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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, 2002
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.
Indicate by check mark whether the registrant is an accelerated filer. (As
defined in Rule 12b-2 of the Act) Yes | | No |X|
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). $8,906,159 as of March 14, 2003.
1
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date:
As of March 14, 2003, 90,000,000 shares of common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Registrant's Definitive Information Statement with respect to its 2002 Annual
Meeting of Stockholders, to be filed on or before April 30, 2003. (Part III)
2
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 ......................... 39
Item 8. Consolidated Financial Statements and Supplementary Data ............................ 40
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure 40
PART III ..................................................................................... 40
Item 10. Directors and Executive Officers of the Registrant .................................. 40
Item 11. Executive Compensation .............................................................. 40
Item 12. Security Ownership of Certain Beneficial Owners and Management ...................... 40
Item 13. Certain Relationships and Related Transactions ...................................... 40
PART IV ...................................................................................... 40
Item 14. Controls and Procedures ............................................................. 40
Item 15. Exhibits, Consolidated Financial Statement Schedules, and Reports on Form 8-K ....... 40
3
PART I
ITEM 1. BUSINESS
This section contains certain forward-looking statements that are subject
to various risks and uncertainties. Such statements include, without limitation,
discussions concerning the outlook of Fresenius Medical Care Holdings, Inc.
(collectively with all its direct and indirect subsidiaries, the "Company"),
government reimbursement, future plans and management's expectations regarding
future performance. Actual results could differ materially from those contained
in these forward-looking statements due to certain factors including, without
limitation, changes in business, economic and competitive conditions, regulatory
reforms, foreign exchange rate fluctuations, uncertainties in litigation or
investigative proceedings, the realization of anticipated tax deductions, and
the availability of financing. These and other risks and uncertainties, which
are more fully described elsewhere in this 2002 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 ("FMCAG"). 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, and
clinical laboratory testing services, and (ii) manufacturing and distributing
products and equipment for dialysis treatment.
- KIDNEY DIALYSIS AND OTHER SERVICES. The Company is the largest
private provider of kidney dialysis and related services in the U.S.
At December 31, 2002, the Company owned approximately 1,080
outpatient dialysis facilities in the U.S. (including Puerto Rico),
treating approximately 79,600 chronic patients (26.6% of estimated
U.S. patients). The Company operated or managed an additional 49
facilities treating approximately another 3,600 patients (1.2% of
estimated U.S. patients). Collectively, these company-operated
facilities treated 27.8% of the estimated dialysis patients in the
U.S. The Company believes its next largest competitor treated
approximately 15.0% of U.S. patients. Additionally, the Company
provides inpatient dialysis services, therapeutic apheresis,
hemoperfusion, and other services under contract to hospitals in the
U.S.
- DIALYSIS PRODUCTS. The Company manufactures a comprehensive line of
dialysis products, including hemodialysis machines, peritoneal
dialysis systems and disposable products. The Company manufactures
innovative and technologically advanced products, including the
Fresenius Polysulfone(TM) dialyzer, which the Company believes is
the best-performing, mass-produced dialyzer on the market, and
Delflex(R) peritoneal solutions with Safe-Lock(R) connectors.
For the year ended December 31, 2002, the Company had net revenues of $3.8
billion, an increase of 4% over 2001 revenues. The Company derives 88% of its
revenue from providing dialysis services and 12% from the sale of dialysis
products.
The following table summarizes revenues by operating segments for the
three years ended December 31, 2002, 2001 and 2000.
2002 2001 2000
------ ------ ------
Dialysis Care $3,294 $3,132 $2,609
Dialysis Products 456 478 480
------ ------ ------
Total $3,750 $3,610 $3,089
====== ====== ======
The Company's principal executive office is located at 95 Hayden Avenue,
Lexington, MA 02420-9192. Its telephone number is (781) 402-9000.
4
RENAL INDUSTRY OVERVIEW
END-STAGE RENAL DISEASE
End-stage renal disease ("ESRD") is the state of advanced chronic kidney
disease that is characterized by the irreversible loss of kidney function and
requires routine dialysis treatment or kidney transplantation to sustain life. A
normally functioning human kidney removes waste products and excess water from
the blood, preventing toxin buildup, eventual poisoning of the body and water
overload. Chronic kidney disease can be caused by a number of conditions,
primarily nephritis, inherited diseases, hypertension and diabetes. Nearly 60%
of all people with ESRD acquire the disease as a complication of one or more of
these primary conditions.
Based on the most recent information published by the Centers for Medicare
& Medicaid Services ("CMS") of the Department of Health and Human Services
("HHS"), the number of patients in the U.S. who received chronic dialysis grew
from approximately 66,000 in 1982 to approximately 285,980 at December 31, 2001
or at a compound annual rate of 8.0%. 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, improved dialysis technology
that has expanded the patient population able to undergo life prolonging
dialysis and better treatment and survival of patients with hypertension,
diabetes and other illnesses that lead to ESRD. Moreover, improved technology
has enabled older patients and those who previously could not tolerate dialysis
due to other illnesses to benefit from this life-prolonging treatment.
There are currently only two methods for the treatment of ESRD: dialysis
and kidney transplantation. Transplants are limited by the scarcity of
compatible kidneys. Approximately 14,630 patients received kidney transplants in
the U.S. during 2001; an increase of 2% over 2000. Therefore, most patients
suffering from ESRD must rely on dialysis, which is the removal of toxic waste
products and excess fluids from the body by artificial means. There are two
major dialysis modalities commonly used today, hemodialysis and peritoneal
dialysis. Generally, the method of treatment used by an ESRD patient is chosen
by the physician in consultation with the patient, and is based on the patient's
medical conditions and needs.
According to CMS data, as of December 31, 2001, there were approximately
4,080 Medicare-certified dialysis treatment centers in the U.S. Ownership of
these centers was fragmented. The Company estimates that at that time, the five
largest multi-facility providers accounted for approximately 2,460 facilities
(60% of facilities) and 189,400 patients (66% of patients). The remaining 34% of
patients were divided among smaller multi-facility providers, freestanding
facilities (many privately owned by physicians) and hospital-affiliated
facilities.
The Company believes that these proportions remained similar in 2002. The
Company estimates that the five multi-center providers accounted for
approximately 199,000 patients, or 67% of estimated U.S. patients at December
31, 2002.
According to CMS, as of December 31, 2001, approximately 91% of dialysis
patients in the U.S. received in-center treatment (virtually all hemodialysis)
and approximately 9% were treated at home. Of those treated at home, more than
95% received peritoneal dialysis.
TREATMENT OPTIONS FOR ESRD
Hemodialysis. Hemodialysis removes waste products and excess fluids from
the blood extracorporeally. In hemodialysis, the blood flows outside the body by
means of plastic tubes known as bloodlines into a specially designed filter, a
dialyzer, which functions as an artificial kidney by separating waste products
and excess water from the blood by diffusion and ultrafiltration. Dialysis
solution removes the waste products and excess water, and the cleansed blood is
returned to the patient. The movement of the blood and dialysis solution is
controlled by a hemodialysis machine, which pumps blood, adds anti-coagulants,
regulates the purification process and controls the mixing of dialysis solution
and the rate of its flow through the system. This machine may also monitor and
record the patient's vital signs.
Hemodialysis patients generally receive treatment three times per week,
typically for two and one-half to four hours or longer per treatment. The
majority of hemodialysis patients receive treatment at outpatient dialysis
clinics, such as ours, where hemodialysis treatments are performed with the
assistance of a nurse or dialysis technician under the general supervision of a
physician.
5
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.
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 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.
- Differentiate Our Patient Care Programs from that of Our
Competitors. The Company believes that its UltraCare(TM) patient
care program now offered at its dialysis facilities will distinguish
and differentiate the Company's patient care programs from that of
our competitors. UltraCare(TM) therapy employs single-use high flux
polysulfone dialyzers, on-line quality measurement, and ultra pure
dialysate. The Company's shift from multi-use to single-use
dialyzers has increased the Company's per treatment dialyzer costs.
These cost increases have been offset, however, by (i) the Company's
ability to achieve economies of scale in the production of these
dialyzers, due to its large-scale single-use dialzyer manufacturing
capacity, (ii) implementation of a new staffing model based on
single use that reduces the personnel costs per treatment, and (iii)
automated controls in the Company's new 2008 Series dialysis machine
that reduce concentrate usage and associated costs.
- Expand Presence in the U.S. The Company intends to continue to take
advantage of its reputation and market recognition by acquiring and
establishing new dialysis clinics within attractive markets.
- 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
implemented this strategy by providing expanded and enhanced patient
services, including laboratory services, to both its own clinics and
those operated by third parties. The Company estimates that Spectra
Renal Management ("SRM") provides laboratory services for
approximately 39% of the ESRD patients in the United States. The
6
Company has developed disease state management methodologies which
involve the coordination of 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
The Permanente Federation. The Company has also formed Renaissance
Health Care as a joint venture with participating nephrologists.
The Company provides ESRD and Chronic Kidney Disease programs
to more than 3,000 patients. The Company also operates a surgical
center for the management and care of vascular access for patients
which decreases hospitalization.
- 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 the Company to provide the customer with a single source for
all of their dialysis machines, systems and disposable products.
During the year ended December 31, 2002 the Company's product
revenues were derived approximately 24% from machine sales and 76%
from sales of disposable products.
- 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. FMCAG has a
global research and development team with more than 200 members
focused on developing dialysis systems that are safer, more
effective and easier to use and that can be easily customized to
meet the differing needs of customers around the world. The Company
believes that its extensive expertise in patient treatment and
clinical data will further enhance its ability to develop more
effective products and treatment methodologies. The Company's
ability to manufacture dialysis products on a cost-effective and
competitive basis results in large part from our process
technologies. Over the past several years, the Company has reduced
manufacturing costs per unit through development of proprietary
manufacturing technologies that have streamlined and automated its
production processes.
- Expand into Related Services. Fresenius Medical Care Cardiovascular
Resources Holdings ("FMC-CVR"), in which the Company owns a 45%
equity interest, is a leading provider of perfusion and related
cardiovascular services. The addition of this business provides a
strong nationwide platform for expansion and innovation in the
extracorporeal service business which compliments our extracorporeal
dialysis service business well.
For a description of other elements of the Company's strategy see
"--Dialysis Services" and "--Dialysis Products Business." For additional
information in respect to the Company's industry segments, see Notes to
Consolidated Financial Statements - Note 19, "Industry Segments and Information
about Foreign Operations."
DIALYSIS SERVICES
OVERVIEW
The Company is the largest provider of kidney dialysis and related
services in the U.S. to patients suffering from chronic kidney disease. The
Company also provides clinical laboratory testing services for dialysis patients
(Company owned and non-Company owned clinics).
The Company's provider business is primarily operated through the Dialysis
Services business unit ("Dialysis Services"). Clinical laboratory testing
services are primarily provided by SRM.
DIALYSIS SERVICES
As of December 31, 2002, the Company owned approximately 1,080 dialysis
centers in the U.S. (including Puerto Rico). The centers are generally
concentrated in areas of high population density. In 2002, the Company acquired
11 existing centers, developed 64 new centers and consolidated or sold 13
centers. The number of patients treated at the Company's centers has increased
from approximately 76,600 at December 31, 2001 to approximately 79,600 at
December 31, 2002.
7
With the Company's large patient population, it has developed the PSP
database which enables it to improve dialysis treatment outcomes and improve
the quality and effectiveness of dialysis products. In addition to the Company's
patient database, it believes that local physicians, hospitals and managed care
plans refer their ESRD patients to its clinics for treatment due to:
- its reputation for quality patient care and treatment;
- its extensive network of dialysis clinics, which enables physicians
to refer their patients to conveniently located clinics; and
- its reputation for technologically advanced products for dialysis
treatment.
The Company treats approximately 28% of the dialysis patients in the U.S.,
including those patents treated in clinics the Company manages. Based on
publicly available reports, the Company believes its next largest competitor
treats approximately 15.0% of U.S. dialysis patients. For the year 2002,
dialysis services accounted for 88% of the Company's total revenue.
At the Company's centers, hemodialysis treatments are provided at
individual "stations" through the use of dialysis machines. A nurse or dialysis
technician attaches the necessary tubing to the patient and monitors the
dialysis equipment and the patient's vital signs. The capacity of a center is a
function of the number of stations and such factors as the type of treatment,
patient requirements, length of time per treatment and local operating practices
and ordinances regulating hours of operation.
Each of the Company's dialysis centers is under the general supervision of
a medical director ("Medical Director"), who is a physician. See "Patient,
Physician and Other Relationships." Each dialysis center also has an
administrator or clinic manager who supervises the day-to-day operations of the
facility and the staff. The staff typically consists of registered nurses,
licensed practical nurses, patient care technicians, a social worker, a
registered dietician, a unit clerk and biomedical technicians.
As part of the dialysis therapy, the Company provides various related
services to ESRD patients in the U.S. at its dialysis centers, including the
administration of erythropoietin ("EPO"), a bioengineered protein that
stimulates the production of red blood cells. EPO is used to treat anemia, a
medical complication frequently experienced by ESRD patients, and is
administered to most of the Company's patients. EPO is produced by a single
source manufacturer, Amgen Inc., and any interruption of supply could materially
adversely affect the Company's business and results of operations. The Company's
current contract with Amgen Inc. covers the period from January 2002 to December
2003 with price guarantees and volume and outcome based discounts.
The Company's centers also offer services for home dialysis patients, the
majority of whom are treated with peritoneal dialysis. For such patients, the
Company provides certain materials, training and patient support services,
including clinical monitoring, supply of EPO, follow-up assistance and
arrangements for the delivery of the supplies to the patient's residence. See
"--Regulatory and Legal Matters-- Reimbursement" and "--Legal Proceedings" for a
discussion of billing for such products and services.
The 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.
8
FRESENIUS ULTRACARE(TM) PROGRAM
In 2002, the Company started a new program in the Dialysis Services group
called UltraCare(TM). This program combines the latest of the Company's product
technology with the Company's highly trained and skilled staff and is designed
to offer our patients an unsurpassed level of care. The basis for this form of
treatment is the Optiflux Polysulfone single use dialyzer. These dialyzers
deliver the highest level of blood clearance and are the most efficient dialyzer
available. Optiflux Dialyzers are combined with our 2008 Series Hemodialysis
Delivery System, which has several systems to allow the tailoring of treatment
to meet the individual needs of patients, as well as advanced online patient
monitoring. Staff will be alerted if clearance is less than target, and
treatment can be adjusted.
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. The Company
paid aggregate consideration, for acquisitions of new clinics of approximately
$37 million in 2002 and approximately $388 million in cash and FMCAG preference
shares, in 2001.
The Company regularly evaluates and explores opportunities with various
other health care companies and other businesses regarding acquisitions and
joint business ventures. In 2002, the Company completed new acquisitions and
acquisitions of previously managed clinics totaling 11 dialysis facilities in
the U.S. providing care to approximately 960 patients. These acquisitions and
agreements expand the Company's presence in selected key areas of the United
States.
QUALITY ASSURANCE IN DIALYSIS CARE
At each of the Company's dialysis clinics, a quality assurance committee
is responsible for reviewing quality of care data, setting goals for quality
enhancement and monitoring the progress of quality assurance initiatives. The
Company believes that it enjoys a reputation of providing high quality care to
dialysis patients. In 2002, the Company continued to develop and implement
programs to assist in achieving its quality goals. The Company's Access
Intervention Management Program ("AIM"), started in 2001, detects and corrects
arteriovenous access failure in hemodialysis treatment, which is the major cause
of hospitalization and morbidity.
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,
--------------------------
2002 2001 2000
------ ------ ------
Medicare ESRD program ....... 61.5% 59.7% 59.1%
Private/alternative payors .. 29.5 31.2 32.1
Medicaid and other government
sources ..................... 4.5 4.6 4.2
Hospitals ................... 4.5 4.5 4.6
------ ------ ------
Total ..................... 100.0% 100.0% 100.0%
====== ====== ======
9
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.
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.
The conditions for coverage under the Medicare ESRD program require that
treatment at a dialysis center be under the general supervision of a Medical
Director. Generally, the Medical Director must be board certified or board
eligible in internal medicine and have at least 12 months of training or
experience in the care of patients at ESRD centers. The Company's Medical
Directors maintain their own private practices.
10
COMPETITION
Dialysis Services. The dialysis services industry is highly competitive.
The Company's major competitors in dialysis services include Gambro AB, DaVita,
Inc. (formerly Total Renal Care Inc.) and Renal Care Group, Inc. 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
manufacturers, 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 for patients
with private insurance coverage.
LABORATORY SERVICES
The Company provides clinical laboratory testing services through its SRM
business unit. SRM is the leading U.S. dialysis clinical laboratory providing
blood, urine and other bodily fluid testing services to assist physicians in
determining whether a dialysis patient's therapy regimen, diet and medicines
remain optimal. SRM laboratories are located in New Jersey and Northern
California.
In 2002, SRM performed over 36 million tests for more than 115,000
dialysis patients in 1713 clinics 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.
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.
11
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 actual net revenues of the Company's products
business for 2002, 2001 and 2000 related to hemodialysis products, peritoneal
dialysis products and other activities, principally technical service:
YEAR ENDED DECEMBER 31,
(DOLLARS IN THOUSANDS)
-------------------------------------------------------------------------------------
2002 2001 2000
----------------------- ----------------------- -----------------------
Total % of Total % of Total % of
Revenues Total Revenues Total Revenues Total
-------- -------- -------- -------- -------- --------
Hemodialysis Products $343,470 75% $340,841 71% $334,447 70%
Peritoneal Dialysis Products 71,582 16 83,653 18 90,985 19
Other 41,449 9 53,324 11 54,635 11
-------- -------- -------- -------- -------- --------
Total $456,501 100% $477,818 100% $480,067 100%
======== ======== ======== ======== ======== ========
HEMODIALYSIS PRODUCTS
The Company believes that it is a leader in the hemodialysis product field
and continually strives to extend and improve the capabilities of its
hemodialysis systems to offer an advanced treatment mode at reasonable cost. The
Company, through its Dialysis Products business unit ("Dialysis Products"),
offers a comprehensive hemodialysis product line.
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 FMCAG and other suppliers. The
Company sells its dialysis machines as Series 2008H and 2008K models in the U.S.
The Company's dialysis machines offer the following features and advantages:
- Volumetric dialysate balancing and ultrafiltration control system.
This system, was introduced in 1977, provides for safe and more
efficient use of highly permeable dialyzers, permitting faster
dialysis with controlled rates of fluid removal;
- Proven hydraulic systems, providing reliable operation and servicing
flexibility;
- Compatibility with all manufacturers' dialyzers and a wide variety
of blood-lines and dialysis solutions, permitting maximum
flexibility in both treatment and disposable products usage;
- Modular design, which permits us to offer dialysis clinics a broad
range of options to meet specific patient or regional treatment
requirements. Modular design also allows upgrading through module
substitution without the need to replace the entire machine;
- Additional modules that provide monitoring and response capability
for selected bio-physical patient parameters, such as body
temperature, relative blood volume and electrolyte balances. This
concept, known as physiological dialysis, permits hemodialysis
treatments with lower incidence of a variety of symptoms or side
effects, which still occur frequently in standard hemodialysis. Our
most recent module, the Blood Volume Monitor(TM) controls removal of
excess fluid from the patient;
- Sophisticated microprocessor controls, and display and readout
panels that are adaptable to meet local language requirements;
12
- Battery backup, which continues operation of the blood circuit and
all protective systems for 15 to 20 minutes following a power
failure;
- Online clearance, measurement of dialyzer clearance for quality
assurance with the On-Line Clearance Module, providing immediate
effective clearance information, real time treatment outcome
monitoring, and therapy adjustment during dialysis without requiring
invasive procedures or blood samples;
- On-line data collection capabilities and computer interfacing with
our Hypercare module and FDS08(R) system. Our machines can:
- monitor and assess prescribed therapy;
- connect a large number of hemodialysis machines and peripheral
devices, such as patient scales, blood chemistry analyzers and
blood pressure monitors, to a personal computer network;
- enter nursing records automatically at bedside to register and
document patient treatment records, facilitate billing, and
improve record-keeping and staff efficiency;
- adapt to new data processing devices and trends;
- perform home hemodialysis with remote monitoring by a staff
caregiver; and
- record and analyze trends in medical outcome factors in
hemodialysis patients; and
Dialyzers. The Company manufactures dialyzers using hollow fiber
polysulfone membranes, a synthetic material. While competitors currently sell
polysulfone membranes in the market, the Company developed and is the only
manufacturer with more than 15 years' experience in applying the technology
required to mass produce polysulfone membranes. The Company believes that
polysulfone offers the following superior performance characteristics compared
to other materials used in dialyzers:
- higher biological compatibility, resulting in reduced incidence of
adverse reactions to the fibers;
- greater capacity to clear uremic toxins from patient blood during
dialysis, permitting more thorough, more rapid dialysis, resulting
in shorter treatment time; and
- a complete range of permeability, or membrane pore size, which
permits dialysis at prescribed rates -- high flux, medium flux and
low flux, for acute dialysis, and allows tailoring of dialysis
therapy to individual patients.
The Company's full line of polysulfone dialyzers includes the new F Series
Optiflux family as well as the traditional reuse and non-reuse dialyzers
including the F70NR, F50NR and F7NR series of single-use polysulfone dialyzers.
Single use dialyzers are becoming more popular, and the Company has increased
production of single-use dialyzers at its Ogden, Utah facility to meet demand
for these products.
Single Use Dialyzers. The Company has nearly completed a $65 million
capital commitment to significantly expand the capacity of its dialyzer
manufacturing plant in Ogden, Utah through the addition of three new dialyzer
assembly lines.
13
Other Hemodialysis Products. The Company manufactures and distributes
arterial, venous, single needle and pediatric bloodlines. The Company produces
both liquid and dry dialysate concentrates. Liquid dialysate concentrate is
mixed with purified water by the hemodialysis machine to produce dialysis
solution, which is used in hemodialysis treatment to remove the waste products
and excess water from the patient's blood. Dry acid concentrate requires less
storage space. The Company also produces dialysis solutions in bags, 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.
PERITONEAL DIALYSIS PRODUCTS
The Company offers a full line of peritoneal dialysis products. The
Company manufactures peritoneal dialysis solutions in bags, peritoneal dialysis
cycling machines for CCPD and disposable products for both CAPD and CCPD, such
as tubing, sterile solutions and sterile kits to prepare patients for dialysis.
CAPD Systems. The Company manufactures standard and specialized peritoneal
dialysis solutions. The Company believes that its peritoneal dialysis products
offer significant advantages for CAPD, including:
- ease of use and greater protection against contamination by touch
than other peritoneal dialysis systems presently available. Its
products incorporate our Safe-Lock(R) connection system for
introducing and draining dialysis solution into and from the
abdominal cavity;
- suitability for all peritoneal dialysis patients through the
Inpersol(R) and Safe-Lock(R) product lines. Inpersol products are
interchangeable with those of other manufacturers; Safe-Lock(R)
products may be used only by peritoneal dialysis patients whose
catheters include the Safe-Lock connector, which attaches to a
solution bag fitted with the other part; and
- higher solution bag volumes with our new Premier twin-bag system
which provides solution container and pre-attached tubing set in one
package. The higher solution volumes permit larger dosages without
increasing the number of required daily solution exchanges performed
by the patient.
CCPD Products. The Company introduced the first peritoneal dialysis
cycler machine in 1980. The Company believes that CCPD therapy offers benefits
over CAPD therapy for patients who need more therapy due to body size,
ultrafiltration loss or other reasons. In a standard CAPD program, a patient
manually introduces two liters of fresh peritoneal dialysis solution and drains
the used solution four times over a 24-hour period. Treatment occurs seven days
per week and the patient must perform the treatment while awake. With CCPD
therapy, the cycler automatically delivers a prescribed volume of dialysis
solution into the peritoneal cavity through an implanted catheter, allows the
solution to dwell for a specified time, and completes the process by draining
the solution. CCPD therapy offers the following benefits over CAPD:
- Solution exchanges take place automatically, which may reduce the
risk of peritonitis due to less frequent handling of the catheter
and connections;
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- The patient can cycle at home, throughout the night while asleep.
The patient has complete daytime freedom, wearing only the
surgically implanted catheter and capping device; and
- CCPD delivers more effective therapy than CAPD due to the supine
position of the patient during the night, higher volume exchanges
and preferable cycle management.
The Company's cycling equipment incorporates microprocessor technology,
and the patient, hospital or clinic staff can easily program it to perform
specific prescribed therapy for a given patient. Since all components are
monitored and programmable, these machines allow the physician to prescribe any
of a number of current therapy procedures. Our CCPD products and therapies
include:
- PD-PLUS(R), a variant on CCPD therapy the Company introduced in
1994. PD-PLUS(R) therapy can only be performed using the Fresenius
Freedom(TM) Cycler and special tubing using Safe-Lock(R) connectors;
and
- IQcard(TM), for use with the Freedom(TM) Cycler PD-PLUS(R) to
monitor CCPD therapy for a full treatment history and improved
therapy compliance.
Other Peritoneal Dialysis Products. The Company also manufactures and
distributes pediatric treatment systems for administration of low volumes of
dialysis solutions, assist devices to facilitate automated bag exchange for
handicapped patients, catheters, catheter implantation instruments, silicon
glue, Pack-PD(R) (a computer program which analyzes patient and peritoneal
characteristics to present a range of treatment options for individual
therapies), disinfectants, bag heating plates, adapters, and products to assist
and enhance connector sterility. The Company also provides scientific and
patient information products, including support materials, such as brochures,
slides, videos, instructional posters and training manuals.
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. The Company
maintains a direct sales force of trained salespersons engaged in the sale of
both hemodialysis and peritoneal dialysis products.
In the Company's distribution system, products are shipped from
factories to central warehouses. Dialysis products are distributed from these
central warehouses to regional warehouses. The Company then distributes
peritoneal dialysis products to the patient at home, and ships hemodialysis
products directly to dialysis clinics and other 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.
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 FMCAG as well as other suppliers. The
Company has experienced no difficulties in obtaining sufficient quantities of
such components.
The Company owns a 590,000 square-foot facility in Ogden, Utah which
operates as a fully integrated manufacturing and research and development
facility for polysulfone dialyzers and peritoneal dialysis solutions. This
facility uses automated equipment for the production of polysulfone dialyzers
and sterile solutions in flexible plastic containers. The Company believes that
it is the principal manufacturer of polysulfone dialyzers in the U.S. The
Company has nearly completed a $65 million capital commitment to significantly
expand the capacity of its dialyzer manufacturing plant in Ogden, Utah through
the addition of three new dialyzer assembly lines.
15
While the Company obtains the film used in the manufacture of its plastic
bags used with its peritoneal solutions from one supplier located in the
Netherlands, the Company believes that there are readily available alternative
sources of supply for which the FDA could grant expedited approval.
The Company also manufactures dialysis products at additional plants.
Bloodlines and PD sets are produced at a facility in Reynosa, Mexico, and
concentrates are produced at five facilities in the U.S.
Each step in the manufacture of the Company's products, from the initial
processing of raw materials through the final packaging of the completed
product, is carried out under controlled quality assurance procedures required
by law and under Good Manufacturing Practices ("GMP"), as well as under
comprehensive quality management systems, such as the internationally recognized
ISO 9000-9004 and CE Mark standards, which are mandated by regulatory
authorities in the countries in which the Company operates. The facilities in
Ogden, Utah and Reynosa, Mexico received ISO 9001 certification in 1999. The
facility in Walnut Creek, California received ISO 9001 certification in 2000.
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, the Company 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.
Incoming raw materials for solutions undergo tests, such as, infrared,
ultraviolet and physical and chemical analyses to assure quality and
consistency. During the production cycle, sampling and testing take place in
accordance with established quality assurance procedures to ensure the finished
product's sterility, safety and potency. Pressure, temperature and time for
various processes are monitored to assure consistency of semi-finished goods.
Environmental conditions are monitored to assure that particulate and
bacteriological levels do not exceed specified maximums. The Company maintains
continuing quality control and Good Manufacturing Policies education and
training programs for its employees. See "Regulatory and Legal Matters."
Dialysis Products Material Management Department (MMD) is responsible for
providing production plans to the manufacturing facilities and supplying
products to the Company's distribution centers. The Distribution department
operates a national network of distribution centers that are strategically
located in the U.S. to ensure high service levels to the Company's own clinics,
external customers, home-based patients and hospitals. The Company's routing
software enables it to distribute its supplies to best accommodate customer
requests while maintaining operational efficiency.
NEW PRODUCT INTRODUCTIONS
The Company remains strongly focused on the development of new products,
technologies, and treatment concepts to optimize the quality of treatment for
dialysis patients in coordination with the FMCAG research and development team.
The Company's research and development expenditures were $9.2 million and $5.5
million in 2002 and 2001, respectively.
The Company introduced the following new or enhanced products in 2002:
- High performance, single use Optiflux series dialyzer at the end of
2001. Optiflux polusulfone dialyzers are engineered to deliver
superior small (urea) and middle molecular weight solute clearance
through the use of NCS coupled with superior membrance composition
and biocompatability. Optiflux dialyzers accounted for 18% of the
dialyzers the Company sold in the U.S. during 2002. Two new models
of Optiflux dialyzers were introduced this year. The Optiflux
dialyzer is the fastest growing, best selling dialyzer in the U.S.
- UltraCare 2008 enhancements. Added auto flow and idle modes to the
2008 series of machines, as well as special display screens user
interface.
- Newton IQ for Peritoneal Dialysis. Cycler designed to take advantage
of higher flow rates available with gravity flow and drain. Improved
software includes persciption upload, evaluated through clinical
studies in 2002.
- Online Clearence Monitor. Monitors patient access flow rate without
the need for additional equipment or specially trained personnel.
Provides immediate information on treatment efficiency.
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- Premier(TM) Plus Double Bag for Peritoneal Dialysis. Twin bag system
incorporating solution, bag, and tubing. Uses Safe-lock(TM) connect
and Snap(TM) disconnect features. Fewer connections lower patient
risk of infection.
PATENTS, TRADEMARKS AND LICENSES
The Company believes that its success will depend, in large part, on
FMCAG's technology. While FMCAG, as a standard practice, obtains such legal
protections it believes are appropriate for its intellectual property, such
intellectual property may be subject to infringement or invalidation claims. In
addition, technological developments in ESRD therapy could reduce the value of
FMCAG's existing intellectual property. This reduction could be rapid and
unanticipated.
COMPETITION
The markets in which the Company sells its dialysis products are highly
competitive. Among the Company's competitors in the sale of hemodialysis and
peritoneal dialysis products are Gambro AB, Baxter International Inc., Asahi
Medical Co., Ltd., B. Braun Melsungen AG, Nissho Corporation (including Nissho
Nipro Corporation Ltd.), Nikkiso Co., Ltd., Terumo Medical Corporation and Toray
Medical Co., Ltd. Some the Company's competitors possess greater financial,
marketing and research and development resources than the Company.
EMPLOYEES
At December 31, 2002, the Company employed approximately 31,183 employees,
including part-time and per diem employees. Such persons are employed by the
Company's principal businesses as follows: dialysis treatment and laboratory
services, approximately 26,623 employees; and dialysis products, approximately
4,560 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 1,946 or 6% of the Company's employees are covered by union
agreements.
17
REGULATORY AND LEGAL MATTERS
REGULATORY OVERVIEW
The operations of the Company are subject to extensive governmental
regulation at the federal, state and local levels regarding the operation of
dialysis centers, laboratories and manufacturing facilities, the provision of
quality health care for patients, the maintenance of occupational, health,
safety and environmental standards and the provision of accurate reporting and
billing for governmental payments and/or reimbursement.
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"),
federal rules under the Health Insurance Portability and Accountability Act of
1996 that protect the privacy of patient medical records and prohibit
inducements to patients to select a particular health care provider (commonly
known as "HIPAA") 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, distribution, 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").
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
18
are also subject to federal laws governing the repackaging and dispensing of
drugs and the maintenance and tracking of certain life sustaining and
life-supporting equipment.
The operations of the Company are subject to various U.S. Department of
Transportation, Nuclear Regulatory Commission and Environmental Protection
Agency requirements and other federal, state and local hazardous and medical
waste disposal laws. As currently in effect, laws governing the disposal of
hazardous waste do not classify most of the waste produced in connection with
the provision of dialysis, or laboratory services as hazardous, although
disposal of nonhazardous medical waste is subject to specific state regulation.
However, the Company's laboratory businesses do generate hazardous waste which
is subject to specific disposal requirements. The operations of the Company are
also subject to various air emission and wastewater discharge regulations.
Federal, state and local regulations require the Company to meet various
standards relating to, among other things, the management of facilities,
personnel qualifications and licensing, maintenance of proper records,
equipment, quality assurance programs, the operation of pharmacies, and
dispensing of controlled substances. All of the operations of the Company in the
U.S. are subject to periodic inspection by federal and state agencies and other
governmental authorities to determine if the operations, premises, equipment,
personnel and patient care meet applicable standards. To receive Medicare
reimbursement, the Company's dialysis centers, renal diagnostic support business
and laboratories must be certified by CMS. All of the Company's dialysis
centers, and laboratories that furnish Medicare services have the required
certification.
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 and laboratories, and require employers
to make a determination as to which employees may be exposed to blood or other
potentially infectious materials and to have in effect a written exposure
control plan. In addition, employers are required to provide hepatitis B
vaccinations, personal protective equipment, blood-borne pathogens training,
post-exposure evaluation and follow-up, waste disposal techniques and
procedures, engineering and work practice controls and other OSHA-mandated
programs for blood-borne and air-borne pathogens.
Some states in which the Company operates have Certificate of Need ("CON")
laws that require any person or entity seeking to establish a new health care
service or to expand an existing service to apply for and receive an
administrative determination that the service is needed. The Company currently
operates in 13 states, including the District of Columbia and Puerto Rico that
have CON laws applicable to dialysis centers. These requirements may, as a
result of a state's internal determination of its dialysis services needs,
prevent entry to new companies seeking to provide services in these states, and
may constrain the Company's ability to expand its operations in these states.
New York law prohibits ownership by a corporation of any stock in another
corporation that is licensed in New York to operate certain health facilities,
including dialysis providers. Therefore, the Company does not own dialysis
facilities in New York, but rather works within the framework of New York's laws
to establish alternative contractual arrangements with New York dialysis
facilities.
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, and dialysis for hospitalized patients
The Medicare program is the primary source of Dialysis Services revenues
from dialysis treatment. For example, in 2002, approximately 61% 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 hereinafter, 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.
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.
19
Medicare payments are subject to change by legislation, regulations and
pursuant to deficit reduction measures. The Composite Rate was unchanged from
commencement of the ESRD program in 1972 until 1983. From 1983 through December
1990, numerous congressional actions resulted in a net reduction of the average
reimbursement rate from $138 per treatment in 1983 to approximately $125 per
treatment in 1990. Congress increased the ESRD reimbursement rate, effective
January 1, 1991, to an average rate of $126 per treatment. Effective January 1,
2000, the reimbursement rate was increased by 1.2%. In December 2000 an
additional increase of 2.4% was approved for the year 2001. Accordingly, there
was a 1.2% reimbursement increase on January 1, 2001. A second increase was
delayed until April 1, 2001, when rates were increased 1.6% to make up for the
delay.
The Company is unable to predict what, if any, future changes may occur in
the rate of Medicare reimbursement. Any significant decreases in the Medicare
reimbursement rates could have a material adverse effect on the Company's
provider business and, because the demand for products is affected by Medicare
reimbursement, on its products business. Increases in operating costs that are
affected by inflation, such as labor and supply costs, without a compensating
increase in reimbursement rates, also may adversely affect the Company's
business and results of operations.
For Medicare-primary patients, 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. 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 agreed to make premium payments for
supplemental medical insurance and/or medigap insurance on behalf of indigent
ESRD patients, including patients of the Company.
LABORATORY TESTS. A substantial portion of SRM's net revenues are derived
from Medicare, which pays for clinical laboratory services provided to dialysis
patients in two ways.
First, payment for certain routine tests is included in the Composite Rate
paid to the centers. As to such services, the dialysis centers obtain the
services from a laboratory and pay the laboratory for such services. In
accordance with industry practice, SRM usually provides such testing services
under capitation agreements with its customers pursuant to which it bills a
fixed amount per patient per month to cover the laboratory tests included in the
Composite Rate at the designated frequencies. In October 1994, the OIG issued a
special fraud alert in which it stated its view that the industry practice of
providing tests covered by the Composite Rate at below fair market value raised
issues under the anti-kickback statutes, as such an arrangement with an ESRD
facility appeared to be an offer of something of value (Composite Rate tests at
below market value) in return for the ordering of additional tests billed
directly to Medicare. See "--Anti-kickback Statutes, False Claims Act, Stark Law
and Fraud and Abuse Laws" for a description of this statute.
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.
EPO. Future changes in the EPO reimbursement rate, inclusion of EPO in the
Medicare Composite Rate, changes in the typical dosage per administration or
increases in the cost of EPO purchased by NMC could adversely affect the
Company's business and results of operations, possibly materially.
COORDINATION OF BENEFITS. Medicare entitlement begins for most patients in
the fourth month after the initiation of chronic dialysis treatment at a
dialysis center. During the first three months, considered to be a waiting
period, the patient or patient's insurance, Medicaid or a state renal program
are responsible for payment.
Patients who are covered by Medicare and are also covered by an employer
group health plan ("EGHP") are subject to a 30 month coordination period during
which the EGHP is the primary payor and Medicare the secondary payor. During
20
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.
Employee group health insurance will therefore generally cover a total of 33
months, the 3 month waiting period plus the 30 month coordination period.
POSSIBLE CHANGES IN MEDICARE. 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, possibly
materially.
HEALTH CARE LAWS
Various operations of the Company are subject to federal and state
statutes and regulations governing financial relationships between health care
providers and potential referral sources and reimbursement for services and
items provided to Medicare and Medicaid patients. Such laws include the
anti-kickback statute, health care fraud statutes, the False Claims Act, the
Stark Law, other federal fraud and abuse laws and similar state laws. These laws
apply because the Company's Medical Directors and other physicians with whom the
Company has financial relationships refer patients to, and order diagnostic and
therapeutic services from, the Company's dialysis centers and other operations.
As is generally true in the dialysis industry, at each dialysis facility a small
number of physicians account for all or a significant portion of the patient
referral base. An ESRD patient generally seeks treatment at a center that is
convenient to the patient and at which the patient's nephrologist has staff
privileges.
ANTI-KICKBACK STATUTES
The federal anti-kickback statute establishes criminal prohibitions
against and civil penalties for the knowing and willful solicitation, receipt,
offer or payment of any remuneration, whether direct or indirect, in return for
or to induce the referral of patients or the ordering or purchasing of items or
services payable in whole or in part under Medicare, Medicaid or other federal
health care programs. Sanctions for violations of the anti-kickback statute
include criminal and civil penalties, such as imprisonment or criminal fines of
up to $25,000 per violation, and civil penalties of up to $50,000 per violation,
and exclusion from the Medicare or Medicaid programs and other federal programs.
In addition, certain provisions of federal criminal law that may be applicable
provide that if a corporation is found guilty of a criminal offense it may be
fined no more than twice any pecuniary gain to the corporation, or, in the
alternative, no more than $500,000 per offense.
Some states also have enacted statutes similar to the anti-kickback
statute, which may include criminal penalties, applicable to referrals of
patients regardless of payor source, and may contain exceptions different from
state to state and from those contained in the federal anti-kickback statute.
FALSE CLAIMS ACT AND RELATED CRIMINAL PROVISIONS
The federal False Claims Act (the "False Claims Act") imposes civil
penalties for knowingly making or causing to be made false claims with respect
to governmental programs, such as Medicare and Medicaid, for services not
rendered, or for misrepresenting actual services rendered, in order to obtain
higher reimbursement. Moreover, private individuals may bring qui tam or
"whistle blower" suits against providers under the False Claims Act, which
authorizes the payment of a portion of any recovery to the individual bringing
suit. Such actions are initially required to be filed under seal pending their
review by the Department of Justice. A few federal district courts have recently
interpreted the False Claims Act as applying to claims for reimbursement that
violate the anti-kickback statute or federal physician self-referral law under
certain circumstances. The False Claims Act generally provides for the
imposition of civil penalties of $5,500 to $11,000 per claim and for treble
damages, resulting in the possibility of substantial financial penalties for
small billing errors that are replicated in a large number of claims, as each
individual claim could be deemed to be a separate violation of the False Claims
Act. Criminal provisions that are similar to the False Claims Act provide that
if a corporation is convicted of presenting a claim or
21
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 expanded federal fraud and abuse laws
by increasing their reach to all federal health care programs, establishing new
bases for exclusions and mandating minimum exclusion terms, creating an
additional exception to the anti-kickback penalties for risk-sharing
arrangements, requiring the Secretary of HHS to issue advisory opinions,
increasing civil money penalties to $10,000 (formerly $2,000) per item or
service and assessments to three times (formerly twice) the amount claimed,
creating a specific health care fraud offense and related health fraud crimes,
and expanding investigative authority and sanctions applicable to health care
fraud. It also prohibits provider payments which could be deemed an inducement
to patient selection of a provider.
The law expands criminal sanctions for health care fraud involving any
governmental or private health benefit program, including freezing of assets and
forfeiture of property traceable to commission of a health care offense.
HIPAA established a health care fraud statute which prohibits knowingly
and willfully executing a scheme or artifice to defraud any "health care benefit
program," which includes any public or private plan or contract affecting
commerce under which any medical benefit, item, or service is provided to any
individual, and includes any individual or entity who is providing a medical
benefit, item, or service for which payment may be made under the plan or
contract.
HIPAA regulations establish national standards for certain electronic
health care transactions, the use and disclosure of certain individually
identifiable patient health information, and the security of the electronic
systems maintaining this information. These are commonly known as the HIPAA
transaction and code set standards, privacy standards, and security standards.
Health insurance payers and healthcare providers like the Company must comply
with the new HIPAA standards. Violations of these HIPAA standards may include
civil money penalties and potential criminal sanctions.
BALANCED BUDGET ACT OF 1997
The Balanced Budget Act of 1997 ("the BBA") contained material adjustments
to both the Medicare and Medicaid programs, as well as further expansion of the
federal fraud and abuse laws. Specifically, the BBA created a civil monetary
penalty for violations of the federal anti-kickback statute whereby violations
will result in damages equal to three times the amount involved as well as a
penalty of $50,000 per violation. In addition, the new provisions expanded the
exclusion requirements so that any person or entity convicted of three health
care offenses is automatically excluded from federally funded health care
programs for life. Individuals or entities convicted of two offenses are subject
to mandatory exclusion of 10 years, while any provider or supplier convicted of
any felony may be denied entry into the Medicare program by the Secretary of HHS
if deemed to be detrimental to the best interests of the Medicare program or its
beneficiaries.
The BBA also provides that any person or entity that arranges or contracts
with an individual or entity that has been excluded from a federally funded
health care program will be subject to civil monetary penalties if the
individual or entity "knows or should have known" of the sanction.
STARK LAW
The original Stark Law, known as "Stark I" and enacted as part of the
Omnibus Budget Reconciliation Act of 1989, prohibits a physician from referring
Medicare patients for clinical laboratory services to entities with which the
physician (or an immediate family member) has a financial relationship, unless
an exception applies. Sanctions for violations of the Stark Law may include
denial of payment, refund obligations, civil monetary penalties and exclusion of
the provider from the Medicare and Medicaid programs. The Stark Law prohibits
the entity receiving the referral from filing a claim or billing for services
arising out of the prohibited referral.
Provisions of OBRA 93, known as "Stark II," amended Stark I to revise and
expand upon various statutory exceptions, to expand the services regulated by
the statute to a list of "Designated Health Services," and expanded the reach of
the statute to the Medicaid program. The provisions of Stark II generally became
effective on January 1, 1995, with the first phase of Stark II regulations
finalized on January 4, 2001. Most portions of the Phase I regulations became
effective in 2002. The additional Designated Health Services include: physical
therapy services; occupational therapy services; radiology services and certain
other imaging services; durable medical equipment and supplies; parenteral and
enteral nutrients, equipment and supplies; prosthetics, orthotics, and
prosthetic devices and supplies; home health services; outpatient prescription
drugs; and inpatient and outpatient hospital services. Phase I of the final
regulations implementing the Stark Law contains an exception for erythropoietin
(EPO) and certain other dialysis-related outpatient prescription drugs furnished
22
in or by an ESRD facility under many circumstances. Further, the final
regulations also adopt a definition of DME which effectively excludes ESRD
equipment and supplies from the category of Designated Health Services Phase II
of the final regulations to the Stark Law, which will address many of the
compensation exceptions, has not yet been released.
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 Medicare statute, including the filing of a false or
fraudulent claim and billing in excess of the amount permitted to be charged for
a particular item or service. Violations may also result in suspension of
payments, exclusion from the Medicare and Medicaid programs, as well as other
federal health care benefit programs, or forfeiture of assets.
In addition to the statutes described above, other criminal statutes may
be applicable to conduct that is found to violate any of the statutes described
above.
HEALTH CARE REFORM
Health care reform is considered by many in the U.S. to be a national
priority. Members of Congress from both parties and officials from the executive
branch are continuing to consider many health care proposals, some of which are
comprehensive and far-reaching in nature. Several states are also currently
considering health care proposals. It cannot be predicted what additional
action, if any, the federal government or any state may ultimately take with
respect to health care reform or when any such action will be taken. Health care
reform may bring radical changes in the financing and regulation of the health
care industry, which could have a material adverse effect on the business of the
Company and the results of its operations.
23
ITEM 2. PROPERTIES
The table below describes the Company's principal facilities as of the
date hereof.
FLOOR AREA
(APPROXIMATE CURRENTLY OWNED
LOCATION SQUARE FEET) OR LEASED USE
-------- ------------ --------- ---
Lexington, Massachusetts 200,000 leased Corporate headquarters and administration.
Walnut Creek, California 85,000 leased Manufacture of hemodialysis machines and
peritoneal dialysis cyclers; research and
development.
17,500 leased Warehouse Space - Machine components
Ogden, Utah 590,000 owned Manufacture polysulfone membranes and dialyzers
and peritoneal dialysis solutions; research and
development.
Delran, New Jersey 42,000 leased Manufacture of liquid hemodialysis concentrate
solutions.
Perrysburg, Ohio 35,000 leased Manufacture of dry hemodialysis concentrates.
Livingston, California 32,000 leased Manufacture of liquid hemodialysis concentrates.
Irving, Texas 70,000 leased Manufacture of liquid hemodialysis solution.
Reynosa, Mexico 150,000 leased Manufacture of bloodlines.
Fremont, California 72,000 leased Clinical laboratory testing
Rockleigh, New Jersey 85,000 leased Clinical Laboratory testing
- ----------
The lease on the Walnut Creek facility expires in 2012. The Company leases
16 warehouses throughout the U.S. These warehouses are used as regional
distribution centers for the Company's peritoneal dialysis products business.
All such warehouses are subject to leases with remaining terms not exceeding ten
years. At December 31, 2002, the Company distributed its products through all
these 16 warehouse facilities.
The Company leases its corporate headquarters in Lexington, Massachusetts.
This lease expires on October 31, 2007.
The Company's subsidiaries lease most of the dialysis centers,
manufacturing, laboratory, distribution and administrative and sales facilities
in the U.S. on terms which the Company believes are customary in the industry.
24
ITEM 3. LEGAL PROCEEDINGS
COMMERCIAL LITIGATION
The Company was formed as a result of a series of transactions pursuant to
the Agreement and Plan of Reorganization (the "Merger") dated as of February 4,
1996 by and between W.R. Grace & Co. and Fresenius AG. At the time of the
Merger, a W.R. Grace & Co. subsidiary known as W.R. Grace & Co.-Conn. had, and
continues to have, significant potential liabilities arising out of
product-liability related litigation, pre-Merger tax claims and other claims
unrelated to NMC, which was Grace's dialysis business prior to the Merger. In
connection with the Merger, W.R. Grace & Co.-Conn. agreed to indemnify the
Company, FMCH and NMC against all liabilities of W.R. Grace & Co., whether
relating to events occurring before or after the Merger, other than liabilities
arising from or relating to NMC's operations. W.R. Grace & Co. and certain of
its subsidiaries filed for reorganization under Chapter 11 of the U.S.
Bankruptcy Code (the "Grace Chapter 11 Proceedings") on April 2, 2001.
Pre-Merger tax claims or tax claims that would arise if events were to
violate the tax-free nature of the Merger, could ultimately be the obligation of
the Company. In particular, W. R. Grace & Co. has disclosed in its filings with
the Securities and Exchange Commission that: its tax returns for the 1993 to
1996 tax years are under audit by the Internal Revenue Service (the "Service");
W. R. Grace & Co. has received the Service's examination report on tax periods
1993 to 1996; that during those years Grace deducted approximately $122,100 in
interest attributable to corporate owned life insurance ("COLI") policy loans;
that W.R. Grace & Co. has paid $21,200 of tax and interest related to COLI
deductions taken in tax years prior to 1993; that a U.S. District Court ruling
has denied interest deductions of a taxpayer in a similar situation and that
W.R. Grace & Co. is seeking a settlement of the Service's claims. Subject to
certain representations made by W.R. Grace & Co., the Company and Fresenius AG,
W.R. Grace & Co. and certain of its affiliates agreed to indemnify the Company
against this and other pre-Merger and Merger related tax liabilities.
Prior to and after the commencement of the Grace Chapter 11 Proceedings,
class action complaints were filed against W.R. Grace & Co. and the Company by
plaintiffs claiming to be creditors of W.R. Grace & Co.- Conn., and by the
asbestos creditors' committees on behalf of the W.R. Grace & Co. bankruptcy
estate in the Grace Chapter 11 Proceedings, alleging among other things that the
Merger was a fraudulent conveyance, violated the uniform fraudulent transfer act
and constituted a conspiracy. All such cases have been stayed and transferred
to or are pending before the U.S. District Court as part of the Grace Chapter
11 Proceedings.
On February 6, 2003, the Company reached a definitive agreement with the
asbestos creditors' committees on behalf of the W.R. Grace and Co. bankruptcy
estate in the matters pending in the Grace Chapter 11 Proceedings (the
"Settlement Agreement") for the settlement of all fraudulent conveyance claims
against it and other claims related to the Company that arise out of the
bankruptcy of W.R. Grace & Co. Under the terms of the Settlement Agreement,
fraudulent conveyance and other claims raised on behalf of asbestos claimants
will be dismissed with prejudice and the Company will receive protection against
existing and potential future W.R. Grace & Co. related claims, including
fraudulent conveyance and asbestos claims, and indemnification against income
tax claims related to the non-NMC members of the W.R. Grace & Co. consolidated
tax group upon confirmation of a W.R. Grace & Co. bankruptcy reorganization plan
that contains such provision. Under the Settlement Agreement, the Company will
pay a total of $115,000 to the W.R. Grace & Co. bankruptcy estate, or as
otherwise directed by the Court, upon plan confirmation. No admission of
liability has been or will be made. The Settlement Agreement is subject to the
approval of the U.S. District Court. The foregoing summary of the material
terms of the Settlement Agreement is qualified in its entirety by reference to
the full text of the Settlement Agreement. The Settlement Agreement has been
filed as an exhibit to the Company's annual report for 2002 to the Securities
and Exchange Commission.
Subsequent to the Merger, W.R. Grace & Co. was involved in a multi-step
transaction involving Sealed Air Corporation (formerly known as Grace Holding,
Inc.). The Company is engaged in litigation with Sealed Air Corporation ("Sealed
Air") to confirm the Company's entitlement to indemnification from Sealed Air
for all losses and expenses incurred by the Company relating to pre-Merger tax
liabilities and Merger-related claims. Under the Settlement Agreement, upon
confirmation of a plan that satisfies the conditions to the Company's payment
obligation, this litigation will be dismissed with prejudice.
Since 1997, the Company, NMC, and certain NMC subsidiaries have been
engaged in litigation with various insurance companies concerning allegations of
inappropriate billing practices for nutritional therapy and diagnostic and
clinical laboratory tests and misrepresentations. These claims against the
Company seek unspecified damages and costs. The Company, NMC and its
subsidiaries believe that there are substantial defenses to the claims asserted,
and intend to vigorously defend all lawsuits. The Company has filed
counterclaims against the plaintiffs in these matters based on inappropriate
claim denials and delays in claim payments. Other private payors have contacted
the Company and may assert
25
that NMC received excess payments and, similarly, may join the lawsuits or file
their own lawsuit seeking reimbursement and other damages. Although the ultimate
outcome on the Company of these proceedings cannot be predicted at this time, an
adverse result could have a material adverse effect on the Company's business,
financial condition and results of operations.
OTHER LITIGATION AND POTENTIAL EXPOSURES
From time to time, the Company is a party to or may be threatened with
other litigation arising in the ordinary course of its business. Management
regularly analyzes current information including, as applicable, the Company's
defenses and insurance coverage and, as necessary, provides accruals for
probable liabilities for the eventual disposition of these matters.
The Company, like other health care providers, conducts its operations
under intense government regulation and scrutiny. The Company must comply with
regulations which relate to or govern the safety and efficacy of medical
products and supplies, the operation of manufacturing facilities, laboratories
and dialysis clinics, and environmental and occupational health and safety. The
Company must also comply with the Anti-Kickback Statute, the False Claims Act,
the Stark Statute, 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. 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 expects 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 large number facilities throughout the U.S. In such a
decentralized system, it is often difficult to maintain the desired level of
oversight and control over the thousands of individuals employed by many
affiliated companies. The Company relies upon its management structure,
regulatory and legal resources, and the effective operation of its compliance
program to direct, manage and monitor the activities of these employees. On
occasion, the Company may identify instances where employees, deliberately or
inadvertently, have submitted inadequate or false billings. The actions of such
persons may subject the Company and its subsidiaries to liability under the
Anti-Kickback Statute, the Stark Statute and False Claims Act, among other laws.
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.
ACCRUED SPECIAL CHARGE FOR LEGAL MATTERS
At December 31, 2001, the Company recorded a pre-tax special charge of
$258,000 to reflect anticipated expenses associated with the continued defense
and resolution of pre-Merger tax claims, Merger-related claims, and commercial
insurer claims. The costs associated with the Settlement Agreement will be
charged against this accrual. While the Company believes that its remaining
accruals reasonably estimate the Company's currently anticipated costs related
to the continued defense and resolution of the remaining matters, no assurances
can be given that the actual costs incurred by the Company will not exceed the
amount of these accruals.
26
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 FMCAG. The NMC Credit
Facilities and the indentures pertaining to the Senior Subordinated Notes of
FMCAG 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
On February 4, 2003, the Company announced it was exercising its right to
redeem all of its outstanding shares of the Class D Preferred Stock ("Class D
Shares"). The Class D Shares were issued to the common shareholders of W.R.
Grace & Co. in connection with the 1996 reorganization involving W.R. Grace and
Fresenius AG.
Class D Shares that have been properly transferred to, and received by,
the redemption agent will be redeemed commencing on March 28, 2003 at a
redemption price of $0.10 per share. The Company intends to redeem the 89
million outstanding Class D Shares at a total cash outflow of approximately
$8,900. This transaction will have no earnings impact on the Company. After
March 28, 2003 the Class D Shares will cease to be deemed issued and outstanding
shares of the Company's capital stock and will be restored to the status of
authorized but unissued shares of preferred stock.
27
ITEM 6. SELECTED FINANCIAL DATA
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
(Dollars in Millions, Except Shares and Per Share Data) 2002 2001 2000 1999 1998
-------- -------- -------- -------- --------
Statement of Operations Data
Continuing Operations
Net sales $ 3,750 $ 3,609 $ 3,089 $ 2,815 $ 2,571
Cost of Sales 2,650 2,510 2,109 1,880 1,707
-------- -------- -------- -------- --------
Gross Profit 1,100 1,099 980 935 864
Selling, general and administrative and
research and development 605 675 560 540 529
Special charge for settlement of investigation
and related costs -- -- -- 601 --
Special charge for legal matters -- 258 -- -- --
-------- -------- -------- -------- --------
Operating income (loss) 495 166 420 (206) 335
Interest expense (net) 210 226 187 202 209
Interest expense on settlement of investigation (net) -- -- 30 -- --
-------- -------- -------- -------- --------
Income (loss) from continuing operations before
income taxes, extraordinary item and cumulative
effect of changes in accounting for start up costs 285 (60) 203 (408) 126
Provision (benefit) for income tax 114 19 98 (81) 74
-------- -------- -------- -------- --------
Net income (loss) from continuing operations
before extraordinary item and cumulative
effect of changes in accounting for
start up costs 171 (79) 105 (327) 52
Extraordinary loss on early redemption of
borrowings from affiliates, net of tax benefit of $6 10 -- -- -- --
-------- -------- -------- -------- --------
Net income (loss) from continuing operations
before cumulative effect of change in accounting
for start up costs $ 161 $ (79) $ 105 $ (327) $ 52
-------- -------- -------- -------- --------
Discontinued Operations
Loss from discontinued operations, net of
income taxes -- -- -- -- (9)
Loss on disposal of discontinued operations,
net of income tax Benefit -- -- -- -- (97)
-------- -------- -------- -------- --------
Loss from discontinued operations -- -- -- -- (106)
-------- -------- -------- -------- --------
Cumulative effect of change in accounting for start
up costs, net of tax benefit -- -- -- -- (5)
Net income (loss) $ 161 $ (79) $ 105 $ (327) $ (59)
======== ======== ======== ======== ========
Net Income (loss) Per Common and Common
Equivalent Share:
Continuing Operations $ 1.89 $ (0.89) $ 1.16 $ (3.64) $ 0.57
Extraordinary loss (0.10) -- -- -- --
Discontinued Operations -- -- -- -- (1.18)
Cumulative effect of accounting change -- -- -- -- (0.05)
Net Income 1.79 (0.89) 1.16 (3.64) (0.66)
Weighted average number of shares of
Common stock and common stock equivalents:
90,000 90,000 90,000 90,000 90,000
Primary (000's)
AT DECEMBER 31,
--------------------------------------------------------
2002 2001 2000 1999 1998
-------- -------- -------- -------- --------
Balance Sheet Data:
Working capital (deficit) $ (73) $ (176) $ (154) $ (456) $ 294
Total assets 5,010 5,003 4,553 4,645 4,613
Total long term debt and capital lease obligations 618 302 589 616 1,014
Mandatorily redeemable preferred securities 771 692 305 -- --
Stockholders' equity 1,723 1,598 1,726 1,622 1,949
28
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 and
clinical laboratory testing 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 59%
in 2002). The reimbursement rates under these programs, including the Composite
Rate, the reimbursement rate for EPO, and the reimbursement rate for other
dialysis and non-dialysis related services and products, as well as other
material aspects of these programs, have in the past and may in the future be
changed as a result of deficit reduction and health care reform measures.
The Company also derives a significant portion of its net revenues from
reimbursement by non-government payors. Historically, reimbursement rates paid
by these payors generally have been higher than Medicare and other government
program rates. However, non-government payors are imposing cost containment
measures that are creating significant downward pressure on reimbursement levels
that the Company receives for its services and products.
SPECIAL CHARGE FOR LEGAL MATTERS
In the fourth quarter of 2001, the Company recorded a $258 million ($177
million after tax) special charge to address 1996 merger-related legal matters,
estimated liabilities and legal expenses arising in connection with the Grace
Chapter 11 Proceedings and the cost of resolving pending litigation and other
disputes with certain commercial insurers.
The Company accrued $172 million principally representing a provision for
income taxes payable for the years prior to the 1996 merger for which the
Company has been indemnified by W.R. Grace, but may ultimately be obligated to
pay as a result of Grace's Chapter 11 Proceedings. In addition, that amount
included the estimated costs of defending the Company in all litigation arising
out of Grace's Chapter 11 Proceedings.
The Company included $55 million in the special charge to provide for
settlement obligations, legal expenses and the resolution of disputed accounts
receivable relating to various insurance companies.
The remaining amount of the special charge ($31 million) was accrued
mainly for (i) assets and receivables that are impaired in connection with other
legal matters and (ii) anticipated expenses associated with the continued
defense and resolution of the legal matters.
At December 31, 2002, there is a remaining balance of $191 million for the
accrual for the special charge for legal matters. The Company believes that
these reserves are adequate for the settlement of all matters described above.
During the year ended December 31, 2002, $33 million in charges were applied
against the accrued special charge for legal matters. See also Note 17 -
"Commitments and contingencies - Accrued Special Charge for Legal Matters."
29
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)
2002 2001 2000
------- ------- -------
NET REVENUES
Dialysis Services ..................... $ 3,311 $ 3,149 $ 2,625
Dialysis Products ..................... 763 755 717
Intercompany Eliminations ............. (324) (295) (253)
------- ------- -------
Net Revenues .............................. $ 3,750 $ 3,609 $ 3,089
======= ======= =======
Operating Earnings:
Dialysis Services ..................... $ 411 $ 422 $ 403
Dialysis Products ..................... 143 138 118
------- ------- -------
Operating Earnings ........................ 554 560 521
------- ------- -------
Other Expenses:
General Corporate ..................... $ 50 $ 131 $ 97
Research & Development ................ 9 5 4
Interest Expense, Net ................. 210 226 187
Interest Expense on Settlement, Net ... -- -- 30
Special Charge for Legal Matters ...... -- 258 --
------- ------- -------
Total Other Expenses ...................... 269 620 318
------- ------- -------
Income (Loss) Before Income Taxes and
Extraordinary Item ..................... 285 (60) 203
Provision for Income Taxes ................ 114 19 98
------- ------- -------
Net Income (Loss) Before Extraordinary Item $ 171 $ (79) $ 105
------- ------- -------
Extraordinary Loss ........................ 10 -- --
------- ------- -------
Net Income (Loss) ......................... $ 161 $ (79) $ 105
------- ------- -------
30
YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001
Net revenues for the year ended December 31, 2002 increased by $141
million (4%) over the year ended December 31, 2001. Excluding the extraordinary
loss on the early redemption of borrowings from affiliates of $10 million after
tax in 2002 and the special charge for the settlement of legal matters in 2001
of $258 million ($177 after tax), net income for 2002 increased by 74% to $171
million as compared to $98 million in 2001. This increase results from the
elimination of amortization for goodwill and intangible assets with indefinite
useful lives in accordance with SFAS No. 142 that was adopted effective January
1, 2002. Had SFAS No. 142 been adopted as of January 1, 2001 net earnings
would have decreased by 10% ($19 million) from $190 million in 2001.
DIALYSIS SERVICES
Dialysis Services net revenues increased by 5% to $3,294 million (net of
$17 million of intercompany sales) as compared to $3,132 million in 2001 due to
growth in base business. The growth in base business revenue is primarily
related to treatment growth. For the years ended 2002 and 2001, EPO represented
approximately 27% of dialysis services revenue.
At December 31, 2002, approximately 79,600 patients were being treated in
approximately 1,080 clinics that the Company owns, operates or manages compared
to approximately 76,600 patents treated in approximately 1,030 clinics at
December 31, 2001. The average revenue rate per treatment, excluding laboratory
testing revenue increased from $273 in 2001 to $274 in 2002. Including
laboratory testing revenues, the average revenue per treatment increased from
$284 in 2001 to $285 in 2002.
Dialysis Services operating earnings decreased by 3% ($11 million) in 2002
as compared to 2001 resulting in a decrease in operating margin from 13.5 % in
2001 to 12.5 % in 2002. The reduction in operating earnings and margin is
primarily due to costs associated with the conversion to single use dialyzers,
price increases for EPO, higher bad debt expense, increased facility costs,
other general cost increases and one-time severance and other payroll costs
related to workforce reductions partially offset by the elimination of
amortization of goodwill and intangible assets with indefinite useful lives in
accordance with SFAS 142 which was adopted effective January 1, 2002. Had SFAS
142 been adopted as of January 1, 2001 operating earnings would have decreased
by 10% to $411 million as compared to $457 million in 2001 resulting in a
decrease in operating margin from 14.6% in 2001 to 12.5% in 2002.
DIALYSIS PRODUCTS
Dialysis Products gross revenues increased by 1% to $763 million in 2002
as compared to $755 million in 2001. Internal sales to Dialysis Services
increased by 10% to $306 million from $278 million in 2001 and were partially
offset by a decrease in external sales of 4% to $457 million as compared to $477
million in 2001. Dialysis Product external sales include both (i) sales of
machines to a third party leasing company which are leased back by Dialysis
Services and (ii) Method II PD revenues for Dialysis Service patients. Dialysis
Products measures its external sales performance based on sales to the "net
available external market." The net available external market excludes machine
sales and Method II revenues involving Dialysis Services as well as sales to
other vertically integrated dialysis companies. Net available external market
sales increased by 6% to $373 million in 2002 as compared to $351 million in
2001.
Operating earnings increased by 4% to $143 million in 2002 as compared to
$138 million in 2001 resulting in an improvement in operating margin from 28.9%
in 2001 to 31.3% in 2002. The improvement in operating earnings and margin is
primarily due to the reduction in amortization due to the implementation of SFAS
142 effective January 1, 2002 and improvements in gross margin partially offset
by increases in operating expenses. Had SFAS 142 been adopted as of January 1,
2001 operating earnings would have decreased by 2% to $143 million as compared
to $146 million in 2001. The operating margin of 31.3% in 2002 continues to show
improvement over a 2001 operating margin of 30.6% after adjustment for SFAS 142
due to favorability in gross margin partially offset by increases in operating
expenses.
OTHER EXPENSES
Excluding the effect of the special charge for legal matters of $258
million in 2001, other expenses have decreased by 26% to $269 million as
compared to $362 million in 2001 due to decreases in general corporate expenses
resulting primarily from the elimination of amortization expense for goodwill
and other intangible assets with indefinite useful lived assets according to
SFAS 142 which was adopted effective January 1, 2002. Had SFAS 142 been adopted
as of January 1, 2001 other expenses would have decreased by 10% or $30 million
due to decreased interest expense, reductions in general corporate costs and a
one-time gain on the curtailment of the Company's employee retirement plans
partially offset by
31
increased research and development costs. The improvement in interest expense is
due to an overall reduction in outstanding debt as well as a change in the mix
of debt instruments.
EXTRAORDINARY LOSS
On June 27, 2002, the Company repaid its intercompany debt to FMC Finance
S.a.r.l. in the amount of $351 million, originally due in 2006, utilizing funds
borrowed under its senior credit facility. An extraordinary loss of $10 million,
net of a tax benefit of $6 million, was recorded for the premium owed to FMC
Finance S.a.r.l. in the event of the early retirement of this obligation in
accordance with the terms of the intercompany debt agreement.
INCOME TAXES
The Company has recorded income tax provisions of $114 million and $19
million in 2002 and 2001, respectively. Approximately $81 million of the
increased provision is related to the tax benefits resulting from the special
charge for settlement of legal matters recorded in 2001. Increased state tax
provisions and other adjustments to earnings generate the remaining increase in
provision in 2002.
YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000
Net revenues for the year ended December 31, 2001 increased by 17% ($520
million) over the comparable period in 2000. Excluding the effects of the
special charge for legal matters of $258 million ($177 million after tax)
recorded in the fourth quarter 2001, net income for the year 2001 would have
decreased by 7% ($7 million) as a result of increased operating earnings ($39
million), offset by increased corporate expense ($34 million, including foreign
exchange losses of $15 million), interest expense ($9 million) and income taxes
($2 million).
DIALYSIS SERVICES
Dialysis Services net revenues increased by 20% to $3,132 million (net of
$17 million of intercompany sales); 10% attributable to base business revenue
growth and 10% to acquisitions. The increase in dialysis services revenue
resulted primarily from a $404 million (15%) increase in treatment volume,
reflecting both base business growth and the impact of 2001 and 2000
acquisitions. Revenue was also favorably impacted by an increase in revenue per
treatment of approximately $118 million (5%) as an aggregate result of increased
Medicare reimbursement rates, increased ancillary services and introduction of
perfusion services, as compared to 2000. For the year 2001 EPO represented
approximately 27% of dialysis services revenue and approximately 24% of total
revenue.
Medicare reimbursement rates increased 1.2% as of January 1, 2001 due to
legislation passed in January 2000. Additional legislation passed during the
fourth quarter 2000 provided for an additional 1.2% rate increase. However, this
second increase was delayed until April 1, 2001 at which time rates were
increased to make up for this delay. Dialysis Services operating earnings grew
by 5% in 2001 due primarily to increased treatment volume, improved treatment
rates, increased ancillary services and increased earnings from laboratory
testing. The operating earnings margin decreased 2% from 15.4% in 2000 to 13.4%
in 2001. This was mainly due to delayed earnings contributed from the Everest
acquisition, expenses caused by dialysis services converting from re-use to
single use dialyzers, an increase in personnel expenses not fully compensated
for by the increase in reimbursement rates, higher bad debt expenses relating to
changes in payor mix and aging of accounts receivable and increased costs to
certify new clinics. The lower operating earnings contribution from Everest was
caused by transition and integration costs that occurred during the first half
of the year.
DIALYSIS PRODUCTS
Dialysis Products net revenues decreased slightly to $477 million (net of
$278 million of intercompany sales). This is primarily attributable to a
shortfall in reuse dialyzer sales, increased sales of single use dialyzers and a
loss of large sales accounts.
Dialysis Products operating earnings increased by 17% to $138 million.
This increase was primarily the result of decreased freight and distribution
costs (4%), improvements in gross margin (4%), and reductions in other
manufacturing and operating costs (9%).
OTHER EXPENSES
Excluding the effects of the special charge for legal matters of $258
million recorded in the fourth quarter of 2001, the
32
Company's other expenses for 2001 increased by 14% ($44 million) over the
comparable period of 2000. General corporate expenses increased by $34 million
and interest expense increased by $9 million. The increases in general corporate
expenses were primarily due to foreign exchange fluctuations ($15 million
resulting from $7 million foreign exchange losses in 2001 versus $8 million
foreign exchange gains in 2000), increased health and general liability
insurance costs ($8 million), increased legal fees ($2 million) and increases in
other general expenses ($9 million).
The increase of $9 million in interest expense is the net result of
increased expenses of $39 million related to a change in mix of debt instruments
offset by $30 million decrease in interest expense recorded in 2000 related to
the settlement of the OIG investigation in 2000.
INCOME TAXES
The Company has recorded income tax provisions of $19 million and $98
million for the years 2001 and 2000, respectively. Excluding the tax benefit of
$81 million for the special charge for legal matters, the effective income tax
rate of 2001 is higher than 2000 due primarily to non-deductible merger
goodwill.
LIQUIDITY AND CAPITAL RESOURCES
YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001
The Company's cash requirements in 2002 and 2001, including acquisitions
and capital expenditures, were funded by cash generated by operations,
additional intercompany borrowings, borrowings under its credit facility and
proceeds from a receivable financing facility.
The Company generated cash from operations of $322 million in 2002 as
compared to $354 million during 2001. The decrease in operating cash of $32
million is primarily related to higher interest payments of $44 million,
increased tax payments of $62 million and payments related to the special charge
for settlement of legal matters of $25 million partially offset by improvements
in accounts receivable of $73 million resulting from favorable cash collections,
improvements in inventory management of $20 million and net other movement in
working capital of $6 million. The strong cash collections in 2002 resulted in
approximately a nine-day decrease in days sales outstanding.
Cash from operations is impacted by the profitability of our business and
the development of working capital, especially accounts receivable. The
profitability of our business depends significantly on reimbursement rates.
Approximately 88% of the Company's revenues are generated from the provision of
dialysis services with approximately 66% of this revenue reimbursed by
government funded Medicare and Medicaid programs. Legislative changes may affect
the reimbursement rates under these programs for the services that we provide. A
decrease in reimbursement rates could have a material adverse effect on our
business, financial condition and results of operations and the Company's
ability to generate cash flow.
Net cash used in investing activities was $143 million in 2002 as compared
to $436 million in 2001. The Company funded its acquisitions and capital
expenditures primarily through cash flows from operations in 2002 and cash flows
from operations and intercompany borrowings in 2001.
The decrease in cash used in investing is related to decreased acquisition
spending ($252 million) and reductions in capital expenditures ($19 million) and
equity investments ($22 million).
During 2001, the Company completed the acquisition of Everest Healthcare
for a purchase price of approximately $365 million. Approximately $99 million of
the purchase price was funded by the issuance of 2.25 million FMCAG preference
shares to the Everest shareholders. The remaining purchase price was paid in
cash of approximately $266 million, including debt assumed. The remaining $23
million of acquisition spending in 2001 was for the purchase of small groups of
clinics or individual clinics. Acquisition spending in 2002 was approximately
$37 million with no individually significant transactions such as the Everest
acquisition in 2001.
Capital expenditures totaling $105 million and $125 million in 2002 and
2001, respectively, were made for new clinics, improvements to existing clinics,
a buyout of operating leases for dialysis machines and expansion and maintenance
of production facilities. During 2001, the Company made an investment of
approximately $22 million in FMC Cardiovascular Resources for a 45% equity
interest in that venture. There were no similar significant investments in 2002.
The Company has financed the expansion of its dialyzer production capacity
by entering into sales-leaseback transactions with independent financing
companies. Under these financing arrangements the assets are sold to the
financing company at construction costs and then leased-back under operating
leases. Financing of $25 million and $28 million was obtained in 2002 and 2001,
respectively, under these types of arrangements. Accordingly, these amounts are
not reported as capital expenditures.
Net cash flows used in financing activities were $176 million in 2002 as
compared to cash flows provided by financing activities of $75 million in 2001
for a change in cash used in financing activities of $251 million. Cash used in
financing activities in 2002 is principally related to the repayment of
borrowings from affiliates of $366 million, including a premium of $16 million
for the early redemption. Approximately $165 million was drawn down under the
Company's credit facility to partially offset this use of cash. During 2001,
cash was provided by financing activities primarily due to an increase in
borrowings from affiliates of $169 million partially offset by payments of $86
million related to the settlement of the investigation in 1999. Also in 2001,
the Company received proceeds of $284 million from the issuance of mandatorily
redeemable preferred securities that were used to pay-down external debt and
capital leases of $290 million.
The Company has an asset securitization facility (the "Accounts Receivable
Facility") whereby receivables are sold to NMC Funding Corporation (the
"Transferor"), a wholly owned subsidiary, and subsequently the Transferor
transfers and assigns percentage ownership interests in receivables to certain
bank investors. The maximum borrowing limit available under the Accounts
Receivable Facility is $560 million at December 31, 2002. The facility matures
on October 23, 2003.
For the twelve months ended December 31, 2002, the Company increased its
borrowings under the Accounts Receivable Facility by $3 million to $445 million.
Outstanding amounts under the Accounts Receivable Facility are reflected as
reductions in accounts receivable.
Cash from short-term borrowings can be generated by borrowings under the
Accounts Receivable Facility and through borrowings from affiliates. Long-term
financing is provided by the revolving credit portion of our senior credit
facility and the issuance of mandatorily redeemable preferred securities. We
believe that our existing credit facilities, cash generated from operations and
other current sources of financing are sufficient to meet our foreseeable cash
requirements.
At December 31, 2002, the Company had approximately $381 million of
borrowing capacity available under revolving portion of our senior credit
facility. On February 21, 2003 the Company and FMCAG entered into an amended
and restated credit agreement ("2003 Senior Credit Agreement") with the Bank of
America N. A., Credit Suisse First Boston, Dresdner Bank AG New York, JPMorgan
Chase Bank, the Bank of Nova Scotia, and certain other financial institutions.
Pursuant to the agreement, the Lenders have made available to the Company and
certain subsidiaries and affiliates an aggregate of up to $1.5 billion through
three credit facilities. The three facilities are a revolving facility of $500
million and two term loan facilities of $500 million each. The Company used the
initial borrowings under the 2003 Senior Credit Agreements to refinance
outstanding borrowings under our prior senior credit agreement and for general
corporate purposes (See Note 21 of the Consolidated Financial Statements).
The 2003 Senior Credit Agreement includes covenants that require FMCAG to
maintain certain financial ratios or meet other financial tests. Under the
Senior Credit Agreement, FMCAG is obligated to maintain a minimum consolidated
net worth, a minimum consolidated fixed charge ratio (ratio of earnings before
interest, taxes, depreciation, amortization and rent to fixed charges) and a
certain consolidated leverage ratio (ratio of consolidated funded debt to
EBITDA). In addition, the 2003 Senior Credit Agreement includes other covenants
which, among other things, restrict or have the effect of restricting the
Company's ability to dispose of assets, incur debt, pay dividends, create liens
or make capital expenditures, investments or acquisitions. The breach of any of
the covenants could result in a default under the credit agreement. In default,
the outstanding balance under the 2003 Senior Credit Agreement becomes due.
33
OBLIGATIONS
CONTRACTUAL CASH OBLIGATIONS
PAYMENTS DUE BY PERIOD OF
-------------------------------------------
TOTAL 1 YEAR 1-5 YEARS OVER 5 YEARS
---------- ---------- ---------- ------------
Mandatorily Redeemable Preferred Securities $ 771,209 $ 771,209 -- $ --
Long Term Debt 618,740 1,840 616,900 --
Capital Lease Obligations 1,583 463 1,120 --
Operating Leases 970,691 202,985 640,172 127,534
Unconditional Purchase Obligation 170,824 58,995 78,619 33,210
Borrowings from Affiliates 970,087 315,394 -- 654,693
---------- ---------- ---------- ----------
Total Contractual Cash Obligations $3,503,134 $1,350,886 $1,336,811 $ 815,437
========== ========== ========== ==========
OTHER COMMERCIAL COMMITMENTS EXPIRATION PER PERIOD OF
-------------------------------------------
TOTAL 1 YEAR 1-5 YEARS OVER 5 YEARS
---------- ---------- ---------- ------------
Unused Senior Credit Lines $ 165,000 $ -- $ 165,000 $ --
Standby Letters of Credit 215,845 -- 215,845 --
---------- ---------- ---------- ----------
Total Other Commercial Commitments $ 380,845 $ -- $ 380,845 $ --
========== ========== ========== ==========
34
YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000
The Company's cash requirements in 2001 and 2000, including acquisitions
and capital expenditures, have been funded by cash generated from operations,
additional intercompany borrowings, borrowings under the credit facility ("NMC
Credit Facility"), and net increases in a receivable financing facility.
Cash from operations has increased by $91 million from $263 million in
2000 to $354 million in 2001. The improvement is primarily related to favorable
changes in operating assets and liabilities of $382 million offset by decreased
earnings ($184 million, including the special charge for legal matters) and
decreases in net income adjustments of $107 million.
The movement in operating assets and liabilities includes the collection
of $5 million related to IDPN receivables. Increases in accounts receivable of
$133 million for the period ended December 31, 2001 are primarily due to the
Company's revenue growth and the impact of acquisitions, offset by a two day
reduction in days sales outstanding. Decreases in accounts payable were
primarily due to timing of disbursements. Cash on hand was $27 million and $33
million at December 31, 2001 and 2000, respectively.
Net cash flows used in investing activities totaled $436 million in 2001
compared to $220 million in 2000. The Company funded its acquisitions and
capital expenditures primarily through cash flows from operations and
intercompany borrowings. Cash expenditures for acquisitions totaled $289 million
in 2001 (including Everest for $266 million) and $116 million in 2000,
respectively, net of cash acquired. In 2001, the Company also funded another $99
million in consideration for Everest through the issuance of 2.25 million FMCAG
preference shares. Capital expenditures of $125 million and $104 million in 2001
and 2000, respectively, were made for new clinics, improvements to existing
clinics and expansion and maintenance of production facilities.
Net cash flows provided by financing activities totaled $75 million in
2001 compared to net cash flows used of $23 million in 2000. For the twelve
months ended December 31, 2001, the Company made final payments to the U.S.
Government totaling $86 million pursuant to the January 2000 Settlement
Agreement. In addition, debt and capital lease obligations decreased by $290
million, primarily due to the pay down of the Company's credit facility of $282
million. Proceeds from financing activities in 2001 included $284 million (net
of mark to market change of $5 million) for the issuance of mandatorily
redeemable preferred stock to an affiliated company.
The Company has an asset securitization facility (the "Accounts Receivable
Facility") whereby receivables of NMC and certain affiliates are sold to NMC
Funding Corporation (the "Transferor"), a wholly-owned subsidiary of NMC, and
subsequently the Transferor transfers and assigns percentage ownership interests
in receivables to certain bank investors. The amount of the accounts receivable
facility was last amended on December 21, 2001, when the Company increased the
accounts receivable facility to $560 million and extended its maturity to
October 24, 2002.
For the twelve months ended December 31, 2001, the Company had decreased
its borrowings under the accounts receivable facility by $3 million from $445
million at December 31, 2000 to $442 million at December 31, 2001. Outstanding
amounts under the Accounts Receivable Facility are reflected as reductions in
accounts receivable.
The Company's capacity to generate cash from the accounts receivable
facility depends on the availability of sufficient accounts receivable that meet
certain criteria defined in the agreement with the third party funding
corporation. A lack of availability of such accounts receivable may have a
material impact on the Company's ability to utilize the facility for its
financial needs.
CRITICAL ACCOUNTING POLICIES
The Company has identified the following selected accounting policies and
issues that the Company believes are critical to understand the financial
reporting risks presented in the current economic environment. These matters and
judgments, and uncertainties affecting them, are also essential to understand
the Company's reported and future operating results. See Notes to Consolidated
Financial Statements - Note 2, "Summary of Significant Accounting Policies"
included in the Company's 2002 report on Form 10-K.
RECOVERABILITY OF GOODWILL AND INTANGIBLE ASSETS
The growth of the Company's business through acquisitions has created a
significant amount of intangible assets, including goodwill, patient
relationships, tradenames and other intangibles. At December 31, 2002, the
carrying amount of
35
net intangible assets amounted to $3,427 million representing approximately 68%
of the Company's total assets. In accordance with Statement of Financial
Accounting Standards No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, the Company reviews the carrying value of our long-lived
assets for impairment at least once a year, at the end of the year, or whenever
events or changes in circumstances indicate that the carrying amount of assets
might be impaired.
To comply with the provisions of SFAS No. 142, the fair value of the
reporting unit is compared to the reporting unit's carrying amount. The Company
estimates the fair value of each reporting unit using estimated future cash
flows for the unit discounted by a weighted average cost of capital specific to
that unit. Estimated cash flows are based on our budgets for the next three
years, and projections for the following years based on an expected growth rate.
The growth rate is based on industry and internal projections. The discount
rates reflect any inflation in local cash flows and risks inherent to each
reporting unit.
If the fair value of the reporting unit is less than its carrying value, a
second step is performed which compares the fair value of the reporting unit's
goodwill to the carrying value of its goodwill. If the fair value of the
goodwill is less than its carrying value, the difference is recorded as an
impairment charge.
A prolonged downturn in the healthcare industry with lower than expected
increases in reimbursement rates and/or higher than expected costs for providing
healthcare services could adversely affect our estimated future cashflows.
Future adverse changes in a reporting unit's economic environment might affect
the discount rate. A decrease in our estimated future cash flows and/or a
decline in the macroeconomic environment could result in impairment charges to
goodwill and other intangible assets which could materially and adversely affect
our future financial position and operating results.
LEGAL CONTINGENCIES
The Company is a party to certain litigation including the commercial
insurer litigation, W.R. Grace & Co. bankruptcy and Sealed Air Corporation
indemnification litigation and other litigation arising in the ordinary course
of the Company's business as described in Note 17 "Commitments and
Contingencies" in the Company's Consolidated Financial Statements. The outcome
of these matters may have a material effect on the Company's financial position,
results of operations or cash flows.
The Company regularly analyzes current information relating to these
litigation matters and provides accruals for probable contingent losses
including the estimated legal expenses to resolve the matter. In its decisions
regarding the recording of litigation accruals, the Company considers the
probability of an unfavorable outcome and its ability to make a reasonable
estimate of the amount of contingent loss.
If an unfavorable outcome is probable but the amount of loss cannot be
reasonably estimated by management, appropriate disclosure is provided, but no
contingent losses are accrued. The mere filing of a suit or formal assertion of
a claim or assessment does not necessarily require the recording of an accrual.
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. 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. The Company records an allowance for estimated
uncollectible accounts receivable based upon an analysis of historical
collection experience. The analysis considers differences in collection
experience by payor mix and aging of the accounts receivable. From time to time,
the Company reviews the accounts receivable for changes in historical collection
experience to ensure the appropriateness of the allowances.
A significant change in collection experience, a deterioration of the
aging of accounts receivable, or a significant change in the mix of payers may
adversely affect the Company's estimate of the allowance for doubtful accounts.
Consequently, it is possible that our future operating results could be
materially and adversely affected by additional charges for bad debt and our
cash flows may be reduced by lower collection of receivables.
Net Revenues from machine sales to a third party leasing company where
there is a leaseback of the machines by the Dialysis Services Division were
$30.5 million, $46.2 million, and $54.5 million for the twelve months ended
December 31, 2002, 2001, and 2000, respectively. The profits on these sales are
deferred and amortized to earnings over the lease terms.
36
SELF INSURANCE PROGRAMS
The Company is self-insured for professional, product and general
liability, auto and worker's compensation claims up to predetermined amounts
above which third party insurance applies. Estimates include ultimate costs for
both reported and incurred but not reported claims.
IMPACT OF INFLATION
A substantial portion of the Company's net revenue is subject to
reimbursement rates which are regulated by the federal government and do not
automatically adjust for inflation. Moreover, non-governmental payors continue
to exert downward pressure on reimbursement levels. Increased operating costs
that are subject to inflation, such as labor and supply costs, without a
compensating increase in reimbursement rates, may adversely affect the Company's
business and results of operations.
RECENTLY ISSUED ACCOUNTING STANDARDS
In July 2001, the FASB issued SFAS No. 141, Business Combinations, and
SFAS No. 142, Goodwill and Other Intangible Assets. Provisions of SFAS 142
related to acquisitions completed after July 1, 2001 were adopted effective as
of July 1, 2001. The Company adopted all other provisions of SFAS 142 effective
January 1, 2002. The effect on prior years income is described in Note 7 of the
Consolidated Financial Statements.
In August 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations ("SFAS 143"). SFAS 143 addresses the reporting
requirements for the retirement of tangible long-lived assets and asset
retirement costs. SFAS 143 requires that the fair value of a liability for an
asset retirement obligation be recognized in the period incurred if a reasonable
estimate of fair value can be made. The associated asset retirement costs must
be capitalized as part of the carrying amount of the long-lived asset. The
Company will adopt SFAS No. 143 effective January 1, 2003. The adoption of SFAS
No. 143 will not have a material impact on the Company's financial statements.
In October 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets ("SFAS 144"). SFAS 144 requires that
those long-lived assets be measured at the lower of carrying amount or fair
value less selling costs. SFAS 144 also broadens the reporting of discontinued
operations and provides that discontinued operations will no longer be measured
at net realizable value or include amounts for operating losses that have not
yet occurred. SFAS No. 144 was adopted effective January 1, 2002. The adoption
of SFAS 144 did not have an impact on the Company's financial statements.
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13 and Technical Corrections
("SFAS 145"). SFAS 145 rescinds Statement No. 4 and requires the criteria under
Opinion 30 to determine if losses from extinguishment of debt should be
classified as extraordinary items. SFAS 145 amends Statement No. 13 to require
that certain lease modifications that have economic effects similar to
sale-leaseback arrangements be accounted for in a similar manner as
sale-leaseback transactions. The Company will adopt SFAS No. 145 as related to
SFAS No. 4 effective January 1, 2003. In the first quarter 2002, the Company
reported an extraordinary loss of $9.8 million for the early redemption of
borrowings from affiliates. This extraordinary loss will be reclassified and
presented as a loss from operating earnings. The Company adopted the remaining
provisions of SFAS 145 effective April 1, 2002.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities (SFAS 146). SFAS 146 nullifies EITF
94-3, Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).
The principal difference between this statement and EITF 94-3 relates to the
requirements for the recognition of a liability for a cost associated with an
exit or disposal activity. SFAS 146 requires that a liability for a cost
associated with an exit or disposal activity be recognized when the liability is
incurred. Under EITF 94-3, a liability for an exit cost was recognized at the
date of an entity's commitment to an exit plan. The provisions of SFAS 146 are
effective for exit or disposal activities that are initiated after December 31,
2002.
In November 2002, the FASB issued FASB Interpretation No. 45 ("Fin 45"),
Guarantor's Accounting and Disclosure Requirements for Guarantees of
Indebtedness of Others. FIN 45 requires a guarantor to recognize a liability
measured at fair value at the inception of a guarantee for obligations
undertaken, including its obligation to stand ready to perform over the term of
the guarantee. The initial recognition and measurement provisions are applicable
prospectively to guarantees issued or modified after December 31, 2002. FIN 45
also clarifies and expends the disclosure requirements related to guarantees and
product warranties. The Company adopted those disclosures on December 31, 2002.
37
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation-Transition and Disclosure - an amendment of FASB Statement No. 123.
Accounting for Stock-Based Compensation to provide alternative methods for a
change to the fair value based method of accounting for stock-based employee
compensation. It also amends the disclosure requirements of SFAS No. 123 to
require disclosures in both annual and interim financial statements of the
method of accounting for stock-based employee compensation and the effect the
method used had on reported results. The Company adopted the annual disclosure
requirement on December 31, 2002.
In January 2003, the Financial Accounting Standards Board issued FASB
Interpretation No. 46 ("Fin 46") Consolidation of Variable Interest Entities.
FIN 46 addresses the consolidation of variable interest entities by the primary
beneficiary, when the total equity investment at risk is not sufficient to
permit the entity to finance its activities without additional subordinated
support from other parties and / or the equity investor lacks certain essential
characteristics of a controlling financial interest. FIN 46 requires existing
variable interest entities to be consolidated if those entities do not
effectively disburse risk among the parties involved. The interpretation becomes
effective at various dates in 2003 and provides various transition rules. The
adoption of FIN 46 has no material impact on the Company's financial statements.
38
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risks due to changes in interest rates
and foreign currency rates. The Company uses derivative financial instruments,
including interest rate swaps and foreign exchange contracts, as part of its
market risk management strategy. These instruments are used as a means of
hedging exposure to interest rate and foreign currency fluctuations in
connection with debt obligations and purchase commitments. The Company does not
hold or issue derivative instruments for trading or speculative purposes.
Hedge accounting is applied if the derivative reduces the risk of the
underlying hedged item and is designated at inception as a hedge. Additionally,
changes in the value of the derivative must result in payoffs that are highly
correlated to the changes in value of the hedged item. Derivatives are measured
for effectiveness both at inception and on an ongoing basis.
The Company enters into foreign exchange contracts that are designated as,
and effective as, hedges for forecasted purchase transactions. Also, since the
Company carries a substantial amount of floating rate debt, the Company uses
interest rate swaps to synthetically change certain variable-rate debt
obligations to fixed-rate obligations to mitigate the impact of interest rate
fluctuations.
Gains and losses on foreign exchange contracts accounted for as hedges are
deferred in other assets or liabilities. The deferred gains and losses are
recognized as adjustments to the underlying hedged transaction when the future
sales or purchases are recognized. Interest rate swap payments and receipts are
recorded as part of interest expense. The fair value of the swap contracts is
recognized in other liabilities in the financial statements. Cash flows from
derivatives are recognized in the consolidated statement of cash flows in the
same category as the item being hedged.
At December 31, 2002, the fair value of the Company's interest rate
agreements, which consisted entirely of interest rate swaps, is recorded as a
liability valued at approximately $99.2 million. The table below presents
information on the Company's significant debt obligations, some of which are
subject to interest rate changes, and the interest rate protection agreement
used to hedge both long-term and short-term obligations.
Interest Rate Exposure
December 31, 2002
($ millions)
2003 2004 2005 Thereafter Totals
---- ---- ---- ---------- ------
Principal Payments Due on NMC Credit Facility $617 $ 617
Variable Interest Rate of approx. 2.55%
Principal Payments Due on A/R Facility $445 $ 445
Variable Interest Rate of approx. 1.49%
Borrowings from Affiliates
Variable Interest Rate of 2.07%-2.73% $315 $ 315
Fixed Interest Rate = 8.43% $435 $ 435
Fixed Interest Rate = 8.25% $219 $ 219
Interest Rate Agreements (notional amounts) $250 $800 $1,050
Average Fixed Pay Rate = 5.51% 6.33% 5.26%
Receive Rate = 3-Month LIBOR
At December 31, 2002, the fair value of the Company's foreign exchange
contracts, which consisted entirely of forward agreements, is recorded as an
asset valued at approximately $84.8 million. The Company had outstanding
contracts covering the purchase of 638.2 million Euros ("EUR") at an average
contract price of $.9037 per EUR, for delivery between January 2003 and May
2004, contracts for the purchases of 168 million Mexican Pesos at an average
contract price of 10.3324 pesos per US dollar, and contracts for the delivery of
14.2 million Canadian Dollars at an average contract price of $.6347 per
Canadian Dollar.
The Company's hedging strategy vis-a-vis the above-mentioned market risks
has not changed significantly from 2001 to 2002. For additional information, see
also "Notes to Consolidated Financial Statements - Note 2. Summary of
Significant Accounting Policies - Derivative Financial Instruments" and "Notes
to Consolidated Financial Statements - Note 15. Financial Instruments".
39
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information called for by this item is indexed in Item 15 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, 2003.
PART IV
ITEM 14. CONTROLS AND PROCEDURES
The Company's management, including the Chief Executive Officer and Chief
Financial Officer, have conducted an evaluation of the effectiveness of the
Company's disclosure controls and procedures within 90 days prior to the filing
of this report, as contemplated by Securities Exchange Act Rule 13a-14. Based on
that evaluation, the Chief Executive Officer and the Chief Financial Officer
concluded that the disclosure controls and procedures are effective in alerting
them in a timely manner that all material information required to be filed in
this annual report has been made known to them. There have been no significant
changes to internal controls, or in factors that could significantly affect
internal controls, subsequent to the date the Chief Executive Officer and the
Chief Financial Officer completed their evaluation.
ITEM 15. 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,
2002, 2001, and 2000.
Consolidated Statements of Comprehensive Income for the Years Ended
December 31, 2002, 2001, and 2000.
Consolidated Balance Sheets as of December 31, 2002 and 2001.
Consolidated Statements of Cash Flows for the Years Ended December 31,
2002, 2001, and 2000.
Consolidated Statements of Changes in Equity for the Years Ended December
31, 2002, 2001, and 2000.
Schedule of Valuation and Qualifying Accounts as of December 31, 2002,
2001, and 2000.
Notes to Consolidated Financial Statements.
40
The Company is a majority-owned subsidiary of Fresenius Medical Care AG.
The operating results and other financial information of the Company
included in this report are not necessarily indicative of the operating
results and financial condition of Fresenius Medical Care AG at the dates
or for the periods presented herein. Users of the Company's financial
statements wishing to obtain financial and other information regarding
Fresenius Medical Care AG should consult the Annual Report on Form 20-F of
Fresenius Medical Care AG, which will be filed with the Securities and
Exchange Commission and the New York Stock Exchange.
(b) Reports on Form 8-K.
On November 29, 2002, FMCAG, the parent corporation of the Company,
announced an agreement in principle for the settlement of all fraudulent
conveyance claims against it and other claims related to the Company that
arises out of the bankruptcy of W.R. Grace & Co.
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 3.1 Certificate of Incorporation of Fresenius Medical Care Holdings,
Inc. (f/k/a W. R. Grace & Co.) under Section 402 of the New York
Business Corporation Law dated March 23, 1988 (incorporated
herein by reference to the Form 8-K of the Company filed on May
9, 1988).
Exhibit 3.2 Certificate of Amendment of the Certificate of Incorporation of
Fresenius Medical Care Holdings, Inc. (f/k/a W. R. Grace & Co.)
under Section 805 of the New York Business Corporation Law dated
May 25, 1988 (changing the name to W. R. Grace & Co.,
incorporated herein by reference to the Form 8-K of the Company
filed on May 9, 1988).
Exhibit 3.3 Certificate of Amendment of the Certificate of Incorporation of
Fresenius Medical Care Holdings, Inc. (f/k/a W. R. Grace & Co.)
under Section 805 of the New York Business Corporation Law dated
September 27, 1996 (incorporated herein by reference to the Form
8-K of the Company filed with the Commission on October 15,
1996).
Exhibit 3.4 Certificate of Amendment of the Certificate of Incorporation of
Fresenius Medical Care Holdings, Inc. (f/k/a W. R. Grace & Co.)
under Section 805 of the New York Business Corporation Law dated
September 27, 1996 (changing the name to Fresenius National
Medical Care Holdings, Inc., incorporated herein by reference to
the Form 8-K of the Company filed with the Commission on October
15, 1996).
Exhibit 3.5 Certificate of Amendment of the Certificate of Incorporation of
Fresenius Medical Care Holdings, Inc. under Section 805 of the
New York Business Corporation Law dated June 12, 1997 (changing
name to Fresenius Medical Care Holdings, Inc., incorporated
herein by reference to the Form 10-Q of the Company filed with
the Commission on August 14, 1997).
Exhibit 3.6 Certificate of Amendment of the Certificate of Incorporation of
Fresenius Medical Care Holdings, Inc. dated July 6, 2001
(authorizing action by majority written consent of the
shareholders) (incorporated herein by reference to the Form 10-Q
of the Company filed with the Commission on August 14, 2001).
Exhibit 3.7 Amended and Restated By-laws of Fresenius Medical Care Holdings,
Inc. (incorporated herein by reference to the Form 10-Q of the
Company filed with the Commission on August 14, 1997).
Exhibit 4.1 Credit Agreement dated as of September 27, 1996 among National
Medical Care, Inc. and Certain Subsidiaries and Affiliates, as
Borrowers, Certain Subsidiaries and Affiliates, as Guarantors,
the Lenders named therein, NationsBank, N.A., as paying agent
and The Bank of Nova Scotia, The Chase Manhattan Bank, Dresdner
Bank AG and Bank of America, N.A. (formerly known as
NationsBank, N.A.), as Managing Agents (incorporated herein by
reference to the Form 6-K of Fresenius Medical Care AG filed
with the Commission on October 15, 1996).
41
Exhibit 4.2 Amendment dated as of November 26, 1996 (amendment to the Credit
Agreement dated as of September 27, 1996, incorporated herein by
reference to the Form 8-K of Registrant filed with the
Commission on December 16, 1996).
Exhibit 4.3 Amendment No. 2 dated December 12, 1996 (second amendment to the
Credit Agreement dated as of September 27, 1996, incorporated
herein by reference to the Form 10-K of Registrant filed with
the Commission on March 31, 1997).
Exhibit 4.4 Amendment No. 3 dated June 13, 1997 to the Credit Agreement
dated as of September 27, 1996, among National Medical Care,
Inc. and Certain Subsidiaries and Affiliates, as Borrowers,
Certain Subsidiaries and Affiliates, as Guarantors, the Lenders
named therein, Bank of America, N.A. (formerly known as
NationsBank, N.A.), as paying agent and The Bank of Nova Scotia,
The Chase Manhattan Bank, Dresdner Bank AG and Bank of America,
N.A. (formerly known as NationsBank, N.A.), as Managing Agents,
as previously amended (incorporated herein by reference to the
Form 10-Q of the Registrant filed with the Commission on
November 14, 1997).
Exhibit 4.5 Amendment No. 4, dated August 26, 1997 to the Credit Agreement
dated as of September 27, 1996, among National Medical Care,
Inc. and Certain Subsidiaries and Affiliates, as Borrowers,
Certain Subsidiaries and Affiliates, as Guarantors, the Lenders
named therein, Bank of America, N.A. (formerly known as
NationsBank, N.A.), as paying agent and The Bank of Nova Scotia,
The Chase Manhattan Bank, Dresdner Bank AG and Bank of America,
N.A. (formerly known as NationsBank, N.A.), as Managing Agents,
as previously amended (incorporated herein by reference to the
Form 10-Q of Registrant filed with Commission on November 14,
1997).
Exhibit 4.6 Amendment No. 5 dated December 12, 1997 to the Credit Agreement
dated as of September 27, 1996, among National Medical Care,
Inc. and Certain Subsidiaries and Affiliates, as Borrowers,
Certain Subsidiaries and Affiliates, as Guarantors, the Lenders
named therein, Bank of America, N.A. (formerly known as
NationsBank, N.A.), as paying agent and The Bank of Nova Scotia,
The Chase Manhattan Bank, Dresdner Bank AG and Bank of America,
N.A. (formerly known as NationsBank, N.A.), as Managing Agents,
as previously amended (incorporated herein by reference to the
Form 10-K of Registrant filed with Commission on March 23,
1998).
Exhibit 4.7 Form of Consent to Modification of Amendment No. 5 dated
December 12, 1997 to the Credit Agreement dated as of September
27, 1996 among National Medical Care, Inc. and Certain
Subsidiaries and Affiliates, as Borrowers, Certain Subsidiaries
and Affiliates, as Guarantors, the Lenders named therein, Bank
of America, N.A. (formerly known as NationsBank, N.A.), as
paying agent and The Bank of Nova Scotia, The Chase Manhattan
Bank, Dresdner Bank AG and Bank of America, N.A. (formerly known
as NationsBank, N.A.), as Managing Agents (incorporated herein
by reference to the Form 10-K of Registrant filed with
Commission on March 23, 1998).
Exhibit 4.8 Amendment No. 6 dated effective September 30, 1998 to the Credit
Agreement dated as of September 27, 1996, among National Medical
Care, Inc. and Certain Subsidiaries and Affiliates, as
Borrowers, Certain Subsidiaries and Affiliates, as Guarantors,
the Lenders named therein, Bank of America, N.A. (formerly known
as NationsBank, N.A.), as paying agent and The Bank of Nova
Scotia, The Chase Manhattan Bank, N.A., Dresdner Bank AG and
Bank of America, N.A. (formerly known as NationsBank, N.A.), as
Managing Agents, as previously amended (incorporated herein by
reference to the Form 10-Q of Registrant filed with Commission
on November 12, 1998).
Exhibit 4.9 Amendment No. 7 dated as of December 31, 1998 to the Credit
Agreement dated as of September 27, 1996 among National Medical
Care, Inc. and Certain Subsidiaries and Affiliates, as
Borrowers, Certain Subsidiaries and Affiliates Guarantors, the
Lenders named therein, Bank of America, N.A. (formerly known as
NationsBank, N.A.), paying agent and The Bank of Nova Scotia,
The Chase Manhattan Bank, Dresdner Bank A. G. and Bank of
America, N.A. (formerly known as NationsBank, N.A.). as Managing
Agents, (incorporated herein by reference to the Form 10-K of
registrant filed with Commission on March 9, 1999).
Exhibit 4.10 Amendment No. 8 dated as of June 30, 1999 to the Credit
Agreement dated as of September 27, 1996 among National Medical
Care, Inc. and Certain Subsidiaries and Affiliates, as
Borrowers, Certain Subsidiaries and Affiliates Guarantors, the
Lenders named therein, Bank of America, N.A. (formerly known as
NationsBank, N.A.), as paying agent and The Bank of Nova Scotia,
The Chase Manhattan Bank, Dresdner
42
Bank A.G. and Bank of America, N.A. (formerly known as
NationsBank, N.A.), as Managing Agent (incorporated herein by
reference to the Form 10-K of registrant filed with Commission
on March 30, 2000).
Exhibit 4.11 Amendment No. 9 dated as of December 15, 1999 to the Credit
Agreement dated as of September 27, 1996 among National Medical
Care, Inc. and Certain Subsidiaries and Affiliates, as
Borrowers, Certain Subsidiaries and Affiliates Guarantors, the
Lenders named therein, Bank of America, N.A. (formerly known as
NationsBank, N.A.), as paying agent and The Bank of Nova Scotia,
The Chase Manhattan Bank, Dresdner Bank A.G. and Bank of
America, N.A. (formerly known as NationsBank, N.A.), as Managing
Agent (incorporated herein by reference to the Form 10-K of
registrant filed with Commission on March 30, 2000).
Exhibit 4.12 Amendment No. 10 dated as of September 21, 2000 to the Credit
Agreement dated as of September 27, 1996 among National Medical
Care, Inc. and Certain Subsidiaries and Affiliates, as
Borrowers, Certain Subsidiaries and Affiliates Guarantors, the
Lenders named therein, Bank of America, N.A. (formerly known as
NationsBank, N.A.), as paying agent and The Bank of Nova Scotia,
The Chase Manhattan Bank, Dresdner Bank A.G. and Bank of
America, N.A. (formerly known as NationsBank, N.A.), as Managing
Agent (incorporated herein by reference to the Form 10-K of
registrant filed with Commission on November 11, 2000).
Exhibit 4.13 Amendment No. 11 dated as of May 31, 2001 to the Credit
Agreement dated as of September 27, 1996 among National Medical
Care, Inc. and Certain Subsidiaries and Affiliates, as
Borrowers, Certain Subsidiaries and Affiliates Guarantors, the
Lenders named therein, Bank of America, N.A. (formerly known as
NationsBank, N.A). as paying agent and The Bank of Nova Scotia,
The Chase Manhattan Bank, Dresdner Bank A.G. and Bank of
America, N.A. (formerly known as NationsBank, N.A.), as Managing
Agent (incorporated by reference to the Registration Statement
on Form F-4 of Fresenius Medical Care AG (Registration No.
333-66558)).
Exhibit 4.14 Amendment No. 12 dated as of June 30, 2001 to the Credit
Agreement dated as of September 27, 1996 among National Medical
Care, Inc. and Certain Subsidiaries and Affiliates, as
Borrowers, Certain Subsidiaries and Affiliates Guarantors, the
Lenders named therein, Bank of America, N.A. (formerly known as
NationsBank, N.A.), as paying agent and The Bank of Nova Scotia,
The Chase Manhattan Bank, Dresdner Bank A.G. and Bank of
America, N.A. (formerly known as NationsBank, N.A.), as Managing
Agent (incorporated by reference to the Registration Statement
on Form F-4 of Fresenius Medical Care AG (Registration No.
333-66558)).
Exhibit 4.15 Amendment No. 13 dated as of December 17, 2001 to the Credit
Agreement dated as of September 27, 1996 among National Medical
Care, Inc. and Certain Subsidiaries and Affiliates, as
Borrowers, Certain Subsidiaries and Affiliates Guarantors, the
Lenders named therein, Bank of America, N.A. (formerly known as
NationsBank, N.A.), as paying agent and The Bank of Nova Scotia,
The Chase Manhattan Bank, Dresdner Bank A.G. and Bank of
America, N.A. (formerly known as NationsBank, N.A.), as Managing
Agent (incorporated herein by reference to the Form 10-K of
Registrant filed with Commission on April 1, 2001).
Exhibit 4.16 Amendment No. 14 dated as of February 22, 2002 to the Credit
Agreement dated as of September 27, 1996 among National Medical
Care, Inc. and Certain Subsidiaries and Affiliates, as
Borrowers, Certain Subsidiaries and Affiliates Guarantors, the
Lenders named therein, Bank of America, N.A. (formerly known as
NationsBank, N. A.), as paying agent and The Bank of Nova
Scotia, The Chase Manhattan Bank, Dresdner Bank A.G. and Bank of
America, N. A. (formerly known as NationsBank, N. A. ), as
Managing Agent (incorporated herein by reference to the Form
10-Q of Registrant filed with Commission on November 14, 2002).
Exhibit 4.17 Amendment No. 15 dated as of December 5, 2002 to the Credit
Agreement, by and among National Medical Care, Inc. and Certain
Subsidiaries and Affiliates party to the Credit Agreement, and
identified therein, and Bank of America, N. A. (formerly known
as NationsBank, N. A.), as paying Agent for and on behalf of the
Lenders (filed herewith).
Exhibit 4.18 Fresenius Medical Care AG 1996 Stock Incentive Plan
(incorporated herein by reference to the Fresenius Medical Care
AG's Registrant Statement on Form S-8 dated October 1, 1996).
Exhibit 4.19 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).
43
Exhibit 4.20 Fresenius Medical Care AG 2001 International Stock Incentive
Plan (incorporated by reference to the Registration Statement on
Form F-4 of Fresenius Medical Care AG filed August 2, 2001
(Registration No. 333-66558)).
Exhibit 4.21 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 4.22 Senior Subordinated Indenture dated as of February 19, 1998
among FMC Trust Finance S.a.r.l. Luxemborg, as Insurer, State
Street Bank and Trust Company as Trustee and Fresenius Medical
Care Holdings, Inc., and Fresenius Medical Care AG, as
Guarantors with respect to the issuance of 7 3/8% Senior
Subordinated Notes due 2008 (incorporated herein by reference to
the Form 10-K of Registrant filed with Commission on March 23,
1998).
Exhibit 4.23 Senior Subordinated Indenture dated as of June 6, 2001 among
Fresenius Medical Care AG, FMC Trust Finance S.a.r.l. Luxemborg
- III, Fresenius Medical Care Holdings, Inc., Fresenius Medical
Care Deutschland GmbH and State Street Bank and Trust Company
with respect to 7 7/8% Senior Subordinated Notes due 2011
(incorporated herein by reference to the Registration Statement
on Form F-4 of Fresenius Medical Care AG dated August 2, 2001
(Registration No. 333-66558)).
Exhibit 4.24 Senior Subordinated Indenture dated as of June 15, 2001 among
Fresenius Medical Care AG, FMC Trust Finance S.a.r.l. Luxemborg
- III, Fresenius Medical Care Holdings, Inc., Fresenius Medical
Care Deutschland GmbH and State Street Bank and Trust Company
with respect to 7 7/8% Senior Subordinated Notes due 2011
(incorporated herein by reference to the Registration Statement
on Form F-4 of Fresenius Medical Care AG dated August 2, 2001
(Registration No. 333-66558)).
Exhibit 10.1* Product Purchase Agreement effective January 1, 2002 between
Amgen USA, Inc. and National Medical Care, Inc. (incorporated by
reference to the Form 10-Q of the Registrant filed with the
Commission on May 15, 2002).
Exhibit 10.2 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 10.3 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 10.4 Second Amended and Restated Transfer and Administrative
agreement dated as of September 24, 2002 among NMC Funding
Corporation, National Medical Care, Inc., Enterprise Funding
Corporation, Compass US Acquisition, LLC, Giro Multifunding
Corporation, the Bank Investors listed therein, WestLB AG, New
York Branch (formerly known as Westdeutsche Landesbank
Girozentrale, New York Branch), as an administrative agent and
Bank of America, N.A., as an administrative agent (incorporated
herein by reference to the Form 10-Q of Registrant filed with
Commission on November 14, 2002).
Exhibit 10.5 Amendment No. 1 dated as of October 22, 2002 to the Second
Amended and Restated Transfer and Administrative agreement dated
as of September 24, 2002 among NMC Funding Corporation, National
Medical Care, Inc., Enterprise Funding Corporation, Compass US
Acquisition, LLC, Giro Multifunding Corporation, the Bank
Investors listed therein, WestLB AG, New York Branch (formerly
known as Westdeutsche Landesbank Girozentrale, New York Branch),
as an administrative agent and Bank of America, N.A., as an
administrative agent (incorporated herein by reference to the
Form 10-Q of Registrant filed with Commission on November 14,
2002).
Exhibit 10.6 Amendment No. 2 dated as of November 8, 2002 to the Second
Amended and Restated Transfer and Administrative agreement dated
as of September 24, 2002 among NMC Funding Corporation, National
Medical Care, Inc., Enterprise Funding Corporation, Compass US
Acquisition, LLC, Giro Multifunding Corporation, Asset One
Securitization, LLC, the Bank Investors listed therein, WestLB
AG, New York
44
Branch (formerly known as Westdeutsche Landesbank Girozentrale,
New York Branch), as an administrative agent and Bank of
America, N.A., as an administrative agent, (filed herewith).
Exhibit 10.7 Amendment No. 3 dated as of December 18, 2002 to the Second
Amended and Restated Transfer and Administrative agreement dated
as of September 24, 2002 among NMC Funding Corporation, National
Medical Care, Inc., Enterprise Funding Corporation, Compass US
Acquisition, LLC, Giro Multifunding Corporation, Asset One
Securitization, LLC, the Bank Investors listed therein, WestLB
AG, New York Branch (formerly known as Westdeutsche Landesbank
Girozentrale, New York Branch), as an administrative agent and
Bank of America, N.A., as an administrative agent, (filed
herewith).
Exhibit 10.8 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 10.9 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 10.10 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 10.11 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 10.12 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 10.13 Employment Agreement dated March 15, 2000 by and between Robert
"Rice" M. Powell, Jr. and National Medical Care, Inc.
(incorporated herein by reference to the Form 10-K of Registrant
filed with Commission on April 2, 2001).
Exhibit 10.14 Employment Agreement dated July 1, 2002 by and between John F.
Markus and National Medical Care, Inc. (incorporated herein by
reference to the Form 10-Q of Registrant filed with Commission
on August 14, 2002).
Exhibit 10.15 Employment Agreement dated October 15, 2002 by and between Mats
Wahlstrom and National Medical Care, Inc. (filed herewith).
Exhibit 10.16 Subordinated Loan Note dated as of May 18, 1999, among National
Medical Care, Inc. and certain Subsidiaries with Fresenius AG as
lender (incorporated herein by reference to the Form 10-Q of
Registrant filed with Commission on November 22, 1999).
Exhibit 10.17 Corporate Integrity Agreement between the Offices of
Inspector General of the Department of Health and Human Services
and Fresenius Medical Care Holdings, Inc. dated as of January
18, 2000 (incorporated herein by reference to the Form 8-K of
the Registrant filed with the Commission on January 21, 2000).
Exhibit 10.18 Settlement Agreement dated as of February 6, 2003 by and among
the Company, National Medical Care, Inc., the Official Committee
of Asbestos Personal Injury Claimants, and the Official
Committee of Asbestos Property Damage Claimants of W.R. Grace &
Co. (filed herewith).
Exhibit 11 Statement re: Computation of Per Share Earnings.
Exhibit 99.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
45
Exhibit 99.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
* Confidential treatment has been requested as to certain portions of this
Exhibit
Schedule II Valuation and Qualifying Accounts
SIGNATURES
Pursuant to the requirements of Section 13 of 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: March 14, 2003 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 March 17, 2003
- ----------------
Ben J. Lipps (Chief Executive Officer)
/s/ Jerry A. Schneider Chief Financial Officer, Treasurer and Director March 17, 2003
- ----------------------
Jerry A. Schneider (Chief Financial and Accounting Officer)
46
CERTIFICATIONS
CHIEF EXECUTIVE OFFICER
I, Ben J. Lipps, certify that:
1. I have reviewed this Annual Report on Form 10-K of Fresenius Medical
Care Holdings, Inc.
2. Based on my knowledge, this Annual Report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by this Annual Report.
3. Based on my knowledge, the financial statements, and other financial
information included in this Annual Report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented
in this Annual Report.
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a. designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries, is
made known to us by others within those entities,
particularly during the period in which this Annual
Report is being prepared;
b. evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date within
90 days prior to the filing date of this Annual Report
(the "Evaluation Date"); and
c. presented in this Annual Report our conclusions about
the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation
Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
a. all significant deficiencies in the design or operation
of internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in
this Annual Report whether or not there were significant changes in
internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: March 17, 2003
/s/ Ben J. Lipps
Ben J. Lipps
President and
Chief Executive Officer
47
CHIEF FINANCIAL OFFICER
I, Jerry A. Schneider, certify that:
1. I have reviewed this Annual Report on Form 10-K of Fresenius Medical
Care Holdings, Inc.
2. Based on my knowledge, this Annual Report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by this Annual Report.
3. Based on my knowledge, the financial statements, and other financial
information included in this Annual Report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented
in this Annual Report.
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a. designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries, is
made known to us by others within those entities,
particularly during the period in which this Annual
Report is being prepared;
b. evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date within
90 days prior to the filing date of this Annual Report
(the "Evaluation Date"); and
c. presented in this Annual Report our conclusions about
the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation
Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
a. all significant deficiencies in the design or operation
of internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in
this Annual Report whether or not there were significant changes in
internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: March 17, 2003
/s/ Jerry A. Schneider
Jerry A. Schneider
Chief Financial Officer
48
INDEPENDENT AUDITORS' REPORT
To the Shareholders
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, 2002 and 2001 and the related consolidated statements of operations,
comprehensive income, cash flows and changes in equity for each of the years in
the three-year period ended December 31, 2002. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the Company
as of December 31, 2002 and 2001, and the results of their operations and their
cash flows for each of the years in the three-year period ended December 31,
2002 in conformity with accounting principles generally accepted in the United
States of America.
As discussed in Note 2 to the consolidated financial statements, effective
January 1, 2002, Fresenius Medical Care Holdings, Inc. adopted Statement of
Financial Accounting Standards No. 142 "Goodwill and Other Intangible Assets."
KPMG LLP
January 31, 2003
Boston, MA
49
FRESENIUS MEDICAL CARE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
TWELVE MONTHS ENDED DECEMBER 31,
---------------------------------------------
2002 2001 2000
----------- ----------- -----------
NET REVENUES
Health care services ........................................... $ 3,293,510 $ 3,131,733 $ 2,609,108
Medical supplies ............................................... 456,501 477,818 480,067
----------- ----------- -----------
3,750,011 3,609,551 3,089,175
----------- ----------- -----------
EXPENSES
Cost of health care services ................................... 2,335,820 2,178,085 1,768,914
Cost of medical supplies ....................................... 314,139 332,770 339,908
General and administrative expenses ............................ 357,077 335,961 269,574
Provision for doubtful accounts ................................ 98,632 85,448 62,949
Depreciation and amortization .................................. 139,750 246,819 222,870
Research and development ....................................... 9,222 5,462 4,127
Interest expense, net, and related financing costs including
$118,983 $134,557 and $110,746 of interest with affiliates . 210,348 226,480 187,315
Interest expense on settlement of investigation, net ........... -- -- 29,947
Special charge for legal matters ............................... -- 258,159 --
----------- ----------- -----------
3,464,988 3,669,184 2,885,604
----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES AND EXTRAORDINARY ITEM ............ 285,023 (59,633) 203,571
PROVISION FOR INCOME TAXES .......................................... 113,924 19,623 98,321
----------- ----------- -----------
NET INCOME (LOSS) BEFORE EXTRAORDINARY ITEM ......................... 171,099 (79,256) 105,250
Extraordinary loss on early redemption of borrowings from affiliates,
net of tax benefit of $6,520 ..................................... 9,780 -- --
----------- ----------- -----------
NET INCOME (LOSS) ................................................... $ 161,319 $ (79,256) $ 105,250
=========== =========== ===========
Basic and fully dilutive net income (loss) before extraordinary item
per share ........................................................... $ 1.89 $ (0.89) $ 1.16
Extraordinary loss per share ........................................ $ (0.10) $ -- $ --
Basic and fully dilutive net income (loss) per share ................ $ 1.79 $ (0.89) $ 1.16
See accompanying Notes to Consolidated Financial Statements
50
FRESENIUS MEDICAL CARE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(DOLLARS IN THOUSANDS)
TWELVE MONTHS ENDED DECEMBER 31,
---------------------------------------
2002 2001 2000
--------- --------- ---------
NET INCOME (LOSS) $ 161,319 $ (79,256) $ 105,250
Other comprehensive income
Foreign currency translation adjustments 607 (130) (174)
Minimum pension liability,
(net of deferred tax of $12,905) (19,357) -- --
Derivative instruments, (net of deferred tax
of $15,856 and $26,514, respectively) (14,086) (50,929) --
Other 230 -- --
--------- --------- ---------
Total other comprehensive loss (32,606) (51,059) (174)
--------- --------- ---------
COMPREHENSIVE INCOME (LOSS) $ 128,713 $(130,315) $ 105,076
========= ========= =========
See accompanying Notes to Consolidated Financial Statements
51
FRESENIUS MEDICAL CARE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
DECEMBER 31,
----------------------------
2002 2001
----------- -----------
ASSETS
Current Assets:
Cash and cash equivalents ............................. $ 30,013 $ 26,786
Accounts receivable, less allowances of $121,620
and $103,859 ...................................... 387,222 423,912
Inventories ........................................... 185,892 202,221
Deferred income taxes ................................. 157,353 196,831
Other current assets .................................. 128,619 119,592
----------- -----------
Total Current Assets ............................. 889,099 969,342
----------- -----------
Properties and equipment, net .............................. 531,081 520,620
----------- -----------
Other Assets:
Goodwill .............................................. 2,934,581 2,889,174
Intangible assets, net of accumulated amortization of
$299,916 and $259,356 ............................ 491,988 529,370
Other assets and deferred charges..................... 163,595 94,460
----------- -----------
Total Other Assets ............................... 3,590,164 3,513,004
----------- -----------
Total Assets ............................................... $ 5,010,344 $ 5,002,966
=========== ===========
LIABILITIES AND EQUITY
Current Liabilities:
Current portion of long-term debt and capitalized lease
obligations ........................................ 2,303 152,046
Current portion of borrowing from affiliates .......... 315,394 291,360
Accounts payable ...................................... 100,603 125,530
Accrued liabilities ................................... 261,888 231,378
Accrued special charge for legal matters .............. 191,130 221,812
Net accounts payable to affiliates .................... 28,897 39,934
Accrued income taxes .................................. 61,754 83,654
----------- -----------
Total Current Liabilities ........................ 961,969 1,145,714
Long-term debt ............................................. 616,900 300,600
Non-current borrowings from affiliates ..................... 654,693 1,005,669
Capitalized lease obligations .............................. 1,120 1,675
Deferred income taxes ...................................... 96,453 113,046
Other liabilities .......................................... 185,200 146,170
----------- -----------
Total Liabilities ................................ 2,516,335 2,712,874
----------- -----------
Mandatorily Redeemable Preferred Securities ................ 771,209 692,330
----------- -----------
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 ......................................... 1,942,755 1,945,014
Retained deficit ........................................ (242,846) (402,749)
Accumulated comprehensive loss .......................... (83,427) (50,821)
----------- -----------
Total Equity ....................................... 1,722,800 1,597,762
----------- -----------
Total Liabilities and Equity ............................... $ 5,010,344 $ 5,002,966
=========== ===========
See accompanying Notes to Consolidated Financial Statements.
52
FRESENIUS MEDICAL CARE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
TWELVE MONTHS ENDED DECEMBER 31,
-----------------------------------------
2002 2001 2000
--------- --------- ---------
Cash Flows from Operating Activities:
Net income (loss) ......................................... $ 161,319 $ (79,256) $ 105,250
Adjustments to reconcile net income to net cash from
Operating activities:
Depreciation and amortization ........................ 139,750 246,819 222,870
Extraordinary loss on early redemption of
borrowings from affiliates ......................... 9,780 -- --
Provision for doubtful accounts ...................... 98,632 85,448 62,949
Deferred income taxes ................................ 52,879 (68,302) 84,900
Loss on disposal of properties and equipment ......... 2,451 965 970
Changes in operating assets and liabilities, net of
effects of purchase acquisitions and foreign
exchange:
Increase in accounts receivable ...................... (73,888) (133,225) (194,772)
Decrease (increase) in inventories ................... 15,825 (5,401) (7,472)
(Increase) decrease in other current assets .......... (9,039) 21,345 (6,025)
Decrease in IDPN receivables ......................... -- 5,189 53,962
Increase in other assets and deferred charges ........ (10,029) (3,561) (3,025)
(Decrease) increase in accounts payable .............. (24,486) (31,810) 5,976
(Decrease) increase in accrued income taxes .......... (16,409) 72,179 (908)
Increase (decrease) in accrued liabilities ........... 27,216 (10,922) (65,227)
(Decrease) increase in accrued special charge for
legal matters ...................................... (24,969) 221,812 --
(Decrease) increase in other long-term liabilities ... (13,405) 2,187 12,035
Net changes due to/from affiliates ................... (10,982) 38,213 (6,044)
Other, net ........................................... (2,814) (7,335) (2,126)
--------- --------- ---------
Net cash provided by operating activities ................. 321,831 354,345 263,313
--------- --------- ---------
Cash Flows from Investing Activities:
Capital expenditures ................................. (105,210) (124,621) (104,199)
Payments for acquisitions, net of cash acquired ...... (37,051) (288,924) (115,601)
Increase in other assets ............................. (1,000) (22,754) --
--------- --------- ---------
Net cash used in investing activities ..................... (143,261) (436,299) (219,800)
--------- --------- ---------
Cash Flows from Financing Activities:
Payments on settlement of investigation .............. -- (85,920) (386,815)
Net (decrease) increase in borrowings from affiliates (326,942) 168,521 (32,947)
Premium on early redemption of debt .................. (16,300) -- --
Cash dividends paid on preferred stock ............... (520) (520) (520)
Proceeds from mandatorily redeemable preferred
securities ......................................... -- 284,403 305,500
Net increase (decrease) from receivable financing
facility ........................................... 3,249 (3,300) 110,300
Net increase (decrease) on debt and capitalized leases 164,577 (290,324) (17,660)
Other, net ........................................... -- 2,628 (647)
--------- --------- ---------
Net cash (used in) provided by financing activities ....... (175,936) 75,488 (22,789)
--------- --------- ---------
Effects of changes in foreign exchange rates ................... 593 (75) 40
--------- --------- ---------
Change in cash and cash equivalents ............................ 3,227 (6,541) 20,764
Cash and cash equivalents at beginning of period ............... 26,786 33,327 12,563
--------- --------- ---------
Cash and cash equivalents at end of period ..................... $ 30,013 $ 26,786 $ 33,327
========= ========= =========
See accompanying Notes to Consolidated Financial Statements
53
FRESENIUS MEDICAL CARE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
TWELVE MONTHS ENDED
-----------------------------------------
2002 2001 2000
--------- --------- ---------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest .............................................. $ 182,865 $ 196,289 $ 223,847
Interest on mandatorily redeemable preferred securities 57,018 -- --
Income taxes paid, net ................................ 77,962 16,024 14,882
Details for Acquisitions:
Assets acquired ............................................ 44,114 423,202 117,935
Liabilities assumed ........................................ (7,063) (34,156) (2,334)
Equity consideration ....................................... -- (99,479) --
--------- --------- ---------
Cash paid .................................................. 37,051 289,567 115,601
Less cash acquired ......................................... -- 643 --
--------- --------- ---------
Net cash paid for acquisitions ............................. $ 37,051 $ 288,924 $ 115,601
========= ========= =========
See accompanying Notes to Consolidated Financial Statements
54
FRESENIUS MEDICAL CARE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Preferred Stocks Common Stock
----------------------- ----------------------- Paid in
Shares Amount Shares Amount Capital
---------- ------- ---------- ------- -----------
BALANCE, DECEMBER 31, 1999 89,136,435 $16,318 90,000,000 $90,000 $ 1,943,034
Net Loss -- -- -- -- --
Cash dividends on preferred stock -- -- -- -- --
Other comprehensive income -- -- -- -- --
Other adjustments -- -- -- -- (647)
---------- ------- ---------- ------- -----------
BALANCE, DECEMBER 31, 2000 89,136,435 $16,318 90,000,000 $90,000 $ 1,942,387
========== ======= ========== ======= ===========
Net Income -- -- -- -- --
Cash dividends on preferred stock -- -- -- -- --
Other comprehensive income - FX -- -- -- -- --
Other comprehensive income - FAS 133 -- -- -- -- --
Other adjustments -- -- -- -- 2,627
---------- ------- ---------- ------- -----------
BALANCE, DECEMBER 31, 2001 89,136,435 $16,318 90,000,000 $90,000 $ 1,945,014
========== ======= ========== ======= ===========
Net Income -- -- -- -- --
Cash dividends on preferred stock -- -- -- -- --
Minimum pension liability -- -- -- -- --
Other comprehensive income - FX -- -- -- -- --
Other comprehensive income -FAS 133 -- -- -- -- --
Transfer of foreign subsidiary to FMC AG -- -- -- -- (2,259)
---------- ------- ---------- ------- -----------
BALANCE, DECEMBER 31, 2002 89,136,435 $16,318 90,000,000 $90,000 1,942,755
========== ======= ========== ======= ===========
Retained Accumulated
Earnings Comprehensive Total
(Deficit) Income Equity
--------- -------- -----------
BALANCE, DECEMBER 31, 1999 $(427,703) $ 412 $ 1,622,061
Net Loss 105,250 -- 105,250
Cash dividends on preferred stock (520) -- (520)
Other comprehensive income -- (174) (174)
Other adjustments -- -- (647)
--------- -------- -----------
BALANCE, DECEMBER 31, 2000 $(322,973) $ 238 1,175,970
========= ======== ===========
Net Income (79,256) -- (79,256)
Cash dividends on preferred stock (520) -- (520)
Other comprehensive income - FX -- (130) (130)
Other comprehensive income - FAS 133 -- (50,929) (50,929)
Other adjustments -- -- 2,627
--------- -------- -----------
BALANCE, DECEMBER 31, 2001 $(402,749) (50,821) 1,597,762
========= ======== ===========
Net Income 161,319 -- 161,319
Cash dividends on preferred stock (520) -- (520)
Minimum pension liability -- (19,357) (19,357)
Other comprehensive income - FX -- 607 607
Other comprehensive income -FAS 133 -- (14,086) (14,086)
Transfer of foreign subsidiary to FMCAG (896) 230 (2,925)
--------- -------- -----------
BALANCE, DECEMBER 31, 2002 $(242,846) (83,427) 1,722,800
========= ======== ===========
See accompanying Notes to Consolidated Financial Statements
55
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
("FMCAG"). The Company conducts its operations through five principal
subsidiaries, National Medical Care, Inc. ("NMC"); Fresenius USA Marketing,
Inc., Fresenius USA Manufacturing, Inc., and SRC Holding Company, Inc. ("SRC"),
all Delaware corporations and Fresenius USA, Inc., a Massachusetts corporation.
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries and those financial statements where the
Company controls professional corporations in accordance with Emerging Issues
Task Force Issue 97-2.
The Company is primarily engaged in (i) providing kidney dialysis
services, and clinical laboratory testing, and (ii) manufacturing and
distributing products and equipment for dialysis treatment.
BASIS OF PRESENTATION
BASIS OF CONSOLIDATION
The consolidated financial statements in this report at December 31, 2002,
2001 and 2000, respectively, have been prepared in accordance with accounting
principles generally accepted in the United States of America. These
consolidated financial statements reflect all adjustments that, in the opinion
of management, are necessary for the fair presentation of the consolidated
results for all periods presented.
NET INCOME PER SHARE
Basic net income 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 net income 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 net income per share was
90,000 in all periods as there were no potential common shares and no
adjustments to income available to common shareholders to be considered for
purposes of the diluted net income per share calculation.
TWELVE MONTHS ENDED
DECEMBER 31,
----------------------------------------
2002 2001 2000
--------- -------- ---------
The weighted average number of shares of
Common Stock were as follows ..................... 90,000 90,000 90,000
========= ======== =========
Net income (loss) used in the computation of net income per share is as follows:
TWELVE MONTHS ENDED
DECEMBER 31,
----------------------------------------
2002 2001 2000
--------- -------- ---------
NET INCOME BEFORE EXTRAORDINARY ITEM
Net income (loss) before extraordinary item ........ $ 171,099 $(79,256) $ 105,250
Dividends paid on preferred stocks ................. (520) (520) (520)
--------- -------- ---------
Income (loss) available to common shareholders ..... $ 170,579 $(79,776) $ 104,730
========= ======== =========
Basic and fully dilutive net income (loss) before
extraordinary item per share .................... $ 1.89 $ (0.89) $ 1.16
========= ======== =========
56
TWELVE MONTHS ENDED
DECEMBER 31,
----------------------------------------
2002 2001 2000
--------- -------- ---------
NET INCOME
Net income (loss) .................................. $ 161,319 $(79,256) $ 105,250
Dividends paid on preferred stocks ................. (520) (520) (520)
--------- -------- ---------
Income (loss) available to common shareholders ..... $ 160,799 $(79,776) $ 104,730
========= ======== =========
Basic and fully dilutive net income (loss) per share $ 1.79 $ (0.89) $ 1.16
========= ======== =========
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions affecting the reported
amounts of assets and liabilities (including disclosed amounts of contingent
assets and liabilities) at the dates of the consolidated financial statements
and the reported revenues and expenses during the reporting periods. Actual
amounts could differ from those estimates.
CASH EQUIVALENTS
Cash equivalents consist of highly liquid instruments with maturities of
three months or less when purchased.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
Effective January 1, 2001, the Company adopted the provisions of SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities and the
related amendments of SFAS No. 138. The cumulative effect of adopting SFAS 133
as of January 1, 2001 was not material to the Company's consolidated financial
statements.
The Company is exposed to market risk due to changes in interest rates and
foreign currencies. The Company uses derivative financial instruments, including
interest rate swaps and foreign exchange contracts, as part of its risk
management strategy. These instruments are used as a means of hedging exposure
to interest rate and foreign currency fluctuations in connection with debt
obligations, forecasted raw material purchases and other obligations and Euro
denominated mandatorily redeemable preferred stock.
The interest rate swaps are designated as cash flow hedges effectively
converting certain variable interest rate payments into fixed interest rate
payments. After tax losses of $19.5 million ($32.6 million pretax) for the
twelve months ended December 31, 2002 and after tax losses of $40.0 million
($66.6 million pretax) for the twelve months ended December 31, 2001 were
deferred in other comprehensive income. Interest payable and receivable under
the swap terms are accrued and recorded as adjustments to interest expense at
each reporting date.
The Company enters into forward rate agreements that are designated and
effective as hedges of forecasted raw material purchases and other obligations.
After tax gains of $1.3 million ($2.2 million pretax) for the twelve months
ended December 31, 2002 and after tax losses of $0.4 million ($0.6 million
pretax) for the twelve months ended December 31, 2001 were deferred in other
comprehensive income and will be reclassified into cost of sales in the period
during which the hedged transactions affect earnings. All deferred amounts will
be reclassified into earnings within the next twelve months.
The Company enters into forward rate agreements that are designated and
effective as hedges of changes in the fair value of the Euro denominated
mandatorily redeemable preferred stock. Changes in fair value are recorded in
earnings and offset against gains and losses resulting from the underlying
exposures. After tax losses of $0.6 million ($1.0 million pretax) for the twelve
months ended December 31, 2002 and after tax gains of $6.8 million ($11.4
million pretax) for the twelve months ended December 31, 2001 were deferred in
other comprehensive income. Ineffective amounts had no material impact on
earnings for the twelve months ended December 31, 2002 and 2001.
57
Periodically, the Company enters into derivative instruments with related
parties to form a natural hedge for currency exposures on intercompany
obligations. These instruments are reflected in the consolidated balance
sheets at fair value with changes in fair value recognized in earnings. Pre-tax
(gains) losses recorded in the consolidated statements of operations for the
twelve months ended December 31, 2002 and 2001 were ($13.7) million and $4.8
million, respectively.
EVEREST ACQUISITION
On January 8, 2001, FMCAG acquired Everest Healthcare Services
Corporation (now known as Everest Healthcare Holdings, Inc., "Everest") through
a merger of Everest into a subsidiary of FMCAG at a purchase price of $365
million. Approximately $99 million of the purchase price was funded by the
issuance of 2.25 million FMCAG preference shares to the Everest shareholders.
The remaining purchase price was paid with cash of $266 million, including
assumed debt. Everest owned, operated or managed approximately 70 clinic
facilities providing therapy to approximately 6,800 patients in the United
States. Everest also operated extracorporeal blood services and acute dialysis
businesses that provide acute dialysis, apheresis and hemoperfusion services to
approximately 100 hospitals. On August 22, 2001 FMCAG transferred its interests
in Everest to the Company at its book value. There was no gain or loss recorded
on this sale as it is a transfer between entities under common control. The
consolidated operations and cash flows of the Company for the comparable periods
in 2001 include the consolidated operations and cash flows of Everest
retroactive to January 1, 2001.
REVENUE RECOGNITION
Revenues are recognized on the date services and related products are
provided/shipped and are recorded at amounts estimated to be received under
reimbursement arrangements with third-party payors, including Medicare and
Medicaid. The Company establishes appropriate allowances based upon factors
surrounding credit risks of specific third party payors, historical trends and
other information. Retroactive adjustments are accrued on an estimated basis in
the period the related services are rendered and adjusted in future periods as
final settlements are determined.
Net Revenues from machines sales for 2002, 2001 and 2000 include $30.5
million, $46.2 million and $54.5 million, respectively, of net revenues for
machines sold to a third party leasing company which are utilized by the
dialysis services division to provide services to our customers. The profits on
these sales are deferred and amortized to earnings over the lease terms.
CONCENTRATION OF CREDIT RISK
The Company is engaged in providing kidney dialysis treatment, clinical
laboratory testing and other ancillary services and in the manufacture and sale
of products for all forms of kidney dialysis principally to health care
providers throughout the world. The Company performs ongoing evaluations of its
customers' financial condition and, generally, requires no collateral.
A significant percentage of the Company's health care services revenues
are paid by and subject to regulations under governmental programs, primarily
Medicare and Medicaid, health care programs administered by the United States
government.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method)
or market.
PROPERTIES AND EQUIPMENT
Properties and equipment are stated at cost. Significant improvements are
capitalized; repairs and maintenance costs that do not extend the lives of the
assets are charged to expense as incurred. Property and equipment under capital
leases are stated at the present value of future minimum lease payments at the
inception of the lease. The cost and accumulated depreciation of assets sold or
otherwise disposed of are removed from the accounts, and any resulting gain or
loss is included in income when the assets are disposed.
The cost of properties and equipment is depreciated over estimated useful
lives on a straight - line basis as follows: buildings - 20 to 40 years,
equipment and furniture - 3 to 10 years, equipment under capital leases and
leasehold improvements - the shorter of the lease term or useful life. For
income tax purposes, depreciation is calculated using accelerated methods to the
extent permitted.
The Company capitalizes interest on borrowed funds during construction
periods. Interest capitalized during 2002, 2001 and 2000 was $4,143, $3,397, and
$2,705 respectively.
58
EXCESS OF COST OVER THE FAIR VALUE OF NET ASSETS ACQUIRED AND OTHER
INTANGIBLE ASSETS
In July 2001, the Financial Accounting Standards Board ("FASB") issued and
the Company adopted Statement of Financial Accounting Standards ("SFAS") No.
141, Business Combinations. Accordingly, the purchase method of accounting is
used for all business combinations. Intangible assets acquired in a purchase
method business combination are recognized and reported apart from goodwill,
pursuant to the criteria specified by SFAS No. 141.
The Company adopted SFAS No. 142, Goodwill and Other Intangible Assets,
effective January 1, 2002. Upon adoption of SFAS No. 142, pursuant to SFAS No.
141, the Company evaluated its existing intangible assets and goodwill that were
acquired in prior purchase business combinations and reclassified amounts
allocated to assembled workforce to goodwill in order to conform with the new
criteria in SFAS No. 141. Upon adoption of SFAS No. 142 the Company reassessed
the useful lives and residual values of all intangible assets acquired with
finite useful lives, and had no significant amortization period adjustments. The
Company identified trade names and management contracts as other intangible
assets with indefinite useful lives.
Prior to the adoption of SFAS No. 142, goodwill was amortized over an
estimated useful life of 40 years. As of January 1, 2002, in accordance with
SFAS No. 142, goodwill and identifiable intangibles with indefinite lives are no
longer amortized, but tested annually for impairment.
To implement the provisions of SFAS No. 142 and to evaluate the
recoverability of goodwill, the Company identified its reporting units and
determined the carrying value of each reporting unit by assigning the assets and
liabilities, including the existing goodwill and intangible assets, to those
reporting units. In the next step the Company compared the fair value of each
reporting unit to the reporting unit's carrying amount. Fair value was
determined using a discounted cash flow approach. In the event that the fair
value of a reporting unit is less than its book value, a second step would be
performed that compares the fair value of the reporting unit's goodwill to the
carrying value of its goodwill. If the fair value of the goodwill is less than
the book value, the difference is recorded as an impairment charge.
To evaluate the recoverability of other intangible assets with indefinite
useful lives, the Company compares the fair values of intangible assets with
their carrying value. The fair value of an intangible asset is determined using
a discounted cash flow approach.
In connection with its annual impairment tests the Company determined that
there was no impairment of goodwill or other intangible assets. Accordingly, the
Company did not record any impairment charges in 2002. For further information
refer to Note 7.
In August 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, which was adopted by the Company
effective January 1, 2002. SFAS No. 144 modifies the existing guidance in SFAS
No. 121 and APB Opinion No. 30. Goodwill is evaluated annually for impairment
under SFAS No. 142. In accordance with SFAS No. 144, the Company reviews the
carrying value of its long lived assets or asset groups to be held and used for
impairment whenever events or changes in circumstances indicate that the
carrying value of these assets may not be recoverable. Recoverability of these
assets is measured by a comparison of the carrying value of an asset to the
future net cash flow directly associated with the asset. If assets are
considered to be impaired, the impairment recognized is the amount by which the
carrying value exceeds the fair value of the asset. The Company uses various
valuation factors, including market prices and present value techniques to
assess fair value.
In accordance with SFAS No. 144, long lived assets to be disposed of by
sale are reported at the lower of carrying value or fair value less cost to sell
and depreciation is ceased. Long lived assets to be disposed of other than by
sale are considered to be held and used until disposal.
DEBT ISSUANCE COSTS
Costs related to the issuance of debt are amortized over the term of the
related obligation.
SELF INSURANCE PROGRAMS
The Company is self insured for professional, product and general
liability, auto and worker's compensation claims up to predetermined amounts
above which third party insurance applies. Estimates include ultimate costs for
both reported and incurred but not reported claims.
59
FOREIGN CURRENCY TRANSLATION
The Company follows the provisions of Statement of Financial Accounting
Standards No. 52, "Foreign Currency Translation". Substantially all assets and
liabilities of the Company's foreign subsidiaries are translated at year end
exchange rates, while revenue and expenses are translated at exchange rates
prevailing during the year. Adjustments for foreign currency translation
fluctuations are excluded from net earnings and are deferred in the cumulative
translation adjustment component of equity. In addition, the translation of
certain intercompany borrowings denominated in foreign currencies, which are
considered foreign equity investments, is included in the cumulative translation
adjustment.
Gains and losses resulting from the translation of revenues and expenses
and intercompany borrowings, which are not considered equity investments, are
included in general and administrative expense. Translation gains (losses)
amounted to $14,842, ($4,519) and $5,927 for the twelve months ended December
31, 2002, 2001, and 2000 respectively.
INCOME TAXES
Deferred income taxes are provided for temporary differences between the
reporting of income and expense for financial reporting and tax return purposes.
Deferred tax liabilities or assets at the end of each period are determined
using the tax rates then in effect for the periods when taxes are actually
expected to be paid or recovered. Accordingly, income tax expense provisions
will increase or decrease in the period in which a change in tax rates is
enacted.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred.
LEGAL COSTS
The Company accrues for loss contingencies when they are probable and can
be reasonably estimated. Included in the Company's accrual is an estimate of the
legal costs associated with the contingencies.
COMPREHENSIVE INCOME
Comprehensive income consists of net income (loss), foreign currency
translation adjustments, minimum pension liability adjustments and changes in
derivative instruments and is presented in the consolidated statements of
comprehensive income.
NEW PRONOUNCEMENTS
In July 2001, the FASB issued SFAS No. 141, Business Combinations, and
SFAS No. 142, Goodwill and Other Intangible Assets. Provisions of SFAS 142
related to acquisitions completed after July 1, 2001 were adopted effective as
of July 1, 2001. The Company adopted all other provisions of SFAS 142 effective
January 1, 2002. The effect on prior years income is described in Note 7 of the
Consolidated Financial Statements.
In August 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations ("SFAS 143"). SFAS 143 addresses the reporting
requirements for the retirement of tangible long-lived assets and asset
retirement costs. SFAS 143 requires that the fair value of a liability for an
asset retirement obligation be recognized in the period incurred if a reasonable
estimate of fair value can be made. The associated asset retirement costs must
be capitalized as part of the carrying amount of the long-lived asset. The
Company will adopt SFAS No. 143 effective January 1, 2003. The adoption of SFAS
No. 143 will not have a material impact on the Company's financial statements.
In October 2001, the FASB issued SFAS No.144, Accounting for the
Impairment or Disposal of Long-Lived Assets ("SFAS 144"). SFAS 144 requires that
those long-lived assets be measured at the lower of carrying amount or fair
value less selling costs. SFAS 144 also broadens the reporting of discontinued
operations and provides that discontinued operations will no longer be measured
at net realizable value or include amounts for operating losses that have not
yet occurred. SFAS No. 144 was adopted effective January 1, 2002. The adoption
of SFAS 144 did not have an impact on the Company's financial statements.
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13 and Technical Corrections
("SFAS 145"). SFAS 145 rescinds Statement No. 4 and requires the criteria under
Opinion 30 to determine if losses from extinguishment of debt should be
classified as extraordinary items. SFAS 145 amends Statement No. 13 to require
that certain lease modifications that have economic effects similar to
sale-leaseback arrangements be accounted for in a similar manner as
sale-leaseback transactions. The Company will adopt SFAS No. 145 as related to
SFAS
60
No. 4 effective January 1, 2003. In the second quarter 2002, the Company
reported an extraordinary loss of $9.8 million for the early redemption of
borrowings from affiliates. This extraordinary loss will be reclassified and
presented as a loss from operating earnings. The Company adopted the remaining
provisions of SFAS 145 effective April 1, 2002.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities (SFAS 146). SFAS 146 nullifies EITF
94-3, Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).
The principal difference between this statement and EITF 94-3 relates to the
requirements for the recognition of a liability for a cost associated with an
exit or disposal activity. SFAS 146 requires that a liability for a cost
associated with an exit or disposal activity be recognized when the liability is
incurred. Under EITF 94-3, a liability for an exit cost was recognized at the
date of an entity's commitment to an exit plan. The provisions of SFAS 146 are
effective for exit or disposal activities that are initiated after December 31,
2002.
In November 2002, the FASB issued FASB Interpretation No. 45 ("Fin 45"),
Guarantor's Accounting and Disclosure Requirements for Guarantees of
Indebtedness of Others. FIN 45 requires a guarantor to recognize a liability
measured at fair value at the inception of a guarantee for obligations
undertaken, including its obligation to stand ready to perform over the term of
the guarantee. The initial recognition and measurement provisions are applicable
prospectively to guarantees issued or modified after December 31, 2002. FIN 45
also clarifies and expends the disclosure requirements related to guarantees and
product warranties. The Company adopted those disclosures on December 31, 2002.
See Note 15, Financial Instruments - "Fair Value and Financial Instruments."
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation-Transition and Disclosure - an amendment of FASB Statement No. 123.
SFAS 148 provides alternative methods for a change to the fair value based
method of accounting for stock-based employee compensation. It also amends the
disclosure requirements of SFAS No. 123 to require disclosures in both annual
and interim financial statements of the method of accounting for stock-based
employee compensation and the effect the method used had on reported results.
The Company adopted the annual disclosure requirement on December 31, 2002. See
Note 14, Equity - "Stock Options."
In January 2003, the Financial Accounting Standards Board issued FASB
Interpretation No. 46 ("FIN 46") Consolidation of Variable Interest Entities.
FIN 46 addresses the consolidation of variable interest entities by the primary
beneficiary, when the total equity investment at risk is not sufficient to
permit the entity to finance its activities without additional subordinated
support from other parties and/ or the equity investor lacks certain essential
characteristics of a controlling financial interest. FIN 46 requires existing
variable interest entities to be consolidated if those entities do not
effectively disburse risk among the parties involved. The interpretation becomes
effective at various dates in 2003 and provides various transition rules. The
adoption of FIN 46 has no material impact on the Company's financial statements.
RECLASSIFICATION
Certain 2001 and 2000 amounts have been reclassified to conform with the
2002 presentation.
NOTE 3. ACQUISITIONS
The Company acquired certain health care facilities for a total
consideration of $37,051, $388,403 and $115,601 for the twelve months ended
December 31, 2002, 2001 and 2000, 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
$36,267, $321,728 and $93,417 for the twelve months ended December 31, 2002,
2001 and 2000, respectively.
Had the acquisitions that occurred during the twelve months ended December
31, 2002 been consummated on January 1, 2001, unaudited proforma net revenues
for the twelve months ended December 31, 2002 and 2001 would have been
$3,774,907 and $3,770,445, respectively. Unaudited proforma net income would
have been $162,238 ($1.80 net income per share) and $(77,606) ($0.87 net loss
per share) for the twelve months ended December 31, 2002 and 2001, respectively.
Had the acquisitions that occurred during the twelve months ended December
31, 2001 been consummated on January 1, 2000, unaudited proforma net revenues
for the twelve months ended December 31, 2001 and 2000 would have been
$3,614,291 and $3,358,910 respectively. Unaudited proforma net income (loss)
would have been ($78,942) ($0.88 net loss per share) and $97,015 ($1.07 net
income per share) for the twelve months ended December 31, 2001 and 2000,
respectively.
61
NOTE 4. OTHER BALANCE SHEET ITEMS
DECEMBER 31,
--------------------------
2002 2001
---------- ----------
INVENTORIES
Raw materials $ 44,670 $ 40,834
Manufactured goods in process 11,127 11,053
Manufactured and purchased inventory available for sale 70,127 84,789
---------- ----------
125,924 136,676
Health care supplies 59,968 65,545
---------- ----------
Total $ 185,892 $ 202,221
========== ==========
Under the terms of certain purchase commitments, the Company is obligated to
purchase raw materials and health care supplies of $170,824 of which $58,995 is
committed at December 31, 2002 for fiscal year 2003. The terms of these
agreements run 1 to 6 years.
OTHER CURRENT ASSETS
Miscellaneous accounts receivable $ 72,645 $ 66,656
Deposits and prepaid expenses 55,974 52,936
---------- ----------
Total $ 128,619 $ 119,592
========== ==========
GOODWILL AND OTHER INTANGIBLE ASSETS:
Goodwill, less accumulated amortization of
$459,687 and $459,687 $2,934,581 $2,889,174
========== ==========
OTHER INTANGIBLE ASSETS:
Patient relationships, less accumulated
amortization of $189,277 and $155,769 47,169 77,721
Tradename, less accumulated amortization
of $31,376 and $31,376 210,135 209,454
Management Contracts, less accumulated
amortization of $21,908 and $21,908 183,057 183,056
Other intangible assets, less accumulated
amortization of $57,355 and $50,406 51,627 59,139
---------- ----------
Total Other Intangible Assets $ 491,988 $ 529,370
========== ==========
ACCRUED LIABILITIES
Accrued salaries and wages $ 74,636 $ 62,056
Accounts receivable credit balances 63,747 57,386
Accrued insurance 43,072 39,047
Accrued operating expenses 21,416 22,638
Accrued physician compensation 18,782 17,436
Accrued interest 18,993 16,492
Accrued other 21,242 16,323
---------- ----------
Total $ 261,888 $ 231,378
========== ==========
Accounts receivable credit balances principally reflect overpayments from
third party payors and are in the process of repayment.
62
NOTE 5. SALE OF ACCOUNTS RECEIVABLE
The Company, has an asset securitization facility (the "Accounts
Receivable Facility") whereby receivables of NMC and certain affiliates are sold
to NMC Funding Corporation (the "Transferor"), a wholly-owned subsidiary of NMC,
and subsequently the Transferor transfers and assigns percentage ownership
interests in the receivables to certain bank investors. NMC Funding Corporation
is not consolidated as it does not meet the control criteria of SFAS No. 140.
The retained interest in accounts receivable is reflected on the face of the
balance sheet net of uncollectable accounts to approximate fair value. The
Company has a servicing obligation to act as collection agent on behalf of the
Transferor. The maturity of the Accounts Receivable Facility has been extended
to October 23, 2003.
At December 31, 2002 and 2001, $445,249 and $442,000, respectively, had
been received pursuant to such sales and are reflected as reductions to accounts
receivable. The Transferor pays interest to the bank investors, calculated based
on the commercial paper rates for the particular tranches selected. The
effective interest rate was approximately 1.48% for $429,249 and 1.89% for
$16,000 at year-end 2002. Under the terms of the agreement, new interests in
accounts receivable are sold without recourse as collections reduce previously
sold accounts receivables. The cost related to such sales are expensed as
incurred and recorded as interest expense and related financing costs. There
were no gains or losses on these transactions.
NOTE 6. DEBT
Long-term debt to outside parties consists of:
DECEMBER 31,
--------------------------
2002 2001
-------- --------
NMC Credit Facility $616,900 $450,600
Other 1,840 27
-------- --------
618,740 450,627
Less amounts classified as current 1,840 150,027
-------- --------
$616,900 $300,600
======== ========
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"). Both the revolving credit facility and the
term loan facility are scheduled to expire on September 30, 2003.
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 September 30, 2003. Prepayments are
permitted at any time without penalty, except in certain defined periods. The
NMC Credit Agreement contains certain affirmative and negative covenants with
respect to the Company, NMC and its subsidiaries, customary for this type of
agreement. In December, 2001, a covenant was modified to reflect pending
commercial payor litigation arising from this investigation. In February, 2002,
an amendment was obtained to certain covenants that would have been affected by
the special charge for potential liabilities and costs resulting from the W.R.
Grace bankruptcy filing and for settlements and expenses related to commercial
insurance litigation. At December 31, 2001, after receipt of the amendment, the
Company was in compliance with all such covenants.
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
63
principal payments, reducing the amount available under the NMC Credit Facility
at the end of 2002 and 2001 to $1,277,500 and $1,427,500, respectively. At
December 31, 2002 and 2001 the Company had available $381,000 and $697,000,
respectively, of additional borrowing capacity under the NMC Credit Facility
including $216,000 and $216,000 respectively, available for additional letters
of credit. In addition, at December 31, 2002, FMCAG had outstanding debt under
the credit facility of $245,000.
On February 21, 2003, the Company entered into an amended and restated
agreement, which revised the NMC Credit Facility (See Note 21, Subsequent
Events, 2003 Senior Credit Facility). Accordingly, the amounts due under the NMC
Credit Facility in 2003 have been classified as long term debt.
Borrowings from affiliates consists of:
DECEMBER 31,
--------------------------
2002 2001
---------- ----------
Fresenius Medical Care AG borrowings primarily at interest
rates approximating 2.22% and 2.85%, respectively ........ $ 214,000 $ 191,967
RTC Holdings International, Inc. borrowings at interest rates
approximating 2.70% ....................................... 11,000 --
Fresenius AG borrowing at interest rates approximating
2.22% and 2.73%, respectively ............................. 6,000 15,000
Fresenius Medical Care Trust Finance S.a.r.l. borrowings at
interest rates ranging between 8.25% and 8.43% ............ 654,244 1,005,239
Franconia Acquisition, LLC at interest rates approximating
1.69% and 2.40%, respectively ............................. 83,721 83,721
Other ....................................................... 1,122 1,102
---------- ----------
970,087 1,297,029
Less amounts classified as current .......................... 315,394 291,360
---------- ----------
Total ....................................................... $ 654,693 $1,005,669
========== ==========
Scheduled maturities of long-term debt and borrowings from affiliates are
as follows:
2003 $ 317,234
2004 55,000
2005 105,000
2006 105,000
2007 351,900
2008 and thereafter 654,693
----------
Total $1,588,827
==========
64
NOTE 7. GOODWILL AND OTHER INTANGIBLE ASSETS - ADOPTION OF SFAS 142
The table below shows net income as reported for the twelve months ended
December 31, 2002, 2001, and 2000 and net income as adjusted for the twelve
months ended December 31, 2002, 2001, and 2000 as if SFAS 142 has been adopted
January 1, 2000. The adjusted amounts have been tax effected.
TWELVE MONTHS ENDED
DECEMBER 31,
-------------------------------------
($000) 2002 2001 2000
-------- -------- --------
Net Income $161,319 $(79,256) $105,250
Net Income Adjusted $161,319 $ 13,022 $192,338
Reconciliation of net income to adjusted net income and net income per
share to adjusted net income per share.
TWELVE MONTHS ENDED
DECEMBER 31,
----------------------------------------------
($000 EXCEPT FOR NET INCOME PER SHARE) 2002 2001 2000
----------- ----------- -----------
Reported Net Income $ 161,319 $ (79,256) $ 105,250
Addback: Amortization -- 92,278 87,088
----------- ----------- -----------
Adjusted Net Income $ 161,319 $ 13,022 $ 192,338
=========== =========== ===========
BASIC AND FULLY DILUTIVE NET INCOME PER SHARE:
Reported $ 1.79 $ (0.89) $ 1.16
Addback: Amortization -- 1.03 0.97
----------- ----------- -----------
Adjusted net income per share $ 1.79 $ 0.14 $ 2.13
=========== =========== ===========
The total pre-tax amortization expense associated with goodwill and
specific indefinite lived intangible assets recognized during the twelve months
ended December 31, 2001 and 2000 totaled $106,834 and $101,828, respectively.
The effective tax rate for the SFAS 142 adjustment of amortization was 13.6% for
2001 and 14.5% for 2000. The effective tax rate is less than the corporate
statutory rate primarily due to permanent differences related to non-deductible
goodwill.
The gross carrying value and accumulated amortization of amortizable
intangible assets is as follows:
DECEMBER, 31 2002 DECEMBER 31, 2001
--------------------------- ---------------------------
GROSS GROSS
CARRYING ACCUMULATED CARRYING ACCUMULATED
VALUE AMORTIZATION VALUE AMORTIZATION
--------- ------------ --------- ------------
Patient Relationships $ 236,446 $(189,277) $ 233,490 $(155,769)
Other Intangibles $ 108,982 $ (57,356) $ 109,545 $ (50,406)
The balance of goodwill at December 31, 2001 was $2,889,174. Goodwill
acquired during the year was $45,407. The balance of goodwill at December 31,
2002 was $2,934,581.
Amortization expense for amortizable intangible assets at December 31,
2002 was $41,965. Amortization expense is estimated to be $21,400 for 2003,
$17,400 for 2004, $14,000 for 2005, and $10,700 for 2006.
NOTE 8. SPECIAL CHARGE FOR LEGAL MATTERS
In the fourth quarter of 2001, the Company recorded a $258 million ($177
million after tax) special charge to address 1996 merger-related legal matters,
estimated liabilities and legal expenses arising in connection with the Grace
Chapter 11 Proceedings and the cost of resolving pending litigation and other
disputes with certain commercial insurers (see Note 17).
The Company accrued $172 million principally representing a provision for
income taxes payable for the years prior to the 1996 merger for which the
Company has been indemnified by W.R. Grace, but may ultimately be obligated to
pay as a result of Grace's Chapter 11 Proceedings. In addition, that amount
included the estimated costs of defending the Company in all litigation arising
out of Grace's Chapter 11 Proceedings (see Note 17).
65
The Company included $55 million in the special charge to provide for
settlement obligations, legal expenses and the resolution of disputed accounts
receivable relating to various insurance companies (see Note 17). The remaining
amount of the special charge ($30 million) was accrued mainly for (i) assets and
receivables that are impaired in connection with other legal matters and (ii)
anticipated expenses associated with the continued defense and resolution of the
legal matters.
At December 31, 2002, there is a remaining balance of $191 million for the
accrual for the special charge for legal matters. The Company believes that
these reserves are adequate for the settlement of all matters described above.
During the year ended December 31, 2002, $33 million in charges were applied
against the accrued special charge for legal matters.
NOTE 9. SPECIAL CHARGE FOR SETTLEMENT OF INVESTIGATION AND RELATED COSTS
RECORDED IN 1999
On January 18, 2000, the Company, NMC and certain affiliated companies
executed definitive agreements (the "Settlement Agreements") with the United
States Government (the "Government") to settle (i) matters concerning violations
of federal laws and (ii) NMC's claims with respect to outstanding Medicare
receivables for nutrition therapy (collectively, the "Settlement").
In 2001, the Company remitted final payment of $85.9 million pursuant to
the Settlement. In addition, the Company received final payment of $5.2 million
in the first quarter of 2001 from the Government, related to the Company's
claims for outstanding Medicare receivables.
NOTE 10. INCOME TAXES
Income (loss) before income taxes are as follows:
TWELVE MONTHS ENDED DECEMBER 31,
-----------------------------------------------
2002 2001 2000
--------- --------- ---------
Domestic $ 268,122 $ (61,655) $ 201,305
Foreign 601 2,022 2,266
--------- --------- ---------
Total income (loss) before income taxes $ 268,723 $ (59,633) $ 203,571
========= ========= =========
The provision (benefit) for income taxes are as follows:
TWELVE MONTHS ENDED DECEMBER 31,
-----------------------------------------------
2002 2001 2000
--------- --------- ---------
Current tax expense
Federal $ 41,224 $ 71,021 $ 2,616
State 12,150 15,675 10,195
Foreign 1,151 1,229 610
--------- --------- ---------
Total current 54,525 87,925 13,421
Deferred tax expense (benefit)
Federal 48,916 (53,396) 79,858
State 4,117 (15,077) 4,712
Foreign (154) 171 330
--------- --------- ---------
Total deferred tax expense (benefit) 52,879 (68,302) 84,900
--------- --------- ---------
Total provision $ 107,404 $ 19,623 $ 98,321
========= ========= =========
The total provision of $107,404 is net of the deferred tax benefit on the early
redemption of borrowings from affiliates of $6,250.
Deferred tax liabilities (assets) are comprised of the following:
DECEMBER 31,
----------------------------
2002 2001
--------- ---------
Reserves and other accrued liabilities $(110,772) $(138,442)
Depreciation and amortization 151,553 148,608
Special charge not currently deductible (46,580) (67,760)
Derivatives (42,370) (26,514)
Minimum additional pension liability (12,905) --
Other 174 323
--------- ---------
Net deferred tax asset $ (60,900) $ (83,785)
========= =========
66
The provision (benefit) for income taxes for the twelve months ended
December 31, 2002, 2001, and 2000 differs 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,
---------------------------------------
2002 2001 2000
------ ------ ------
Statutory federal tax rate (benefit) 35.0% (35.0%) 35.0%
State income taxes, net of federal
tax benefit 4.0 0.7 4.7
Amortization of goodwill -- 38.2 10.2
Special charge for legal matters -- 31.6 --
Government Settlement -- -- (2.3)
Foreign losses and taxes 0.3 0.7 0.6
Other 0.7 (3.3) 0.1
------ ------ ------
Effective tax rate 40.0% 32.9% 48.3%
====== ====== ======
The net increase (decrease) in the valuation allowance for deferred tax
assets was $4,221, $1,097 and $(2,407) for the twelve months ended December 31,
2002, 2001, and 2000, 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, 2002, there were approximately $18,764 of foreign net
operating losses, the majority of which expire within seven years.
Provision has not been made for additional federal, state, or foreign
taxes on $5,595 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 $2,238 of additional foreign withholding and
federal income taxes.
The Internal Revenue Service has proposed federal income tax deficiencies
for the years 1997 and 1998. The Company is contesting these proposed
deficiencies and believes that adequate provision has been made for any
adjustment that may result from this tax examination.
NOTE 11. PROPERTIES AND EQUIPMENT
DECEMBER 31,
----------------------------
2002 2001
--------- ---------
Land and improvements $ 5,423 $ 5,211
Buildings 69,876 69,874
Capitalized lease property 613 613
Leasehold improvements 381,214 315,260
Equipment and furniture 492,128 459,790
Construction in progress 36,321 51,817
--------- ---------
985,575 902,565
Accumulated depreciation and amortization (454,494) (381,945)
--------- ---------
Properties and equipment, net $ 531,081 $ 520,620
========= =========
Depreciation expense relating to properties and equipment amounted to
$97,785, $91,328 and $80,034 for the years ended December 31, 2002, 2001 and
2000, respectively.
Included in properties and equipment as of December 31, 2002, and 2001
were $30,726 and $28,804, 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 $11,614, $13,108, and $12,472 for the twelve months ended December 31, 2002,
2001 and 2000, respectively.
67
LEASES
In June 2001, the Company entered into an amended operating lease
arrangement with a bank that covers approximately $77,378 of equipment in its
dialyzer manufacturing facility in Ogden, Utah. The agreement has a basic term
expiration date of January 1, 2010, renewal options and a purchase option at the
greater of 20% of the original cost or the fair market value.
In September 2001, the Company entered into an additional operating lease
agreement for the financing of approximately $15,798 of new equipment for the
expansion of the Ogden, Utah manufacturing facility. The agreement has an
expiration date of September 28, 2011 with a one year renewal option and an
option to purchase at fair market value There is an early purchase option on
October 2, 2006 for 70% of the original cost, and a second early purchase option
at January 2, 2010 for the greater of fair market value or 40% of the original
cost.
In June 2002, the Company entered into an additional operating lease
agreement for the financing of approximately $19,500 of new equipment for the
expansion of the Ogden, Utah manufacturing facility. The agreement has an
expiration date of September 28, 2011 with a one year renewal option and option
to purchase at fair market value. There is an early purchase option on January
2, 2010 for the greater of fair market value or 30% of the original cost.
In December 2002, the Company entered into an additional operating lease
agreement for the financing of approximately $1,900 of new equipment for the
expansion of the Ogden, Utah manufacturing facility. The agreement has an
expiration date of September 28, 2011 with a three month renewal option. There
is an early purchase option on January 2, 2010 for 34% of the original cost.
In December 2002, the Company entered into an additional operating lease
agreement for the financing of approximately $3,160 of new equipment for the
expansion of the Reynosa Tamaulipas, Mexico manufacturing facility. The
agreement has an expiration date of June 30, 2007 with a six month renewal
option and a purchase option at the fair market value of the equipment not to
exceed 12% of the original cost. There is an early purchase option on December
31, 2006 for 23% of the original cost.
Future minimum payments under noncancelable leases (principally for
clinics, offices and equipment) as of December 31, 2002 are as follows:
OPERATING
LEASES CAPITAL LEASES TOTAL
------------- -------------- -----------
2003 $ 202,985 $ 879 $ 203,864
2004 226,197 422 226,619
2005 168,509 512 169,021
2006 158,244 -- 158,244
2007 87,223 -- 87,223
2008 and beyond 127,534 -- 127,534
------------- ------------- -----------
Total minimum payments $ 970,692 $ 1,813 $ 972,505
============= ===========
Less interest and operating costs 231
-------------
Present value of minimum lease Payments ($463
payable in 2003). $ 1,582
=============
Rental expense for operating leases was $220,234, $195,830 and $157,335
for the years ended December 31, 2002, 2001 and 2000, respectively. Amortization
of properties under capital leases amounted to $153, $180, and $369 for the
years ended December 31, 2002, 2001 and 2000, 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.
68
NOTE 12. MANDATORILY REDEEMABLE PREFERRED SECURITIES
During 2001 and 2000, a wholly-owned subsidiary of the Company issued
shares of various series of Preferred Stock ("Redeemable Preferred Securities")
to NMC which were then transferred to FMCAG for proceeds totaling $392,037 in
2001 and $305,500 in 2000. No Redeemable Preferred Securities were issued during
the twelve months ended December 31, 2002. The table below provides information
for Redeemable Preferred Securities for the periods indicated.
DECEMBER 31, DECEMBER 31,
MANDATORILY REDEEMABLE PREFERRED SECURITIES 2002 2001
------------ ------------
Series A Preferred Stock, 1,000 shares .. $ 113,500 $ 113,500
Series B Preferred Stock, 300 shares .... 34,000 34,000
Series C Preferred Stock, 1,700 shares .. 192,000 192,000
Series D Preferred Stock, 870 shares .... 97,500 97,500
Series E Preferred Stock, 1,300 shares .. 147,500 147,500
Series F Preferred Stock, 980 shares .... 113,037 113,037
--------- ---------
697,537 697,537
Mark to Market Adjustment ............... 73,672 (5,207)
--------- ---------
Total ................................... $ 771,209 $ 692,330
========= =========
These securities are similar in substance except for the order of
preference both as to dividends and liquidation, dissolution or winding-up of
the subsidiary. The order of preference among the various series corresponds to
the alphabetical order of Series A through Series F. In addition, the holders of
the Redeemable Preferred Securities are entitled to receive dividends in an
amount of dollars per share that varies from approximately 3% to 8% of the
purchase price depending on the Series. The dividends will be declared and paid
in cash at least annually. All the Redeemable Preferred Securities have a par
value of $.01 per share.
Upon liquidation or dissolution or winding up of the issuer of the
Redeemable Preferred Securities, the holders of the Redeemable Preferred
Securities are entitled to an amount equal to the liquidation preference for
each share of stock plus an amount equal to all accrued and unpaid dividends
thereon through the date of distribution. The liquidation preference is the sum
of the issuance price plus, for each year or portion thereof, an amount equal to
one-half of one percent of the issue price, not to exceed 5%.
Redeemable Preferred Securities (Series A and C) originally due to be sold
to the Company in 2002 for Euro 341,385 had their redemption dates extended
until October and November 2003, respectively. The other Redeemable Preferred
Securities will be sold back to the Company two years from their respective date
of issuance for a total amount equal to Euros 160,388 (Series B and F) and US
dollars $245,000 (Series D and E) plus any accrued and unpaid dividends.
Dividends were recorded and classified as part of interest expense in the
consolidated statement of operations in the amounts of $41,583 and $32,946 in
the twelve month periods ended December 31, 2002 and 2001, respectively. In
March and December 2002, cash dividend payments were made totaling $29,860 and
$27,158, respectively. The Euro Redeemable Preferred Securities are deemed to be
a Euro liability and the risk of foreign currency fluctuations are hedged
through forward currency contracts.
The Company records mark to market adjustments based on fluctuations in
currency rates and records the offset to accumulated comprehensive income.
The holders of the Redeemable Preferred Securities have the same
participation rights as the holders of all other classes of capital stock of the
issuing subsidiary.
69
NOTE 13. 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.
During the first quarter of 2002, the Company recorded a gain of
approximately $12.6 million resulting from the curtailment of the Company's
defined benefit and supplemental executive retirement plans. Under the
curtailment amendment, no additional defined benefits for future services will
be earned by substantially all employees eligible for the plan. The Company has
retained all employee pension obligations as of the curtailment date for the
fully-vested and frozen benefits for all employees.
The following provides a reconciliation of benefit obligations, plan assets, and
funded status of the plans.
TWELVE MONTHS ENDED DECEMBER 31,
-----------------------------------------
2002 2001 2000
--------- --------- ---------
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year $ 124,022 $ 105,441 $ 87,737
Service Cost 2,820 11,050 9,987
Interest Cost 8,320 7,708 6,713
Actuarial (Gain)/Loss 19,646 2,871 3,752
Benefits Paid (2,558) (3,048) (2,748)
Effect of Curtailment (21,660) -- --
--------- --------- ---------
Benefit obligation at end of year
$ 130,590 $ 124,022 $ 105,441
--------- --------- ---------
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year 83,354 81,948 86,794
Actual return on plan assets (8,830) (4,558) (2,098)
Employer contribution 6,034 9,012 --
Benefits paid (2,558) (3,048) (2,748)
--------- --------- ---------
Fair value of plan assets at end of year $ 78,000 $ 83,354 $ 81,948
--------- --------- ---------
FUNDED STATUS AND STATEMENT OF FINANCIAL POSITION
Funded Status (52,590) (40,668) (23,493)
Unrecognized actuarial net (gain)/loss 29,912 2,868 (14,367)
Unrecognized prior service cost -- (3) (4)
--------- --------- ---------
Accrued benefit costs $ (22,678) $ (37,803) $ (37,864)
--------- --------- ---------
Accumulated Benefit Obligation $(129,264) $(101,590) $ (81,948)
Fair value of plan assets at end of year 78,000 83,354 81,948
--------- --------- ---------
Unfunded accrued benefit liability (51,264) (18,236) --
Accrued benefit costs 22,678 37,803 37,864
--------- --------- ---------
Additional minimum liability $ (28,586) $ * $ *
--------- --------- ---------
*No additional minimum liability is required since the unfunded accrued benefit
liability is less than the accrued benefit costs.
AMOUNTS RECOGNIZED IN STATEMENT OF FINANCIAL
POSITION CONSIST OF :
Accrued benefit costs $ (22,678) $ (37,803) $ (37,864)
Accumulated other comprehensive income (28,586) -- --
--------- --------- ---------
Net amount recognized $ (51,264) $ (37,803) $ (37,864)
--------- --------- ---------
WEIGHTED - AVERAGE ASSUMPTIONS AS OF DECEMBER 31,
Discount rate 6.75% 7.50% 8.00%
Expected return of plan assets 8.50 10.0 9.70
Rate of compensation increase 4.50 4.50 4.50
70
COMPONENTS OF NET PERIODIC BENEFIT COST
Service Cost $ 2,820 $ 11,050 $ 9,987
Interest Cost 8,320 7,708 6,713
Expected return on plan assets (7,612) (8,430) (8,345)
Net Amortization -- (1,377) (2,430)
Effect of curtailment (12,620) -- --
--------- --------- ---------
Net periodic (benefit) costs $ (9,092) $ 8,951 $ 5,925
--------- --------- ---------
NMC's supplemental executive retirement plan provides certain key
executives with benefits in excess of normal pension benefits. This plan was
also curtailed during the first quarter 2002. The projected benefit obligation
was $5,821 and $6,513 at December 31, 2002 and 2001, respectively. Pension
expense for this plan, for the twelve months ended December 31, 2002, 2001 and
2000 was $529, $1,070 and $983, respectively. The Company recorded $1,565 to
accumulated other comprehensive income to recognize the additional minimum
liability for this plan related to the excess of the accumulated benefit
obligation over the fair value of plan assets and accrued pension benefits at
December 31, 2002. No additional minimum liability was recognized at December
31, 2001.
NMC does not provide any postretirement benefits to its employees other
than those provided under its pension plan and supplemental executive retirement
plan.
DEFINED CONTRIBUTION PLANS
The Company's employees are eligible to join 401 (k) Savings Plan once
they have achieved a minimum of 90 days of service and if they have more than
900 hours of service before their one year anniversary date. Under the
provisions of the 401(k) plan, employees are allowed to contribute up to 16% of
their salaries. The Company contributes 50% of their savings up to 6% of saved
pay after one year. The Company's total contributions for the years ended
December 31, 2002, 2001 and 2000 was $12,974, $10,647 and $8,786, respectively.
EVEREST EMPLOYEES' RETIREMENT PLAN AND TRUST
The Company's Everest employees participated in the Everest Employees
Retirement Plan ("Everest Plan"), a non-contributory defined benefit pension
plan. The defined benefit plan covered all the employees of Everest and a
related party with common ownership, Nephrology Associates of Northern Illinois,
Ltd ("NANI"), who met certain eligibility requirements. Retirement benefit
payments were based on years of credited service and average compensation over
the final five years of employment. The funding policy was to contribute
annually amounts, which were deductible for federal income tax purposes.
Effective May 16, 1996, all participant plan benefits in the defined benefit
plans were frozen. Everest and NANI ceased funding the defined benefit plans as
of May 16, 1996 and no additional years of benefit service were accrued by plan
participants subsequent to that date.
The projected benefit obligation was $7,807 and $7,418 at December 31,
2002 and 2001, respectively. There was a pension benefit of $27 for this plan
for the year ended December 31, 2002. There was no pension benefit or expense
for 2001 or 2000. The Company recorded $2,110 to accumulated other comprehensive
income to recognize the additional minimum liability for this plan related to
the excess of the accumulated benefit obligation over the fair value of plan
assets and accrued pension benefits at December 31, 2002. No additional minimum
liability was recognized at December 31, 2001.
71
NOTE 14. EQUITY
PREFERRED STOCK
At December 31, 2002 and 2001, the components of the Company's preferred
stocks as presented in the Consolidated Balance Sheets and the Consolidated
Statements 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: See Note 21. Subsequent Events, "Class D Preferred Stock". $16,318
=======
(1) 160 votes per share
(2) 16 votes per share
(3) 1/10 vote per share
STOCK OPTIONS
In 1996, FMCAG adopted a stock incentive plan (the "FMCAG Plan") under
which the Company's key management and executive employees are eligible. Under
the FMCAG Plan, eligible employees will have the right to acquire Preference
Shares of FMCAG. Options granted under the FMCAG 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 1998, the FMCAG adopted a new stock incentive plan ("FMCAG 98
Plan") under which the Company's key management and executive employees are
eligible. Under the FMCAG 98 Plan, eligible employees will have the right to
acquire Preference Shares of FMCAG. Options granted under the FMCAG 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 is 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. Effective September 2001,
no additional Grants or Options will be awarded under the FMCAG 98 Plan.
On May 23, 2001, by resolution of the FMCAG shareholders at the annual
general meeting, the FMCAG 98 Plan was replaced by a new plan (FMCAG
International Plan). The management board was empowered to issue convertible
bonds with a total value of $10,240 to the members of the management board and
to other employees of the Company entitling a total subscription of up to 4
million non-voting Preference shares. The convertible bonds have a par value of
$2.56 and are interest bearing at a rate of 5.5%. Purchase of the bonds is
funded by a non-recourse loan secured by the bond with respect to which the loan
was made. The Company has the right to offset its obligation on a convertible
bond against the employee obligation on the related loan; therefore, the
convertible bond obligations and employee loan receivables are not reflected in
the Company's consolidated financial statements. The bonds mature in ten years
and are generally fully convertible after three years. The bonds may be issued
either as convertible bonds, which are subject to a stock price target or
convertible bonds without a stock price target. In the case of convertible bonds
which are subject to a stock price target the conversion right is exercisable
only if the market price of the preference shares increased by 25% or more over
the grant-date price subsequent
72
to the day of grant for at least one day prior to exercise. Participants have
the right to opt for convertible bonds with or without the stock price target.
In order to create an incentive to select convertible bonds which depend on the
stock price target, the number of convertible bonds awarded to those employees
who select the bonds without a stock price target will be reduced by 15%.
Each convertible bond entitles the holder thereof, upon payment of a
conversion price to convert the bond into one Preference share. The conversion
price of the convertible bonds which are not subject to the stock price target
is determined by the average price of the Preference shares during the last 30
trading days prior to the date of grant. The conversion price of the convertible
bonds subject to a stock price target is equal to 125% of the average price of
the preference shares during the last 30 preceding days prior to the grant date.
The Managing Board and Supervisory Board of FMCAG are authorized to issue
up to 20% of the total number of convertible bonds each year up to May 22, 2006.
The plan is valid until the last convertible bond issued under this plan is
terminated or converted.
The following table summarizes the preference shares available at December
31, 2002 under each of the plans.
FMCAG
FMCAG PLAN FMCAG 98 PLAN INTERNATIONAL PLAN
---------- --------------- ------------------
BALANCE AT DECEMBER 31, 1999 280,999 1,455,855 --
Granted -- 653,325 --
Exercised -- (303,123) --
Canceled/Forfeited (75,833) (13,203) --
---------- ---------- ----------
BALANCE AT DECEMBER 31, 2000 205,166 1,792,854 --
Granted -- 183,007 414,264
Exercised -- (131,820) --
Canceled/Forfeited -- (154,110) --
---------- ---------- ----------
BALANCE AT DECEMBER 31, 2001 205,166 1,689,931 414,264
Granted -- -- --
Exercised -- (9,797) --
Canceled/Forfeited (45,000) (64,931) (16,850)
---------- ---------- ----------
BALANCE AT DECEMBER 31, 2002 160,166 1,615,203 397,414
========== ========== ==========
EXERCISABLE AT DECEMBER 31, 2002 68,689 1,322,745 --
========== ========== ==========
NOTE 15. 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, 2002 and 2001, the Company had
outstanding foreign currency contracts for the purchase of Euros ("EUR")
totaling $576,741 and $476,378, respectively, contracts for the purchase of
168,000 Mexican Pesos, and contracts for the sale of 14,200 Canadian Dollars.
The contracts outstanding at December 31, 2002 include forward contracts for
purchase of EUR at rates ranging from $0.8719 to $0.9676 per EUR, forward
contracts for the purchase of Mexican Pesos at rates ranging from 10.295 to
11.101 per US$, and outright sale contracts for
73
Canadian Dollars at rates ranging from $0.6283 to $0.6539 per Canadian Dollar.
All contracts are for periods between January 2003 and May 2004.
The fair value of currency contracts are the estimated amounts that the
Company would receive or pay to terminate the agreement at the reporting date,
taking into account the current exchange rates and the current creditworthiness
of the counterparties. At December 31, 2002 and 2001, the Company would have
received (paid) approximately $84,821 and ($13,340), respectively, to terminate
the contracts.
INTEREST RATE AGREEMENTS
At December 31, 2002 and 2001, the Company had interest rate swaps and
option agreements outstanding with various commercial banks for notional amounts
totaling $1,050,000. All of these agreements were entered into for other than
trading purposes. During 2002, the Company extended $600,000 of interest rate
swaps due to expire in 2003 until 2006 through 2009 with an average reduction in
interest rate of 1.77%. There were no amounts paid or received for these
extensions. The contracts mature at various dates between May 2004 and December
2009.
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, 2002: $616,900), draw downs under
the receivables financing facility (drawn as of December 31, 2002: $445,000), to
fixed rates of interest approximating 6.88%. Under the NMC Credit Facility, the
Company agreed to maintain at least $500,000 of interest rate protection.
The fair value of the interest rate swaps and options is the estimated
amount that the Company would receive or pay to terminate the agreements. The
fair value of these agreements at December 31, 2002 and December 31, 2001 would
require the Company to pay approximately $99,200 and $66,600 respectively. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgement and therefore cannot be determined with precision. Changes
in assumptions significantly affect the estimates.
CREDIT RISK
The Company is exposed to credit risk to the extent of potential
nonperformance by counterparties on financial instruments. As of December 31,
2002, the Company's credit exposure was insignificant and limited to the fair
value stated above; the Company believes the risk of incurring losses due to
credit risk is remote.
FAIR VALUE OF OTHER FINANCIAL INSTRUMENTS
At December 31, 2002 and 2001, the carrying value of cash, cash
equivalents, accounts receivable, prepaid expenses, accounts payable, accrued
expenses, short-term borrowings and current liabilities approximated their fair
values, based on the short-term maturities of these instruments. Mandatorily
redeemable preferred securities with related parties are mark to market at each
balance sheet date and reflect their fair value.
The Company's long-term bank debt represents borrowings primarily from a
syndicated bank credit facility. The long-term bank debt is valued at its
carrying amount because the actual drawings under the facility carry interest on
a variable basis which reflects actual money market conditions, plus specific
margins which represent Company-related performance ratios as well as the entire
set of terms and conditions including covenants as determined in the 2003
Senior Credit Agreement.
In addition, the Company is a "Subsidiary Guarantor" along with its parent
company, FMCAG, for the issuance of Trust Preferred Securities on the books of
FMCAG at a carrying value of $1,145,281 and $1,428,768, at December 31, 2002 and
2001 respectively. FMCAG and Subsidiary Guarantors guarantee the Trust Preferred
Securities through a series of undertakings. At December 31, 2002 the carrying
value of the Trust Preferred Securities exceeded the fair value by $34,978. At
December 31, 2001, the fair value of these Trust Preferred Securities exceeded
the carrying value by $4,506. The fair value of these Trust Preferred Securities
is based upon market quotes.
74
NOTE 16. 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, 2002 and 2001, the Company had
net accounts payable of $28,897 and $39,934, respectively.
BORROWINGS WITH AFFILIATES
The Company has various outstanding borrowings with FMCAG 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 12 - "Mandatorily Redeemable Preferred Securities."
75
NOTE 17. COMMITMENTS AND CONTINGENCIES
COMMERCIAL LITIGATION
The Company was formed as a result of a series of transactions pursuant to
the Agreement and Plan of Reorganization (the "Merger") dated as of February 4,
1996 by and between W.R. Grace & Co. and Fresenius AG. At the time of the
Merger, a W.R. Grace & Co. subsidiary known as W.R. Grace & Co.-Conn. had, and
continues to have, significant potential liabilities arising out of
product-liability related litigation, pre-Merger tax claims and other claims
unrelated to NMC, which was Grace's dialysis business prior to the Merger. In
connection with the Merger, W.R. Grace & Co.-Conn. agreed to indemnify the
Company, and NMC against all liabilities of W.R. Grace & Co., whether
relating to events occurring before or after the Merger, other than liabilities
arising from or relating to NMC's operations. W.R. Grace & Co. and certain of
its subsidiaries filed for reorganization under Chapter 11 of the U.S.
Bankruptcy Code (the "Grace Chapter 11 Proceedings") on April 2, 2001.
Pre-Merger tax claims or tax claims that would arise if events were to
violate the tax-free nature of the Merger, could ultimately be the obligation of
the Company. In particular, W. R. Grace & Co. has disclosed in its filings with
the Securities and Exchange Commission that: its tax returns for the 1993 to
1996 tax years are under audit by the Internal Revenue Service (the "Service");
W. R. Grace & Co. has received the Service's examination report on tax periods
1993 to 1996; that during those years Grace deducted approximately $122,100 in
interest attributable to corporate owned life insurance ("COLI") policy loans;
that W.R. Grace & Co. has paid $21,200 of tax and interest related to COLI
deductions taken in tax years prior to 1993; that a U.S. District Court ruling
has denied interest deductions of a taxpayer in a similar situation and that
W.R. Grace & Co. is seeking a settlement of the Service's claims. Subject to
certain representations made by W.R. Grace & Co., the Company and Fresenius AG,
W.R. Grace & Co. and certain of its affiliates agreed to indemnify the Company
against this and other pre-Merger and Merger related tax liabilities.
Prior to and after the commencement of the Grace Chapter 11 Proceedings,
class action complaints were filed against W.R. Grace & Co. and the Company by
plaintiffs claiming to be creditors of W.R. Grace & Co.- Conn., and by the
asbestos creditors' committees on behalf of the W.R. Grace & Co. bankruptcy
estate in the Grace Chapter 11 Proceedings, alleging among other things that the
Merger was a fraudulent conveyance, violated the uniform fraudulent transfer act
and constituted a conspiracy. All such cases have been stayed and transferred to
or are pending before the U.S. District Court as part of the Grace Chapter 11
Proceedings.
On February 6, 2003, the Company reached a definitive agreement with the
asbestos creditors' committees on behalf of the W.R. Grace and Co. bankruptcy
estate in the matters pending in the Grace Chapter 11 Proceedings (the
"Settlement Agreement") for the settlement of all fraudulent conveyance claims
against it and other claims related to the Company that arise out of the
bankruptcy of W.R. Grace & Co. Under the terms of the Settlement Agreement,
fraudulent conveyance and other claims raised on behalf of asbestos claimants
will be dismissed with prejudice and the Company will receive protection against
existing and potential future W.R. Grace & Co. related claims, including
fraudulent conveyance and asbestos claims, and indemnification against income
tax claims related to the non-NMC members of the W.R. Grace & Co. consolidated
tax group upon confirmation of a W.R. Grace & Co. bankruptcy reorganization plan
that contains such provision. Under the Settlement Agreement, the Company will
pay a total of $115,000 to the W.R. Grace & Co. bankruptcy estate, or as
otherwise directed by the Court, upon plan confirmation. No admission of
liability has been or will be made. The Settlement Agreement is subject to the
approval of the U.S. District Court. The foregoing summary of the material
terms of the Settlement Agreement is qualified in its entirety by reference to
the full text of the Settlement Agreement. The Settlement Agreement has been
filed as an exhibit to the Company's annual report for 2002 to the Securities
and Exchange Commission.
Subsequent to the Merger, W.R. Grace & Co. was involved in a multi-step
transaction involving Sealed Air Corporation (formerly known as Grace Holding,
Inc.). The Company is engaged in litigation with Sealed Air Corporation ("Sealed
Air") to confirm the Company's entitlement to indemnification from Sealed Air
for all losses and expenses incurred by the Company relating to pre-Merger tax
liabilities and Merger-related claims. Under the Settlement Agreement, upon
confirmation of a plan that satisfies the conditions to the Company's payment
obligation, this litigation will be dismissed with prejudice.
Since 1997, the Company, NMC, and certain NMC subsidiaries have been
engaged in litigation with various insurance companies concerning allegations of
inappropriate billing practices for nutritional therapy and diagnostic and
clinical laboratory tests and misrepresentations. These claims against the
Company seek unspecified damages and costs. The Company, NMC and its
subsidiaries believe that there are substantial defenses to the claims asserted,
and intend to vigorously defend all lawsuits. The Company has filed
counterclaims against the plaintiffs in these matters based on inappropriate
claim denials and delays in claim payments. Other private payors have contacted
the Company and may assert that NMC received excess payments and, similarly, may
join the lawsuits or file their own lawsuit seeking reimbursement and other
damages. Although the ultimate outcome on the Company of these proceedings
cannot be predicted at this time, an adverse result could have a material
adverse effect on the Company's business, financial condition and results of
operations.
76
OTHER LITIGATION AND POTENTIAL EXPOSURES
From time to time, the Company is a party to or may be threatened with
other litigation arising in the ordinary course of its business. Management
regularly analyzes current information including, as applicable, the Company's
defenses and insurance coverage and, as necessary, provides accruals for
probable liabilities for the eventual disposition of these matters.
The Company, like other health care providers, conducts its operations
under intense government regulation and scrutiny. The Company must comply with
regulations which relate to or govern the safety and efficacy of medical
products and supplies, the operation of manufacturing facilities, laboratories
and dialysis clinics, and environmental and occupational health and safety. The
Company must also comply with the Anti-Kickback Statute, the False Claims Act,
the Stark Statute, 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. 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 expects 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 large number facilities throughout the U.S. In such a
decentralized system, it is often difficult to maintain the desired level of
oversight and control over the thousands of individuals employed by many
affiliated companies. The Company relies upon its management structure,
regulatory and legal resources, and the effective operation of its compliance
program to direct, manage and monitor the activities of these employees. On
occasion, the Company may identify instances where employees, deliberately or
inadvertently, have submitted inadequate or false billings. The actions of such
persons may subject the Company and its subsidiaries to liability under the
Anti-Kickback Statute, the Stark Statute and False Claims Act, among other laws.
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.
ACCRUED SPECIAL CHARGE FOR LEGAL MATTERS
At December 31, 2001, the Company recorded a pre-tax special charge of
$258,000 to reflect anticipated expenses associated with the continued defense
and resolution of pre-Merger tax claims, Merger-related claims, and commercial
insurer claims. The costs associated with the Settlement Agreement will be
charged against this accrual. While the Company believes that its remaining
accruals reasonably estimate the Company's currently anticipated costs related
to the continued defense and resolution of the remaining matters, no assurances
can be given that the actual costs incurred by the Company will not exceed the
amount of these accruals.
77
NOTE 18. SIGNIFICANT RELATIONS
For the periods presented, approximately 66% of the Company's health care
services net revenues are paid by and subject to regulations under governmental
programs, primarily Medicare and Medicaid. The Company maintains reserves for
losses related to these programs, including uncollectible accounts receivable,
and such losses have been within management's expectations.
Revenues from EPO accounted for approximately 27% of the Dialysis Services
net revenues for the twelve months ended December 31, 2002 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 19. 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,
2002, 2001 and 2000 pertaining to the Company's operations by geographic area.
UNITED STATES ASIA/PACIFIC TOTAL
------------- ------------ ----------
NET REVENUES FOR TWELVE MONTHS ENDED
2002 $3,749,495 $ 516 $3,750,011
2001 3,605,350 4,201 3,609,551
2000 3,085,320 3,855 3,089,175
OPERATING EARNINGS FOR TWELVE MONTHS ENDED
2002 $ 552,921 $ 744 $ 553,665
2001 559,319 631 559,950
2000 520,790 30 520,820
TOTAL ASSETS AT DECEMBER 31,
2002 3,288,919 4,551 3,293,470
2001 3,287,097 9,420 3,296,517
2000 2,810,514 10,394 2,820,908
The table below provides information for the years ended December 31,
2002, 2001 and 2000 pertaining to the Company's two industry segments.
LESS
DIALYSIS DIALYSIS INTERSEGMENT
SERVICES PRODUCTS SALES TOTAL
---------- -------- ------------ ----------
NET REVENUES FOR TWELVE MONTHS ENDED
2002 $3,311,001 $762,999 $323,989 $3,750,011
2001 3,149,223 755,103 294,775 3,609,551
2000 2,624,520 716,757 252,102 3,089,175
OPERATING EARNINGS FOR TWELVE MONTHS ENDED
2002 410,202 143,463 -- 553,665
2001 422,030 137,920 -- 559,950
2000 402,887 117,933 -- 520,820
78
ASSETS AT DECEMBER 31
2002 2,657,692 635,778 -- 3,293,470
2001 2,650,561 645,956 -- 3,296,517
2000 2,176,055 644,853 -- 2,820,908
CAPITAL EXPENDITURES FOR TWELVE MONTHS ENDED
2002 90,721 14,000 -- 104,721
2001 85,465 37,749 -- 123,214
2000 72,421 28,775 -- 101,196
DEPRECIATION AND AMORTIZATION OF PROPERTIES AND
EQUIPMENT FOR TWELVE MONTHS ENDED
2002 105,243 17,289 -- 122,532
2001 146,986 24,196 -- 171,182
2000 120,985 23,749 -- 144,734
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 2002 2001 2000
----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES:
Total operating earnings for reportable segments $ 553,665 $ 559,950 $ 520,820
Corporate G&A (including foreign exchange) (49,072) (129,482) (95,860)
Research and development expense (9,222) (5,462) (4,127)
Net interest expense (210,348) (226,480) (187,315)
Interest expense on settlement of investigation, net -- -- (29,947)
Special charge for legal matters -- (258,159) --
----------- ----------- -----------
Income (Loss) before income taxes and extraordinary item $ 285,023 $ (59,633) $ 203,571
=========== =========== ===========
ASSETS:
Total assets for reportable segments $ 3,293,470 $ 3,296,517 $ 2,820,908
Intangible assets not allocated to segments 1,876,780 1,888,873 1,934,643
Accounts receivable facility (445,249) (442,000) (445,300)
IDPN accounts receivable -- -- 5,189
Corporate assets and other 285,343 259,576 237,918
----------- ----------- -----------
Total Assets $ 5,010,344 $ 5,002,966 $ 4,553,358
=========== =========== ===========
CAPITAL EXPENDITURES
Total capital expenditures for reportable segments $ 104,721 $ 123,214 $ 101,196
Corporate capital expenditures 489 1,407 3,003
----------- ----------- -----------
Total Capital Expenditures $ 105,210 $ 124,621 $ 104,199
=========== =========== ===========
DEPRECIATION AND AMORTIZATION:
Total depreciation and amortization for reportable segments $ 122,532 $ 171,182 $ 144,734
Corporate depreciation and amortization 17,218 75,637 78,136
----------- ----------- -----------
Total Depreciation and Amortization $ 139,750 $ 246,819 $ 222,870
=========== =========== ===========
79
NOTE 20. QUARTERLY SUMMARY (UNAUDITED)
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
----------- ----------- ----------- -----------
2002
Net revenues $ 893,904 $ 930,400 $ 948,645 $ 977,062
Cost of health care services and medical supplies 636,778 656,764 671,953 684,464
Operating expenses 134,944 144,312 164,354 161,071
Interest expense, net 55,023 55,818 50,543 48,964
----------- ----------- ----------- -----------
Total expenses 826,745 856,894 886,850 894,499
----------- ----------- ----------- -----------
Income before income taxes and extraordinary item 67,159 73,506 61,795 82,563
Provision for income taxes 26,701 29,032 25,387 32,804
----------- ----------- ----------- -----------
Net Income before extraordinary item 40,458 44,474 36,408 49,759
Extraordinary loss on early redemption of borrowings
net of tax benefit $6,520 -- 9,780 -- --
=========== =========== =========== ===========
Net income $ 40,458 $ 34,694 $ 36,408 $ 49,759
=========== =========== =========== ===========
Basic and fully dilutive net income
before extraordinary item per share $ 0.45 $ 0.49 $ 0.40 $ 0.55
----------- ----------- ----------- -----------
Basic and fully dilutive net income per share $ 0.45 $ 0.39 $ 0.40 $ 0.55
----------- ----------- ----------- -----------
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
----------- ----------- ----------- -----------
2001
Net revenues $ 868,276 $ 903,791 $ 916,508 $ 920,976
Cost of health care services and medical supplies 602,266 619,588 633,530 655,471
Operating expenses 167,575 167,930 162,356 175,829
Interest expense, net 55,478 55,149 59,457 56,396
Special Charge for legal matters -- -- -- 258,159
----------- ----------- ----------- -----------
Total expenses 825,319 842,667 855,343 1,145,855
----------- ----------- ----------- -----------
Income (loss) before income taxes 42,957 61,124 61,165 (224,879)
Provision (benefit) for income taxes 20,510 29,650 29,219 (59,756)
----------- ----------- ----------- -----------
Net income (loss) $ 22,447 $ 31,474 $ 31,946 $ (165,123)
=========== =========== =========== ===========
Basic and fully dilutive net income (loss)per share $ 0.25 $ 0.35 $ 0.35 $ (1.84)
----------- ----------- ----------- -----------
The first and second quarter of 2001 have been restated to include the results
of operations of Everest. See Note 2 - "Summary of Significant Accounting
Policies - Everest Acquisition."
80
NOTE 21. SUBSEQUENT EVENTS
2003 SENIOR CREDIT AGREEMENT
On February 21, 2003, the Company entered into an amended and restated
credit agreement (hereafter "2003 Senior Credit Agreement") with Bank of America
N.A, Credit Suisse First Boston, Dresdner Bank AG New York, JPMorgan Chase Bank,
The Bank of Nova Scotia and certain other lenders (collectively, the "Lenders"),
pursuant to which the Lenders have made available to the Company and certain
subsidiaries and affiliates an aggregate of up to $1,500,000 through three
credit facilities:
- - a revolving credit facility of up to $500,000 (of which up to $250,000 is
available for letters of credit, up to $300,000 is available for
borrowings in certain non-U.S. currencies, up to $75,000 is available as
swing lines in U.S. dollars, up to $250,000 is available as a competitive
loan facility and up to $50,000 is available as swing lines in certain
non-U.S. currencies, the total of which cannot exceed $500,000) which will
be due and payable on October 31, 2007.
- - a term loan facility ("Loan A") of $500,000, also scheduled to expire on
October 31, 2007. The terms of the 2003 Senior Credit Agreement require
payments that permanently reduce the term loan facility. The repayment
begins in the third quarter of 2004 and amounts to $25,000 per quarter.
The remaining amount outstanding is due on October 31, 2007.
- - a term loan facility ("Loan B") of $500,000, scheduled to expire February
21, 2010 with a repayment provision that if the Trust Preferred Securities
due February 1, 2008 are not repaid, refinanced or have their maturity
extended, repayment will be due on October 31, 2007. The terms of the Loan
B require repayments of 0.25% per quarter beginning with the second
quarter of 2003.
Loans under the 2003 Senior Credit Agreement bear interest at a base rate
determined in accordance with the agreement. For the revolving credit facility
and Loan A, interest will be at a rate equal to LIBOR plus an applicable margin,
or an alternate base rate, defined as the higher of the Bank of America prime
rate or the Federal Funds rate plus the applicable margin. The applicable margin
is variable and depends on the ratio of EBITDA and funded debt as defined in the
credit agreement. The interest rate for Loan B is LIBOR plus a percentage in
accordance with the agreement. Fees are also payable at a percentage per annum
on the portion of the 2003 Senior Credit Agreement not used.
In addition to scheduled principal payments, the 2003 Senior Credit
Agreement will be reduced by portions of the net cash proceeds from certain
sales of assets, securitization transactions and the issuance of subordinated
debt and equity securities.
The 2003 Senior Credit Agreement contains affirmative and negative
covenants with respect to the Company and its subsidiaries and other payment
restrictions substantially similar to the previous 1996 Senior Credit Agreement.
Some of the limitations imposed by the covenant are the indebtedness of the
Company, investments by the Company, and require the Company to maintain certain
ratios defined in the agreement.
CLASS D PREFERRED STOCK
On February 4, 2003, the Company announced it was exercising its right to
redeem all of its outstanding shares of the Class D Preferred Stock ("Class D
Shares"). The Class D Shares were issued to the common shareholders of W.R.
Grace & Co. in connection with the 1996 reorganization involving W. R. Grace and
Fresenius Medical Care.
Class D Shares that have been properly transferred to, and received by,
the redemption agent will be redeemed commencing on March 28, 2003 at a
redemption price of $0.10 per share. FMCH intends to redeem the 89 million
outstanding Class D Shares at a total cash outflow of approximately $8,900. This
transaction will have no earnings impact for the Company. After March 28, 2003
the Class D Shares will cease to be deemed issued and outstanding shares of the
Company's capital stock and will be restored to the status of authorized but
unissued shares of preferred stock.
81
To the Shareholders
Fresenius Medical Care Holdings, Inc.
Under the date of January 31, 2003, we reported on the consolidated
balance sheets of Fresenius Medical Care Holdings, Inc. and its subsidiaries
(the "Company") as of December 31, 2002 and 2001 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, 2002 as
included in the annual report on Form 10-K for the year 2002. 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
January 31, 2003
Boston, MA
82
SCHEDULE II
FRESENIUS MEDICAL CARE HOLDINGS, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(DOLLARS IN THOUSANDS)
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 2002
ADDITIONS (DEDUCTIONS)
----------------------------
CHARGED
BALANCE AT (CREDITED) TO
BEGINNING OF COSTS AND BALANCE AT
YEAR EXPENSES OTHER NET END OF PERIOD
------------ -------------- --------- -------------
DESCRIPTION
Valuation and qualifying accounts deducted
from assets:
Allowances for notes and accounts receivable $103,859 98,632 (80,871) $121,620
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 2001
ADDITIONS (DEDUCTIONS)
----------------------------
CHARGED
BALANCE AT (CREDITED) TO
BEGINNING OF COSTS AND BALANCE AT
YEAR EXPENSES OTHER NET END OF PERIOD
------------ -------------- --------- -------------
DESCRIPTION
Valuation and qualifying accounts deducted
from assets:
Allowances for notes and accounts receivable $ 80,466 85,448 (62,055) $103,859
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 2000
ADDITIONS (DEDUCTIONS)
----------------------------
CHARGED
BALANCE AT (CREDITED) TO
BEGINNING OF COSTS AND BALANCE AT
YEAR EXPENSES OTHER NET END OF PERIOD
------------ -------------- --------- -------------
DESCRIPTION
Valuation and qualifying accounts deducted
from assets:
Allowances for notes and accounts receivable $ 63,012 62,949 (45,495) $ 80,466
83
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------- -----------
Exhibit 3.1 Certificate of Incorporation of Fresenius Medical Care Holdings,
Inc. (f/k/a W. R. Grace & Co.) under Section 402 of the New York
Business Corporation Law dated March 23, 1988 (incorporated
herein by reference to the Form 8-K of the Company filed on May
9, 1988).
Exhibit 3.2 Certificate of Amendment of the Certificate of Incorporation of
Fresenius Medical Care Holdings, Inc. (f/k/a W. R. Grace & Co.)
under Section 805 of the New York Business Corporation Law dated
May 25, 1988 (changing the name to W. R. Grace & Co.,
incorporated herein by reference to the Form 8-K of the Company
filed on May 9, 1988).
Exhibit 3.3 Certificate of Amendment of the Certificate of Incorporation of
Fresenius Medical Care Holdings, Inc. (f/k/a W. R. Grace & Co.)
under Section 805 of the New York Business Corporation Law dated
September 27, 1996 (incorporated herein by reference to the Form
8-K of the Company filed with the Commission on October 15,
1996).
Exhibit 3.4 Certificate of Amendment of the Certificate of Incorporation of
Fresenius Medical Care Holdings, Inc. (f/k/a W. R. Grace & Co.)
under Section 805 of the New York Business Corporation Law dated
September 27, 1996 (changing the name to Fresenius National
Medical Care Holdings, Inc., incorporated herein by reference to
the Form 8-K of the Company filed with the Commission on October
15, 1996).
Exhibit 3.5 Certificate of Amendment of the Certificate of Incorporation of
Fresenius Medical Care Holdings, Inc. under Section 805 of the
New York Business Corporation Law dated June 12, 1997 (changing
name to Fresenius Medical Care Holdings, Inc., incorporated
herein by reference to the Form 10-Q of the Company filed with
the Commission on August 14, 1997).
Exhibit 3.6 Certificate of Amendment of the Certificate of Incorporation of
Fresenius Medical Care Holdings, Inc. dated July 6, 2001
(authorizing action by majority written consent of the
shareholders) (incorporated herein by reference to the Form 10-Q
of the Company filed with the Commission on August 14, 2001).
Exhibit 3.7 Amended and Restated By-laws of Fresenius Medical Care Holdings,
Inc. (incorporated herein by reference to the Form 10-Q of the
Company filed with the Commission on August 14, 1997).
Exhibit 4.1 Credit Agreement dated as of September 27, 1996 among National
Medical Care, Inc. and Certain Subsidiaries and Affiliates, as
Borrowers, Certain Subsidiaries and Affiliates, as Guarantors,
the Lenders named therein, NationsBank, N.A., as paying agent
and The Bank of Nova Scotia, The Chase Manhattan Bank, Dresdner
Bank AG and Bank of America, N.A. (formerly known as
NationsBank, N.A.), as Managing Agents (incorporated herein by
reference to the Form 6-K of Fresenius Medical Care AG filed
with the Commission on October 15, 1996).
Exhibit 4.2 Amendment dated as of November 26, 1996 (amendment to the Credit
Agreement dated as of September 27, 1996, incorporated herein by
reference to the Form 8-K of Registrant filed with the
Commission on December 16, 1996).
Exhibit 4.3 Amendment No. 2 dated December 12, 1996 (second amendment to the
Credit Agreement dated as of September 27, 1996, incorporated
herein by reference to the Form 10-K of Registrant filed with
the Commission on March 31, 1997).
Exhibit 4.4 Amendment No. 3 dated June 13, 1997 to the Credit Agreement
dated as of September 27, 1996, among National Medical Care,
Inc. and Certain Subsidiaries and Affiliates, as Borrowers,
Certain Subsidiaries and Affiliates, as Guarantors, the Lenders
named therein, Bank of America, N.A. (formerly known as
NationsBank, N.A.), as paying agent and The Bank of Nova Scotia,
The Chase Manhattan Bank, Dresdner Bank AG and Bank of America,
N.A. (formerly known as NationsBank, N.A.), as Managing Agents,
as previously amended (incorporated herein by reference to the
Form 10-Q of the Registrant filed with the Commission on
November 14, 1997).
84
Exhibit 4.5 Amendment No. 4, dated August 26, 1997 to the Credit Agreement
dated as of September 27, 1996, among National Medical Care,
Inc. and Certain Subsidiaries and Affiliates, as Borrowers,
Certain Subsidiaries and Affiliates, as Guarantors, the Lenders
named therein, Bank of America, N.A. (formerly known as
NationsBank, N.A.), as paying agent and The Bank of Nova Scotia,
The Chase Manhattan Bank, Dresdner Bank AG and Bank of America,
N.A. (formerly known as NationsBank, N.A.), as Managing Agents,
as previously amended (incorporated herein by reference to the
Form 10-Q of Registrant filed with Commission on November 14,
1997).
Exhibit 4.6 Amendment No. 5 dated December 12, 1997 to the Credit Agreement
dated as of September 27, 1996, among National Medical Care,
Inc. and Certain Subsidiaries and Affiliates, as Borrowers,
Certain Subsidiaries and Affiliates, as Guarantors, the Lenders
named therein, Bank of America, N.A. (formerly known as
NationsBank, N.A.), as paying agent and The Bank of Nova Scotia,
The Chase Manhattan Bank, Dresdner Bank AG and Bank of America,
N.A. (formerly known as NationsBank, N.A.), as Managing Agents,
as previously amended (incorporated herein by reference to the
Form 10-K of Registrant filed with Commission on March 23,
1998).
Exhibit 4.7 Form of Consent to Modification of Amendment No. 5 dated
December 12, 1997 to the Credit Agreement dated as of September
27, 1996 among National Medical Care, Inc. and Certain
Subsidiaries and Affiliates, as Borrowers, Certain Subsidiaries
and Affiliates, as Guarantors, the Lenders named therein, Bank
of America, N.A. (formerly known as NationsBank, N.A.), as
paying agent and The Bank of Nova Scotia, The Chase Manhattan
Bank, Dresdner Bank AG and Bank of America, N.A. (formerly known
as NationsBank, N.A.), as Managing Agents (incorporated herein
by reference to the Form 10-K of Registrant filed with
Commission on March 23, 1998).
Exhibit 4.8 Amendment No. 6 dated effective September 30, 1998 to the Credit
Agreement dated as of September 27, 1996, among National Medical
Care, Inc. and Certain Subsidiaries and Affiliates, as
Borrowers, Certain Subsidiaries and Affiliates, as Guarantors,
the Lenders named therein, Bank of America, N.A. (formerly known
as NationsBank, N.A.), as paying agent and The Bank of Nova
Scotia, The Chase Manhattan Bank, N.A., Dresdner Bank AG and
Bank of America, N.A. (formerly known as NationsBank, N.A.), as
Managing Agents, as previously amended (incorporated herein by
reference to the Form 10-Q of Registrant filed with Commission
on November 12, 1998).
Exhibit 4.9 Amendment No. 7 dated as of December 31, 1998 to the Credit
Agreement dated as of September 27, 1996 among National Medical
Care, Inc. and Certain Subsidiaries and Affiliates, as
Borrowers, Certain Subsidiaries and Affiliates Guarantors, the
Lenders named therein, Bank of America, N.A. (formerly known as
NationsBank, N.A.), paying agent and The Bank of Nova Scotia,
The Chase Manhattan Bank, Dresdner Bank A. G. and Bank of
America, N.A. (formerly known as NationsBank, N.A.). as Managing
Agents, (incorporated herein by reference to the Form 10-K of
registrant filed with Commission on March 9, 1999).
Exhibit 4.10 Amendment No. 8 dated as of June 30, 1999 to the Credit
Agreement dated as of September 27, 1996 among National Medical
Care, Inc. and Certain Subsidiaries and Affiliates, as
Borrowers, Certain Subsidiaries and Affiliates Guarantors, the
Lenders named therein, Bank of America, N.A. (formerly known as
NationsBank, N.A.), as paying agent and The Bank of Nova Scotia,
The Chase Manhattan Bank, Dresdner Bank A.G. and Bank of
America, N.A. (formerly known as NationsBank, N.A.), as Managing
Agent (incorporated herein by reference to the Form 10-K of
registrant filed with Commission on March 30, 2000).
Exhibit 4.11 Amendment No. 9 dated as of December 15, 1999 to the Credit
Agreement dated as of September 27, 1996 among National Medical
Care, Inc. and Certain Subsidiaries and Affiliates, as
Borrowers, Certain Subsidiaries and Affiliates Guarantors, the
Lenders named therein, Bank of America, N.A. (formerly known as
NationsBank, N.A.), as paying agent and The Bank of Nova Scotia,
The Chase Manhattan Bank, Dresdner Bank A.G. and Bank of
America, N.A. (formerly known as NationsBank, N.A.), as Managing
Agent (incorporated herein by reference to the Form 10-K of
registrant filed with Commission on March 30, 2000).
Exhibit 4.12 Amendment No. 10 dated as of September 21, 2000 to the Credit
Agreement dated as of September 27, 1996 among National Medical
Care, Inc. and Certain Subsidiaries and Affiliates, as
Borrowers, Certain
85
Subsidiaries and Affiliates Guarantors, the Lenders named
therein, Bank of America, N.A. (formerly known as NationsBank,
N.A.), as paying agent and The Bank of Nova Scotia, The Chase
Manhattan Bank, Dresdner Bank A.G. and Bank of America, N.A.
(formerly known as NationsBank, N.A.), as Managing Agent
(incorporated herein by reference to the Form 10-K of registrant
filed with Commission on November 11, 2000).
Exhibit 4.13 Amendment No. 11 dated as of May 31, 2001 to the Credit
Agreement dated as of September 27, 1996 among National Medical
Care, Inc. and Certain Subsidiaries and Affiliates, as
Borrowers, Certain Subsidiaries and Affiliates Guarantors, the
Lenders named therein, Bank of America, N.A. (formerly known as
NationsBank, N.A). as paying agent and The Bank of Nova Scotia,
The Chase Manhattan Bank, Dresdner Bank A.G. and Bank of
America, N.A. (formerly known as NationsBank, N.A.), as Managing
Agent (incorporated by reference to the Registration Statement
on Form F-4 of Fresenius Medical Care AG (Registration No.
333-66558)).
Exhibit 4.14 Amendment No. 12 dated as of June 30, 2001 to the Credit
Agreement dated as of September 27, 1996 among National Medical
Care, Inc. and Certain Subsidiaries and Affiliates, as
Borrowers, Certain Subsidiaries and Affiliates Guarantors, the
Lenders named therein, Bank of America, N.A. (formerly known as
NationsBank, N.A.), as paying agent and The Bank of Nova Scotia,
The Chase Manhattan Bank, Dresdner Bank A.G. and Bank of
America, N.A. (formerly known as NationsBank, N.A.), as Managing
Agent (incorporated by reference to the Registration Statement
on Form F-4 of Fresenius Medical Care AG (Registration No.
333-66558)).
Exhibit 4.15 Amendment No. 13 dated as of December 17, 2001 to the Credit
Agreement dated as of September 27, 1996 among National Medical
Care, Inc. and Certain Subsidiaries and Affiliates, as
Borrowers, Certain Subsidiaries and Affiliates Guarantors, the
Lenders named therein, Bank of America, N.A. (formerly known as
NationsBank, N.A.), as paying agent and The Bank of Nova Scotia,
The Chase Manhattan Bank, Dresdner Bank A.G. and Bank of
America, N.A. (formerly known as NationsBank, N.A.), as Managing
Agent (incorporated herein by reference to the Form 10-K of
Registrant filed with Commission on April 1, 2001).
Exhibit 4.16 Amendment No. 14 dated as of February 22, 2002 to the Credit
Agreement dated as of September 27, 1996 among National Medical
Care, Inc. and Certain Subsidiaries and Affiliates, as
Borrowers, Certain Subsidiaries and Affiliates Guarantors, the
Lenders named therein, Bank of America, N.A. (formerly known as
NationsBank, N. A.), as paying agent and The Bank of Nova
Scotia, The Chase Manhattan Bank, Dresdner Bank A.G. and Bank of
America, N. A. (formerly known as NationsBank, N. A. ), as
Managing Agent (incorporated herein by reference to the Form
10-Q of Registrant filed with Commission on November 14, 2002).
Exhibit 4.17 Amendment No. 15 dated as of December 5, 2002 to the Credit
Agreement, by and among National Medical Care, Inc. and Certain
Subsidiaries and Affiliates party to the Credit Agreement, and
identified therein, and Bank of America, N. A. (formerly known
as NationsBank, N. A.), as paying Agent for and on behalf of the
Lenders (filed herewith).
Exhibit 4.18 Fresenius Medical Care AG 1996 Stock Incentive Plan
(incorporated herein by reference to the FMC AG's Registrant
Statement on Form S-8 dated October 1, 1996).
Exhibit 4.19 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 4.20 Fresenius Medical Care AG 2001 International Stock Incentive
Plan (incorporated by reference to the Registration Statement on
Form F-4 of Fresenius Medical Care AG filed August 2, 2001
(Registration No. 333-66558)).
Exhibit 4.21 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 4.22 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
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Subordinated Notes due 2008 (incorporated herein by reference to
the Form 10-K of Registrant filed with Commission on March 23,
1998).
Exhibit 4.23 Senior Subordinated Indenture dated as of June 6, 2001 among
Fresenius Medical Care AG, FMC Trust Finance S.a.r.l. Luxemborg
- III, Fresenius Medical Care Holdings, Inc., Fresenius Medical
Care Deutschland GmbH and State Street Bank and Trust Company
with respect to 7 7/8% Senior Subordinated Notes due 2011
(incorporated herein by reference to the Registration Statement
on Form F-4 of Fresenius Medical Care AG dated August 2, 2001
(Registration No. 333-66558)).
Exhibit 4.24 Senior Subordinated Indenture dated as of June 15, 2001 among
Fresenius Medical Care AG, FMC Trust Finance S.a.r.l. Luxemborg
- III, Fresenius Medical Care Holdings, Inc., Fresenius Medical
Care Deutschland GmbH and State Street Bank and Trust Company
with respect to 7 7/8% Senior Subordinated Notes due 2011
(incorporated herein by reference to the Registration Statement
on Form F-4 of Fresenius Medical Care AG dated August 2, 2001
(Registration No. 333-66558)).
Exhibit 10.1* Product Purchase Agreement effective January 1, 2002 between
Amgen USA, Inc. and National Medical Care, Inc. (incorporated by
reference to the Form 10-Q of the Registrant filed with the
Commission on May 15, 2002).
Exhibit 10.2 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 10.3 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 10.4 Second Amended and Restated Transfer and Administrative
agreement dated as of September 24, 2002 among NMC Funding
Corporation, National Medical Care, Inc., Enterprise Funding
Corporation, Compass US Acquisition, LLC, Giro Multifunding
Corporation, the Bank Investors listed therein, WestLB AG, New
York Branch (formerly known as Westdeutsche Landesbank
Girozentrale, New York Branch), as an administrative agent and
Bank of America, N.A., as an administrative agent (incorporated
herein by reference to the Form 10-Q of Registrant filed with
Commission on November 14, 2002).
Exhibit 10.5 Amendment No.1 dated as of October 22, 2002 to the Second
Amended and Restated Transfer and Administrative agreement dated
as of September 24, 2002 among NMC Funding Corporation, National
Medical Care, Inc., Enterprise Funding Corporation, Compass US
Acquisition, LLC, Giro Multifunding Corporation, the Bank
Investors listed therein, WestLB AG, New York Branch (formerly
known as Westdeutsche Landesbank Girozentrale, New York Branch),
as an administrative agent and Bank of America, N.A., as an
administrative agent (incorporated herein by reference to the
Form 10-Q of Registrant filed with Commission on November 14,
2002).
Exhibit 10.6 Amendment No.2 dated as of November 8, 2002 to the Second
Amended and Restated Transfer and Administrative agreement dated
as of September 24, 2002 among NMC Funding Corporation, National
Medical Care, Inc., Enterprise Funding Corporation, Compass US
Acquisition, LLC, Giro Multifunding Corporation, Asset One
Securitization, LLC, the Bank Investors listed therein, WestLB
AG, New York Branch (formerly known as Westdeutsche Landesbank
Girozentrale, New York Branch), as an administrative agent and
Bank of America, N.A., as an administrative agent, filed
herewith).
Exhibit 10.7 Amendment No.3 dated as of December 18, 2002 to the Second
Amended and Restated Transfer and Administrative agreement dated
as of September 24, 2002 among NMC Funding Corporation, National
Medical Care, Inc., Enterprise Funding Corporation, Compass US
Acquisition, LLC, Giro Multifunding Corporation, Asset One
Securitization, LLC, the Bank Investors listed therein, WestLB
AG, New York Branch (formerly known as Westdeutsche Landesbank
Girozentrale, New York Branch), as an administrative agent and
Bank of America, N.A., as an administrative agent, filed
herewith).
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Exhibit 10.8 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 10.9 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 10.10 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 10.11 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 10.12 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 10.13 Employment Agreement dated March 15, 2000 by and between Robert
"Rice" M. Powell, Jr. and National Medical Care, Inc.
(incorporated herein by reference to the Form 10-K of Registrant
filed with Commission on April 2, 2001).
Exhibit 10.14 Employment Agreement dated July 1, 2002 by and between John F.
Markus and National Medical Care, Inc. (incorporated herein by
reference to the Form 10-Q of Registrant filed with Commission
on August 14, 2002).
Exhibit 10.15 Employment Agreement dated October 15, 2002 by and between Mats
Wahlstrom and National Medical Care, Inc. (filed herewith).
Exhibit 10.16 Subordinated Loan Note dated as of May 18, 1999, among National
Medical Care, Inc. and certain Subsidiaries with Fresenius AG as
lender (incorporated herein by reference to the Form 10-Q of
Registrant filed with Commission on November 22, 1999).
Exhibit 10.17 Corporate Integrity Agreement between the Offices of Inspector
General of the Department of Health and Human Services and
Fresenius Medical Care Holdings, Inc. dated as of January 18,
2000 (incorporated herein by reference to the Form 8-K of the
Registrant filed with the Commission on January 21, 2000).
Exhibit 10.18 Settlement Agreement dated as of February 6, 2003 by and among
the Company, National Medical Care, Inc., the Official Committee
of Asbestos Personal Injury Claimants, and the Official
Committee of Asbestos Property Damage Claimants of W.R. Grace &
Co. (filed herewith).
Exhibit 11 Statement re: Computation of Per Share Earnings.
Exhibit 99.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
Exhibit 99.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
* Confidential treatment has been requested as to certain portions of this
Exhibit
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