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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
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). $3,384,368 March 23, 2001.
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Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date:
As of April 2, 2001, 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 April 30, 2001. (Part III)
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TABLE OF CONTENTS
PART I
Item 1. Business ............................................................................. 4
Item 2. Properties ........................................................................... 24
Item 3. Legal Proceedings .................................................................... 25
Item 4. Submission of Matters to a Vote of Security Holders .................................. 27
PART II ...................................................................................... 27
Item 5. Market Price for Registrant's Common Equity and Related Stockholder Matters .......... 27
Item 6. Selected Financial Data .............................................................. 28
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 29
Item 7A Quantitative and Qualitative Disclosures About Market Risks .......................... 37
Item 8. Consolidated Financial Statements and Supplementary Data ............................. 39
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.. 39
PART III ..................................................................................... 39
Item 10. Directors and Executive Officers of the Registrant .................................. 39
Item 11. Executive Compensation .............................................................. 39
Item 12. Security Ownership of Certain Beneficial Owners and Management ...................... 39
Item 13. Certain Relationships and Related Transactions ...................................... 39
PART IV ...................................................................................... 39
Item 14. Exhibits, Consolidated Financial Statement Schedules, and Reports on Form 8-K ....... 39
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PART I
ITEM 1. BUSINESS
This section contains certain forward-looking statements that are
subject to various risks and uncertainties. Such statements include, without
limitation, discussions concerning the outlook of Fresenius Medical Care
Holdings, Inc. (collectively with all its direct and indirect subsidiaries, the
"Company"), government reimbursement, future plans and management's expectations
regarding future performance. Actual results could differ materially from those
contained in these forward-looking statements due to certain factors including,
without limitation, changes in business, economic and competitive conditions,
regulatory reforms, foreign exchange rate fluctuations, uncertainties in
litigation or investigative proceedings, the realization of anticipated tax
deductions, and the availability of financing. These and other risks and
uncertainties, which are more fully described elsewhere in this 2000 Form 10-K
and in the Company's reports filed from time to time with the Securities and
Exchange Commission (the "Commission") could cause the Company's results to
differ materially from the results that have been or may be projected by or on
behalf of the Company.
Fresenius Medical Care Holdings, Inc., a New York corporation, is a
subsidiary of Fresenius Medical Care AG, a German corporation ("FMC" or
"Fresenius Medical Care"). The Company conducts its operations through five
principal subsidiaries: National Medical Care, Inc. ("NMC"), Fresenius USA
Marketing Inc.; Fresenius USA Manufacturing Inc.; and SRC Holding Company, Inc.,
all Delaware corporations and Fresenius USA Inc., a Massachusetts corporation.
The Company is primarily engaged in (i) providing kidney dialysis
services, clinical laboratory testing and renal diagnostic services, and (ii)
manufacturing and distributing products and equipment for dialysis treatment,
which accounted for 84% and 16% of 2000 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, 2000, the Company owned 921
outpatient dialysis facilities in the U.S. (including Puerto
Rico), treating approximately 67,950 chronic patients (24.6%
of estimated U.S. patients). The Company operated or managed
an additional 33 facilities treating approximately another
3,750 patients (1.4% of estimated U.S. patients).
Collectively, these company-operated facilities treated 26.0%
of the estimated dialysis patients in the U.S. The Company
believes its next largest competitor treated approximately
14.8% of U.S. patients. Additionally, the Company provides
inpatient dialysis services, therapeutic apheresis, hemo
perfusion, and other services under contract to hospitals in
the U.S.
- DIALYSIS PRODUCTS. The Company manufactures a comprehensive
line of dialysis products, including hemodialysis machines,
peritoneal dialysis systems and disposable products. The
Company manufactures innovative and technologically advanced
products, including the Fresenius Polysulfone(TM) dialyzer,
which the Company believes is the best-performing,
mass-produced dialyzer on the market, and Delflex(R)
peritoneal solutions with Safe-Lock(R) connectors.
The Company's principal executive office is located at 95 Hayden Avenue,
Lexington, MA 02420-9192. Its telephone number is (781) 402-9000.
RENAL INDUSTRY OVERVIEW
END-STAGE RENAL DISEASE
End-stage renal disease ("ESRD") is the state of advanced chronic kidney
disease that is characterized by the irreversible loss of kidney function and
requires routine dialysis treatment or kidney transplantation to sustain life. A
normally functioning human kidney removes waste products and excess water from
the blood, preventing toxin buildup, eventual poisoning of the body and water
overload. Chronic kidney disease can be caused by a number of conditions,
primarily nephritis, inherited diseases, hypertension and diabetes. Nearly 60%
of all people with ESRD acquire the disease as a complication of one or more of
these primary conditions.
Based on the most recent information published by the 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 259,500 at December 31, 1999
or at a compound annual rate of 8.4%.
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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 13,500 patients received kidney transplants in
the U.S. during 1999. 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, 1999, there were approximately
3,740 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 2,280 facilities (61% of
facilities) and 176,000 patients (68% of patients). The remaining 32% of
patients were divided among freestanding facilities (many privately owned by
physicians) and hospital-affiliated facilities.
The Company believes that these proportions remained similar in 2000. The
Company estimates that the top ten multi-center providers accounted for
approximately 187,000 patients, or 68% of estimated U.S. patents at December 31,
2000.
According to HCFA, as of December 31, 1999, 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, 1999, 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.
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
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catheter, leading to excessive episodes of peritonitis, a bacterial infection of
the peritoneum which can result in serious adverse health consequences,
including death. Second, treatment by current forms of peritoneal dialysis may
not be as effective as hemodialysis in removing wastes and fluids for some
patients.
STRATEGY
The Company's objective is to focus on generating revenue growth that
exceeds market growth of the dialysis industry, as measured by growth in patient
population, while maintaining the Company's leading position in the market and
increasing earnings at a faster pace than revenue growth.
The Company's dialysis services and product businesses have grown faster
than the market in terms of revenues over the past five years, and the Company
believes that it is well positioned to continue this growth by focusing on the
following strategies:
- Continue to Provide High Standards of Patient Care. The
Company believes that its reputation for providing high
standards of patient care is a competitive advantage. The
Company believes that NMC's proprietary Patient Statistical
Profile ("PSP") database, which contains clinical and
demographic data on approximately 73,400 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 2000, the
Company acquired 30 clinics and opened 51 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 40% of the
dialysis patients in the United States. The Company has
developed disease state management methodologies which involve
total patient care for ESRD patients, that it believes are
attractive to managed care payors. The Company has formed
Optimal Renal Care, LLC, a joint venture with Permanente
Medical Group of Southern California, a subsidiary of Kaiser
Permanente which has the largest dialysis patient population
of any managed care organization, 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, 2000
Fresenius Medical Care's product revenues were derived
approximately 18% from machine sales and 82% 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 technological
leadership in both hemodialysis and peritoneal dialysis
products. FMC has a research and development team with
approximately 220 members focused on developing dialysis
systems that are safer, more effective and easier to use and
that can be easily customized to meet the differing needs of
customers around the world. The Company believes that its
extensive expertise in patient treatment and clinical data
will further enhance its ability to develop more effective
products and treatment methodologies. The Company's ability to
manufacture dialysis products on a cost-effective and
competitive basis results in large part from our process
technologies. Over the past several years, the Company has
reduced
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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 segments, see Notes to
Consolidated Financial Statements - Note 18, "Industry Segments and Information
about Foreign Operations."
DIALYSIS SERVICES
OVERVIEW
The Company is the largest provider in the U.S. of kidney dialysis and
related services to patients suffering from chronic kidney disease. The Company
also provides clinical laboratory testing and renal diagnostic services for
dialysis patients (Company owned and non-Company owned clinics).
The Company's provider business is primarily operated through the Dialysis
Services business unit ("Dialysis Services"). Clinical laboratory testing and
renal diagnostic services are primarily provided by Spectra Renal Management
("SRM")
DIALYSIS SERVICES
As of December 31, 2000, the Company owned 921 dialysis centers in the
U.S. The centers are generally concentrated in areas of high population density.
In 2000, the Company acquired 30 existing centers, developed 51 new centers and
consolidated or sold 9 centers. The number of patients treated at the Company's
centers has increased from approximately 62,000 at December 31, 1999 to
approximately 68,000 at December 31, 2000.
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 staff. The staff
typically consists of registered nurses, licensed practical nurses, patient care
technicians, a social worker, a registered dietician, and 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 2001 to December
2001 with price guarantees and volume and outcome based discounts.
Other services provided to ESRD patients in the U.S. include: the
administration of vitamin D, iron, hepatitis vaccine, and blood transfusions;
the provision of interdialytic parenteral nutrition ("IDPN"), in which nutrients
are added to the
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patient's blood during hemodialysis; the provision, through SRM, of clinical
laboratory testing and renal services. 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., owners may be motivated to sell their centers to obtain relief from
day-to-day administrative responsibilities and changing governmental
regulations, to focus on patient care and to realize a return on their
investment. While price is typically the key factor in securing acquisitions,
the Company believes that it will be an attractive acquirer or partner to many
dialysis center owners due to its reputation for patient treatment, its
proprietary PSP database (which contains clinical and demographic data on
approximately 73,400 dialysis patients), its comprehensive clinical and
administrative systems, manuals and policies, its ability to provide ancillary
services to dialysis centers and patients and its reputation for technologically
advanced products. The Company believes that these factors will also be
advantages when opening new centers.
The 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 2000, the Company completed new acquisitions and
acquisitions of previously managed clinics totaling 30 dialysis facilities in
the U.S. providing care to approximately 2,755 patients. These acquisitions and
agreements expand the Company's presence in selected key areas of the United
States.
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SOURCES OF DIALYSIS SERVICES NET REVENUES
The following table provides information for the periods indicated
regarding the percentage of the Company's U.S. dialysis treatment services net
revenues provided by (a) the Medicare ESRD program, (b) private/alternative
payors, such as commercial insurance and private funds, (c) Medicaid and other
government sources and (d) hospitals.
YEAR ENDED DECEMBER 31,
-----------------------
2000 1999 1998
---- ---- ----
Medicare ESRD program ....... 59.1% 60.2% 57.0%
Private/alternative payors .. 32.1 30.3 33.8
Medicaid and other government
sources..................... 4.2 4.2 4.1
Hospitals ................... 4.6 5.3 5.1
----- ----- -----
Total ..................... 100.0% 100.0% 100.0%
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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").
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. If
successful, this pilot program could result in the elimination of the regulation
that precludes ESRD patients from enrolling in managed care organizations. If
Medicare HMO enrollments increase and the number of ESRD patients in managed
care plans also increases, managed care plans' leverage to negotiate lower rates
or reduce services provided by the Company may become greater.
The Company has formed two joint ventures seeking to contract "at risk"
with managed care organizations for the care of ESRD patients. Renaissance
Health Care, Inc. is a joint venture between the Company and participating
nephrologists throughout the U.S. Optimal Renal Care, LLC is a joint venture
between Permanente Medical Group of Southern California, a subsidiary of Kaiser
Permanente and the Company. The Company believes a significant increase in 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.
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As managed care programs expand market share and gain greater bargaining
power vis-a-vis health care providers, there will be increasing pressure to
reduce the amounts paid for services and products furnished by the Company.
These trends would be accelerated if future changes to the Medicare ESRD program
require private payors to assume a greater percentage of the cost of care given
to dialysis patients. The Company is presently seeking to expand the portion of
its revenues attributable to non-governmental private payors. However, the
Company believes that the historically higher rates of reimbursement paid by
non-governmental payors may not be maintained at such levels. If substantially
more patients of the Company join managed care plans or such plans reduce
reimbursements to the Company, the Company's business and results of operations
could be adversely affected, possibly materially. See " -- Regulatory and Legal
Matters -- Reimbursement," " -- Anti-Kickback Statutes, False Claims Act, Stark
Law and Fraud and Abuse Laws -- Changes in the Health Care Industry
PATIENT, PHYSICIAN AND OTHER RELATIONSHIPS
The Company believes that its success in establishing and maintaining dialysis
centers, in the U.S. depends in significant part upon its ability to obtain the
acceptance of, and referrals from, local physicians, hospitals and managed care
plans. A dialysis patient generally seeks treatment at a center that is
convenient to the patient and at which the patient's nephrologist has staff
privileges. Virtually all of the Company's clinics maintain open staff
privileges for local nephrologists. The Company's ability to provide quality
dialysis care and otherwise to meet the needs of local patients and physicians
is central to its ability to attract nephrologists to the Company's centers and
to receive referrals from such physicians. See " -- Anti- kickback Statutes,
False Claims Act, Stark Law and Fraud and Abuse Laws."
The conditions for coverage under the Medicare ESRD program require that
treatment at a dialysis center be under the general supervision of a Medical
Director. Generally, the Medical Director must be board certified or board
eligible in internal medicine and have at least 12 months of training or
experience in the care of patients at ESRD centers. The Company's Medical
Directors maintain their own private practices.
The Company has written agreements with the physicians who serve as
Medical Directors at its centers. The Medical Director agreements entered into
by the Company generally have terms of three years, although some have terms of
as long as five to ten years. The compensation of Medical Directors and other
physicians under contract with the Company is individually negotiated and
generally depends upon competitive factors in the local market, the physician's
professional qualifications, experience and responsibilities and the size of and
services provided by the center. The aggregate compensation of the Medical
Directors and other physicians under contract is fixed in advance for a period
of one year or more and is based in part on various efficiency and quality
incentives. The Company believes that compensation is paid at fair market value.
Virtually all of the Medical Director agreements, as well as the typical
contract under which the Company acquires existing dialysis centers, include
noncompetition covenants covering specified activities within specified
geographic areas for specified periods of time, although they do not prohibit
the physicians from providing direct patient care services at other locations
and, consistent with law, do not require a physician to refer patients to the
Company or particular centers or to buy or use specific medical products. In
certain states, non-competition covenants may not be enforceable.
COMPETITION
Dialysis Services. The dialysis services industry is highly competitive.
Ownership of dialysis centers in the U.S. is fragmented, with a large number of
operators each owning 10 or fewer centers and a small number of larger
providers, the largest of which is the Company. Consolidation of the industry
has been ongoing over the last decade. In urban areas, where many of the
Company's dialysis centers are located, there frequently are many competing
centers in proximity to the Company's centers. The Company experiences direct
competition from time to time from former Medical Directors, former employees or
referring physicians who establish their own centers. Furthermore, other health
care providers or product manufactures, some of which have significant
operations or resources, may decide to enter the dialysis services business in
the future.
Because services to the majority of patients in the U.S. are primarily
reimbursed under government programs, competition for patients is based
primarily on quality and accessibility of service and the ability to obtain
referrals from physicians and hospitals. However, extension of periods during
which commercial insurers are primarily responsible for reimbursement and the
growth of managed care has placed greater emphasis on service costs. The Company
believes that it competes effectively in all of these areas. In particular,
based upon the Company's knowledge and understanding of other
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providers of dialysis treatments, as well as from information obtained from
publicly available sources, the Company believes that it is among the most
cost-efficient providers of kidney dialysis services. In addition, as a result
of its large size relative to most other dialysis service providers, the Company
enjoys economies of scale in areas such as purchasing, billing, collections and
data processing.
LABORATORY AND RENAL DIAGNOSTIC SERVICES
The Company provides clinical laboratory testing and renal services
through its business unit known as Spectra Renal Management ("SRM"). SRM is the
leading U.S. dialysis clinical laboratory providing blood, urine and other
bodily fluid testing services to assist physicians in determining whether a
dialysis patient's therapy regimen, diet and medicines remain optimal. SRM
laboratories are located in New Jersey, Illinois, and Northern California.
In 2000, SRM performed approximately 37 million tests for more than
100,000 dialysis patients across the United States. SRM also provided testing
services to clinical research projects and others. The Company plans to expand
SRM into related markets such as hospital dialysis units and physician office
practices to offer assistance with the pre-ESRD patient base.
The Company's clinical laboratory results have been a critical element in
the development of the Company's proprietary PSP database, which contains
clinical, laboratory and demographic data on the 73,400 dialysis patients
currently receiving treatment. The Company uses PSP to assist physicians in
providing quality care to dialysis patients. In addition, PSP is a key resource
in ongoing research, both within the Company and at outside research
institutions, to decrease mortality rates among dialysis patients and improve
their quality of life.
COMPETITION
SRM competes in the U.S. with large nationwide laboratories, dedicated
dialysis laboratories and numerous local and regional laboratories, including
hospital laboratories. In the laboratory services market, companies compete on
the basis of performance, including quality of laboratory testing, timeliness of
reporting test results and cost-effectiveness. The Company believes that SRM's
services are competitive in these areas. While the main competition is local
hospitals, SRM is competitive based upon the quality and accessibility of the
service.
DIALYSIS PRODUCTS
The Company manufactures and distributes equipment and disposable products
for the treatment of kidney failure using both hemodialysis and peritoneal
dialysis. Such products include hemodialysis machines, peritoneal dialysis
cyclers and related equipment, dialyzers, peritoneal dialysis solutions in
flexible plastic bags, hemodialysis concentrates and solutions, granulate mixes,
bloodlines, disposable tubing assemblies and equipment for water treatment in
dialysis centers. Other products manufactured by third parties and distributed
by the Company include dialyzers, special blood access needles, heparin (used to
prevent blood clotting) and commodity supplies such as bandages, clamps and
syringes.
OVERVIEW
The following table shows for 2000, 1999 and 1998 actual net revenues of
the Company's products business related to hemodialysis products, peritoneal
dialysis products and other activities, principally technical service:
YEAR ENDED DECEMBER 31,
(DOLLARS IN THOUSANDS)
-------------------------------------------------------------------------------------
2000 1999 1998
-------------------------------------------------------------------------------------
Total % of Total % of Total % of
Revenues Total Revenues Total Revenues Total
--------- ---------- --------- ---------- ----------- ---------
Hemodialysis Products $334,447 70% $329,561 67% $296,361 63%
Peritoneal Dialysis Products 93,742 20 108,145 22 123,389 26
Other 51,878 10 53,205 11 51,234 11
--------- ---------- --------- ---------- ----------- ---------
Total $480,067 100% $490,911 100% $470,984 100%
========= ========== ========= ========== =========== =========
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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. The Company, through its Dialysis Products business unit
("Dialysis Products"), offers a comprehensive hemodialysis product line,
consisting of hemodialysis machines, modular accessories for dialysis machines,
polysulfone dialyzers, bloodlines, dialysis solutions and concentrates, fistula
needles, connectors, data management systems, machines and supplies for the
reuse of dialyzers.
Dialysis Machines. The Company assembles, tests and calibrates
hemodialysis machines and sells these machines in the U.S., Canada and Mexico.
Components for these machines are provided by Fresenius Medical Care and other
vendors. Hemodialysis machines manufactured by the Company provide a unique
volumetric dialysate balancing and ultrafiltration control system. This system,
first developed and introduced by FMC 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.
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, FMC 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. FMC'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. FMC's Polysulfone(TM) dialyzers are
available in both reuse and non reuse series.
The Company also sells dialyzer reprocessing and rinse. These machines
cleanse dialyzers after dialysis, permitting multiple usage for the same patient
before disposal of the dialyzer. The machines facilitate the reuse of disposable
dialyzers and, therefore, permit hemodialysis providers to reduce operating
costs.
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.
The Company 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 the Company'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.
New Hemodialysis Products. The Company has introduced the FX-class and
Optiflux dialyzers. Both of these dialyzers use polysulfone-based Helixone
membranes, which significantly increase clearance. FX-class dialyzers provide
simplified handling and more secure treatment and improve waste management,
logistics and handling through weight reduction and environmentally improved
materials. Optiflux polysulfone dialyzers deliver small and middle molecular
weightsolute clearance. Both dialyzers have outstanding biocompatibility,
continuing the Company's efforts to provide patient care in the most
biocompatible way.
The Company has also introduced the 2008K hemodialysis machine, which
provides innovative elements such as improved operator interface, an improved
blood pump, level detector and heparin pump modules, and fluid removal
measurement combined with a feedback control mechanism to monitor and avoid
sudden declines in blood pressure and resulting complications.
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.
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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.
Cyclers. While there are two main forms of peritoneal dialysis therapy,
the Company believes that CCPD therapy offers benefits over CAPD therapy for
patients who need more therapy due to body size, ultrafiltration loss or any
other similar reasons. 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.
The Company 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 the Company, can only be performed using the Fresenius Freedom
Cycler(TM) and special tubing using Safe-Lock(R)connectors.
FMC 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 FMC Stay-Safe(TM) 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.
Other Peritoneal Dialysis Products. The Company also manufactures and
distributes pediatric treatment systems for administration of low volumes of
dialysis solutions, assist devices to facilitate automated bag exchange for
handicapped patients, catheters, catheter implantation instruments, silicon
glue, Pack-PD(TM) (a computer program which analyzes patient and peritoneal
characteristics to present a range of treatment options for individual
therapies), disinfectants, bag heating plates, adapters, and products to assist
and enhance connector sterility. The Company also provides scientific and
patient information products, including support materials, such as brochures,
slides, videos, instructional posters and training manuals.
New Peritoneal Dialysis Products. The Company has introduced the
IQcard(TM) system which has been developed to monitor patient compliance in
Automated Peritoneal Dialysis Therapy. The IQcard is used with the Freedom(TM)
Cycler PD+ to monitor the delivered dose of APD Therapy and record a full
treatment history for each patient. It is estimated that patient non-compliance
with prescribed Peritoneal Dialysis Therapy varies from 11% to 80%. Lack of
compliance may be the most
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significant cause of inadequate dialysis and poor clinical outcomes. With
IQcard, the physician has a tool for assessing patient compliance and making
adjustments to the prescription as necessary to meet therapy goals.
The Company also manufactures the Premier Plus twin bag CAPD system. This
system comprises a single product, the Delflex(R) solution bag and the tubing
and drainage set necessary for CAPD exchanges. The Premier Plus twin bag system
also utilizes Safe-Lock(R) connectors and, because fewer connections are
required, may help to reduce patient complications associated with peritoneal
dialysis therapy. The Premier Plus twin bag system offers the physician the
ability to prescribe larger dosages without requiring the patient to do more
exchanges during the day.
MARKETING, DISTRIBUTION AND SERVICE
Most of the Company's products are sold to hospitals, clinics and
specialized treatment centers. With its comprehensive product line and years of
experience in dialysis, the Company believes that it has been able to establish
and maintain very close relationships with its clinic customer base . Close
interaction among the Company's sales force and FMC research and development
personnel enables concepts and ideas that develop in the field to be considered
and integrated into product development. The Company maintains a direct sales
force of trained salespersons engaged in the sale of both hemodialysis and
peritoneal dialysis products. This sales force engages in direct promotional
efforts, including visits to physicians, clinical specialists, hospitals,
clinics and dialysis centers, and represents the Company at industry trade
shows. The Company also sponsors medical conferences and scientific symposia as
a means for disseminating product information. The sales force is assisted by
clinical nurses who provide clinical support, training and assistance to
customers.
The Company offers customer service, training and education, and technical
support such as field service, spare parts, repair shops, maintenance, and
warranty regulation. The Company also provides training sessions on the
Company's equipment. The Company provides supportive literature on the benefits
of its core business products. The Company's management believes its service
organizations have a reputation for reliability and high quality service.
MANUFACTURING OPERATIONS
The Company assembles, tests, and calibrates equipment, including
hemodialysis machines, dialyzer reuse devices and peritoneal dialysis cyclers,
at its facility in Walnut Creek, California. Components of the Company's
hemodialysis machines are supplied by FMC as well as other suppliers. The
Company has experienced no difficulties in obtaining sufficient quantities of
such components. In connection with the sale and installation of the machines,
Company technicians and engineers calibrate the machines and add computer
software for record keeping and monitoring.
The Company owns a 450,000 square-foot facility in Ogden, Utah which
operates as a fully integrated manufacturing and research and development
facility for polysulfone dialyzers and peritoneal dialysis solutions. This
facility uses automated equipment for the production of polysulfone dialyzers
and sterile solutions in flexible plastic containers. The Company, also has the
capability to purchase dialyzers and polysulfone bundles from FMC. The Company
believes that it is the principal manufacturer of polysulfone dialyzers in the
U.S. While the Company obtains the film used in the manufacture of its plastic
bags used with its peritoneal solutions from one supplier located in the
Netherlands, the Company believes that there are readily available alternative
sources of supply for which the FDA could grant expedited approval. The Company
also 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 four facilities in the U.S.
Each step in the manufacture of the Company's products, from the initial
processing of raw materials through the final packaging of the completed
product, is carried out under controlled quality assurance procedures required
by law and under Good Manufacturing Practices ("GMP"), as well as under
comprehensive quality management systems, such as the internationally recognized
ISO 9000-9004 and CE Mark standards, which are mandated by regulatory
authorities in the countries in which the Company operates. The facilities in
Ogden, Utah and Reynosa, Mexico received ISO 9001 certification in 1999. The
facility in Walnut Creek, California received ISO 9001 Certification in 2000.
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SOURCES OF SUPPLY
Raw materials essential to the Company's dialysis products business are
purchased worldwide from numerous suppliers and no serious shortages or delays
in obtaining raw materials have been encountered. To assure continuous high
quality, FMC has single supplier agreements for many of its polymers, including
polysulfone, polyvinylpyrrolidone, and polyurethane for dialyzer production, and
for certain other raw materials. Wherever single supplier agreements exist, the
Company believes 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 as a secondary source of supply to the Company's self manufactured
blood lines from Reynosa, Mexico. The new agreement expires in 2002.
RESEARCH AND DEVELOPMENT
Current research and development activities of the Company are primarily
conducted through FMC 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.
FMC 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. FMC employs approximately 220 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. FMC's research and development
expenses were $32 million in 2000.
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, FMC holds rights under more than 997 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,
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., Norway, and Europe. Other
pending patents include the new generation of "DIASAFE plus"(R) filters.
For peritoneal dialysis, FMC 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. The Company's
intellectual property includes the Inpersol(R)trademark and rights to certain
manufacturing know-how, and a paid-up non-exclusive global sublicense from
Baxter, Inc. to certain CAPD and connector technology.
The Company believes that its success will depend, in large part, on FMC's
technology. While FMC, as a standard practice, obtains such legal protections it
believes are appropriate for its intellectual property, such intellectual
property is subject to infringement or invalidation claims. In addition,
technological developments in ESRD therapy
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could reduce the value of FMC's existing intellectual property, which reduction
could be rapid and unanticipated.
COMPETITION
The markets in which the Company sells its dialysis products are highly
competitive. Among the Company's competitors in the sale of hemodialysis and
peritoneal dialysis products are Gambro AB, Baxter International Inc., Asahi
Medical Co., Ltd., 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. 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, 2000, the Company employed approximately 26,732 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 23,195 employees; and dialysis products, approximately
3,537 employees. Medical Directors of the Company's dialysis centers are
retained as independent contractors and are excluded from the employee total.
Management believes that its relations with its employees are good.
Approximately 600, or 2% of the Company's employees are covered by union
agreements.
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REGULATORY AND LEGAL MATTERS
REGULATORY OVERVIEW
The operations of the Company are subject to extensive governmental
regulation at the federal, state and local levels regarding the operation of
dialysis centers, laboratories and manufacturing facilities, the provision of
quality health care for patients, the maintenance of occupational, health,
safety and environmental standards and the provision of accurate reporting and
billing for governmental payments and/or reimbursement. In addition, some states
prohibit ownership of health care providers by for-profit corporations or
establish other regulatory barriers to direct ownership by for-profit
corporations. In those states, the Company works within the framework of local
laws to establish alternative contractual arrangements for the provision of
services to those facilities.
Any failure by the Company or its subsidiaries to receive required
licenses, certifications or other approvals for new facilities, significant
delays in such receipt, loss of its various federal certifications, termination
of licenses under the laws of any state or other governmental authority or
changes resulting from health care reform or other government actions that
reduce reimbursement or reduce or eliminate coverage for particular services
rendered by the Company or its subsidiaries could have a material adverse effect
on the business, financial condition and results of operations of the Company.
The Company must comply with legal and regulatory requirements under which
it operates, including the federal Medicare and Medicaid Fraud and Abuse
Amendments of 1977, as amended (the "anti-kickback statute"), the federal
restrictions on certain physician referrals (commonly known as the "Stark Law")
and other fraud and abuse laws and similar state statutes, as well as similar
laws in other countries. Moreover, there can be no assurance that applicable
laws, or the regulations thereunder, will not be amended, or that enforcement
agencies or the courts will not make interpretations inconsistent with those of
the Company, any one of which could have a material adverse effect on its
business, reputation, financial condition and results of operations of the
Company. Sanctions for violations of these statutes may include criminal or
civil penalties, such as imprisonment, fines or forfeitures, denial of payments,
and suspension or exclusion from the Medicare and Medicaid programs. In the
U.S., these laws have been broadly interpreted by a number of courts, and
significant government funds and personnel have been devoted to their
enforcement because such enforcement has become a high priority for the federal
government and some states. The Company, and the health care industry in
general, will continue to be subject to extensive federal, state and foreign
regulation, the full scope of which cannot be predicted.
The Company has entered into a corporate integrity agreement with the U.S.
government which requires that the Company staff and maintain a comprehensive
compliance program, including a written code of conduct, training program and
compliance policies and procedures. The corporate integrity agreement requires
annual audits by an independent review organization and periodic reporting to
the government. The corporate integrity agreement permits the U.S. government to
exclude the Company and its subsidiaries from participation in U.S. federal
health care programs if there is a material breach of the agreement that is not
cured by the Company within thirty days after the Company receives written
notice of the breach.
PRODUCT REGULATION
In the U.S., the FDA and comparable state regulatory agencies impose
requirements on certain subsidiaries of the Company as a manufacturer and a
seller of medical products and supplies under their jurisdiction. These require
that products be manufactured in accordance with GMP and that the Company comply
with FDA requirements regarding the design, safety, advertising, labeling,
recordkeeping and reporting of adverse events related to the use of its
products. In addition, in order to clinically test, produce and market certain
medical products and other disposables (including hemodialysis and peritoneal
dialysis equipment and solutions, dialyzers, bloodlines and other disposables)
for human use, the Company must satisfy mandatory procedures and safety and
efficacy requirements established by the FDA or comparable state and foreign
governmental agencies. Such rules generally require that products be approved by
the FDA as safe and effective for their intended use prior to being marketed.
The Company's peritoneal dialysis solutions have been designated as drugs by the
FDA and, as such, are subject to additional FDA regulation under the Food, Drug
and Cosmetic Act of 1938 ("FDC Act").
The approval process is expensive, time consuming and subject to
unanticipated delays. The FDA may also prohibit the sale or importation of
products, order product recalls or require post-marketing testing and
surveillance programs to monitor a product's effects. The Company believes that
it has filed for or obtained all necessary approvals for the manufacture and
sale of its products in jurisdictions in which those products are currently
produced or sold. There can be no assurance that the Company will obtain
necessary regulatory approvals or clearances within reasonable time frames, if
at all. Any such delay or failure to
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obtain regulatory approval or clearances could have a materially adverse effect
on the business, financial condition and results of operations of the Company.
FACILITIES AND OPERATIONAL REGULATION
The Clinical Laboratory Improvement Amendments of 1988 ("CLIA") subject
virtually all clinical laboratory testing facilities, including those of the
Company, to the jurisdiction of HHS. CLIA establishes national standards for
assuring the quality of laboratories based upon the complexity of testing
performed by a laboratory. Certain operations of the Company are also subject to
federal laws governing the repackaging and dispensing of drugs and the
maintenance and tracking of certain life sustaining and life-supporting
equipment.
The operations of the Company are subject to various U.S. Department of
Transportation, Nuclear Regulatory Commission and Environmental Protection
Agency requirements and other federal, state and local hazardous and medical
waste disposal laws. As currently in effect, laws governing the disposal of
hazardous waste do not classify most of the waste produced in connection with
the provision of dialysis, or laboratory services as hazardous, although
disposal of nonhazardous medical waste is subject to specific state regulation.
However, the Company's laboratory businesses do generate hazardous waste which
is subject to specific disposal requirements. The operations of the Company are
also subject to various air emission and wastewater discharge regulations.
Federal, state and local regulations require the Company to meet various
standards relating to, among other things, the management of facilities,
personnel qualifications and licensing, maintenance of proper records,
equipment, quality assurance programs, the operation of pharmacies, and
dispensing of controlled substances. All of the operations of the Company in the
U.S. are subject to periodic inspection by federal and state agencies and other
governmental authorities to determine if the operations, premises, equipment,
personnel and patient care meet applicable standards. To receive Medicare
reimbursement, the Company's dialysis centers, renal diagnostic support business
and laboratories must be certified by 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 13 states, including 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.
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.
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The Medicare program is the primary source of Dialysis Services revenues
from dialysis treatment. For example, in 2000, approximately 59% of Dialysis
Services revenues resulted from Medicare's ESRD program. As described below,
Dialysis Services is reimbursed by the Medicare program in accordance with the
Composite Rate for certain products and services rendered at the Company's
dialysis centers. As described in the next paragraph, other payment
methodologies apply to Medicare reimbursement for other products and services
provided at the Company's dialysis centers and for products (such as those sold
by the Company) and support services furnished to ESRD patients receiving
dialysis treatment at home (such as those of Dialysis Products). Medicare
reimbursement rates are fixed in advance and are subject to adjustment from time
to time by the U.S. Congress. Although this form of reimbursement limits the
allowable charge per treatment, it provides the Company with predictable per
treatment revenues.
When Medicare assumes responsibility as primary payor (see
"Reimbursement -- Coordination of Benefits"), Medicare is responsible for
payment of 80% of the Composite Rates set by HCFA for dialysis treatments. The
Composite Rates govern the Medicare reimbursement available for a designated
group of dialysis services, including the dialysis treatment, supplies used for
such treatment, certain laboratory tests and certain medications. The Composite
Rates consists of labor and non labor components with adjustments made for
regional wage costs subject to a national payment rate schedule. The Composite
Rates for 2001 were increased by an average of 2.4% (as a result of set
increases over the year), with a new payment ceiling of $144 per treatment. Some
exceptions based on specified criteria are paid at a higher rate.
The method under which the Company is reimbursed for home dialysis is
based on which supplier is selected to provide dialysis supplies and equipment.
If the center is designated as the supplier ("Method I"), the center provides
all dialysis treatment related services, including equipment and supplies, and
is reimbursed using a methodology based on the Composite Rate. If Dialysis
Products is designated as the direct supplier ("Method II"), Dialysis Products
provides the patient directly with all necessary equipment and supplies and is
reimbursed by Medicare subject to a capitated ceiling. Clinics provide home
support services to Method II patients and these services are reimbursed at a
monthly fee for service basis subject to a capitated ceiling. The reimbursement
rates under Method I and Method II differ, although both are prospectively
determined and are subject to adjustment from time to time by Congress.
Certain items and services that the Company furnishes at its dialysis
centers are not included in the Composite Rate and are eligible for separate
Medicare reimbursement, typically on the basis of established fee schedule
amounts. Such items and services include certain drugs (such as EPO), blood
transfusions and certain diagnostic tests.
Medicare payments are subject to change by legislation and pursuant to
deficit reduction measures. The Composite Rate was unchanged from commencement
of the ESRD program in 1972 until 1983. From 1983 through December 1990,
numerous congressional actions resulted in a net reduction of the average
reimbursement rate from $138 per treatment in 1983 to approximately $125 per
treatment in 1990. Congress increased the ESRD reimbursement rate, effective
January 1, 1991, to an average rate of $126 per treatment.
The Company is unable to predict what, if any, future changes may occur in
the rate of Medicare reimbursement. Any significant decreases in the Medicare
reimbursement rates could have a material adverse effect on the Company's
provider business and, because the demand for products is affected by Medicare
reimbursement, on its products business. Increases in operating costs that are
affected by inflation, such as labor and supply costs, without a compensating
increase in reimbursement rates, also may adversely affect the Company's
business and results of operations.
The patient or third-party insurance payors, including employer-sponsored
health insurance plans, commercial insurance carriers and the Medicaid program,
are responsible for paying any co-payment amounts for approved services not paid
by Medicare (typically the annual deductible and 20% co-insurance), subject to
the specific coverage policies of such payors. The extent to which the Company
is actually paid the full co-payment amounts depends on the particular
responsible party. Each third-party payor, including Medicaid, makes payment
under contractual or regulatory reimbursement provisions which may or may not
cover the full 20% co-payment or annual deductible. Where the patient has no
third-party insurance or the third party insurance does not cover copayment or
deductible and the patient is responsible for paying the co-payments or the
deductible, which the Company frequently does not collect fully despite
reasonable collection efforts. Under an advisory opinion from the Office of the
Inspector General, subject to specified conditions, the Company and the other
similarly situated providers may make contributions to a non-profit organization
that has volunteered to make premium payments for supplemental medical insurance
and/or medigap insurance on behalf of indigent ESRD patients, including patients
of the Company.
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Laboratory Tests. A substantial portion of SRM's net revenues are derived
from Medicare, which pays for clinical laboratory services provided to dialysis
patients in two ways.
First, payment for certain routine tests is included in the Composite Rate paid
to the centers. As to such services, the dialysis centers obtain the services
from a laboratory and pay the laboratory for such services. In accordance with
industry practice, SRM usually provides such testing services under capitation
agreements with its customers pursuant to which it bills a fixed amount per
patient per month to cover the laboratory tests included in the Composite Rate
at the designated frequencies. In October 1994, the OIG issued a special fraud
alert in which it stated its view that the industry practice of providing tests
covered by the Composite Rate at below fair market value raised issues under the
anti-kickback statutes, as such an arrangement with an ESRD facility appeared to
be an offer of something of value (Composite Rate tests at below market value)
in return for the ordering of additional tests billed directly to Medicare. See
" -- Anti-kickback Statutes, False Claims Act, Stark Law and Fraud and Abuse
Laws" for a description of this statute.
Second, laboratory tests performed by SRM for Medicare beneficiaries that
are not included in the Composite Rate are separately billable directly to
Medicare. Such tests are paid at 100% of the Medicare fee schedule amounts,
which are limited by national ceilings on payment rates, called National
Limitation Amounts ("NLAs"). Congress has periodically reduced the fee schedule
rates and the NLAs, with the most recent reductions in the NLAs occurring in
January 1998. (As part of the Balanced Budget Act of 1997, Congress lowered the
NLAs from 76% to 74% effective January 1, 1998.) Congress has also approved a
five year freeze on the inflation updates based on the Consumer Price Index
(CPI) for 1998-2002.
Medicare carriers have aggressively implemented Local Medical Review
Policies (LMRPs) limiting the coverage of certain clinical laboratory services
to an established list of diagnosis codes supporting medical necessity. These
LMRPs set forth medical necessity criteria based on diagnosis coding as well as
frequency of service provisions. Provisions in the Balanced Budget Act of 1997,
require the Secretary of HHS to adopt uniform coverage and payment policies for
laboratory testing 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. The provision of
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 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, 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, Medicaid or a state renal program
are responsible for payment.
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Patients who are covered by Medicare and are also covered by an employer
group health plan ("EGHP") are subject to a 30 month coordination period during
which the EGHP is the primary payor and Medicare the secondary payor. During
this coordination period the EGHP pays a negotiated rate or in the absence of
such a rate, the Company's standard rate or a rate defined by its plan
documents. The payments are generally higher than the Medicare Composite Rate.
insurance will therefore generally cover a total of 33 months, the 3 month
waiting period plus the 30 month coordination period.
Patients who already are eligible for Medicare based on age when they
become ESRD patients are dual eligible patients. If these patients are covered
under an EGHP that is their primary payor for covered services, then these
patients will have a 30 month coordination period. If Medicare is already the
primary payor when ESRD entitlement begins, Medicare remains the primary payor,
the EGHP is the secondary payor and no coordination period will apply. All ESRD
patients or patients over 65 who do not have a health insurance retirement
benefit plan can purchase Medigap plans.
Possible Changes in Medicare. Because the Medicare program represents a
substantial portion of the federal budget, the U.S. Congress takes action in
almost every legislative session to modify the Medicare program by refining the
amounts payable to health care providers. Legislation or regulations may be
enacted in the future that could substantially modify or reduce the amounts paid
for services and products offered by the Company and its subsidiaries. It is
also possible that statutes may be adopted or regulations may be promulgated in
the future that impose additional eligibility requirements for 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 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.
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.
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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.
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.
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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. Pursuant to proposed regulations implementing Stark I and II,
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.
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.
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ITEM 2. PROPERTIES
The table below describes the Company's principal facilities as of the
date hereof.
FLOOR AREA
(APPROXIMATE CURRENTLY OWNED
LOCATION SQUARE FEET) OR LEASED USE
-------- ------------ --------- ---
Lexington, Massachusetts 200,000 leased Corporate headquarters and administration.
Walnut Creek, California 85,000 leased Manufacture of hemodialysis machines and
peritoneal dialysis cyclers; research and
development.
17,500 leased Warehouse Space - Machine components
Ogden, Utah 450,000 owned (1) Manufacture polysulfone membranes and dialyzers
and peritoneal dialysis solutions; research and
development.
Delran, New Jersey 42,000 leased Manufacture of liquid hemodialysis concentrate
solutions.
Perrysburg, Ohio 35,000 leased Manufacture of dry hemodialysis concentrates.
Livingston, California 32,000 leased Manufacture of liquid hemodialysis concentrates.
Irving, Texas 70,000 leased Manufacture of liquid hemodialysis solution.
Reynosa, Mexico 150,000 leased Manufacture of bloodlines.
Fremont, California 72,000 leased Clinical laboratory testing
Chicago, Illinois 670 leased Clinical laboratory testing
Rockleigh, New Jersey 85,000 leased Clinical Laboratory testing
(1) Land and majority of equipment is leased, building is owned.
The lease on the Walnut Creek facility expires in 2002. The Company leases
17 warehouses throughout the U.S. These warehouses are used as regional
distribution centers for the Company's peritoneal dialysis products business.
All such warehouses are subject to leases with remaining terms not exceeding ten
years. At December 31, 2000, the Company distributed its products through all
these 17 warehouse facilities
The Company leases its corporate headquarters in Lexington, Massachusetts.
This lease expires on October 31, 2007.
The Company's subsidiaries lease most of the dialysis centers,
manufacturing, laboratory, distribution and administrative and sales facilities
in the U.S. on terms which the Company believes are customary in the industry.
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ITEM 3. LEGAL PROCEEDINGS
COMMERCIAL INSURER LITIGATION
In 1997, the Company, NMC, and certain named NMC subsidiaries, were served
with a civil complaint filed by Aetna Life Insurance Company in the U.S.
District Court for the Southern District of New York. The lawsuit alleges
inappropriate billing practices for nutritional therapy, diagnostic and clinical
laboratory tests and misrepresentations. In April 1999, Aetna amended its
complaint to include its affiliate, Aetna U.S. Healthcare, Inc., as an
additional plaintiff, and to make certain other limited changes in its pleading.
The amended complaint seeks unspecified damages and costs. In February 2000, the
Company was served with a similar complaint filed by Connecticut General Life
Insurance Company, Equitable Life Assurance Society for the United States, Cigna
Employee Benefits Services, Inc. and Guardian Life Insurance Company of America,
Inc. (Connecticut General Life Insurance Company et al v. National Medical Care
et al, 00-Civ-0932) seeking unspecified damages and costs. However, the Company,
NMC and its subsidiaries believe that there are substantial defenses to the
claims asserted, and intend to vigorously defend both lawsuits. Other private
payors have contacted the Company and may assert that NMC received excess
payment and, similarly, may join either lawsuit or file their own lawsuit
seeking reimbursement and other damages.
The Company has filed counterclaims against the plaintiffs in these
matters based on inappropriate claim denials and delays in claim payments.
Although the ultimate outcome on the Company of these proceedings cannot
be predicted at this time, an adverse result could have a material adverse
effect on the Company's business, financial condition and result of operations.
OBRA 93
The Omnibus Budget Reconciliation Act of 1993 affected the payment of
benefits under Medicare and employer health plans for dual-eligible ESRD
patients. In July 1994, the Health Care Financing Administration issued an
instruction to Medicare claims processors to the effect that Medicare benefits
for the patients affected by that act would be subject to a new 18-month
"coordination of benefits" period. This instruction had a positive impact on
NMC's dialysis revenues because, during the 18-month coordination of benefits
period, patients' employer health plans were responsible for payment, which was
generally at rates higher than those provided under Medicare.
In April 1995, the Health Care Financing Administration issued a new
instruction, reversing its original instruction in a manner that would
substantially diminish the positive effect of the original instruction on NMC's
dialysis business. The Health Care Financing Administration further proposed
that its new instruction be effective retroactive to August 1993, the effective
date of the Omnibus Budget Reconciliation Act of 1993.
NMC ceased to recognize the incremental revenue realized under the
original instruction as of July 1, 1995, but it continued to bill employer
health plans as primary payors for patients affected by the Omnibus Budget
Reconciliation Act of 1993 through December 31, 1995. As of January 1, 1996, NMC
commenced billing Medicare as primary payor for dual eligible ESRD patients
affected by the act, and then began to re-bill in compliance with the revised
policy for services rendered between April 24 and December 31, 1995.
On May 5, 1995, NMC filed a complaint in the U.S. District Court for the
District of Columbia (National Medical Care, Inc. and Bio-Medical Applications
of Colorado, Inc. d/b/a Northern Colorado Kidney Center v. Shalala, C.A.
No.95-0860 (WBB) seeking to preclude the Health Care Financing Administration
from retroactively enforcing its April 24, 1995 implementation of the Omnibus
Budget Reconciliation Act of 1993 provision relating to the coordination of
benefits for dual eligible ESRD patients. On May 9, 1995, NMC moved for a
preliminary injunction to preclude the Health Care Financing Administration from
enforcing its new policy retroactively, that is, to billing for services
provided between August 10, 1993 and April 23, 1995. On June 6, 1995, the court
granted NMC's request for a preliminary injunction and in December of 1996, NMC
moved for partial summary judgment seeking a declaration from the Court that the
Health Care Financing Administration's retroactive application of the April 1995
rule was legally invalid. The Health Care Financing Administration cross-moved
for summary judgment on the grounds that the April 1995 rule was validly applied
prospectively. In January 1998, the court granted NMC's motion for partial
summary judgment and entered a declaratory judgment in favor of NMC, holding the
Health Care Financing Administration's retroactive application of the April 1995
rule legally invalid. Based on its finding, the Court also permanently enjoined
the Health Care Financing Administration from enforcing and applying the April
1995 rule retroactively against NMC. The Court took no action on the Health Care
Financing Administration's motion for summary judgment pending
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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.
In July, 2000, NMC filed a complaint in the U.S. District Court for the
Eastern District of Virginia (National Medical Care, Inc. and Bio-Medical
Applications of Virginia, Inc. v. Aetna Life Insurance, Co., Inc. Aetna U.S.
Healthcare, Inc. and John Does 1-10) seeking recovery against Aetna U.S.
Healthcare and health plans administered by Aetna U.S. Healthcare for claims
related to primary payor liability for dual eligible ESRD patients under the
Omnibus Budget Reconciliation Act of 1993. On January 16, 2001, the Court stayed
the action pending resolution of the District of Columbia Court action.
OTHER LITIGATION AND POTENTIAL EXPOSURES
From time to time, the Company is a party to or may be threatened with
other arising in the ordinary course of its business. Management regularly
analyzes current information including, as applicable, the Company's defenses
and insurance coverage and, as necessary, provides accruals for probable
liabilities for the eventual disposition of these matters. The ultimate outcome
of these matters is not expected to materially affect the Company's financial
position, results of operations or cash flows.
The Company, like other health care providers, conducts its operations
under intense government regulation and scrutiny. The Company must comply with
regulations which relate to or govern the safety and efficacy of medical
products and supplies, the operation of manufacturing facilities, laboratories
and dialysis clinics, and environmental and occupational health and safety. The
Company must also comply with the U.S. anti-kickback statute, the False Claims
Act, the Stark Law, and other federal and state fraud and abuse laws. Applicable
laws or regulations may be amended, or enforcement agencies or courts may make
interpretations that differ from the Company's or the manner in which the
Company conduct its business. In the U.S., enforcement has become a high
priority for the federal government and some states. In addition, the provisions
of the False Claims Act authorizing payment of a portion of any recovery to the
party bringing the suit encourage private plaintiffs to commence "whistle
blower" actions. By virtue of this regulatory environment, as well as our
corporate integrity agreement with the government, the Company expects that its
business activities and practices will continue to be subject to extensive
review by regulatory authorities and private parties, continuing inquiries,
claims and litigation relating to its compliance with applicable laws and
regulations. The Company may not always be aware that an inquiry or action has
begun, particularly in the case of "whistle blower" actions, which are initially
filed under court seal.
The Company operates a large number of facilities throughout the U.S. In
such a decentralized system, it is often difficult to maintain the desired level
of oversight and control over the thousands of individuals employed by many
affiliate companies. The Company relies upon its management structure,
regulatory and legal resources, and the effective operation of its compliance
program to direct, manage and monitor the activities of these employees. On
occasion, the Company may identify instances where employees, deliberately or
inadvertently, have submitted inadequate or false billings. The actions of such
persons may subject the Company and its subsidiaries to liability under the
False Claims Act, among other laws, and the Company cannot predict whether law
enforcement authorities may use such information to initiate further
investigations of the business practices disclosed or any of its other business
activities.
Physicians, hospitals and other participants in the health care industry
are also subject to a large number of lawsuits alleging professional negligence,
malpractice, product liability, worker's compensation or related claims, many of
which involve large claims and significant defense costs. The Company has been
subject to these suits due to the nature of its business and the Company expects
that those types of lawsuits may continue. Although the Company maintains
insurance at a level which it believes to be prudent, the Company cannot assure
that the coverage limits will be adequate or that insurance will cover all
asserted claims. A successful claim against the Company or any of its
subsidiaries in excess of insurance coverage could have a material adverse
effect upon the Company and the results of its operations. Any claims,
regardless of their merit or eventual outcome, also may have a material adverse
effect on the Company's reputation and business.
26
27
The Company has also had claims asserted against it and has had lawsuits
filed against it relating to businesses that it has acquired or divested. These
claims and suits relate both to operation of the businesses and to the
acquisition and divestiture transactions. The Company has asserted its own
claims, and claims for indemnification. Although the ultimate outcome on the
Company cannot be predicted at this time, an adverse result could have a
material adverse effect upon the Company's business, financial condition, and
results of operations.
On September 28, 2000, Mesquita, et al. v. W. R. Grace & Company, et al.
(Sup. Court of Calif., S.F. County, #315465) was filed as a class action against
Grace Chemicals, the Company, and other defendants, principally alleging that
the Merger was a fraudulent transfer, violated the uniform fraudulent transfer
act, and constituted a conspiracy. An amended complaint was filed subsequently
with substantially similar allegations (Abner et al. v. W. R. Grace & Company,
et al.). The Company has requested indemnification from Grace Chemicals pursuant
to the Merger agreement. If the Merger is determined to have been a fraudulent
transfer, if material damages are proved by the plaintiffs and if the Company is
not able to collect, in whole or in part, on the indemnity, a judgment could
have a material adverse effect on the Company's business, financial condition
and results of operations. The Company believes that no fraudulent transfer or
conspiracy occurred and intends to defend the case vigorously.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5. MARKET PRICE FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
All of the Company's common stock is held by FMC. The NMC Credit
Facilities and the indentures pertaining to the Senior Subordinated Notes of FMC
and one of its subsidiaries impose certain limits on the Company's payment of
dividends. See Item 7 - "Management's Discussion and Analysis of Financial
Condition and Results of Operations".
FRESENIUS MEDICAL CARE HOLDINGS CLASS D PREFERRED SHARES
The Company, distributed its Class D Preferred Shares exclusively to W.R.
Grace ("Grace") common shareholders in connection with the 1996 reorganization
involving Grace and FMC. The Class D Preferred Shares trade over-the counter
only in the United States under the symbol FSMEP.OB.
Holders of the Company's Class D Preferred Shares may be entitled to a
one-time special dividend if (but only if) conditions specified in the Company's
Certificate of Incorporation are met. The Class D Preferred Shares are not
entitled to receive any dividends other than this special dividend. In
particular, the Company's Class D Preferred Shares are not entitled to any
dividend that FMC may pay on their Preference shares or their ADSs.
The special dividend is payable only if the cumulative adjusted cash flow
to FMC's ordinary shareholders (defined as the Company's net income plus
depreciation and amortization) from January 1, 1997 through December 31, 2001
exceeds US$3.7 billion. If FMC's cumulative adjusted cash flow meets that
threshold, 44.8% of any amount exceeding US$3.7 billion will be distributed as a
special dividend on the Company's Class D Preferred Shares. For the period from
January 1, 1997 through the end of 2000, FMC's cumulative adjusted cash flow for
the purpose of the Class D Preferred Shares special dividend calculation was
approximately US $1.2 billion. The Company must make a public announcement of
the amount, if any, of the special dividend by May 1, 2002. Payment of a special
dividend on the Class D Preferred Shares that is earned, if any, would commence
in October 2002. FMC does not have any obligation to contribute any amount to
the Company to enable it to pay any special dividend.
The Class D Preferred Shares are redeemable at the Company's sole option
after the date it makes its public announcement of the amount of the special
dividend (if any) in 2002. The redemption price is the greater of the
liquidation preference ($0.10 cents per Class D Preferred Share) and any unpaid
special dividend amount. The Company is not, however, required to redeem the
Class D Preferred Shares.
This description of the material terms of the Company's Class D Preferred
Shares is not complete and is qualified in its entirety by the terms of the
Company's Certificate of Incorporation. The Company's Certificate of
incorporation is on file with the Securities and Exchange Commission.
27
28
ITEM 6. SELECTED FINANCIAL DATA
SUCCESSOR
YEAR ENDED DECEMBER 31,
- ----------------------------------------------------------------------------------------------------- ---------------
(Dollars in Millions, Except Shares and Per Share Data) 2000 1999 1998 1997
- ----------------------------------------------------------------------------------------------------- ---------------
Statement of Operations Data
Continuing Operations
Net sales $ 3,089 $ 2,815 $ 2,571 $ 2,166
Cost of Sales 2,109 1,880 1,707 1,456
-------- -------- -------- --------
Gross Profit 980 935 864 710
Selling, general and administrative and research and
development 560 540 529 452
Special charge for settlement of investigation and
related costs -- 601 -- --
-------- -------- -------- --------
Operating income (loss) 420 (206) 335 258
Interest expense (net) 187 202 209 178
Interest expense on settlement of investigation
(net) 30 -- -- --
-------- -------- -------- --------
Income (loss) from continuing operations before income
taxes and cumulative effect of changes in
accounting for start up costs 203 (408) 126 80
Income tax (benefit) expense 98 (81) 74 46
-------- -------- -------- --------
Income (loss) from continuing operations before
cumulative effect of change in accounting
for start up costs $ 105 $ (327) $ 52 $ 34
-------- -------- -------- --------
Discontinued Operations
Loss from discontinued operations, net of income taxes -- -- (9) (14)
Loss on disposal of discontinued operations, net of
income tax benefit -- -- (97) --
-------- -------- --------- --------
Loss from discontinued operations -- -- (106) (14)
-------- -------- --------- ---------
Cumulative effect of change in accounting for start up
costs, net of tax benefit -- -- (5) --
-------- -------- ---------
Net income (loss) $ 105 $ (327) $ (59) $ 20
======== ======== ========= ========
Net Income (loss) Per Common and Common Equivalent Share:
Continuing Operations $ 1.16 $ (3.64) $ 0.57 $ 0.37
Discontinued Operations -- -- (1.18) (0.15)
Cumulative effect of accounting change -- -- (0.05) --
Net Income 1.16 (3.64) (0.66) 0.22
Weighted average number of shares of
Common stock and common stock equivalents:
Primary (000's) 90,000 90,000 90,000 90,000
SUCCESSOR PREDECESSOR
THREE MONTHS NINE MONTHS
ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
- -------------------------------------------------------------- -------------- ---------------
(Dollars in Millions, Except Shares and Per Share Data) 1996 1996
- -------------------------------------------------------------- -------------- ---------------
Statement of Operations Data
Continuing Operations
Net sales $ 505 $ 1,615
Cost of Sales 340 969
-------- -------
Gross Profit 165 646
Selling, general and administrative and research and
development 106 501
Special charge for settlement of investigation and
related costs -- --
-------- -------
Operating income (loss) 59 145
Interest expense (net) 43 16
Interest expense on settlement of investigation (net) -- --
-------- -------
Income (loss) from continuing operations before income
taxes and cumulative effect of changes in
accounting for start up costs 16 129
Income tax (benefit) expense 11 66
-------- -------
Income (loss) from continuing operations before
cumulative effect of change in accounting
for start up costs $ 5 $ 63
-------- -------
Discontinued Operations
Loss from discontinued operations, net of income taxes (2) --
Loss on disposal of discontinued operations, net of
income tax benefit -- --
-------- -------
Loss from discontinued operations (2) --
--------- -------
Cumulative effect of change in accounting for start up
costs, net of tax benefit -- --
Net income (loss) $ 3 $ 63
======== =======
Net Income (loss) Per Common and Common Equivalent Share:
Continuing Operations $ 0.06 $ 0.66
Discontinued Operations (0.02) --
Cumulative effect of accounting change -- --
Net Income 0.04 0.66
Weighted average number of shares of
Common stock and common stock equivalents: 90,000 95,188
Primary (000's)
SUCCESSOR
AT DECEMBER 31,
---------------------------------------------------------------------
2000 1999 1998 1997 1996
----------- --------------- ------------ ------------- --------------
Balance Sheet Data:
Working capital $ (154) $ (456) $ 294 $ 394 $ 282
Total assets 4,553 4,645 4,613 4,771 4,370
Total long term debt and capital lease obligations 589 616 1,014 1,622 1,438
Mandatorily redeemable preferred securities 305 -- -- -- --
Stockholders' equity 1,726 1,622 1,949 1,987 1,764
28
29
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following is a discussion of the financial condition and results of
operations of the Company. The discussion should be read in conjunction with the
consolidated financial statements included elsewhere in this document.
This section contains certain forward-looking statements that are subject
to various risks and uncertainties. Such statements include, without limitation,
discussions concerning the outlook of the Company, government reimbursement,
future plans and management's expectations regarding future performance. Actual
results could differ materially from those contained in these forward-looking
statements due to certain factors including, without limitation, changes in
business, economic and competitive conditions, regulatory reforms, foreign
exchange rate fluctuations, uncertainties in litigation or investigative
proceedings, the realization of anticipated tax deductions, and the availability
of financing. These and other risks and uncertainties, which are more fully
described elsewhere in this Item 7 and in the Company's reports filed from time
to time with the Commission, could cause the Company's results to differ
materially from the results that have been or may be projected by or on behalf
of the Company.
OVERVIEW
The Company is primarily engaged in (a) providing kidney dialysis
services, 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 2000). The reimbursement rates under these programs, including the Composite
Rate, the reimbursement rate for EPO, and the reimbursement rate for other
dialysis and non-dialysis related services and products, as well as other
material aspects of these programs, have in the past and may in the future be
changed as a result of deficit reduction and health care reform measures.
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
On January 18, 2000, the Company, NMC and certain affiliated companies
executed definitive agreements (the "Settlement Agreements") with the United
States Government (the "Government") to settle (i) matters concerning violations
of federal laws and (ii) NMC's claims with respect to outstanding Medicare
receivables for nutrition therapy (collectively, the "Settlement").
Under the Settlement with the Government, the Company entered into a note
payable for the settlement payment obligations to the Government. Interest on
installment payments to the Government will accrue at 6.3% on $51.2 million of
the obligation and at 7.5% annually on the balance, until paid in full.
In February 2000, the Company made initial payments to the Government
totaling $286.4 million. The remaining obligation is payable in six quarterly
installments which began in April 2000 and will end in July 2001. The first four
quarterly installments were in the amount of $35.4 million including interest at
7.5%. The first three of these four payments were made in April, July, and
October 2000 to the Government totaling $106.2 million including interest. The
fourth installment was made in January 2001. The remaining two installments of
$27.8 million including interest at 6.3% will be made in April and July 2001,
respectively.
In addition, the Company received approximately $59.2 million from the
Government related to the Company's claims for outstanding Medicare receivables
The Company received $54.0 million in 2000 and a final payment of $5.2 million
in February 2001.
29
30
RESULTS OF OPERATIONS
The following table summarizes certain operating results of the Company by
principal business unit for the periods indicated. Intercompany eliminations
primarily reflect sales of medical supplies by Dialysis Products to Dialysis
Services.
YEAR ENDED DECEMBER 31,
-------------------------------------
(DOLLARS IN MILLIONS)
2000 1999 1998
---- ---- ----
NET REVENUES
Dialysis Services .................. $ 2,625 $ 2,339 $ 2,116
Dialysis Products .................. 717 707 662
Intercompany Eliminations .......... (253) (231) (207)
-------- -------- --------
Net Revenues .................................. $ 3,089 $ 2,815 $ 2,571
======= ======= =======
Operating Earnings:
Dialysis Services .................. $ 403 $ 386 $ 344
Dialysis Products .................. 118 126 103
------- ------- -------
Operating Earnings ............................ 521 512 447
======= ======= =======
Other Expenses:
General Corporate .................. $ 97 $ 113 $ 108
Research & Development ............. 4 4 4
Interest Expense, Net .............. 187 202 209
Interest Expense on Settlement, Net 30 -- --
Special Charge for OIG Settlement .. -- 601 --
------- ------- -------
Total Other Expenses .......................... 318 920 321
======= ======= =======
Income (Loss) Before Income Taxes and
cumulative effect of change in accounting
for start up costs ....................... 203 (408) 126
Provision for Income Taxes .................... 98 (81) 74
------- ------- -------
Income (loss) from continuing operations
before cumulative effect of change in
accounting for start up costs ............ $ 105 $ (327) $ 52
------- ------- -------
Discontinued Operations:
Net Revenues ....................... $ -- $ -- $ 121
======= ======= =======
Loss before income taxes ........... -- -- (14)
Benefit for income Taxes ........... -- -- (5)
------- ------- --------
Loss from operations ............... -- -- (9)
------- ------- --------
Loss on disposal before income taxes -- -- (140)
Income tax benefit ................. -- -- (43)
------- ------- --------
Loss on disposal ................... -- -- (97)
------- ------- -------
Loss on Discontinued Operations ............... $ -- $ -- $ (106)
======= ======= ========
Cumulative effect of change in accounting for
start up costs, net of tax benefits ...... -- -- (5)
------- -------- --------
------- -------- --------
Net Income/(loss) ............................. $ 105 $ (327) $ (59)
======= ======== ========
30
31
2000 COMPARED TO 1999
Net revenues from continuing operations for 2000 increased by 10% ($274
million) over 1999. Income from continuing operations increased by $432 million
over 1999 as a result of increased operating earnings ($9 million), reduced
corporate expense ($4 million), and no comparable 2000 expense relating to the
special charge for settlement of investigation and related costs ($419 million,
after income taxes) recorded in 1999, partially offset by increased interest
expense. Excluding the effect of the special charge for settlement of
investigation and related costs, net income from operations increased by 14%
over 1999.
DIALYSIS SERVICES
Dialysis Services net revenues for 2000 increased by 12% ($286 million)
over 1999, primarily as a result of a 9% increase in the number of treatments
provided, the impact of increased Medicare reimbursement rates, improved anemia
management (higher EPO utilization), consolidation of joint ventures, higher
revenues in other pharmaceuticals and increased laboratory testing revenues. The
treatment increase was a result of base business growth and the impact of 1999
and 2000 acquisitions. The laboratory testing revenues increased as a result of
higher patient volume.
Dialysis Services operating earnings for 2000 increased by 4% ($17
million) over 1999 primarily due to increases in treatment volume, the impact of
increased Medicare reimbursement rates, higher earnings in other
pharmaceuticals, and increased earnings from laboratory testing. These increases
were partially offset by higher personnel costs, increased costs of EPO, higher
provisions for doubtful accounts, and higher equipment lease expenses.
DIALYSIS PRODUCTS
Dialysis Products net revenues for 2000 increased by 1% ($10 million) over
the comparable period of 1999. This is primarily due to increased sales of
hemo products including machines and disposables, partially offset by decreased
sales of peritoneal products.
Dialysis Products operating earnings for 2000 decreased by 6% ($8 million)
over the comparable period of 1999. This is a result of higher sales and
marketing costs and freight and distribution expenses as well as an increased
provision for doubtful accounts, partially offset by improvements in gross
margin.
SPECIAL CHARGE FOR SETTLEMENT OF INVESTIGATION AND RELATED COSTS
On January 18, 2000, the Company, NMC and certain affiliated companies
executed definitive agreements (the "Settlement Agreements") with the United
States Government ("the Government") to settle (i) matters concerning violations
of federal laws and (ii) NMC's claims with respect to outstanding Medicare
receivables for nutrition therapy (collectively, the "Settlement").
As a result of the Settlement, the Company recorded, a special pre-tax
charge of $601 million ($419 million net of income taxes ) in 1999 which
included (i) a charge of approximately $486 million for settlement payment
obligations to the government; (ii) a reserve of approximately $94 million for
the resolution of the Company's IDPN accounts receivable; and (iii) a reserve
for other related costs of $21 million. The settlement payment obligations to
the Government and the amounts due to the Company for outstanding Medicare
receivables have been classified in the balance sheet at their expected
settlement date. (See Note 7 - "Special Charge for Settlement of Investigation
and Related Costs").
OTHER EXPENSES
The Company's other expenses for 2000 decreased by 1% ($1 million) over
the comparable period of 1999 excluding the special charge. General corporate
expenses decreased by $16 million and operating interest expense decreased by
$15 million primarily due to the change in the mix of debt instruments. The
decreases in general corporate and operating interest expenses for 2000 were
offset by $30 million of increased interest expense related to the settlement of
the OIG investigation in January 2000.
31
32
INCOME TAXES
The Company has recorded an income tax provision of $98 million for 2000 as
compared to an income tax benefit of $81 million for 1999. The income tax
provision in 2000 is higher than the statutory tax rate primarily due to the
non-deductible merger goodwill. The income tax benefit in 1999 is lower than the
statutory tax rate primarily due to the tax effect of the special charge for the
Settlement and related costs, partially offset by non-deductible merger
goodwill.
1999 COMPARED TO 1998
Net revenues from continuing operations for 1999 increased by 10% ($244
million) over 1998. Income from continuing operations for 1999 decreased ($379
million) over 1998 as a result of increased expense relating to the special
charge for settlement of investigation and related costs ($419 million, after
income taxes), and increases to general corporate expenses, partially offset by
increased operating earnings and reduced interest expense. Excluding the effect
of the special charge for settlement of investigation and related costs recorded
in 1999, net income from operations increased by 78%.
DIALYSIS SERVICES
Dialysis Services net revenues for 1999 increased by 11% ($223 million)
over 1998, primarily as a result of 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 hemo products
including machines and disposables, partially offset by decrease sales
of peritoneal products.
Dialysis Products operating earnings for 1999 increased by 22% ($23
million) over 1998. This is primarily due to revenue growth and improvements in
gross margin resulting from manufacturing efficiencies from increased production
volume, partially offset by increased freight and distribution costs.
SPECIAL CHARGE FOR SETTLEMENT OF INVESTIGATION AND RELATED COSTS
On January 18, 2000, the Company, NMC and certain affiliated companies
executed definitive agreements (the "Settlement Agreements") with the United
States Government (the "Government") to settle (i) the matters covered in the
OIG Investigation and (ii) NMC's claims with respect outstanding Medicare
receivables for nutrition therapy (collectively, the "Settlement").
As a result of the Settlement, the Company recorded a special pre-tax
charge of $601 million ($419 million after tax) in 1999 which included (i) a
charge of $486 million for settlement payment obligations to the Government,
(ii) a reserve of approximately $94 million for resolution of the Company's IDPN
accounts receivable, and (iii) a reserve for other related costs of $21 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.
32
33
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.
LIQUIDITY AND CAPITAL RESOURCES
YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999
The Company's cash requirements in 2000 and 1999, including acquisitions
and capital expenditures, have been funded by cash generated from operations,
additional intercompany borrowings, and an increase in the receivable financing
facility.
Cash from operations has improved by $14 million from $249 million in 1999
to $263 million in 2000. This improvement is primarily related to an increase in
earnings and the addback of non-cash expenses of $125 million offset by net
decreases in operating assets and liabilities of $111 million. These changes
have been adjusted to exclude the special charge for the settlement of the OIG
investigation in 1999.
The movement in operating assets and liabilities includes the collection
of $54 million related to IDPN receivables; increases in accounts receivable
primarily due to increases in days sales outstanding resulting from slower
payment patterns from third parties, specifically from non-governmental payors
as well as the impact of new acquisitions; decreases in accounts payable due
primarily to timing of disbursements; decreases in accrued liabilities primarily
due to timing for physician compensation payments, unreconciled payments and
compliance and legal costs. Cash on hand was $33 million at December 31, 2000
compared to $13 million at December 31, 1999.
Under the final settlement with the government, the Company is required to
make net settlement payments totaling approximately $427 million, of which $14
million had previously been paid prior to 2000. This amount is net of
approximately $59.2 million of reimbursement for Medicare receivables from the
Government. During 2000, the Company made payments to the Government totaling
$387 million and received $54 million from the Government.
Under the definitive agreements with the Government, the Company entered
into a note payable for the settlement payment obligations to the Government.
Interest on installment payments to the Government accrues at 6.3% on $51.2
million of the obligation and at 7.5% annually on the balance, until paid in
full.
Under the terms of the note payable, the remaining obligation is payable
in six quarterly installments which began April 2000 and will end July 2001. The
first three of these quarterly installments of $35.4 million including interest
of 7.5% were made in April, July, and October 2000. The fourth quarterly
installment was made in the amount of $35.4 million including interest at 7.5%
in January 2001. The remaining two installments of $27.8 million including
interest at 6.3% will be made in April and July 2001, respectively. The
Government has remitted the balance of the Company's outstanding Medicare
receivables in four quarterly payments of $5.2 million plus interest at 7.5%.
The first three quarterly payments from the Government were received in May,
August, and October 2000. The final payment was received in February 2001.
Net cash flows used in investing activities of operations during 2000
totaled $220 million compared to $146 million in 1999. The Company funded its
acquisitions and capital expenditures primarily through cash flows from
operations and intercompany borrowings. Acquisitions totaled $116 million and
$65 million in 2000 and 1999, respectively, net of cash acquired. Capital
expenditures of $104 million and $81 million were made for internal expansion,
improvements, new furnishings and equipment in 2000 and 1999, respectively.
Net cash flows used in financing activities of operations during 2000
totaled $23 million as compared to net cash flows used of $96 million in 1999.
During 2000, the Company made payments to the government of $387 million for the
33
34
Settlement. In addition, debt and capital lease obligations were paid down by
$18 million and repayments of $33 million were made on intercompany borrowings.
Proceeds from financing activities in 2000 included $306 million for the
issuance of mandatorily redeemable preferred stock to an affiliated company and
increased borrowings under a receivable financing facility (the "A/R Facility")
by $110 million. At December 31, 2000 the Company had additional borrowing
capacity of approximately $69.8 million under its credit facility ("NMC Credit
Facility") and $54.7 million under its A/R Facility.
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.
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CONTINGENCIES
The Company is a plaintiff in litigation against the federal government
with respect to the implementation of OBRA 93 and is a defendant in significant
litigations described in Item 3. "Legal Proceedings." 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 - 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 "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.
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 ("SFAS 133"). SFAS 133 requires the
recognition of the fair value of all derivative instruments on the balance
sheet. Subsequent to the issuance of SFAS 133, the FASB received many requests
to clarify certain issues causing difficulties in implementation.
In June 2000, the FASB issued SFAS 138, which responds to those requests
by amending certain provisions of SFAS 133. These amendments include allowing
foreign-currency denominated assets and liabilities to qualify for hedge
accounting, permitting the offsetting of certain inter-entity foreign currency
exposures that reduce the need for third party derivatives and redefining the
nature of interest rate risk to avoid sources of ineffectiveness. The Company is
adopting SFAS 133, and the corresponding amendments under SFAS 138 effective as
January 1, 2001. The adoption of SFAS 133, as amended by SFAS 138, results in
the recording of assets related to forward currency contracts of approximately
$12.9 million and a liability for interest rate swaps of approximately $24.6
million. The offset to each of these transition adjustments will be recorded
to other comprehensive income. The Company expects that approximately $2.0
million deferred gains on foreign currency contracts will be recognized to
earnings during fiscal year 2001.
In December 1999, the United States Securities and Exchange Commission
("SEC") issued Staff Accounting Bulletin 101, Revenue Recognition in Financial
Statements ("SAB 101"). SAB 101 provides the staff's views in applying generally
accepted accounting principles to selected revenue recognition issues, as well
as examples of how the staff applies revenue recognition guidance to specific
circumstances. In June 2000, SAB 101B was issued by the SEC further delaying the
date of SAB 101 until the fourth quarter of the fiscal year beginning after
December 15, 1999. The impact of the adoption of SAB 101 is not significant.
In May 2000, the Emerging Issues Task Force ("EITF") issued EITF 00-014,
Accounting for Certain Sales Incentives, which establishes accounting for point
of sales coupons, rebates, and free merchandise. This EITF requires that an
entity report these sales incentives that reduce the price paid to be netted
directly against revenues. EITF 00-014 is effective no later than the fourth
quarter of fiscal year beginning after December 15, 1999. The impact of the
adoption of EITF 00-014 is not significant.
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In September 2000, the Financial Accounting Standards Board issued SFAS
No. 140, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities, which replaces SFAS No. 125. SFAS No. 140
provides the accounting and reporting standards for securitizations and other
transfers of financial assets and collateral. These standards are based on
consistent application of a financial-components approach that focuses on
control. This Statement also provides consistent standards for distinguishing
transfers of financial assets that are sales from transfers that are secured
borrowings. SFAS No. 140 is effective for transfers after March 31, 2001 and is
effective for disclosures about securitizations and collateral for fiscal years
ending after December 15, 2000. There is no impact to the Company for the
adoption of SFAS No. 140.
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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, 2000, the fair value of the Company's interest rate
agreements, which consisted entirely of interest rate swaps, is approximately
($24.6 million). The table below presents information on the Company's
significant debt obligations, some of which are subject to interest rate
changes, and the interest rate protection agreements used to hedge both
long-term and short-term obligations.
INTEREST RATE EXPOSURE
DECEMBER 31, 2000
($ MILLIONS)
2001 2002 2003 2004 Thereafter Totals
---- ---- ---- ---- ---------- ------
Principal Payments Due on NMC Credit Facility $150 $150 $433 $ 733
Variable Interest Rate = 7.43% - 7.69%
Principal Payments Due on A/R Facility $445 $ 445
Variable Interest Rate = approx. 6.59%
Borrowings from Affiliates
Variable Interest Rate = 6.87% - 7.75% $340 $ 340
Fixed Interest Rate = 9.25% $351 $ 351
Fixed Interest Rate = 8.43% $436 $ 436
Interest Rate Agreements (notional amounts) $600 $250 $200 $1,050
Average Fixed Pay Rate = 6.52% 6.58% 6.32% 6.61%
Receive Rate = 3-Month LIBOR
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At December 31, 2000, the fair value of the Company's foreign exchange
contracts, which consisted entirely of forward agreements, is approximately
$20.4 million. The Company had outstanding contracts covering the purchase of
494.9 million Euros ("EUR") at an average contract price of $0.9109 per EUR, for
delivery between January 2001 and November 2003.
The Company's hedging strategy vis-a-vis the above-mentioned market risks
has not changed significantly from 1999 to 2000. The Company does not believe
the adoption of SFAS 133, Accounting for Derivative Instruments and Hedging
Activities, and the corresponding amendments under SFAS 138 effective January 1,
2001, will have a material impact on its hedging strategy or the consolidated
financial statements, except that hedge accounting for option agreements may
result in increased earnings volatility and the Company has therefore minimized
its use of such hedging instruments. For additional information, see also "Notes
to Consolidated Financial Statements - Note 2. Summary of Significant Accounting
Policies - Derivative Financial Instruments" and "Notes to Consolidated
Financial Statements - Note 14. Financial Instruments".
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information called for by this item is indexed in Item 14 of this
Report and contained on the pages following the signature page hereof.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In accordance with General Instruction G. (3) to Form 10-K, the
information required by Part III is incorporated by reference to the Company's
definitive information statement to be filed by April 30, 2001.
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,
2000, 1999 and 1998.
Consolidated Statements of Comprehensive Income for the Years Ended
December 31, 2000, 1999 and 1998.
Consolidated Balance Sheets as of December 31, 2000 and 1999.
Consolidated Statements of Cash Flows for the Years Ended December 31,
2000, 1999 and 1998.
Consolidated Statements of Changes in Equity for the Years Ended
December 31, 2000, 1999 and 1998.
Schedule of Valuation and Qualifying Accounts as of December 31, 2000,
1999, and 1998.
Notes to Consolidated Financial Statements.
The Company is a majority-owned subsidiary of Fresenius Medical Care
AG. The operating results and other financial information of the
Company included in this report are not necessarily indicative of the
operating results and financial condition of Fresenius Medical Care AG
at the dates or for the periods presented herein. Users of the
Company's financial statements wishing to obtain financial and other
information regarding Fresenius Medical Care AG should consult the
Annual Report on Form 20-F of Fresenius Medical Care AG, which will be
filed with the Securities and Exchange Commission and the New York
Stock Exchange.
(b) Reports on Form 8-K.
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No current reports were filed during the fourth quarter of 2000.
(c) Exhibits.
Exhibits. The following exhibits are filed or incorporated by reference
as required by Item 601 of Regulation S-K.
EXHIBIT NO. DESCRIPTION
Exhibit 2.1 Agreement and Plan of Reorganization dated as of February 4,
1996 between W. R. Grace & Co. and Fresenius AG
(incorporated herein by reference to Appendix A to the Joint
Proxy Statement-Prospectus of Fresenius Medical Care AG, W.
R. Grace & Co. and Fresenius USA, Inc. dated August 2, 1996
and filed with the Commission on August 5, 1996).
Exhibit 2.2 Distribution Agreement by and among W. R. Grace & Co., W. R.
Grace & Co.-Conn. and Fresenius AG dated as of February 4,
1996 (incorporated herein by reference to Exhibit A to
Appendix A to the Joint Proxy Statement-Prospectus of
Fresenius Medical Care AG, W. R. Grace & Co. and Fresenius
USA, Inc. dated August 2, 1996 and filed with the Commission
on August 5, 1996).
Exhibit 2.3 Contribution Agreement by and among Fresenius AG,
Sterilpharma GmbH and W. R. Grace & Co.-Conn. dated February
4, 1996 (incorporated herein by reference to Exhibit E to
Appendix A to the Joint Proxy-Statement Prospectus of
Fresenius Medical Care AG, W. R. Grace & Co. and Fresenius
USA, Inc. dated August 2, 1996 and filed with the Commission
on August 5, 1996).
Exhibit 3.1 Certificate of Incorporation of Fresenius Medical Care
Holdings, Inc. (f/k/a W. R. Grace & Co.) under Section 402
of the New York Business Corporation Law dated March 23,
1988 (incorporated herein by reference to the Form 8-K of
the Company filed on May 9, 1988).
Exhibit 3.2 Certificate of Amendment of the Certificate of Incorporation
of Fresenius Medical Care Holdings, Inc. (f/k/a W. R. Grace
& Co.) under Section 805 of the New York Business
Corporation Law dated May 25, 1988 (changing the name to W.
R. Grace & Co., incorporated herein by reference to the Form
8-K of the Company filed on May 9, 1988).
Exhibit 3.3 Certificate of Amendment of the Certificate of Incorporation
of Fresenius Medical Care Holdings, Inc. (f/k/a W. R. Grace
& Co.) under Section 805 of the New York Business
Corporation Law dated September 27, 1996 (incorporated
herein by reference to the Form 8-K of the Company filed
with the Commission on October 15, 1996).
Exhibit 3.4 Certificate of Amendment of the Certificate of Incorporation
of Fresenius Medical Care Holdings, Inc. (f/k/a W. R. Grace
& Co.) under Section 805 of the New York Business
Corporation Law dated September 27, 1996 (changing the name
to Fresenius National Medical Care Holdings, Inc.,
incorporated herein by reference to the Form 8-K of the
Company filed with the Commission on October 15, 1996).
Exhibit 3.5 Certificate of Amendment of the Certificate of Incorporation
of Fresenius Medical Care Holdings, Inc. under Section 805
of the New York Business Corporation Law dated June 12, 1997
(changing name to Fresenius Medical Care Holdings, Inc.,
incorporated herein by reference to the Form 10-Q of the
Company filed with the Commission on August 14, 1997).
Exhibit 3.6 Amended and Restated By-laws of Fresenius Medical Care
Holdings, Inc. (incorporated herein by reference to the Form
10-Q of the Company filed with the Commission on August 14,
1997).
Exhibit 4.1 Credit Agreement dated as of September 27, 1996 among
National Medical Care, Inc. and Certain Subsidiaries and
Affiliates, as Borrowers, Certain Subsidiaries and
Affiliates, as Guarantors, the Lenders named therein,
NationsBank, N.A., as paying agent and The Bank of Nova
Scotia, The Chase Manhattan Bank, Dresdner Bank AG and Bank
of America, N.A. (formerly known as NationsBank, N.A.), as
Managing Agents
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(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,
Dresdner Bank AG and Bank of America, N.A. (formerly known
as NationsBank, N.A.), as Managing Agents, as previously
amended (incorporated herein by reference to the Form 10-Q
of the Registrant filed with the Commission on November 14,
1997).
Exhibit 4.5 Amendment No. 4, dated August 26, 1997 to the Credit
Agreement dated as of September 27, 1996, among National
Medical Care, Inc. and Certain Subsidiaries and Affiliates,
as Borrowers, Certain Subsidiaries and Affiliates, as
Guarantors, the Lenders named therein, NationsBank, N.A., as
paying agent and The Bank of Nova Scotia, The Chase
Manhattan Bank, Dresdner Bank AG and Bank of America, N.A.
(formerly known as NationsBank, N.A.), as Managing Agents,
as previously amended (incorporated herein by reference to
the Form 10-Q of Registrant filed with Commission on
November 14, 1997).
Exhibit 4.6 Amendment No. 5 dated December 12, 1997 to the Credit
Agreement dated as of September 27, 1996, among National
Medical Care, Inc. and Certain Subsidiaries and Affiliates,
as Borrowers, Certain Subsidiaries and Affiliates, as
Guarantors, the Lenders named therein, NationsBank, N.A., as
paying agent and The Bank of Nova Scotia, The Chase
Manhattan Bank, Dresdner Bank AG and Bank of America, N.A.
(formerly known as NationsBank, N.A.), as Managing Agents,
as previously amended (incorporated herein by reference to
the Form 10-K of Registrant filed with Commission on March
23, 1998).
Exhibit 4.7 Form of Consent to Modification of Amendment No. 5 dated
December 12, 1997 to the Credit Agreement dated as of
September 27, 1996 among National Medical Care, Inc. and
Certain Subsidiaries and Affiliates, as Borrowers, Certain
Subsidiaries and Affiliates, as Guarantors, the Lenders
named therein, NationsBank, N.A., as paying agent and The
Bank of Nova Scotia, The Chase Manhattan Bank, Dresdner Bank
AG and Bank of America, N.A. (formerly known as NationsBank,
N.A.), as Managing Agents (incorporated herein by reference
to the Form 10-K of Registrant filed with Commission on
March 23, 1998).
Exhibit 4.8 Amendment No. 6 dated effective September 30, 1998 to the
Credit Agreement dated as of September 27, 1996, among
National Medical Care, Inc. and Certain Subsidiaries and
Affiliates, as Borrowers, Certain Subsidiaries and
Affiliates, as Guarantors, the Lenders named therein,
NationsBank, as paying agent and The Bank of Nova Scotia,
The Chase Manhattan Bank, N.A., Dresdner Bank AG and Bank of
America, N.A. (formerly known as NationsBank, N.A.), as
Managing Agents, as previously amended (incorporated herein
by reference to the Form 10-Q of Registrant filed with
Commission on November 12, 1998).
Exhibit 4.9 Amendment No. 7 dated as of December 31, 1998 to the Credit
Agreement dated as of September 27, 1996 among National
Medical Care, Inc. and Certain Subsidiaries and Affiliates,
as Borrowers, Certain Subsidiaries and Affiliates
Guarantors, the Lenders named therein, Nations Bank, N.A. as
paying agent and The Bank of Nova Scotia, The Chase
Manhattan Bank, Dresdner Bank A. G. and Bank of America,
N.A. (formerly known as NationsBank, N.A.). as Managing
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 Bank of America, N.A.
(formerly known as
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NationsBank, N.A.), as Managing Agent (incorporated herein
by reference to the Form 10-K of registrant filed with
Commission on March 30, 2000).
Exhibit 4.11 Amendment No. 9 dated as of December 15, 1999 to the Credit
Agreement dated as of September 27, 1996 among National
Medical Care, Inc. and Certain Subsidiaries and Affiliates,
as Borrowers, Certain Subsidiaries and Affiliates
Guarantors, the Lenders named therein, NationsBank, N.A. as
paying agent and The Bank of Nova Scotia, The Chase
Manhattan Bank, Dresdner Bank A.G. and Bank of America, N.A.
(formerly known as NationsBank, N.A.), as Managing Agent
(incorporated herein by reference to the Form 10-K of
registrant filed with Commission on March 30, 2000).
Exhibit 4.12 Amendment No. 10 dated as of September 21, 2000 to the
Credit Agreement dated as of September 27, 1996 among
National Medical Care, Inc. and Certain Subsidiaries and
Affiliates, as Borrowers, Certain Subsidiaries and
Affiliates Guarantors, the Lenders named therein,
NationsBank, N.A. as paying agent and The Bank of Nova
Scotia, The Chase Manhattan Bank, Dresdner Bank A.G. and
Bank of America, N.A. (formerly known as NationsBank, N.A.),
as Managing Agent, (incorporated herein by reference to the
Form 10-K of registrant filed with Commission on November
11, 2000).
Exhibit 4.13 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 4.14 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 4.15 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 4.16 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* Product Purchase Agreement effective January 1, 2000 between
Amgen, Inc. and National Medical Care, Inc. (incorporated
herein by reference to the Form 10-Q of Registrant filed
with Commission on May 12, 2000).
Exhibit 10.4* Amendment to Product Purchase Agreement between Amgen, Inc.
and National Medical Care, Inc. (amending Appendix A),
(incorporated herein by reference to the Form 10-Q of
Registrant filed with Commission on August 9, 2000).
Exhibit 10.5 Primary Guarantee dated July 31, 1996 (incorporated by
reference to the Registrant's Registration Statement on Form
S-4 (Registration No. 333-09497) dated August 2, 1996 and
the exhibits thereto).
Exhibit 10.6 Secondary Guarantee dated July 31, 1996 (incorporated by
reference to the Registrant's Registration Statement on Form
S-4 (Registration No. 333-09497) dated August 2, 1996 and
the exhibits thereto).
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Exhibit 10.7 Receivables Purchase Agreement dated August 28, 1997 between
National Medical Care, Inc. and NMC Funding Corporation
(incorporated herein by reference to the Form 10-Q of the
Registrant filed with the Commission on November 14, 1997).
Exhibit 10.8 Amendment dated as of September 28, 1998 to the Receivables
Purchase Agreement dated as of August 28, 1997, by and
between NMC Funding Corporation, as Purchaser and National
Medical Care, Inc., as Seller (incorporated herein by
reference to the Form 10-Q of Registrant filed with
Commission on November 12, 1998).
Exhibit 10.9 Amended and Restated Transfer and Administration Agreement
dated as October 26, 2000 among Compass US Acquisition, LLC,
NMC Funding Corporation, National Medical Care, Inc.,
Enterprise Funding Corporation, the Bank Investors listed
therein, Westdeutsche Landesbank Girozentrale, New York
Branch, as an administrative agent and Bank of America,
N.A., as an administrative agent.
Exhibit 10.10 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 10.11 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 10.12 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 10.13 Employment Agreement dated March 15, 2000 by and between
Jerry A. Schneider and National Medical Care, Inc
(incorporated herein by reference to the Form 10-Q of
Registrant filed with Commission on May 12, 2000).
Exhibit 10.14 Employment Agreement dated March 15, 2000 by and between
Ronald J. Kuerbitz and National Medical Care, Inc.
(incorporated herein by reference to the Form 10-Q of
Registrant filed with Commission on May 12, 2000).
Exhibit 10.15 Employment Agreement dated March 15, 2000 by and between J.
Michael Lazarus and National Medical Care, Inc.
(incorporated herein by reference to the Form 10-Q of
Registrant filed with Commission on May 12, 2000).
Exhibit 10.16 Employment Agreement dated March 15, 2000 by and between
Robert "Rice" M. Powell, Jr. and Fresenius Medical Care
North America (filed herewith).
Exhibit 10.17 Employment Agreement dated June 1, 2000 by and between John
F. Markus and Fresenius Medical Care North America (filed
herewith).
Exhibit 10.18 Employment Agreement dated January 1, 2001 by and between E.
Craig Dawson and Fresenius Medical Care North America (filed
herewith).
Exhibit 10.19 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.
Schedule II- Valuation and Qualifying Accounts
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SIGNATURES
Pursuant to the requirements of Section 13 of 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: April 2, 2001 FRESENIUS MEDICAL CARE HOLDINGS, INC.
By: /s/ Ben J. Lipps
Ben J. Lipps, President
(Chief Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
NAME TITLE DATE
---- ----- ----
/s/ Ben J. Lipps President and Director April 2, 2001
Ben J. Lipps (Chief Executive Officer)
/s/ Jerry A. Schneider Chief Financial Officer, Treasurer and Director April 2, 2001
Jerry A. Schneider (Chief Financial and Accounting Officer)
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REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of
Fresenius Medical Care Holdings, Inc.
We have audited the accompanying consolidated balance sheets of
Fresenius Medical Care Holdings, Inc. and its subsidiaries (the "Company") as of
December 31, 2000 and 1999 and the related consolidated statements of
operations, comprehensive income, changes in equity and cash flows for each of
the years in the three year period ended December 31, 2000. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the Company
as of December 31, 2000 and 1999, and the consolidated results of their
operations and their cash flows for the three years then ended in conformity
with accounting principles generally accepted in the United States of America.
KPMG LLP
February 9, 2001, except as to paragraph 14 of
Note 16, as to which the date is April 2, 2001
Boston, MA
45
46
FRESENIUS MEDICAL CARE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
TWELVE MONTHS ENDED DECEMBER 31,
-----------------------------------------------
2000 1999 1998
---------- ----------- -----------
NET REVENUES
Health care services ........................................... $2,609,108 $ 2,324,322 $ 2,100,422
Medical supplies ............................................... 480,067 490,911 470,984
---------- ----------- -----------
3,089,175 2,815,233 2,571,406
---------- ----------- -----------
EXPENSES
Cost of health care services ................................... 1,768,914 1,542,965 1,390,321
Cost of medical supplies ....................................... 339,908 336,749 317,122
General and administrative expenses ............................ 269,574 276,408 253,920
Provision for doubtful accounts ................................ 62,949 42,243 54,709
Depreciation and amortization .................................. 222,870 217,952 216,214
Research and development ....................................... 4,127 4,065 4,060
Interest expense, net, and related financing costs including
$110,746, $88,679 and $77,705 interest with affiliates ..... 187,315 201,915 208,776
Interest expense on settlement of investigation, net ........... 29,947 -- --
Special charge for settlement of investigation and related costs -- 601,000 --
---------- ----------- -----------
2,885,604 3,223,297 2,445,122
---------- ----------- -----------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES AND CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING FOR START UP COSTS ..................................... 203,571 (408,064) 126,284
PROVISION (BENEFIT) FOR INCOME TAXES ................................ 98,321 (81,037) 74,447
---------- ----------- -----------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR
START UP COSTS .................................................... $ 105,250 $ (327,027) $ 51,837
---------- ----------- -----------
DISCONTINUED OPERATIONS
Loss from discontinued operations, net of income taxes ......... -- -- (8,669)
Loss on disposal of discontinued operations, net of income
tax benefit ................................................... -- -- (97,228)
---------- ----------- -----------
Loss from discontinued operations .............................. $ -- $ -- $ (105,897)
---------- ----------- -----------
CUMLUATIVE EFFECT OF CHANGE IN ACCOUNTING FOR
START UP COSTS, NET OF TAX BENEFIT .............................. -- -- (4,890)
---------- ----------- -----------
NET INCOME (LOSS) ................................................... $ 105,250 $ (327,027) $ (58,950)
========== =========== ===========
Basic and fully dilutive (loss) earnings per share
Continuing operations ............................................ $ 1.16 $ (3.64) $ 0.57
Loss from discontinued operations ............................... $ -- $ -- $ (0.10)
Loss on disposal of discontinued operations ........................ $ $ $ (1.08)
Cumulative effect of accounting change ........................... $ -- $ -- $ (0.05)
Net Income (loss) ................................................ $ 1.16 $ (3.64) $ (0.66)
See accompanying Notes to Consolidated Financial Statements
46
47
FRESENIUS MEDICAL CARE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(DOLLARS IN THOUSANDS)
TWELVE MONTHS ENDED DECEMBER 31,
-------------------------------------------
2000 1999 1998
--------- --------- --------
NET INCOME (LOSS) $ 105,250 $(327,027) $(58,950)
Other comprehensive income
Foreign currency translation adjustments (174) (625) 1,872
--------- --------- --------
Total other comprehensive income (174) (625) 1,872
--------- --------- --------
COMPREHENSIVE INCOME (LOSS) $ 105,076 $(327,652) $(57,078)
========= ========= ========
See accompanying Notes to Consolidated Financial Statements
48
48
FRESENIUS MEDICAL CARE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
DECEMBER 31,
-------------------------------
2000 1999
------------- ------------
ASSETS
Current Assets:
Cash and cash equivalents ....................... $ 33,327 $ 12,563
Accounts receivable, less allowances of
$80,466 and $63,012 ............................ 318,391 295,235
Inventories ..................................... 191,699 183,112
Deferred income taxes ........................... 123,190 219,454
Other current assets ............................ 139,082 130,771
IDPN accounts receivable ........................ 5,189 53,962
----------- -----------
Total Current Assets ....................... 810,878 895,097
----------- -----------
Properties and equipment, net ........................ 456,936 428,793
----------- -----------
Other Assets:
Excess of cost over the fair value of net
assets acquired and other intangible assets,
net of accumulated amortization of $564,880 and
$424,704 ...................................... 3,222,044 3,265,491
Other assets and deferred charges ............... 63,500 49,998
Non-current IDPN accounts receivable ............ -- 5,189
----------- -----------
Total Other Assets ......................... 3,285,544 3,320,678
----------- -----------
Total Assets ......................................... $ 4,553,358 $ 4,644,568
=========== ===========
LIABILITIES AND EQUITY
Current Liabilities:
Note payable for settlement of investigation .... $ 85,920 $ --
Current portion of long-term debt and
capitalized lease obligations .................. 151,268 142,110
Current portion of borrowing from affiliates .... 341,643 372,949
Accounts payable ................................ 139,754 133,337
Accrued settlement .............................. -- 386,815
Accrued liabilities ............................. 228,025 291,358
Net accounts payable to affiliates .............. 6,317 12,361
Accrued income taxes ............................ 11,525 12,433
----------- -----------
Total Current Liabilities .................. 964,452 1,351,363
Long-term debt ....................................... 588,526 615,065
Non-current borrowings from affiliates ............... 786,865 788,506
Capitalized lease obligations ........................ 911 1,190
Deferred income taxes ................................ 122,946 134,310
Accrued settlement ................................... -- 85,920
Other liabilities .................................... 58,188 46,153
----------- -----------
Total Liabilities .......................... 2,521,888 3,022,507
----------- -----------
Mandatorily Redeemable Preferred Securities .......... 305,500 --
----------- -----------
Equity:
Preferred stock, $100 par value ................... 7,412 7,412
Preferred stock, $.10 par value ................... 8,906 8,906
Common stock, $1 par value; 300,000,000 shares
authorized; outstanding 90,000,000 ............. 90,000 90,000
Paid in capital ................................... 1,942,387 1,943,034
Retained deficit .................................. (322,973) (427,703)
Accumulated comprehensive income .................. 238 412
----------- -----------
Total Equity ................................. 1,725,970 1,622,061
----------- -----------
Total Liabilities and Equity ......................... $ 4,553,358 $ 4,644,568
=========== ===========
See accompanying Notes to Consolidated Financial Statements.
49
49
FRESENIUS MEDICAL CARE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
TWELVE MONTHS ENDED DECEMBER 31,
--------------------------------------------
2000 1999 1998
--------- --------- ---------
Cash Flows from Operating Activities:
Net income (loss) ..................................... $ 105,250 $(327,027) $ (58,950)
Adjustments to reconcile net income to net cash from
operating activities:
Depreciation and amortization .................... 222,870 217,952 216,214
Write-off of receivables relating to settlement of
investigation .................................. -- 94,349 --
Loss on disposition of businesses ................ -- -- 97,228
Loss from discontinued operations ................ -- -- 8,669
Cumulative effect of change in accounting ........ -- -- 4,890
Provision for doubtful accounts .................. 62,949 42,243 54,709
Deferred income taxes ............................ 84,900 (93,124) 16,734
Loss on disposal of properties and equipment ..... 970 713 402
Changes in operating assets and liabilities, net of
effects of purchase acquisitions and foreign exchange:
Increase in accounts receivable ................. (194,772) (112,095) (159,228)
Increase in inventories .......................... (7,472) (12,606) (30,979)
(Increase) decrease in other current assets ..... (6,025) (21,300) 3,890
Decrease in IDPN receivables ..................... 53,962 -- --
(Increase) decrease in other assets and deferred
charges ........................................ (3,025) 1,646 (19,554)
Increase (decrease) in accounts payable .......... 5,976 25,855 (11,705)
(Decrease) increase in accrued income taxes ...... (908) 22 74,395
(Decrease) increase in accrued liabilities ....... (65,227) 356,539 (31,040)
Increase in other long-term liabilities .......... 12,035 102,795 3,560
Net changes due to/from affiliates ............... (6,044) (5,605) 22,777
Other, net ....................................... (2,126) (17,088) 19,614
--------- --------- ---------
Net cash provided by operating activities of continued
operations ......................................... 263,313 253,269 211,626
--------- --------- ---------
Net cash used in operating activities of discontinued
operations ......................................... -- (3,782) (11,947)
--------- --------- ---------
Net cash provided by operating activities ............. 263,313 249,487 199,679
--------- --------- ---------
Cash Flows from Investing Activities:
Capital expenditures ............................. (104,199) (81,330) (74,653)
Payments for acquisitions, net of cash acquired .. (115,601) (65,235) (170,137)
Proceeds from disposition of businesses .......... -- -- 82,500
--------- --------- ---------
Net cash used in investing activities of continued
operations .......................................... (219,800) (146,565) (162,290)
--------- --------- ---------
Net cash used in investing activities of discontinued
operations ........................................... -- -- (8,925)
--------- --------- ---------
Net cash used in investing activities ................. (219,800) (146,565) (171,215)
--------- --------- ---------
Cash Flows from Financing Activities:
Payments on settlement of investigation .......... (386,815) -- --
(Decrease) increase in borrowings from affiliates (32,947) 172,455 445,447
Cash dividends paid .............................. (520) (520) (520)
Proceeds from mandatorily redeemable preferred
securities ..................................... 305,500 -- --
Proceeds from issuance of debt ................... -- 37 16,385
Proceeds from receivable financing facility ...... 110,300 29,400 105,600
Payments on debt and capitalized leases .......... (17,660) (298,587) (599,714)
Other, net ....................................... (647) 799 (2,027)
--------- --------- ---------
Net cash used in financing activities of continued
operations .......................................... (22,789) (96,416) (34,829)
--------- --------- ---------
Net cash used in financing activities of discontinued
operations .......................................... -- -- (2,107)
--------- --------- ---------
Net cash used in financing activities .................. (22,789) (96,416) (36,936)
--------- --------- ---------
Effects of changes in foreign exchange rates ............... 40 (522) 1,997
--------- --------- ---------
Change in cash and cash equivalents ........................ 20,764 5,984 (6,475)
Cash and cash equivalents at beginning of period ........... 12,563 6,579 13,054
--------- --------- ---------
Cash and cash equivalents at end of period ................. $ 33,327 $ 12,563 $ 6,579
========= ========= =========
50
50
FRESENIUS MEDICAL CARE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
TWELVE MONTHS ENDED
-------------------------------------------
2000 1999 1998
--------- --------- ---------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest ............................... $ 223,847 $ 216,647 $ 194,141
Income taxes (received)/paid, net ...... 14,882 8,344 (19,149)
Details for Acquisitions:
Assets acquired ............................. 117,935 65,256 172,511
Liabilities assumed ......................... (2,334) (21) (2,374)
--------- --------- ---------
Cash paid ................................... 115,601 65,235 170,137
Less cash acquired .......................... -- -- --
--------- --------- ---------
Net cash paid for acquisitions .............. $ 115,601 $ 65,235 $ 170,137
========= ========= =========
See accompanying Notes to Consolidated Financial Statements
51
51
FRESENIUS MEDICAL CARE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Preferred Stocks Common Stock
------------------------ -------------------------
Shares Amount Shares Amount
---------- ------- ---------- --------
BALANCE, DECEMBER 31, 1997 89,136,435 $16,318 90,000,000 $ 90,000
Net Loss -- -- -- --
Cash dividends on preferred stock -- -- -- --
Tax benefit on International transfer -- -- -- --
Other comprehensive income -- -- -- --
BALANCE, DECEMBER 31, 1998 89,136,435 $16,318 90,000,000 $ 90,000
========== ======= ========== ========
Net Loss -- -- -- --
Cash dividends on preferred stock -- -- -- --
Tax benefit of dispositions of stock options -- -- -- --
Other comprehensive income -- -- -- --
Other adjustments -- -- -- --
---------- ------- ---------- --------
BALANCE, DECEMBER 31, 1999 89,136,435 $16,318 90,000,000 $ 90,000
========== ======= ========== ========
Net Income -- -- -- --
Cash dividends on preferred stock -- -- -- --
Other comprehensive income -- -- -- --
Other adjustments -- -- -- --
---------- ------- ---------- --------
BALANCE, DECEMBER 31, 2000 89,136,435 $16,318 90,000,000 $ 90,000
========== ======= ========== ========
Capital in Retained Other
Excess Earnings Comprehensive Total
of Par Value (Deficit) Income Equity
----------- --------- ------------- -----------
BALANCE, DECEMBER 31, 1997 $ 1,921,853 $ (40,686) $ (835) $ 1,986,650
Net Loss -- (58,950) -- (58,950)
Cash dividends on preferred stock -- (520) -- (520)
Tax benefit on International transfer 20,382 -- -- 20,382
Other comprehensive income -- -- 1,872 1,872
----------- --------- ------- -----------
BALANCE, DECEMBER 31, 1998 $ 1,942,235 $(100,156) $ 1,037 $ 1,949,434
=========== ========= ======= ===========
Net Loss -- (327,027) -- (327,027)
Cash dividends on preferred stock -- (520) -- (520)
Tax benefit of dispositions of stock options 822 -- -- 822
Other comprehensive income -- -- (625) (625)
Other adjustments (23) -- -- (23)
----------- --------- ------- -----------
BALANCE, DECEMBER 31, 1999 $ 1,943,034 $(427,703) $ 412 $ 1,622,061
=========== ========= ======= ===========
Net Income -- 105,250 -- 105,250
Cash dividends on preferred stock -- (520) -- (520)
Other comprehensive income -- -- (174) (174)
Other adjustments (647) -- -- (647)
----------- --------- ------- -----------
BALANCE, DECEMBER 31, 2000 $ 1,942,387 $(322,973) $ 238 $ 1,725,970
=========== ========= ======= ===========
See accompanying Notes to Consolidated Financial Statements
52
52
FRESENIUS MEDICAL CARE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
NOTE 1. THE COMPANY
Fresenius Medical Care Holdings, Inc., a New York corporation ("the
Company") is a subsidiary of Fresenius Medical Care AG, a German corporation
("FMC" or "Fresenius Medical Care"). The Company conducts its operations through
five principal subsidiaries, National Medical Care, Inc., ("NMC"); Fresenius USA
Marketing Inc., Fresenius USA Manufacturing Inc., and SRC Holding Company, Inc.,
("SRC"), all Delaware corporations and Fresenius USA Inc., a Massachusetts
corporation.
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries, NMC, FUSA, and SRC and those financial
statements where the Company controls professional corporations in accordance
with Emerging Issues Task Force Issue 97-2.
The Company is primarily engaged in (i) providing kidney dialysis
services, clinical laboratory testing and renal diagnostic services, and (ii)
manufacturing and distributing products and equipment for dialysis treatment.
Effective January 1, 1998, the Company transferred legal ownership of
substantially all of its international operations to FMC. The transfer of
contributed capital of $199 million was accounted for on the cost basis.
BASIS OF PRESENTATION
BASIS OF CONSOLIDATION
The consolidated financial statements in this report at December 31, 2000,
1999 and 1998, respectively, reflect all adjustments that, in the opinion of
management, are necessary for the fair presentation of the consolidated results
for all periods presented.
All intercompany transactions and balances have been eliminated in
consolidation.
EARNINGS PER SHARE
Basic earnings per share are computed by dividing net income available to
common shareholders by the weighted-average number of common shares outstanding
during the year. Diluted earnings per share includes the effect of all dilutive
potential common shares that were outstanding during the year. The number of
shares used to compute basic and diluted earnings per share was 90,000 in all
periods as there were no potential common shares and no adjustments to income to
be considered for purposes of the diluted earnings per shares calculation.
TWELVE MONTHS ENDED
DECEMBER 31,
-------------------------------
2000 1999 1998
------ ------ ------
The weighted average number of shares of
Common Stock were as follows................. 90,000 90,000 90,000
====== ====== ======
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53
Net income (loss) used in the computation of earnings per share is as follows:
TWELVE MONTHS ENDED
DECEMBER 31,
-----------------------------------------
2000 1999 1998
--------- --------- --------
CONSOLIDATED
Net income (loss) $ 105,250 $(327,027) $(58,950)
Dividends paid on preferred stocks (520) (520) (520)
--------- --------- --------
Income (loss) used in per share computation of earnings $ 104,730 $(327,547) $(59,470)
========= ========= ========
Basic and fully dilutive earnings (loss) per share $ 1.16 $ (3.64) $ (0.66)
========= ========= ========
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions affecting the reported
amounts of assets and liabilities (including disclosed amounts of contingent
assets and liabilities) at the dates of the consolidated financial statements
and the reported revenues and expenses during the reporting periods. Actual
amounts could differ from those estimates.
CASH EQUIVALENTS
Cash equivalents consist of highly liquid instruments with maturities of
three months or less when purchased.
DERIVATIVE FINANCIAL INSTRUMENTS
Foreign currency contracts -- Gains and losses on foreign currency
contracts that are designated and effective as hedges of existing assets,
liabilities (including borrowings) and firm commitments are deferred and
recorded as an adjustment to general and administrative expenses or cost of
goods sold in the period in which the related transaction is consummated. Gains
and losses on other foreign currency contracts are recognized at each reporting
period.
Interest rate swaps -- Interest rate agreements that are designated and
effective as a hedge of a debt or other long-term obligations are accounted for
on an accrual basis. That is, the interest payable and interest receivable under
the swaps terms are accrued and recorded as an adjustment to interest expense of
the designated liabilities or obligations.
Amounts due from and payable to the counterparties of interest rate swaps
are recorded on an accrual basis at each reporting date on amounts computed by
reference of the respective interest rate swap contract. Realized gains and
losses that occur from the early termination or of foreign currency contracts
and interest rate swaps are recorded in the consolidated statement of operations
over the remaining period of the original agreement. Gains and losses arising
from the interest differential on contracts that hedge specific borrowings are
recorded as a component of interest expense over the life of the contract.
The effectiveness of the hedge is measured by a historical and probable
future high correlation of changes in the fair value of the hedging instruments
with changes in the value of the hedged item. If correlation ceases to exist,
hedge accounting will be terminated and gains on losses recorded in other
income. To date, high correlation has always been achieved.
REVENUE RECOGNITION
Revenues are recognized on the date services and related products are
provided/shipped and are recorded at amounts estimated to be received under
reimbursement arrangements with third-party payors, including Medicare and
Medicaid. The Company establishes appropriate allowances based upon factors
surrounding credit risks of specific third party payors, historical
54
54
trends and other information. Retroactive adjustments are accrued on an
estimated basis in the period the related services are rendered and adjusted in
future periods as final settlements are determined.
Net Revenues from machines sales for 2000 and 1999 include $54.5 million
and $36.0 million, respectively, of net revenues for machines sold to a third
party leasing company which are utilized by the dialysis services division to
provide services to our customers. The profits on these sales are deferred and
amortized to earnings over the lease terms.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method)
or market.
PROPERTIES AND EQUIPMENT
Properties and equipment are stated at cost. Significant improvements are
capitalized; repairs and maintenance costs that do not extend the lives of the
assets are charged to expense as incurred. The cost and accumulated depreciation
of assets sold or otherwise disposed of are removed from the accounts, and any
resulting gain or loss is included in income when the assets are disposed.
The cost of properties and equipment is depreciated over estimated useful
lives on a straight - line basis as follows: buildings - 20 to 40 years,
equipment and furniture - 3 to 10 years, and leasehold improvements - the
shorter of the lease term or useful life. For income tax purposes, depreciation
is calculated using accelerated methods to the extent permitted.
EXCESS OF COST OVER THE FAIR VALUE OF NET ASSETS ACQUIRED AND OTHER
INTANGIBLE ASSETS
The Company has adopted the following useful lives and methods to amortize
intangible assets: trade name, 40 years; goodwill -- 25 to 40 years on a
straight-line basis; acute care agreements - over the term of the agreement,
generally from 1 to 2 years; patient relationships and other intangible assets -
over the estimated period to be benefited, generally from 5 to 6 years on a
straight line basis.
Goodwill is the excess of the purchase price over the fair value of
identifiable net assets acquired on business combinations accounted for as a
purchase.
DEBT ISSUANCE COSTS
Costs related to the issuance of debt are amortized over the term of the
related obligation using a straight line method.
SELF INSURANCE PROGRAMS
The Company is self insured for professional, product and general
liability, auto and worker's compensation claims up to predetermined amounts
above which third party insurance applies. Estimates include ultimate costs for
both reported and incurred but not reported claims.
IMPAIRMENT
In accordance with Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of", the Company reviews the carrying value of its long-lived assets
for impairment whenever events or changes in circumstances indicate that the
carrying amount of assets may not be recoverable. The Company considers various
valuation factors including discounted cash flows, fair values and replacement
costs to assess any impairment of goodwill and other long lived assets.
FOREIGN CURRENCY TRANSLATION
The Company follows the provisions of Statement of Financial Accounting
Standards No. 52, "Foreign Currency Translation". Substantially all assets and
liabilities of the Company's foreign subsidiaries are translated at year end
exchange rates, while revenue and expenses are translated at exchange rates
prevailing during the year. Adjustments for foreign currency translation
fluctuations are excluded from net earnings and are deferred in the cumulative
translation adjustment component of
55
55
equity. In addition, the translation of certain intercompany borrowings
denominated in foreign currencies, which are considered foreign equity
investments, is included in the cumulative translation adjustment.
Gains and losses resulting from the translation of revenues and expenses
and intercompany borrowings, which are not considered equity investments, are
included in general and administrative expense. Translation gains amounted to
$5,927, $58 and $766 for the twelve months ended December 31, 2000, 1999 and
1998, respectively.
INCOME TAXES
Deferred income taxes are provided for temporary differences between the
reporting of income and expense for financial reporting and tax return purposes.
Deferred tax liabilities or assets at the end of each period are determined
using the tax rates then in effect for the periods when taxes are actually
expected to be paid or recovered. Accordingly, income tax expense provisions
will increase or decrease in the period in which a change in tax rates is
enacted.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred.
COMPREHENSIVE INCOME
The Company has adopted the provisions of SFAS No. 130, Reporting
Comprehensive Income. This statement requires that all items that are required
to be recognized under accounting standards as components of comprehensive
income be reported in a financial statement that is displayed with the same
prominence as other financial statements. This statement further requires that
the Company classify items of other comprehensive income by their nature in a
financial statement and display the accumulated balance of other comprehensive
income separately from retained earnings and additional paid-in capital in the
equity section of a statement of financial position.
PENSION AND OTHER POSTRETIREMENT BENEFITS
Effective December 31, 1998, the Company adopted SFAS No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits". The provisions of
SFAS No. 132 revise employers' disclosures about pension and other post
retirement benefit plans. It does not change the measurement or recognition of
these plans. It standardized the disclosure requirements for pensions and other
post retirement benefits to the extent practicable.
NEW PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for
Derivative Instruments and Hedging Activities "(SFAS 133"). SFAS 133 requires
the recognition of the fair value of all derivative instruments on the balance
sheet. Subsequent to the issuance of SFAS 133, the FASB received many requests
to clarify certain issues causing difficulties in implementation.
In June 2000, the FASB issued SFAS 138, which responds to those requests
by amending certain provisions of SFAS 133. These amendments include allowing
foreign-currency denominated assets and liabilities to qualify for hedge
accounting, permitting the offsetting of certain inter-entity foreign currency
exposures that reduce the need for third party derivatives and redefining the
nature of interest rate risk to avoid sources of ineffectiveness. The Company is
adopting SFAS 133, and the corresponding amendments under SFAS 138 effective as
January 1, 2001. The adoption of SFAS 133, as amended by SFAS 138, results in
the recording of assets related to forward currency contracts of approximately
$12.9 million and a liability for interest rate swaps of approximately $24.6
million. The offset to each of these transition adjustments will be recorded to
other comprehensive income. The Company expects that approximately $2.0 million
deferred gains on foreign currency contracts will be recognized to earnings
during fiscal year 2001.
In December 1999, the United States Securities and Exchange Commission
("SEC") issued Staff Accounting Bulletin 101, Revenue Recognition in Financial
Statements ("SAB 101"). SAB 101 provides the staff's views in applying generally
accepted accounting principles to selected revenue recognition issues, as well
as examples of how the staff applies revenue recognition guidance to specific
circumstances. In June 2000, SAB 101B was issued by the SEC further delaying the
date of SAB 101 until the fourth quarter of the fiscal year beginning after
December 15, 1999. The impact of the adoption of SAB 101 is not significant.
In May 2000, the Emerging Issues Task Force ("EITF") issued EITF 00-014,
Accounting for Certain Sales Incentives, which establishes accounting for point
of sales coupons, rebates, and free merchandise. This EITF requires that an
entity
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56
report these sales incentives that reduce the price paid to be netted directly
against revenues. EITF 00-014 is effective no later than the second quarter of
2000. The impact of the adoption of EITF-00-14 is not significant.
In September 2000, the Financial Accounting Standards Board issued SFAS
No. 140, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities, which replaces SFAS No. 125 and rescinds SFAS
No. 127. SFAS No. 140 provides the accounting and reporting standards for
securitizations and other transfers of financial assets and collateral. These
standards are based on consistent application of a financial-components approach
that focuses on control. This Statement also provides consistent standards for
distinguishing transfers of financial assets that are sales from transfers that
are secured borrowings. SFAS No. 140 is effective for transfers after March 31,
2001 and is effective for disclosures about securitizations and collateral for
fiscal years ending after December 15, 2000. There is no impact for the adoption
of SFAS No. 140.
1996 RESTRUCTURING COSTS
In 1996, the Company accrued approximately $50,000 for restructuring costs
relating to the closing of certain renal products manufacturing and distribution
operations as well as the closing of certain clinics of the Homecare Division.
These restructuring costs primarily relate to severance payments and lease
commitments. Through the period ended December 31, 2000 approximately $49,000 in
payments and other charges have been applied against these restructuring costs.
The restructuring plan has been completed and the remaining outstanding balance
will be used primarily for the remaining lease commitments for closed production
facilities.
RECLASSIFICATION
Certain 1999 and 1998 amounts have been reclassified to conform with the
2000 presentation.
NOTE 3. ACQUISITIONS
The Company acquired certain health care facilities, and clinical
laboratories, for a total consideration of $115,601, $65,235 and $170,137 for
the twelve months ended December 31, 2000, 1999 and 1998, respectively. These
acquisitions have been accounted for as purchase transactions and, accordingly,
are included in the results of operations from the dates of acquisition. The
excess of the total acquisition costs over the fair value of tangible net assets
acquired was $93,417, $62,376 and $157,836 for the twelve months ended December
31, 2000, 1999 and 1998, respectively.
Had the acquisitions that occurred during the twelve months ended December
31, 2000 been consummated on January 1, 1999, unaudited proforma net revenues
for the twelve months ended December 31, 2000 and 1999 would have been
$3,139,406 and $2,929,550, respectively. Unaudited proforma income (loss) from
continuing operations before cumulative effect of change in accounting for start
up costs would have been $106,505 and ($325,648) for the twelve months ended
December 31, 2000 and 1999, respectively.
Had the acquisitions that occurred during the twelve months ended December
31, 1999 been consummated on January 1, 1998, unaudited proforma net revenues
for the twelve months ended December 31, 1999 and 1998 would have been
$2,829,989 and $2,606,856, respectively. Unaudited proforma income from
continuing operations before cumulative effect of change in accounting for start
up costs would have been ($328,167) and $49,676 for the twelve months ended
December 31, 1999 and 1998, respectively.
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NOTE 4. OTHER BALANCE SHEET ITEMS
DECEMBER 31,
--------------------------
2000 1999
---------- ----------
Inventories
Raw materials $ 44,787 $ 41,045
Manufactured goods in process 10,516 8,748
Manufactured and purchased inventory available for sale 80,520 90,748
---------- ----------
135,823 140,541
Health care supplies 55,876 42,571
---------- ----------
Total $ 191,699 $ 183,112
========== ==========
Under the terms of certain purchase commitments,
the Company is obligated to purchase raw materials and
health care supplies during 2001 amounting to $55,483
Other Current Assets
Miscellaneous accounts receivable $ 98,668 $ 91,042
Deposits and prepaid expenses 40,414 39,729
---------- ----------
Total $ 139,082 $ 130,771
========== ==========
Excess of Cost Over the Fair Value of Net Assets
Acquired and Other Intangible Assets:
Goodwill, less accumulated amortization of
$302,757 and $228,426 $2,701,281 $2,713,385
Patient relationships, less accumulated
amortization of $116,856 and $87,169 72,662 92,898
Other intangible assets, less accumulated
amortization of $145,267 and $109,109 448,101 459,208
---------- ----------
Total $3,222,044 $3,265,491
========== ==========
Accrued Liabilities
Accrued operating expenses $ 36,062 $ 46,019
Accrued insurance 47,021 54,702
Accrued legal and compliance costs 1,601 9,441
Accrued salaries and wages 50,988 53,371
Accounts receivable credit balances 38,215 48,932
Accrued interest 14,974 19,125
Accrued other 16,529 21,669
Accrued physician compensation 17,649 17,721
Accrued other related costs for OIG investigation 4,986 20,378
---------- ----------
Total $ 228,025 $ 291,358
========== ==========
Accounts receivable credit balances principally reflect overpayments
from third party payors and are in the process of repayment.
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NOTE 5. SALE OF ACCOUNTS RECEIVABLE
On September 27, 1997, NMC established a new $204,000 receivable financing
facility (the "A/R Facility") with NationsBank, N.A. (now known as Bank of
America, N.A.) to replace its former facility with CitiCorp. The A/R Facility
was amended on February 27, 1998 to increase the commitment amount to $331,500.
It was further amended on September 27, 1999 to increase the commitment amount
to $360,000 and to add WestDeutsche Landesbank Girozentrale, New York Branch, as
an additional Administrative Agent. On October 26, 2000, the amount was
increased to $500,000 and Bayerische Landesbank, New York Branch, became an
additional Administrative Agent.
The current agreement carries an effective interest rate based on
commercial paper, which was approximately 6.59% at December 31, 2000, and
matures on October 25, 2001. At December 31, 2000 and 1999, $445,300 and
$335,000 had been received pursuant to such sales, respectively; these amounts
are reflected as reductions to accounts receivable. Under the terms of the
agreement, new interests in accounts receivable are sold as collections reduce
previously sold accounts receivable. The costs related to such sales are
expensed as incurred and recorded as interest expense and related financing
costs. There were no gains or losses on these transactions.
NOTE 6. DEBT
Long-term debt to outside parties consists of:
DECEMBER 31,
----------------------
2000 1999
-------- --------
NMC Credit Facility $732,500 $738,150
Note payable for settlement of investigation 85,920 --
Other
7,120 17,454
-------- --------
825,540 755,604
Less amounts classified as current 237,014 140,539
-------- --------
$588,526 $615,065
======== ========
In September 1996, NMC entered into a credit agreement with a group of
banks (collectively, the "Lenders"), pursuant to which the Lenders made
available to NMC and certain specified subsidiaries and affiliates an aggregate
of $2,000,000 through two credit facilities (collectively, the "NMC Credit
Facility"). The NMC Credit Facility, as amended, includes: (i) a revolving
credit facility of up to $1,000,000 for up to seven years (of which up to
$250,000 is available for letters of credit, up to $450,000 is available for
borrowings in certain non-U.S. currencies, up to $50,000 is available as swing
lines in U.S. dollars and up to $20,000 is available as swing lines in certain
non-U.S. currencies) ("Facility 1") and (ii) a term loan facility of $1,000,000
for up to seven years ("Facility 2").
Loans under the NMC Credit Facility bear interest at one of the following
rates, at either (i) LIBOR plus an applicable margin or (ii) a base rate equal
to the sum of (1) the higher from time to time of (A) the prime rate of Bank of
America, N.A. or (B) the federal funds rate plus 0.50% and (2) an applicable
margin. A commitment fee is payable to the Lenders equal to a percentage per
annum applied against the unused portion of the NMC Credit Facility.
In addition to scheduled quarterly principal payments under Facility 2,
the NMC Credit Facility will be reduced by certain portions of the net cash
proceeds from certain sales of assets, sales of accounts receivable and the
issuance of subordinated debt and equity securities. All borrowings outstanding
under Facility 1 are due and payable at the end of the seventh year. Prepayments
are permitted at any time without penalty, except in certain defined periods.
The NMC Credit Agreement contains certain affirmative and negative covenants
with respect to the Company, NMC and its subsidiaries, customary for this type
of agreement. In December 1999, the Company successfully amended certain
covenants including, among other things, financial ratios contained in its NMC
Credit Facility that would have been affected by the impact of the settlement
related to the U.S. Government investigation. At December 31, 2000, the Company
was in compliance with all such covenants.
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59
In February 1998, $250,000 of Facility 2 was repaid, primarily using
borrowings from affiliates. The voluntary prepayment reduced the available
financing under the agreement to $1,750,000. The Company has made all of its
scheduled principal payments, reducing the amount available under the NMC Credit
Facility at the end of 2000and 1999 to $1,577,500 and $1,716,250, respectively.
At December 31, 2000 and 1999 the Company had available $698,000 and $777,000,
respectively, of additional borrowing capacity under the NMC Credit Facility
including $103,000 and $49,000 respectively, available for additional letters of
credit.
Borrowings from affiliates consists of:
DECEMBER 31,
--------------------------
2000 1999
---------- ----------
Fresenius Medical Care AG, borrowings at
interest rates approximating 7.75% $ 18,850 $ 42,949
Fresenius AG, borrowings at interest rates
approximating 7.34 - 7.38% 209,000 330,000
Fresenius Medical Care Trust Finance S.a.r.l.,
borrowings at interest rates of 8.43% and 9.25% 786,524 786,524
Fresenius Acquisition, LLC at interest rates
approximating 6.87% 113,121 --
Other 1,013 1,982
---------- ----------
1,128,508 1,161,455
Less amounts classified as current 341,643 372,949
---------- ----------
Total $ 786,865 $ 788,506
========== ==========
Scheduled maturities of long-term debt and borrowings from affiliates
are as follows:
2001 $ 578,657
2002 151,985
2003 150,000
2004 282,500
2005 0
2006 and thereafter 790,865
--------------
Total $ 1,954,007
==============
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NOTE 7. SPECIAL CHARGE FOR SETTLEMENT OF INVESTIGATION AND RELATED COSTS
On January 18, 2000, the Company, NMC and certain affiliated companies
executed definitive agreements (the "Settlement Agreements") with the United
States Government (the "Government") to settle (i) matters concerning violations
of federal laws and (ii) NMC's claims with respect to outstanding Medicare
receivables for nutrition therapy (collectively, the "Settlement").
Under the Settlement with the Government, the Company entered into a note
payable for the settlement payment obligations to the Government. Interest on
installment payments to the Government will accrue at 6.3% on $51.2 million of
the obligation and at 7.5% annually on the balance, until paid in full.
In February 2000, the Company made initial payments to the Government
totaling $286.4 million. The remaining obligations is payable in six quarterly
installments which began in April 2000 and will end in July 2001. The first four
quarterly installments were made in the amount of $35.4 million including
interest at 7.5%. The first three of these four payments were made in April,
July, and October 2000 to the Government totaling $106.2 million including
interest. The fourth installment was made in January 2001. The remaining two
installments of $27.8 million including interest at 6.3% will be made in April
and July 2001, respectively.
In addition, the Company received approximately $59.2 million from the
Government related to the Company's claims for outstanding Medicare receivables.
The Company received $54.0 million in 2000 and a final payment of $5.2 million
in February 2001.
NOTE 8. DISCONTINUED OPERATIONS
Effective June 1, 1998, the Company classified its non-renal diagnostic
services business ("Non-Renal Diagnostic Services") and homecare business
("Homecare") as discontinued operations. The Company disposed of its Non-Renal
Diagnostic Services division and its Homecare division on June 26, 1998 and July
29, 1998, respectively. In connection with the sale of Homecare, the Company
retained the assets and the operations associated with the delivery of IDPN. The
Company recorded a net after tax loss of $97 million in 1998 on the sale of
these businesses. The net loss on the disposal of these businesses and their
results of operations have been accounted for as discontinued operations.
IDPN receivables of $153.5 million, that had been included in net assets
of discontinued operations were resolved as part of the Settlement Agreements
with the Government as part of the OIG Investigation. As a result, a $94.3
million write-off was taken against these receivables. The remaining receivables
were reclassified to other current and non-current IDPN receivables on the
balance sheet. The Company has collected approximately $54.0 million from the
Government, and the remaining portion will be collected on February 2001.
Operating results of discontinued operations are presented below:
Discontinued Operations - Results of Operations
The revenues and results of operations of the discontinued operations of
Non Renal Diagnostic Services and Homecare divisions were as follows:
TWELVE MONTHS ENDED DECEMBER 31,
---------------------------------------
2000 1999 1998
--------- --------- ---------
NET REVENUES ................................. $ -- $ -- $ 120,940
--------- --------- ---------
Loss from operations before income tax benefit -- -- (14,212)
Income tax benefit ........................... -- -- (5,543)
--------- --------- ---------
Loss from operations ......................... -- -- (8,669)
--------- --------- ---------
Loss on disposal before income tax benefit ... -- -- (140,000)
Income tax benefit ........................... -- -- (42,772)
--------- --------- ---------
Loss on disposal ............................. -- -- (97,228)
--------- --------- ---------
Loss from discontinued operations ............ -- -- (105,897)
========= ========= =========
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NOTE 9. INCOME TAXES
Income (loss) from continuing operations before income taxes are as
follows:
TWELVE MONTHS ENDED DECEMBER 31,
---------------------------------------
2000 1999 1998
-------- --------- ---------
Domestic $201,305 $(410,034) $ 126,347
Foreign 2,266 1,970 (63)
-------- --------- ---------
Total income (loss) $203,571 $(408,064) $ 126,284
======== ========= =========
The provision (benefit) for income taxes was as follows:
TWELVE MONTHS ENDED DECEMBER 31,
-----------------------------------
2000 1999 1998
------- -------- -------
Current tax expense
Federal $ 2,616 $ 1,545 $44,777
State 10,195 9,916 12,406
Foreign 610 626 530
------- -------- -------
Total current 13,421 12,087 57,713
Deferred tax (benefit) expense
Federal 79,858 (87,926) 14,642
State 4,712 (4,981) 2,092
Foreign 330 (217) --
------- -------- -------
Total deferred tax (benefit) 84,900 (93,124) 16,734
------- -------- -------
Total provision (benefit) $98,321 $(81,037) $74,447
======= ======== =======
Deferred tax liabilities (assets) are comprised of the following:
DECEMBER 31,
--------------------------
2000 1999
--------- ---------
Allowance for doubtful accounts $ (22,928) $ (26,345)
Insurance liability (388) (21,125)
Legal liability (11,461) (13,109)
Deferred and incentive compensation (8,547) (9,055)
Pension and benefit accruals (19,623) (19,424)
Accrued interest (47,259) (36,181)
Inventory reserves (6,099) (5,236)
Accrued expenses (7,033) (13,643)
Other temporary differences (4,392) (4,653)
Government settlement (5,302) (92,469)
Loss carry forwards (11,222) (5,301)
--------- ---------
Gross deferred tax assets (144,254) (246,541)
Deferred tax assets valuation 2,622 5,029
--------- ---------
Deferred tax assets (141,632) (241,512)
--------- ---------
Depreciation and amortization 140,864 156,113
Other temporary differences 524 255
--------- ---------
Gross deferred tax liabilities 141,388 156,368
--------- ---------
Net deferred tax (asset) liabilities $ (244) $ (85,144)
========= =========
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The provision (benefit) for income taxes for the twelve months ended
December 31, 2000, 1999, and 1998 differed from the amount of income taxes
determined by applying the applicable statutory federal income tax rate to
pretax earnings as a result of the following differences:
TWELVE MONTHS ENDED DECEMBER 31,
--------------------------------
2000 1999 1998
------ ------ ------
Statutory federal tax rate (benefit) 35.0% (35.0%) 35.0%
State income taxes, net of federal 4.7 0.8 7.5
tax benefit
Amortization of goodwill 10.2 5.1 16.6
Government Settlement (2.3) 8.7 --
Foreign losses and taxes 0.6 (0.1) 0.4
Other 0.1 0.6 (0.6)
---- ----- ----
Effective tax rate (benefit) 48.3% (19.9%) 58.9%
==== ===== ====
The net (decrease) increase in the valuation allowance for deferred tax
assets was $(2,407), $(311) and $1,972 for the twelve months ended December 31,
2000, 1999, and 1998, respectively. It is the Company's expectation that it is
more likely than not to generate future taxable income to utilize its net
deferred tax asset. The changes for all three years relate to activities
incurred by foreign subsidiaries.
At December 31, 2000, there were approximately $6,750 of foreign net
operating losses, the majority of which expire within seven years. The Company
also has $21,500 of Federal net operating losses which will begin to expire in
the year 2018.
Provision has not been made for additional federal, state, or foreign
taxes on $5,509 of undistributed earnings of foreign subsidiaries. Those
earnings have been, and will continue to be reinvested. The earnings could be
subject to additional tax if they were remitted as dividends, if foreign
earnings were loaned to the Company or a U.S. affiliate or if the Company should
sell its stock in the subsidiaries. The Company estimates that the distribution
of these earnings would result in $ 2,166 of additional foreign withholding and
federal income taxes.
NOTE 10. PROPERTIES AND EQUIPMENT
DECEMBER 31,
-------------------------
2000 1999
--------- ---------
Land and improvements $ 5,135 $ 5,205
Buildings 63,937 68,812
Capitalized lease property 3,312 6,668
Leasehold improvements 235,096 201,405
Equipment and furniture 403,701 363,244
Construction in progress 38,176 25,028
--------- ---------
749,357 670,362
Accumulated depreciation and amortization (292,421) (241,569)
--------- ---------
Properties and equipment, net $ 456,936 $ 428,793
========= =========
Depreciation expense relating to properties and equipment amounted to
$80,034, $80,803 and $81,683 for the years ended December 31, 2000, 1999 and
1998, respectively.
Included in properties and equipment as of December 31, 2000, and 1999
were $26,816 and $25,355, respectively, of peritoneal dialysis cycler machines
which the Company leases to customers with end-stage renal disease on a
month-to-month basis. Rental income for the peritoneal dialysis cycler machines
was $12,472, $8,762, and $7,679 for the twelve months ended December 31, 2000,
1999 and 1998, respectively.
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LEASES
In September 2000, the Company entered into an amended operating lease
arrangement with a bank that covers approximately $65,165 of equipment in its
dialyzer manufacturing facility in Ogden, Utah. The agreement has a basic term
expiration date of January 1, 2010, renewal options and a purchase option at the
greater of 20% of the original cost or the fair market value.
Future minimum payments under noncancelable leases (principally for
clinics and offices) as of December 31, 2000 are as follows:
OPERATING CAPITAL
LEASES LEASES TOTAL
-------- -------- --------
2001 $136,936 $ 342 $137,278
2002 117,394 300 117,694
2003 104,414 284 104,698
2004 130,577 230 130,807
2005 55,153 292 55,445
2006 and beyond 131,552 -- 131,552
-------- ------ --------
Total minimum payments $676,026 $1,448 $677,474
======== ========
Less interest and operating costs 323
------
Present value of minimum lease Payments ($215
payable in 2001) $1,125
======
Rental expense for operating leases was $157,335, $132,248 and $103,838
for the years ended December 31, 2000, 1999 and 1998, respectively. Amortization
of properties under capital leases amounted to $369, $852, and $968 for the
years ended December 31, 2000, 1999 and 1998, respectively.
Lease agreements frequently include renewal options and require that the
Company pay for utilities, taxes, insurance and maintenance expenses. Options to
purchase are also included in some lease agreements, particularly capital
leases.
NOTE 11. MANDATORILY REDEEMABLE PREFERRED SECURITIES
During the fourth quarter of 2000, a wholly-owned subsidiary of the Company
issued to NMC 1,000 shares of Series A Preferred Stock and 1,700 shares of
Series C Preferred Stock that were then transferred to FMC for proceeds of
$113,500 and $192,000, respectively ("Redeemable Preferred Securities"). The
Redeemable Preferred Securities are identical in substance except that the
Series A shares rank prior to the Series C shares both as to dividends and
liquidation, dissolution or winding-up of the subsidiary.
The Redeemable Preferred Securities have a par value of $.01 per share. The
holders of the securities are entitled to receive dividends in amount of dollars
per share equal to approximately 8% of the share issuance price. The dividends
will be declared and paid in cash at least annually.
Upon liquidation or dissolution or winding up of the subsidiary, the holders of
the Redeemable Preferred Securities are entitled to an amount equal to the
liquidation preference for each share of stock plus an amount equal to all
accrued and unpaid dividends thereon through the date of distribution. The
liquidation preference is the sum of the issuance price plus, for each year or
portion thereof an amount equal to one-half of one percent of the issue price,
not to exceed 5%.
The Redeemable Preferred Securities will be sold to the Company in two years for
an amount equal to Euros 341,385 plus any accrued and unpaid dividends.
Accordingly, the mandatorily redeemable preferred securities are deemed to Euro
liability and the risk of foreign currency fluctuations are hedged through
forward currency contracts.
The holders of the Redeemable Preferred Securities have the participation rights
of the holders of all other classes of capital stock of the subsidiary.
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NOTE 12. PENSION AND OTHER POST RETIREMENT BENEFITS
DEFINED BENEFIT PENSION PLANS
Substantially all domestic employees are covered by NMC's
non-contributory, defined benefit pension plan. Each year NMC contributes at
least the minimum required by the Employee Retirement Income Security Act of
1974, as amended. Plan assets consist primarily of publicly traded common stock,
fixed income securities and cash equivalents.
The following provides a reconciliation of benefit obligations, plan assets, and
funded status of the plans.
TWELVE MONTHS ENDED DECEMBER 31,
----------------------------------------
2000 1999 1998
--------- -------- --------
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year $ 87,737 $ 87,464 $ 72,025
Service Cost 9,987 8,212 7,416
Interest Cost 6,713 5,966 5,217
Amendments -- (5) --
Actuarial (Gain)/Loss 3,752 (12,496) 5,810
Divestitures -- -- (1,717)
Benefits Paid (2,748) (1,404) (1,287)
--------- -------- --------
Benefit obligation at end of year $ 105,441 $ 87,737 $ 87,464
--------- -------- --------
CHANGE ON PLAN ASSETS
Fair value of plan assets at beginning of year 86,794 77,019 65,088
Actual return on plan assets (2,098) 11,179 13,218
Employee contribution -- -- --
Benefits paid (2,748) (1,404) (1,287)
--------- -------- --------
Fair value of plan assets at end of year $ 81,948 $ 86,794 $ 77,019
--------- -------- --------
Funded Status (23,493) (942) (10,444)
Unrecognized net (gain)/loss (14,367) (30,993) (15,239)
Unrecognized prior service cost (4) (4) --
--------- -------- --------
Accrued benefit costs $ (37,864) $(31,939) $(25,683)
--------- -------- --------
WEIGHTED - AVERAGE ASSUMPTIONS AS OF DECEMBER 31,
Discount rate
7.50% 7.50% 6.75%
Expected return of plan assets 9.70 9.70 9.70
Rate of compensation increase 4.50 4.50 4.50
COMPONENTS OF NET PERIOD BENEFIT COST
Service Cost $ 9,987 $ 8,212 $ 7,416
Interest Cost 6,713 5,966 5,217
Expected return on plan assets (8,345) (7,401) (6,430)
Amortization of prior service cost (1) (1) --
Recognized net (gain)/loss (2,429) (520) (891)
Curtailment net (gain) -- -- (1,717)
--------- -------- --------
Net periodic benefit costs $ 5,925 $ 6,256 $ 3,595
--------- -------- --------
NMC also sponsors a supplemental executive retirement plan to provide
certain key executives with benefits in excess of normal pension benefits. The
projected benefit obligation was $5,453 and $3,057 at December 31, 2000 and
1999, respectively. Pension expense for this plan, for the twelve months ended
December 31, 2000, 1999 and 1998 was $983, $402 and $374, respectively.
NMC does not provide any postretirement benefits to its employees other
than those provided under its pension plan and supplemental executive retirement
plan.
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DEFINED CONTRIBUTION PLANS
The Company's employees are eligible to join 401 (k) Savings Plan once
they have achieved a minimum of 90 days of service and if they have more than
900 hours of service before their one year anniversary date. Under the
provisions of the 401(k) plan, employees are allowed to contribute up to 16% of
their salaries. The Company contributes 50% of their savings up to 6% of saved
pay after one year. The Company's total contributions for the year ended
December 31, 2000, 1999 and 1998 was $8,786, $7,298 and $7,617, respectively.
NOTE 13. EQUITY
PREFERRED STOCK
At December 31, 2000 and 1999, the components of the Company's preferred
stocks as presented in the Consolidated Balance Sheet and the Consolidated
Statement of Changes in Equity are as follows:
PREFERRED STOCKS, $100 PAR VALUE
- - 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 2000, 1999 and 1998 a total of 75,833,
30,065, and, 2,169,711 awards were cancelled or forfeited resulting in awards
outstanding of 205,166 for 2000, 280,999 for 1999 and 311,064 in 1998. If the
205,166 awards outstanding at December 31, 2000 were exercised, a total of
approximately 68.389 non-voting preferred shares would be issued. At December
31, 2000, 205,166 options were exercisable under the FMC plan.
During 1998, the FMC adopted a new stock incentive plan ("FMC 98 Plan")
under which the Company's key management and executive employees are eligible.
Under the FMC 98 Plan, eligible employees will have the right to acquire
Preference Shares of FMC. Options granted under the FMC 98 Plan will be
evidenced by a non-transferable convertible bond and a corresponding
non-recourse loan to the employee, secured solely by the bond with which it was
made. Each convertible bond, which will be DM denominated, will entitle the
holder thereof to convert the bond in Preference Shares equal to the face amount
of the bond divided by the Preference Share's nominal value. During 1998, FMC
awarded 1,024,083 options and exercisable upon vesting for 1,024,083 Preference
Shares. During 1999, FMC granted 571,940 Preference Shares. During 1999, options
for 140,168 Preference Shares were forfeited or cancelled under the FMC 98 Plan.
During 2000, FMC granted 653,325 Preference Shares and 303,123 Preference Shares
were forfeited or cancelled. In addition, 10,060 stock options from the FMC 98
Plan were
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exercised with 10,060 Preference Shares being issued. At December 31, 2000,
there were 568,887 Preference Shares for which grants could be issued. Grants
for 660,270 Preference Shares were exercisable under the FMC 98 Plan at December
31, 2000.
NOTE 14. FINANCIAL INSTRUMENTS
MARKET RISK
The Company is exposed to market risks due to changes in interest rates
and foreign currency rates. The Company uses derivative financial instruments,
including interest rate swaps and foreign exchange contracts, as part of its
risk management strategy. These instruments are used as a means of hedging
exposure to interest rate and foreign currency fluctuations in connection with
firm commitments and debt obligations. The Company does not hold or issue
derivative instruments for trading or speculative purposes.
The mark-to-market valuations of the financial instruments and of
associated underlying exposures are closely monitored at all times. The Company
uses portfolio sensitivities and stress tests to monitor risk. Overall financial
strategies and the effects of using derivatives are reviewed periodically.
FOREIGN CURRENCY CONTRACTS
The Company uses foreign exchange contracts as a hedge against foreign
exchange risks associated with the settlement of foreign currency denominated
payables and firm commitments. At December 31, 2000 and 1999, the Company had
outstanding foreign currency contracts for the purchase of Euros ("EUR")
totaling $450,856 and $41,925, respectively. The contracts outstanding at
December 31, 2000 include forward contracts for delivery of EUR between January
2001 and November 2003, at rates ranging from $0.8489 to $0.9374 per EUR.
The fair value of forward currency contracts are the estimated amounts
that the Company would receive or pay to terminate the agreement at the
reporting date, taking into account the current exchange rates and the current
creditworthiness of the counterparties. At December 31, 2000 and 1999, the
Company would have received approximately $20,400 and $2,800, respectively, to
terminate the contracts.
INTEREST RATE AGREEMENTS
At December 31, 2000 and 1999, the Company had interest rate swaps and
option agreements outstanding with various commercial banks for notional amounts
totaling $1,050,000 and $1,600,000, respectively. All of these agreements were
entered into for other than trading purposes. In the year 2000, the Company
purchased new interest rate swaps with $450,000 notional amount and closed out
its option agreements (cap and floor with notional amount of $150,000). Hedges
totalling $850,000 expired on January 4, 2000.The rest of the contracts mature
at various dates between November 2003 and November 2007.
For a notional amount of $1,050,000, the interest rate swaps effectively
change the Company's interest rate exposure on its variable-rate loans under the
NMC Credit Facility (drawn as of December 31, 2000: $732,500), and drawdowns
under the receivables financing facility (drawn as of December 31, 2000:
$445,300) to fixed rates of interest ranging between 6.05% and 6.611%. Under the
NMC Credit Facility, the Company agreed to maintain at least $500,000 of
interest rate protection. The Company closed out its option agreements (cap and
floor with notional amount of $150,000) in November 2000 and is amortizing the
loss over the original term of the agreements.
The fair value of the interest rate swaps and options is the estimated
amount that the Company would receive or pay to terminate the agreements. The
fair value of these agreements at December 31, 2000 and 1999 would require the
Company to pay approximately $24,600 and receive approximately $9,200,
respectively. These estimates are subjective in nature and involve uncertainties
and matters of significant judgement and therefore cannot be determined with
precision. Changes in assumptions significantly affect the estimates.
CREDIT RISK
The Company is exposed to credit risk to the extent of potential
nonperformance by counterparties on financial instruments. As of December 31,
2000, the Company's credit exposure was insignificant and limited to the fair
value stated above; the Company believes the risk of incurring losses due to
credit risk is remote.
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FAIR VALUE OF OTHER FINANCIAL INSTRUMENTS
At December 31, 2000 and 1999, the carrying value of cash, cash
equivalents, accounts receivable, prepaid expenses, accounts payable, accrued
expenses, short-term borrowings, short-term borrowings and mandatorily
redeemable preferred securities with related parties and current liabilities
approximated their fair values, based on the short-term maturities of these
instruments.
In addition, the Company is a "Subsidiary Guarantor" along with its parent
company, FMC, for the issuance of Trust Preferred Securities on the books of FMC
at a carrying value of $952,727 and $964,103, at December 31, 2000 and 1999
respectively. The Trust Preferred Securities are guaranteed through a series of
undertakings by FMC and Subsidiary Guarantors. At December 31, 2000 and 1999,
the carrying value of these Trust Preferred Securities exceeded their fair value
by $54,900 and $20,059, respectively. The fair value of these Trust Preferred
Securities is based upon market quotes.
NOTE 15. RELATED PARTY TRANSACTIONS AND ALLOCATIONS
SERVICES
Related party transactions pertaining to services performed and products
purchased/sold between affiliates are recorded as net accounts payable to
affiliates on the balance sheet. At December 31, 2000 and 1999, the Company had
net accounts payable of $6,317 and $12,361, respectively.
BORROWINGS WITH AFFILIATES
The Company has various outstanding borrowings with FMC and affiliates.
The funds were used for general corporate purposes. The loans are due at various
maturities. See Note 6 - "Debt, - Borrowings from Affiliates" for details and
See Note 11 - "Mandatorily Redeemable Preferred Securities"
NOTE 16. COMMITMENTS AND CONTINGENCIES
LEGAL PROCEEDINGS
COMMERCIAL INSURER LITIGATION
In 1997, the Company, NMC, and certain named NMC subsidiaries, were served
with a civil complaint filed by Aetna Life Insurance Company in the U.S.
District Court for the Southern District of New York. The lawsuit alleges
inappropriate billing practices for nutritional therapy, diagnostic and clinical
laboratory tests and misrepresentations. In April 1999, Aetna amended its
complaint to include its affiliate, Aetna U.S. Healthcare, Inc., as an
additional plaintiff, and to make certain other limited changes in its pleading.
The amended complaint seeks unspecified damages and costs. In February 2000, the
Company was served with a similar complaint filed by Connecticut General Life
Insurance Company, Equitable Life Assurance Society for the United States, Cigna
Employee Benefits Services, Inc. and Guardian Life Insurance Company of America,
Inc. (Connecticut General Life Insurance Company et al v. National Medical Care
et al, 00-Civ-0932) seeking unspecified damages and costs. However, the Company,
NMC and its subsidiaries believe that there are substantial defenses to the
claims asserted, and intend to vigorously defend both lawsuits. Other private
payors have contacted the Company and may assert that NMC received excess
payment and, similarly, may join either lawsuit or file their own lawsuit
seeking reimbursement and other damages.
The Company has filed counterclaims against the plaintiffs in these
matters based on inappropriate claim denials and delays in claim payments.
Although the ultimate outcome on the Company of these proceedings cannot
be predicted at this time, an adverse result could have a material adverse
effect on the Company's business, financial condition and result of operations.
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OBRA 93
The Omnibus Budget Reconciliation Act of 1993 affected the payment of
benefits under Medicare and employer health plans for dual-eligible ESRD
patients. In July 1994, the Health Care Financing Administration issued an
instruction to Medicare claims processors to the effect that Medicare benefits
for the patients affected by that act would be subject to a new 18-month
"coordination of benefits" period. This instruction had a positive impact on
NMC's dialysis revenues because, during the 18-month coordination of benefits
period, patients' employer health plans were responsible for payment, which was
generally at rates higher than those provided under Medicare.
In April 1995, the Health Care Financing Administration issued a new
instruction, reversing its original instruction in a manner that would
substantially diminish the positive effect of the original instruction on NMC's
dialysis business. The Health Care Financing Administration further proposed
that its new instruction be effective retroactive to August 1993, the effective
date of the Omnibus Budget Reconciliation Act of 1993.
NMC ceased to recognize the incremental revenue realized under the
original instruction as of July 1, 1995, but it continued to bill employer
health plans as primary payors for patients affected by the Omnibus Budget
Reconciliation Act of 1993 through December 31, 1995. As of January 1, 1996, NMC
commenced billing Medicare as primary payor for dual eligible ESRD patients
affected by the act, and then began to re-bill in compliance with the revised
policy for services rendered between April 24 and December 31, 1995.
On May 5, 1995, NMC filed a complaint in the U.S. District Court for the
District of Columbia (National Medical Care, Inc. and Bio-Medical Applications
of Colorado, Inc. d/b/a Northern Colorado Kidney Center v. Shalala, C.A.
No.95-0860 (WBB) seeking to preclude the Health Care Financing Administration
from retroactively enforcing its April 24, 1995 implementation of the Omnibus
Budget Reconciliation Act of 1993 provision relating to the coordination of
benefits for dual eligible ESRD patients. On May 9, 1995, NMC moved for a
preliminary injunction to preclude the Health Care Financing Administration from
enforcing its new policy retroactively, that is, to billing for services
provided between August 10, 1993 and April 23, 1995. On June 6, 1995, the court
granted NMC's request for a preliminary injunction and in December of 1996, NMC
moved for partial summary judgment seeking a declaration from the Court that the
Health Care Financing Administration's retroactive application of the April 1995
rule was legally invalid. The Health Care Financing Administration cross-moved
for summary judgment on the grounds that the April 1995 rule was validly applied
prospectively. In January 1998, the court granted NMC's motion for partial
summary judgment and entered a declaratory judgment in favor of NMC, holding the
Health Care Financing Administration's retroactive application of the April 1995
rule legally invalid. Based on its finding, the Court also permanently enjoined
the Health Care Financing Administration from enforcing and applying the April
1995 rule retroactively against NMC. The Court took no action on the Health Care
Financing Administration's motion for summary judgment pending completion of the
outstanding discovery. On October 5, 1998, NMC filed its own motion for summary
judgment requesting that the Court declare the Health Care Financing
Administration's prospective application of the April 1995 rule invalid and
permanently enjoin Health Care Financing Administration from prospectively
enforcing and applying the April 1995 rule. The Court has not yet ruled on the
parties' motions. The Health Care Financing Administration elected not to appeal
the Court's June 1995 and January 1998 orders. The Health Care Financing
Administration may, however, appeal all rulings at the conclusion of the
litigation. If the Health Care Financing Administration should successfully
appeal so that the revised interpretation would be applied retroactively, NMC
may be required to refund the payment received from employer health plans for
services provided after August 10, 1993 under the Health Care Financing
Administration's original implementation, and to re-bill Medicare for the same
services, which would result in a loss to NMC of approximately $120 million
attributable to all periods prior to December 31, 1995. Also, in this event, the
Company's business, financial condition and results of operations would be
materially adversely affected.
In July, 2000, NMC filed a complaint in the U.S. District Court for the
Eastern District of Virginia (National Medical Care, Inc. and Bio-Medical
Applications of Virginia, Inc. v. Aetna Life Insurance, Co., Inc. Aetna U.S.
Healthcare, Inc. and John Does 1-10) seeking recovery against Aetna U.S.
Healthcare and health plans administered by Aetna U.S. Healthcare for claims
related to primary payor liability for dual eligible ESRD patients under the
Omnibus Budget Reconciliation Act of 1993. On January 16, 2001, the Court stayed
the action pending resolution of the District of Columbia Court action.
OTHER LITIGATION AND POTENTIAL EXPOSURES
From time to time, the Company is a party to or may be threatened with
other litigation arising in the ordinary course of its business. Management
regularly analyzes current information including, as applicable, the Company's
defenses and insurance coverage and, as necessary, provides accruals for
probable liabilities for the eventual disposition of these matters. The ultimate
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outcome of these matters is not expected to materially affect the Company's
financial position, results of operations or cash flows.
The Company, like other health care providers, conducts its operations
under intense government regulation and scrutiny. The Company must comply with
regulations which relate to or govern the safety and efficacy of medical
products and supplies, the operation of manufacturing facilities, laboratories
and dialysis clinics, and environmental and occupational health and safety. The
Company must also comply with the U.S. anti-kickback statute, the False Claims
Act, the Stark Law, and other federal and state fraud and abuse laws. Applicable
laws or regulations may be amended, or enforcement agencies or courts may make
interpretations that differ from the Company's or the manner in which the
Company conduct its business. In the U.S., enforcement has become a high
priority for the federal government and some states. In addition, the provisions
of the False Claims Act authorizing payment of a portion of any recovery to the
party bringing the suit encourage private plaintiffs to commence "whistle
blower" actions. By virtue of this regulatory environment, as well as our
corporate integrity agreement with the government, the Company expects that its
business activities and practices will continue to be subject to extensive
review by regulatory authorities and private parties, and continuing inquiries,
claims and litigation relating to its compliance with applicable laws and
regulations. The Company may not always be aware that an inquiry or action has
begun, particularly in the case of "whistle blower" actions, which are initially
filed under court seal.
The Company operates a large number of facilities throughout the U.S. In
such a decentralized system, it is often difficult to maintain the desired level
of oversight and control over the thousands of individuals employed by many
affiliate companies. The Company relies upon its management structure,
regulatory and legal resources, and the effective operation of its compliance
program to direct, manage and monitor the activities of these employees. On
occasion, the Company may identify instances where employees, deliberately or
inadvertently, have submitted inadequate or false billings. The actions of such
persons may subject the Company and its subsidiaries to liability under the
False Claims Act, among other laws, and the Company cannot predict whether law
enforcement authorities may use such information to initiate further
investigations of the business practices disclosed or any of its other business
activities.
Physicians, hospitals and other participants in the health care industry
are also subject to a large number of lawsuits alleging professional negligence,
malpractice, product liability, worker's compensation or related claims, many of
which involve large claims and significant defense costs. The Company has been
subject to these suits due to the nature of its business and the Company expects
that those types of lawsuits may continue. Although the Company maintains
insurance at a level which it believes to be prudent, the Company cannot assure
that the coverage limits will be adequate or that insurance will cover all
asserted claims. A successful claim against the Company or any of its
subsidiaries in excess of insurance coverage could have a material adverse
effect upon the Company and the results of its operations. Any claims,
regardless of their merit or eventual outcome, also may have a material adverse
effect on the Company's reputation and business.
The Company has also had claims asserted against it and has had lawsuits
filed against it relating to businesses that it has acquired or divested. These
claims and suits relate both to operation of the businesses and to the
acquisition and divestiture transactions. The Company has asserted its own
claims, and claims for indemnification. Although the ultimate outcome on the
Company cannot be predicted at this time, an adverse result could have a
material adverse effect upon the Company's business, financial condition, and
results of operations.
CONTINGENT NON-NMC LIABILITIES OF W. R. GRACE & CO. (NOW KNOWN AS
FRESENIUS MEDICAL CARE HOLDINGS, INC.)
The Company was formed as a result of a series of transactions pursuant to
the Agreement and Plan of Reorganization (the "Merger") dated as of February 4,
1996 by and between W.R. Grace & Co. ("Grace") and Fresenius AG. In connection
with the Merger, W.R. Grace & Co.-Conn. ("Grace Chemicals") agreed to indemnify
the Company and NMC against all liabilities of the Company and its successors,
whether relating to events occurring before or after the Merger, other than
liabilities arising from or relating to NMC operations. The Company may be
contingently liable for certain liabilities with respect to pre-Merger matters
that are not related to NMC operations. Grace Chemicals has filed for
reorganization under Chapter 11 of the U.S. Bankruptcy Code. If Grace Chemicals'
indemnity obligation is terminated or limited as a result of this bankruptcy
proceeding, and the Company is held liable for pre-Merger obligations of Grace
Chemicals, the Company's business, financial condition, and results of
operations may be adversely affected.
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On September 28, 2000, Mesquita, et al. v. W. R. Grace & Company, et al.
(Sup. Court of Calif., S.F. County, #315465) was filed as a class action by
plaintiffs claiming to be creditors of Grace Chemicals against Grace Chemicals,
the Company, and other defendants, principally alleging that the Merger was a
fraudulent transfer, violated the uniform fraudulent transfer act, and
constituted a conspiracy. An amended complaint was filed subsequently with
substantially similar allegations (Abner et al. v. W. R. Grace & Company, et
al.). The Company has requested indemnification from Grace Chemicals pursuant to
the Merger agreement. If the Merger is determined to have been a fraudulent
transfer, if material damages are proved by the plaintiff, and if the Company is
not able to collect, in whole or in part, on the indemnity, a judgment could
have a material adverse effect on the Company's business, the financial
condition of the Company and results of operations. The Company believes that no
fraudulent transfer or conspiracy occurred and intends to defend the case
vigorously.
Were events to violate the tax-free nature of the Merger, the resulting
tax liability would be the obligation of the Company. Subject to representations
by Grace Chemicals, the Company and Fresenius AG, Grace Chemicals has agreed to
indemnify the Company for such a tax liability. If the Company was not able to
collect on the indemnity, the tax liability would have a material adverse effect
on the Company's business, financial condition and results of operations.
NOTE 17. SIGNIFICANT RELATIONS
For the periods presented, approximately 63% of the Company's health
care services net revenues are paid by and subject to regulations under
governmental programs, primarily Medicare and Medicaid. The Company maintains
reserves for losses related to these programs, including uncollectible accounts
receivable, and such losses have been within management's expectations.
Revenues from EPO accounted for approximately 28% of the Dialysis Services
net revenues for the twelve months ended December 31, 2000 and materially
contribute to Dialysis Services operating earnings. EPO is produced by a single
source manufacturer, Amgen, Inc., and any interruption of supply could
materially adversely affect the Company's business and results of operations.
NOTE 18. INDUSTRY SEGMENTS AND INFORMATION ABOUT FOREIGN OPERATIONS
The Company adopted SFAS No. 131, Disclosure about Segments of an
Enterprise and Related Information during the fourth quarter of 1998. SFAS No.
131 established the standards for reporting information about operating
statements in annual financial statements and requires selected information
about operating segments in interim financial reports issued to stockholders.
The Company's reportable segments are Dialysis Services and Dialysis
Products. For purposes of segment reporting, the Dialysis Services Division and
Spectra Renal Management are combined and reported as Dialysis Services. These
divisions are aggregated because of their similar economic classifications.
These include the fact that they are both health care service providers whose
services are provided to a common patient population, and both receive a
significant portion of their net revenue from Medicare and other government and
non-government third party payors. The Dialysis Products segment reflects the
activity of the Dialysis Products Division only.
The accounting policies of the operating segments are the same as those
described in the summary of significant accounting policies. The Company
generally evaluates division operating performance based on Earnings Before
Interest and Taxes (EBIT) but does use Earning Before Interest, Taxes,
Depreciation and Amortization (EBITDA) in some cases.
The table below provides information for the years ended December 31,
2000, 1999 and 1998 pertaining to the Company's operations by geographic area.
UNITED STATES ASIA/PACIFIC TOTAL
------------- ------------ -----------
NET REVENUES FOR TWELVE MONTHS ENDED
2000 $3,085,320 $ 3,855 $3,089,175
1999 2,811,380 3,853 2,815,233
1998 2,564,785 6,621 2,571,406
OPERATING EARNINGS FOR TWELVE MONTHS ENDED
2000 $ 520,790 $ 30 $ 520,820
1999 511,847 444 512,291
1998 446,725 1,013 447,738
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ASSETS AT DECEMBER 31,
2000 2,810,514 10,394 2,820,908
1999 2,553,763 10,112 2,563,875
1998 2,461,863 9,584 2,471,447
The table below provides information for the years ended December 31,
2000, 1999 and 1998 pertaining to the Company's two industry segments.
LESS
DIALYSIS DIALYSIS INTERSEGMENT TOTAL
SERVICES PRODUCTS SALES
---------- ---------- ----------- ----------
NET REVENUES FOR TWELVE MONTHS ENDED
2000 $2,624,520 $716,757 $252,102 $3,089,175
1999 2,339,185 706,709 230,661 2,815,233
1998 2,116,185 662,324 207,103 2,571,406
OPERATING EARNINGS FOR TWELVE MONTHS ENDED
2000 402,887 117,933 -- 520,820
1999 386,479 125,812 -- 512,291
1998 344,208 103,530 -- 447,738
ASSETS AT DECEMBER 31 2,176,055 644,853 -- 2,820,908
2000 1,918,612 645,263 -- 2,563,875
1999 1,815,368 656,079 -- 2,471,447
1998
CAPITAL EXPENDITURES FOR TWELVE MONTHS ENDED
2000 72,421 28,775 -- 101,196
1999 59,061 15,519 -- 74,580
1998 54,821 13,147 -- 67,968
DEPRECIATION AND AMORTIZATION OF PROPERTIES AND
EQUIPMENT FOR TWELVE MONTHS ENDED
2000 120,985 23,749 -- 144,734
1999 117,059 21,936 -- 138,995
1998 114,240 22,175 -- 136,415
The table below provides the reconciliations of reportable segment
operating earnings, assets, capital expenditures, and depreciation and
amortization to the Company's consolidated totals.
TWELVE MONTHS ENDED DECEMBER 31,
-----------------------------------------------
SEGMENT RECONCILIATION 2000 1999 1998
--------------------- ----------- ----------- -----------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND CUMULATIVE
EFFECTIVE OF CHANGE IN ACCOUNTING FOR START UP COSTS:
Total operating earnings for reportable segments $ 520,820 $ 512,291 $ 447,738
Corporate G&A (including foreign exchange) (95,860) (113,375) (108,618)
Research and development expense (4,127) (4,065) (4,060)
Net interest expense (187,315) (201,915) (208,776)
Interest expense on settlement of investigation, net (29,947) -- --
Special charge for settlement of investigation and related costs -- (601,000) --
----------- ----------- -----------
Income (Loss) before income taxes and cumulative effective
of change in accounting for start up costs $ 203,571 $ (408,064) $ 126,284
=========== =========== ===========
ASSETS:
Total assets for reportable segments $ 2,820,908 $ 2,563,875 $ 2,471,447
Intangible assets not allocated to segments 1,934,643 2,006,985 2,067,648
Accounts receivable financing agreement (445,300) (335,000) (305,600)
Net assets of discontinued operations and IDPN accounts receivable 5,189 59,151 151,067
Corporate assets and other 237,918 349,557 228,841
----------- ----------- -----------
Total Assets $ 4,553,358 $ 4,644,568 $ 4,613,403
=========== =========== ===========
CAPITAL EXPENDITURES
Total capital expenditures for reportable segments $ 101,196 $ 74,580 $ 67,968
Corporate capital expenditures 3,003 6,750 6,685
----------- ----------- -----------
Total Capital Expenditures $ 104,199 $ 81,330 $ 74,653
=========== =========== ===========
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DEPRECIATION AND AMORTIZATION:
Total depreciation and amortization for reportable segments $ 144,734 $ 138,995 $ 136,415
Corporate depreciation and amortization 78,136 78,957 79,799
----------- ----------- -----------
Total Depreciation and Amortization $ 222,870 $ 217,952 $ 216,214
=========== =========== ===========
NOTE 19. QUARTERLY SUMMARY (UNAUDITED)
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
----------- ----------- ----------- -----------
2000
Net revenues $745,115 $760,724 $794,694 $788,642
Cost of health care services and medical supplies 506,858 512,494 544,011 545,459
Operating expenses 139,899 141,199 140,944 137,478
Interest expense, net 47,118 49,269 46,892 44,036
Interest expense, on settlement of investigation 6,185 7,666 7,951 8,145
-------- -------- -------- --------
Total expenses 700,060 710,628 739,798 735,118
-------- -------- -------- --------
Earnings before income taxes 45,055 50,096 54,896 53,524
Provision for income taxes 21,961 24,927 27,227 24,206
-------- -------- -------- --------
Net income $ 23,094 $ 25,169 $ 27,669 $ 29,318
======== ======== ======== ========
Basic and fully dilutive earnings per share $ 0.26 $ 0.28 $ 0.31 $ 0.31
-------- -------- -------- --------
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
----------- ----------- ----------- -----------
1999
Net revenues $672,140 $698,466 $ 711,850 $732,777
Cost of health care services and medical supplies 450,432 471,548 477,726 480,008
Operating expenses 134,003 129,403 131,995 145,267
Interest expense, net 50,126 52,504 49,524 49,761
Special charge for settlement of investigations
and related costs -- -- 590,000 11,000
-------- -------- -------- --------
Total expenses 634,561 653,455 1,249,245 686,036
-------- -------- -------- --------
Earnings before income taxes 37,579 45,011 (537,395) 46,741
Provision (Benefit) for income taxes 19,952 23,607 (150,190) 25,594
-------- -------- -------- --------
Net income (loss) $ 17,627 $ 21,404 $ (387,205) $ 21,147
======== ======== =========== ========
Basic and fully dilutive earnings per share $ 0.19 $ 0.24 $ (4.30) $ 0.23
-------- -------- ----------- --------
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To the Board of Directors and Stockholders of
Fresenius Medical Care Holdings, Inc.
Under the date of February 9, 2001, we reported on the consolidated
balance sheets of Fresenius Medical Care Holdings, Inc. and its subsidiaries
(the "Company") as of December 31, 2000 and 1999 and the related consolidated
statements of operations, comprehensive income, changes in equity and cash flows
for each of the years in the three year period ended December 31, 2000 as
included in the annual report on Form 10-K for the year 2000. In connection with
our audits of the aforementioned consolidated financial statements, we also
audited the related consolidated financial statement schedule. This consolidated
financial statement schedule is the responsibility of the Company's management.
Our responsibility is to express an opinion on this consolidated financial
statement schedule based on our audits.
In our opinion, such consolidated financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, present fairly, in all material respects, the information set forth
therein.
KPMG LLP
February 9, 2001, except as to paragraph 14 of Note 16,
as to which the date is April 2, 2001
Boston, MA
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SCHEDULE II
FRESENIUS MEDICAL CARE HOLDINGS, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(DOLLARS IN THOUSANDS)
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 2000
ADDITIONS (DEDUCTIONS)
--------------------------------
CHARGED
BALANCE AT (CREDITED) TO OTHER NET BALANCE AT
BEGINNING OF COSTS AND END OF PERIOD
YEAR EXPENSES
------------- --------------- ---------- -------------
DESCRIPTION
Valuation and qualifying accounts deducted from assets:
Allowances for notes and accounts receivable $63,012 62,949 (45,495) $80,466
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1999
ADDITIONS (DEDUCTIONS)
--------------------------------
CHARGED
BALANCE AT (CREDITED) TO OTHER NET BALANCE AT
BEGINNING OF COSTS AND END OF PERIOD
YEAR EXPENSES
------------- --------------- ---------- -------------
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
ADDITIONS (DEDUCTIONS)
--------------------------------
CHARGED
BALANCE AT (CREDITED) TO OTHER NET BALANCE AT
BEGINNING OF COSTS AND END OF PERIOD
YEAR EXPENSES
------------- --------------- ---------- -------------
DESCRIPTION
Valuation and qualifying accounts deducted from assets:
Allowances for notes and accounts receivable $53,109 54,709 (58,609) $49,209
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EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------- -----------
Exhibit 2.1 Agreement and Plan of Reorganization dated as of February 4,
1996 between W. R. Grace & Co. and Fresenius AG
(incorporated herein by reference to Appendix A to the Joint
Proxy Statement-Prospectus of Fresenius Medical Care AG, W.
R. Grace & Co. and Fresenius USA, Inc. dated August 2, 1996
and filed with the Commission on August 5, 1996).
Exhibit 2.2 Distribution Agreement by and among W. R. Grace & Co., W. R.
Grace & Co.-Conn. and Fresenius AG dated as of February 4,
1996 (incorporated herein by reference to Exhibit A to
Appendix A to the Joint Proxy Statement-Prospectus of
Fresenius Medical Care AG, W. R. Grace & Co. and Fresenius
USA, Inc. dated August 2, 1996 and filed with the Commission
on August 5, 1996).
Exhibit 2.3 Contribution Agreement by and among Fresenius AG,
Sterilpharma GmbH and W. R. Grace & Co.-Conn. dated February
4, 1996 (incorporated herein by reference to Exhibit E to
Appendix A to the Joint Proxy-Statement Prospectus of
Fresenius Medical Care AG, W. R. Grace & Co. and Fresenius
USA, Inc. dated August 2, 1996 and filed with the Commission
on August 5, 1996).
Exhibit 3.1 Certificate of Incorporation of Fresenius Medical Care
Holdings, Inc. (f/k/a W. R. Grace & Co.) under Section 402
of the New York Business Corporation Law dated March 23,
1988 (incorporated herein by reference to the Form 8-K of
the Company filed on May 9, 1988).
Exhibit 3.2 Certificate of Amendment of the Certificate of Incorporation
of Fresenius Medical Care Holdings, Inc. (f/k/a W. R. Grace
& Co.) under Section 805 of the New York Business
Corporation Law dated May 25, 1988 (changing the name to W.
R. Grace & Co., incorporated herein by reference to the Form
8-K of the Company filed on May 9, 1988).
Exhibit 3.3 Certificate of Amendment of the Certificate of Incorporation
of Fresenius Medical Care Holdings, Inc. (f/k/a W. R. Grace
& Co.) under Section 805 of the New York Business
Corporation Law dated September 27, 1996 (incorporated
herein by reference to the Form 8-K of the Company filed
with the Commission on October 15, 1996).
Exhibit 3.4 Certificate of Amendment of the Certificate of Incorporation
of Fresenius Medical Care Holdings, Inc. (f/k/a W. R. Grace
& Co.) under Section 805 of the New York Business
Corporation Law dated September 27, 1996 (changing the name
to Fresenius National Medical Care Holdings, Inc.,
incorporated herein by reference to the Form 8-K of the
Company filed with the Commission on October 15, 1996).
Exhibit 3.5 Certificate of Amendment of the Certificate of Incorporation
of Fresenius Medical Care Holdings, Inc. under Section 805
of the New York Business Corporation Law dated June 12, 1997
(changing name to Fresenius Medical Care Holdings, Inc.,
incorporated herein by reference to the Form 10-Q of the
Company filed with the Commission on August 14, 1997).
Exhibit 3.6 Amended and Restated By-laws of Fresenius Medical Care
Holdings, Inc. (incorporated herein by reference to the Form
10-Q of the Company filed with the Commission on August 14,
1997).
Exhibit 4.1 Credit Agreement dated as of September 27, 1996 among
National Medical Care, Inc. and Certain Subsidiaries and
Affiliates, as Borrowers, Certain Subsidiaries and
Affiliates, as Guarantors, the Lenders named therein,
NationsBank, N.A., as paying agent and The Bank of Nova
Scotia, The Chase Manhattan Bank, Dresdner Bank AG and Bank
of America, N.A. (formerly known as NationsBank, N.A.), as
Managing Agents (incorporated herein by reference to the
Form 6-K of Fresenius Medical Care AG filed with the
Commission on October 15, 1996).
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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,
Dresdner Bank AG and Bank of America, N.A. (formerly known
as NationsBank, N.A.), as Managing Agents, as previously
amended (incorporated herein by reference to the Form 10-Q
of the Registrant filed with the Commission on November 14,
1997).
Exhibit 4.5 Amendment No. 4, dated August 26, 1997 to the Credit
Agreement dated as of September 27, 1996, among National
Medical Care, Inc. and Certain Subsidiaries and Affiliates,
as Borrowers, Certain Subsidiaries and Affiliates, as
Guarantors, the Lenders named therein, NationsBank, N.A., as
paying agent and The Bank of Nova Scotia, The Chase
Manhattan Bank, Dresdner Bank AG and Bank of America, N.A.
(formerly known as NationsBank, N.A.), as Managing Agents,
as previously amended (incorporated herein by reference to
the Form 10-Q of Registrant filed with Commission on
November 14, 1997).
Exhibit 4.6 Amendment No. 5 dated December 12, 1997 to the Credit
Agreement dated as of September 27, 1996, among National
Medical Care, Inc. and Certain Subsidiaries and Affiliates,
as Borrowers, Certain Subsidiaries and Affiliates, as
Guarantors, the Lenders named therein, NationsBank, N.A., as
paying agent and The Bank of Nova Scotia, The Chase
Manhattan Bank, Dresdner Bank AG and Bank of America, N.A.
(formerly known as NationsBank, N.A.), as Managing Agents,
as previously amended (incorporated herein by reference to
the Form 10-K of Registrant filed with Commission on March
23, 1998).
Exhibit 4.7 Form of Consent to Modification of Amendment No. 5 dated
December 12, 1997 to the Credit Agreement dated as of
September 27, 1996 among National Medical Care, Inc. and
Certain Subsidiaries and Affiliates, as Borrowers, Certain
Subsidiaries and Affiliates, as Guarantors, the Lenders
named therein, NationsBank, N.A., as paying agent and The
Bank of Nova Scotia, The Chase Manhattan Bank, Dresdner Bank
AG and Bank of America, N.A. (formerly known as NationsBank,
N.A.), as Managing Agents (incorporated herein by reference
to the Form 10-K of Registrant filed with Commission on
March 23, 1998).
Exhibit 4.8 Amendment No. 6 dated effective September 30, 1998 to the
Credit Agreement dated as of September 27, 1996, among
National Medical Care, Inc. and Certain Subsidiaries and
Affiliates, as Borrowers, Certain Subsidiaries and
Affiliates, as Guarantors, the Lenders named therein,
NationsBank, as paying agent and The Bank of Nova Scotia,
The Chase Manhattan Bank, N.A., Dresdner Bank AG and Bank of
America, N.A. (formerly known as NationsBank, N.A.), as
Managing Agents, as previously amended (incorporated herein
by reference to the Form 10-Q of Registrant filed with
Commission on November 12, 1998).
Exhibit 4.9 Amendment No. 7 dated as of December 31, 1998 to the Credit
Agreement dated as of September 27, 1996 among National
Medical Care, Inc. and Certain Subsidiaries and Affiliates,
as Borrowers, Certain Subsidiaries and Affiliates
Guarantors, the Lenders named therein, Nations Bank, N.A. as
paying agent and The Bank of Nova Scotia, The Chase
Manhattan Bank, Dresdner Bank A. G. and Bank of America,
N.A. (formerly known as NationsBank, N.A.). as Managing
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 Bank of America, N.A.
(formerly known as
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NationsBank, N.A.), as Managing Agent (incorporated herein
by reference to the Form 10-K of registrant filed with
Commission on March 30, 2000).
Exhibit 4.11 Amendment No. 9 dated as of December 15, 1999 to the Credit
Agreement dated as of September 27, 1996 among National
Medical Care, Inc. and Certain Subsidiaries and Affiliates,
as Borrowers, Certain Subsidiaries and Affiliates
Guarantors, the Lenders named therein, NationsBank, N.A. as
paying agent and The Bank of Nova Scotia, The Chase
Manhattan Bank, Dresdner Bank A.G. and Bank of America, N.A.
(formerly known as NationsBank, N.A.), as Managing Agent
(incorporated herein by reference to the Form 10-K of
registrant filed with Commission on March 30, 2000).
Exhibit 4.12 Amendment No. 10 dated as of September 21, 2000 to the
Credit Agreement dated as of September 27, 1996 among
National Medical Care, Inc. and Certain Subsidiaries and
Affiliates, as Borrowers, Certain Subsidiaries and
Affiliates Guarantors, the Lenders named therein,
NationsBank, N.A. as paying agent and The Bank of Nova
Scotia, The Chase Manhattan Bank, Dresdner Bank A.G. and
Bank of America, N.A. (formerly known as NationsBank, N.A.),
as Managing Agent, (incorporated herein by reference to the
Form 10-K of registrant filed with Commission on November
11, 2000).
Exhibit 4.13 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 4.14 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 4.15 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 4.16 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* Product Purchase Agreement effective January 1, 2000 between
Amgen, Inc. and National Medical Care, Inc. (incorporated
herein by reference to the Form 10-Q of Registrant filed
with Commission on May 12, 2000).
Exhibit 10.4* Amendment to Product Purchase Agreement between Amgen, Inc.
and National Medical Care, Inc. (amending Appendix A),
(incorporated herein by reference to the Form 10-Q of
Registrant filed with Commission on August 9, 2000).
Exhibit 10.5 Primary Guarantee dated July 31, 1996 (incorporated by
reference to the Registrant's Registration Statement on Form
S-4 (Registration No. 333-09497) dated August 2, 1996 and
the exhibits thereto).
Exhibit 10.6 Secondary Guarantee dated July 31, 1996 (incorporated by
reference to the Registrant's Registration Statement on Form
S-4 (Registration No. 333-09497) dated August 2, 1996 and
the exhibits thereto).
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Exhibit 10.7 Receivables Purchase Agreement dated August 28, 1997 between
National Medical Care, Inc. and NMC Funding Corporation
(incorporated herein by reference to the Form 10-Q of the
Registrant filed with the Commission on November 14, 1997).
Exhibit 10.8 Amendment dated as of September 28, 1998 to the Receivables
Purchase Agreement dated as of August 28, 1997, by and
between NMC Funding Corporation, as Purchaser and National
Medical Care, Inc., as Seller (incorporated herein by
reference to the Form 10-Q of Registrant filed with
Commission on November 12, 1998).
Exhibit 10.9 Amended and Restated Transfer and Administration Agreement
dated as October 26, 2000 among Compass US Acquisition, LLC,
NMC Funding Corporation, National Medical Care, Inc.,
Enterprise Funding Corporation, the Bank Investors listed
therein, Westdeutsche Landesbank Girozentrale, New York
Branch, as an administrative agent and Bank of America,
N.A., as an administrative agent.
Exhibit 10.10 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 10.11 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 10.12 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 10.13 Employment Agreement dated March 15, 2000 by and between
Jerry A. Schneider and National Medical Care, Inc
(incorporated herein by reference to the Form 10-Q of
Registrant filed with Commission on May 12, 2000).
Exhibit 10.14 Employment Agreement dated March 15, 2000 by and between
Ronald J. Kuerbitz and National Medical Care, Inc.
(incorporated herein by reference to the Form 10-Q of
Registrant filed with Commission on May 12, 2000).
Exhibit 10.15 Employment Agreement dated March 15, 2000 by and between J.
Michael Lazarus and National Medical Care, Inc.
(incorporated herein by reference to the Form 10-Q of
Registrant filed with Commission on May 12, 2000).
Exhibit 10.16 Employment Agreement dated March 15, 2000 by and between
Robert "Rice" M. Powell, Jr. and Fresenius Medical Care
North America (filed herewith).
Exhibit 10.17 Employment Agreement dated June 1, 2000 by and between John
F. Markus and Fresenius Medical Care North America (filed
herewith).
Exhibit 10.18 Employment Agreement dated January 1, 2001 by and between E.
Craig Dawson and Fresenius Medical Care North America (filed
herewith).
Exhibit 10.19 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.
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