Document/Exhibit Description Pages Size
1: 10-K Fresenius Medical Care Holdings, Inc. 87 551K
2: EX-4.10 Amendment #8 to the Credit Agreement 8 27K
3: EX-4.11 Amendment #9 to the Credit Agreement 11 41K
4: EX-10.8 Amended & Restated Transfer & Administrative Agmnt 123 377K
5: EX-11 Computation of Per Share Earnings 2± 11K
6: EX-27 Financial Data Schedule 1 6K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM_____ TO_____ .
COMMISSION FILE NUMBER 1-3720
FRESENIUS MEDICAL CARE HOLDINGS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NEW YORK 13-3461988
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
(JURISDICTION OF INCORPORATION
OR ORGANIZATION)
95 HAYDEN AVE., LEXINGTON, MA 02420
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
Registrant's telephone number, including area code: 781-402-9000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Class D Special Dividend Preferred Stock, par value $.10 per share
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No__
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to the
Form 10-K.
State the aggregate market value of the voting stock held by non-affiliates of
the registrant. The aggregate market value shall be computed by reference to the
price at which the stock was sold, or the average bid and asked prices of such
stock, as of a specified date within 60 days prior to the date of filing. (See
definition of affiliate in Rule 405). $11,132,750 March 30, 2000.
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date:
As of March 30, 2000, 90,000,000 shares of common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Registrant's Definitive Information Statement with respect to its 2000 Annual
Meeting of Stockholders, to be filed on or before May 1, 2000. (Part III)
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TABLE OF CONTENTS
[Download Table]
PART I
Item 1. Business ......................................................... 4
Item 2. Properties ....................................................... 26
Item 3. Legal Proceedings ................................................ 27
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 ..... 42
Item 8. Consolidated Financial Statements and Supplementary Data ......... 43
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure ............................................. 43
PART III ................................................................. 43
Item 10. Directors and Executive Officers of the Registrant .............. 43
Item 11. Executive Compensation .......................................... 43
Item 12. Security Ownership of Certain Beneficial Owners and Management .. 43
Item 13. Certain Relationships and Related Transactions .................. 43
PART IV .................................................................. 43
Item 14. Exhibits, Consolidated Financial Statement Schedules, and Reports
on Form 8-K ...................................................... 43
3
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 1999 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., a Delaware corporation
("NMC"); Fresenius USA, Marketing Inc., and Fresenius USA Manufacturing Inc.,
Delaware corporations and Fresenius USA Inc, a Massachusetts corporation
(collectively "Fresenius USA" or "FUSA") and SRC Holding Company, Inc., a
Delaware corporation.
The Company is primarily engaged in (i) providing kidney dialysis
services, clinical laboratory testing and renal diagnostic services, and (ii)
manufacturing and distributing products and equipment for dialysis treatment,
which accounted for 83% and 17% of 1999 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, 1999, the Company
operated 849 outpatient dialysis facilities in the U.S.
(including Puerto Rico), treating approximately 65,700
chronic patients. The company treats approximately 24% of
the dialysis patients in the U.S., and believes its next
largest competitor treats approximately 16% of U.S.
dialysis patients. Additionally, the Company provides
inpatient dialysis 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.
Since 1995, NMC, a subsidiary of the Company and certain of NMC's
subsidiaries had been the subject of an investigation (the "OIG Investigation")
by the Office of Inspector General ("OIG") of the United States Department of
Health and Human Services, the United States Attorney for the District of
Massachusetts (the "U.S. Attorney's Office") and other authorities concerning
possible violations of federal laws, including the anti-kickback status and the
False Claims Act.
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) the matters covered in the
OIG Investigation and (ii) NMC's claim with respect to approximately $153.5
million of outstanding Medicare receivables for nutrition therapy rendered on or
before December 31, 1999 (collectively, the "Settlement"). The Settlement was
approved by the United States District Court for the District of Massachusetts
on February 2, 2000. See "Legal Proceedings - Settlement of the U.S. Government
Investigation", See "Notes to Consolidated Financial Statements - Note 7,
Special Charge for Settlement of Investigation and Related Costs, Note 8-
Discontinued Operations and Note 16 - Commitments and Contingencies - Legal
Proceedings - Settlement of U.S. Government Investigation".
The Company's principal executive office is located at 95 Hayden Avenue,
Lexington, MA 02420-9192. Its telephone number is (781) 402-9000.
4
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 Health Care
Financing Administration ("HCFA") 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 246,000 at December 31, 1998
or at a compound annual rate of 8.6%. The Company attributes the continuing
growth in the number of dialysis patients principally to an increase in general
life expectancy and, thus, the overall aging of the general population, the
shortage of donor organs for kidney transplants 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 13,200 patients received kidney transplants in
the U.S. during 1998. 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 HCFA data, as of December 31, 1998, there were approximately
3,600 Medicare-certified ESRD treatment centers in the U.S. Ownership of these
centers was fragmented. The Company estimates that at that time, the ten largest
multi-facility providers accounted for approximately 1,800 facilities (56% of
facilities) and 136,000 patients (59% of patients). Freestanding facilities
(many privately owned by physicians) and hospital-affiliated facilities were the
sites of treatment for the remaining 23% and 21% of patients, respectively.
There was substantial further consolidation in the market in 1998 leading
the Company to estimate that the top ten multi-center providers accounted for
approximately 157,500 patients, or 64% of the estimated market at December 31,
1998.
According to HCFA, as of December 31, 1998, approximately 88% of dialysis
patients in the U.S. received in-center treatment (virtually all hemodialysis)
and approximately 12% 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 carries away 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 HCFA, as of December 31, 1998, hemodialysis patients
represented 88% 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.
Hemodialysis is the only form of treatment (other than
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transplantation) currently available to patients who have very low residual or
nonexistent renal function and are inadequately dialyzed using peritoneal
dialysis.
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 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 the highest standards of
patient care is a competitive advantage. The Company believes that
NMC's proprietary Patient Statistical Profile ("PSP") database,
which contains clinical and demographic data on approximately 65,700
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.
- Expand Presence in the U.S. Over the past several years, the Company
has significantly expanded its U.S. provider operations through the
acquisition of existing dialysis clinics as well as the opening of
new clinics. In 1999, the Company acquired 15 clinics and opened 57
new clinics. As a result, the Company now has an established
presence in each of its targeted markets in the U.S. Prospectively,
the Company expects to enhance its presence in the U.S. by focusing
its expansion on the acquisition of individual or small groups of
dialysis centers in selected markets, expansion of existing clinics,
and opening of new centers, although the Company will consider large
acquisitions if suitable opportunities become available.
- 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 and diagnostic services, to
both its own clinics and those operated by third parties. The
Company estimates that Spectra Renal Management provides laboratory
services for 37% of the dialysis patients in the United States. The
Company has developed disease state management methodologies 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
6
largest dialysis patient population of any managed care
organization, and has formed Renaissance Health Care as a joint
venture with certain of the Company's nephrologists.
- 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, 1999 Fresenius Medical Care's product revenues were
derived approximately 16% from machine sales and 84% from sales of
disposable products. These disposable products provide FMC with 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 being a technology
leader in both hemodialysis and peritoneal dialysis products.
FMC has a research and development team with approximately 238
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.
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 sections, 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 and renal diagnostic services for
dialysis patients (Company owned and non-Company owned clinics). Such diagnostic
services include electrocardiograms, doppler flow testing, nerve conduction
velocity, and other tests.
The Company's provider business is primarily operated through the Dialysis
Services business unit ("Dialysis Services"). Clinical laboratory testing and
renal diagnostic services are primarily provided by Spectra Renal Management
("SRM")
DIALYSIS SERVICES
As of December 31, 1999, the Company owned or managed 849 dialysis centers
in the U.S. The centers are generally concentrated in areas of high population
density. In 1999, the Company acquired 15 existing centers, developed 57 new
centers and consolidated or sold 5 centers. The number of patients treated at
the Company's centers has increased from approximately 58,627 at December 31,
1998 to approximately 61,700 at December 31, 1999.
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 who
supervises the day-to-day operations of the facility and the
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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.
The Company engages in systematic efforts to measure, maintain and improve
the quality of the services that it delivers at its dialysis centers. Each
center collects and analyzes quality assurance and patient data, which in turn
is regularly reviewed by Dialysis Services and corporate management. At each
center, a quality assurance committee is responsible for reviewing quality of
care reports generated by the Company's PSP system, setting goals for quality
enhancement and monitoring the progress of quality assurance initiatives. The
Company believes that it enjoys a reputation of providing superior quality care
to dialysis patients.
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 2000 to
December 2000 with price guarantees and volume and outcome based discounts.
Other services provided to ESRD patients in the U.S. include the administration
of calcium, iron and hepatitis vaccine and blood transfusions; the provision of
interdialytic perenteral nutrition ("IDPN"), in which nutrients are added to the
patient's blood during hemodialysis; the provision, through SRM, of clinical
laboratory testing; the provision of electrocardiograms; and Doppler flow
testing of the effectiveness of the patient's vascular access for dialysis.
These tests and other ancillary services are provided by specific prescription
of the patient's attending physician.
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 equipment,
regardless of brand, is 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 provide for
payment at negotiated rates that are higher than the Medicare reimbursement
rates for chronic in-center treatments.
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., doctors 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 65,700 dialysis patients), its comprehensive clinical and
administrative systems, manuals and policies, its
8
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 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 1999, the Company completed new acquisitions and
acquisitions of previously managed clinics totaling 15 dialysis facilities in
the U.S. providing care to approximately 1,274 patients. These acquisitions and
agreements expand the Company's presence in selected key areas of the United
States.
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.
[Download Table]
YEAR ENDED DECEMBER 31,
----------------------------------------
1999 1998 1997
------ ------ ------
Medicare ESRD program .... 60.2% 57.0% 64.5%
Private/alternative payors 30.3 33.8 25.8
Medicaid and other
government sources ....... 4.2 4.1 4.6
Hospitals ................ 5.3 5.1 5.1
------ ------ ------
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 diagnostic 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"). Managed care plans have increased their market share
overall, and in the Medicare population in particular. This trend may continue
as a result of the merger and consolidation of providers and payors in the
health care industry, as well as the discussions among members of Congress and
the executive branch regarding ways to increase the number of Medicare and
Medicaid beneficiaries served through managed care plans. The Company estimates
that approximately 12% of Dialysis Services' net revenues for the twelve months
ended December 31, 1999 was attributable to managed care plans.
9
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. HCFA has a pilot evaluation underway for treatment of
Medicare ESRD patients by managed care companies under capitated contracts, with
three organizations. If successful, this pilot program could result in the
elimination of the pre-existing condition requiring ESRD patients to enroll in
managed care organizations. As Medicare HMO enrollments increase and the number
of ESRD patients in managed care plans also increases, managed care plans'
leverage to negotiate lower rates may become greater. In addition, the HMO may
have contracted with another provider, or may have tighter utilization controls
with respect to certain ancillary services typically provided by the Company to
ESRD patients, which could limit the Company's future payments for such
services.
HCFA has initiated the ESRD demonstration projects that are likely to be
conducted over the next three to four years and that will seek to evaluate the
feasibility of "privatizing" the Medicare ESRD program. The Company believes
that the elimination of "pre-existing conditions" exclusions would greatly
facilitate the enrollment of ESRD patients into managed care plans. The
likelihood and timing of this decision is impossible to predict. Should
legislation to implement this change be enacted, the Company believes it would
likely increase the number of patients enrolled in managed care plans, and might
also cause these plans to look closer at outsourcing ESRD care to ESRD companies
such as the Company's joint decrease state management ventures (Optimal Renal
Care and Renaissance Health Care).
The Company 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 50/50 joint venture between the Company and participating
nephrologists throughout the U.S. Optimal Renal Care, LLC is a 50/50 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.
10
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. Until January 1, 1995, Medical Director
compensation typically included a component based on some measure of the
financial performance of the clinics under the supervision of that Medical
Director. See " -- Legal Proceedings --Settlement of U.S. Government
Investigation". Since 1995, the Company has entered into new agreements, or
amended existing agreements, for substantially all of its Medical Directors.
Under the new arrangements, 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 or other employees
or referring physicians who establish their own centers. Furthermore, other
health care providers or product manufactures, some of which have significant
operations or resources, may decide to enter the dialysis business in the
future.
Because in most cases the prices of dialysis services in the U.S. are
directly or indirectly regulated by Medicare, competition for patients is based
primarily on quality and accessibility of service and the ability to obtain
referrals from physicians and hospitals. However, the growth of managed care has
placed greater emphasis on service costs for patients insured by
non-governmental payors. 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.
Competition in the dialysis industry is particularly intense with respect
to the acquisition of existing dialysis centers, which has resulted in an
increase in the cost of such acquisitions, and in enlisting and retaining
qualified physicians to act as Medical Directors.
LABORATORY AND RENAL DIAGNOSTIC SERVICES
The Company provides clinical laboratory testing and renal diagnostic
services through its business unit known as Spectra Renal Management ("SRM").
SRM was created as a result of the acquisition of Spectra Laboratories, Inc.
("Spectra") in June of 1997 and its combination with the Company's existing
laboratory business at that time ("LifeChem") and its renal diagnostic testing
business. 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 oversees the operation of three laboratories, one in New
Jersey operated by Spectra East, Inc. one in Northern California operated by
(Spectra) and one in Illinois. Spectra and Spectra East, Inc. are operated as
separate, indirect subsidiaries of the Company.
In 1999, SRM performed approximately 31 million tests for more than 96,000
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,
particularly nephrologists.
11
The Company's clinical laboratory results have been a critical element in
the development of the Company's proprietary PSP database, which contains
clinical, laboratory and demographic data on approximately 65,700 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. See " -- Legal
Proceedings, Settlement of U.S. Government Investigation".
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. While the main competition is local
hospitals, SRM is competitive based upon the quality and accessibility of the
service.
DIALYSIS PRODUCTS BUSINESS
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, and 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 actual net revenues for 1999, 1998 and 1997, of
the Company's products business related to hemodialysis products, peritoneal
dialysis products and other activities, principally technical service:
[Enlarge/Download Table]
YEAR ENDED DECEMBER 31,
(DOLLARS IN THOUSANDS)
--------------------------------------------------------------------------------------------
1999 1998 1997
-------------------------- ------------------------- --------------------------
Total % of Total % of Total % of
Revenues Total Revenues Total Revenues Total
-------- ----- -------- ----- -------- -----
Hemodialysis Products....... $329,561 67% $296,361 63% $265.066 60%
Peritoneal Dialysis Products 108,145 22 123,389 26 131,830 30
Other ...................... 53,205 11 51,235 11 46,332 10
-------- --- -------- --- -------- ---
Total ........ $490,911 100% $470,985 100% $443,228 100%
======== === ======== === ======== ===
12
HEMODIALYSIS PRODUCTS
The Company believes that Fresenius Medical Care 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. In North America, 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 and cuprophane dialyzers, bloodlines, dialysis solutions
and concentrates, fistula needles, connectors, data management systems, machines
and supplies for the reuse of dialyzers and other similar supplies.
Dialysis Machines. Through Fresenius USA, 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 vendors. Hemodialysis machines manufactured by the Company provide a
unique volumetric dialysate balancing and ultrafiltration control system. This
system, first developed and introduced by Fresenius AG in 1977, provides for the
safe and more efficient use of highly permeable dialyzers. The Company also
provides machine upgrade kits to allow for advanced therapy modes, thus offering
the customer maximum performance with highly permeable polysulfone dialyzers.
The Company's hemodialysis machines are capable of operating with dialyzers
manufactured by all manufacturers, and are compatible with a wide variety of
bloodlines and dialysis concentrates. Fresenius USA has extended the Fresenius
Series 2008 hemodialysis machine for the North American market through the
development of the model 2008H, which combines the reliable hydraulic system of
the Series 2008 with electronic systems developed by Fresenius USA. Dialysis
machines sold by the Company employ the same modular design as those of
Fresenius Medical Care, but are tailored to local markets. Modular design also
permits the Company to offer dialysis centers a broad range of options to meet
specific patient or regional treatment requirements. The display panel can also
be adapted using different modules to meet local language requirements.
Dialyzers. All dialyzers manufactured by the Company use hollow fiber
polysulfone membranes, a synthetic material. The Company believes that the
Fresenius Medical Care Polysulfone(TM) dialyzer is the best-performing
mass-produced dialyzer on the market. Fresenius Medical Care is the leading
worldwide producer of polysulfone dialyzers. While competitors currently sell
polysulfone membranes in the market, Fresenius Medical Care developed and is the
only manufacturer with more than 13 years' experience in applying the technology
required to mass produce polysulfone membranes. The Company believes that
polysulfone has superior performance characteristics compared to other materials
used in dialyzers, including a higher biocompatibility and greater clearing
capacities for uremic toxins. Fresenius Medical Care's Polysulfone(TM) dialyzer
line consists of a complete range of permeability (high, medium and low flux) to
allow tailoring of the dialysis therapy to the individual patient. Fresenius
Medical Care's Polysulfone(TM) dialyzers are also available in an "NR" Series
for acute dialysis.
The Company also sells dialyzer reprocessing and rinse machines
manufactured by Fresenius USA for Seratronics, Inc. ("Seratronics"). These
machines cleanse dialyzers after dialysis, permitting multiple usage for the
same patient before disposal of the dialyzer. The Seratronics machines
facilitate the reuse of disposable dialyzers and, therefore, permit hemodialysis
providers to reduce operating costs. The reuse business of Seratronics is
managed by the Company through Fresenius USA.
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, developed more
recently, 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.
Fresenius USA has developed the Fresenius Data System FDS08(TM) ("FDS08")
computerized treatment monitoring and documentation system. The FDS08 can
automatically monitor and record machine and treatment information from as many
as 32 hemodialysis machines. The FDS08 is a PC-based system which has found many
applications for improving record keeping and increasing staff efficiency. The
FDS08 system has been used to pioneer new therapies such as remote monitoring of
patients during nightly home hemodialysis, which enables a patient to be
dialyzed at home while a staff caregiver monitors the machine performance via a
modem link. Additionally the FDS08 system can be linked to Fresenius USA's
Hypercare(TM) Medical Records System. The Hypercare(TM) Medical Records System
is a medical records system which can record and analyze trends in medical
outcome factors in hemodialysis patients.
13
PERITONEAL DIALYSIS PRODUCTS
The Company offers a full line of products for peritoneal dialysis
patients. Peritoneal dialysis products manufactured by the Company include
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. The Company also
distributes (primarily to its own dialysis centers) other manufacturers'
peritoneal dialysis products.
Peritoneal Dialysis Systems. The Company manufactures a range of
peritoneal dialysis solutions. The Company believes that its peritoneal solution
products with Safe-Lock(R) connection systems offer significant advantages for
CAPD and CCPD home patients, including ease of use and greater protection
against touch contamination than other peritoneal dialysis systems presently
available. The Safe-Lock(R) standard system involves the connection procedure of
introducing and draining the dialysis solution into and from the abdominal
cavity through the use of the same bag for introduction and drainage. To use
Safe-Lock(R) products, a catheter that has been surgically implanted in the
patient is fitted with one part of the Safe-Lock(R) connector, and the
peritoneal dialysis solution bag and tubing are fitted with the other part of
the Safe-Lock(R) connector. The Company also manufactures disposable double bag
systems utilizing a special drainage bag and a snap-off Y-shaped piece that is
connected to the Safe-Lock(R) connector at the catheter. These double bag
systems further reduce possible entry of contaminants during peritoneal
dialysis. The Company's Inpersol(R) line of peritoneal dialysis products
acquired by Fresenius USA from Abbott Laboratories in 1993 is interchangeable
and competitive with the peritoneal dialysis products offered by Baxter, the
Company's major competitor in this field. Therefore, the addition of the
Inpersol(R) product line to the Company's other products enables the Company to
expand the potential customer base for which it competes, because the Company
now supplies peritoneal dialysis products usable by all peritoneal dialysis
patients in the U.S.
Cyclers. While there are two main forms of peritoneal dialysis therapy,
the Company believes that CCPD therapy offers patients benefits over CAPD
therapy for patients who need more therapy due to body size, ultrafiltration
loss or any other reason. In a standard CAPD program, a patient typically
undergoes four manual two-liter exchanges of peritoneal dialysis solution over a
24-hour period, with treatment occurring seven days per week. CAPD must be
performed by the patient when he or she is awake. With CCPD therapy, peritoneal
dialysis cyclers provide automated dialysis solution exchange. The cycler
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. Cycling may be
performed by patients at home throughout the night while sleeping. 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's cycling equipment incorporates microprocessor technology, that can be
easily programmed by the patient, hospital or clinic staff 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. With nighttime cycling, the patient has complete
daytime freedom, wearing only the surgically-implanted catheter and capping
device. In addition, the Company believes that CCPD reduces the risk of
peritonitis due to less frequent handling of the catheter.
Fresenius USA introduced the first CCPD machine in 1980 and, in 1994,
introduced a new variant on CCPD therapy, PD-Plus(TM) ,that is offered by the
Company in other parts of the world. Normally, a CCPD patient undergoes five or
six two-liter solution exchanges at night, and carries no solution during the
day. PD-Plus(TM) therapy provides a more tailored therapy using a simpler
nighttime cycler, and, where necessary, one exchange during the day. Compared
with typical CCPD therapy, the Company believes that PD-Plus(TM) therapy is less
costly and easier to administer. In addition, compared with CAPD therapy, the
Company believes that PD-Plus(TM) therapy improves toxin removal by more than
40% and therefore is attractive to patients and physicians alike. By increasing
the effectiveness of peritoneal dialysis treatments, at an acceptable increase
in cost over CAPD therapy, PD-Plus(TM) therapy may also effectively prolong the
time period during which a patient will be able to remain on peritoneal dialysis
before requiring hemodialysis. PD-Plus(TM) therapy, as developed by Fresenius
USA, can only be performed using the Fresenius Freedom Cycler and special tubing
using Safe-Lock(R) connectors.
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.
Fresenius Medical Care has also developed a new CAPD system, comprising
tubing, connectors and a peritoneal dialysis double bag, together with the
process technology for the manufacture of the system. The Fresenius Medical Care
Stay-Safe(TM)
14
peritoneal dialysis system utilizes a single switching mechanism that replaces
the three tubing clamps to control drainage of solution, flushing of tubes that
connect solution bags to catheters, the introduction of new solution, and the
tight closure of the line. The control device also further reduces the
possibility of catheter contamination during connection and disconnection by
sealing the catheter access and surrounding the catheter adapter with a
disinfectant solution.
New Peritoneal Dialysis Products. Fresenius USA has recently 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 make adjustments to the prescription as necessary to meet therapy
goals.
In March 1996, Fresenius USA received approval by the U.S. Food and Drug
Administration ("FDA") of its new 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 also includes new fill volumes which
offer the physician the ability to prescribe larger dosages without requiring
the patient to do more exchanges during the day. Fresenius USA began limited
marketing of the Premier Plus twin bag system during July 1996. Additionally, in
December 1997, Fresenius Medical Care submitted to the FDA a file for review of
a more advanced Premier Plus twin bag system that utilizes additional features
beyond those approved in March 1996. This application was approved in May 1999.
Trials were conducted later that year and the product was launched at the
National Peritoneal Dialysis conference in February 2000.
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 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. The Company also utilizes outside distributors to provide sales
coverage in countries not serviced by its internal sales force.
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 Fresenius Medical Care as well as other
suppliers, and 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 a 344,000 square-foot facility in Ogden, Utah which
operates as a fully integrated manufacturing and research and development
facility for polysulfone dialyzers. This facility uses automated equipment for
the production of polysulfone dialyzers and sterile solutions in flexible
plastic containers. The Company, through Fresenius USA, also purchases dialyzers
and polysulfone bundles from Fresenius Medical Care. 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
15
alternative sources of supply for which the FDA could grant expedited approval.
The Company also intends to manufacture its own plastic film for peritoneal
dialysis solution bags.
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 three 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.
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, Fresenius Medical Care 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 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.
The Company obtains bloodlines under an agreement with Medisystems
Corporation whose principal source of bloodlines is a single FDA-approved plant
located in Thailand. A new Medisystems agreement was signed in 1999 that
provides for Medisystems as a secondary source of supply to the Company's self
manufactured blood lines from Reynosa, Mexico. The new agreement has a three
year term.
RESEARCH AND DEVELOPMENT
Current research and development activities of the Company are primarily
conducted through Fresenius Medical Care and are strongly focused on the
development of new products, technologies and treatment concepts to optimize the
quality of treatment for dialysis patients, and on process technology for the
manufacture of the Company's products.
Fresenius Medical Care intends to continue to maintain its central
research and development operations for disposable products, at its St. Wendel
facility and for durable products at its facilities in Schweinfurt and Bad
Homburg, Germany. It expects that as its dialysis products business continues to
expand internationally, research and development activities by its international
operations, including the Company, will rely primarily on the research and
development activities conducted at St. Wendel, Schweinfurt, and Bad Homburg
which will transfer production technology FMC develops to FMC production
centers. Local activities focusing on cooperative efforts with those facilities
to develop new products and product modifications for local markets. The
Company's product development staff works closely with the Fresenius Medical
Care research and development group in this regard. Fresenius Medical Care
employs approximately 238 persons in research and development (including medical
doctors, engineers, technicians and research scientists), and conducts its
activities at three locations in Germany (at the St. Wendel facility, the
Schweinfurt facility and the Bad Homburg facility), and in Walnut Creek,
California and Ogden, Utah. Fresenius Medical Care's research and development
expenses were $32 million in 1999.
The Company seeks to maintain its profile in scientific circles through
articles in scientific and medical journals, participation in academic symposia,
relationships with scientists and physicians in relevant fields and the
organization of scientific meetings and workshops. The Company will continue to
establish scientific advisory boards and works with medical and other
consultants.
PATENTS, TRADEMARKS AND LICENSES
As the owner of or licensee under patents and trademarks throughout the
world, Fresenius Medical Care holds rights under more than 855 patents and
patent applications relating to dialysis technology in major markets. Patented
technologies that relate to dialyzers include polysulfone hollow fiber, in-line
sterilization method, and sterile closures for in-line sterilized medical
devices. For dialysis machines, patents include, the location for a filter
device for sterile filtering dialysate in the dialysis machine circuit, the
safety concept for the ultrafiltration device in a dialysis machine used for
high flux dialysis, a process for the on-line preparation of substitution fluid
in hemodiafiltration machine, conductivity sensor arrangements in the dialysis
machine circuit,
16
conductivity sensor devices and mathematical algorithms for using such devices,
patents relating to controlled bicarbonate dialysis and patents related to
control thermal balance during dialysis. The connector system for the Fresenius
Medical Care biBag (TM) has been patented in the U.S. and Europe, while national
applications in Japan, Finland, and Norway are still pending. Other pending
patents include the new generation of "DIASAFE plus"(R) filters.
For peritoneal dialysis, Fresenius Medical Care holds rights on the
Safe-Lock(R) system. Pending patents include non-PVC film (Biofine(TM)) for
general use in intravenous and peritoneal dialysis applications and a special
film for a peelable, non-PVC double bag for peritoneal dialysis solutions.
Fresenius USA's intellectual property includes the Inpersol(R) trademark and
rights to certain manufacturing know-how Fresenius USA obtained from Abbott, and
a paid-up non-exclusive global sublicense from Baxter, Inc. to certain CAPD and
connector technology.
The patent family covering Fresenius Medical Care Polysulfone(TM) high
flux membranes has been subject to opposition by competitors in Europe and
Japan. FMC patents have been upheld in both Europe and Japan. FMC successfully
defended an appeal in the European Union, but an appeal by the Japanese
opposition is still pending. While Fresenius Medical Care believes that these
patents are valid in the relevant jurisdictions, a successful opposition could
have a material adverse effect on the Company.
The Company believes that its success will depend, in large part, on
Fresenius Medical Care's technology. While Fresenius Medical Care, 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 Fresenius Medical Care'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 CGH Medical (an affiliate of Gambro AB), Baxter
International Inc., Althin CD Medical, Inc. which has been recently acquired by
Baxter, Inc., Asahi Medical Co., Ltd., Bellco S.p.A. (a subsidiary of Sorin
Biomedica S.p.A.), Bieffe Medital S.p.A., ( an affiliate of Baxter, Inc.), B.
Braun Melsungen AG, Nissho Corporation (including Nissho Nipro Corporation
Ltd.), Nikkiso Co., Ltd., Terumo Medical Corporation and Toray Medical Co., Ltd.
Some 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. Independent dialysis centers and 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.
EMPLOYEES
At December 31, 1999, the Company employed approximately 24,828 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 21,480 employees; and dialysis products, approximately
3,348 employees. Medical Directors of the Company's dialysis centers are
retained as independent contractors. Management believes that its relations with
its employees are good. Approximately 500, or 2% of the Company's employees are
covered by union agreements.
17
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.
In connection with the Company's settlement of the U.S. government
investigation of National Medical Care and certain of its subsidiaries, the
Company entered into a corporate integrity agreement with the U.S. government.
This agreement requires that the Company staff and maintain a comprehensive
compliance program, including a written code of conduct, training program and
compliance policies and procedures relating to the areas covered by the U.S.
government investigation. 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 supplies (including hemodialysis and peritoneal dialysis
equipment and solutions, dialyzers, bloodlines and cell separators) 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 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. See - "Legal Proceedings - District of New
Jersey Investigation" for information about the settlement of a District of New
Jersey federal grand jury investigation into NMC's historical activities.
18
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 it
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 HCFA. 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 40 states and the District of Columbia and Puerto Rico that have CON
laws applicable to dialysis centers. These requirements may provide a barrier to
entry to new companies seeking to provide services in these states, but also may
constrain the Company's ability to expand its operations in these states.
19
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.
The Medicare program is the primary source of Dialysis Services revenues
from dialysis treatment. For example, in 1999, 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 and allows the Company to retain any profit earned.
When Medicare assumes responsibility as primary payor (see "Reimbursement
-- Coordination of Benefits"), Medicare is responsible for payment of 80% of the
Composite Rate set by HCFA for dialysis treatments. The Composite Rate governs
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 Rate consists of
labor and nonlabor components with adjustments made for regional wage costs,
subject to a national payment floor and ceiling currently ranging from $118 to
$141 per treatment, reflecting a 1.2% increase at January 1, 2000, with
exceptions based on specified criteria. In certain instances, products sold by
Fresenius USA and RPD are included in the non-labor component of the Composite
Rate as described below.
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. The rate of utilization by the
Company's facilities of items and services that are not included in the
Composite Rate was a subject of the OIG Investigation. See " -- Legal
Proceedings -- Settlement of U.S. Government Investigation."
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.
In 1990, Congress required that the Prospective Payment Assessment
Commission ("PROPAC") study dialysis costs and reimbursement and make reports
annually to Congress with a recommendation as to the appropriateness of changes
to the ESRD reimbursement rates. In 1993, PROPAC recommended a 2.5% increase in
the Composite Rate for independent freestanding dialysis facilities, which was
not implemented by Congress. In March 1994 and again in 1995, PROPAC recommended
that no changes be made in the reimbursement rate. In March 1996, PROPAC
recommended a 2% increase in the Composite Rate for independent freestanding
dialysis facilities. In March 1997, the Medicare Payment Advisory Commission
("MedPAC") recommended a 2.8% increase in the Composite Rate for both
independent freestanding dialysis facilities and hospital-based dialysis
facilities for fiscal year 1998 which was not implemented by Congress. Congress
is not required to, and no congressional action was taken to, implement the
MedPAC recommendations and Congress could establish a different reimbursement
rate. 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
20
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 is not eligible for Medicaid, 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 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. LifeChem's use
of capitation rates in billing for tests in the Composite Rate was a subject of
the OIG Investigation. See " -- Legal Proceedings -- Settlement of U.S.
Government Investigation".
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 by July 1, 1999. 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.
IDPN. Among its other services, SRM administers IDPN to chronic dialysis
patients who suffer from gastrointestinal malfunctions. These services are
covered by the Medicare program under the Medicare Parenteral and Enteral
Nutrition ("PEN") benefit, which requires extensive documentation and individual
physician certification of medical necessity for each patient. Treatment by IDPN
has been shown to increase the body content of vital, high biologic value
proteins like albumin. Deficiency of such proteins has been shown to be
associated with substantially higher risk of death, among dialysis patients.
Under the Company's settlement of the government investigation, the
Company will receive $59.2 million in respect of outstanding claims for IDPN
therapy, which will be applied to payment of the overall settlement obligation.
The remaining $94.3 million of claims was written off. See " -- Legal
Proceedings - Settlement of the U.S. Government Investigation".
21
SRM has continued to provide IDPN therapy to malnourished dialysis
patients. Analyses of data from the Company's PSP database, both internal and as
published in peer-reviewed medical journals, indicate that malnutrition measured
by a serum albumin value of 3.4 g/dl or less is associated with significantly
increased mortality risk in the chronic dialysis population and that IDPN is
effective in increasing serum albumin and moderating mortality risk for such
malnourished patients. These studies show that when these initial albumin levels
were 3.0 g/dl or less, IDPN treatment was accompanied by a 70% improvement in
survival. Similarly, when the initial albumin was 3.4 g/dl or less, survival
with IDPN treatment was improved by about 15%. IDPN treatment is therefore
associated with improved odds of survival at albumin concentration lower than
3.4 g/dl and the amount of improvement increases as albumin concentrates falls.
A statistical review conducted in March 1996 suggests that about 5% of dialysis
patients suffer from albumin concentration that is 3.0 g/dl or less.
Under the corporate integrity agreement, the Company agreed to submit
claims for payment of IDPN and other PEN therapies in accordance with coverage
criteria of the Health Care Financing Administration as in effect from time to
time.
EPO. In 1999, the Office of the Inspector General and the Clinton
Administration announced their intention to seek a 10% reduction in Medicare
reimbursement for EPO, from $11.00 to $10.00 per 1,000 units, although this
proposal was not enacted. 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, Medicare or a state renal program
are responsible for payment.
Patients who have 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 cover a total of 33 months, the 3 month waiting period plus the 30
month coordination period.
Patients who already have Medicare based on age when they become ESRD
patients are dual eligible patients. If these patients have an EGHP that is
paying primary 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. Most patients over 65 are retired and fall into this second
category. Patients who do not have a health insurance retirement benefit plan
can purchase Medigap plans offered by AARP and many other insurance companies.
Possible Changes in Medicare. Because the Medicare program represents a
substantial portion of the federal budget, in order to reduce the federal
government deficit, and for other reasons, 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 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 statutes, 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
22
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 statutes or other federal laws. See
" -- Legal Proceedings Settlement of the U.S Government Investigation" for
information concerning the OIG's investigations of NMC's activities under these
provisions.
ANTI-KICKBACK STATUTES
The federal anti-kickback statutes establish criminal prohibitions against
and civil penalties for the knowing and willful solicitation, receipt, offer or
payment of any remuneration, whether direct or indirect, in return for or to
induce the referral of patients or the ordering or purchasing of items or
services payable in whole or in part under Medicare, Medicaid or other federal
health care programs. Sanctions for violations of the anti-kickback statutes
include criminal and civil penalties, such as imprisonment or criminal fines of
up to $25,000 per violation, and civil penalties of up to $50,000 per violation,
and exclusion from the Medicare or Medicaid programs and other federal programs.
In addition, certain provisions of federal criminal law that may be applicable
provide that if a corporation is found guilty of a criminal offense it may be
fined no more than twice any pecuniary gain to the corporation, or, in the
alternative, no more than $500,000 per offense.
Some states also have enacted statutes similar to the anti-kickback
statutes, which may include criminal penalties, applicable to referrals of
patients regardless of payor source, and may contain exceptions different from
state to state and from those contained in the federal anti-kickback statutes.
FALSE CLAIMS ACT AND RELATED CRIMINAL PROVISIONS
The 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 statutes under certain
circumstances. The False Claims Act generally provides for the imposition of
civil penalties of $5,000 to $10,000 per claim and for treble damages, resulting
in the possibility of substantial financial penalties for small billing errors
that are replicated in a large number of claims, as each individual 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.
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 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.
23
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
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.
Finally, the BBA creates a Medicare+Choice Program that is designed to
provide a variety of options to Medicare beneficiaries, almost all of whom may
enroll in a Medicare+Choice Plan. The options include provider sponsored
organizations, coordinated care plans, HMOs with and without point of service
options involving out-of-network providers, and medical savings accounts offered
as a demonstration project.
STARK LAW
The original Stark Law, known as "Stark I" 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. 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. The Company has determined that the Stark Law does apply to
dialysis-related Designated Health Services not paid for under the Composite
Rate as well as to certain services provided by SRM's renal support business.
However, pursuant to proposed regulations implementing Stark II, published on
January 9, 1998, erythropoietin (EPO) provided to ESRD patients as part of a
renal dialysis treatment plan is specifically exempted as a Designated Health
Service. Further, in the proposed regulations discussing Durable Medical
Equipment, ESRD equipment and supplies are excluded from coverage as a
Designated Health Service because the ESRD benefit is distinguished under
Medicare from the DME benefit. Outpatient prescription drugs and in-hospital
treatments would also be excluded.
Prior to the effective date of Stark II, NMC had compensated the
substantial majority of its Medical Directors on the basis of a percentage of
net pre-tax earnings of the facilities. In response to Stark II, since January
1, 1995, NMC has compensated its Medical Directors on a fixed compensation
arrangement intended to comply with the requirements of Stark II. See " -- Legal
Proceedings -- OIG Investigation" and " -- Medical Director Compensation."
On August 14, 1995, HCFA promulgated a final regulation implementing Stark
I and its statutory restrictions on referrals for clinical laboratory services.
One of the provisions of the regulation significantly affecting dialysis
providers is HCFA's interpretation that the Stark Law applies to
dialysis-related laboratory services. However, in proposed regulations published
on January 9, 1998, HCFA proposed a regulatory exception for clinical laboratory
services paid for as part of the Composite Rate. The proposed Stark II
regulations follow the provisions set forth in the Stark I regulation in that
any service included as part of the Composite Rate is not considered a
Designated Health Service. The government has not yet finalized the Stark II
regulations.
24
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.
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 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 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.
CHANGES IN THE HEALTH CARE INDUSTRY
Significant changes in the health care industry are occurring as a result
of market driven forces that are creating significant downward pressure on
reimbursement rates that the Company and its subsidiaries will receive for their
services and products. A substantial portion of third-party health insurance is
now furnished through some type of managed care plan, including HMOs.
Managed care plans have increased their market share within the last
decade. This trend may continue as a result of the merger and consolidation of
providers and payors in the health care industry and as a result of the
discussions among members of Congress and the executive branch regarding ways to
increase the number of Medicare and Medicaid beneficiaries served through such
managed care plans. At the same time, private purchasing cooperatives and the
government are attempting to limit premium increases for these plans. In
response to this environment, managed care plans have been aggressive in seeking
lower reimbursement levels. For some populations, plans have sought to limit
their own financial risk by negotiating capitation agreements under which
providers assume responsibility for delivering a range of services at a fixed
payment amount. If substantially more patients of the Company join managed care
plans or if such plans reduce reimbursements or capitate competitor companies,
the Company's business and results of operations could be adversely affected,
possibly materially.
25
ITEM 2. PROPERTIES
The table below describes the Company's principal facilities as of the
date hereof.
[Enlarge/Download Table]
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.
Ogden, Utah 334,000 owned 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 concentrate
solutions.
Reynosa, Mexico 48,745 leased Manufacture of bloodlines.
Fremont, California 72,000 leased Clinical laboratory testing
Chicago, Illinois 670 leased Clinical laboratory testing
Woodland Hills, California 24,000 leased Clinical laboratory testing
Rockleigh, New Jersey 85,000 leased Clinical laboratory testing
----------
(1) Land is leased, building is owned.
The lease on the Walnut Creek facility expires in 2002. The Company leases
21 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
seven years. At December 31, 1999, the Company distributed its products through
all these 21 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, and
manufacturing, laboratory, distribution and administrative and sales facilities
in the U.S. on terms which the Company believes are customary in the industry.
The Company's subsidiaries own those dialysis centers and manufacturing
facilities that it does not lease.
26
ITEM 3. LEGAL PROCEEDINGS
SETTLEMENT OF THE U.S. GOVERNMENT INVESTIGATION
Since 1995, NMC and certain of its subsidiaries had been the subject of an
investigation by the Office of Inspector General of the United States Department
of Health and Human Services, the United States Attorney for the District of
Massachusetts and other government authorities concerning possible violation of
federal laws, including the anti-kickback statute and the False Claims Act.
On January 18, 2000, the Company, NMC and certain affiliated companies
executed definitive agreements with the U.S. government to settle the matter
covered in the government investigations and National Medical Care's claim with
respect to approximately $153.5 million of outstanding Medicare accounts
receivable for intradialytic parenteral nutrition therapy provided on and before
December 31, 1999. The Settlement was approved by the United States District
Court for the District of Massachusetts on February 2, 2000.
Under the settlement agreements, the Company will make a net settlement
payment to the U.S. government of approximately $427.1 million. These amounts
comprise:
- an initial payment to the government of approximately $286.4
million paid in February 2000.
- additional installment payments over the eighteen months
totaling approximately $186.3 million; and
- payments previously made to the government under the
government's voluntary disclosure program totaling
approximately $13.6 million; less
- installment payments to be made by the government to the
Company over the next eighteen months totaling approximately
$59.2 million related to the intradialytic parenteral
nutrition therapy accounts receivable claims.
The government payments bear interest on unpaid amounts at 7.5% per annum.
Interest on installment payments to the government will accrue at 6.3% on $51.2
million of the installment payments and at 7.5% annually on the balance of the
installment payment, until paid in full. As security for the Company's
obligations under the settlement agreement, a $150 million letter of credit that
was issued to the government in 1996 has been amended to increase the amount
available for drawing under the letter of credit to $189.6 million. The maximum
drawing amount will be reduced over time as the Company makes installment
principal payments to the government.
The Company anticipates that the net cash outflow resulting from the
settlement agreements will be approximately $265.5 million. This amount reflects
the anticipated receipt of the account receivable payment from the government,
the tax benefit of a special charge the Company recorded in connection with the
settlement, which is discussed below, and the payment terms of the net
settlement amount. The Company expects to realize the cash savings of the tax
benefit over the next eighteen months.
The Company believes it will have sufficient cash flows from continued
operations and borrowing capacity under its senior credit agreement to make the
settlement payment in accordance with the settlement agreement. The Company also
believes that following these payments, the Company will continue to have
sufficient funds available for both our day-to-day operations and our
anticipated growth.
In anticipation of the settlement, a pre-tax charge totaling $590 million
($412 million net of taxes) was recorded against consolidated earnings in the
three month period ended September 30, 1999. The Company recorded an additional
charge to earnings of approximately $11 million in the three-month period ended
December 31, 1999 to reflect the reduction in anticipated payments from the
government for the resolution of the intradialytic parenteral nutrition therapy
receivable claims. These charges will cover the payment of the net settlement
amount, a $94.3 million write-off of the remaining nutrition therapy accounts
receivable, and other related costs.
In December 1999, the senior credit agreement was amended to enable the
Company to continue in compliance with the covenants upon consummation of the
settlement.
27
The government investigation covered the following areas:
- NMC's dialysis services business, principally relating to its
Medical Director contracts and compensation;
- NMC's treatment of credit balance resulting from overpayments
received under the Medicare, Medicaid, TriCare and other
government programs, NMC Medical Products, Inc.'s billing for
home dialysis products, and NMC's payment of supplemental
medical insurance premiums on behalf of indigent patients;
- LifeChem, Inc.'s laboratory business, including testing
procedures, marketing, customer relationships, competition,
overpayments that were received by LifeChem, Inc. from the
Medicare program, a 1997 review of dialysis facilities'
standing orders, and the provision of discounts on products
from NMC Medical Products, Inc, grants, equipment and
entertainment to LifeChem, Inc.'s customers;
- NMC Homecare, Inc.'s intradialytic parenteral nutrition
therapy business and, in particular, information concerning
utilization of intradialytic parenteral nutrition therapy,
documentation of claims and billing practices including
various services, equipment and supplies, and payments made to
third parties as compensation for administering intradialytic
parenteral nutrition therapy; and
- billing for certain Doppler flow and bio-impedance analysis
tests performed in clinical studies.
As a result of the settlement, National Medical Care's subsidiaries,
Lifechem, Inc., NMC Homecare, Inc. and NMC Medical Products, Inc. pled guilty to
certain violations of federal law. The plea agreements impose a total of $101
million in federal criminal fines, which have been included in the net
settlement amount described above. As a consequence of their guilty pleas, these
subsidiaries will be excluded effective March 31, 2000 from further
participation in federally funded health care programs, including Medicare,
Medicaid and TriCare. The Company believes that these exclusions will not
materially interrupt the Company's provision or receipt of payment for the
products and services that the excluded subsidiaries provided, because the
Company intends to continue to provide these products and services through other
subsidiaries, which will continue to be qualified to participate in federal
health care programs.
With the exception of these three guilty pleas, the Company has been
advised that the government has declined criminal prosecution of FMC and its
subsidiaries, with respect to all aspects of the government investigation and
that there is no pending federal criminal investigation of Fresenius Medical
Care Holdings. Further, with respect to the settlement, the government has
released Fresenius Medical Care Holdings from civil liability for all of the
conduct described in the settlement agreements. The government has also advised
the Company that, with the limited exception described below, the government has
no current investigation and no intention of initiating an investigation in
connection with any conduct that has been the subject of the government
investigations. The continued effectiveness of these releases is subject to the
Company satisfying all payment obligations under the settlement agreements.
There have been allegations raised by private parties against the Company, most
of which have been previously investigated by the government in the course of
the government investigation and resolved without a finding of liability against
the Company. The government has reserved the right to investigate elements of
these allegations that have not previously been investigated. While there can be
no assurance, the Company believes that the resolution of these recent
allegations will not have a material adverse impact on the business, financial
condition or results of operations.
"Whistleblower actions" are filed under seal as a matter of law in the
first instance, thereby preventing disclosure to the Company and to the public,
except by court order. The Company and its subsidiaries may be the subject of
other whistleblower actions not known to the Company, or which have not yet been
unsealed. The resolution of any such action could have a material adverse impact
on our business, financial condition and results of operations.
With one exception, each of the qui tam or whistleblower actions which
serves as the basis for the government investigation have been dismissed as a
result of the settlement. The exception is a portion of a qui tam proceeding
filed in the United States District Court for the Middle District of Tennessee
on December 15, 1994. That action was transferred to the United Stated District
Court for the District of Massachusetts in 1995, and disclosed to the Company in
September 1999. The portion of this qui tam action that will not be dismissed as
a result of the settlement alleges, among other things, that the Company
violated the Medicare and Medicaid Anti-kickback Statute by providing discounted
hemodialysis products to
28
induce the purchase of laboratory services. In the settlement agreement, the U.
S. government has declined to continue to pursue further the investigation or
prosecution of these allegations. The government and the current and former
employees who filed this qui tam action, called "relators," offered to dismiss
this portion of this qui tam action in connection with the settlement. However,
this offer required that the Company grant a full release of all of the
Company's claims against the relators, and the Company is unwilling to do so.
While there can be no assurance, the Company believe that the resolution of
these remaining allegations will not have a material adverse impact on the
Company's business, financial condition or results of operations.
The settlement does not extend to any current or former employees of NMC
or its subsidiaries, including those who have been, or may be, indicted in
connection with the government investigations.
In connection with the settlement, the Company entered into an eight-year
Corporate Integrity Agreement dated January 18, 2000 with the government. During
the term of this agreement, the Company is required, among other things, to
ensure that its current compliance program includes, at least the following:
- a written code of conduct;
- compliance training program, compliance policies and
procedures relating to the areas covered by the government
investigation;
- screening of employees and others for eligibility to
participate in federal health care programs;
- annual audits by an independent review organization;
- a confidential disclosure program; and
- periodic reporting to the government.
The Corporate Integrity Agreement provides for penalties of up to $2,500
per day for each day during which the Company fails to satisfy its obligations
under the agreement. The Corporate Integrity Agreement permits the government to
exclude the Company and its subsidiaries from participation in federal health
care programs if a material breach of the agreement occurs and is not corrected
by the Company within thirty days after the Company receives written notice of
the breach. The Company derives approximately 55% of its consolidated revenue
from U.S. federal health care benefit programs. Consequently, a material breach
by the Company of the Corporate Integrity Agreement that results in the
exclusion of the Company or its subsidiaries from continued participation in
federal health care programs would have a material adverse effect on its
business, financial condition and results of operations.
The foregoing discussion of the settlement, the settlement agreements, the
plea agreements and the Corporate Integrity Agreement describes the material
terms of those agreements but is not complete and is qualified in its entirety
by reference to the full text of the agreements. These agreements have been
filed as exhibits to the Company's periodic reports to the Securities and
Exchange Commission, and may be obtained from the Securities and Exchange
Commission as described under "Where You Can Find More Information."
OTHER LEGAL PROCEEDINGS
DISTRICT OF NEW JERSEY INVESTIGATION
NMC had received multiple subpoenas from a federal grand jury in the
District of New Jersey investigating, among other things, whether NMC sold
defective products, the manner in which NMC handled customer complaints and
certain matters relating to the development of a new dialyzer product line. NMC
cooperated with this investigation and provided the grand jury with extensive
documents. In February, 1996, NMC received a letter from the U.S. Attorney's
Office for the District of New Jersey indicating that it was the target of a
federal grand jury investigation into possible violation of criminal law in
connection with its efforts to persuade the Food and Drug Administration to lift
a January 1991 import hold issued with respect to NMC's Dublin, Ireland
manufacturing facility. In June 1996, NMC received a letter from the U.S.
Attorney for the District of New Jersey indicating that the U.S. Attorney had
declined to prosecute National Medical Care with respect to a submission related
to NMC's effort to lift the import hold. The letter added that NMC remains a
subject of a federal grand jury's investigation into other matters. NMC also
produced documents in response to a June 1996 subpoena from the federal grand
jury requesting certain documents in connection with NMC's imports of the
FOCUS(R) dialyzer from January 1991 to November 1995. Pursuant to a plea
agreement entered into with the U.S. Attorney for the District of New Jersey and
the Food and Drug Administration, NMC's subsidiary, NMC Medical Products, Inc.
in December 1999 pled guilty to two misdemeanor violations of the Federal Food,
Drug and Cosmetic Act, and agreed to pay the U.S government $3.8 million. The
U.S. District Court for the District of New Jersey approved the terms of the
plea agreement and the judgement has been
29
satisfied by payment of the $3.8 million. Under the terms of the plea agreement,
NMC Medical Products has been released, together with NMC and its related
entities and their present officers, directors and employees, from any further
civil or criminal liability with respect to all matters investigated by the U.S.
Attorney's Office for the District of New Jersey, including the matters
described above, or arising out of Food and Drug Administration inspection of
NMC Medical Products' facilities prior to October 20, 1995. The $3.8 million
paid in January 2000 pursuant to this agreement does not constitute part of the
$427.1 million in net payments relating to the settlement of the U.S. government
investigation.
COMMERCIAL INSURER LITIGATION
In 1997, the Company, NMC, and certain named NMC subsidiaries, were served with
a civil complaint filed by Aetna Life Insurance Company in the U.S. District
Court for the Southern District of New York. Based in large part on information
contained in prior reports filed by the Company with the Securities and Exchange
Commission, the lawsuit alleges inappropriate billing practices for nutritional
therapy, diagnostic and clinical laboratory tests and misrepresentations. In
April 1999, Aetna amended its complaint to include its affiliate, Aetna U.S.
Healthcare, Inc., as an additional plaintiff, and to make certain other limited
changes in its pleading. The amended complaint seeks unspecified damages and
costs. In February 2000, the Company was served with a similar complaint filed
by Connecticut General Life Insurance Company, Equitable Life Assurance Society
of the United States, Cigna Employee Benefits Services, Inc. and Guardian Life
Insurance Company of America, Inc. (Connecticut General Life Insurance Company
et al v. National Medical Care et al, 00-Civ-0932) seeking unspecified damages
and costs. However, the Company, NMC and its subsidiaries believe that there are
substantial defenses to the claims asserted, and intend to vigorously defend
both lawsuits. Other private payors have contacted the Company and may assert
that NMC received excess payment and similarly, may join either lawsuit or file
their own lawsuit seeking reimbursement and other damages from NMC. An adverse
result could have a material adverse effect on the Company's business, financial
condition and result of operations.
In May 1999, the Company filed counterclaims against Aetna Life Insurance
Company and Aetna U.S. Healthcare, Inc. based on inappropriate claim denials and
delays in claim payments. The Company is investigating similar counterclaims
against other private payors that have filed a complaint or contacted them. An
adverse result of these litigations could have a material adverse effect on the
Company's business, financial position and result of operations. The settlement
of the U.S. government investigations does not resolve these proceedings and
claims.
The ultimate outcome and impact on the Company of these proceedings cannot
be predicted at this time.
OBRA 93
The Omnibus Budget Reconciliation Act of 1993 affected the payment of
benefits under Medicare and employer health plans for dual-eligible ESRD
patients. In July 1994, the Health Care Financing Administration issued an
instruction to Medicare claims processors to the effect that Medicare benefits
for the patients affected by that act would be subject to a new 18-month
"coordination of benefits" period. This instruction had a positive impact on
NMC's dialysis revenues because, during the 18-month coordination of benefits
period, patients' employer health plans were responsible for payment, which was
generally at rates higher than those provided under Medicare.
In April 1995, the Health Care Financing Administration issued a new
instruction, reversing its original instruction in a manner that would
substantially diminish the positive effect of the original instruction on NMC's
dialysis business. The Health Care Financing Administration further proposed
that its new instruction be effective retroactive to August 1993, the effective
date off 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-
30
0860 (WBB) seeking to preclude the Health Care Financing Administration from
retroactively enforcing its April 24, 1995 implementation of the Omnibus Budget
Reconciliation Act of 1993 provision relating to the coordination of benefits
for dual eligible ESRD patients. On May 9, 1995, NMC moved for a preliminary
injunction to preclude the Health Care Financing Administration from enforcing
its new policy retroactively, that is, to billing for services provided between
August 10, 1993 and April 23, 1995. On June 6, 1995, the court granted NMC's
request for a preliminary injunction and in December of 1996, NMC moved for
partial summary judgment seeking a declaration from the Court that the Health
Care Financing Administration's retroactive application of the April 1995 rule
was legally invalid. The Health Care Financing Administration cross-moved for
summary judgment on the grounds that April 1995 rule was validly applied
prospectively. In January 1998, the court granted NMC's motion for partial
summary judgment and entered a declaratory judgment in favor of NMC, holding the
Health Care Financing Administration's retroactive application of the April 1995
rule legally invalid. Based on its finding, the Court also permanently enjoined
the Health Care Financing Administration from enforcing and applying the April
1995 rule retroactively against NMC. The Court took no action on the Health Care
Financing Administration's motion for summary judgment pending completion of the
outstanding discovery. On October 5, 1998, NMC filed its own motion for summary
judgment requesting that the Court declare the Health Care Financing
Administration's prospective application of the April 1995 rule invalid and
permanently enjoin Health Care Financing Administration from prospectively
enforcing and applying the April 1995 rule. The Court has not yet ruled on the
parties' motions. The Health Care Financing Administration elected not to appeal
the Court's June 1995 and January 1998 orders. The Health Care Financing
Administration may, however, appeal all rulings at the conclusion of the
litigation. If the Health Care Financing Administration should successfully
appeal so that the revised interpretation would be applied retroactively, NMC
may be required to refund the payment received from employer health plans for
services provided after August 10, 1993 under the Health Care Financing
Administration's original implementation, and to re-bill Medicare for the same
services, which would result in a loss to NMC of approximately $120 million
attributable to all periods prior to December 31, 1995. Also, in this event, the
Company's business, financial condition and results of operations would be
materially adversely affected. The settlement of the U.S. government
investigation does not resolve these proceedings and claims.
ADMINISTRATION APPEALS
NMC and its subsidiaries regularly purse various administrative appeals
relating to reimbursement issues in connection with their dialysis facilities.
One such appeal consists of a challenge to the Medicare regulation which capped
reimbursement for the bad debts incurred by dialysis facilities. In 1998, the
U.S. Court of Appeals for the District of Columbia ruled favorably in connection
with the bad debt issue, holding that the Secretary of Health and Human Services
had not adequately justified the bad debt regulation, and ruling that the
government's order adopting the rule was arbitrary and capricious. The Court of
Appeals remanded the matter to the Secretary to provide a more adequate
explanation of the bad debt cap or to abandon it. Subsequently, the Court
modified its holding to continue the bad debt regulation in effect pending
remand and, the Company has revised its estimate of recoveries for the
previously disallowed bad debt expense associated with the regulation. The
Company has reached an agreement with the Department of Health and Human
Services with respect to certain material terms to resolve this matter in June
1999. Pursuant to the agreement the Health Care Financing Administration paid
the Company $20.9 million in February 2000.
STATE OF FLORIDA
In October 1999, NMC received an Antitrust Civil Investigative Demand
("CID") from the Attorney General of the State of Florida ("Florida AG") . The
CID was issued by the Florida AG in the course of an investigation to determine
whether there is, has been, or may be a violation of federal and Florida laws
resulting from the possible monopolization of, or the entering into agreement in
restraint of, trade relating to the provision of dialysis products and services
in Florida.
The Company is cooperating with the Florida AG's investigation by
providing documents and other information to them. The impact of this
investigation on the business and financial condition, if any, cannot be
determined at this time.
OTHER LITIGATION AND POTENTIAL EXPOSURES
In recent years, physicians, hospitals and other participants in the
health care industry have become subject to an increasing number of lawsuits
alleging professional negligence, malpractice, product liability, worker's
compensation or related claims, many of which involve large claims and
significant defense costs. The Company has been subject to these
31
suits due to the nature of its business and expects lawsuits of those types to
continue from time to time. Although the Company maintains insurance at a level
which is believed to be prudent, the Company cannot assure that the coverage
limits will be adequate or that all asserted claims will be covered by
insurance. In Addition, there can be no assurance that liability insurance will
continue to be available at acceptable costs. A successful claim against the
Company or any of its subsidiaries in excess of insurance coverage could have a
material adverse effect on the results of our operations.
The Company operates a large number and wide variety of facilities
throughout the U.S. In such a decentralized system it is often difficult to
maintain the desired level of oversight and control over the thousand of
individuals employed by many affiliated companies. The Company relies upon
management structure, regulatory and legal resources, and the effective
operation of its compliance program to direct, manage and monitor the activities
of these employees. However, on occasion, the Company has identified instances
where employees, deliberately or inadvertently, have submitted inadequate or
false billing while employed by an affiliated company. The illegal action of
such persons my subject the Company to liability under the False Claims Act,
among other laws, and the Company cannot predict whether such law enforcement
authorities may use such information to initiate further investigations of the
business practice disclosed or any of our other business activities.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) Annual Meeting. The Company held its annual meeting of shareholders on
December 17, 1999 (the "Meeting").
(b) Election of Directors. At the Meeting, the shareholders elected Ben J.
Lipps, Jerry A. Schneider and Roger G. Stoll as directors of the Company for a
one-year term. Holders of shares representing 90,000,071 votes voted in favor of
the election of Messrs. Lipps, Schneider and Stoll to the Board of Directors.
There were no votes against such elections. There were no abstentions and no
broker non-votes.
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 Fresenius Medical Care. The
NMC Credit Facilities and the indentures pertaining to the Senior Subordinated
Notes of Fresenius Medical Care 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".
CLASS D SPECIAL DIVIDEND PREFERRED STOCK
Shares of the Company's Class D Special Dividend Preferred Stock (the
"Class D Preferred shares") were distributed to stockholders of W.R. Grace &
Co. ("Grace") as part of the 1996 reorganization involving Grace and Fresenius
Medical Care. The holders of the Class D Preferred shares may be entitled to
receive a special dividend (the "Special Dividend") only upon Fresenius Medical
Care's achievement of certain financial performance targets that have not yet
been, and may never be, fulfilled. The holders of the Class D Preferred shares
are not entitled to receive any other dividends or payments from the Company or
Fresenius Medical Care other than the Special Dividend which is payable, if at
all, commencing in October 2002.
The Company's Class D Preferred shares are redeemable at the sole option
and election of the Company. The Company is not obligated to redeem its Class D
Preferred shares.
The preceding is merely an abbreviated description of certain of the
terms of the Class D Preferred Shares and the related Special Dividend and is
qualified in its entirety by reference to the full text of the terms of the
Class D Preferred shares, which are set forth in the Company's Certificate of
Incorporation which has been filed as an exhibit to the Company's Current
Report on Form 8-K dated September 30, 1996 and is also on file with the New
York Department of State -- Corporations Division.
32
ITEM 6. SELECTED FINANCIAL DATA
[Enlarge/Download Table]
YEAR ENDED DECEMBER 31,
------------------------------------------
(Dollars in Millions, Except Shares and Per 1999 1998 1997
Share Data) -------- -------- --------
Statement of Operations Data
Continuing Operations
Net sales $ 2,815 $ 2,571 $ 2,166
Cost of Sales 1,880 1,707 1,456
-------- -------- --------
Gross Profit 935 864 710
Selling, general and administrative and research
and development 540 529 452
Special charge for settlement of investigation and
related costs 601 -- --
-------- -------- --------
Operating income (loss) (206) 335 258
Interest expense (net) 202 209 178
-------- -------- --------
Income (loss) from continuing operations before
income taxes and cumulative effect of
changes in accounting for start up costs (408) 126 80
Income tax (benefit) expense (81) 74 46
-------- -------- --------
Income (loss) from continuing operations before
cumulative effect of change in accounting
for start up costs $ (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) $ (327) $ (59) $ 20
======== ======== ========
Net Income Per Common and Common Equivalent Share:
Continuing Operations $ (3.64) $ 0.57 $ 0.37
Discontinued Operations -- (1.18) (0.15)
Cumulative effect of accounting change -- (0.05) --
Net Income (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
[Enlarge/Download Table]
AT DECEMBER 31,
--------------------------------------
1999 1998 1997
------- ------- -------
Balance Sheet Data:
Working capital $ (456) $ 294 $ 394
Total assets 4,645 4,613 4,771
Total long term debt and capital lease obligations 616 1,014 1,622
Stockholders' equity 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
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, clinical laboratory testing and renal diagnostic services and (b)
manufacturing and distributing products and equipment for dialysis treatment.
Throughout the Company's history, a significant portion of the Company's growth
has resulted from the development of new dialysis centers and the acquisition of
existing dialysis centers, as well as from the acquisition and development of
complementary businesses in the health care field.
The Company derives a significant portion of its net revenues from
Medicare, Medicaid and other government health care programs (approximately 55%
in 1999). 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 SETTLEMENT OF INVESTIGATION AND RELATED COSTS
Since 1995, National Medical Care, Inc. ("NMC"), a subsidiary of the
Company and certain of NMC's subsidiaries had been the subject of an
investigation (the "OIG Investigation") by the Office of Inspector General
("OIG") of the United States Department of Health and Human Services, the United
States Attorney for the District of Massachusetts (the "U.S. Attorney's Office")
and other authorities concerning possible violations of federal laws, including
the anti-kickback status and the False Claims Act.
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) the matters covered in the
OIG Investigation and (ii) NMC's claim with respect to approximately $153.5
million of outstanding Medicare receivables for nutrition therapy rendered on or
before December 31, 1999 (collectively, the "Settlement"). The Settlement was
approved by the United States District Court for the District of Massachusetts
on February 2, 2000. See "Legal Proceedings - Settlement of the U.S. Government
Investigation", "Notes to Consolidated Financial Statements - Note 7, Special
Charge for Settlement of Investigation and Related Costs", "Note 8- Discontinued
Operations" and "Note 16. - Commitments and Contingencies - Legal Proceedings -
Settlement of U.S. Government Investigation".
In connection with this Settlement, the Company entered into a corporate
integrity agreement with the U.S. Government. This agreement requires that the
Company staff and maintain a comprehensive compliance program, including a
written code of conduct, training programs and compliance policies and
procedures relating to the areas covered by the U.S. government investigation.
The corporate integrity agreement also 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.., A
material breach by the Company of the corporate integrity agreement that results
in the exclusion of the Company
34
or its subsidiaries from continued participation in those programs would have a
material adverse effect on our business, financial condition and results of
operations.
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. This information has been reorganized and prior period information has
been reclassified to conform with the business unit reporting requirements of
FMC and to distinguish between continued and discontinued operations.
[Enlarge/Download Table]
YEAR ENDED DECEMBER 31,
---------------------------------------
(DOLLARS IN MILLIONS)
1999 1998 1997
------- ------- -------
NET REVENUES
Dialysis Services .............................. $ 2,339 $ 2,116 $ 1,755
Dialysis Products .............................. 707 662 630
Intercompany Eliminations ...................... (231) (207) (219)
------- ------- -------
Total Net Revenues ................................ $ 2,815 $ 2,571 $ 2,166
======= ======= =======
Operating Earnings:
Dialysis Services .............................. $ 386 $ 344 $ 266
Dialysis Products .............................. 126 103 66
------- ------- -------
Total Operating Earnings .......................... 512 447 332
------- ------- -------
Other Expenses:
General Corporate .............................. $ 113 $ 108 $ 70
Research & Development ......................... 4 4 4
Interest Expense, Net .......................... 202 209 178
Special Charge for OIG Settlement .............. 601 -- --
------- ------- -------
Total Other Expenses .............................. 920 321 252
------- ------- -------
Earnings (Loss) Before Income Taxes and
cumulative effect of change
in accounting for start up costs ............... (408) 126 80
Provision for Income Taxes ........................ (81) 74 46
------- ------- -------
Net earnings loss from continuing operations before
cumulative effect of change in accounting for
start up costs .................................... $ (327) $ 52 $ 34
------- ------- -------
Discontinued Operations:
Net Revenues ................................... $ -- $ 121 $ 283
======= ======= =======
Loss before income taxes ....................... -- (14) (21)
Benefit for income Taxes ...................... -- (5) (7)
------- ------- -------
Loss from operations ........................... -- (9) (14)
------- ------- -------
Loss on disposal before income taxes ........... -- (140) --
Income tax benefit ............................. -- (43) --
------- ------- -------
Loss on disposal ............................... -- (97) --
------- ------- -------
Total Loss on Discontinued Operations ............. $ -- $ (106) $ (14)
======= ======= =======
Cumulative effect of change in accounting for start
up costs, net of tax benefits .................. -- (5) --
------- ------- -------
Net Income/(loss) ................................. $ (327) $ (59) $ 20
======= ======= =======
35
1999 COMPARED TO 1998
Net revenues from continuing operations for 1999 increased by 10% ($244
million) over 1998. Net earnings from continuing operations for 1999 decreased
($379 million) over 1998 as a result of the special charge for settlement of
investigation and related costs ($419 million, after income taxes) and increases
to general corporate expenses, partially offset by increased operating earnings.
DIALYSIS SERVICES
Dialysis Services net revenues for 1999 increased by 11% ($223 million)
over 1998, primarily as a result of a 8% increase in the number of treatments
provided, the beneficial impact of the extension of the Medicare Secondary Payor
(MSP) provision, higher EPO utilization relative to the comparable 1998 period,
partially offset by decreased laboratory testing revenues. The treatment
increase was a result of base business growth and the impact of 1998 and 1999
acquisitions. The laboratory testing revenue decrease was primarily due to lower
testing volume as competitors continue to consolidate lab activity.
Dialysis Services operating earnings for 1999 increased by 12% ($42
million) over the comparable period of 1998 primarily due to the increase in
treatment volume, the beneficial impact of the extension of the MSP provision
and higher EPO utilization, and the decrease in the provision for doubtful
accounts, partially offset by decreased operating earnings in laboratory
testing. The provision for doubtful accounts decreased due to revisions of
estimates for bad debt cost report recoveries. These recoveries include the
result of the Company's successful challenge of the Medicare regulation which
capped reimbursement for the bad debts incurred by dialysis facilities in those
years. Accordingly, the Company has revised its estimate of recoveries for the
previously disallowed bad debt expense associated with this regulation during
the year.
DIALYSIS PRODUCTS
Dialysis Products net revenues for 1999 increased by 7% ($45 million) over
the comparable period of 1998. This is due to increased sales of dialyzers ($26
million), machines ($9 million), concentrates ($9 million), bloodlines ($1
million), and other products ($19 million), partially offset by decrease sales
of peritoneal products ($19 million).
Dialysis Products operating earnings for 1999 increased by 22% ($23
million) over 1998. This is primarily due to revenue growth and improvements in
gross margin resulting from manufacturing efficiencies from increased production
volume, partially offset by increased freight and distribution costs.
SPECIAL CHARGE FOR SETTLEMENT OF INVESTIGATION AND RELATED COSTS
Since 1995, National Medical Care, Inc. ("NMC"), a subsidiary of Fresenius
Medical Care Holdings, Inc. (the "Company"), and certain of NMC's subsidiaries
had been the subject of an investigation (the "OIG Investigation") by the Office
of Inspector General ("OIG") of the United States Department of Health and Human
Services, the United States Attorney for the District of Massachusetts (the
"U.S. Attorney's Office") and other authorities concerning possible violations
of federal laws, including the anti-kickback statute and the False Claims Act.
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) the matters covered in the
OIG Investigation and (ii) NMC's claims with respect to approximately $153.5
million of outstanding Medicare receivables for nutrition therapy rendered on or
before December 31, 1999 (collectively, the "Settlement"). The Settlement was
approved by the United States District Court for the District of Massachusetts
on February 2, 2000.
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). This special pre-tax charge includes (i) a charge of $486.3
million for settlement payment obligations to the Government, (ii) a $94.3
million write-off of the remaining receivables described above, and (iii) a
reserve for other related costs of $20.4 million. The settlement payment
obligations to the Government and the amounts due to the Company for the
outstanding Medicare receivables have been classified in the balance sheet at
their expected settlement dates. See Note 16 - "Commitments and Contingencies -
Legal Proceedings.
36
OTHER EXPENSES
The Company's other expenses for 1999 decreased by 1% ($2 million) over
the comparable period of 1998. General corporate expenses increased by $5
million due to increases in casualty and insurance expenses. Interest expense
decreased by $7 million primarily due to the reduction of the Company's funded
debt.
INCOME TAXES
The Company has recorded an income tax benefit of $81 million for 1999 as
compared to an income tax provision of $74 million in 1998. The income tax
benefit in 1999 is lower than the statutory tax rate primarily due to the tax
effect of the special charge for the Settlement and related costs. The provision
for income taxes in 1998 is higher than the statutory tax rate primarily due to
the non-deductible merger goodwill.
1998 COMPARED TO 1997
Net revenues from continuing operations for 1998 increased by 19% ($405
million) over 1997. Net earnings from continuing operations before cumulative
effect of change in accounting for start up costs for 1998 increased 53% ($18
million) over 1997 as a result of increased operating earnings, partially offset
by higher interest expenses and increased general corporate expenses.
DIALYSIS SERVICES
Dialysis Services net revenues for 1998 increased by 21% ($361 million)
over 1997, primarily as a result of a 14% increase in the number of treatments
provided, the beneficial impact of the extension of the Medicare Secondary Payor
(MSP) provision, higher EPO utilization relative to the comparable 1997 period
and increased laboratory testing revenues. The treatment increase was a result
of base business growth and the impact of 1997 and 1998 acquisitions. The
laboratory testing revenue increase was primarily due to the full year revenue
impact of Spectra Laboratories acquired by the Company in June 1997, partially
offset by the decreased number of patients of other dialysis providers serviced
by the Company, during the third and fourth quarter of 1998, as competitors
consolidate lab activity.
Dialysis Services operating earnings for 1998 increased by 29% ($78
million) over the comparable period of 1997 primarily due to the increase in
treatment volume, the beneficial impact of the extension of the MSP provision
and higher EPO utilization.
DIALYSIS PRODUCTS
Dialysis Products net revenues for 1998 increased by 5% ($32 million) over
the comparable period of 1997. This is due to increased sales of dialyzers ($26
million), machines ($13 million), concentrates ($5 million), partially offset by
decreased sales of bloodlines ($3 million), peritoneal products ($3 million),
and other products ($6 million).
Dialysis Products operating earnings for 1998 increased by 56% ($37
million) over 1997. This is primarily due to revenue growth and improvements in
gross margin resulting from manufacturing efficiencies from increased production
volume.
OTHER EXPENSES
The Company's other expenses for 1998 increased by 27% ($69 million) over
1997. General corporate expenses increased by $38 million primarily due to
foreign exchange gains ($28 million) realized in 1997, increased insurance and
legal expenses ($6 million) and other cost increases ($4 million). Research and
development expenses for 1998 were essentially the same as 1997. Interest
expense for 1998 increased by $31 million over 1997 mainly due to an increase in
debt to finance acquisitions.
INCOME TAX RATE
The effective tax rate from continuing operations for 1998 (58.9%) is
higher than the rate for 1997 (57.4%), due primarily to a rate reduction in 1997
related to the loss carryover of FUSA offset by various other items.
37
DISCONTINUED OPERATIONS
Effective June 1, 1998, the Company classified its non-renal diagnostic
services business ("Non-Renal Diagnostic Services") and homecare business
("Homecare") as discontinued operations. The Company disposed of its Non-Renal
Diagnostic Services division and its Homecare division on June 26, 1998 and July
29, 1998, respectively. In connection with the sale of Homecare, the Company
retained the assets and the operations associated with the delivery of IDPN. The
Company recorded a net after tax loss of $97 million in 1998 on the sale of
these businesses. The net loss on the disposal of these businesses and their
results of operations have been accounted for as discontinued operations.
IDPN receivables of $153.5 million, that had been included in net assets
of discontinued operations were resolved as part of the Settlement Agreements
with the Government as part of the OIG Investigation. As a result, a $94.3
million write-off was taken against these receivables. The remaining receivables
have been reclassified to other current and non-current IDPN receivables on the
balance sheet and will be collected from the Government over the next eighteen
months according to terms under the Settlement Agreement. See Note 7 - "Special
Charge for Settlement of Investigation and Related Costs" and Note 16 -
"Commitments and Contingencies - Legal Proceedings.
Operating results of discontinued operations are presented below:
Discontinued Operations - Results of Operations
The revenues and results of operations of the discontinued operations of
Non Renal Diagnostic Services and Homecare divisions were as follows:
[Download Table]
TWELVE MONTHS ENDED
DECEMBER 31,
---------------------------
1998 1997
--------- ---------
NET REVENUES .................................... $ 120,940 $ 283,006
--------- ---------
Loss from operations before income tax benefit .. (14,212) (21,001)
Income tax benefit .............................. (5,543) (7,218)
--------- ---------
Loss from operations ............................ (8,669) (13,783)
--------- ---------
Loss on disposal before income tax benefit ...... (140,000) --
Income tax benefit .............................. (42,772) --
--------- ---------
Loss on disposal ................................ (97,228) --
--------- ---------
Loss from discontinued operations ............... (105,897) (13,783)
========= =========
38
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash requirements, including, to a limited extent,
acquisitions, have historically been funded by cash generated from operations.
Cash generated from continued operations was $253 million, $212 million, and
$127 million for the years 1999, 1998 and 1997, respectively. These increases
are primarily due to the Company's improved profit levels as well as working
capital improvements.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Net cash flows provided by operating activities of continued operations
totaled $253 million in 1999 compared to $212 million in 1998. Cash on hand was
$13 million at December 31, 1999 compared to $7 million at December 31, 1998.
On January 18, 2000 the Company reached a final settlement agreement with
respect to the U.S. government investigation. The settlement requires net
settlement payments totaling approximately $427 million, of which $14 million
had previously been paid. The Company paid another $286 million after court
approval of the settlement and will pay an additional $186 million over the next
18 months. As part of the Settlement, the Company will receive $59 million over
the next 18 months from the U.S. government against receivable claims of $153
million for intradialytic parenteral nutrition therapy rendered on or before
December 31, 1999. The Company has amended the letter of credit that was given
to the government in 1996 from $150 million to $190 million which will be
reduced over a period of time as we make installment payments to the government.
The net cash obligations of the Company, related to the special charge are
anticipated to approximate $266 million. This amount reflects the special charge
of $601 million reduced for the resolution of the Company's intradialytic
parenteral nutrition receivable claims of approximately $153 million, and the
estimated cash savings for the tax effect of the special charge of $182 million.
The cash savings of the tax benefit are expected to be realized over time in
relation to the cash outflows of the settlement payment obligations to the
government and expenditures for other related costs.
The Company believes that it will have sufficient cash flows from
continued operations and borrowing capacity under its revolving credit facility
to make the payments required by the settlement agreement. The Company also
believes that following such payments, it will have sufficient funds available
for both its day to day operations and its anticipated growth.
In December 1999, the Company and the lenders under the senior credit
facility, amended certain covenants in the senior credit facility to accommodate
our obligations under the settlement agreements and to enable the Company to
continue in compliance with the financial covenants upon consummation of the
Settlement.
If cash flows from operations or availability under existing banking
arrangements fall below expectations, or if the company is unsuccessful in
amending its existing banking agreements, the Company may be required to
consider other alternatives to maintain sufficient liquidity.
Net cash flows used in investing activities of continued operations
totaled $147 million in 1999 compared to $162 million in 1998. The Company
funded its acquisitions and capital expenditures primarily through cash flows
from operations. Acquisitions totaled $65 million and $170 million in 1999 and
1998, respectively net of cash acquired. Capital expenditures of $81 million and
$75 million were made for internal expansion, improvements, new furnishings and
equipment in 1999 and 1998, respectively. The Company intends to continue to
enhance its presence in the U.S. by focusing its expansion on the acquisition of
individual or small groups of clinics, expansion of existing clinics, and
opening of new clinics.
Net cash flows used in financing activities of continued operations
totaled $96 million in 1999 compared to $35 million in 1998. Due to the
improvement in cash flow from operations, the Company was able to reduce its
total borrowings in 1999 by approximately $97 million. In 1998, the Company
funded its acquisitions and capital expenditures primarily through proceeds from
external short and long-term debt, proceeds from a receivable financing
facility, and proceeds from the sale of the Non-Renal Diagnostics and Homecare
divisions. Additionally in 1998, acquisitions were also funded through the
issuance of investment securities by Fresenius Medical Care Finance, S.A., a
Luxembourg subsidiary of FMC ("FMC Finance"). In exchange for such financing, an
intercompany account was established between FMC Finance and the Company with
payables due to FMC Finance of $42 million at December 31, 1998.
39
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Net cash flows provided by operating activities of continued operations
totaled $212 million in 1998 compared to $127 million in 1997. Cash on hand was
$7 million at December 31, 1998 compared to $13 million at December 31, 1997.
Net cash flows used in investing activities of continued operations
totaled $162 million in 1998 compared to $608 million in 1997. The Company made
acquisitions totaling $170 million and $474 million in 1998 and 1997,
respectively net of cash acquired. Capital expenditures were made for internal
expansion, improvements, new furnishings and equipment of $75 million, and $134
million 1998 and 1997, respectively. The Company capitalized on the continuing
shift in the U.S. from physician-owned and hospital based dialysis clinics to
multi-center providers by acquiring existing dialysis centers and the
establishment of new or expanded centers and, accordingly, will require
significant capital resources to pursue its growth strategy in the dialysis
marketplace. The Company may also make other strategic acquisitions in the
future.
Net cash flows used in financing activities of continued operations
totaled $35 million in 1998 compared to net cash provided by of $538 million in
1997. During 1998 and 1997, the Company funded its acquisitions and capital
expenditures primarily through proceeds from external short and long-term debt
and the proceeds from the receivable financing facility and proceeds from the
sale of the Non Renal Diagnostics and Homecare divisions. In addition,
acquisitions were also funded through the issuance of investment securities by
Fresenius Medical Care Finance, S.A., a Luxembourg subsidiary of FMC ("FMC
Finance"). In exchange for such financing, an intercompany account was
established between FMC Finance and the Company with payables due to FMC Finance
of $42 million and $67 million for 1998 and 1997, respectively.
Effective July 1, 1995, the Company ceased to recognize the incremental
revenue provided under HCFA's initial instruction under OBRA 93, although it
continued to bill private third-party payors for these amounts through December
31, 1995. The Company began billing Medicare as the primary payor for the dual
eligible ESRD patients affected by OBRA 93 effective January 1, 1996. If HCFA's
revised instruction under OBRA 93 is permanently enjoined on a prospective
basis, or if such revised instruction is sustained but given an effective date
of later than June 30, 1995, the Company may be able to rebill such services to
third-party payors and, as a result, the Company's future results of operations
and financial position would be favorably affected by the incremental revenue
that the Company would recognize. For further discussion see Notes to
Consolidated Financial Statements - Note 16, "Commitments and Contingencies -
Omnibus Budget Reconciliation Act of 1993".
CONTINGENCIES
The Company is a plaintiff in litigation against the federal government
with respect to the implementation of OBRA 93 is seeking to change a proposed
revision to IDPN coverage policies, and is a defendant in significant commercial
insurance litigation. An adverse outcome in any of these matters, could have a
material adverse effect on the Company's business, financial condition and
results of operations. Because of the significant complexities and uncertainties
associated with these proceedings, neither an estimate of the possible loss or
range of loss the Company may incur in respect of such matters nor a reserve
based on any such estimate can be reasonably made. See Item 3 - "Legal
Proceedings" and Notes to Consolidated Financial Statements - Note 16,
"Commitments and Contingencies".
The Company believes that its existing credit facilities, cash generated
from operations and other current sources of financing are sufficient to meet
its foreseeable needs. If cash flows from operations or availability under
existing banking arrangements fall below expectations, the Company may be
required to consider other alternatives to maintain sufficient liquidity. There
can be no assurance that the Company will be able to do so on satisfactory
terms, if at all. See Part I, Item 7 "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources."
DIVESTITURES
The Company sold its Non Renal Diagnostic Services and Homecare divisions
on June 26, 1998 and July 29, 1998, respectively. The combined proceeds of the
sales were approximately $100 million in cash and notes.
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.
40
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative
Instruments and Hedging Activities, which establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts (collectively referred to as "derivatives") and for
hedging activities. This statement requires that an entity recognizes all
derivatives as either assets or liabilities in the balance sheet and measure
those instruments at fair value. The statement also sets forth the criteria for
determining whether a derivative may be specifically designated as a hedge of a
particular exposure with the intent of measuring the effectiveness of that hedge
in the statement of operations.
In June 1999, the Financial Accounting Standards Board issued SFAS No. 137,
Accounting for Derivative Instruments and Hedging Activities, which amended the
effective date of SFAS No. 133. The amended SFAS No. 133 is effective for all
fiscal quarters of fiscal years beginning after June 15, 2000.
YEAR 2000 ISSUES
The year 2000 problem developed as a result of computer software
programs using two digits rather than four to define the applicable years. Such
software may recognize a date using "00" as the year 1900 rather than the year
2000. These programs are present in software applications running on desktop
computers and network services. These programs are also presented in microchips
and microcontrollers incorporated into equipment. Some of our computer hardware
and software, building infrastructure components, such as alarm systems, HVAC
systems, etc. and medical devices that are date sensitive may contain programs
with susceptibility to the year 2000 problem. Investigation and, if found,
correction of the program was necessary to avoid computer system and program
failures or equipment and medical devise malfunctions or miscalculations that
could result in a disruption of business operations, billing and reimbursement
breakdowns or affect patient treatment. We believe that our competitors faced a
similar risk. We engaged in extensive preparation of the year 2000 changeover.
As a result of this preparation, our business operations continued normally and
without disruption at the commencement of the year 2000.
41
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 firmly committed purchases. Also, since the Company
carries a substantial amount of floating rate debt, the Company uses interest
rate swaps to synthetically change certain variable-rate debt obligations to
fixed-rate obligations, as well as options to mitigate the impact of interest
rate fluctuations.
Gains and losses on foreign exchange contracts accounted for as hedges are
deferred in other current assets or liabilities. The deferred gains and losses
are recognized as adjustments to the underlying hedged transaction when the
future sales or purchases are recognized. Interest rate swap payments and
receipts are recorded as part of interest expense. The fair value of the swap
contracts is not recognized in the financial statements. Cash flows from
derivatives are recognized in the consolidated statement of cash flows in the
same category as the item being hedged.
If a derivative instrument ceases to meet the criteria for deferral, any
subsequent gains or losses are recognized in operations. If a firm commitment
does not occur, the foreign exchange contract is terminated and any gain or loss
is recognized in operations. If a hedging instrument is sold or terminated prior
to maturity, gains or losses continue to be deferred until the hedged item is
recognized. Should a swap be terminated while the underlying obligation remains
outstanding, the gain or loss is capitalized as part of the underlying
obligation and amortized into interest expense over the remaining term of the
obligation.
At December 31, 1999, the fair value of the Company's interest rate
agreements, including both swaps and a collar, is approximately $9.2 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, 1999
(MILLIONS)
[Enlarge/Download Table]
2000 2001 2002 2003 Thereafter Totals
---- ---- ---- ---- ---------- ------
Principal Payments Due on NMC Credit Facility $139 $150 $150 $299 $ 738
Variable Interest Rate = 7.41%
Borrowings from Affiliates
Variable Interest Rate = 5.80% - 7.44% $373 $ 373
Fixed Interest Rate = 9.25% $351 $ 351
Fixed Interest Rate = 8.43% $436 $ 436
Interest Rate Agreements (notional amounts) $850 $500 $250 $1,600
Average Fixed Pay Rate = 6.43% 6.37% 6.60% 6.12%
Receive Rate = 3-Month LIBOR
At December 31, 1999, the fair value of the Company's foreign exchange
contracts, including both forward agreements and a collar, is approximately
($3.8 million). The Company had outstanding contracts covering the purchase of
52.0 million Euros ("EUR") at an average contract price of $1.0948 per EUR, for
delivery between January 2000 and May 2001.
42
The Company's hedging strategy vis-a-vis the above-mentioned market risks
has not changed significantly from 1998 to 1999. As mentioned in a prior
section, the Company does not believe the adoption of SFAS 133, Accounting for
Derivative Instruments and Hedging Activities, in the year 2000 will have a
material impact on its hedging strategy or the consolidated financial
statements. 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 15. Financial Instruments".
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
Not applicable
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, 2000.
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,
1999, 1998 and 1997.
Consolidated Statements of Comprehensive Income for the Years Ended
December 31, 1999, 1998 and 1997.
Consolidated Balance Sheets as of December 31, 1999 and 1998.
Consolidated Statements of Cash Flows for the Years Ended December 31,
1999, 1998 and 1997.
Consolidated Statements of Changes in Equity for the Years Ended
December 31, 1999, 1998 and 1997.
Notes to Consolidated Financial Statements.
43
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.
On January 21, 2000, the Company filed a report on
Form 8-K with respect to the Company's settlement of the OIG
Investigation with the United States Government.
(c) Exhibits.
Exhibits. The following exhibits are filed or incorporated by reference
as required by Item 601 of Regulation S-K.
[Download Table]
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).
44
[Download Table]
Exhibit 3.6 Amended and Restated By-laws of Fresenius Medical Care
Holdings, Inc. (incorporated herein by reference to the Form
10-Q of the Company filed with the Commission on August 14,
1997).
Exhibit 4.1 Credit Agreement dated as of September 27, 1996 among National
Medical Care, Inc. and Certain Subsidiaries and Affiliates, as
Borrowers, Certain Subsidiaries and Affiliates, as Guarantors,
the Lenders named therein, Nationsbank, N.A., as paying agent
and the Bank of Nova Scotia, The Chase Manhattan Bank,
Dresdner Bank AG and Nationsbank, N.A., as Managing Agents
(incorporated herein by reference to the Form 6-K of Fresenius
Medical Care AG filed with the Commission on October 15,
1996).
Exhibit 4.2 Amendment dated as of November 26, 1996 (amendment to the
Credit Agreement dated as of September 27, 1996, incorporated
herein by reference to the Form 8-K of Registrant filed with
the Commission on December 16, 1996).
Exhibit 4.3 Amendment No. 2 dated December 12, 1996 (second amendment to
the Credit Agreement dated as of September 27, 1996,
incorporated herein by reference to the Form 10-K of
Registrant filed with the Commission on March 31, 1997).
Exhibit 4.4 Amendment No. 3 dated June 13, 1997 to the Credit Agreement
dated as of September 27, 1996 , among National Medical Care,
Inc. and Certain Subsidiaries and Affiliates , as Borrowers,
Certain Subsidiaries and Affiliates, as Guarantors, the
Lenders named therein, NationsBank, N.A., as paying agent and
the Bank of Nova Scotia, the Chase Manhattan Bank, N.A.,
Dresdner Bank AG and NationsBank, N.A. as Managing Agents, as
previously amended (incorporated herein by reference to the
Form 10-Q of the Registrant filed with the Commission on
November 14, 1997).
Exhibit 4.5 Amendment No. 4, dated August 26, 1997 to the Credit Agreement
dated as of September 27, 1996, among National Medical Care,
Inc. and Certain Subsidiaries and Affiliates, as Borrowers,
Certain Subsidiaries and Affiliates, as Guarantors, the
Lenders named therein, NationsBank, N.A., as paying agent and
the Bank of Nova Scotia, the Chase Manhattan Bank, N.A.,
Dresdner Bank AG and NationsBank, N.A. as Managing Agents, as
previously amended (incorporated herein by reference to the
Form 10-Q of Registrant filed with Commission on November 14,
1997).
Exhibit 4.6 Amendment No. 5 dated December 12, 1997 to the Credit
Agreement dated as of September 27, 1996, among National
Medical Care, Inc. and Certain Subsidiaries and Affiliates, as
Borrowers, Certain Subsidiaries and Affiliates, as Guarantors,
the Lenders named therein, NationsBank, N.A., as paying agent
and the Bank of Nova Scotia, the Chase Manhattan Bank, N.A.,
Dresdner Bank AG and NationsBank, N.A. as Managing Agents, as
previously amended (incorporated herein by reference to the
Form 10-K of Registrant filed with Commission on March 23,
1998).
Exhibit 4.7 Form of Consent to Modification of Amendment No. 5 dated
December 12, 1997 to the Credit Agreement dated as of
September 27, 1996 among National Medical Care, Inc. and
Certain Subsidiaries and Affiliates, as Borrowers, Certain
Subsidiaries and Affiliates, as Guarantors, the Lenders named
therein, NationsBank, N.A., as paying agent and the Bank of
Nova Scotia, the Chase Manhattan Bank, N.A., Dresdner Bank AG
and NationsBank, N.A. as Managing Agents (incorporated herein
by reference to the Form 10-K of Registrant filed with
Commission on March 23, 1998).
Exhibit 4.8 Amendment No. 6 dated effective 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, NationsBank, N.A.,
as paying agent and the Bank of Nova Scotia, the Chase
Manhattan Bank, N.A., Dresdner Bank AG and NationsBank, N.A.
as Managing Agents, as previously amended (incorporated herein
by reference to the Form 10-Q of Registrant filed with
Commission on November 12, 1998).
Exhibit 4.9 Amendment No. 7 dated as of December 31, 1998 to the Credit
Agreement dated as of September 27, 1996 among National
Medical Care, Inc. and Certain Subsidiaries and Affiliates, as
Borrowers, Certain Subsidiaries and Affiliates Guarantors ,
the Lendors named therein, Nations Bank, N.A. as paying agent
and the Bank of
45
[Download Table]
Nova Scotia, the Chase Manhattan Bank, Dresdner Bank A. G. and
Nations Bank, N.A. as Managing Agents (incorporated herein by
reference to the Form 10-K of registrant filed with Commission
on March 9, 1999).
Exhibit 4.10 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, NationsBank, N.A. as paying agent and
the Bank of Nova Scotia, the Chase Manhattan Bank, Dresdner
Bank A.G. and NationsBank, N.A. as Managing Agent (filed
herewith).
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, NationsBank, N.A. as paying agent and
the Bank of Nova Scotia, the Chase Manhattan Bank, Dresdner
Bank A.G. and NationsBank, N.A. as Managing Agent (filed
herewith).
Exhibit 4.12 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 4.13 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 4.14 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 4.15 Senior Subordinated Indenture dated as of February 19, 1998
among FMC Trust Finance S.a.r.l. Luxemborg, as Insurer, State
Street Bank and Trust Company as Trustee and Fresenius Medical
Care Holdings, Inc., and Fresenius Medical Care AG, as
Guarantors with respect to the issuance of 7 3/8% Senior
Subordinated Notes due 2008 (incorporated herein by reference
to the Form 10-K of Registrant filed with Commission on March
23, 1998).
Exhibit 10.1 Employee Benefits and Compensation Agreement dated September
27, 1996 by and among W. R. Grace & Co., National Medical
Care, Inc., and W. R. Grace & Co.-- Conn. (incorporated herein
by reference to the Registration Statement on Form F-1 of
Fresenius Medical Care AG, as amended (Registration No.
333-05922), dated November 22, 1996 and the exhibits thereto).
Exhibit 10.2 Purchase Agreement, effective January 1, 1995, between Baxter
Health Care Corporation and National Medical Care, Inc.,
including the addendum thereto (incorporated by reference to
the Form SE of Fresenius Medical Care dated July 29, 1996 and
the exhibits thereto).
Exhibit 10.3 Agreement, dated November 25, 1992 between Bergen Brunswig
Drug Company and National Medical Care, Inc., including the
addendum thereto (incorporated by reference to the Form SE of
Fresenius Medical Care dated July 29, 1996 and the exhibits
thereto).
Exhibit 10.4 Primary Guarantee dated July 31, 1996 (incorporated by
reference to the Registrant's Registration Statement on Form
S-4 (Registration No. 333-09497) dated August 2, 1996 and the
exhibits thereto).
Exhibit 10.5 Secondary Guarantee dated July 31, 1996 (incorporated by
reference to the Registrant's Registration Statement on Form
S-4 (Registration No. 333-09497) dated August 2, 1996 and the
exhibits thereto).
46
[Download Table]
Exhibit 10.6 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 10.7 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 10.8 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, 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 July 1, 1997 by and between Jerry
A. Schneider and the Company (incorporated herein by reference
to the Form 10-Q of Registrant filed with Commission on May
14, 1998).
Exhibit 10.12 Addendum to Employment Agreement dated as of September 18,
1997 by and between Jerry A. Schneider and the Company
(incorporated herein by reference to the Form 10-Q of
Registrant filed with Commission on May 14, 1998).
Exhibit 10.13 Separation Agreement dated as of July 21, 1998 by and between
Geoffrey W. Swett and National Medical Care, Inc.,
(incorporated herein by reference to the Form 10-Q of
Registrant filed with Commission on November 12, 1998).
Exhibit 10.14 Employment Agreement dated October 23, 1998 by and between
Roger G. Stoll and National Medical Care, Inc. (incorporated
herein by reference to the Form 10-K of Registrant filed with
Commission on March 9, 1999).
Exhibit 10.15 Employment Agreement dated November 11, 1998 by and between
William F. Grieco and National Medical Care, Inc.,
(incorporated herein by reference to the Form 10-K of
Registrant filed with Commission on March 9, 1999).
Exhibit 10.16 Separation Agreement dated as of September 30, 1999 by and
among William F. Grieco and Fresenius Medical Care Holdings,
Inc. and Fresenius Medical Care AG (incorporated herein by
reference to the Form 10-K of Registrant filed with Commission
on August 3, 1999).
Exhibit 10.17 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).
47
Exhibit 11 Statement re: Computation of Per Share Earnings.
Exhibit 27 Financial Data Schedule
(d) Financial Statement Schedules
Schedule II-Valuation and Qualifying Accounts
48
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: March 30, 2000 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.
[Enlarge/Download Table]
NAME TITLE DATE
---- ----- ----
/s/ Ben J. Lipps President and Director March 30, 2000
Ben J. Lipps (Chief Executive Officer)
/s/ Jerry A. Schneider Chief Financial Officer, Treasurer and Director March 30, 2000
Jerry A. Schneider (Chief Financial and Accounting Officer)
/s/ Roger G. Stoll Executive Vice President and Director March 30, 2000
Roger G. Stoll
49
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, 1999 and 1998 and the related consolidated statements of
operations, comprehensive income, changes in equity and cash flows for the three
years then ended. 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 generally accepted auditing
standards. 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, 1999 and 1998, and the consolidated results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
KPMG LLP
February 21, 2000
Boston, MA
50
FRESENIUS MEDICAL CARE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
[Enlarge/Download Table]
TWELVE MONTHS ENDED DECEMBER 31,
-------------------------------------------
1999 1998 1997
---- ---- ----
NET REVENUES
Health care services ....................................... $ 2,324,322 $ 2,100,422 $ 1,722,651
Medical supplies ........................................... 490,911 470,984 443,228
----------- ----------- -----------
2,815,233 2,571,406 2,165,879
----------- ----------- -----------
EXPENSES
Cost of health care services ............................... 1,542,965 1,390,321 1,138,575
Cost of medical supplies ................................... 336,749 317,122 317,829
General and administrative expenses ........................ 276,408 253,920 204,644
Provision for doubtful accounts ............................ 42,243 54,709 43,301
Depreciation and amortization .............................. 217,952 216,214 199,726
Research and development ................................... 4,065 4,060 4,077
Interest expense, net, and related financing costs including
$88,679, $77,705 and $36,158 interest with affiliates ... 201,915 208,776 178,087
Special charge for settlement of investigation and related
costs .................................................. 601,000 -- --
----------- ----------- -----------
3,223,297 2,445,122 2,086,239
----------- ----------- -----------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES AND CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING FOR START UP COSTS ..................... (408,064) 126,284 79,640
PROVISION (BENEFIT) FOR INCOME TAXES ............................ (81,037) 74,447 45,720
----------- ----------- -----------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING FOR START UP COSTS ................................. $ (327,027) $ 51,837 $ 33,920
----------- ----------- -----------
DISCONTINUED OPERATIONS
Loss from discontinued operations, net of income taxes ..... -- (8,669) (13,783)
Loss on disposal of discontinued operations, net of income
tax benefit ............................................... -- (97,228) --
----------- ----------- -----------
Loss from discontinued operations .......................... $ (327,027) $ (105,897) $ (13,783)
----------- ----------- -----------
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR
START UP COSTS, NET OF TAX BENEFIT .......................... -- (4,890) --
----------- ----------- -----------
NET INCOME (LOSS) ............................................... $ (327,027) $ (58,950) $ 20,137
=========== =========== ===========
Basic and fully dilutive (loss) earnings per share
Continuing operations ........................................ $ (3.64) $ 0.57 $ 0.37
Discontinued operations ...................................... $ -- $ (1.18) $ (0.15)
Cumulative effect of accounting charge ....................... $ -- $ (0.05) $ --
Net Income (loss) ............................................ $ (3.64) $ (0.66) $ 0.22
See accompanying Notes to Consolidated Financial Statements
51
FRESENIUS MEDICAL CARE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(DOLLARS IN THOUSANDS)
[Download Table]
TWELVE MONTHS ENDED DECEMBER 31,
--------------------------------------
1999 1998 1997
---- ---- ----
NET INCOME (LOSS) $(327,027) $ (58,950) $ 20,137
Other comprehensive income
Foreign currency translation
adjustments (625) 1,872 --
--------- --------- ---------
Total other comprehensive income (625) 1,872 --
--------- --------- ---------
COMPREHENSIVE INCOME (LOSS) $(327,652) $ (57,078) $ 20,137
========= ========= =========
See accompanying Notes to Consolidated Financial Statements
52
FRESENIUS MEDICAL CARE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
[Enlarge/Download Table]
DECEMBER 31,
------------------------
1999 1998
---- ----
ASSETS
Current Assets:
Cash and cash equivalents ........................... $ 12,563 $ 6,579
Accounts receivable, less allowances of
$63,012 and $49,209 ............................... 295,235 254,783
Inventories ......................................... 183,112 169,789
Deferred income taxes ............................... 219,454 139,653
Other current assets ................................ 130,771 92,794
IDPN accounts receivable ............................ 53,962 151,067
----------- -----------
Total Current Assets ........................... 895,097 814,665
----------- -----------
Properties and equipment, net ............................ 428,793 429,639
----------- -----------
Other Assets:
Excess of cost over the fair value of net
assets acquired and other intangible assets, net of
accumulated amortization of $424,704 and
$289,167 .......................................... 3,265,491 3,317,424
Other assets and deferred charges ................... 49,998 51,675
Non-current IDPN accounts receivable ................ 5,189 --
----------- -----------
Total Other Assets ............................. 3,320,678 3,369,099
----------- -----------
Total Assets ............................................. $ 4,644,568 $ 4,613,403
=========== ===========
LIABILITIES AND EQUITY
Current Liabilities:
Current portion of long-term debt and
capitalized lease obligations ..................... $ 142,110 $ 43,348
Current portion of borrowing from affiliates ........ 372,949 32,716
Accounts payable .................................... 133,337 107,482
Accrued settlement .................................. 386,815 --
Accrued liabilities ................................. 291,358 306,333
Net accounts payable to affiliates .................. 12,361 17,966
Accrued income taxes ................................ 12,433 12,411
----------- -----------
Total Current Liabilities ...................... 1,351,363 520,256
Long-term debt ........................................... 615,065 1,010,880
Non-current borrowings from affiliates ................... 788,506 956,284
Capitalized lease obligations ............................ 1,190 2,666
Deferred income taxes .................................... 134,310 144,605
Accrued settlement ....................................... 85,920 --
Other liabilities ........................................ 46,153 29,278
----------- -----------
Total Liabilities .............................. 3,022,507 2,663,969
----------- -----------
Equity:
Preferred stock, $100 par value ....................... 7,412 7,412
Preferred stock, $.10 par value ....................... 8,906 8,906
Common stock, $1 par value; 300,000,000 shares
authorized; outstanding 90,000,000 ................. 90,000 90,000
Paid in capital ....................................... 1,943,034 1,942,235
Retained deficit ...................................... (427,703) (100,156)
Accumulated comprehensive income ...................... 412 1,037
----------- -----------
Total Equity ..................................... 1,622,061 1,949,434
----------- -----------
Total Liabilities and Equity ............................. $ 4,644,568 $ 4,613,403
=========== ===========
See accompanying Notes to Consolidated Financial Statements.
53
FRESENIUS MEDICAL CARE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
[Enlarge/Download Table]
TWELVE MONTHS ENDED DECEMBER 31,
---------------------------------------
1999 1998 1997
---- ---- ----
Cash Flows from Operating Activities:
Net income (loss) .......................................................... $(327,027) $ (58,950) $ 20,137
Adjustments to reconcile net earnings to net cash from operating activities:
Depreciation and amortization ......................................... 217,952 216,214 199,726
Write-off of receivables relating to settlement of investigation ...... 94,349 -- --
Loss on disposition of businesses ..................................... -- 97,228 --
Loss from discontinued operations ..................................... -- 8,669 13,783
Cumulative effect of change in accounting ............................. -- 4,890 --
Provision for doubtful accounts ....................................... 42,243 54,709 43,301
Deferred income taxes ................................................. (93,124) 16,734 6,262
Loss on disposal of properties and equipment .......................... 713 402 587
Changes in operating assets and liabilities, net of effects of purchase
acquisitions and foreign exchange:
Increase in accounts receivable ...................................... (112,095) (159,228) (113,631)
(Increase) decrease in inventories .................................... (12,606) (30,979) 1,085
(Increase) decrease in other current assets .......................... (21,300) 3,890 (28,967)
Decrease (increase) in other assets and deferred charges .............. 1,646 (19,554) 2,521
Increase (decrease) in accounts payable ............................... 25,855 (11,705) 11,934
Increase (decrease) in accrued income taxes ........................... 22 74,395 (16,615)
Increase (decrease) in accrued liabilities ............................ 356,539 (31,040) (42,792)
Increase (decrease) in other long-term liabilities .................... 102,795 3,560 (6,095)
Net changes due to/from affiliates .................................... (5,605) 22,777 17,935
Other, net ............................................................ (17,088) 19,614 17,568
--------- --------- ---------
Net cash provided by operating activities of continued operations .......... 253,269 211,626 126,739
--------- --------- ---------
Net cash used in operating activities of discontinued operations ........... (3,782) (11,947) (18,762)
--------- --------- ---------
Net cash provided by operating activities .................................. 249,487 199,679 107,977
--------- --------- ---------
Cash Flows from Investing Activities:
Capital expenditures .................................................. (81,330) (74,653) (133,744)
Payments for acquisitions, net of cash acquired ....................... (65,235) (170,137) (473,954)
Proceeds from disposition of businesses ............................... -- 82,500 --
--------- --------- ---------
Net cash used in investing activities of continued operations .............. (146,565) (162,290) (607,698)
--------- --------- ---------
Net cash used in investing activities of discontinued operations ........... -- (8,925) (22,744)
--------- --------- ---------
Net cash used in investing activities ...................................... (146,565) (171,215) (630,442)
--------- --------- ---------
Cash Flows from Financing Activities:
Increase in borrowings from affiliates ................................ 172,455 445,447 137,282
Cash dividends paid ................................................... (520) (520) (520)
Proceeds from issuance of debt ........................................ 37 16,385 203,937
Proceeds from receivable financing facility ........................... 29,400 105,600 52,000
Payments on debt and capitalized leases ............................... (298,587) (599,714) (60,978)
Contributed Capital from FMC AG ....................................... -- -- 199,425
Other, net ............................................................ 799 (2,027) 6,663
--------- --------- ---------
Net cash provided by (used in) financing activities of continued
operations ............................................................... (96,416) (34,829) 537,809
--------- --------- ---------
Net cash used in financing activities of discontinued operations ........... -- (2,107) (4,462)
--------- --------- ---------
Net cash provided by (used in) financing activities ........................ (96,416) (36,936) 533,347
--------- --------- ---------
Effects of changes in foreign exchange rates .................................... (522) 1,997 (18,799)
--------- --------- ---------
Change in cash and cash equivalents ............................................. 5,984 (6,475) (7,917)
Cash and cash equivalents at beginning of period ................................ 6,579 13,054 20,971
--------- --------- ---------
Cash and cash equivalents at end of period ...................................... $ 12,563 $ 6,579 $ 13,054
========= ========= =========
54
FRESENIUS MEDICAL CARE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
[Enlarge/Download Table]
TWELVE MONTHS ENDED
--------------------------------------
1999 1998 1997
---- ---- ----
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest ............................... $ 216,647 $ 194,141 $ 180,269
Income taxes (received)/paid, net ...... 8,344 (19,149) 40,471
Details for Acquisitions:
Assets acquired ............................. 65,256 172,511 508,594
Liabilities assumed ......................... (21) (2,374) (32,830)
--------- --------- ---------
Cash paid ................................... 65,235 170,137 475,764
Less cash acquired .......................... -- -- 1,810
--------- --------- ---------
Net cash paid for acquisitions .............. $ 65,235 $ 170,137 $ 473,954
========= ========= =========
See accompanying Notes to Consolidated Financial Statements
55
FRESENIUS MEDICAL CARE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
[Enlarge/Download Table]
Preferred Stocks Common Stock Capital in
----------------------- ----------------------- Excess
Shares Amount Shares Amount of Par Value
------ ------ ------ ------ ------------
BALANCE, DECEMBER 31, 1996 ................. $89,136,435 $16,318 90,000,000 $90,000 $1,719,683
Net Income ................................. -- -- -- -- --
Cash dividends on preferred stocks ......... -- -- -- -- --
Contributed capital from Fresenius Medical
Care, AG ................................... -- -- -- -- 199,425
Tax benefit of dispositions of stock
options .................................... -- -- -- -- 2,739
Other adjustments .......................... -- -- -- -- 6
----------- ------- ----------- ------- ----------
BALANCE, DECEMBER 31, 1997 ................. 89,136,435 $16,318 90,000,000 $90,000 $1,921,853
=========== ======= =========== ======= ==========
Net Loss ................................... -- -- -- -- --
Cash dividends on preferred stock .......... -- -- -- -- --
Tax benefit on International transfer ...... -- -- -- -- 20,382
Other comprehensive income ................. -- -- -- -- --
----------- ------- ----------- ------- ----------
BALANCE, DECEMBER 31, 1998 ................. 89,136,435 $16,318 90,000,000 $90,000 $1,942,235
=========== ======= =========== ======= ==========
Net Loss ................................... -- -- -- -- --
Cash dividends on preferred stock .......... -- -- -- -- --
Tax benefit of dispositions of stock
options .................................... -- -- -- -- 822
Other comprehensive income ................. -- -- -- -- --
Other adjustments .......................... -- -- -- -- (23)
----------- ------- ----------- ------- ----------
BALANCE, DECEMBER 31, 1999 ................. 89,136,435 $16,318 90,000,000 $90,000 $1,943,034
=========== ======= =========== ======= ==========
[Enlarge/Download Table]
Retained Other
Earnings Comprehensive
(Deficit) Income Total Equity
--------- ------ ------------
BALANCE, DECEMBER 31, 1996 ................. (61,089) $ (835) $1,764,077
Net Income ................................. 20,923 -- 20,923
Cash dividends on preferred stocks ......... (520) -- (520)
Contributed capital from Fresenius Medical
Care, AG ................................... -- -- 199,425
Tax benefit of dispositions of stock options -- -- 2,739
Other adjustments .......................... -- -- 6
--------- ------ ----------
BALANCE, DECEMBER 31, 1997 ................. $ (40,686) $ (835) $1,986,650
========= ====== ==========
Net Loss ................................... (58,950) -- (58,950)
Cash dividends on preferred stock .......... (520) -- (520)
Tax benefit on International transfer ...... -- -- 20,382
Other comprehensive income ................. -- 1,872 1,872
--------- ------ ----------
BALANCE, DECEMBER 31, 1998 ................. $(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
Other comprehensive income ................. -- (625) (625)
Other adjustments .......................... -- -- (23)
--------- ------ ----------
BALANCE, DECEMBER 31, 1999 ................. $(427,703) $ 412 $1,622,061
========= ====== ==========
See accompanying Notes to Consolidated Financial Statements
56
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 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., a Delaware corporation
("NMC"); Fresenius USA, Marketing Inc., and Fresenius USA Manufacturing Inc.,
Delaware corporations and Fresenius USA Inc, a Massachusetts corporation
(collectively "Fresenius USA" or "FUSA") and SRC Holding Company, Inc., a
Delaware corporation.
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries, NMC and FUSA and those financial statements
where the Company controls professional corporations in accordance with Emerging
Issues Task Force Issue 97-2.
The Company is primarily engaged in (i) providing kidney dialysis
services, clinical laboratory testing and renal diagnostic services, and (ii)
manufacturing and distributing products and equipment for dialysis treatment.
Effective January 1, 1998, the Company transferred legal ownership of
substantially all of its international operations to FMC. The transfer of
contributed capital of $199 million was accounted for on the cost basis.
BASIS OF PRESENTATION
BASIS OF CONSOLIDATION
The consolidated financial statements in this report at December 31, 1999,
1998 and 1997, respectively, reflect all adjustments that, in the opinion of
management, are necessary for the fair presentation of the consolidated results
for all periods presented.
All intercompany transactions and balances have been eliminated in
consolidation.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions affecting the reported amounts of assets and liabilities
(including disclosed amounts of contingent assets and liabilities) at the dates
of the consolidated financial statements and the reported revenues and expenses
during the reporting periods. Actual amounts could differ from those estimates.
Cash Equivalents
Cash equivalents consist of highly liquid instruments with maturities of
three months or less when purchased.
Derivative Financial Instruments
Foreign currency contracts -- Gains and losses on foreign currency
contracts that are designated and effective as hedges of existing assets,
liabilities (including borrowings) and firm commitments are deferred and
recorded as an adjustment to general and administrative expenses in the period
in which the related transaction is consummated. Gains and losses on other
foreign currency contracts are recognized at each reporting period.
Interest rate swaps -- Interest rate agreements that are designated and
effective as a hedge of a debt or other long-term obligations are accounted for
on an accrual basis. That is, the interest payable and interest receivable under
the swaps terms are accrued and recorded as an adjustment to interest expense of
the designated liabilities or obligations.
57
Amounts due from and payable to the counterparties of interest rate swaps
are recorded on an accrual basis at each reporting date on amounts computed by
reference of the respective interest rate swap contract. Realized gains and
losses that occur from the early termination or of foreign currency contracts
and interest rate swaps are recorded in the consolidated statement of operations
over the remaining period of the original agreement. Gains and losses arising
from the interest differential on contracts that hedge specific borrowings are
recorded as a component of interest expense over the life of the contract.
The effectiveness of the hedge is measured by a historical and probable
future high correlation of changes in the fair value of the hedging instruments
with changes in the value of the hedged item. If correlation ceases to exist,
hedge accounting will be terminated and gains on losses recorded in other
income. To date, high correlation has always been achieved.
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 a large number of 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.
Machines sales for 1999 and 1998 include $36.0 million and $32.6 million,
respectively, of net revenues for machines sold to a third party leasing company
which are utilized by the dialysis services division to provide services to our
customers. The profits on these sales are deferred and amortized to earnings
over the lease terms.
Inventories
Inventories are stated at the lower of cost (first-in, first-out method)
or market.
Properties and Equipment
Properties and equipment are stated at cost. Significant improvements are
capitalized; repairs and maintenance costs that do not extend the lives of the
assets are charged to expense as incurred. The cost and accumulated depreciation
of assets sold or otherwise disposed of are removed from the accounts, and any
resulting gain or loss is included in income when the assets are disposed.
The cost of properties and equipment is depreciated over estimated useful
lives on a straight - line basis as follows: buildings - 20 to 40 years,
equipment and furniture - 3 to 10 years, and leasehold improvements - the
shorter of the lease term or useful life. For income tax purposes, depreciation
is calculated using accelerated methods to the extent permitted.
Excess of Cost Over the Fair Value of Net Assets Acquired and Other
Intangible Assets
The Company has adopted the following useful lives and methods to amortize
intangible assets: trade name, acute care agreements 40 years; and goodwill --
25 to 40 years on a straight-line basis; patient relationships and other
intangible assets - over the estimated period to be benefited, generally from 5
to 6 years on a straight line basis.
Debt Issuance Costs
Costs related to the issuance of debt are amortized over the term of the
related obligation using a straight line method.
Self Insurance Programs
The Company is self insured for professional, product and general
liability, auto and worker's compensation claims up to predetermined amounts
above which third party insurance applies. Estimates include ultimate costs for
both reported claims and incurred but not reported.
58
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 investments for
impairment whenever events or changes in circumstances indicate that the
carrying amount of assets may not be recoverable. The Company considers various
valuation factors including discounted cash flows, fair values and replacement
costs to assess any impairment of goodwill and other long lived assets.
Foreign Currency Translation
The Company follows the provisions of Statement of Financial Accounting
Standards No. 52, "Foreign Currency Translation". Substantially all assets and
liabilities of the Company's foreign subsidiaries are translated at year end
exchange rates, while revenue and expenses are translated at exchange rates
prevailing during the year. Adjustments for foreign currency translation
fluctuations are excluded from net earnings and are deferred in the cumulative
translation adjustment component of equity. In addition, the translation of
certain intercompany borrowings denominated in foreign currencies, which are
considered foreign equity investments, is included in the cumulative translation
adjustment.
Gains and losses resulting from the translation of revenues and expenses
and intercompany borrowings, which are not considered equity investments, are
included in general and administrative expense. Translation gains amounted to
$58, $766, and $27,732 for the twelve months ended December 31, 1999, 1998 and
1997, 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.
Earnings per Share
The Company adopted the provisions of SFAS No. 128, Earnings per Share,
effective for fiscal 1997. This statement requires the presentation of basic
earnings per share and diluted 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 from continuing operations
before cumulative effect of change in accounting for start up costs to be
considered for purposes of the diluted earnings per shares calculation.
Comprehensive Income
The Company has adopted the provisions of SFAS No. 130, Reporting
Comprehensive Income. This statement requires that all items that are required
to be recognized under accounting standards as components of comprehensive
income be reported in a financial statement that is displayed with the same
prominence as other financial statements. This statement further requires that
the Company classify items of other comprehensive income by their nature in a
financial statement and display the accumulated balance of other comprehensive
income separately from retained earnings and additional paid-in capital in the
equity section of a statement of financial position.
Pension and other Postretirement Benefits
Effective December 31, 1998, the Company adopted SFAS No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits". The provisions of
SFAS No. 132 revise employers' disclosures about pension and other post
retirement benefit plans. It does not change the measurement or recognition of
these plans. It standardized the disclosure requirements for pensions and other
post retirement benefits to the extent practicable.
59
New Pronouncements
In April 1998, Statement of Position No. 98-5, Reporting on the Costs of
Start-up Activities ("SOP 98-5"), was issued by the Accounting Standards
Executive Committee (AcSEC) of the AICPA and was adapted by the Company,
effective January 1, 1998. SOP 98-5 requires that the costs of start-up
activities, including organization costs, which have been previously
capitalized, should be expensed as incurred. As a result of the adoption of SOP
98-5, all deferred start-up activities as of January 1, 1998, have been
recognized as a cumulative effect of a change in accounting for start-up costs
net of tax benefit, in the consolidated statements of operations for the twelve
months ended December 31, 1998. During 1998, costs for start-up activities were
expensed as incurred.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative
Instruments and Hedging Activities, which establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts (collectively referred to as "derivatives") and for
hedging activities. This statement requires that an entity recognizes all
derivatives as either assets or liabilities in the balance sheet and measure
those instruments at fair value. The statement also sets forth the criteria for
determining whether a derivative may be specifically designated as a hedge of a
particular exposure with the intent of measuring the effectiveness of that hedge
in the statement of operations.
In June 1999, the Financial Accounting Standards Board issued SFAS No.
137, Accounting for Derivative Instruments and Hedging Activities, which amended
the effective date of SFAS No. 133. The amended SFAS No. 133 is effective for
all fiscal quarters of fiscal years beginning after June 15, 2000.
1996 Restructuring Costs
In 1996, the Company accrued approximately $50,000 for restructuring costs
relating to the closing of certain renal products manufacturing and distribution
operations as well as the closing of certain clinics of the Homecare Division.
These restructuring costs primarily relate to severance payments and lease
commitments. Through the period ended December 31, 1999 approximately $47,000 in
payments and other charges have been applied against these restructuring costs.
The restructuring plan has been completed and the remaining outstanding balance
will be used primarily for the remaining lease commitments for closed production
facilities.
Reclassification
Certain 1998 and 1997 amounts have been reclassified to conform with the
1999 presentation.
NOTE 3. ACQUISITIONS
The Company acquired certain health care facilities, and clinical
laboratories, for a total consideration of $65,235, $170,137 and $475,764 for
the twelve months ended December 31, 1999, 1998 and 1997, 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 $62,376, $157,836 and $383,626 for the twelve months ended December
31, 1999, 1998 and 1997, respectively.
Had the acquisitions that occurred during the twelve months ended December
31, 1999 been consummated on January 1, 1998, unaudited proforma net revenues
for the twelve months ended December 31, 1999 and 1998 would have been
$2,829,989 and $2,606,856, respectively. Unaudited proforma income (loss) from
continuing operations before cumulative effect of change in accounting for start
up costs would have been ($328,167) and $49,676 for the twelve months ended
December 31, 1999 and 1998, respectively.
Had the acquisitions that occurred during the twelve months ended December
31, 1998 been consummated on January 1, 1997, unaudited proforma net revenues
for the twelve months ended December 31, 1998 and 1997 would have been
$2,584,806 and $2,226,976, respectively. Unaudited proforma income from
continuing operations before cumulative effect of change in accounting for start
up costs would have been $50,806 and $27,657 for the twelve months ended
December 31, 1998 and 1997, respectively.
60
NOTE 4. OTHER BALANCE SHEET ITEMS
[Enlarge/Download Table]
DECEMBER 31,
1999 1998
---- ----
Inventories
Raw materials $ 41,045 $ 35,199
Manufactured goods in process 8,748 18,802
Manufactured and purchased inventory available for sale 90,748 86,615
---------- ----------
140,541 140,616
Health care supplies 42,571 29,173
---------- ----------
Total $ 183,112 $ 169,789
========== ==========
Under the terms of certain purchase commitments, the Company is
obligated to raw materials and health care supplies during
2000 amounting to $82,428
Other Current Assets
Miscellaneous accounts receivable $ 91,042 $ 70,126
Deposits and prepaid expenses 39,729 22,668
---------- ----------
Total $ 130,771 $ 92,794
========== ==========
Excess of Cost Over the Fair Value of Net Assets
Acquired and Other Intangible Assets:
Goodwill, less accumulated amortization of
$228,426 and $156,210 $2,713,385 $2,710,236
Patient relationships, less accumulated
amortization of $87,169 and $57,650 92,898 115,954
Other intangible assets, less accumulated
amortization of $109,109 and $75,307 459,208 491,234
---------- ----------
Total $3,265,491 $3,317,424
========== ==========
Accrued Liabilities
Accrued operating expenses $ 46,019 $ 42,943
Accrued insurance 54,702 66,513
Accrued legal and compliance costs 9,441 46,329
Accrued salaries and wages 53,371 45,151
Accounts receivable credit balances 48,932 42,804
Accrued interest 19,125 30,742
Accrued other 21,669 14,356
Accrued physician compensation 17,721 17,495
Accrued other related costs for OIG investigation 20,378 --
---------- ----------
Total $ 291,358 $ 306,333
========== ==========
Accounts receivable credit balances principally reflect overpayments
from third party payors and are in the process of repayment.
61
NOTE 5. SALE OF ACCOUNTS RECEIVABLE
On September 27, 1997, NMC established a new $204,000 receivable financing
facility (the "A/R Facility") with NationsBank, N.A. (now known as Bank of
America, N.A.) to replace its former facility with CitiCorp. The A/R Facility
was amended on February 27, 1998 to increase the commitment amount to $331,500.
It was further amended on September 27, 1999 to increase the commitment amount
to $360,000 and to add WestDeutsche Landesbank Girozentrale, New York Branch, as
an additional Administrative Agent.
The current agreement carries an effective interest rate based on
commercial paper, which was approximately 5.90% at December 31, 1999, and
matures on September 25, 2000. At December 31, 1999 and 1998, $335,000 and
$305,600 had been received pursuant to such sales, respectively; these amounts
are reflected as reductions to accounts receivable. Under the terms of the
agreement, new interests in accounts receivable are sold as collections reduce
previously sold accounts receivable. The costs related to such sales are
expensed as incurred and recorded as interest expense and related financing
costs. There were no gains or losses on these transactions.
NOTE 6. DEBT
Long-term debt to outside parties consists of:
[Enlarge/Download Table]
DECEMBER 31,
1999 1998
---- ----
NMC Credit Facility $ 738,150 $1,032,700
Third-party debt, primarily bank borrowings at
variable interest rates (3% -14%) with various maturities 17,454 16,215
---------- ----------
755,604 1,048,915
Less amounts classified as current 140,539 38,035
---------- ----------
$ 615,065 $1,010,880
========== ==========
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 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 payments 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 31, 1999, the Company successfully amended certain covenants including,
among other things, financial rations contained in its senior credit facility
that would have been affected by the impact of the settlement related to the
U.S. Government investigation. At December 31, 1999, the Company was in
compliance with all such covenants.
In February 1998, $250,000 of Facility 2 was repaid, primarily using
borrowings from affiliates. The voluntary prepayment reduces the available
financing under the agreement to $1,750,000. The Company made its first schedule
principal payment in December 1999, further reducing the amount available under
the NMC Credit Facility to $1,716,250. At December
62
31, 1999 and 1998 the Company had available $777,000 and $508,000, respectively,
of additional borrowing capacity under the NMC Credit Facility including $49,000
and $33,000 respectively, available for additional letters of credit.
Borrowings from affiliates consists of:
[Download Table]
DECEMBER 31,
1999 1998
---- ----
Fresenius Medical Care AG, borrowings at
interest rates approximating 5.80 - 6.76% .... $ 42,949 $ 94,471
Fresenius AG, borrowings at interest rates
approximating 7.06 - 7.44% ................... 330,000 60,000
Fresenius Medical Care Finance SA ................ -- 47,665
Fresenius Medical Care Trust Finance S.a.r.l.,
borrowings at interest rates of 8.43% and 9.25% 786,524 786,524
Other ............................................ 1,982 340
---------- ----------
1,161,455 989,000
Less amounts classified as current ............... 372,949 32,716
---------- ----------
Total ............................................ $ 788,506 $ 956,284
========== ==========
Scheduled maturities of long-term debt and borrowings from affiliates
are as follows:
[Download Table]
2000 $ 513,527
2001 157,005
2002 154,607
2003 299,400
2004 0
2005 and thereafter 792,519
----------
Total $1,917,058
==========
63
NOTE 7. SPECIAL CHARGE FOR SETTLEMENT OF INVESTIGATION AND RELATED COSTS
Since 1995, National Medical Care, Inc. ("NMC"), a subsidiary of Fresenius
Medical Care Holdings, Inc. (the "Company"), and certain of NMC's subsidiaries
has been the subject of an investigation (the "OIG Investigation") by the Office
of Inspector General ("OIG") of the United States Department of Health and Human
Services, the United States Attorney for the District of Massachusetts (the
"U.S. Attorney's Office") and other authorities concerning possible violations
of federal laws, including the anti-kickback statute and the False Claims Act.
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) the matters covered in the
OIG Investigation and (ii) NMC's claims with respect to approximately $153.5
million of outstanding Medicare receivables for nutrition therapy rendered on or
before December 31, 1999 (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). This special pre-tax charge includes (i) a charge of $486.3
million for settlement payment obligations to the Government, (ii) a $94.3
million write-off of the remaining receivables described above, and (iii) a
reserve for other related costs of $20.4 million. The settlement payment
obligations to the Government and the amounts due to the Company for the
outstanding Medicare receivables have been classified in the balance sheet at
their expected settlement dates. See Note 16 - "Commitments and Contingencies -
Legal Proceedings.
NOTE 8. DISCONTINUED OPERATIONS
Effective June 1, 1998, the Company classified its non-renal diagnostic
services business ("Non-Renal Diagnostic Services") and homecare business
("Homecare") as discontinued operations. The Company disposed of its Non-Renal
Diagnostic Services division and its Homecare division on June 26, 1998 and July
29, 1998, respectively. In connection with the sale of Homecare, the Company
retained the assets and the operations associated with the delivery of IDPN. The
Company recorded a net after tax loss of $97 million in 1998 on the sale of
these businesses. The net loss on the disposal of these businesses and their
results of operations have been accounted for as discontinued operations.
IDPN receivables of $153.5 million, that had been included in net assets
of discontinued operations were resolved as part of the Settlement Agreements
with the Government as part of the OIG Investigation. As a result, a $94.3
million write-off was taken against these receivables. The remaining receivables
have been reclassified to other current and non-current IDPN receivables on the
balance sheet and will be collected from the Government over the next eighteen
months according to terms under the Settlement Agreement. See Note 7 - "Special
Charge for Settlement of Investigation and Related Costs" and Note 16 -
"Commitments and Contingencies - Legal Proceedings.
Operating results of discontinued operations are presented below:
Discontinued Operations - Results of Operations
The revenues and results of operations of the discontinued operations of
Non Renal Diagnostic Services and Homecare divisions were as follows:
[Enlarge/Download Table]
TWELVE MONTHS ENDED DECEMBER 31,
-------------------------------------------------
1999 1998 1997
----------- --------- ---------
NET REVENUES $ -- $ 120,940 $ 283,006
----------- --------- ---------
Loss from operations before income tax benefit -- (14,212) (21,001)
Income tax benefit -- (5,543) (7,218)
----------- --------- ---------
Loss from operations -- (8,669) (13,783)
----------- --------- ---------
Loss on disposal before income tax benefit -- (140,000) --
Income tax benefit -- (42,772) --
----------- --------- ---------
Loss on disposal -- (97,228) --
----------- --------- ---------
Loss from discontinued operations -- (105,897) (13,783)
=========== ========= =========
64
NOTE 9. INCOME TAXES
Income (loss) from continuing operations before income taxes and
cumulative effect of change in accounting for start-up costs are as follows:
[Download Table]
TWELVE MONTHS ENDED DECEMBER 31,
---------------------------------------------
1999 1998 1997
--------- --------- ---------
Domestic $(410,034) $ 126,347 $ 80,461
Foreign 1,970 (63) (821)
--------- --------- ---------
Total income (loss) $(408,064) $ 126,284 $ 79,640
========= ========= =========
The provision (benefit) for income taxes was as follows:
[Download Table]
TWELVE MONTHS ENDED DECEMBER 31,
-----------------------------------------
1999 1998 1997
-------- -------- --------
Current tax expense
Federal $ 1,545 $ 44,777 $ 25,040
State 9,916 12,406 13,354
Foreign 626 530 1,064
-------- -------- --------
Total Current 12,087 57,713 39,458
Deferred tax (benefit) expense
Federal (87,926) 14,642 5,137
State (4,981) 2,092 1,125
Foreign (217) -- --
-------- -------- --------
Total deferred tax (benefit) (93,124) 16,734 6,262
-------- -------- --------
Total provision (benefit) .. $(81,037) $ 74,447 $ 45,720
======== ======== ========
Deferred tax liabilities (assets) are comprised of the following:
[Download Table]
DECEMBER 31,
---------------------------
1999 1998
--------- ---------
Allowance for doubtful accounts $ (26,345) $ (28,965)
Insurance liability (21,125) (23,550)
Legal liability (13,109) (28,972)
Deferred and incentive compensation (9,055) (9,335)
Pension and benefit accruals (19,424) (16,153)
Accrued interest (36,181) (9,990)
Inventory reserves (5,236) (4,155)
Accrued expenses (13,643) (14,684)
Other temporary differences (4,653) (8,789)
Government settlement (92,469) --
Loss carry forwards (5,301) (18,405)
--------- ---------
Gross deferred tax assets (246,541) (162,998)
Deferred tax assets valuation 5,029 5,340
--------- ---------
Deferred tax assets (241,512) (157,658)
--------- ---------
Depreciation and amortization 156,113 162,148
Other temporary differences 255 462
--------- ---------
Gross deferred tax liabilities 156,368 162,610
--------- ---------
Net deferred tax (asset) liabilities $ (85,144) $ 4,952
========= =========
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The provision (benefit) for income taxes for the twelve months ended
December 31, 1999, 1998, and 1997 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:
[Download Table]
TWELVE MONTHS ENDED DECEMBER 31,
--------------------------------------
1999 1998 1997
------ ------ ------
Statutory federal tax rate (benefit) (35.0%) 35.0% 35.0%
State income taxes, net of Federal
tax benefit 0.8 7.5 11.8
Amortization of goodwill 5.1 16.6 25.2
Government Settlement 8.7 -- --
Foreign losses and taxes (0.1) 0.4 1.7
Decrease in valuation allowance 0.0 0.0 (16.5)
Other 0.6 (0.6) 0.2
------ ------ ------
Effective tax rate (benefit) (19.9%) 58.9% 57.4%
====== ====== ======
The net (decrease) increase in the valuation allowance for deferred tax
assets was $(311), $1,972, and $(11,042) for the twelve months ended December
31, 1999, 1998, and 1997, respectively. The changes for 1999 and 1998 relate to
activities incurred by foreign subsidiaries. The decrease for 1997 relates
mainly to the utilization of the Fresenius USA Federal net operating loss carry
forward.
The deferred tax asset of $92,469 for Government Settlement represents the
benefit of future tax deductions associated with payments to be made in
settlement of the OIG investigation.
At December 31, 1999, there were approximately $12,652 of foreign net
operating losses, the majority of which are not subject to an expiration period.
The Company also has $777 of Federal net operating losses which will expire in
the year 2018.
Provision has not been made for additional federal, state, or foreign
taxes on $3,937 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 $1,577 of additional foreign withholding and
federal income taxes.
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NOTE 10. PROPERTIES AND EQUIPMENT
[Download Table]
DECEMBER 31,
---------------------------
1999 1998
--------- ---------
Land and improvements $ 5,205 $ 5,219
Buildings 68,812 68,384
Capitalized lease property 6,668 9,398
Leasehold improvements 201,405 176,099
Equipment and furniture 363,244 327,643
Construction in progress 25,028 16,932
--------- ---------
670,362 603,675
Accumulated depreciation and amortization (241,569) (174,036)
--------- ---------
Properties and equipment, net $ 428,793 $ 429,639
========= =========
Depreciation expense relating to properties and equipment amounted to
$80,803, $81,683 and $76,912 for the years ended December 31,1999, 1998 and
1997, respectively.
Included in properties and equipment as of December 31, 1999, and 1998
were $25,355 and $24,428, 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 $8,762, $7,679 and $6,230 for the twelve months ended December 31, 1999,
1998 and 1997, respectively.
Leases
In September 1997, FUSA entered into an amended operating lease
arrangement with a bank that covers approximately $40,100 of certain new
equipment of FUSA's dialyzer manufacturing facility at its Ogden, Utah plant.
The agreement has a basic term expiration date of January 1, 2010, renewal
options and a purchase option at the greater of 20% of the original cost or the
fair market value.
Future minimum payments under noncancelable leases (principally for
clinics and offices) as of December 31, 1999 are as follows:
[Download Table]
OPERATING CAPITAL
LEASES LEASES TOTAL
-------- -------- --------
2000 $117,662 $ 1,647 $119,309
2001 108,985 342 109,327
2002 89,050 300 89,350
2003 77,285 284 77,569
2004 96,418 230 96,648
2005 and beyond 107,637 292 107,929
-------- -------- --------
Total minimum payments $597,037 $ 3,095 $600,132
======== ========
Less interest and operating costs 333
--------
Present value of minimum lease Payments $1,572
payable in 2000) $ 2,762
========
Rental expense for operating leases was $132,248, $103,838 and $81,740 for
the years ended December 31, 1999, 1998 and 1997, respectively. Amortization of
properties under capital leases amounted to $852, $968 and $3,445 for the years
ended December 31, 1999, 1998 and 1997, 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.
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NOTE 11. EMPLOYEE INCENTIVES
Annual Incentive Compensation Plan
The Company has an annual incentive compensation plan under which key
employees of the Company are eligible to receive bonuses based upon the
achievement of EBIT results and other key objectives. Target awards range from
10% to 40% of employee's salary. Awards under these plans totaled $5,020 and
$7,120 for the twelve months ended December 31, 1999 and 1998, respectively. No
awards were paid in 1997.
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.
[Enlarge/Download Table]
TWELVE MONTHS ENDED DECEMBER 31,
--------------------------------------------
1999 1998 1997
-------- -------- --------
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year 87,464 72,025 63,260
Service Cost 8,212 7,416 7,100
Interest Cost 5,966 5,217 4,561
Amendments (5) -- --
Actuarial (Gain)/Loss (12,496) 5,810 (1,972)
Divestures -- (1,717) --
Benefits Paid (1,404) (1,287) (924)
-------- -------- --------
Benefit obligation at end of year 87,737 87,464 72,025
-------- -------- --------
CHANGE ON PLAN ASSETS
Fair value of plan assets at beginning of year 77,019 65,088 54,218
Actual return on plan assets 11,179 13,218 11,794
Employee contribution -- -- --
Benefits paid (1,404) (1,287) (924)
-------- -------- --------
Fair value of plan assets at end of year 86,794 77,019 65,088
-------- -------- --------
Funded Status (942) (10,444) (6,937)
Unrecognized net (gain)/loss (30,993) (15,239) (15,152)
Unrecognized prior service cost (4) -- --
-------- -------- --------
Accrued benefit costs (31,939) (25,683) (22,089)
-------- -------- --------
WEIGHTED - AVERAGE ASSUMPTIONS AS OF DECEMBER 31,
Discount rate 7.50% 6.75% 7.50%
Expected return of plan assets 9.70 9.70 9.00
Rate of compensation increase 4.50 4.50 4.50
COMPONENTS OF NET PERIOD BENEFIT COST
Service Cost $ 8,212 $ 7,416 7,100
Interest Cost 5,966 5,217 4,561
Expected return on plan assets (7,401) (6,430) (4,758)
Amortization of prior service cost (1) -- --
Recognized net (gain)/loss (520) (891) (139)
Curtailment net (gain) -- (1,717) --
-------- -------- --------
Net periodic benefit costs $ 6,256 $ 3,595 $ 6,764
-------- -------- --------
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 $3,057 and 3,145 at December 31, 1999 and 1998,
respectively.
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Pension expense for this plan, for the twelve months ended December 31, 1999,
1998 and 1997 was $402, $374 and $360, respectively.
NMC does not provide any postretirement benefits to its employees other
than those provided under its pension plan and supplemental executive retirement
plan.
Defined Contribution Plans
The Company's employees are eligible to join 401 (k) Savings Plan once
they have achieved a minimum of one year 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. The Company's total contributions for the year ended December 31, 1999,
1998 and 1997 was $7,298, $7,617 and $7,165, respectively.
NOTE 13. EQUITY
PREFERRED STOCK
At December 31, 1999 and 1998, 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
[Enlarge/Download Table]
- 6% Cumulative (1); 40,000 shares authorized; 36,460 outstanding $ 3,646
- 8% Cumulative Class A (2); 50,000 shares authorized; 16,176 outstanding 1,618
- 8% Noncumulative Class B (2); 40,000 shares authorized; 21,483 outstanding 2,148
-------
$ 7,412
-------
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 1998, 2,169,711 options were cancelled or
forfeited leaving 311,064 options outstanding under this plan. If these awards
are exercisable, a total of 103,688 non-voting preference shares would be issued
at December 31, 1998. At December 31, 1999, 187,333 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,
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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 1024,083 Preference Shares. During 1999, FMC
granted 571,940 Preference Shares. During 1998 and 1999, options for 140,168
Preference Shares were forfeited or cancelled under the FMC 98 plan. At December
31, 1999, there were 233,812 Preference Shares for which options could be
issued. At December 31, 1999, 314,285 options were exercisable under the FMC 98
plan.
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, 1999 and 1998, the Company had
outstanding foreign currency contracts for the purchase of Euros ("EUR") and
Deutsche Marks ("DEM") totaling $41,925 and $33,280, respectively. The contracts
outstanding at December 31, 1999 include forward contracts for delivery of EUR
between January 2000 and May 2001, at rates ranging from $1.0420 to $1.1192 per
EUR, plus a zero-cost collar option contract to hedge the purchase of EUR 2,500
within the range of $1.0730 to $1.0988 per EUR with a maturity date in May 2000.
The fair value of forward currency contracts are the estimated amounts
that the Company would receive or pay to terminate the agreement at the
reporting date, taking into account the current exchange rates and the current
credit worthiness of the counterparties. At December 31, 1999 and 1998, the
Company would have paid $2,753 and received $1,658, respectively, to terminate
the contracts.
Interest Rate Agreements
At December 31, 1999 and 1998, the Company had interest rate swaps and
option agreements outstanding with various commercial banks for notional amounts
totaling $1,600,000 and $1,600,000, respectively. Of the amount outstanding at
December 31, 1999, $1,350,000 relate to agreements that became effective in 1997
and 1998. Three other agreements totaling $250,000 become effective on January
4, 2000. All of these agreements were entered into for other than trading
purposes. Hedges totalling $850,000 expired on January 4, 2000, while the rest
of the contracts expire at various dates between January 4, 2000 and January 4,
2005.
For a notional amount of $1,450,000, 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, 1999: $738,150), drawdowns under
the receivables financing facility (drawn as of December 31, 1999: $335,000),
LIBOR-based borrowings from affiliates under a Subordinated Loan Note (drawn as
of December 31, 1999: $355,000) and certain operating lease payments to fixed
rates of interest ranging between 6.05% and 6.6025%.
For a notional amount of $150,000, the option agreements give protection
against an increase of interest rates above 6.76% whereas the Company has to pay
the difference between the current interest rates and 5.55% when the current
rates are below that level. These option contracts will be effective between
January 4, 2000 and January 4, 2005. Under the NMC Credit Facility, the Company
agreed to maintain at least $500,000 of interest rate protection.
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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, 1999 and 1998 would require the
Company to receive approximately $9,200 and pay approximately $51,500,
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,
1999, 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, 1999 and 1998, the carrying value of cash, cash
equivalents, accounts receivable, prepaid expenses, accounts payable, accrued
expenses, short-term borrowings, short-term borrowing from related parties and
current liabilities approximated their fair values, based on the short-term
maturities of these instruments. At December 31, 1999, the fair value of the
mandatorily redeemable trust preferred securities exceeded their carrying value
by $4,990. At December 31, 1998, the fair value of this debt outstanding at that
time exceeded its carrying value by $13,486. Fair value was determined 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, 1999 and 1998, the Company had
net accounts payable of $12,361 and $17,966, 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.
NOTE 16. COMMITMENTS AND CONTINGENCIES
Contingent Non-NMC Liabilities of Grace New York (Now Known as Fresenius
Medical Care Holdings, Inc.)
The Company was formed as a result of a series of transactions pursuant to
the Agreement and Plan of Reorganization (the "Merger") dated as of February 4,
1996 by and between W.R. Grace & Co.-Conn. ("Grace Chemicals"). In connection
with the Merger, Grace Chemicals agreed to indemnify the Company and NMC against
all liabilities of the Company and its successors, whether relating to events
occurring before or after the Merger, other than liabilities arising from or
relating to NMC operations. The Company remains contingently liable for certain
liabilities with respect to pre-Merger matters that are not related to NMC
operations. The Company believes that in view of the nature of the non-NMC
liabilities and Grace Chemicals' current financial position, the risk of
significant loss from non-NMC liabilities is remote.
Were events to violate the tax-free nature of the Merger, the resulting tax
liability would be the obligation of the Company. Subject to representations by
Grace Chemicals, the Company and Fresenius AG, Grace Chemicals has agreed to
indemnify the Company for such a tax liability. If the Company was not able to
collect on the indemnity, the tax liability would have a material adverse effect
on the Company's business, the financial condition of the Company and the
results of operations.
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LEGAL PROCEEDINGS
SETTLEMENT OF THE U.S. GOVERNMENT INVESTIGATION
Since 1995, NMC and certain of its subsidiaries had been the subject of an
investigation by the Office of Inspector General of the United States Department
of Health and Human Services, the United States Attorney for the District of
Massachusetts and other government authorities concerning possible violation of
federal laws, including the anti-kickback statute and the False Claims Act.
On January 18, 2000, the Company, NMC and certain affiliated companies
executed definitive agreements with the U.S. government to settle the matter
covered in the government investigations and National Medical Care's claim with
respect to approximately $153.5 million of outstanding Medicare accounts
receivable for intradialytic parenteral nutrition therapy provided on and before
December 31, 1999. The Settlement was approved by the United States District
Court for the District of Massachusetts on February 2, 2000.
Under the settlement agreements, the Company will make a net settlement
payment to the U.S. government of approximately $427.1 million. These amounts
comprise:
- an initial payment to the government of approximately $286.4
million paid in February 2000.
- additional installment payments over the eighteen months
totaling approximately $186.3 million; and
- payments previously made to the government under the
government's voluntary disclosure program totaling
approximately $13.6 million; less
- installment payments to be made by the government to the
Company over the next eighteen months totaling approximately
$59.2 million related to the intradialytic parenteral
nutrition therapy accounts receivable claims.
The government payments bear interest on unpaid amounts at 7.5% per annum.
Interest on installment payments to the government will accrue at 6.3% on $51.2
million of the installment payments and at 7.5% annually on the balance of the
installment payment, until paid in full. As security for the Company's
obligations under the settlement agreement, a $150 million letter of credit that
was issued to the government in 1996 has been amended to increase the amount
available for drawing under the letter of credit to $189.6 million. The maximum
drawing amount will be reduced over time as the Company makes installment
principal payments to the government.
The Company anticipates that the net cash outflow resulting from the
settlement agreements will be approximately $265.5 million. This amount reflects
the anticipated receipt of the account receivable payment from the government,
the tax benefit of a special charge the Company recorded in connection with the
settlement, which is discussed below, and the payment terms of the net
settlement amount. The Company expects to realize the cash savings of the tax
benefit over the next eighteen months.
The Company believes it will have sufficient cash flows from continued
operations and borrowing capacity under its senior credit agreement to make the
settlement payment in accordance with the settlement agreement. The Company also
believes that following these payments, the Company will continue to have
sufficient funds available for both our day-to-day operations and our
anticipated growth.
In anticipation of the settlement, a pre-tax charge totaling $590 million
($412 million net of taxes) was recorded against consolidated earnings in the
three-month period ended September 30, 1999. The Company recorded an additional
charge to earnings of approximately $11 million in the three-month period ended
December 31, 1999 to reflect the reduction in anticipated payments from the
government for the resolution of the intradialytic parenteral nutrition therapy
receivable claims. These charges will cover the payment of the net settlement
amount, a $94.3 million write-off of the remaining nutrition therapy accounts
receivable, and other related costs.
72
In December 1999, the senior credit agreement was amended to enable the
Company to continue in compliance with the covenants upon consummation of the
settlement.
The government investigation covered the following areas:
- NMC's dialysis services business, principally relating to its
Medical Director contracts and compensation;
- NMC's treatment of credit balance resulting from overpayments
received under the Medicare, Medicaid, TriCare and other
government programs, NMC Medical Products, Inc.'s billing for
home dialysis products, and NMC's payment of supplemental
medical insurance premiums on behalf of indigent patients;
- LifeChem, Inc.'s laboratory business, including testing
procedures, marketing, customer relationships, competition,
overpayments that were received by LifeChem, Inc. from the
Medicare program, a 1997 review of dialysis facilities'
standing orders, and the provision of discounts on products
from NMC Medical Products, Inc, grants, equipment and
entertainment to LifeChem, Inc.'s customers;
- NMC Homecare, Inc.'s intradialytic parenteral nutrition
therapy business and, in particular, information concerning
utilization of intradialytic parenteral nutrition therapy,
documentation of claims and billing practices including
various services, equipment and supplies, and payments made to
third parties as compensation for administering intradialytic
parenteral nutrition therapy; and
- Billing for certain Doppler flow and bio-impedance analysis
tests performed in clinical studies.
As a result of the settlement, National Medical Care's subsidiaries,
Lifechem, Inc., NMC Homecare, Inc. and NMC Medical Products, Inc. pled guilty to
certain violations of federal law. The plea agreements impose a total of
$101million in federal criminal fines, which have been included in the net
settlement amount described above. As a consequence of their guilty pleas, these
subsidiaries will be excluded effective March 31, 2000 from further
participation in federally funded health care programs, including Medicare,
Medicaid and TriCare. The Company believes that these exclusions will not
materially interrupt the Company's provision or receipt of payment for the
products and services that the excluded subsidiaries provides, because the
Company intends to continue to provide these products and services through other
subsidiaries, which will continue to be qualified to participate in federal
health care programs.
With the exception of these three guilty pleas, the Company has been
advised that the government has declined criminal prosecution of FMC and its
subsidiaries, with respect to all aspects of the government investigation and
that there is no pending federal criminal investigation of Fresenius Medical
Care Holdings. Further, with respect to the settlement, the government has
released Fresenius Medical Care Holdings from civil liability for all of the
conduct described in the settlement agreements. The government has also advised
the Company that, with the limited exception described below, the government has
no current investigation and no intention of initiating an investigation in
connection with any conduct that has been the subject of the government
investigations. The continued effectiveness of these releases is subject to the
Company satisfying all payment obligations under the settlement agreements.
There have been allegations raised by private parties against the Company, most
of which have been previously investigated by the government in the course of
the government investigation and resolved without a finding of liability against
the Company. The government has reserved the right to investigate elements of
these allegations that have not previously been investigated. While there can be
no assurance, the Company believes that the resolution of these recent
allegations will not have a material adverse impact on the business, financial
condition or results of operations.
"Whistleblower actions" are filed under seal as a matter of law in the
first instance, thereby preventing disclosure to the Company and to the public,
except by court order. The Company and its subsidiaries may be the subject of
other whistleblower actions not known to the Company, or which have not yet been
unsealed. The resolution of any such action could have a material adverse impact
on our business, financial condition and results of operations.
With one exception, each of the qui tam or whistleblower actions which
serves as the basis for the government investigation have been dismissed as a
result of the settlement. The exception is a portion of a qui tam proceeding
filed in the United States District Court for the Middle District of Tennessee
on December 15, 1994. That action was transferred to the United Stated District
Court for the District of Massachusetts in 1995, and disclosed to the Company in
September 1999. The
73
portion of this qui tam action that will not be dismissed as a result of the
settlement alleges, among other things, that the Company violated the Medicare
and Medicaid Anti-kickback Statute by providing discounted hemodialysis products
to induce the purchase of laboratory services. In the settlement agreement, the
U. S. government has declined to continue to pursue further the investigation or
prosecution of these allegations. The government and the current and former
employees who filed this qui tam action, called "relators," offered to dismiss
this portion of this qui tam action in connection with the settlement. However,
this offer required that the Company grant a full release of all of the
Company's claims against the relators, and the Company is unwilling to do so.
While there can be no assurance, the Company believe that the resolution of
these remaining allegations will not have a material adverse impact on the
Company's business, financial condition or results of operations.
The settlement does not extend to any current or former employees of NMC
or its subsidiaries, including those who have been, or may be, indicted in
connection with the government investigations.
In connection with the settlement, the Company entered into an eight-year
Corporate Integrity Agreement dated January 18, 2000 with the government. During
the term of this agreement, the Company is required, among other things, to
ensure that its current compliance program includes, at least the following:
- a written code of conduct;
- compliance training program, compliance policies and
procedures relating to the areas covered by the government
investigation;
- screening of employees and others for eligibility to
participate in federal health care programs;
- annual audits by an independent review organization;
- a confidential disclosure program; and
- periodic reporting to the government.
The Corporate Integrity Agreement provides for penalties of up to $2,500
per day for each day during which the Company fails to satisfy its obligations
under the agreement. The Corporate Integrity Agreement permits the government to
exclude the Company and its subsidiaries from participation in federal health
care programs if a material breach of the agreement occurs and is not corrected
by the Company within thirty days after the Company receives written notice of
the breach. The Company derives approximately 55% of its consolidated revenue
from U.S. federal health care benefit programs. Consequently, a material breach
the Company of the Corporate Integrity Agreement that results in the exclusion
of the Company or its subsidiaries from continued participation in federal
health care programs would have a material adverse effect on its business,
financial condition and results of operations.
The foregoing discussion of the settlement, the settlement agreements, the
plea agreements and the Corporate Integrity Agreement describes the material
terms of those agreements but is not complete and is qualified in its entirety
by reference to the full text of the agreements. These agreements have been
filed as exhibits to the Company's periodic reports to the Securities and
Exchange Commission, and may be obtained from the Securities and Exchange
Commission as described under "Where You Can Find More Information."
OTHER LEGAL PROCEEDINGS
DISTRICT OF NEW JERSEY INVESTIGATION
NMC had received multiple subpoenas from a federal grand jury in the
District of New Jersey investigating, among other things, whether NMC sold
defective products, the manner in which NMC handled customer complaints and
certain matters relating to the development of a new dialyzer product line. NMC
cooperated with this investigation and provided the grand jury with extensive
documents. In February, 1996, NMC received a letter from the U.S. Attorney's
Office for the District of New Jersey indicating that it was the target of a
federal grand jury investigation into possible violation of criminal law in
connection with its efforts to persuade the Food and Drug Administration to lift
a January 1991 import hold issued with respect to NMC's Dublin, Ireland
manufacturing facility. In June 1996, NMC received a letter from the U.S.
Attorney for the District of New Jersey indicating that the U.S. Attorney had
declined to prosecute NMC with respect to a submission related to NMC's effort
to lift the import hold. The letter added that NMC remains a subject of a
federal grand jury's investigation into other matters. NMC also produced
documents in response to a June 1996 subpoena from the federal grand jury
requesting certain documents in connection with NMC's imports of the FOCUS(R)
dialyzer from January 1991 to November 1995. Pursuant to a plea agreement
entered into with the U.S. Attorney for the District of New Jersey and the Food
and Drug Administration, NMC's subsidiary, NMC Medical Products, Inc. in
December 1999 pled guilty to two
74
misdemeanor violations of the Federal Food, Drug and Cosmetic Act, and agreed to
pay the U.S government $3.8 million. The U.S. District Court for the District of
New Jersey approved the terms of the plea agreement and the judgement has been
satisfied by payment of the $3.8 million. Under the terms of the plea agreement,
NMC Medical Products has been released, together with National Medical Care and
its related entities and their present officers, directors and employees, from
any further civil or criminal liability with respect to all matters investigated
by the U.S. Attorney's Office for the District of New Jersey, including the
matters described above, or arising out of Food and Drug Administration
inspection of NMC Medical Products' facilities prior to October 20, 1995. The
$3.8 million paid in January 2000 pursuant to this agreement does not constitute
part of the $427.1 million in net payments relating to the settlement of the
U.S. government investigation.
COMMERCIAL INSURER LITIGATION
In 1997, the Company, NMC, and certain named NMC subsidiaries, were served
with a civil complaint filed by Aetna Life Insurance Company in the U.S.
District Court for the Southern District of New York. Based in large part on
information contained in prior reports filed by the Company with the Securities
and Exchange Commission, the lawsuit alleges inappropriate billing practices for
nutritional therapy, diagnostic and clinical laboratory tests and
misrepresentations. In April 1999, Aetna amended its complaint to include its
affiliate, Aetna U.S. Healthcare, Inc., as an additional plaintiff, and to make
certain other limited changes in its pleading. The amended complaint seeks
unspecified damages and costs. In February 2000, the Company was served with a
similar complaint filed by Connecticut General Life Insurance Company, Equitable
Life Assurance Society for the United States, Cigna Employee Benefits Services,
Inc. and Guardian Life Insurance Company of America, Inc. (Connecticut General
Life Insurance Company et al v. National Medical Care et al, 00-Civ-0932)
seeking unspecified damages and costs. However, the Company, NMC and its
subsidiaries believe that there are substantial defenses to the claims asserted,
and intend to vigorously defend both lawsuits. Other private payors have
contacted the Company and may assert that NMC received excess payment and
similarly, may join either lawsuit or file their own lawsuit seeking
reimbursement and other damages from NMC. An adverse result could have a
material adverse effect on the Company's business, financial condition and
result of operations.
In May 1999, the Company filed counterclaims against Aetna Life Insurance
Company and Aetna U.S. Healthcare, Inc. based on inappropriate claim denials and
delays in claim payments. The Company is investigating similar counterclaims
against other private payors that have filed a complaint or contacted them. An
adverse result of these litigations could have a material adverse effect on the
Company's business, financial position and result of operations. The settlement
of the U.S. government investigations does not resolve these proceedings and
claims.
The ultimate outcome and impact on the Company of these proceedings cannot
be predicted at this time.
OBRA 93
The Omnibus Budget Reconciliation Act of 1993 affected the payment of
benefits under Medicare and employer health plans for dual-eligible ESRD
patients. In July 1994, the Health Care Financing Administration issued an
instruction to Medicare claims processors to the effect that Medicare benefits
for the patients affected by that act would be subject to a new 18-month
"coordination of benefits" period. This instruction had a positive impact on
NMC's dialysis revenues because, during the 18-month coordination of benefits
period, patients' employer health plans were responsible for payment, which was
generally at rates higher than those provided under Medicare.
In April 1995, the Health Care Financing Administration issued a new
instruction, reversing its original instruction in a manner that would
substantially diminish the positive effect of the original instruction on NMC's
dialysis business. The Health Care Financing Administration further proposed
that its new instruction be effective retroactive to August 1993, the effective
date off 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.
75
On May 5, 1995, NMC filed a complaint in the U.S. District Court for the
District of Columbia (National Medical Care, Inc. and Bio-Medical Applications
of Colorado, Inc. d/b/a Northern Colorado Kidney Center v. Shalala, C.A. No.
95-0860 (WBB) seeking to preclude the Health Care Financing Administration from
retroactively enforcing its April 24, 1995 implementation of the Omnibus Budget
Reconciliation Act of 1993 provision relating to the coordination of benefits
for dual eligible ESRD patients. On May 9, 1995, NMC moved for a preliminary
injunction to preclude the Health Care Financing Administration from enforcing
its new policy retroactively, that is, to billing for services provided between
August 10, 1993 and April 23, 1995. On June 6, 1995, the court granted NMC's
request for a preliminary injunction and in December of 1996, NMC moved for
partial summary judgment seeking a declaration from the Court that the Health
Care Financing Administration's retroactive application of the April 1995 rule
was legally invalid. The Health Care Financing Administration cross-moved for
summary judgement on the grounds that April 1995 rule was validly applied
prospectively. In January 1998, the court granted NMC's motion for partial
summary judgment and entered a declaratory judgement in favor of NMC, holding
the Health Care Financing Administration's retroactive application of the April
1995 rule legally invalid. Based on its finding, the Court also permanently
enjoined the Health Care Financing Administration from enforcing and applying
the April 1995 rule retroactively against NMC. The Court took no action on the
Health Care Financing Administration's motion for summary judgement pending
completion of the outstanding discovery. On October 5, 1998, NMC filed its own
motion for summary judgement requesting that the Court declare the Health Care
Financing Administration's prospective application of the April 1995 rule
invalid and permanently enjoin Health Care Financing Administration from
prospectively enforcing and applying the April 1995 rule. The Court has not yet
ruled on the parties' motions. The Health Care Financing Administration elected
not to appeal the Court's June 1995 and January 1998 orders. The Health Care
Financing Administration may, however, appeal all rulings at the conclusion of
the litigation. If the Health Care Financing Administration should successfully
appeal so that the revised interpretation would be applied retroactively, NMC
may be required to refund the payment received from employer health plans for
services provided after August 10, 1993 under the Health Care Financing
Administration's original implementation, and to re-bill Medicare for the same
services, which would result in a loss to NMC of approximately $120 million
attributable to all periods prior to December 31, 1995. Also, in this event, the
Company's business, financial condition and results of operations would be
materially adversely affected. The settlement of the U.S. government
investigation does not resolve these proceedings and claims.
ADMINISTRATION APPEALS
NMC and its subsidiaries regularly purse various administrative appeals
relating to reimbursement issues in connection with their dialysis facilities.
One such appeal consists of a challenge to the Medicare regulation which capped
reimbursement for the bad debts incurred by dialysis facilities. In 1998, the
U.S. Court of Appeals for the District of Columbia ruled favorably in connection
with the bad debt issue, holding that the Secretary of Health and Human Services
had not adequately justified the bad debt regulation, and ruling that the
government's order adopting the rule was arbitrary and capricious. The Court of
Appeals remanded the matter to the Secretary to provide a more adequate
explanation of the bad debt cap or to abandon it. Subsequently, the Court
modified its holding to continue the bad debt regulation in effect pending
remand and, the Company has revised its estimate of recoveries for the
previously disallowed bad debt expense associated with the regulation. The
Company has reached an agreement with the Department of Health and Human
Services with respect to certain material terms to resolve this matter in June
1999. Pursuant to the agreement the Health Care Financing Administration paid
the Company $20.9 million in February 2000.
STATE OF FLORIDA
In October 1999, NMC received an Antitrust Civil Investigative Demand
("CID") from the Attorney General of the State of Florida ("Florida AG"). The
CID was issued by the Florida AG in the course of an investigation to determine
whether there is, has been, or may be a violation of federal and Florida laws
resulting from the possible monopolization of, or the entering into agreement in
restraint of, trade relating to the provision of dialysis products and services
in Florida.
The Company is cooperating with the Florida AG's investigation by
providing documents and other information to them. The impact of this
investigation on the business and financial condition, if any, cannot be
determined at this time.
OTHER LITIGATION AND POTENTIAL EXPOSURES
In recent years, physicians, hospitals and other participants in the
health care industry have become subject to an increasing number of lawsuits
alleging professional negligence, malpractice, product liability, 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 expects lawsuits of those types to continue from
time to time. Although the
76
Company maintains insurance at a level which is believed to be prudent, the
Company cannot assure that the coverage limits will be adequate or that all
asserted claims will be covered by insurance. In Addition, there can be no
assurance that liability insurance will continue to be available at acceptable
costs. A successful claim against the Company or any of its subsidiaries in
excess of insurance coverage could have a material adverse effect on the results
of our operations.
The Company operates a large number and wide variety of facilities
throughout the U.S. In such a decentralized system it is often difficult to
maintain the desired level of oversight and control over the thousand of
individuals employed by many affiliated companies. The Company relies upon
management structure, regulatory and legal resources, and the effective
operation of its compliance program to direct, manage and monitor the activities
of these employees. However, on occasion, the Company has identified instances
where employees, deliberately or inadvertently, have submitted inadequate or
false billing while employed by an affiliated company. The illegal action of
such persons my subject the Company to liability under the False Claims Act,
among other laws, and the Company cannot predict whether such law enforcement
authorities may use such information to initiate further investigations of the
business practice disclosed or any of our other business activities.
77
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 28% of the Dialysis Services
net revenues for the twelve months ended December 31, 1999 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,
1999, 1998 and 1997 pertaining to the Company's operations by geographic area.
[Download Table]
UNITED STATES ASIA/PAC IFIC TOTAL
------------- ------------- -----
NET REVENUES
Twelve Months Ended 1999 $ 2,811,380 $ 3,853 $ 2,815,233
Twelve Months Ended 1998 2,564,785 6,621 2,571,406
Twelve Months Ended 1997 2,156,622 9,257 2,165,879
OPERATING EARNINGS
Twelve Months Ended 1999 511,847 444 512,291
Twelve Months Ended 1998 446,725 1,013 447,738
Twelve Months Ended 1997 332,166 (123) 332,043
Assets 1999 2,553,763 10,112 2,563,875
1998 2,461,863 9,584 2,471,447
1997 2,246,171 12,239 2,258,410
78
The table below provides information for the years ended December 31,
1999, 1998 and 1997 pertaining to the Company's two industry segments.
[Enlarge/Download Table]
LESS
DIALYSIS DIALYSIS INTERSEGMENT
SERVICES PRODUCTS SALES TOTAL
-------- -------- ----- -----
NET REVENUES
Twelve Months Ended 1999 $2,339,185 $ 706,709 $ 230,661 $2,815,233
Twelve Months Ended 1998 2,116,185 662,324 207,103 2,571,406
Twelve Months Ended 1997 1,754,655 629,848 218,624 2,165,879
OPERATING EARNINGS
Twelve Months Ended 1999 386,479 125,812 -- 512,291
Twelve Months Ended 1998 344,208 103,530 -- 447,738
Twelve Months Ended 1997 265,713 66,330 -- 332,043
Assets 1999 1,918,612 645,263 -- 2,563,875
1998 1,815,368 656,079 -- 2,471,447
1997 1,627,295 631,115 -- 2,258,410
CAPITAL EXPENDITURES
Twelve Months Ended 1999 59,061 15,519 -- 74,580
Twelve Months Ended 1998 54,821 13,147 -- 67,968
Twelve Months Ended 1997 79,123 50,729 -- 129,852
DEPRECIATION AND AMORTIZATION
OF PROPERTIES AND EQUIPMENT
Twelve Months Ended 1999 117,059 21,936 -- 138,995
Twelve Months Ended 1998 114,240 22,175 -- 136,415
Twelve Months Ended 1997 94,572 26,739 -- 121,311
79
The table below provides the reconciliations of reportable segment
operating earnings, assets, capital expenditures, and depreciation and
amortization to the Company's consolidated totals.
[Enlarge/Download Table]
TWELVE MONTHS ENDED DECEMBER 31,
---------------------------------------------------
SEGMENT RECONCILIATION 1999 1998 1997
----------- ----------- -----------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
AND CUMULATIVE EFFECTIVE OF CHANGE IN ACCOUNTING FOR START UP
COSTS:
Total operating earnings for reportable segments $ 512,291 $ 447,738 $ 332,043
Corporate G&A (including foreign exchange) (113,374) (108,618) (70,240)
Research and development expense (4,065) (4,060) (4,077)
Net interest expense (201,916) (208,776) (178,086)
Special charge for settlement of investigation and related costs (601,000) -- --
----------- ----------- -----------
Income (Loss) before income taxes and cumulative effective of
change in accounting for start up costs $ (408,064) $ 126,284 $ 79,640
=========== =========== ===========
ASSETS:
Total assets for reportable segments $ 2,563,875 $ 2,471,447 $ 2,258,410
Intangible assets not allocated to segments 2,006,985 2,067,648 2,002,656
Accounts receivable financing agreement (335,000) (305,600) (200,000)
Net assets of discontinued operations and IDPN accounts receivable 59,151 151,067 370,677
Corporate assets and other 349,557 228,841 339,443
----------- ----------- -----------
Total Assets $ 4,644,568 $ 4,613,403 $ 4,771,186
=========== =========== ===========
Capital Expenditures
Total capital expenditures for reportable segments $ 74,580 $ 67,968 $ 129,852
Corporate capital expenditures 6,750 6,685 3,892
----------- ----------- -----------
Total Capital Expenditures $ 81,330 $ 74,653 $ 133,744
=========== =========== ===========
DEPRECIATION AND AMORTIZATION:
Total depreciation and amortization for reportable segments $ 138,995 $ 136,415 $ 121,311
Corporate depreciation and amortization 78,957 79,799 78,415
----------- ----------- -----------
Total Depreciation and Amortization $ 217,952 $ 216,214 $ 199,726
=========== =========== ===========
80
NOTE 19. QUARTERLY SUMMARY (UNAUDITED)
[Enlarge/Download Table]
------------------------------------------------------------------
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
----------- ----------- ----------- -----------
1999
Net revenues $ 672,140 $ 698,466 $ 711,850 $ 732,777
Cost of health care services and medical supplies 450,432 471,548 477,726 480,008
Operating expenses 134,003 129,403 131,995 145,267
Operating earnings
Interest expense, net 50,126 52,504 49,524 49,761
Special charge for settlement of investigations and
related costs -- -- 590,000 11,000
---------- ---------- ---------- ----------
Total expenses 634,561 653,455 1,249,245 686,036
---------- ---------- ---------- ----------
Earnings (Loss) from continuing operations before income
taxes and cumulative effect of accounting policy change 37,579 45,011 (537,395) 46,741
Provision (Benefit) for income taxes 19,952 23,607 (150,190) 25,594
---------- ---------- ---------- ----------
Net earnings (loss) from continuing operations
before cumulative effect of accounting change $ 17,627 $ 21,404 $ (387,205) $ 21,147
========== ========== ========== ==========
[Enlarge/Download Table]
--------------------------------------------------------------
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
----------- ----------- ----------- -----------
1998
Net revenues $610,046 $638,282 $655,652 $667,426
Cost of health care services and medical supplies 406,842 423,903 433,103 443,595
Operating expenses 136,213 130,986 134,400 127,304
Interest expense, net 47,099 53,080 54,880 53,717
-------- -------- -------- --------
Total expenses 590,154 607,969 622,383 624,616
-------- -------- -------- --------
Earnings from continuing operations before income
taxes and cumulative effect of accounting policy change 19,892 30,313 33,269 42,810
Provision for income taxes 10,046 17,543 18,965 27,893
-------- -------- -------- --------
Net earnings from continuing operations before
cumulative effect of accounting change $ 9,846 $ 12,770 $ 14,304 $ 14,917
======== ======== ======== ========
81
To the Board of Directors and Stockholders of Fresenius Medical Care Holdings,
Inc.
Under the date of February 21, 2000, we reported on the consolidated
balance sheets of Fresenius Medical Care Holdings, Inc. and its subsidiaries
(the "Company") as of December 31, 1999 and 1998 and the related consolidated
statements of operations, comprehensive income, changes in equity and cash flows
for the three years ended. as included in the annual report on Form 10-K for the
year 1999. In connection with our audits of the aforementioned consolidated
financial statements, we also audited the related consolidated financial
statement schedules. These consolidated financial statement schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statement schedules based on our audits.
In our opinion, such consolidated financial statement schedules, 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 21, 2000
Boston, MA
82
SCHEDULE II
FRESENIUS MEDICAL CARE HOLDINGS, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(DOLLARS IN THOUSANDS)
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1999
[Enlarge/Download Table]
ADDITIONS (DEDUCTIONS)
-------------------------
CHARGED
BALANCE AT (CREDITED) TO
BEGINNING OF COSTS AND OTHER NET BALANCE AT
YEAR EXPENSES 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
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1998
[Enlarge/Download Table]
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 53,109 54,709 (58,609) 49,209
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1997
[Enlarge/Download Table]
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 $ 56,491 $ 43,300 $(46,682) $ 53,109
83
EXHIBIT INDEX
[Enlarge/Download Table]
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 Amended and Restated By-laws of Fresenius Medical Care Holdings, Inc. (incorporated herein
by reference to the Form 10-Q of the Company filed with the Commission on August 14, 1997).
Exhibit 4.1 Credit Agreement dated as of September 27, 1996 among National Medical Care, Inc. and Certain
Subsidiaries and Affiliates, as Borrowers, Certain Subsidiaries and Affiliates, as Guarantors,
the Lenders named therein, Nationsbank, N.A., as paying agent and the Bank of Nova Scotia, The
Chase Manhattan Bank, Dresdner Bank AG and Nationsbank, N.A., as Managing Agents (incorporated
herein by reference to the Form 6-K of Fresenius Medical Care AG filed with the Commission on
October 15, 1996).
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).
84
[Enlarge/Download Table]
Exhibit 4.3 Amendment No. 2 dated December 12, 1996 (second amendment to the Credit Agreement dated as of
September 27, 1996, incorporated herein by reference to the Form 10-K of Registrant filed with
the Commission on March 31, 1997).
Exhibit 4.4 Amendment No. 3 dated June 13, 1997 to the Credit Agreement dated as of September 27, 1996 ,
among National Medical Care, Inc. and Certain Subsidiaries and Affiliates , as Borrowers,
Certain Subsidiaries and Affiliates, as Guarantors, the Lenders named therein, NationsBank,
N.A., as paying agent and the Bank of Nova Scotia, the Chase Manhattan Bank, N.A., Dresdner Bank
AG and NationsBank, N.A. as Managing Agents, as previously amended (incorporated herein by
reference to the Form 10-Q of the Registrant filed with the Commission on November 14, 1997).
Exhibit 4.5 Amendment No. 4, dated August 26, 1997 to the Credit Agreement dated as of September 27, 1996,
among National Medical Care, Inc. and Certain Subsidiaries and Affiliates, as Borrowers, Certain
Subsidiaries and Affiliates, as Guarantors, the Lenders named therein, NationsBank, N.A., as
paying agent and the Bank of Nova Scotia, the Chase Manhattan Bank, N.A., Dresdner Bank AG and
NationsBank, N.A. as Managing Agents, as previously amended (incorporated herein by reference to
the Form 10-Q of Registrant filed with Commission on November 14, 1997).
Exhibit 4.6 Amendment No. 5 dated December 12, 1997 to the Credit Agreement dated as of September 27, 1996,
among National Medical Care, Inc. and Certain Subsidiaries and Affiliates, as Borrowers, Certain
Subsidiaries and Affiliates, as Guarantors, the Lenders named therein, NationsBank, N.A., as
paying agent and the Bank of Nova Scotia, the Chase Manhattan Bank, N.A., Dresdner Bank AG and
NationsBank, N.A. as Managing Agents, as previously amended (incorporated herein by reference to
the Form 10-K of Registrant filed with Commission on March 23, 1998).
Exhibit 4.7 Form of Consent to Modification of Amendment No. 5 dated December 12, 1997 to the Credit
Agreement dated as of September 27, 1996 among National Medical Care, Inc. and Certain
Subsidiaries and Affiliates, as Borrowers, Certain Subsidiaries and Affiliates, as Guarantors,
the Lenders named therein, NationsBank, N.A., as paying agent and the Bank of Nova Scotia, the
Chase Manhattan Bank, N.A., Dresdner Bank AG and NationsBank, N.A. as Managing Agents
(incorporated herein by reference to the Form 10-K of Registrant filed with Commission on March
23, 1998).
Exhibit 4.8 Amendment No. 6 dated effective 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,
NationsBank, N.A., as paying agent and the Bank of Nova Scotia, the Chase Manhattan Bank, N.A.,
Dresdner Bank AG and NationsBank, N.A. as Managing Agents, as previously amended (incorporated
herein by reference to the Form 10-Q of Registrant filed with Commission on November 12, 1998).
Exhibit 4.9 Amendment No. 7 dated as of December 31, 1998 to the Credit Agreement dated as of September 27,
1996 among National Medical Care, Inc. and Certain Subsidiaries and Affiliates, as Borrowers,
Certain Subsidiaries and Affiliates Guarantors , the Lendors named therein, Nations Bank, N.A.
as paying agent and the Bank of Nova Scotia, the Chase Manhattan Bank, Dresdner Bank A. G. and
Nations Bank, N.A. as Managing Agents (incorporated herein by reference to the Form 10-K of
registrant filed with Commission on March 9, 1999).
Exhibit 4.10 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, NationsBank, N.A. as
paying agent and the Bank of Nova Scotia, the Chase Manhattan Bank, Dresdner Bank A.G. and
NationsBank, N.A. as Managing Agent (filed herewith).
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,
NationsBank, N.A. as paying agent and the Bank of Nova Scotia, the Chase Manhattan Bank,
Dresdner Bank A.G. and NationsBank, N.A. as Managing Agent (filed herewith).
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Exhibit 4.12 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 4.13 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 4.14 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 4.15 Senior Subordinated Indenture dated as of February 19, 1998 among FMC Trust Finance S.a.r.l.
Luxemborg, as Insurer, State Street Bank and Trust Company as Trustee and Fresenius Medical Care
Holdings, Inc., and Fresenius Medical Care AG, as Guarantors with respect to the issuance of 7
3/8% Senior Subordinated Notes due 2008 (incorporated herein by reference to the Form 10-K of
Registrant filed with Commission on March 23, 1998).
Exhibit 10.1 Employee Benefits and Compensation Agreement dated September 27, 1996 by and among W. R.
Grace & Co., National Medical Care, Inc., and W. R. Grace & Co.-- Conn. (incorporated herein
by reference to the Registration Statement on Form F-1 of Fresenius Medical Care AG, as amended
(Registration No. 333-05922), dated November 22, 1996 and the exhibits thereto).
Exhibit 10.2 Purchase Agreement, effective January 1, 1995, between Baxter Health Care Corporation and
National Medical Care, Inc., including the addendum thereto (incorporated by reference to the
Form SE of Fresenius Medical Care dated July 29, 1996 and the exhibits thereto).
Exhibit 10.3 Agreement, dated November 25, 1992 between Bergen Brunswig Drug Company and National Medical
Care, Inc., including the addendum thereto (incorporated by reference to the Form SE of
Fresenius Medical Care dated July 29, 1996 and the exhibits thereto).
Exhibit 10.4 Primary Guarantee dated July 31, 1996 (incorporated by reference to the Registrant's
Registration Statement on Form S-4 (Registration No. 333-09497) dated August 2, 1996 and the
exhibits thereto).
Exhibit 10.5 Secondary Guarantee dated July 31, 1996 (incorporated by reference to the Registrant's
Registration Statement on Form S-4 (Registration No. 333-09497) dated August 2, 1996 and the
exhibits thereto).
Exhibit 10.6 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 10.7 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 10.8 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, as an administrative agent (filed
herewith).
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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 July 1, 1997 by and between Jerry A. Schneider and the Company
(incorporated herein by reference to the Form 10-Q of Registrant filed with Commission on May
14, 1998).
Exhibit 10.12 Addendum to Employment Agreement dated as of September 18, 1997 by and between Jerry A.
Schneider and the Company (incorporated herein by reference to the Form 10-Q of Registrant filed
with Commission on May 14, 1998).
Exhibit 10.13 Separation Agreement dated as of July 21, 1998 by and between Geoffrey W. Swett and National
Medical Care, Inc., (incorporated herein by reference to the Form 10-Q of Registrant filed with
Commission on November 12, 1998).
Exhibit 10.14 Employment Agreement dated October 23, 1998 by and between Roger G. Stoll and National
Medical Care, Inc. (incorporated herein by reference to the Form 10-K of Registrant filed with
Commission on March 9, 1999).
Exhibit 10.15 Employment Agreement dated November 11, 1998 by and between William F. Grieco and National
Medical Care, Inc., (incorporated herein by reference to the Form 10-K of Registrant filed with
Commission on March 9, 1999).
Exhibit 10.16 Separation Agreement dated as of September 30, 1999 by and among William F. Grieco and Fresenius
Medical Care Holdings, Inc. and Fresenius Medical Care AG (incorporated herein by reference to
the Form 10-K of Registrant filed with Commission on August 3, 1999).
Exhibit 10.17 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 11 Statement re: Computation of Per Share Earnings.
Exhibit 27 Financial Data Schedule
(d) Financial Statement Schedules
Schedule II- Valuation and Qualifying Accounts
(b) Reports on Form 8-K
On January 21, 2000, the Company filed a report on Form 8-K with respect
to the Company's settlement of the OIG Investigation with the United States
Government.
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Dates Referenced Herein and Documents Incorporated by Reference
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