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