded Status.............................................. (23,493) (942) (10,444)
Unrecognized net (gain)/loss............................... (14,367) (30,993) (15,239)
Unrecognized prior service cost............................ (4) (4) --
-------- -------- --------
Accrued benefit costs...................................... $(37,864) $(31,939) $(25,683)
-------- -------- --------
WEIGHTED -- AVERAGE ASSUMPTIONS AS OF DECEMBER 31,
Discount rate.............................................. 7.50% 7.50% 6.75%
Expected return of plan assets............................. 9.70 9.70 9.70
Rate of compensation increase.............................. 4.50 4.50 4.50
</Table>
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FRESENIUS MEDICAL CARE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
<Table>
<Caption>
TWELVE MONTHS ENDED DECEMBER 31,
--------------------------------
2000 1999 1998
-------- -------- --------
COMPONENTS OF NET PERIOD BENEFIT COST
Service Cost............................................... $ 9,987 $ 8,212 $ 7,416
Interest Cost.............................................. 6,713 5,966 5,217
Expected return on plan assets............................. (8,345) (7,401) (6,430)
Amortization of prior service cost......................... (1) (1) --
Recognized net (gain)/loss................................. (2,429) (520) (891)
Curtailment net (gain)..................................... -- -- (1,717)
-------- -------- --------
Net periodic benefit costs................................. $ 5,925 $ 6,256 $ 3,595
-------- -------- --------
</Table>
NMC also sponsors a supplemental executive retirement plan to provide
certain key executives with benefits in excess of normal pension benefits. The
projected benefit obligation was $5,453 and $3,057 at December 31, 2000 and
1999, respectively. Pension expense for this plan, for the twelve months ended
December 31, 2000, 1999 and 1998 was $983, $402 and $374, respectively.
NMC does not provide any postretirement benefits to its employees other
than those provided under its pension plan and supplemental executive retirement
plan.
DEFINED CONTRIBUTION PLANS
The Company's employees are eligible to join 401(k) Savings Plan once they
have achieved a minimum of 90 days of service and if they have more than 900
hours of service before their one year anniversary date. Under the provisions of
the 401(k) plan, employees are allowed to contribute up to 16% of their
salaries. The Company contributes 50% of their savings up to 6% of saved pay
after one year. The Company's total contributions for the year ended December
31, 2000, 1999 and 1998 was $8,786, $7,298 and $7,617, respectively.
NOTE 13. EQUITY
PREFERRED STOCK
At December 31, 2000 and 1999, the components of the Company's preferred
stocks as presented in the Consolidated Balance Sheet and the Consolidated
Statement of Changes in Equity are as follows:
PREFERRED STOCKS, $100 PAR VALUE
<Table>
-- 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
-------
</Table>
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FRESENIUS MEDICAL CARE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
PREFERRED STOCKS, $.10 PAR VALUE
<Table>
- -- Noncumulative Class D(3); 100,000,000 shares authorized;
89,062,316 outstanding................................... 8,906
-------
Total Preferred................................... $16,318
=======
</Table>
- ---------------
(1) 160 votes per share
(2) 16 votes per share
(3) 1/10 vote per share
STOCK OPTIONS
In 1996, FMC adopted a stock incentive plan (the "FMC Plan") under which
the Company's key management and executive employees are eligible. Under the FMC
Plan, eligible employees will have the right to acquire Preference Shares of
FMC. Options granted under the FMC Plan will be evidenced by a non-transferable
convertible bond and corresponding non-recourse loan to the employee, secured
solely by the bond with which it was made. The bonds mature in ten years and are
generally fully convertible after three to five years. Each convertible bond,
which is DM denominated, entitles the holder thereof to convert the bond in
Preference Shares equal to the face amount of the bond divided by the Preference
Share's nominal value. During 1997, FMC granted 2,697,438 options (of which
216,663 were forfeited) to the Company, under the FMC Plan. At December 31, 1997
no options were exercisable. During 2000, 1999 and 1998 a total of 75,833,
30,065, and, 2,169,711 awards were cancelled or forfeited resulting in awards
outstanding of 205,166 for 2000, 280,999 for 1999 and 311,064 in 1998. If the
205,166 awards outstanding at December 31, 2000 were exercised, a total of
approximately 68.389 non-voting preferred shares would be issued. At December
31, 2000, 205,166 options were exercisable under the FMC plan.
During 1998, the FMC adopted a new stock incentive plan ("FMC 98 Plan")
under which the Company's key management and executive employees are eligible.
Under the FMC 98 Plan, eligible employees will have the right to acquire
Preference Shares of FMC. Options granted under the FMC 98 Plan will be
evidenced by a non-transferable convertible bond and a corresponding
non-recourse loan to the employee, secured solely by the bond with which it was
made. Each convertible bond, which will be DM denominated, will entitle the
holder thereof to convert the bond in Preference Shares equal to the face amount
of the bond divided by the Preference Share's nominal value. During 1998, FMC
awarded 1,024,083 options and exercisable upon vesting for 1,024,083 Preference
Shares. During 1999, FMC granted 571,940 Preference Shares. During 1999, options
for 140,168 Preference Shares were forfeited or cancelled under the FMC 98 Plan.
During 2000, FMC granted 653,325 Preference Shares and 303,123 Preference Shares
were forfeited or cancelled. In addition, 10,060 stock options from the FMC 98
Plan were exercised with 10,060 Preference Shares being issued. At December 31,
2000, there were 568,887 Preference Shares for which grants could be issued.
Grants for 660,270 Preference Shares were exercisable under the FMC 98 Plan at
December 31, 2000.
NOTE 14. FINANCIAL INSTRUMENTS
MARKET RISK
The Company is exposed to market risks due to changes in interest rates and
foreign currency rates. The Company uses derivative financial instruments,
including interest rate swaps and foreign exchange contracts, as part of its
risk management strategy. These instruments are used as a means of hedging
exposure to interest rate and foreign currency fluctuations in connection with
firm commitments and debt obligations. The Company does not hold or issue
derivative instruments for trading or speculative purposes.
F-114
314
FRESENIUS MEDICAL CARE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
The mark-to-market valuations of the financial instruments and of
associated underlying exposures are closely monitored at all times. The Company
uses portfolio sensitivities and stress tests to monitor risk. Overall financial
strategies and the effects of using derivatives are reviewed periodically.
FOREIGN CURRENCY CONTRACTS
The Company uses foreign exchange contracts as a hedge against foreign
exchange risks associated with the settlement of foreign currency denominated
payables and firm commitments. At December 31, 2000 and 1999, the Company had
outstanding foreign currency contracts for the purchase of Euros ("EUR")
totaling $450,856 and $41,925, respectively. The contracts outstanding at
December 31, 2000 include forward contracts for delivery of EUR between January
2001 and November 2003, at rates ranging from $0.8489 to $0.9374 per EUR.
The fair value of forward currency contracts are the estimated amounts that
the Company would receive or pay to terminate the agreement at the reporting
date, taking into account the current exchange rates and the current
creditworthiness of the counterparties. At December 31, 2000 and 1999, the
Company would have received approximately $20,400 and $2,800, respectively, to
terminate the contracts.
INTEREST RATE AGREEMENTS
At December 31, 2000 and 1999, the Company had interest rate swaps and
option agreements outstanding with various commercial banks for notional amounts
totaling $1,050,000 and $1,600,000, respectively. All of these agreements were
entered into for other than trading purposes. In the year 2000, the Company
purchased new interest rate swaps with $450,000 notional amount and closed out
its option agreements (cap and floor with notional amount of $150,000). Hedges
totalling $850,000 expired on January 4, 2000. The rest of the contracts mature
at various dates between November 2003 and November 2007.
For a notional amount of $1,050,000, the interest rate swaps effectively
change the Company's interest rate exposure on its variable-rate loans under the
NMC Credit Facility (drawn as of December 31, 2000: $732,500), and drawdowns
under the receivables financing facility (drawn as of December 31, 2000:
$445,300) to fixed rates of interest ranging between 6.05% and 6.611%. Under the
NMC Credit Facility, the Company agreed to maintain at least $500,000 of
interest rate protection. The Company closed out its option agreements (cap and
floor with notional amount of $150,000) in November 2000 and is amortizing the
loss over the original term of the agreements.
The fair value of the interest rate swaps and options is the estimated
amount that the Company would receive or pay to terminate the agreements. The
fair value of these agreements at December 31, 2000 and 1999 would require the
Company to pay approximately $24,600 and receive approximately $9,200,
respectively. These estimates are subjective in nature and involve uncertainties
and matters of significant judgement and therefore cannot be determined with
precision. Changes in assumptions significantly affect the estimates.
CREDIT RISK
The Company is exposed to credit risk to the extent of potential
nonperformance by counterparties on financial instruments. As of December 31,
2000, the Company's credit exposure was insignificant and limited to the fair
value stated above; the Company believes the risk of incurring losses due to
credit risk is remote.
F-115
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FRESENIUS MEDICAL CARE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
FAIR VALUE OF OTHER FINANCIAL INSTRUMENTS
At December 31, 2000 and 1999, the carrying value of cash, cash
equivalents, accounts receivable, prepaid expenses, accounts payable, accrued
expenses, short-term borrowings, short-term borrowings and mandatorily
redeemable preferred securities with related parties and current liabilities
approximated their fair values, based on the short-term maturities of these
instruments.
In addition, the Company is a "Subsidiary Guarantor" along with its parent
company, FMC, for the issuance of Trust Preferred Securities on the books of FMC
at a carrying value of $952,727 and $964,103, at December 31, 2000 and 1999
respectively. FMC and Subsidiary Guarantors guarantee the Trust Preferred
Securities through a series of undertakings. At December 31, 2000 and 1999, the
carrying value of these Trust Preferred Securities exceeded their fair value by
$54,900 and $20,059, respectively. The fair value of these Trust Preferred
Securities is based upon market quotes.
NOTE 15. RELATED PARTY TRANSACTIONS AND ALLOCATIONS
SERVICES
Related party transactions pertaining to services performed and products
purchased/sold between affiliates are recorded as net accounts payable to
affiliates on the balance sheet. At December 31, 2000 and 1999, the Company had
net accounts payable of $6,317 and $12,361, respectively.
BORROWINGS WITH AFFILIATES
The Company has various outstanding borrowings with FMC and affiliates. The
funds were used for general corporate purposes. The loans are due at various
maturities. See Note 6 -- "Debt, -- Borrowings from Affiliates" for details and
See Note 11 -- "Mandatorily Redeemable Preferred Securities".
NOTE 16. COMMITMENTS AND CONTINGENCIES
LEGAL PROCEEDINGS
COMMERCIAL INSURER LITIGATION
In 1997, the Company, NMC, and certain named NMC subsidiaries, were served
with a civil complaint filed by Aetna Life Insurance Company in the U.S.
District Court for the Southern District of New York. The lawsuit alleges
inappropriate billing practices for nutritional therapy, diagnostic and clinical
laboratory tests and misrepresentations. In April 1999, Aetna amended its
complaint to include its affiliate, Aetna U.S. Healthcare, Inc., as an
additional plaintiff, and to make certain other limited changes in its pleading.
The amended complaint seeks unspecified damages and costs. In February 2000, the
Company was served with a similar complaint filed by Connecticut General Life
Insurance Company, Equitable Life Assurance Society for the United States, Cigna
Employee Benefits Services, Inc. and Guardian Life Insurance Company of America,
Inc. (Connecticut General Life Insurance Company et al v. National Medical Care
et al, 00-Civ-0932) seeking unspecified damages and costs. However, the Company,
NMC and its subsidiaries believe that there are substantial defenses to the
claims asserted, and intend to vigorously defend both lawsuits. Other private
payors have contacted the Company and may assert that NMC received excess
payment and, similarly, may join either lawsuit or file their own lawsuit
seeking reimbursement and other damages.
The Company has filed counterclaims against the plaintiffs in these matters
based on inappropriate claim denials and delays in claim payments.
F-116
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FRESENIUS MEDICAL CARE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
Although the ultimate outcome on the Company of these proceedings cannot be
predicted at this time, an adverse result could have a material adverse effect
on the Company's business, financial condition and result of operations.
OBRA 93
The Omnibus Budget Reconciliation Act of 1993 affected the payment of
benefits under Medicare and employer health plans for dual-eligible ESRD
patients. In July 1994, the Health Care Financing Administration issued an
instruction to Medicare claims processors to the effect that Medicare benefits
for the patients affected by that act would be subject to a new 18-month
"coordination of benefits" period. This instruction had a positive impact on
NMC's dialysis revenues because, during the 18-month coordination of benefits
period, patients' employer health plans were responsible for payment, which was
generally at rates higher than those provided under Medicare.
In April 1995, the Health Care Financing Administration issued a new
instruction, reversing its original instruction in a manner that would
substantially diminish the positive effect of the original instruction on NMC's
dialysis business. The Health Care Financing Administration further proposed
that its new instruction be effective retroactive to August 1993, the effective
date of the Omnibus Budget Reconciliation Act of 1993.
NMC ceased to recognize the incremental revenue realized under the original
instruction as of July 1, 1995, but it continued to bill employer health plans
as primary payors for patients affected by the Omnibus Budget Reconciliation Act
of 1993 through December 31, 1995. As of January 1, 1996, NMC commenced billing
Medicare as primary payor for dual eligible ESRD patients affected by the act,
and then began to re-bill in compliance with the revised policy for services
rendered between April 24 and December 31, 1995.
On May 5, 1995, NMC filed a complaint in the U.S. District Court for the
District of Columbia (National Medical Care, Inc. and Bio-Medical Applications
of Colorado, Inc. d/b/a Northern Colorado Kidney Center v. Shalala, C.A.
No.95-0860 (WBB) seeking to preclude the Health Care Financing Administration
from retroactively enforcing its April 24, 1995 implementation of the Omnibus
Budget Reconciliation Act of 1993 provision relating to the coordination of
benefits for dual eligible ESRD patients. On May 9, 1995, NMC moved for a
preliminary injunction to preclude the Health Care Financing Administration from
enforcing its new policy retroactively, that is, to billing for services
provided between August 10, 1993 and April 23, 1995. On June 6, 1995, the court
granted NMC's request for a preliminary injunction and in December of 1996, NMC
moved for partial summary judgment seeking a declaration from the Court that the
Health Care Financing Administration's retroactive application of the April 1995
rule was legally invalid. The Health Care Financing Administration cross-moved
for summary judgment on the grounds that the April 1995 rule was validly applied
prospectively. In January 1998, the court granted NMC's motion for partial
summary judgment and entered a declaratory judgment in favor of NMC, holding the
Health Care Financing Administration's retroactive application of the April 1995
rule legally invalid. Based on its finding, the Court also permanently enjoined
the Health Care Financing Administration from enforcing and applying the April
1995 rule retroactively against NMC. The Court took no action on the Health Care
Financing Administration's motion for summary judgment pending completion of the
outstanding discovery. On October 5, 1998, NMC filed its own motion for summary
judgment requesting that the Court declare the Health Care Financing
Administration's prospective application of the April 1995 rule invalid and
permanently enjoin Health Care Financing Administration from prospectively
enforcing and applying the April 1995 rule. The Court has not yet ruled on the
parties' motions. The Health Care Financing Administration elected not to appeal
the Court's June 1995 and January 1998 orders. The Health Care Financing
Administration may, however, appeal all rulings at the
F-117
317
FRESENIUS MEDICAL CARE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
conclusion of the litigation. If the Health Care Financing Administration should
successfully appeal so that the revised interpretation would be applied
retroactively, NMC may be required to refund the payment received from employer
health plans for services provided after August 10, 1993 under the Health Care
Financing Administration's original implementation, and to re-bill Medicare for
the same services, which would result in a loss to NMC of approximately $120
million attributable to all periods prior to December 31, 1995. Also, in this
event, the Company's business, financial condition and results of operations
would be materially adversely affected.
In July, 2000, NMC filed a complaint in the U.S. District Court for the
Eastern District of Virginia (National Medical Care, Inc. and Bio-Medical
Applications of Virginia, Inc. v. Aetna Life Insurance, Co., Inc. Aetna U.S.
Healthcare, Inc. and John Does 1-10) seeking recovery against Aetna U.S.
Healthcare and health plans administered by Aetna U.S. Healthcare for claims
related to primary payor liability for dual eligible ESRD patients under the
Omnibus Budget Reconciliation Act of 1993. On January 16, 2001, the Court stayed
the action pending resolution of the District of Columbia Court action.
OTHER LITIGATION AND POTENTIAL EXPOSURES
From time to time, the Company is a party to or may be threatened with
other litigation arising in the ordinary course of its business. Management
regularly analyzes current information including, as applicable, the Company's
defenses and insurance coverage and, as necessary, provides accruals for
probable liabilities for the eventual disposition of these matters. The ultimate
outcome of these matters is not expected to materially affect the Company's
financial position, results of operations or cash flows.
The Company, like other health care providers, conducts its operations
under intense government regulation and scrutiny. The Company must comply with
regulations which relate to or govern the safety and efficacy of medical
products and supplies, the operation of manufacturing facilities, laboratories
and dialysis clinics, and environmental and occupational health and safety. The
Company must also comply with the U.S. anti-kickback statute, the False Claims
Act, the Stark Law, and other federal and state fraud and abuse laws. Applicable
laws or regulations may be amended, or enforcement agencies or courts may make
interpretations that differ from the Company's or the manner in which the
Company conduct its business. In the U.S., enforcement has become a high
priority for the federal government and some states. In addition, the provisions
of the False Claims Act authorizing payment of a portion of any recovery to the
party bringing the suit encourage private plaintiffs to commence "whistle
blower" actions. By virtue of this regulatory environment, as well as our
corporate integrity agreement with the government, the Company expects that its
business activities and practices will continue to be subject to extensive
review by regulatory authorities and private parties, and continuing inquiries,
claims and litigation relating to its compliance with applicable laws and
regulations. The Company may not always be aware that an inquiry or action has
begun, particularly in the case of "whistle blower" actions, which are initially
filed under court seal.
The Company operates a large number of facilities throughout the U.S. In
such a decentralized system, it is often difficult to maintain the desired level
of oversight and control over the thousands of individuals employed by many
affiliate companies. The Company relies upon its management structure,
regulatory and legal resources, and the effective operation of its compliance
program to direct, manage and monitor the activities of these employees. On
occasion, the Company may identify instances where employees, deliberately or
inadvertently, have submitted inadequate or false billings. The actions of such
persons may subject the Company and its subsidiaries to liability under the
False Claims Act, among other laws, and the Company cannot predict whether law
enforcement authorities may use such information to initiate further
investigations of the business practices disclosed or any of its other business
activities.
F-118
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FRESENIUS MEDICAL CARE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
Physicians, hospitals and other participants in the health care industry
are also subject to a large number of lawsuits alleging professional negligence,
malpractice, product liability, worker's compensation or related claims, many of
which involve large claims and significant defense costs. The Company has been
subject to these suits due to the nature of its business and the Company expects
that those types of lawsuits may continue. Although the Company maintains
insurance at a level which it believes to be prudent, the Company cannot assure
that the coverage limits will be adequate or that insurance will cover all
asserted claims. A successful claim against the Company or any of its
subsidiaries in excess of insurance coverage could have a material adverse
effect upon the Company and the results of its operations. Any claims,
regardless of their merit or eventual outcome, also may have a material adverse
effect on the Company's reputation and business.
The Company has also had claims asserted against it and has had lawsuits
filed against it relating to businesses that it has acquired or divested. These
claims and suits relate both to operation of the businesses and to the
acquisition and divestiture transactions. The Company has asserted its own
claims, and claims for indemnification. Although the ultimate outcome on the
Company cannot be predicted at this time, an adverse result could have a
material adverse effect upon the Company's business, financial condition, and
results of operations.
CONTINGENT NON-NMC LIABILITIES OF W. R. GRACE & CO. (NOW KNOWN AS FRESENIUS
MEDICAL CARE HOLDINGS, INC.)
The Company was formed as a result of a series of transactions pursuant to
the Agreement and Plan of Reorganization (the "Merger") dated as of February 4,
1996 by and between W.R. Grace & Co. ("Grace") and Fresenius AG. In connection
with the Merger, W.R. Grace & Co.-Conn. ("Grace Chemicals") agreed to indemnify
the Company and NMC against all liabilities of the Company and its successors,
whether relating to events occurring before or after the Merger, other than
liabilities arising from or relating to NMC operations. The Company may be
contingently liable for certain liabilities with respect to pre-Merger matters
that are not related to NMC operations. Grace Chemicals has filed for
reorganization under Chapter 11 of the U.S. Bankruptcy Code. If Grace Chemicals'
indemnity obligation is terminated or limited as a result of this bankruptcy
proceeding, and the Company is held liable for pre-Merger obligations of Grace
Chemicals, the Company's business, financial condition, and results of
operations may be adversely affected.
On September 28, 2000, Mesquita, et al. v. W. R. Grace & Company, et al.
(Sup. Court of Calif., S.F. County, #315465) was filed as a class action by
plaintiffs claiming to be creditors of Grace Chemicals against Grace Chemicals,
the Company, and other defendants, principally alleging that the Merger was a
fraudulent transfer, violated the uniform fraudulent transfer act, and
constituted a conspiracy. An amended complaint was filed subsequently with
substantially similar allegations (Abner et al. v. W. R. Grace & Company, et
al.). The Company has requested indemnification from Grace Chemicals pursuant to
the Merger agreement. If the Merger is determined to have been a fraudulent
transfer, if material damages are proved by the plaintiff, and if the Company is
not able to collect, in whole or in part, on the indemnity, a judgment could
have a material adverse effect on the Company's business, financial condition
and results of operations. The Company believes that no fraudulent transfer or
conspiracy occurred and intends to defend the case vigorously.
Were events to violate the tax-free nature of the Merger, the resulting tax
liability would be the obligation of the Company. Subject to representations by
Grace Chemicals, the Company and Fresenius AG, Grace Chemicals has agreed to
indemnify the Company for such a tax liability. If the Company was not able to
collect on the indemnity, the tax liability would have a material adverse effect
on the Company's business, the financial condition of the Company and the
results of operations.
F-119
319
FRESENIUS MEDICAL CARE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 17. SIGNIFICANT RELATIONS
For the periods presented, approximately 63% of the Company's health care
services net revenues are paid by and subject to regulations under governmental
programs, primarily Medicare and Medicaid. The Company maintains reserves for
losses related to these programs, including uncollectible accounts receivable,
and such losses have been within management's expectations.
Revenues from EPO accounted for approximately 28% of the Dialysis Services
net revenues for the twelve months ended December 31, 2000 and materially
contribute to Dialysis Services operating earnings. EPO is produced by a single
source manufacturer, Amgen, Inc., and any interruption of supply could
materially adversely affect the Company's business and results of operations.
NOTE 18. INDUSTRY SEGMENTS AND INFORMATION ABOUT FOREIGN OPERATIONS
The Company adopted SFAS No. 131, Disclosure about Segments of an
Enterprise and Related Information during the fourth quarter of 1998. SFAS No.
131 established the standards for reporting information about operating
statements in annual financial statements and requires selected information
about operating segments in interim financial reports issued to stockholders.
The Company's reportable segments are Dialysis Services and Dialysis
Products. For purposes of segment reporting, the Dialysis Services Division and
Spectra Renal Management are combined and reported as Dialysis Services. These
divisions are aggregated because of their similar economic classifications.
These include the fact that they are both health care service providers whose
services are provided to a common patient population, and both receive a
significant portion of their net revenue from Medicare and other government and
non-government third party payors. The Dialysis Products segment reflects the
activity of the Dialysis Products Division only.
The accounting policies of the operating segments are the same as those
described in the summary of significant accounting policies. The Company
generally evaluates division operating performance based on Earnings Before
Interest and Taxes (EBIT) but does use Earning Before Interest, Taxes,
Depreciation and Amortization (EBITDA) in some cases.
The table below provides information for the years ended December 31, 2000,
1999 and 1998 pertaining to the Company's operations by geographic area.
<Table>
<Caption>
UNITED STATES ASIA/PACIFIC TOTAL
------------- ------------ ----------
NET REVENUES FOR TWELVE MONTHS ENDED
2000................................................. $3,085,320 $ 3,855 $3,089,175
1999................................................. 2,811,380 3,853 2,815,233
1998................................................. 2,564,785 6,621 2,571,406
OPERATING EARNINGS FOR TWELVE MONTHS ENDED
2000................................................. $ 520,790 $ 30 $ 520,820
1999................................................. 511,847 444 512,291
1998................................................. 446,725 1,013 447,738
ASSETS AT DECEMBER 31,
2000................................................. 2,810,514 10,394 2,820,908
1999................................................. 2,553,763 10,112 2,563,875
1998................................................. 2,461,863 9,584 2,471,447
</Table>
F-120
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FRESENIUS MEDICAL CARE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
The table below provides information for the years ended December 31, 2000,
1999 and 1998 pertaining to the Company's two industry segments.
<Table>
<Caption>
LESS
DIALYSIS DIALYSIS INTERSEGMENT
SERVICES PRODUCTS SALES TOTAL
---------- -------- ------------ ----------
NET REVENUES FOR TWELVE MONTHS ENDED
2000....................................... $2,624,520 $716,757 $252,102 $3,089,175
1999....................................... 2,339,185 706,709 230,661 2,815,233
1998....................................... 2,116,185 662,324 207,103 2,571,406
OPERATING EARNINGS FOR TWELVE MONTHS ENDED
2000....................................... 402,887 117,933 -- 520,820
1999....................................... 386,479 125,812 -- 512,291
1998....................................... 344,208 103,530 -- 447,738
ASSETS AT DECEMBER 31
2000....................................... 2,176,055 644,853 -- 2,820,908
1999....................................... 1,918,612 645,263 -- 2,563,875
1998....................................... 1,815,368 656,079 -- 2,471,447
CAPITAL EXPENDITURES FOR TWELVE MONTHS ENDED
2000....................................... 72,421 28,775 -- 101,196
1999....................................... 59,061 15,519 -- 74,580
1998....................................... 54,821 13,147 -- 67,968
DEPRECIATION AND AMORTIZATION OF PROPERTIES
AND EQUIPMENT FOR TWELVE MONTHS ENDED
2000....................................... 120,985 23,749 -- 144,734
1999....................................... 117,059 21,936 -- 138,995
1998....................................... 114,240 22,175 -- 136,415
</Table>
F-121
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FRESENIUS MEDICAL CARE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
The table below provides the reconciliations of reportable segment
operating earnings, assets, capital expenditures, and depreciation and
amortization to the Company's consolidated totals.
<Table>
<Caption>
TWELVE MONTHS ENDED DECEMBER 31,
--------------------------------------
SEGMENT RECONCILIATION 2000 1999 1998
- ---------------------- ---------- ---------- ----------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME
TAXES AND CUMULATIVE EFFECTIVE OF CHANGE IN
ACCOUNTING FOR START UP COSTS:
Total operating earnings for reportable segments..... $ 520,820 $ 512,291 $ 447,738
Corporate G&A (including foreign exchange)........... (95,860) (113,375) (108,618)
Research and development expense..................... (4,127) (4,065) (4,060)
Net interest expense................................. (187,315) (201,915) (208,776)
Interest expense on settlement of investigation,
net............................................... (29,947) -- --
Special charge for settlement of investigation and
related costs..................................... -- (601,000) --
---------- ---------- ----------
Income (Loss) before income taxes and cumulative
effective of change in accounting for start up
costs............................................. $ 203,571 $ (408,064) $ 126,284
========== ========== ==========
ASSETS:
Total assets for reportable segments................. $2,820,908 $2,563,875 $2,471,447
Intangible assets not allocated to segments.......... 1,934,643 2,006,985 2,067,648
Accounts receivable financing agreement.............. (445,300) (335,000) (305,600)
Net assets of discontinued operations and IDPN
accounts receivable............................... 5,189 59,151 151,067
Corporate assets and other........................... 237,918 349,557 228,841
---------- ---------- ----------
Total Assets......................................... $4,553,358 $4,644,568 $4,613,403
========== ========== ==========
CAPITAL EXPENDITURES
Total capital expenditures for reportable segments... $ 101,196 $ 74,580 $ 67,968
Corporate capital expenditures....................... 3,003 6,750 6,685
---------- ---------- ----------
Total Capital Expenditures........................... $ 104,199 $ 81,330 $ 74,653
========== ========== ==========
DEPRECIATION AND AMORTIZATION:
Total depreciation and amortization for reportable
segments.......................................... $ 144,734 $ 138,995 $ 136,415
Corporate depreciation and amortization.............. 78,136 78,957 79,799
---------- ---------- ----------
Total Depreciation and Amortization.................. $ 222,870 $ 217,952 $ 216,214
========== ========== ==========
</Table>
F-122
322
FRESENIUS MEDICAL CARE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 19. QUARTERLY SUMMARY (UNAUDITED)
<Table>
<Caption>
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
-------- -------- -------- --------
</Table>
<Table>
<Caption>
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
----------- ----------- ----------- -----------
1999
Net revenues................................. $672,140 $698,466 $ 711,850 $732,777
Cost of health care services and medical
supplies................................... 450,432 471,548 477,726 480,008
Operating expenses........................... 134,003 129,403 131,995 145,267
Interest expense, net........................ 50,126 52,504 49,524 49,761
Special charge for settlement of
investigations and related costs........... -- -- 590,000 11,000
-------- -------- ---------- --------
Total expenses............................. 634,561 653,455 1,249,245 686,036
-------- -------- ---------- --------
Earnings before income taxes................. 37,579 45,011 (537,395) 46,741
Provision (Benefit) for income taxes......... 19,952 23,607 (150,190) 25,594
-------- -------- ---------- --------
Net income (loss)............................ $ 17,627 $ 21,404 $ (387,205) $ 21,147
======== ======== ========== ========
Basic and fully dilutive earnings per
share...................................... $ 0.19 $ 0.24 $ (4.30) $ 0.23
-------- -------- ---------- --------
</Table>
F-123
323
PRINCIPAL EXECUTIVE OFFICES OF
FRESENIUS MEDICAL CARE AG
Else-Kroner Strasse 1
61352 Bad Homburg
Germany
<Table>
FRESENIUS MEDICAL CARE CAPITAL TRUST IV FRESENIUS MEDICAL CARE CAPITAL TRUST V
95 Hayden Avenue 95 Hayden Avenue
Lexington, Massachusetts 02173 Lexington, Massachusetts 02173
United States of America United States of America
</Table>
LEGAL ADVISORS
TO FRESENIUS MEDICAL CARE AG
<Table>
As to United States Law As to German Law
O'MELVENY & MYERS LLP NORR STIEFENHOFER LUTZ
153 East 53rd Street Victoriaplatz 2
New York, New York 10022 40477 Dusseldorf
United States of America Germany
</Table>
AUDITORS
TO FRESENIUS MEDICAL CARE AG
KPMG DEUTSCHE TREUHAND-GESELLSCHAFT
AKTIENGESELLSCHAFT WIRTSCHAFTSPRUFUNGSGESELLSCHAFT
Marie-Curie-Strasse 30
60439 Frankfurt am Main
Germany
TO FRESENIUS MEDICAL CARE HOLDINGS, INC.
KPMG LLP
99 High Street
Boston, Massachusetts 02110
United States of America
<Table>
TRUST IV PAYING AGENT TRUST V U.S. PAYING AGENT TRUST V EUROPEAN PAYING AGENT AND
STATE STREET BANK AND TRUST STATE STREET BANK AND TRUST REGISTRAR
COMPANY COMPANY Deutsche Bank AG London
Corporate Trust Department Corporate Trust Department Winchester House
225 Asylum Street, 23rd Floor 225 Asylum Street, 23rd Floor 1 Great Winchester Street
Hartford, Connecticut 06103 Hartford, Connecticut 06103 London EC2N 2DB
United States of America United States of America United Kingdom
</Table>
LUXEMBOURG PAYING AGENT AND LISTING AGENT
BANQUE GENERALE DU LUXEMBOURG
127 Avenue Monterey
L.2951 Luxembourg
324
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[FRESENIUS MEDICAL CARE LOGO]
<Table>
ALL TENDERED OLD USD TRUST PREFERRED OFFER TO EXCHANGE ALL OUTSTANDING 7 7/8% TRUST
SECURITIES, EXECUTED LETTERS OF TRANSMITTAL AND PREFERRED SECURITIES
OTHER RELATED DOCUMENTS IN THE USD EXCHANGE
OFFER SHOULD BE DIRECTED TO THE EXCHANGE AGENT (Liquidation Amount $1,000 per
FOR THE USD EXCHANGE OFFER AS FOLLOWS: Trust Preferred Security)
By Mail FOR
State Street Bank and Trust Company 7 7/8% TRUST PREFERRED SECURITIES
Corporate Trust Department
P.O. Box 778 (Liquidation Amount $1,000 per
Boston, MA 02102-0778 Trust Preferred Security)
Attn: Ralph Jones
OF
By Overnight or Hand Delivery
FRESENIUS MEDICAL CARE
State Street Bank and Trust Company CAPITAL TRUST IV
Corporate Trust Department
2 Avenue de Lafayette GUARANTEED ON A SENIOR SUBORDINATED BASIS TO THE
Corporate Trust Window, 5th Floor EXTENT SET FORTH IN THIS PROSPECTUS BY
Boston, MA 02111-1724
Attn: Ralph Jones FRESENIUS MEDICAL CARE AG
By Facsimile
State Street Bank and Trust Company
Attn: Ralph Jones
617-662-1452
To Confirm Receipt: 617-662-1548
* * *
ALL TENDERED OLD EURO TRUST PREFERRED SECURITIES OFFER TO EXCHANGE ALL OUTSTANDING
EXECUTED LETTERS OF TRANSMITTAL AND OTHER RELATED DOCU- 7 3/8% TRUST PREFERRED SECURITIES
MENTS IN THE EURO EXCHANGE OFFER SHOULD BE DIRECTED TO (Liquidation Amount E1,000 per
CLEARSTREAM, LUXEMBOURG AND EUROCLEAR IN ACCORDANCE Trust Preferred Security)
WITH THE USUAL PROCEDURES OF THOSE AGENCIES. QUESTIONS FOR
REGARDING THE EURO EXCHANGE OFFER MAY BE ADDRESSED 7 3/8% TRUST PREFERRED SECURITIES
TO THE EURO EXCHANGE AGENT AS FOLLOWS: (Liquidation Amount E1,000 per
By Mail, Overnight or Hand Delivery or by Facsimile Trust Preferred Security)
Deutsche Bank AG LondonWinchester House OF
1 Great Winchester Street FRESENIUS MEDICAL CARE
London EC2N 2DB England CAPITAL TRUST V
Attn: Corporate Trust and Agency Services GUARANTEED ON A SENIOR SUBORDINATED BASIS TO THE
Fax No.: ++44 (0)207 547-0271 EXTENT SET FORTH IN THIS PROSPECTUS BY
To Confirm Receipt: ++44 (0)207 545-8000 FRESENIUS MEDICAL CARE AG
</Table>
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