-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SCm2dLOxtWYFSH3tE0pGNyj+3/A6I1htSMHOLAZ0xqQraGo8iRc2F6bgPAoOmhd0 ACZ3FqQNdD9HLBxdV1bobA== 0000950135-98-005840.txt : 19981113 0000950135-98-005840.hdr.sgml : 19981113 ACCESSION NUMBER: 0000950135-98-005840 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981112 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FRESENIUS NATIONAL MEDICAL CARE HOLDINGS INC CENTRAL INDEX KEY: 0000042872 STANDARD INDUSTRIAL CLASSIFICATION: SURGICAL & MEDICAL INSTRUMENTS & APPARATUS [3841] IRS NUMBER: 133461988 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-03720 FILM NUMBER: 98745545 BUSINESS ADDRESS: STREET 1: TWO LEDGEMONT CENTER STREET 2: 95 HAYDEN AVE CITY: LEXINGTON STATE: MA ZIP: 02173 BUSINESS PHONE: 6174029000 FORMER COMPANY: FORMER CONFORMED NAME: GRACE W R & CO /NY/ DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: GRACE W R & CO /CT/ DATE OF NAME CHANGE: 19900423 10-Q 1 FRESNIUS MEDICAL CARE HOLDINGS, INC. 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED: SEPTEMBER 30, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. 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 of Incorporation) (I.R.S. Employer ID No.) Two Ledgemont Center, 95 Hayden Avenue, Lexington, MA 02420 - ----------------------------------------------------- ---------- (Address of Principal Executive Office) (Zip Code) Registrant's Telephone Number, Including Area Code: 781-402-9000 ---------------------------------------------------------------- --------------------------------------------------------------------- (Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report) Indicated by check 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 [ ] 2 APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: as of the date hereof, 90,000,000 shares of common stock, par value $1.00 per share, are outstanding, all of which are held by Fresenius Medical Care AG. 2 3 FRESENIUS MEDICAL CARE HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES TABLE OF CONTENTS PART I: FINANCIAL INFORMATION ITEM 1: FINANCIAL STATEMENTS PAGE Consolidated Statements of Earnings ............................ 4 Consolidated Statements of Comprehensive Income................. 6 Consolidated Balance Sheets..................................... 7 Consolidated Statements of Cash Flows........................... 8 Notes to Consolidated Financial Statements...................... 9 ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS....................................... 22 PART II: OTHER INFORMATION ITEM 1: Legal Proceedings............................................... 29 ITEM 6: Exhibits and Reports on Form 8-K................................ 42 3 4 PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS FRESENIUS MEDICAL CARE HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES UNAUDITED, CONSOLIDATED STATEMENTS OF EARNINGS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED SEPTEMBER 30, ------------------------ 1998 1997 -------- --------- NET REVENUES Health care services ......................... $541,052 $440,936 Medical supplies ............................. 114,600 106,742 -------- -------- 655,652 547,678 -------- -------- EXPENSES Cost of health care services ................. 335,434 267,873 Cost of medical supplies ..................... 76,539 78,184 General and administrative expenses .......... 82,653 70,100 Provision for doubtful accounts .............. 16,308 12,616 Depreciation and amortization ................ 55,507 51,335 Research and development ..................... 1,294 441 Interest expense, net, and related financing costs including $21,730 and $11,310 of interest with affiliates ........ 54,880 47,547 -------- -------- 622,615 528,096 -------- -------- INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES ........................... 33,037 19,582 PROVISION FOR INCOME TAXES ........................ 18,872 9,775 -------- -------- INCOME FROM CONTINUING OPERATIONS ................. $ 14,165 $ 9,807 -------- -------- DISCONTINUED OPERATIONS (NOTE 5) Loss from discontinued operations, net of income taxes ............................... -- (7,905) Loss on disposal of discontinued operations, net of income tax benefit ...... -- -- -------- -------- Loss from discontinued operations ............ -- (7,905) -------- -------- NET INCOME ........................................ $ 14,165 $ 1,902 ======== ======== Basic and fully dilutive earnings per share Continuing operations........................... $ 0.16 $ 0.11 Discontinued operations......................... $ -- $ (.09) Net Income ..................................... $ 0.16 $ 0.02
See accompanying Notes to Unaudited, Consolidated Financial Statements. 4 5 FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS FRESENIUS MEDICAL CARE HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES UNAUDITED, CONSOLIDATED STATEMENTS OF EARNINGS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NINE MONTHS ENDED SEPTEMBER 30, ----------------------------- 1998 1997 ---------- ---------- NET REVENUES Health care services .......................... $1,550,689 $1,257,786 Medical supplies .............................. 353,291 322,271 ---------- ---------- 1,903,980 1,580,057 ---------- ---------- EXPENSES Cost of health care services .................. 958,833 766,038 Cost of medical supplies ...................... 238,898 223,342 General and administrative expenses ........... 249,816 209,309 Provision for doubtful accounts ............... 50,187 39,106 Depreciation and amortization ................. 164,954 150,167 Research and development ...................... 3,102 2,311 Interest expense, net, and related financing costs including $59,315 and $23,830 of interest with affiliates.......... 155,059 129,733 ---------- ---------- 1,820,849 1,520,006 ---------- ---------- INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES ............................ 83,131 60,051 PROVISION FOR INCOME TAXES ......................... 46,416 32,464 ---------- ---------- INCOME FROM CONTINUING OPERATIONS .................. $ 36,715 $ 27,587 ---------- ---------- DISCONTINUED OPERATIONS (NOTE 5) Loss from discontinued operations, net of income taxes ................................ (8,669) (6,366) Loss on disposal of discontinued operations, net of income tax benefit ....... (97,228) -- ---------- ---------- Loss from discontinued operations ............. (105,897) (6,366) ---------- ---------- NET INCOME (LOSS) .................................. $ (69,182) $ 21,221 ========== ========== Basic and fully dilutive earnings per share Continuing operations ........................... $ 0.41 $ 0.30 Discontinued operations ......................... $ (1.18) $ (0.07) Net Income (loss) ............................... $ (0.77) $ 0.23
See accompanying Notes to Unaudited, Consolidated Financial Statements. 5 6 FRESENIUS MEDICAL CARE HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES UNAUDITED, CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (DOLLARS IN THOUSANDS)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------- -------------------- 1998 1997 1998 1997 ------- ------- -------- -------- NET INCOME (LOSS) .............................. $14,165 $ 1,902 $(69,182) $ 21,221 Other comprehensive income ..................... Foreign currency translation adjustments .... 226 (8,363) 1,921 (15,162) ------- ------- -------- -------- Total other comprehensive income ............ 226 (8,363) 1,921 (15,162) ------- ------- -------- -------- COMPREHENSIVE INCOME (LOSS) .................... $14,391 $(6,461) $(67,261) $ 6,059 ======= ======= ======== ========
6 7 FRESENIUS MEDICAL CARE HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
SEPTEMBER 30, DECEMBER 31, 1998 1997 ------------ ----------- (UNAUDITED) ASSETS Current Assets: Cash and cash equivalents ...................... $ 8,797 $ 13,054 Accounts receivable, less allowances of $66,166 and $53,109 .......................... 189,882 252,023 Inventories .................................... 172,677 137,470 Deferred income taxes .......................... 131,939 94,905 Other current assets ........................... 106,180 82,148 Income taxes receivable ........................ 22,737 12,421 Net assets of discontinued operations .......... 150,259 370,676 ---------- ---------- Total Current Assets ...................... 782,471 962,697 ---------- ---------- Properties and equipment, net ....................... 435,335 505,929 ---------- ---------- Other Assets: Excess of cost over the fair value of net assets acquired and other intangible assets, net of accumulated amortization of $255,328 and $152,506 ..................... 3,352,838 3,265,260 Other assets and deferred charges .............. 58,836 40,295 ---------- ---------- Total Other Assets ........................ 3,411,674 3,305,555 ---------- ---------- Total Assets ........................................ $4,629,480 $4,774,181 ========== ========== LIABILITIES AND EQUITY Current Liabilities: Current portion of long-term debt and capitalized lease obligations ................ $ 10,350 $ 18,599 Accounts payable ............................... 106,793 119,027 Accrued liabilities ............................ 308,568 338,237 Net accounts payable to affiliates ............. 11,326 20,744 ---------- ---------- Total Current Liabilities ................. 437,037 496,607 Long-term debt ...................................... 1,106,086 1,613,657 Non-current borrowings from affiliates .............. 954,404 510,498 Capitalized lease obligations ....................... 3,752 7,968 Deferred income taxes ............................... 147,230 139,536 Other liabilities ................................... 31,003 25,718 ---------- ---------- Total Liabilities ......................... 2,679,512 2,793,984 ---------- ---------- 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 .................................. 2,016,814 1,975,572 Retained deficit ................................. (172,800) (99,408) Accumulated comprehensive income ................. (364) (2,285) ---------- ---------- Total Equity ................................ 1,949,968 1,980,197 ---------- ---------- Total Liabilities and Equity ........................ $4,629,480 $4,774,181 ========== ==========
See accompanying Notes to Unaudited, Consolidated Financial Statements. 7 8 FRESENIUS MEDICAL CARE HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES UNAUDITED, CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
NINE MONTHS ENDED SEPTEMBER 30, --------------------------- 1998 1997 --------- --------- Cash Flows from Operating Activities: Net income (loss) ........................................... $ (69,182) $ 21,221 Adjustments to reconcile net earnings to net cash from Operating activities: Depreciation and amortization .......................... 164,954 150,167 Loss from discontinued operations ...................... 8,669 6,366 Loss on disposition of businesses ...................... 97,228 -- Provision for doubtful accounts ........................ 50,187 39,106 Benefit of deferred income taxes ....................... (40,771) (11,846) Loss on disposal of properties and equipment ........... 91 574 Changes in operating assets and liabilities, net of effects of purchase acquisitions and foreign exchange: Increase in accounts receivable ........................ (109,205) (63,881) Increase in inventories ................................ (34,060) (2,343) Increase in other current assets ....................... (8,532) (26,079) Increase in other assets and deferred charges .......... (21,970) (3,495) Decrease in accounts payable ........................... (12,394) (2,852) Increase (decrease) in accrued income taxes ............ 94,058 (12,744) Decrease in accrued liabilities ........................ (36,567) (20,321) Increase (decrease) in other long-term liabilities ..... 5,284 (7,930) Net changes due to/from affiliates ..................... (8,346) 7,579 Other, net ............................................. 20,915 19,130 --------- --------- Net cash provided by operating activities of continued operations ................................... 100,359 92,652 --------- --------- Net cash used in operating activities of discontinued operations ................................ (13,878) (28,553) --------- --------- Net cash provided by operating activities ................... 86,481 64,099 --------- --------- Cash Flows from Investing Activities: Capital expenditures ................................... (50,794) (95,078) Payments for acquisitions, net of cash acquired ....... (174,969) (415,954) Proceeds from disposition of businesses ................ 82,500 -- --------- --------- Net cash used in investing activities of continued operations ................................... (143,263) (511,032) --------- --------- Net cash used in investing activities of discontinued ....... (8,925) (14,124) --------- --------- Net cash used in investing activities ....................... (152,188) (525,156) --------- --------- Cash Flows from Financing Activities: Increase in borrowings from affiliates ................. 457,558 130,136 Cash dividends paid .................................... (390) (390) Proceeds on issuance of debt ........................... 16,086 189,898 Proceeds from receivable financing facility ............ 125,000 52,000 Payments on debt and capitalized leases ................ (536,122) (52,840) Transfer of International operations ................... (168) -- Contributed Capital from FMC AG ........................ -- 144,000 Other net .............................................. (448) 2,962 --------- --------- Net cash provided by financing activities of continued operations ................................... 61,516 465,766 --------- --------- Net cash used in financing activities of discontinued operations ................................ (2,107) (1,457) --------- --------- Net cash provided by financing activities ................... 59,409 464,309 --------- --------- Effects of changes in foreign exchange rates ..................... 2,041 (15,138) --------- --------- Change in cash and cash equivalents .............................. (4,257) (11,886) Cash and cash equivalents at beginning of period ................. 13,054 20,971 --------- --------- Cash and cash equivalents at end of period ....................... $ 8,797 $ 9,085 ========= ========= Supplemental disclosures of cash flow information: Cash paid during the period for: Interest ............................................... $ 102,940 $ 92,169 Income taxes (received)/paid, net ...................... (7,532) 53,469 Details for Acquisitions: Assets acquired ............................................. 162,621 478,871 Liabilities assumed ......................................... 2,375 26,691 Advances from affiliates .................................... 41,805 0 Contributed capital from FMC AG ............................. -- 34,425 Payments on prior year advances from affiliates ............. 56,528 -- --------- --------- Cash paid ................................................... 174,969 417,755 Less cash acquired .......................................... -- 1,801 --------- --------- Net cash paid for acquisitions .............................. $ 174,969 $ 415,954 ========= =========
See accompanying Notes to Unaudited, Consolidated Financial Statements. 8 9 FRESENIUS MEDICAL CARE HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO UNAUDITED, CONSOLIDATED INTERIM FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) NOTE 1. THE COMPANY, AND BASIS OF PRESENTATION THE COMPANY Fresenius Medical Care Holdings, Inc., a New York corporation ("FMCH or the "Company"), is a subsidiary of Fresenius Medical Care AG, a German corporation ("Fresenius Medical Care" or "FMC"). The Company conducts its operations through three principal subsidiaries, National Medical Care, Inc., a Delaware corporation ("NMC"), Fresenius USA, Inc., a Massachusetts corporation ("FUSA") and SRC Holding Company, Inc., a Delaware corporation. The Company is primarily engaged in (i) providing kidney dialysis services, clinical laboratory testing and renal diagnostic services, and (ii) manufacturing and distributing products and equipment for dialysis treatment. BASIS OF PRESENTATION BASIS OF CONSOLIDATION The consolidated financial statements in this report at September 30, 1998 and 1997 and for the three month and nine month interim periods then ended are unaudited and should be read in conjunction with the consolidated financial statements in the Company's 1997 report on Form 10-K. Such interim financial statements reflect all adjustments that, in the opinion of management, are necessary for a fair presentation of the results of the interim periods presented. Certain amounts in the prior periods' consolidated financial statements have been reclassified to conform to the current periods' basis of presentation. The results of operations for the three and nine-month periods ended September 30, 1998 are not necessarily indicative of the results of operations for the fiscal year ending December 31, 1998. NEW STANDARDS The Company adopted the provisions of Statement of Financial Accounting Standards ("SFAS") No.130, Reporting Comprehensive Income, effective January 1, 1998. This statement requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. This statement further requires that the Company classify items of other comprehensive income by their nature in a financial statement and display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of a statement of financial position. 9 10 NOTE 2. INVENTORIES
SEPTEMBER 30, DECEMBER 31, 1998 1997 ------------ ----------- Inventories: Raw materials ....................................... $ 38,721 $ 37,792 Manufactured goods in process ....................... 20,441 14,074 Manufactured and purchased inventory available for sale ............................... 85,040 63,385 -------- -------- 144,202 115,251 Health care supplies ............................... 28,475 22,219 -------- -------- Total .......................................... $172,677 $137,470 ======== ========
NOTE 3. DEBT Long-term debt to outside parties consists of:
SEPTEMBER 30, DECEMBER 31, 1998 1997 ------------- ------------ Credit Agreement...................................... $1,093,800 $1,613,300 Third-party debt, primarily bank borrowings at various interest rates (3% - 14%) with various maturities ................................. 16,651 12,475 ---------- ---------- 1,110,451 1,625,775 Less amounts classified as current.................... 4,365 12,118 ---------- ---------- $1,106,086 $1,613,657 ========== ==========
Non current borrowings from affiliates consists of:
SEPTEMBER 30, DECEMBER 31, 1998 1997 ------------- ------------ Fresenius Medical Care AG non-current borrowings primarily at fixed interest rates of approximately 7% and 9.25%......................................... $377,669 $352,939 Fresenius Medical Care AG deutsche mark denominated at variable interest rates approximately 5%............. -- 72,601 Fresenius Medical Care - Deutschland - GmbH at interest rates approximating 7% (USD denominated) and 5% (deutsche mark denominated), respectively............ 87,000 17,099 Fresenius Medical Care Finance SA non-current borrowings primarily at interest rates approximating 6% .................................... 52,861 67,584 Fresenius Medical Care Trust Finance S.a.r.l. at an interest rate of 8.43%............................... 435,529 -- Other.................................................. 1,345 275 -------- -------- 954,404 510,498 Less amounts classified as current..................... -- -- -------- -------- Total.................................................. $954,404 $510,498 ======== ========
On February 27, 1998, FMCH increased its existing accounts receivable financing facility with NationsBank to $331,000 from $204,000. As of September 30, 1998, proceeds of $325,000 have been drawn under the NationsBank accounts receivable financing facility. The amount drawn under the NationsBank account receivable financing facility is netted against accounts receivable. NOTE 4. INTERNATIONAL OPERATIONS Effective January 1, 1998, FMCH transferred legal ownership of substantially all of its international operations to FMC. This transfer was accounted for on the cost basis since the international subsidiaries remain under control of a common parent. The consolidated financial statements in this report at September 30, 1998 and for the three month and nine month interim periods then ended do not include the operating results and cash flows of the international operations which were transferred. The consolidated financial statements at September 30, 1997 and for the three month and nine month interim periods then ended have been restated to exclude operating results and cash flows of the international operations and to conform to the current period presentation. Total international assets of $208,669 and liabilities of $249,733, which included $187,525 of intercompany obligations were transferred at December 31, 1997. The following table shows the restatement to net revenues and net earnings for continuing operations and earnings per share for the prior periods:
NINE MONTHS TWELVE MONTHS THREE MONTHS ENDED ENDED ENDED SEPTEMBER 30, 1997 DECEMBER 31, 1997 DECEMBER 31, 1996 ------------------ ----------------- ----------------- Net Revenues:....................................... Consolidated FMCH.............................. $1,709,162 $2,621,300 $630,566 Less International Transfer.................... 129,105 172,415 43,838 ---------- ---------- -------- Restated FMCH.................................. $1,580,057 $2,448,885 $586,728 ========== ========== ======== Net Earnings........................................ Consolidated FMCH.............................. $ 22,300 $ 20,923 $ 6,046 Less International Transfer.................... 1,079 786 715 ---------- ---------- -------- Restated FMCH.................................. $ 21,221 $ 20,137 $ 5,331 ========== ========== ======== Restated basic and fully diluted earnings per share ..................................... $ 0.23 $ 0.22 $ 0.06
The following table shows the restatement to the previously reported December 31, 1997 stockholders equity:
Consolidated Less International Restated FMCH Transfer FMCH ------------ ------------------ -------- Net Equity...................................... $1,968,979 $11,218 $1,980,197
10 11 NOTE 5. DISCONTINUED OPERATIONS Effective June 1, 1998, the Company classified its Non Renal Diagnostic Services and Homecare divisions as discontinued operations. The Company disposed of its Non Renal Diagnostic Services division and its Homecare division on respectively, June 26, 1998 and July 29, 1998. The Company has recorded a net after tax loss of $97 million on the sale of these businesses. The net loss on the disposal of these businesses and their results of operations have been accounted for as discontinued operations, and accordingly, prior year results have been restated. The remaining assets and liabilities of these discontinued operations at the balance sheet date have been classified in the consolidated balance sheet as Net Assets of Discontinued Operations. Included in net assets of discontinued operations is approximately $150 million of IDPN receivables. These assets have not been sold and will remain classified as discontinued operations until they have been settled. See Note 6 "Commitments and Contingencies - Legal Proceedings." Operating results and net assets of discontinued operations are presented below: Discontinued Operations - Results of Operations The revenues and results of operations of the discontinued operations of Non Renal Diagnostic Services and Homecare divisions were as follows:
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------ -------------------- 1998 1997 1998 1997 ------- -------- --------- -------- NET REVENUES........................................... $ -- $ 66,558 $ 120,940 $217,683 ------- -------- --------- -------- Loss from operations before income tax benefit......... (11,989) (14,212) (9,764) Income tax benefit..................................... -- (4,084) (5,543) (3,398) ------- -------- --------- --------- Loss from operations................................... -- (7,905) (8,669) (6,366) ------- -------- --------- -------- Loss on disposal before income tax benefit............. -- (140,000) -- Income tax benefit..................................... -- -- (42,772) -- ------- -------- --------- -------- Loss on disposal....................................... -- -- (97,228) -- ------- -------- --------- -------- Loss from discontinued operations...................... -- (7,905) (105,897) (6,366) ======= ======== ========= ========
Discontinued Operations - Consolidated Balance Sheet The net assets, excluding intercompany assets, of the discontinued operations of the Non Renal Diagnostic Services and Homecare divisions, included in the consolidated balance sheet at September 30, 1998 are as follows:
Total Current assets........................... $172,665 Properties & equipment, net.............. 249 Other assets............................. 594 -------- Total Assets.......................... $173,508 ======== Current liabilities...................... 23,002 Other liabilities........................ 247 -------- Total Liabilities..................... 23,249 ======== Net assets............................ $150,259 ========
11 12 NOTE 6. COMMITMENTS AND CONTINGENCIES Contingent Non-NMC Liabilities of Grace New York (Now Known as Fresenius Medical Care Holdings, Inc.) The Company, formerly known as W. R. Grace & Co. ("Grace New York"), together with its wholly owned subsidiaries, National Medical Care, Inc. and its subsidiaries ("NMC") and Fresenius USA, Inc. and its subsidiaries ("FUSA"), was formed as a result of a series of transactions pursuant to the Agreement and Plan of Reorganization dated as of February 4, 1996 by and between Grace New York and Fresenius AG (the "Merger"). In connection with the Merger, W. R. Grace & Co. - Conn. ("Grace Chemicals") has agreed to indemnify the Company and NMC against all liabilities of the Company and its successors, whether relating to events occurring before or after the Merger, other than liabilities arising from or relating to NMC operations. After the Merger the Company will remain contingently liable for certain liabilities with respect to pre-Merger matters that are not related to NMC operations. The Company believes that in view of the nature of the non-NMC liabilities and the expected impact of the Merger on Grace Chemicals' financial position, the risk of significant loss from non-NMC liabilities is remote. Were events to violate the tax-free nature of the Merger, the resulting tax liability would be the obligation of the Company. Subject to representations by Grace Chemicals, the Company, and Fresenius AG, Grace Chemicals has agreed to indemnify the Company for such a tax liability. If the Company was not able to collect on the indemnity, the tax liability would have a material adverse effect on the Company's business, the financial condition of the Company and the results of operations. LEGAL PROCEEDINGS Government Investigations OIG INVESTIGATIVE SUBPOENAS In October 1995, NMC received five investigative subpoenas from the Office of the Inspector General ("OIG") of the Department of Health and Human Services. The subpoenas were issued in connection with an investigation being conducted by the OIG, the U.S. Attorney for the District of Massachusetts and others concerning possible violations of federal laws, including the anti-kickback statutes and the False Claims Act (the "OIG Investigation"). The subpoenas call for extensive document production relating to various aspects of NMC's business. In connection with the OIG Investigation, the Company continues to receive additional subpoenas directed to NMC or the Company to obtain supplemental information and documents regarding the above-noted issues, or to clarify the scope of the original subpoenas. The Company is cooperating with the OIG Investigation. The Company believes that the government continues to review and evaluate the voluminous information the Company has provided. As indicated above, the government continues, from time to time, to seek supplementing and/or clarifying information from the Company. The Company expects that this process will continue while the government completes its evaluation of the issues. The OIG Investigation covers the following areas: (a) NMC's dialysis services business ("DSD"), principally relating to its Medical Director contracts and compensation; (b) NMC's treatment of credit balances resulting from overpayments received under the Medicare ESRD program, its billing for home dialysis services, and its payment of supplemental medical insurance premiums on behalf of indigent patients; (c) NMC's LifeChem laboratory subsidiary's ("LifeChem") business, including documents relating to testing procedures, marketing, customers, competition and certain overpayments totaling approximately $4.9 million that were received by LifeChem from the Medicare program with respect to laboratory services rendered between 1989 and 1993, and a 1997 review of dialysis facilities' standing orders; and (d) NMC's homecare division ("Homecare") and, in particular, information concerning intradialytic parenteral nutrition ("IDPN") billing practices including various services, equipment and supplies and payments made to third parties as compensation for administering IDPN therapy. The government has indicated that the areas identified above are not exclusive, and that it may pursue additional areas. As noted, the penalties applicable under the anti-kickback statutes, the U.S. Federal False Claims Act (the "False Claims Act") and other federal and state statutes and regulations applicable to NMC's business can be substantial. While NMC asserts that it is able to offer legal and/or factual defenses with respect to many of the areas the government has identified, there can be no assurance that the federal 12 13 government and/or one or more state agencies will not claim that NMC has violated statutory or regulatory provisions. Additionally, eight and possibly other qui tam actions alleging that NMC submitted false claims to the government have been filed under seal by former or current NMC employees or other individuals who may have familiarity with one or more of the issues under investigation. As noted, under the False Claims Act, any such private plaintiff could pursue an action against NMC in the name of the U.S. at his or her own expense if the government declines to do so. DIAGNOSTICS SUBPOENA In October 1996, Biotrax International, Inc. ("Biotrax") and NMC Diagnostics, Inc., ("DSI") both of which are subsidiaries of NMC, received an investigative subpoena from the OIG. The subpoena calls for the production of extensive documents and was issued in connection with an investigation being conducted by the OIG in conjunction with the U.S. Attorney for the Eastern District of Pennsylvania concerning the possible submission of false or improper claims to, and their payment by, the Medicare program. The subpoena calls for the production of documents on corporate organization, business plans, document retention, personnel files, sales and marketing and Medicare billing issues relating to certain procedures offered by the prior owner of the Biotrax business before its assets were acquired by NMC in March 1994 and by DSI following the acquisition. The Company has reviewed the subpoena with its legal counsel and is making extensive document production in response to the subpoena. The outcome of this investigation, its duration, and its effect, if any, on NMC or the Company cannot be predicted at this time. The Company divested its Non Renal Diagnostic business on June 26, 1998. See Note 5 - "Discontinued Operations." MEDICAL DIRECTOR COMPENSATION The government is investigating whether DSD's compensation arrangements with its Medical Directors constitute payments to induce referrals, which would be illegal under the anti-kickback statutes, rather than payment for services rendered. DSD compensated the substantial majority of its Medical Directors on the basis of a percentage of the earnings of the dialysis center for which the Medical Director was responsible from the inception of NMC's predecessor in 1972 until January 1, 1995, the effective date of Stark II. Under the arrangements in effect prior to January 1, 1995, the compensation paid to Medical Directors was adjusted to include "add backs," which represented a portion of the profit earned by NMC's Medical Products Group ("MPG") on products purchased by the Medical Director's facility from MPG and (until January 1, 1992) a portion of the profit earned by LifeChem on laboratory services provided to patients at the Medical Director's facility. These adjustments were designed to allocate a profit factor to each dialysis center relating to the profits that could have been realized by the center if it had provided the items and services directly rather than through a subsidiary of NMC. The percentage of profits paid to any specific Medical Director was reached through negotiation, and was typically a provision of a multi-year consulting agreement. To comply with provisions of OBRA 93 (as hereafter defined) known as "Stark II" if Designated Health Services (as defined in Stark II) are involved, Medical Director compensation must not exceed fair market value and may not take into account the volume or value of referrals or other business generated between the parties. Since January 1, 1995, DSD has compensated its Medical Directors on a fixed compensation arrangement intended to comply with the requirements of Stark II. In renegotiating its Medical Director compensation arrangements in connection with Stark II, DSD took and continues to take account of the compensation levels paid to its Medical Directors in prior years. Certain government representatives have expressed the view in meetings with counsel for NMC that arrangements where the Medical Director was or is paid amounts in excess of the "fair market value" of the services rendered may evidence illegal payments to induce referrals, and that hourly compensation is a relevant measure for evaluating the "fair market value" of the services. DSD does not compensate its Medical Directors on an hourly basis and has asserted to the government that hourly compensation is not a determinative measure of fair market value. Although the Company believes that the compensation paid to its Medical Directors is generally reflective of fair market value, there can be no assurances that the government will agree with this position or that the Company ultimately will be able to defend its position successfully. Because of the wide variation in local market factors and in the profit percentage contractually negotiated between DSD and its Medical Directors prior to January 1, 1995, there is a wide variation in the amounts that have been paid to Medical Directors. As a result, the compensation that DSD has paid and is continuing to pay to a material number of its Medical Directors could be viewed by the government as being in excess of "fair market value," both in absolute terms and in terms of hourly compensation. NMC has asserted to the government that its compensation arrangements do not constitute illegal payments to induce referrals. NMC has also asserted to the government that OIG auditors repeatedly reviewed NMC's compensation arrangements with its Medical 13 14 Directors in connection with their audits of the costs claimed by DSD; that the OIG stated in its audit reports that, with the exception of certain technical issues, NMC had complied with applicable Medicare laws and regulations pertaining to the ESRD program; and that NMC reasonably relied on these audit reports in concluding that its program for compensating Medical Directors was lawful. There has been no indication that the government will accept NMC's assertions concerning the legality of its arrangements generally or NMC's assertion that it reasonably relied on OIG audits, or that the government will not focus on specific arrangements that DSD has made with one or more Medical Directors and claim that those specific arrangements were or are unlawful. The government is also investigating whether DSD's profit sharing arrangements with its Medical Directors influenced them to order unnecessary ancillary services and items. NMC has asserted to the government that the rate of utilization of ancillary services and items by its Medical Directors is reasonable and that it did not provide illegal inducements to Medical Directors to order ancillary services and items. CREDIT BALANCES In the ordinary course of business, Medicare providers like DSD receive overpayments from Medicare intermediaries for services that they provide to Medicare patients. Medicare intermediaries commonly direct such providers to notify them of the overpayment and not remit such amounts to the intermediary by check or otherwise unless specifically requested to do so. In 1992, the Health Care Financing Administration ("HCFA") adopted a regulation requiring certain Medicare providers, including dialysis centers, to file a quarterly form listing unrecouped overpayments with the Medicare intermediary responsible for reimbursing the provider. The first such filing was required to be made as of June 30, 1992 for the period beginning with the initial date that the provider participated in the Medicare program and ending on June 30, 1992. The government is investigating whether DSD intentionally understated the Medicare credit balance reflected on its books and records for the period ending June 30, 1992 by reversing entries out of its credit balance account and taking overpayments into income in anticipation of the institution of the new filing requirement. DSD's policy was to notify Medicare intermediaries in writing of overpayments upon receipt and to maintain unrecouped Medicare overpayments as credit balances on the books and records of DSD for four years; overpayments not recouped by Medicare within four years would be reversed from the credit balance account and would be available to be taken into income. NMC asserts that Medicare overpayments that have not been recouped by Medicare within four years are not subject to recovery under applicable regulations and that its initial filing with the intermediaries disclosed the credit balance on the books and records of DSD as shown in accordance with its policy, but there can be no assurance that the government will accept NMC's views. The government has inquired whether other divisions including Homecare, LifeChem and DSI have appropriately treated Medicare credit balances. The government is also investigating whether DSD failed to disclose Medicare overpayments that resulted from DSD's obligation to rebill commercial payors for amounts originally billed to Medicare under HCFA's initial implementation of the Omnibus Budget Reconciliation Act of 1993 ("OBRA 93") amendments to the secondary payor provisions of the Medicare Act. DSD experienced delays in reporting a material amount of overpayments after the implementation of the OBRA 93 amendments. NMC asserts that most of these delays were the result of the substantial administrative burdens placed on DSD as a consequence of the changing and inconsistent instructions issued by HCFA with respect to the OBRA 93 amendments and were not intentional. Substantially all overpayments resulting from the rebilling effort associated with the OBRA 93 amendments have now been reported. Procedures are in place that are designed to ensure that subsequent overpayments resulting from the OBRA 93 amendments will be reported on a timely basis. OVERPAYMENTS FOR HOME DIALYSIS SERVICES NMC acquired Home Intensive Care, Inc. ("HIC"), an in-center and home dialysis service provider, in 1993. At the time of the acquisition, HIC was the subject of a claim by HCFA that HIC had received payments for home dialysis services in excess of the Medicare reasonable charge for services rendered prior to February 1, 1990. NMC settled the HCFA claim against HIC in 1994. The government is investigating whether the settlement concerning the alleged overpayments made to HIC resolved all issues relating to such alleged overpayments. The government is also investigating whether an NMC subsidiary, Home Dialysis Services, Inc. ("HDS"), received payments similar to the payments that HIC received, and whether HDS improperly billed for home dialysis services in excess of the monthly cost cap for services rendered on or after February 1, 1990. The government is investigating whether NMC was overpaid for services rendered. NMC asserts that the billings by HDS were proper, but there can be no assurance that the government will accept NMC's view. 14 15 LIFECHEM Overpayments. On September 22, 1995, LifeChem voluntarily disclosed certain billing problems to the government that had resulted in LifeChem's receipt of approximately $4.9 million in overpayments from the Medicare program for laboratory services rendered between 1989 and 1993. LifeChem asserts that most of these overpayments relate to errors caused by a change in LifeChem's computer systems and that the remainder of the overpayments were the result of the incorrect practice of billing for a complete blood count with differential when only a complete blood count was ordered and performed, and of the incorrect practice of billing for a complete blood count when only a hemoglobin or hematocrit test was ordered. LifeChem asserts that the overpayments it received were not caused by fraudulent activity, but there can be no assurance that the government will accept LifeChem's view. LifeChem made these disclosures to the government as part of an application to be admitted to a voluntary disclosure program begun by the government in mid-1995. At the time of the disclosures, LifeChem tendered repayment to the government of the $4.9 million in overpayments. After the OIG Investigation was announced, the government indicated that LifeChem had not been accepted into its voluntary disclosure program. The government has deposited the $4.9 million check with NMC's approval. The matters disclosed in LifeChem's September 22, 1995 voluntary disclosure are a subject of the OIG Investigation. On June 7, 1996, LifeChem voluntarily disclosed an additional billing problem to the government that had resulted in LifeChem's receipt of between $40,000 and $160,000 in overpayments for laboratory services rendered in 1991. LifeChem advised the government that this overpayment resulted from the submission for payment of a computer billing tape that had not been subjected to a "billing rules" program designed to eliminate requests for payments for laboratory tests that are included in the Composite Rate and that were not eligible for separate reimbursement. LifeChem also advised the government that there may have been additional instances during the period from 1990 to 1992 when other overpayments were received as a result of the submission of computer billing tapes containing similar errors and that it was in the process of determining whether such additional overpayments were received. On June 21, 1996, LifeChem advised the government that the 1991 billing problem disclosed on June 7, 1996 resulted in an overpayment of approximately $112,000. LifeChem also advised the government that certain records suggested instances in July 1990 and August 31 through September 11, 1990, when billing tapes may have been processed without rules processing. LifeChem continued its effort to determine whether any other overpayments occurred relating to the "billing rules" problem and, in March 1997, advised the government that an additional overpayment of approximately $260,000 was made by Medicare. Capitation for routine tests and panel design. In October 1994, the OIG issued a special fraud alert in which it stated its view that the industry practice of offering to perform or performing the routine tests covered by the composite rate payment method (the "Composite Rate") at a price below fair market value, coupled with an agreement by a dialysis center to refer all or most of its non-Composite Rate tests to the laboratory, violates the anti-kickback statutes. In response to this alert, LifeChem changed its practices with respect to testing covered by the Composite Rate to increase the amount charged to both DSD and third-party dialysis centers and reduce the number of tests provided for the fixed rate. The government is investigating LifeChem's practices with respect to these tests. Benefits provided to dialysis centers and persons associated with dialysis centers. The government is investigating whether DSD or any third-party dialysis center or any person associated with any such center was provided with benefits in order to induce them to use LifeChem services. Such benefits could include, for example, discounts on Renal Products Division ("RPD") supplies, the provision of computer equipment, the provision of money for the purchase of computer equipment, and the provision of research grants. NMC has identified certain instances in which benefits were provided to MPG customers who purchased medical products from RPD and used LifeChem's laboratory services. The government may claim that the provision of such benefits violates, among other things, the anti-kickback statutes. Business and testing practices. As noted above, the government has identified a number of specific categories of documents that it is requiring NMC to produce at this time. In addition to documents relating to the areas discussed above, the government has also required LifeChem to produce documents relating to the equipment and systems used by LifeChem in performing and billing for clinical laboratory blood tests, the design of the test panels offered and requisition forms used by LifeChem, the utilization rate for certain tests performed by LifeChem, recommendations concerning diagnostic codes to be used in ordering tests for patients with given illnesses or conditions, internal and external audits and investigations relating to LifeChem's billing and testing. Subsequently, the government served an investigative subpoena for documents concerning the Company's 1997 review of dialysis facilities' standing orders, and responsive documents were provided. 15 16 INTRADIALYTIC PARENTERAL NUTRITION Administration kits. One of the principal activities of Homecare is to provide IDPN therapy to dialysis patients at both NMC-owned facilities and at facilities owned by other providers. IDPN therapy is typically provided to the patient 12-13 times per month during dialysis treatment. Bills are submitted to Medicare on a monthly basis and include separate claims for reimbursement for supplies, including, among other things, nutritional solutions, administration kits and infusion pumps. In February 1991, the Medicare carrier responsible for processing Homecare's IDPN claims issued a Medicare advisory to all parenteral and enteral nutrition suppliers announcing a coding change for reimbursement of administration kits provided in connection with IDPN therapy for claims filed for items provided on or after April 1, 1991. The Medicare allowance for administration kits during this period was approximately $625 per month per patient. The advisory stated that IDPN providers were to indicate the "total number of actual days" when administration kits were "used," instead of indicating that a one-month supply of administration kits had been provided. In response, Homecare billed for administration kits on the basis of the number of days that the patient was on an IDPN treatment program during the billing period, which typically represented the entire month, as opposed to the number of days the treatment was actually administered. During the period from April 1991 to June 1992, Homecare had an average of approximately 1,200 IDPN patients on service. In May 1992, the carrier issued another Medicare advisory to all PEN suppliers in which it stated that it had come to the carrier's attention that some IDPN suppliers had not been prorating their billing for administration kits used by IDPN patients and that providers should not bill for administration kits on the basis of the number of days that the patient was on an IDPN treatment program during the billing period. The advisory stated further that the carrier would be conducting "a special study to determine whether or not overpayments have occurred as a result of incorrect billing" and that "if overpayments have resulted, providers that have incorrectly billed" would "be contacted so that refunds can be recovered." Homecare revised its billing practices in response to this advisory for claims filed for items provided on or after July 1, 1992. Homecare was not asked to refund any amounts relating to its billings for administration kits following the issuance of the second advisory. The government is investigating whether NMC submitted false claims for administration kits during the period from April 1, 1991 to June 30, 1992. NMC asserts that the claims submitted in connection with billing for administration kits were proper, but there can be no assurance that the government will accept NMC's view. The government may claim that Homecare's billing for administration kits during this period violates, among other things, the False Claims Act. Infusion Pumps and IV Poles. During the time period covered by the subpoenas, Medicare regulations permitted IDPN providers to bill Medicare for the infusion pumps and, until 1992, for IV poles provided to IDPN patients in connection with the administration of IDPN treatments. These regulations do not expressly specify that a particular pump and IV pole be dedicated to a specific patient, and NMC asserts that these regulations permitted Homecare to bill Medicare for an infusion pump and IV pole so long as the patient was infused using a pump and IV pole. Despite the absence of an express regulatory specification, Homecare developed a policy to deliver to a dialysis center a dedicated infusion pump and IV pole for each patient, although NMC cannot represent that it followed this policy in every instance. The government is investigating the propriety of Homecare's billings for infusion pumps and IV poles. As noted above, under the new policies published by HCFA with respect to IDPN therapy, the Company has not been able to bill for infusion pumps after July 1, 1996. The government discontinued reimbursement for IV poles in 1992. "Hang fees" and other payments. IDPN therapy is typically provided to the patient during dialysis by personnel employed by the dialysis center treating the patient with supplies provided and billed to Medicare by Homecare in accordance with the Medicare parenteral nutrition supplier rules. In order to compensate dialysis centers for the costs incurred in administering IDPN therapy and monitoring the patient during therapy, Homecare followed the practice common in the industry of paying a "hang fee" to the center. Dialysis centers are responsible for reporting such fees to HCFA on their cost reports. For DSD dialysis centers, the fee was $30 per administration, based upon internal DSD cost calculations. For third-party dialysis centers, the fee was negotiated with each center, typically pursuant to a written contract, and ranged from $15 to $65 per administration. NMC has identified instances in which other payments and amounts beyond that reflected in a contract were paid to these third-party centers. NMC has stopped paying "hang fees" to both DSD and third-party facilities. In July 1993, the OIG issued a management advisory alert to HCFA in which it stated that "hang fees" and other payments made by suppliers of IDPN to dialysis centers "appear to be illegal as well as unreasonably high." The government is investigating the 16 17 nature and extent of the "hang fees" and other payments made by Homecare as well as payments by Homecare to physicians whose patients have received IDPN therapy. The government may claim that the payments by Homecare to dialysis centers violate, among other things, the anti-kickback statutes. Utilization of IDPN. Since 1984, when HCFA determined that Medicare should cover IDPN and other parenteral nutrition therapies, NMC has been an industry leader in identifying situations in which IDPN therapy is beneficial to end-stage renal disease ("ESRD") patients. It is the policy of Homecare to seek Medicare reimbursement for IDPN therapy only when it is prescribed by a patient's treating physician and when it believes that the circumstances satisfy the requirements published by HCFA and its carrier agents. Prior to 1994, HCFA and its carriers approved for payment more than 90% of the IDPN claims submitted by Homecare. After 1993, the rate of approval for Medicare reimbursement for IDPN claims submitted by Homecare for new patients and by the infusion industry in general, fell to approximately 9%. NMC contends that the reduction in rates of approval occurred because HCFA and its carriers implemented an unauthorized change in coverage policy without giving notice to providers. While NMC continued to offer IDPN to patients pursuant to the prescription of the patients' treating physicians and to submit claims for Medicare reimbursement when it believed the requirements stated in HCFA's published regulations were satisfied, other providers responded to the drop in the approval rate for new Medicare IDPN patients by abandoning the Medicare IDPN business, cutting back on the number of Medicare patients to whom they provide IDPN, or declining to add new Medicare patients. The number of patients to whom NMC provided IDPN increased as a result. The government is investigating the utilization rate of IDPN therapy among NMC patients, whether NMC submitted IDPN claims to Medicare for patients who were not eligible for coverage, and whether documentation of eligibility was adequate. NMC asserts that the utilization rate of IDPN therapy among its dialysis patients, which, in 1995, averaged less than 3.5%, is the result of the factors discussed above and that it is the policy of Homecare to seek Medicare reimbursement for IDPN therapy prescribed by the patients' treating physician in accordance with the requirements published by HCFA and its carrier agents. There can be no assurance that the government will accept NMC's view or that the government will not claim that Homecare submitted IDPN claims for individuals who were not eligible for coverage or with inadequate documentation of eligibility. In addition, the government is investigating whether, in certain circumstances, documentation of eligibility was false or inaccurate. With respect to some claims, the Company has determined that false or inaccurate documentation was submitted, deliberately or otherwise. The Company understands that the government recently has utilized a grand jury to investigate this matter. QUI TAM ACTIONS The Company and NMC have become aware that eight qui tam actions have been filed in various jurisdictions. Each of these actions is under seal and in each action, pursuant to court order the seal has been modified to permit the Company, NMC and other affiliated defendants to disclose the complaint to any relevant investors, financial institutions and/or underwriters, their successors and assigns and their respective counsel and to disclose the allegations in the complaints in their respective U.S. Securities and Exchange Commission (the "SEC" or the "Commission") and New York Stock Exchange ("NYSE") periodically required filings. The first qui tam action was filed in the United States District Court for the Southern District of Florida in 1996, amended on July 8, 1996 and disclosed to the Company on July 10, 1996. It alleges, among other things, that Grace Chemicals and NMC violated the False Claims Act in connection with certain billing practices regarding IDPN and the administration of EPO and that as a result of this allegedly wrongful conduct, the United States suffered actual damages in excess of $200 million. The Amended Complaint also seeks the imposition of a constructive trust on the proceeds of the NMC dividend to Grace Chemicals for the benefit of the United States on the ground that the Merger constitutes a fraudulent conveyance that will render NMC unable to satisfy the claims asserted in the Amended Complaint. The second qui tam action was filed in the United States District Court for the Middle District of Florida in 1995 and disclosed to the Company on or before November 7, 1996. It alleges, among other things, that NMC and certain NMC subsidiaries violated the False Claims Act in connection with the alleged retention of over-payments made under the Medicare program, the alleged submission of claims in violation of applicable cost caps and the payment of supplemental Medicare insurance premiums as an alleged inducement to patients to obtain dialysis products and services from NMC. The complaint alleges that as a result of this allegedly wrongful conduct, the United States suffered damages in excess of $10 million including applicable fines. The third qui tam action was filed in the United States District Court for the Eastern District of Pennsylvania in February 1996 17 18 and was disclosed to the Company in November 1996. It alleges, among other things, that a pharmaceutical manufacturer, an unaffiliated dialysis provider and NMC violated the False Claims Act in connection with the submission of claims to the Medicare program for a nonsterile intravenous drug and for intravenous drugs which were allegedly billed in excess of permissible Medicare reimbursement rates. The complaint also claims that the defendants violated the Medicare and Medicaid anti-kickback statutes in connection with the receipt of discounts and other in kind payments as alleged inducements to purchase intravenous drugs. The complaint is focused on the business relationship between the pharmaceutical manufacturer and several providers, one of which is NMC. The complaint claims that as a result of this allegedly wrongful conduct, the United States suffered damages. On June 28, 1997, in response to relator's motion to dismiss and the United States' declination to intervene, the District Court ordered the complaint dismissed without prejudice. The fourth qui tam action was filed in the United States District Court for the Eastern District of Pennsylvania in May 1995 and was disclosed to the Company in August 1997. It alleges, among other things, that Biotrax violated the False Claims Act in connection with its submission of claims to the Medicare program for diagnostic tests and induced overutilization of such tests in the medical community through improper marketing practices also in violation of the False Claims Act. The fifth qui tam action was filed in the United States District Court for the Eastern District of Pennsylvania in August 1996 and was disclosed to the Company in August 1997. It alleges, among other things, that Biotrax and NMC Diagnostic Services induced overutilization of diagnostic tests by several named and unnamed physician defendants in the local medical community, through improper marketing practices and fee arrangements, in violation of the False Claims Act. The sixth qui tam action was filed in the United States District Court for the Eastern District of Pennsylvania in November 1996 and was disclosed to the Company in August 1997. It alleges, among other things, that NMC, DSI and Biotrax violated the False Claims Act in connection with the submission of claims to the Medicare program by improperly upcoding and otherwise billing for various diagnostic tests. The seventh qui tam action was filed in the United States District Court for the District of Delaware in January 1997 and was disclosed to the Company in September 1997. It alleges, among other things, that NMC and Biotrax violated the False Claims Act in connection with the submission of claims to the Medicare program for diagnostic tests, and induced overutilization of such tests through improper marketing practices which provided impermissible incentives to health care providers to order these tests. The eighth qui tam action was filed in the United States District Court for the District of New Jersey in February 1997 and was disclosed to the Company in September 1997. It alleges, among other things, that DSI and NMC violated the False Claims Act in connection with the submission of claims to the Medicare program for reimbursement for diagnostic tests, by causing unnamed physicians to overutilize these tests though a variety of fee arrangements and other impermissible inducements. Each of the qui tam complaints claims that as a result of the allegedly wrongful conduct, the United States suffered damages and that the defendants are liable to the United States for three times the amount of the alleged damages plus civil penalties of up to $10,000 per false claim. An adverse result in any of the qui tam actions could have a material adverse affect on the Company's business, financial condition or results of operations. OIG AGREEMENTS As a result of discussions with representatives of the United States in connection with the OIG Investigation, certain agreements (the "OIG Agreements") have been entered into to guarantee the payment of any obligations of NMC to the United States (an "Obligation") relating to or arising out of the OIG Investigation and the qui tam action filed in the Southern District of Florida (the "Government Claims"). For the purposes of the OIG Agreements, an Obligation is (a) a liability or obligation of NMC to the United States in respect of a Government Claim pursuant to a court order (i) which is final and nonappealable or (ii) the enforcement of which has not been stayed pending appeal or (b) a liability or obligation agreed to be an Obligation in a settlement agreement executed by Fresenius Medical Care, the Company or NMC, on the one hand, and the United States, on the other hand. As stated elsewhere herein, the outcome of the OIG Investigation cannot be predicted. The entering into of the OIG Agreements is not an admission of liability by any party with respect to the OIG Investigation, nor does it indicate the liability, if any, which may result therefrom. Pursuant to the OIG Agreements, upon consummation of the Merger, Fresenius Medical Care, the Company and NMC provided the United States with a joint and several unconditional guarantee of payment when due of all Obligations (the "Primary Guarantee"). As credit support for this guarantee, NMC delivered an irrevocable standby letter of credit in the amount of $150 million. The United 18 19 States will return such letter of credit (or any renewal or replacement) for cancellation when all Obligations have been paid in full or it is determined that NMC has no liability in respect of the Government Claims. Under the terms of the Merger, any potential resulting monetary liability has been retained by NMC, and the Company has indemnified Grace Chemicals against all potential liability arising from or relating to the OIG Investigation. Fresenius Medical Care and the United States state in the OIG Agreements that they will negotiate in good faith to attempt to arrive at a consensual resolution of the Government Claims and, in the context of such negotiations, will negotiate in good faith as to the need for any restructuring of the payment of any Obligations arising under such resolution, taking into account the ability of Fresenius Medical Care to pay the Obligations. The OIG Agreements state that the foregoing statements shall not be construed to obligate any person to enter into any settlement of the Government Claims or to agree to a structured settlement. Moreover, the OIG Agreements state that the statements described in the first sentence of this paragraph are precatory and statements of intent only and that (a) compliance by the United States with such provisions is not a condition or defense to the obligations of Fresenius Medical Care under the OIG Agreements and (b) breach of such provisions by the United States cannot and will not be raised by Fresenius Medical Care to excuse performance under the OIG Agreements. The foregoing describes the material terms of the OIG Agreements, copies of which were previously filed with the Commission and copies of which may be examined without charge at the public reference facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W. Washington, D.C. 20549, and at the Regional Offices of the Commission located at Suite 1400, Citicorp Center, 500 West Madison Street, Chicago, Illinois 60661-2551 and Room 1300, 7 World Trade Center, New York, New York 10048. Copies of such material will also be made available by mail from the Public Reference Branch of the Commission at 450 Fifth Street, N.W. Washington, D.C. 20549, at prescribed rates. The foregoing description does not purport to be complete and is qualified in its entirety by reference to such agreements. An adverse determination with respect to any of the issues addressed by the subpoenas, or any of the other issues that have been or may be identified by the government, could result in the payment of substantial fines, penalties and forfeitures, the suspension of payments or exclusion of the Company or one or more of its subsidiaries from the Medicare program and other federal programs, and changes in billing and other practices that could adversely affect the Company's revenues. Any such result could have a material adverse effect on the Company's business, financial condition and results of operations. OMNIBUS BUDGET RECONCILIATION ACT OF 1993 OBRA 93 affected the payment of benefits under Medicare and employer health plans for certain eligible ESRD patients. In July 1994, HCFA issued an instruction to Medicare claims processors to the effect that Medicare benefits for the patients affected by OBRA 93 would be subject to a new 18-month "coordination of benefits" period. This instruction had a positive impact on NMC's dialysis revenues because, during the 18-month coordination of benefits period, patients' employer health plans were responsible for payment, which was generally at rates higher than that provided under Medicare. In April 1995, HCFA issued a new instruction, reversing its original instruction in a manner that would substantially diminish the positive effect of the original instruction on NMC's dialysis business. Under the new instruction, no 18-month coordination of benefits period would arise, and Medicare would remain the primary payor. HCFA further proposed that its new instruction be effective retroactive to August 1993, the effective date of OBRA 93. If HCFA's reversal of its original implementation of the provisions of OBRA 93 that relate to ESRD patients for whom Medicare is the secondary payor is upheld, NMC may be required to refund the payments received from employer health plans for services provided after August 10, 1993 under HCFA's original implementation, and to re-bill Medicare for the same services, which would result in a net loss to DSD of approximately $120 million as of December 31, 1995. NMC ceased to recognize the incremental revenue realized under the original Program Memorandum as of July 1, 1995, but it continued to bill employer health plans as primary payors for patients affected by OBRA 93 through December 31, 1995. As of January 1, 1996, NMC commenced billing Medicare as primary payor for dual eligible ESRD patients affected by OBRA 93, and then began to rebill in compliance with the revised policy for services rendered between April 24 and December 31, 1995. On May 5, 1995, NMC filed a complaint in the U.S. District Court for the District of Columbia (National Medical Care, Inc. and Bio-Medical Applications of Colorado, Inc. d/b/a Northern Colorado Kidney Center v. Shalala, C.A. No. 95-0860 (WBB)) seeking to 19 20 preclude HCFA from retroactively enforcing its April 24, 1995 implementation of the OBRA 93 provisions relating to the coordination of benefits for dual eligible ESRD patients. On May 9, 1995, NMC moved for a preliminary injunction to preclude HCFA from enforcing its new policy retroactively, that is, to billings for services provided between August 10, 1993 and April 23, 1995. On June 6, 1995, the court granted NMC's request for a preliminary injunction. The litigation is continuing with respect to NMC's request to enjoin HCFA's new policy, both retroactively and prospectively, and NMC filed significant discovery requests concerning how HCFA developed the April 1995 rule. In December of 1996, NMC moved for partial summary judgment seeking a declaration from the Court that HCFA's retroactive application of the April 1995 rule was legally invalid. HCFA cross-moved for summary judgment on the grounds that the April 1995 rule was validly applied prospectively. In January 1998, the court granted NMC's motion for partial summary judgment and entered a declaratory judgment in favor of NMC, holding HCFA's retroactive application of the April 1995 rule legally invalid. Based on its finding, the Court also ordered that HCFA is permanently enjoined from enforcing and applying the April 1995 rule retroactively against NMC and granted NMC's outstanding discovery motions. The Court took no action on HCFA's motion for summary judgment pending completion of the outstanding discovery. The Court's favorable rulings provide a stronger legal basis for NMC to collect outstanding amounts from commercial payors on the retroactive portion of the case during the first half of 1998. HCFA elected not to appeal from the Court's June 1995 and January 1998 orders and has agreed to a schedule for providing discovery under the Court's January 1998 order. HCFA may, however, appeal all rulings at the conclusion of the litigation. If HCFA should successfully appeal so that the revised interpretation would be applied retroactively, FMCH's business, financial position and results of operations would be materially adversely affected. INTRADIALYTIC PARENTERAL NUTRITION COVERAGE ISSUES NMC administers IDPN therapy to chronic dialysis patients who suffer from severe gastrointestinal malfunctions. After 1993, Medicare claims processors sharply reduced the number of IDPN claims approved for payment as compared to prior periods. NMC believes that the reduction in IDPN claims represented an unauthorized policy coverage change. Accordingly, NMC and other IDPN providers pursued various administrative and legal remedies, including administrative appeals, to address this reduction. In November 1995, NMC filed a complaint in the U.S. District Court for the Middle District of Pennsylvania seeking a declaratory judgment and injunctive relief to prevent the implementation of this policy coverage change. (National Medical Care, Inc. v. Shalala, 3:CV-95-1922 (RPC)). Subsequently, the District Court affirmed a prior report of the magistrate judge dismissing NMC's complaint, without considering any substantive claims, on the grounds that the underlying cause of action should be submitted fully to the administrative review processes available under the Medicare Act. NMC decided not to appeal the Court's decision, but rather, to pursue the claims through the available administrative processes. Although NMC management believes that those IDPN claims were consistent with published Medicare coverage guidelines and ultimately will be approved for payment, there can be no assurance that the claims on appeal will be approved for payment. Such claims represent substantial accounts receivable of NMC, amounting to approximately $150 million as of September 30, 1998. If NMC is unable to collect its IDPN receivable or if IDPN coverage is reduced or eliminated, depending on the amount of the receivable that is not collected and/or the nature of the coverage change, the Company's business, financial condition and results of operations could be materially adversely affected. NMC's IDPN receivables are included in the net assets of the Company's discontinued operations. However, these receivables have not been sold and will remain classified as discontinued operations until they have been settled. See Note 5 -"Discontinued Operations." OTHER LEGAL PROCEEDINGS DISTRICT OF NEW JERSEY INVESTIGATION NMC has received multiple subpoenas from a federal grand jury in the District of New Jersey investigating, among other things, whether NMC sold defective products, the manner in which NMC handled customer complaints and certain matters relating to the development of a new dialyzer product line. NMC is cooperating with this investigation and has provided the grand jury with extensive documents. In February, 1996, NMC received a letter from the U.S. Attorney for the District of New Jersey indicating that it is the target of a federal grand jury investigation into possible violations of criminal law in connection with its efforts to persuade the FDA to lift a January 1991 import hold issued with respect to NMC's Dublin, Ireland manufacturing facility. In June 1996, NMC received a letter from the U.S. Attorney for the District of New Jersey indicating that the U.S. Attorney had declined to prosecute 20 21 NMC with respect to a submission related to NMC's effort to lift the import hold. The letter added that NMC remains a subject of a federal grand jury's investigation into other matters. NMC has produced documents in response to a June 1996 subpoena from the federal grand jury requesting certain documents in connection with NMC's imports of the FOCUS(R) dialyzer from January 1991 to November 1995. The government investigators and the Company have narrowed the issues with respect to which the government has previously expressed concerns in order to resolve this investigation. However, the outcome and impact, if any, of these discussions and potential resolution on the Company's business, financial condition or results of operations cannot be predicted at this time. COMMERCIAL INSURER LITIGATION In December 1997, FMCH, NMC, and certain named NMC subsidiaries, as well as Grace Chemicals, were served with a civil complaint filed by Aetna Life Insurance Company in the U.S. District Court for the Southern District of New York (Aetna Life Insurance Company v. National Medical Care, Inc. et al, 97-Civ-9310). Based in large part on information contained in prior securities filings, the lawsuit alleges inappropriate billing practices for nutritional therapy, diagnostic and clinical laboratory tests and misrepresentations. The complaint seeks unspecified damages and costs. Grace Chemicals has sought indemnification from the Company pursuant to the terms of an indemnification agreement between Grace and the Company for any liability, costs and expenses that Grace may incur as a result of the lawsuit. The Company has moved to dismiss the complaint on the grounds that it does not state a claim against FMCH, NMC or their affiliates. This action is at an early stage and its outcome and impact on the Company cannot be predicted at this time. However, the Company, NMC and its subsidiaries believe that they have substantial defenses to the claims asserted, and intend to vigorously defend the lawsuit. It is also possible that one or more other private payors may claim that NMC received excess payments and similarly, may seek reimbursement and other damages from NMC. An adverse result could have a material adverse effect on the Company's business, financial condition or results of operations. 21 22 ITEM 2. 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 FMCH. The discussion should be read in conjunction with the financial statements included elsewhere in this document. This section contains certain forward-looking statements that are subject to various risks and uncertainties. Such statements include, without limitation, discussions concerning the outlook of FMCH, 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, and the availability of financing. These and other risks and uncertainties, which are more fully described elsewhere in this Item 2 and in Management's Discussion and Analysis of Financial Condition and Results of Operation in FMCH's 1997 Form 10-K and in FMCH's reports filed from time to time with the Commission, could cause FMCH's results to differ materially from the results that have been or may be projected by or on behalf of FMCH. OVERVIEW FMCH is primarily engaged in (a) providing kidney dialysis services, clinical laboratory testing and renal diagnostic services and (b) manufacturing and distributing products and equipment for dialysis treatment. Throughout FMCH's history, a significant portion of FMCH'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. FMCH derives a significant portion of its net revenues from Medicare, Medicaid and other government health care programs (approximately 64% in 1997). The reimbursement rates under these programs, including the Composite Rate, the reimbursement rate for EPO (which accounted for approximately 23% of dialysis service's domestic net revenues in 1997), and the reimbursement rate for other dialysis and non-dialysis related services and products, as well as other material aspects of these programs, have in the past and may in the future be changed as a result of deficit reduction and health care reform measures. FMCH's business, financial position and results of operations also could be materially adversely effected by an adverse outcome in the OIG investigations, any whistleblower action, the pending challenge by FMCH of changes effected by Medicare in approving reimbursement claims relating to the administration of IDPN or the adoption in 1996 of a new coverage policy that has changed IDPN coverage prospectively. FMCH's business, financial position and results of operations would also be materially adversely affected by an adverse outcome in the pending litigation concerning the implementation of certain provisions of OBRA 93 relating to the coordination of benefits between Medicare and employer health plans in the case of certain dual eligible ESRD patients. FMCH also derives a significant portion of its net revenues from reimbursement by non-government payors. Historically, reimbursement rates paid by these payors generally have been higher than Medicare and other government program rates. However, non-government payors are imposing cost containment measures that are creating significant downward pressure on reimbursement levels that FMCH receives for its services and products. 22 23 RESULTS OF OPERATIONS The following table summarizes certain unaudited operating results of FMCH by principal business unit for the periods indicated. Intercompany eliminations primarily reflect sales of medical supplies by Dialysis Products to Dialysis Services. This information has been reorganized and prior period information has been reclassified to conform with the business unit reporting requirements of FMC and to distinguish between continued and discontinued operations.
(DOLLARS IN MILLIONS) THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------ ----------------- 1998 1997 1998 1997 ---- ---- ------ ------ NET REVENUES Dialysis Services ........................... $549 $453 $1,575 $1,291 Dialysis Products ........................... 171 163 514 475 Intercompany Eliminations ................... (64) (68) (185) (186) ---- ---- ------ ------ Total Net Revenues .............................. $656 $548 $1,904 $1,580 ==== ==== ====== ====== Operating Earnings: Dialysis Services ........................... $ 88 $ 71 $ 246 $ 192 Dialysis Products ........................... 29 16 75 57 ---- ---- ------ ------ Total Operating Earnings ........................ 117 87 321 249 ---- ---- ------ ------ Other Expenses: General Corporate ........................... $ 28 $ 19 $ 80 $ 57 Research & Development ...................... 1 -- 3 2 Interest Expense, Net ....................... 55 48 155 130 ---- ---- ------ ------ Total Other Expenses ............................ 84 67 238 189 ---- ---- ------ ------ Earnings Before Income Taxes - Continuing Operations ................................... 33 20 83 60 (Benefit)/provision for Income Taxes ............ 19 10 46 32 ---- ---- ------ ------ Net Earnings - Continuing Operations ............ $ 14 $ 10 $ 37 $ 28 ==== ==== ====== ====== Discontinued Operations: Net Revenues ................................ $ -- $ 67 $ 121 $ 218 Income (Loss) before income taxes ........... -- (12) (14) (10) (Benefit)/provision for Income Taxes ........ -- (4) (5) (4) ---- ---- ------ ------ Income (Loss) from Operations ............... -- (8) (9) (6) ---- ---- ------ ------ Loss on Disposal before Income Taxes ............ -- -- (140) -- Income Tax Benefit .............................. -- -- (43) -- ---- ---- ------ ------ Loss on Disposal ................................ -- -- (97) -- ---- ---- ------ ------ Total Income/Loss on Discontinued Operations .... $ -- $ (8) $ (106) $ (6) ==== ==== ====== ======
23 24 THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 1997 Net revenues from continuing operations for the third quarter of 1998 increased by 20% ($108 million) over the comparable period of 1997. Net earnings from continuing operations for the third quarter of 1998 increased 40% ($4 million) over the comparable period of 1997 as a result of increased operating earnings partially offset by higher interest expenses and increased general corporate expenses. DIALYSIS SERVICES Dialysis Services net revenues for the third quarter of 1998 increased by 22% ($96 million) over the comparable period of 1997, primarily as a result of a 13% increase in the number of treatments provided, the beneficial impact of the extension of the Medicare Secondary Payor (MSP) provision, and higher EPO utilization relative to the comparable 1997 period which reflected relatively low EPO utilization, partially offset by decreased laboratory testing revenues. The treatment increase was a result of base business growth and the impact of 1997 and 1998 acquisitions. The laboratory testing revenue decrease was primarily due to the decreased number of patients of other dialysis providers serviced by FMCH, as competitors consolidate lab activity. Dialysis Services operating earnings for the third quarter of 1998 increased by 24% ($17 million) over the comparable period of 1997 primarily due to the increase in treatment volume, the beneficial impact of the extension of the MSP provision and higher EPO utilization relative to the comparable 1997 period which reflected relatively low EPO utilization. DIALYSIS PRODUCTS Dialysis Products net revenues for the third quarter of 1998 increased by 5% ($8 million) over the comparable period of 1997. This is due to increased sales of dialyzers ($9 million), and machines ($5 million), partially offset by decreased sales of peritoneal products ($2 million), concentrates ($1 million) and other products ($3 million). Dialysis Products operating earnings for the third quarter of 1998 increased by 81% ($13 million) over the comparable period of 1997. This is primarily due to revenue growth and improvements in gross margin resulting from manufacturing efficiencies from increased production volume. OTHER EXPENSES FMCH's other expenses for the third quarter of 1998 increased by 25% ($17 million) over the comparable period of 1997. General corporate expenses increased by $9 million entirely due to foreign exchange gains realized in 1997. Research and development expenses for the third quarter of 1998 increased by $1 million over the comparable period of 1997. Interest expense for the third quarter of 1998 increased by $7 million over the comparable period of 1997 mainly due to an increase in debt to finance acquisitions. INCOME TAX RATE The effective tax rate from continuing operations for the third quarter 1998 (57.1%) is significantly higher than the rate for the comparable period of 1997 (49.9%), due primarily to a 1997 rate reduction related to the loss carryover of FUSA. DISCONTINUED OPERATIONS On June 1, 1998, the Company classified its Non Renal Diagnostic Services and Homecare divisions as discontinued operations. The Company sold its Non Renal Diagnostic Services division and its Homecare division on, respectively, June 26, 1998, and July 29, 1998. A net after tax loss of $97 million has been recorded on the sale of these businesses. See "Liquidity and Capital Resources - Divestitures." 24 25 NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 1997 Net revenues from continuing operations for the first nine months of 1998 increased by 21% ($324 million) over the comparable period of 1997. Net earnings from continuing operations for the first nine months of 1998 increased 32% ($9 million) over the comparable period of 1997 as a result of increased operating earnings, partially offset by higher interest expenses and increased general corporate expenses. DIALYSIS SERVICES Dialysis Services net revenues for the first nine months of 1998 increased by 22% ($284 million) over the comparable period of 1997, primarily as a result of a 16% increase in the number of treatments provided, the beneficial impact of the extension of the Medicare Secondary Payor (MSP) provision, higher EPO utilization relative to the comparable 1997 period which reflected relatively low EPO utilization and increased laboratory testing revenues. The treatment increase was a result of base business growth and the impact of 1997 and 1998 acquisitions. The laboratory testing revenue increase was primarily due to the full nine month revenue impact of Spectra Laboratories acquired by FMCH in June 1997, partially offset by the decreased number of patients of other dialysis providers serviced by FMCH during the third quarter of 1998 as competitors consolidate lab activity. Dialysis Services operating earnings for the first nine months of 1998 increased by 28% ($54 million) over the comparable period of 1997 primarily due to the increase in treatment volume, the beneficial impact of the extension of the MSP provision and higher EPO utilization. DIALYSIS PRODUCTS Dialysis Products net revenues for the first nine months of 1998 increased by 8% ($39 million) over the comparable period of 1997. This is due to increased sales of dialyzers ($20 million), machines ($9 million), concentrates ($5 million), peritoneal products ($2 million), and other products ($3 million). Dialysis Products operating earnings for the first nine months of 1998 increased by 32% ($18 million) over the comparable period of 1997. This is primarily due to revenue growth and improvements in gross margin resulting from manufacturing efficiencies from increased production volume. OTHER EXPENSES FMCH's other expenses for the first nine months of 1998 increased by 26% ($49 million) over the comparable period of 1997. General corporate expenses increased by $23 million primarily due to foreign exchange gains ($18 million) realized in 1997, and increased insurance and legal expenses ($6 million). Research and development expenses for the first nine months of 1998 increased by $1 million over the comparable period of 1997. Interest expense for the first nine months of 1998 increased by $25 million over the comparable period of 1997 mainly due to an increase in debt to finance acquisitions. INCOME TAX RATE The effective tax rate from continuing operations for the first nine months of 1998 (55.8%) is higher than the rate for the comparable period of 1997 (54.1%), due primarily to a 1997 rate reduction related to the loss carryover of FUSA offset by various other items. DISCONTINUED OPERATIONS On June 1, 1998, the Company classified its Non Renal Diagnostic Services and Homecare divisions as discontinued operations. The Company sold its Non Renal Diagnostic Services division and its Homecare division on, June 26, 1998 and July 29, 1998 respectively. A net after tax loss of $97 million has been recorded on the sale of these businesses. The discontinued operations revenues for its Non Renal Diagnostic Services and Homecare divisions was $121 million for the first nine months of 1998 with a net after tax loss of $9 million. 25 26 LIQUIDITY AND CAPITAL RESOURCES FMCH's cash requirements, including, to a limited extent, acquisitions, have historically been funded by cash generated from operations. Cash generated from continued operations was $100 million and $93 million for the first nine months of 1998 and 1997, respectively. The increase is primarily due to the Company's improved profit levels. FMCH made acquisitions of net assets totaling $175 million and $416 million, during the first nine months of 1998 and 1997, respectively. FMCH made capital expenditures for internal expansion, improvements, new furnishings and equipment of $51 million and $95 million during the first three months of 1998 and 1997, respectively. The Company intends to capitalize on the continuing shift in the U.S. from physician-owned and hospital-based dialysis clinics to multi-center providers by acquiring existing dialysis centers and the establishment of new or expanded centers and, accordingly, will require significant capital resources to pursue its growth strategy in the dialysis marketplace. FMCH may also make other strategic acquisitions in the future. During the first nine months of 1998, FMCH funded its acquisitions and capital expenditures primarily through proceeds from external short and long-term debt and the proceeds from the receivable financing facility. In addition, acquisitions were also funded through the issuance of $42 million of investment securities by Fresenius Medical Care Finance, S.A., a Luxembourg subsidiary of FMC ("FMC Finance"). In exchange for such financing, a $42 million intercompany account was established between FMC Finance and FMCH. Effective July 1, 1995, FMCH ceased to recognize the incremental revenue provided under HCFA's initial instruction under OBRA 93, although it continued to bill private third-party payors for these amounts through December 31, 1995. FMCH began billing Medicare as the primary payor for the dual eligible ESRD patients affected by OBRA 93 effective January 1, 1996. If HCFA's revised instruction under OBRA 93 is permanently enjoined on a prospective basis, or if such revised instruction is sustained but given an effective date of later than June 30, 1995, FMCH may be able to rebill such services to third-party payors and, as a result, FMCH's future results of operations and financial position would be favorably affected by the incremental revenue that FMCH would recognize. For further discussion see Note 6 to Unaudited Consolidated Financial Statements, Commitments and Contingencies", Omnibus Budget Reconciliation Act of 1993". FMCH believes that its existing credit facilities, cash generated from operations and other current sources of financing are sufficient to meet its foreseeable needs. If existing sources of funds are not sufficient to provide liquidity, FMCH may need to sell assets or obtain debt or equity financing from additional external sources. There can be no assurance that FMCH will be able to do so on satisfactory terms, if at all. DIVESTITURES FMCH sold its Non Renal Diagnostic Services and Homecare divisions on June 26, 1998 and July 29, 1998, respectively. The combined proceeds of the sales were approximately $100 million in cash and notes. IMPACT OF INFLATION A substantial portion of FMCH's net revenue is subject to reimbursement rates which are regulated by the federal government and do not automatically adjust for inflation. Non-governmental payors also are exerting downward pressure on reimbursement levels. Increased operating costs that are subject to inflation, such as labor and supply costs, without a compensating increase in reimbursement rates, may adversely affect FMCH's business and results of operations, possibly materially. 26 27 NEW PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities, which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as "derivatives") and for hedging activities. This statement requires that an entity recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. The statement also sets forth the criteria for determining whether a derivative may be specifically designated as a hedge of a particular exposure with the intent of measuring the effectiveness of that hedge in the statement of operations. SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. The Company has not yet determined if the adoption of SFAS 133 will have a material impact on the consolidated financial statements. In April 1998, Statement of Position No. 98-5, Reporting on the Costs of Start-up Activities ("SOP 98-5"), was issued by the Accounting Standards Executive Committee (AcSEC) of the AICPA. SOP 98-5 requires that the costs of start-up activities, including organization costs, which have been previously capitalized, should be expensed as incurred. Unless adopted earlier, SOP 98-5 is effective for financial statements for fiscal years beginning after December 15, 1998. Management does not believe that the adoption of this statement will have a material impact on the Company's consolidated financial position, results of operations or cash flows. YEAR 2000 ISSUES The "Year 2000 problem" is the result of computer programs using two digits rather than four to define the applicable years. Such software may recognize a date using "00" as the year 1900 rather than the year 2000. These programs are present in software applications running on desktop computers and network servers. These programs are also present in microchips and microcontrollers incorporated into equipment. Certain of the Company's computer hardware and software, building infrastructure components (e.g., alarm systems, HVAC systems, etc.) and medical devices that are date sensitive may contain programs with the Year 2000 problem. If uncorrected, the problem could result in computer system and program failures or equipment and medical device malfunctions or miscalculations that could result in a disruption of business operations or affect patient treatment. If the Company, its significant customers, reimbursement sources or suppliers fail to make necessary modifications and conversions on a timely basis, the Year 2000 problem could have a material adverse effect on the Company's operations and financial results. The Company believes that its competitors face a similar risk. The Company has been working on identifying and addressing potential Year 2000 risks since March 1997. In an effort to more comprehensively monitor and assess its progress in addressing Year 2000 issues, the Company established a Year 2000 Steering Committee in August 1998. The committee is comprised of senior company executives who meet regularly and provide status updates to the Company's management committee on a regular basis. Regarding information technology ("IT") systems, the Company has inventoried substantially all IT systems (e.g., clinical, supply chain management, financial, etc.) and has assessed Year 2000 compliance for those systems. The Company has developed specific plans and timetables to remediate or replace critical non-compliant systems. The Company's current target is to resolve Year 2000 compliance issues (including testing to validate Year 2000 compliance) for all critical systems by September 30, 1999. The Company is in the process of implementing an integrated financial/manufacturing information system which is Year 2000 compliant. The Company continually upgrades software and hardware to promote efficiencies and standardization throughout the Company and ensures that all upgrades are Year 2000 compliant. Regarding non-IT equipment that may be dependent upon embedded software (e.g., medical, manufacturing/distribution, etc.), the Company has inventoried and assessed Year 2000 compliance for most of this equipment. The Company plans to have assessed Year 2000 compliance for all of its non-IT equipment by December 31, 1998. For medical equipment, the Company has developed specific plans to remediate Year 2000 non-compliance and is in the process of completing this remediation. For manufacturing/distribution equipment, the Company is in the process of developing specific plans to remediate Year 2000 non-compliance for this equipment. The Company's current target is to resolve Year 2000 compliance issues (including testing to validate Year 2000 compliance) for all non-IT equipment by September 30, 1999. 27 28 Although there can be no assurance that the Company will successfully complete implementation of its remediation efforts for IT systems and non-IT equipment by the dates critical for Year 2000 compliance, the Company's Year 2000 program is currently progressing in accordance with the Company's completion timetables. The Company relies heavily on third parties in operating its business. In addition to its reliance on systems and non-IT equipment vendors to verify Year 2000 compliance of their products, the Company also depends on 1) fiscal intermediaries which process claims and make payments for their Medicare and Medicaid programs, 2) insurance companies, HMOs, and other private payors, 3) utilities which provide electricity, water, natural gas, and telephone services, and 4) vendors of medical supplies and pharmaceuticals used in patient care. The Company is in the process of identifying and contacting all significant third parties to seek assurances that the third parties' services and products will not be interrupted or malfunction due to the Year 2000 problem. The Company intends to contact all significant third parties by December 31, 1998. Failure of significant third parties to resolve their Year 2000 issues could have a material adverse effect on the Company's results of operations and ability to provide health care service and manufacture products. Costs related to the Year 2000 issue are funded through operating cash flows. The Company expects to spend a total of approximately $4 million in remediation and replacement efforts, including new software and hardware, costs to modify existing software, and consultant fees. The Company estimates remaining costs to be approximately $3 million. IT expenditures for Year 2000 are covered as part of the normal IT budget (the Year 2000 efforts are taking priority over other discretionary IT projects). Non-IT expenditures for Year 2000 are similarly being covered as part of the normal non-IT budget. The Company presently believes that the incremental cost of achieving Year 2000 compliant systems and equipment will not be material to the Company's financial condition, liquidity, or results of operation. Time and cost estimates are based on currently available information. Developments that could affect estimates include, but are not limited to: 1) the availability and cost of trained personnel, 2) the ability to locate and correct all relevant computer code and systems, and 3) remediation success of the Company's customers and suppliers. Based on its assessments to date, the Company believes it will not experience any material disruption as a result of Year 2000 issues in its internally manufactured medical devices, its internal manufacturing and distribution processes, and its internal information processing. However, if certain critical third party providers, such as those supplying electricity or water, experience difficulties resulting in disruption of service to the Company, a shutdown of the Company's operations at individual facilities could occur for the duration of the disruption. At present, the Company has not developed contingency plans but intends to determine whether to develop any such plan by March 1999. The Company will continue to track its progress and will develop contingency plans if new risks are identified or the Company's remediation/replacement efforts do not progress satisfactorily. CONTINGENCIES FMCH is the subject of investigations by several federal agencies and authorities, is a plaintiff in litigation against the federal government with respect to the implementation of OBRA 93 and coverage for IDPN therapy, and is seeking to change a proposed revision to IDPN coverage policies. An adverse outcome in any of these matters, beyond the reserves which have established, could have a material adverse effect on FMCH's business, financial condition and results of operations. 28 29 PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS As discussed in greater detail below, most aspects of NMC's U.S. businesses are the subject of criminal or civil investigations by several federal agencies and authorities, the outcome of which cannot be predicted. If the government were successfully to pursue claims arising from any of these investigations, NMC or one or more of its subsidiaries could be subject to civil or criminal penalties, including substantial fines, suspension of payments or exclusion from the Medicare and Medicaid programs as well as other federal health care benefit programs, which provide over 60% of NMC's revenues. In addition, NMC could be required to change billing or other practices which could adversely affect NMC's revenues. In addition, as discussed below, NMC has become aware that it is the subject of qui tam or "whistleblower" actions with respect to some or all of the issues raised by the government investigations, which whistleblower actions are filed under seal as a matter of law in the first instance, thereby preventing disclosure to the Company and to the public except by court order. In the process of unsealing federal whistleblower complaints, it is not unusual for courts to allow the government to inform the Company and its counsel of a complaint prior to the time the Company may be legally permitted to disclose it to the public. NMC may be the subject of other "whistleblower" actions not known to the Company. Fresenius Medical Care and FMCH have guaranteed NMC's obligations relating to or arising out of the OIG Investigation and the qui tam proceedings, and indemnified Grace Chemicals for any such liabilities. An adverse result in any of such governmental investigations or "whistleblower" proceedings could have a material adverse effect on the Company's business, financial condition and results of operations. OIG INVESTIGATION In October 1995, NMC received five investigative subpoenas from the OIG. The subpoenas were issued in connection with an investigation being conducted by the OIG, the U.S. Attorney for the District of Massachusetts and others concerning possible violations of federal laws, including the anti-kickback statutes and the False Claims Act. The subpoenas call for extensive document production relating to various aspects of NMC's business. In connection with the OIG Investigation, the Company continues to receive additional subpoenas directed to NMC or the Company to obtain supplemental information and documents regarding the above-noted issues, or to clarify the scope of the original subpoenas. The Company is cooperating with the OIG Investigation. The Company believes that the government continues to review and evaluate the voluminous information the Company has provided. As indicated above, the government continues, from time to time, to seek supplementing and/or clarifying information from the Company. The Company expects that this process will continue while the government completes its evaluation of the issues. The OIG Investigation covers the following areas: (a) NMC's dialysis services business, principally relating to its Medical Director contracts and compensation; (b) NMC's treatment of credit balances resulting from overpayments received under the Medicare ESRD program, its billing for home dialysis services, and its payment of supplemental medical insurance premiums on behalf of indigent patients; (c) LifeChem's laboratory business, including documents relating to testing procedures, marketing, customers, competition and certain overpayments totaling approximately $4.9 million that were received by LifeChem from the Medicare program with respect to laboratory services rendered between 1989 and 1993, and a 1997 review of dialysis facilities' standing orders; and (d) Homecare and, in particular, information concerning IDPN billing practices including various services, equipment and supplies and payments made to third parties as compensation for administering IDPN therapy. The government has indicated that the areas identified above are not exclusive, and that it may pursue additional areas. As noted, the penalties applicable under the anti-kickback statutes, the False Claims Act and other federal and state statutes and regulations applicable to NMC's business can be substantial. While NMC asserts that it is able to offer legal and/or factual defenses with respect to many of the areas the government has identified, there can be no assurance that the federal government and/or one or more state agencies will not claim that NMC has violated statutory or regulatory provisions. Additionally, eight and possibly other 29 30 qui tam actions alleging that NMC submitted false claims to the government have been filed under seal by former or current NMC employees or other individuals who may have familiarity with one or more of the issues under investigation. As noted, under the False Claims Act, any such private plaintiff could pursue an action against NMC in the name of the U.S. at his or her own expense if the government declines to do so. An adverse determination with respect to any of the issues addressed by the subpoenas, or any of the other issues that have been or may be identified by the government, could result in the payment of substantial fines, penalties and forfeitures, the suspension of payments or exclusion of the Company or one or more of its subsidiaries from the Medicare program and other federal programs, and changes in billing and other practices that could adversely affect the Company's revenues. Any such result could have a material adverse effect on the Company's business, financial condition and results of operations. Under the terms of the Merger, any potential resulting monetary liability has been retained by NMC, and the Company has indemnified Grace Chemicals against all potential liability arising from or relating to the OIG Investigation. The Company has provided the U.S. government with a guarantee of payment of the obligations, if any, arising from the OIG Investigation. In support of this guarantee, the Company has delivered to the U.S. government a standby letter of credit in the amount of $150 million. MEDICAL DIRECTOR COMPENSATION The government is investigating whether DSD's compensation arrangements with its Medical Directors constitute payments to induce referrals, which would be illegal under the anti-kickback statutes, rather than payment for services rendered. DSD compensated the substantial majority of its Medical Directors on the basis of a percentage of the earnings of the dialysis center for which the Medical Director was responsible from the inception of NMC's predecessor in 1972 until January 1, 1995, the effective date of Stark II. Under the arrangements in effect prior to January 1, 1995, the compensation paid to Medical Directors was adjusted to include "add backs," which represented a portion of the profit earned by MPG on products purchased by the Medical Director's facility from MPG and (until January 1, 1992) a portion of the profit earned by LifeChem on laboratory services provided to patients at the Medical Director's facility. These adjustments were designed to allocate a profit factor to each dialysis center relating to the profits that could have been realized by the center if it had provided the items and services directly rather than through a subsidiary of NMC. The percentage of profits paid to any specific Medical Director was reached through negotiation, and was typically a provision of a multi-year consulting agreement. To comply with Stark II if Designated Health Services are involved, Medical Director compensation must not exceed fair market value and may not take into account the volume or value of referrals or other business generated between the parties. Since January 1, 1995, DSD has compensated its Medical Directors on a fixed compensation arrangement intended to comply with the requirements of Stark II. In renegotiating its Medical Director compensation arrangements in connection with Stark II, DSD took and continues to take account of the compensation levels paid to its Medical Directors in prior years. Certain government representatives have expressed the view in meetings with counsel for NMC that arrangements where the Medical Director was or is paid amounts in excess of the "fair market value" of the services rendered may evidence illegal payments to induce referrals, and that hourly compensation is a relevant measure for evaluating the "fair market value" of the services. DSD does not compensate its Medical Directors on an hourly basis and has asserted to the government that hourly compensation is not a determinative measure of fair market value. Although the Company believes that the compensation paid to its Medical Directors is generally reflective of fair market value, there can be no assurances that the government will agree with this position or that the Company ultimately will be able to defend its position successfully. Because of the wide variation in local market factors and in the profit percentage contractually negotiated between DSD and its Medical Directors prior to January 1, 1995, there is a wide variation in the amounts that have been paid to Medical Directors. As a result, the compensation that DSD has paid and is continuing to pay to a material number of its Medical Directors could be viewed by the government as being in excess of "fair market value," both in absolute terms and in terms of hourly compensation. NMC has asserted to the government that its compensation arrangements do not constitute illegal payments to induce referrals. NMC has also asserted to the government that OIG auditors repeatedly reviewed NMC's compensation arrangements with its Medical Directors in connection with their audits of the costs claimed by DSD; that the OIG stated in its audit reports that, with the exception of certain technical issues, NMC had complied with applicable Medicare laws and regulations pertaining to the ESRD program; and that NMC reasonably relied on these audit reports in concluding that its program for compensating Medical Directors was lawful. There has been no indication that the government will accept NMC's assertions concerning the legality of its arrangements generally or NMC's assertion that it reasonably relied on OIG audits, or that the government will not focus on specific arrangements that DSD 30 31 has made with one or more Medical Directors and claim that those specific arrangements were or are unlawful. The government is also investigating whether DSD's profit sharing arrangements with its Medical Directors influenced them to order unnecessary ancillary services and items. NMC has asserted to the government that the rate of utilization of ancillary services and items by its Medical Directors is reasonable and that it did not provide illegal inducements to Medical Directors to order ancillary services and items. CREDIT BALANCES In the ordinary course of business, Medicare providers like DSD receive overpayments from Medicare intermediaries for services that they provide to Medicare patients. Medicare intermediaries commonly direct such providers to notify them of the overpayment and not remit such amounts to the intermediary by check or otherwise unless specifically requested to do so. In 1992, HCFA adopted a regulation requiring certain Medicare providers, including dialysis centers, to file a quarterly form listing unrecouped overpayments with the Medicare intermediary responsible for reimbursing the provider. The first such filing was required to be made as of June 30, 1992 for the period beginning with the initial date that the provider participated in the Medicare program and ending on June 30, 1992. The government is investigating whether DSD intentionally understated the Medicare credit balance reflected on its books and records for the period ending June 30, 1992 by reversing entries out of its credit balance account and taking overpayments into income in anticipation of the institution of the new filing requirement. DSD's policy was to notify Medicare intermediaries in writing of overpayments upon receipt and to maintain unrecouped Medicare overpayments as credit balances on the books and records of DSD for four years; overpayments not recouped by Medicare within four years would be reversed from the credit balance account and would be available to be taken into income. NMC asserts that Medicare overpayments that have not been recouped by Medicare within four years are not subject to recovery under applicable regulations and that its initial filing with the intermediaries disclosed the credit balance on the books and records of DSD as shown in accordance with its policy, but there can be no assurance that the government will accept NMC's views. The government has inquired whether other divisions including Homecare, LifeChem and DSI have appropriately treated Medicare credit balances. The government is also investigating whether DSD failed to disclose Medicare overpayments that resulted from DSD's obligation to rebill commercial payors for amounts originally billed to Medicare under HCFA's initial implementation of the OBRA 93 amendments to the secondary payor provisions of the Medicare Act. DSD experienced delays in reporting a material amount of overpayments after the implementation of the OBRA 93 amendments. NMC asserts that most of these delays were the result of the substantial administrative burdens placed on DSD as a consequence of the changing and inconsistent instructions issued by HCFA with respect to the OBRA 93 amendments and were not intentional. Substantially all overpayments resulting from the rebilling effort associated with the OBRA 93 amendments have now been reported. Procedures are in place that are designed to ensure that subsequent overpayments resulting from the OBRA 93 amendments will be reported on a timely basis. SUPPLEMENTAL MEDICAL INSURANCE DSD provided grants or loans for the payment of premiums for supplemental medical insurance (under which Medicare Part B coverage is provided) on behalf of a small percentage of its patients who are financially needy. The practice of providing loans or grants for the payment of supplemental medical insurance premiums by NMC was one of the subjects of review by the government as part of the OIG investigation. The Government, however, advised the Company orally that it is no longer pursuing this issue. Furthermore, as a result of the passage of HIPPA, the Company terminated making such payments on behalf of its patients. Instead, the Company, together with other representatives of the industry, obtained an advisory opinion from the OIG, whereby, consistent with specified conditions, the Company and other similarly situated providers may make contributions to a non-profit organization that has volunteered to make these payments on behalf of indigent ESRD patients, including patients of the Company. OVERPAYMENTS FOR HOME DIALYSIS SERVICES NMC acquired HIC, an in-center and home dialysis service provider, in 1993. At the time of the acquisition, HIC was the subject of a claim by HCFA that HIC had received payments for home dialysis services in excess of the Medicare reasonable charge 31 32 for services rendered prior to February 1, 1990. NMC settled the HCFA claim against HIC in 1994. The government is investigating whether the settlement concerning the alleged overpayments made to HIC resolved all issues relating to such alleged overpayments. The government is also investigating whether HDS received payments similar to the payments that HIC received, and whether HDS improperly billed for home dialysis services in excess of the monthly cost cap for services rendered on or after February 1, 1990. The government is investigating whether NMC was overpaid for services rendered. NMC asserts that the billings by HDS were proper, but there can be no assurance that the government will accept NMC's view. LIFECHEM Overpayments. On September 22, 1995, LifeChem voluntarily disclosed certain billing problems to the government that had resulted in LifeChem's receipt of approximately $4.9 million in overpayments from the Medicare program for laboratory services rendered between 1989 and 1993. LifeChem asserts that most of these overpayments relate to errors caused by a change in LifeChem's computer systems and that the remainder of the overpayments were the result of the incorrect practice of billing for a complete blood count with differential when only a complete blood count was ordered and performed, and of the incorrect practice of billing for a complete blood count when only a hemoglobin or hematocrit test was ordered. LifeChem asserts that the overpayments it received were not caused by fraudulent activity, but there can be no assurance that the government will accept LifeChem's view. LifeChem made these disclosures to the government as part of an application to be admitted to a voluntary disclosure program begun by the government in mid-1995 . At the time of the disclosures, LifeChem tendered repayment to the government of the $4.9 million in overpayments. After the OIG Investigation was announced, the government indicated that LifeChem had not been accepted into its voluntary disclosure program. The government has deposited the $4.9 million check with NMC's approval. The matters disclosed in LifeChem's September 22, 1995 voluntary disclosure are a subject of the OIG Investigation. On June 7, 1996, LifeChem voluntarily disclosed an additional billing problem to the government that had resulted in LifeChem's receipt of between $40,000 and $160,000 in overpayments for laboratory services rendered in 1991. LifeChem advised the government that this overpayment resulted from the submission for payment of a computer billing tape that had not been subjected to a "billing rules" program designed to eliminate requests for payments for laboratory tests that are included in the Composite Rate and that were not eligible for separate reimbursement. LifeChem also advised the government that there may have been additional instances during the period from 1990 to 1992 when other overpayments were received as a result of the submission of computer billing tapes containing similar errors and that it was in the process of determining whether such additional overpayments were received. On June 21, 1996, LifeChem advised the government that the 1991 billing problem disclosed on June 7, 1996 resulted in an overpayment of approximately $112,000. LifeChem also advised the government that certain records suggested instances in July 1990 and August 31 through September 11, 1990, when billing tapes may have been processed without rules processing. LifeChem continued its effort to determine whether any other overpayments occurred relating to the "billing rules" problem and, in March 1997, advised the government that an additional overpayment of approximately $260,000 was made by Medicare. Capitation for routine tests and panel design. In October 1994, the OIG issued a special fraud alert in which it stated its view that the industry practice of offering to perform or performing the routine tests covered by the Composite Rate at a price below fair market value, coupled with an agreement by a dialysis center to refer all or most of its non-Composite Rate tests to the laboratory, violates the anti-kickback statutes. In response to this alert, LifeChem changed its practices with respect to testing covered by the Composite Rate to increase the amount charged to both DSD and third-party dialysis centers and reduce the number of tests provided for the fixed rate. The government is investigating LifeChem's practices with respect to these tests. Benefits provided to dialysis centers and persons associated with dialysis centers. The government is investigating whether DSD or any third-party dialysis center or any person associated with any such center was provided with benefits in order to induce them to use LifeChem services. Such benefits could include, for example, discounts on RPD supplies, the provision of computer equipment, the provision of money for the purchase of computer equipment, and the provision of research grants. NMC has identified certain instances in which benefits were provided to MPG customers who purchased medical products from RPD and used LifeChem's laboratory services. The government may claim that the provision of such benefits violates, among other things, the anti-kickback statutes. Business and testing practices. As noted above, the government has identified a number of specific categories of documents that it is requiring NMC to produce at this time. In addition to documents relating to the areas discussed above, the government has also required LifeChem to produce documents relating to the equipment and systems used by LifeChem in performing and billing for 32 33 clinical laboratory blood tests, the design of the test panels offered and requisition forms used by LifeChem, the utilization rate for certain tests performed by LifeChem, recommendations concerning diagnostic codes to be used in ordering tests for patients with given illnesses or conditions, internal and external audits and investigations relating to LifeChem's billing and testing. Subsequently, the government served an investigative subpoena for documents concerning the Company's 1997 review of dialysis facilities' standing orders, and responsive documents were provided. IDPN Administration kits. As discussed above, one of the principal activities of Homecare is to provide IDPN therapy to dialysis patients at both NMC-owned facilities and at facilities owned by other providers. IDPN therapy is typically provided to the patient 12-13 times per month during dialysis treatment. Bills are submitted to Medicare on a monthly basis and include separate claims for reimbursement for supplies, including, among other things, nutritional solutions, administration kits and infusion pumps. In February 1991, the Medicare carrier responsible for processing Homecare's IDPN claims issued a Medicare advisory to all parenteral and enteral nutrition suppliers announcing a coding change for reimbursement of administration kits provided in connection with IDPN therapy for claims filed for items provided on or after April 1, 1991. The Medicare allowance for administration kits during this period was approximately $625 per month per patient. The advisory stated that IDPN providers were to indicate the "total number of actual days" when administration kits were "used," instead of indicating that a one-month supply of administration kits had been provided. In response, Homecare billed for administration kits on the basis of the number of days that the patient was on an IDPN treatment program during the billing period, which typically represented the entire month, as opposed to the number of days the treatment was actually administered. During the period from April 1991 to June 1992, Homecare had an average of approximately 1,200 IDPN patients on service. In May 1992, the carrier issued another Medicare advisory to all PEN suppliers in which it stated that it had come to the carrier's attention that some IDPN suppliers had not been prorating their billing for administration kits used by IDPN patients and that providers should not bill for administration kits on the basis of the number of days that the patient was on an IDPN treatment program during the billing period. The advisory stated further that the carrier would be conducting "a special study to determine whether or not overpayments have occurred as a result of incorrect billing" and that "if overpayments have resulted, providers that have incorrectly billed" would "be contacted so that refunds can be recovered." Homecare revised its billing practices in response to this advisory for claims filed for items provided on or after July 1, 1992. Homecare was not asked to refund any amounts relating to its billings for administration kits following the issuance of the second advisory. The government is investigating whether NMC submitted false claims for administration kits during the period from April 1, 1991 to June 30, 1992. NMC asserts that the claims submitted in connection with billing for administration kits were proper, but there can be no assurance that the government will accept NMC's view. The government may claim that Homecare's billing for administration kits during this period violates, among other things, the False Claims Act. Infusion Pumps and IV Poles. During the time period covered by the subpoenas, Medicare regulations permitted IDPN providers to bill Medicare for the infusion pumps and, until 1992, for IV poles provided to IDPN patients in connection with the administration of IDPN treatments. These regulations do not expressly specify that a particular pump and IV pole be dedicated to a specific patient, and NMC asserts that these regulations permitted Homecare to bill Medicare for an infusion pump and IV pole so long as the patient was infused using a pump and IV pole. Despite the absence of an express regulatory specification, Homecare developed a policy to deliver to a dialysis center a dedicated infusion pump and IV pole for each patient, although NMC cannot represent that it followed this policy in every instance. The government is investigating the propriety of Homecare's billings for infusion pumps and IV poles. As noted above, under the new policies published by HCFA with respect to IDPN therapy, the Company has not been able to bill for infusion pumps after July 1, 1996. The government discontinued reimbursement for IV poles in 1992. "Hang fees" and other payments. IDPN therapy is typically provided to the patient during dialysis by personnel employed by the dialysis center treating the patient with supplies provided and billed to Medicare by Homecare in accordance with the Medicare parenteral nutrition supplier rules. In order to compensate dialysis centers for the costs incurred in administering IDPN therapy and monitoring the patient during therapy, Homecare followed the practice common in the industry of paying a "hang fee" to the center. Dialysis centers are responsible for reporting such fees to HCFA on their cost reports. For DSD dialysis centers, the fee was $30 per administration, based upon internal DSD cost calculations For third-party dialysis centers, the fee was negotiated with each center, 33 34 typically pursuant to a written contract, and ranged from $15 to $65 per administration. NMC has identified instances in which other payments and amounts beyond that reflected in a contract were paid to these third-party centers. NMC has stopped paying "hang fees" to both DSD and third-party facilities. In July 1993, the OIG issued a management advisory alert to HCFA in which it stated that "hang fees" and other payments made by suppliers of IDPN to dialysis centers "appear to be illegal as well as unreasonably high." The government is investigating the nature and extent of the "hang fees" and other payments made by Homecare as well as payments by Homecare to physicians whose patients have received IDPN therapy. The government may claim that the payments by Homecare to dialysis centers violate, among other things, the anti-kickback statutes. Utilization of IDPN. Since 1984, when HCFA determined that Medicare should cover IDPN and other parenteral nutrition therapies, NMC has been an industry leader in identifying situations in which IDPN therapy is beneficial to ESRD patients. It is the policy of Homecare to seek Medicare reimbursement for IDPN therapy only when it is prescribed by a patient's treating physician and when it believes that the circumstances satisfy the requirements published by HCFA and its carrier agents. Prior to 1994, HCFA and its carriers approved for payment more than 90% of the IDPN claims submitted by Homecare. After 1993, the rate of approval for Medicare reimbursement for IDPN claims submitted by Homecare for new patients, and by the infusion industry in general, fell to approximately 9%. NMC contends that the reduction in rates of approval occurred because HCFA and its carriers implemented an unauthorized change in coverage policy without giving notice to providers. While NMC continued to offer IDPN to patients pursuant to the prescription of the patients' treating physicians and to submit claims for Medicare reimbursement when it believed the requirements stated in HCFA's published regulations were satisfied, other providers responded to the drop in the approval rate for new Medicare IDPN patients by abandoning the Medicare IDPN business, cutting back on the number of Medicare patients to whom they provide IDPN, or declining to add new Medicare patients. The number of patients to whom NMC provided IDPN increased as a result. The government is investigating the utilization rate of IDPN therapy among NMC patients, whether NMC submitted IDPN claims to Medicare for patients who were not eligible for coverage, and whether documentation of eligibility was adequate. NMC asserts that the utilization rate of IDPN therapy among its dialysis patients, which, in 1995, averaged less than 3.5%, is the result of the factors discussed above and that it is the policy of Homecare to seek Medicare reimbursement for IDPN therapy prescribed by the patients' treating physician in accordance with the requirements published by HCFA and its carrier agents. There can be no assurance that the government will accept NMC's view or that the government will not claim that Homecare submitted IDPN claims for individuals who were not eligible for coverage or with inadequate documentation of eligibility. In addition, the government is investigating whether, in certain circumstances, documentation of eligibility was false or inaccurate. With respect to some claims, the Company has determined that false or inaccurate documentation was submitted, deliberately or otherwise. The Company understands that the government recently has utilized a grand jury to investigate this matter. QUI TAM ACTIONS The Company and NMC have become aware that eight qui tam actions have been filed in various jurisdictions. Each of these actions is under seal and in each action, pursuant to court order the seal has been modified to permit the Company, NMC and other affiliated defendants to disclose the complaint to any relevant investors, financial institutions and/or underwriters, their successors and assigns and their respective counsel and to disclose the allegations in the complaints in their respective SEC and NYSE periodically required filings. The first qui tam action was filed in the United States District Court for the Southern District of Florida in 1996, amended on July 8, 1996 and disclosed to the Company on July 10, 1996. It alleges, among other things, that Grace Chemicals and NMC violated the False Claims Act in connection with certain billing practices regarding IDPN and the administration of EPO and that as a result of this allegedly wrongful conduct, the United States suffered actual damages in excess of $200 million. The Amended Complaint also seeks the imposition of a constructive trust on the proceeds of the NMC dividend to Grace Chemicals for the benefit of the United States on the ground that the Merger constitutes a fraudulent conveyance that will render NMC unable to satisfy the claims asserted in the Amended Complaint. The second qui tam action was filed in the United States District Court for the Middle District of Florida in 1995 and disclosed to the Company on or before November 7, 1996. It alleges, among other things, that NMC and certain NMC subsidiaries 34 35 violated the False Claims Act in connection with the alleged retention of over-payments made under the Medicare program, the alleged submission of claims in violation of applicable cost caps and the payment of supplemental Medicare insurance premiums as an alleged inducement to patients to obtain dialysis products and services from NMC. The complaint alleges that as a result of this allegedly wrongful conduct, the United States suffered damages in excess of $10 million including applicable fines. The third qui tam action was filed in the United States District Court for the Eastern District of Pennsylvania in February 1996 and was disclosed to the Company in November 1996. It alleges, among other things, that a pharmaceutical manufacturer, an unaffiliated dialysis provider and NMC violated the False Claims Act in connection with the submission of claims to the Medicare program for a nonsterile intravenous drug and for intravenous drugs which were allegedly billed in excess of permissible Medicare reimbursement rates. The complaint also claims that the defendants violated the Medicare and Medicaid anti-kickback statutes in connection with the receipt of discounts and other in kind payments as alleged inducements to purchase intravenous drugs. The complaint is focused on the business relationship between the pharmaceutical manufacturer and several providers, one of which is NMC. The complaint claims that as a result of this allegedly wrongful conduct, the United States suffered damages. On June 28, 1997, in response to relator's motion to dismiss and the United States' declination to intervene, the District Court ordered the complaint dismissed without prejudice. The fourth qui tam action was filed in the United States District Court for the Eastern District of Pennsylvania in May 1995 and was disclosed to the Company in August 1997. It alleges, among other things, that Biotrax violated the False Claims Act in connection with its submission of claims to the Medicare program for diagnostic tests and induced overutilization of such tests in the medical community through improper marketing practices also in violation of the False Claims Act. The fifth qui tam action was filed in the United States District Court for the Eastern District of Pennsylvania in August 1996 and was disclosed to the Company in August 1997. It alleges, among other things, that Biotrax and NMC Diagnostic Services induced overutilization of diagnostic tests by several named and unnamed physician defendants in the local medical community, through improper marketing practices and fee arrangements, in violation of the False Claims Act. The sixth qui tam action was filed in the United States District Court for the Eastern District of Pennsylvania in November 1996 and was disclosed to the Company in August 1997. It alleges, among other things, that NMC, DSI and Biotrax violated the False Claims Act in connection with the submission of claims to the Medicare program by improperly upcoding and otherwise billing for various diagnostic tests. The seventh qui tam action was filed in the United States District Court for the District of Delaware in January 1997 and was disclosed to the Company in September 1997. It alleges, among other things, that NMC and Biotrax violated the False Claims Act in connection with the submission of claims to the Medicare program for diagnostic tests, and induced overutilization of such tests through improper marketing practices which provided impermissible incentives to health care providers to order these tests. The eighth qui tam action was filed in the United States District Court for the District of New Jersey in February 1997 and was disclosed to the Company in September 1997. It alleges, among other things, that DSI and NMC violated the False Claims Act in connection with the submission of claims to the Medicare program for reimbursement for diagnostic tests, by causing unnamed physicians to overutilize these tests though a variety of fee arrangements and other impermissible inducements. Each of the qui tam complaints claims that as a result of the allegedly wrongful conduct, the United States suffered damages and that the defendants are liable to the United States for three times the amount of the alleged damages plus civil penalties of up to $10,000 per false claim. An adverse result in any of the qui tam actions could have a material adverse affect on the Company's business, financial condition or results of operations. OIG AGREEMENTS As a result of discussions with representatives of the United States in connection with the OIG Investigation, certain agreements (the "OIG Agreements") have been entered into to guarantee the payment of any obligations of NMC to the United States (an "Obligation") relating to or arising out of the OIG Investigation and the qui tam action filed in the Southern District of Florida (the "Government Claims"). For the purposes of the OIG Agreements, an Obligation is (a) a liability or obligation of NMC to the United States in respect of a Government Claim pursuant to a court order (i) which is final and nonappealable or (ii) the enforcement of which has not been stayed pending appeal or (b) a liability or obligation agreed to be an Obligation in a settlement agreement 35 36 executed by Fresenius Medical Care, the Company or NMC, on the one hand, and the United States, on the other hand. As stated elsewhere herein, the outcome of the OIG Investigation cannot be predicted. The entering into of the OIG Agreements is not an admission of liability by any party with respect to the OIG Investigation, nor does it indicate the liability, if any, which may result therefrom. Pursuant to the OIG Agreements, upon consummation of the Merger, Fresenius Medical Care, the Company and NMC provided the United States with a joint and several unconditional guarantee of payment when due of all Obligations (the "Primary Guarantee"). As credit support for this guarantee, NMC delivered an irrevocable standby letter of credit in the amount of $150 million. The United States will return such letter of credit (or any renewal or replacement) for cancellation when all Obligations have been paid in full or it is determined that NMC has no liability in respect of the Government Claims. Under the terms of the Merger, any potential resulting monetary liability has been retained by NMC, and the Company has indemnified Grace Chemicals against all potential liability arising from or relating to the OIG Investigation. Fresenius Medical Care and the United States state in the OIG Agreements that they will negotiate in good faith to attempt to arrive at a consensual resolution of the Government Claims and, in the context of such negotiations, will negotiate in good faith as to the need for any restructuring of the payment of any Obligations arising under such resolution, taking into account the ability of Fresenius Medical Care to pay the Obligations. The OIG Agreements state that the foregoing statements shall not be construed to obligate any person to enter into any settlement of the Government Claims or to agree to a structured settlement. Moreover, the OIG Agreements state that the statements described in the first sentence of this paragraph are precatory and statements of intent only and that (a) compliance by the United States with such provisions is not a condition or defense to the obligations of Fresenius Medical Care under the OIG Agreements and (b) breach of such provisions by the United States cannot and will not be raised by Fresenius Medical Care to excuse performance under the OIG Agreements. The foregoing describes the material terms of the OIG Agreements, copies of which were previously filed with the Commission and copies of which may be examined without charge at the public reference facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W. Washington, D.C. 20549, and at the Regional Offices of the Commission located at Suite 1400, Citicorp Center, 500 West Madison Street, Chicago, Illinois 60661-2551 and Room 1300, 7 World Trade Center, New York, New York 10048. Copies of such material will also be made available by mail from the Public Reference Branch of the Commission at 450 Fifth Street, N.W. Washington, D.C. 20549, at prescribed rates. The foregoing description does not purport to be complete and is qualified in its entirety by reference to such agreements. DIAGNOSTICS SUBPOENA In October 1996, Biotrax and NMC Diagnostics, Inc., both of which are subsidiaries of NMC, received an investigative subpoena from the OIG. The subpoena calls for the production of extensive documents and was issued in connection with an investigation being conducted by the OIG in conjunction with the U.S. Attorney for the Eastern District of Pennsylvania concerning the possible submission of false or improper claims to, and their payment by, the Medicare program. The subpoena calls for the production of documents on corporate organization, business plans, document retention, personnel files, sales and marketing and Medicare billing issues relating to certain procedures offered by the prior owner of the Biotrax business before its assets were acquired by NMC in March 1994 and by DSI following the acquisition. The Company has reviewed the subpoena with its legal counsel and is making extensive document production in response to the subpoena. The outcome of this investigation, its duration, and its effect, if any, on NMC or the Company cannot be predicted at this time. The Company recently divested its Non Renal Diagnostic business. See "Management Discussion and Analysis of Financial Condition and Results of Operations - Divestitures." EASTERN DISTRICT OF VIRGINIA In December 1994, a subsidiary of NMC received a subpoena from a federal grand jury in the Eastern District of Virginia investigating the contractual relationships between subsidiaries of NMC that provide dialysis services and third parties that provide medical directorship and related services to those subsidiaries. There has been no communication from the government since a January 1995 document production and the outcome of this investigation and its effect, if any, on NMC cannot be predicted at this time. 36 37 DISTRICT OF NEW JERSEY INVESTIGATION NMC has received multiple subpoenas from a federal grand jury in the District of New Jersey investigating, among other things, whether NMC sold defective products, the manner in which NMC handled customer complaints and certain matters relating to the development of a new dialyzer product line NMC is cooperating with this investigation and has provided the grand jury with extensive documents. In February, 1996, NMC received a letter from the U.S. Attorney for the District of New Jersey indicating that it is the target of a federal grand jury investigation into possible violations of criminal law in connection with its efforts to persuade the FDA to lift a January 1991 import hold issued with respect to NMC's Dublin, Ireland manufacturing facility. In June 1996, NMC received a letter from the U.S. Attorney for the District of New Jersey indicating that the U.S. Attorney had declined to prosecute NMC with respect to a submission related to NMC's effort to lift the import hold. The letter added that NMC remains a subject of a federal grand jury's investigation into other matters. NMC has produced documents in response to a June 1996 subpoena from the federal grand jury requesting certain documents in connection with NMC's imports of the FOCUS(R) dialyzer from January 1991 to November 1995. The government investigators and the Company have narrowed the issues with respect to which the government has previously expressed concerns in order to resolve this investigation. However, the outcome and impact, if any, of these discussions and potential resolution on the Company's business, financial condition or results of operations cannot be predicted at this time. FDA MATTERS Since 1993, NMC has engaged in a number of voluntary recalls of products that it manufactured or that were manufactured by third parties and distributed by NMC. None of these product recalls has resulted in fines or penalties for NMC. In 1995, Fresenius USA completed a voluntary action with respect to the Optum(R) exchange device that Fresenius USA acquired from Abbott, which was classified by the FDA as a recall. The FDA reviewed Fresenius USA's actions with respect to this device and determined that they were adequate. During the period from 1991 through 1993, the FDA issued warning letters concerning four of the six RPD facilities in the U.S., as well as import alerts concerning hemodialysis bloodlines manufactured at NMC's Reynosa, Mexico facility and Focus(R) brand hemodialyzers manufactured at NMC's Dublin, Ireland facility. As a result of the import alerts, NMC was prohibited from importing the products covered by the alerts into the U.S. until the FDA confirmed compliance with GMP requirements at the facilities where such products were manufactured. In January 1994, NMC and certain members of its senior management entered into the Consent Decree providing that the importation of bloodlines and hemodialyzers could resume upon certification by NMC that the relevant manufacturing facility complied with GMP requirements and successful completion of an FDA inspection at the relevant facility to confirm compliance. The Consent Decree also required NMC to certify, and be inspected for, GMP compliance at all of RPD's manufacturing facilities in the U.S. Under the Consent Decree, RPD committed to maintaining ongoing compliance with GMP and related requirements at both U.S. and non-U.S. manufacturing facilities. As a result of the Consent Decree, NMC's U.S. facilities were required to undertake significant GMP improvements. NMC submitted all required certifications for its U.S. and non-U.S. facilities in accordance with timetables specified in the Consent Decree, and the bloodline import alert was lifted in March 1994. During the course of 1994 and 1995, NMC also worked with the FDA and demonstrated that its other manufacturing facilities in the U.S. were in compliance with GMP requirements. The hemodialyzer manufacturing facility in Dublin, Ireland was inspected by the FDA in April and December 1994 but did not pass inspection. NMC completed all remaining corrective actions, and in December 1995 the FDA determined that the Dublin facility was in compliance with GMP requirements and lifted the import alert. No fines or penalties have been imposed on NMC as a result of the FDA's actions or in connection with the Consent Decree. By policy, however, the FDA generally will undertake more frequent and more rigorous inspections of facilities that have been subject to consent decrees. The Consent Decree was lifted in January 1997. In February 1997, the Company closed its Dublin, Ireland facility. On January 24, 1995, the FDA issued a warning letter and import alert relating to NMC's manufacture of Diafilter(R) products at its Limerick, Ireland facility. That facility was not expressly named in the Consent Decree described above. Because NMC voluntarily ceased importing Diafilters(R) into the U.S. in December 1994, and, for business reasons, decided to shut down the Diafilter(R) business at the Limerick facility on January 23, 1995, no subsequent compliance review was deemed necessary by the FDA. NMC was not restricted from importing into the U.S. the other products manufactured at the Limerick facility. 37 38 In 1994 and 1995, the FDA inspected Fresenius USA's manufacturing facilities in Maumee, Ohio, Ogden, Utah and Walnut Creek, California. At each location, violations of certain GMPs were found. At the Walnut Creek facility, violations of pre-market notification filing requirements were also found, although these findings were subsequently reversed when the devices in question were determined to be covered by appropriate filings. The FDA issued warning letters with respect to each facility, as a result of which the issuance of new 510(k) notices and new export clearances was placed on administrative hold. Fresenius USA responded to the inspection findings at Maumee in a manner it believes addresses the FDA's findings. Fresenius USA subsequently closed the Maumee facility in connection with the relocation of production from that facility to a facility in Lewisberry, Pennsylvania. Fresenius USA undertook an exhaustive review of the FDA's findings relating to Walnut Creek and submitted a detailed response to those findings. The Ogden plant was reinspected in 1995 and the administrative holds have been lifted from both Ogden and Walnut Creek. The Walnut Creek facility was inspected again in January and February of 1996 and Fresenius USA was advised that all GMP issues raised by the FDA have been resolved. Fresenius USA believes that its facilities are currently in compliance in all material respects with applicable state, local and federal requirements. In August 1996, Fresenius USA undertook a voluntary North American recall of certain lots of its peritoneal dialysis solutions which were associated with aseptic peritonitis. This condition is an inflammation of the abdominal cavity not caused by infection. The patients affected in the episode recovered quickly after using non-suspect product lots. In the recall, Fresenius USA notified hospitals and dialysis centers that received the recalled lots as well as individual patients. Patients with recalled lots were provided with replacement solution, and a toll free telephone number for patient inquiries was established. Fresenius USA cooperated with the FDA and other government agencies in resolving the matter. In addition, the FDA may inspect facilities in the ordinary course of business to ensure compliance with GMP and other applicable regulations. The Company intends to address expeditiously any FDA findings resulting from such inspections. COMMERCIAL INSURER LITIGATION In December 1997, the Company, NMC, and certain named NMC subsidiaries, as well as Grace Chemicals, were served with a civil complaint filed by Aetna Life Insurance Company in the U.S. District Court for the Southern District of New York (Aetna Life Insurance Company v. National Medical Care, Inc. et al, 97-Civ-9310). Based in large part on information contained in prior securities filings, the lawsuit alleges inappropriate billing practices for nutritional therapy, diagnostic and clinical laboratory tests and misrepresentations. The complaint seeks unspecified damages and costs. Grace Chemicals has sought indemnification from the Company pursuant to the terms of an indemnification agreement between Grace Chemicals and the Company for any liability, costs and expenses that Grace may incur as a result of the lawsuit. The Company has moved to dismiss the complaint on the grounds that it does not state a claim against the Company, NMC or their affiliates. This action is at an early stage and its outcome and impact on the Company cannot be predicted at this time. However, the Company, NMC and its subsidiaries believe that they have substantial defenses to the claims asserted, and intend to vigorously defend the lawsuit. It is also possible that one or more other private payors may claim that NMC received excess payments and similarly, may seek reimbursement and other damages from NMC. An adverse result could have a material adverse effect on the Company's business, financial condition or results of operations. OBRA 93 OBRA 93 affected the payment of benefits under Medicare and employer health plans for certain eligible ESRD patients. In July 1994, HCFA issued an instruction to Medicare claims processors to the effect that Medicare benefits for the patients affected by OBRA 93 would be subject to a new 18-month "coordination of benefits" period. This instruction had a positive impact on NMC's dialysis revenues because, during the 18-month coordination of benefits period, patients' employer health plans were responsible for payment, which was generally at rates higher than that provided under Medicare. In April 1995, HCFA issued a new instruction, reversing its original instruction in a manner that would substantially diminish the positive effect of the original instruction on NMC's dialysis business. Under the new instruction, no 18-month coordination of benefits period would arise, and Medicare would remain the primary payor. HCFA further proposed that its new instruction be effective retroactive to August 1993, the effective date of OBRA 93. If HCFA's reversal of its original implementation of the provisions of OBRA 93 that relate to ESRD patients for whom Medicare is the secondary payor is upheld, NMC may be required to refund the payments received from employer health plans for 38 39 services provided after August 10, 1993 under HCFA's original implementation, and to re-bill Medicare for the same services, which would result in a net loss to DSD of approximately $120 million as of December 31, 1995. NMC ceased to recognize the incremental revenue realized under the original Program Memorandum as of July 1, 1995, but it continued to bill employer health plans as primary payors for patients affected by OBRA 93 through December 31, 1995. As of January 1, 1996, NMC commenced billing Medicare as primary payor for dual eligible ESRD patients affected by OBRA 93, and then began to rebill in compliance with the revised policy for services rendered between April 24 and December 31, 1995. On May 5, 1995, NMC filed a complaint in the U.S. District Court for the District of Columbia (National Medical Care, Inc. and Bio-Medical Applications of Colorado, Inc. d/b/a Northern Colorado Kidney Center v. Shalala, C.A. No. 95-0860 (WBB)) seeking to preclude HCFA from retroactively enforcing its April 24, 1995 implementation of the OBRA 93 provisions relating to the coordination of benefits for dual eligible ESRD patients. On May 9, 1995, NMC moved for a preliminary injunction to preclude HCFA from enforcing its new policy retroactively, that is, to billings for services provided between August 10, 1993 and April 23, 1995. On June 6, 1995, the court granted NMC's request for a preliminary injunction. The litigation is continuing with respect to NMC's request to enjoin HCFA's new policy, both retroactively and prospectively, and NMC filed significant discovery requests concerning how HCFA developed the April 1995 rule. In December of 1996, NMC moved for partial summary judgment seeking a declaration from the Court that HCFA's retroactive application of the April 1995 rule was legally invalid. HCFA cross-moved for summary judgment on the grounds that the April 1995 rule was validly applied prospectively. In January 1998, the court granted NMC's motion for partial summary judgment and entered a declaratory judgment in favor of NMC, holding HCFA's retroactive application of the April 1995 rule legally invalid. Based on its finding, the Court also ordered that HCFA is permanently enjoined from enforcing and applying the April 1995 rule retroactively against NMC and granted NMC's outstanding discovery motions. The Court took no action on HCFA's motion for summary judgment pending completion of the outstanding discovery. The Court's favorable rulings provide a stronger legal basis for NMC to collect outstanding amounts from commercial payors on the retroactive portion of the case during the first half of 1998. HCFA elected not to appeal from the Court's June 1995 and January 1998 orders and has agreed to a schedule for providing discovery under the Court's January 1998 order. HCFA may, however, appeal all rulings at the conclusion of the litigation. If HCFA should successfully appeal so that the revised interpretation would be applied retroactively, FMCH's business, financial position and results of operations would be materially adversely affected. SECURITIES AND EXCHANGE COMMISSION INVESTIGATION In April 1996, the Company (then called W.R. Grace & Co.) received a formal order of investigation issued by the Commission directing an investigation into, among other things, whether Grace violated the federal securities laws by filing periodic reports with the Commission that contained false and misleading financial information. Pursuant to this formal order of investigation, the Company has produced documents pursuant to subpoenas from the Southeast Regional Office of the Commission relating to reserves (net of applicable taxes) established by the Company and NMC during the period from January 1, 1990 to the date of the subpoena (the "Covered Period") and certain corporate records and personnel material. The Company believes that all financial statements filed by the Company with the Commission during the Covered Period, including the financial statements of NMC included in the NMC Form 10 filed with the Commission on September 25, 1995, and the consolidated financial statements of Grace filed in Grace's Annual Report on Form 10-K for the year ended December 31, 1995 (all of which financial statements, other than unaudited quarterly financial statements, were covered by unqualified opinions issued by Price Waterhouse LLP, independent certified public accountants), have been fairly stated, in all material respects, in conformity with U.S. GAAP. The Company and NMC have been cooperating with the Commission. While there can be no assurance, FMCH believes that the outcome of this investigation will have no material adverse effect on the business, financial condition and results of operations of the Company. IDPN COVERAGE ISSUES NMC administers IDPN therapy to chronic dialysis patients who suffer from severe gastrointestinal malfunctions. After 1993, Medicare claims processors sharply reduced the number of IDPN claims approved for payment as compared to prior periods. NMC believes that the reduction in IDPN claims represented an unauthorized policy coverage change. Accordingly, NMC and other IDPN providers pursued various administrative and legal remedies, including administrative appeals, to address this reduction. In November 1995, NMC filed a complaint in the U.S. District Court for the Middle District of Pennsylvania seeking a declaratory judgment and injunctive relief to prevent the implementation of this policy coverage change. (National Medical Care, Inc. v. Shalala, 3:CV-95-1922 (RPC)). Subsequently, the District Court affirmed a prior report of the magistrate judge dismissing NMC's complaint, without considering any substantive claims, on the grounds that the underlying cause of action should be submitted fully to 39 40 the administrative review processes available under the Medicare Act. NMC decided not to appeal the Court's decision, but rather, to pursue the claims through the available administrative processes. Although NMC management believes that those IDPN claims were consistent with published Medicare coverage guidelines and ultimately will be approved for payment, there can be no assurance that the claims on appeal will be approved for payment. Such claims represent substantial accounts receivable of NMC, amounting to approximately $150 million as of September 30, 1998. If NMC is unable to collect its IDPN receivable or if IDPN coverage is reduced or eliminated, depending on the amount of the receivable that is not collected and/or the nature of the coverage change, NMC's business, financial condition and results of operations could be materially adversely affected. NMC's IDPN receivables are included in the net assets of the Company's discontinued operations. However, these receivables have not been sold and will remain classified as discontinued operations until they have been settled. SHAREHOLDER LITIGATION In 1995, nine purported class action lawsuits were brought against the Company (prior to the Merger, when it was Grace) and certain of its then officers and directors in various federal courts. These lawsuits were consolidated in a case entitled Murphy, et al. v. W.R. Grace & Co., et al. No. 95-CV-9003(JFK) (the "Murphy Action"), which is pending in the U.S. District Court for the Southern District of New York. The first amended class action complaint in this lawsuit, which purports to be a class action on behalf of all persons and entities who purchased publicly traded securities of the Company during the period from March 13, 1995 through October 17, 1995, generally allege that the defendants violated federal securities laws by concealing information and issuing misleading public statements and reports concerning NMC's financial position and business prospects, a proposed spin-off of NMC, and the matters that are the subject of the OIG Investigation and the investigation by the federal grand jury in the District of New Jersey. The Murphy Action sought unspecified damages, attorneys' and experts' fees and costs and such other relief as the court deems proper. In October 1995, a purported derivative lawsuit was filed in the U.S. District Court for the Southern District of Florida, Northern Division against the Company (prior to the Merger, when it was known as Grace), certain of its then directors and its former President and Chief Executive Officer, alleging, inter alia, that such individuals breached their fiduciary duties by failing to properly supervise the activities of NMC in the conduct of its business (Bennett v. Bolduc, et al. 95-8638-CIV-MORENO). In December 1995, the plaintiff in this action filed a new action, based on similar allegations, in the U.S. District Court for the Southern District of New York (Bennett v. Bolduc, et al. 95-CV-10737 (AGS)) (the "Bennett Action"). The action in Florida was dismissed in favor of the Bennett Action. A second action making similar allegations was filed in October 1995 in New York State Supreme Court, New York County (Bauer v. Bolduc, et al. 95-125751). This action was stayed in favor of the Bennett Action, which was consolidated, for discovery purposes only, with the Murphy Action described above. The complaint in the Bennett Action sought unspecified damages, attorneys' and experts' fees and costs and such other relief as the court deems proper. In February 1996, a purported class action was filed in New York State Supreme Court, New York County, against the Company (prior to the Merger, when it was known as Grace) and certain of Grace's then current and former directors, alleging that the defendants breached their fiduciary duties, principally by failing to provide internal financial data concerning NMC and by failing to negotiate with certain other companies that had made proposals for business combinations involving NMC (Rosman v. W. R. Grace, et al. 96-102347). The lawsuit sought injunctive relief ordering defendants to carry out their fiduciary duties and preventing or rescinding the Merger or any related transactions with Fresenius AG, unspecified monetary damages, an award of plaintiff's attorneys' and experts' fees and costs, and such other relief as the court may deem just and proper. Grace Chemicals indemnified the Company and its affiliates for any losses related to these lawsuits, which were recently settled without the contribution of any payment in connection with the settlements by the Company or any of its affiliates. OTHER LITIGATION AND POTENTIAL EXPOSURES In recent years, physicians, hospitals and other participants in the health care industry have become subject to an increasing number of lawsuits alleging professional negligence, malpractice, product liability, workers' compensation or related claims, many of which involve large claims and significant defense costs. The Company and NMC and their subsidiaries have been, and the Company can be expected to continue from time to time to be, subject to such suits due to the nature of the Company's business. Although the Company maintains insurance at a level which it believes to be prudent, there can be no assurance that the coverage limits will be adequate or that all asserted claims will be covered by insurance. In addition, there can be no assurance that liability insurance will 40 41 continue to be available at acceptable costs. A successful claim against the Company or any of its subsidiaries in excess of insurance coverage could have a material adverse effect 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 reputation and business of the Company. The Company, NMC and their subsidiaries operate a large number and wide variety of facilities throughout the U.S. In such a decentralized system it is often difficult to maintain the desired level of oversight and control over the thousands of individuals employed by many affiliate companies. The Company relies upon its management structure, regulatory and legal resources, and the effective operation of its compliance program to direct, manage and monitor the activities of these employees. However, on occasion, the Company, NMC and their subsidiaries have identified instances where employees, deliberately or inadvertently, have submitted inadequate or false billings while employed by an affiliated company. The illegal actions of such persons may subject NMC to liability under the False Claims Act, among other laws, and the Company cannot predict whether such law enforcement authorities may use such information to initiate further investigations of the business practices disclosed or any other business activities of the Company. In addition, the Company asserts claims and suits arising in the ordinary course of business, the ultimate resolution of which would not, in the opinion of the Company, have a material adverse effect on its financial condition. 41 42 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Exhibit 2.1 Agreement and Plan of Reorganization dated as of February 4, 1996 between W. R. Grace & Co. and Fresenius AG (incorporated herein by reference to Appendix A to the Joint Proxy Statement-Prospectus of Fresenius Medical Care AG, W. R. Grace & Co. and Fresenius USA, Inc. dated August 2, 1996 and filed with the Commission on August 5, 1996). Exhibit 2.2 Distribution Agreement by and among W. R. Grace & Co., W. R. Grace & Co.-Conn. and Fresenius AG dated as of February 4, 1996 (incorporated herein by reference to Exhibit A to Appendix A to the Joint Proxy Statement-Prospectus of Fresenius Medical Care AG, W. R. Grace & Co. and Fresenius USA, Inc. dated August 2, 1996 and filed with the Commission on August 5, 1996). Exhibit 2.3 Contribution Agreement by and among Fresenius AG, Sterilpharma GmbH and W. R. Grace & Co.-Conn. dated February 4, 1996 (incorporated herein by reference to Exhibit E to Appendix A to the Joint Proxy-Statement Prospectus of Fresenius Medical Care AG, W. R. Grace & Co. and Fresenius USA, Inc. dated August 2, 1996 and filed with the Commission on August 5, 1996). Exhibit 3.1 Certificate of Incorporation of Fresenius Medical Care Holdings, Inc. (f/k/a W. R. Grace & Co.) under Section 402 of the New York Business Corporation Law dated March 23, 1988 (incorporated herein by reference to the Form 8-K of the Company filed on May 9, 1988). Exhibit 3.2 Certificate of Amendment of the Certificate of Incorporation of Fresenius Medical Care Holdings, Inc. (f/k/a W. R. Grace & Co.) under Section 805 of the New York Business Corporation Law dated May 25, 1988 (changing the name to W. R. Grace & Co., incorporated herein by reference to the Form 8-K of the Company filed on May 9, 1988). Exhibit 3.3 Certificate of Amendment of the Certificate of Incorporation of Fresenius Medical Care Holdings, Inc. (f/k/a W. R. Grace & Co.) under Section 805 of the New York Business Corporation Law dated September 27, 1996 (incorporated herein by reference to the Form 8-K of the Company filed with the Commission on October 15, 1996). Exhibit 3.4 Certificate of Amendment of the Certificate of Incorporation of Fresenius Medical Care Holdings, Inc. (f/k/a W. R. Grace & Co.) under Section 805 of the New York Business Corporation Law dated September 27, 1996 (changing the name to Fresenius National Medical Care Holdings, Inc., incorporated herein by reference to the Form 8-K of the Company filed with the Commission on October 15, 1996). Exhibit 3.5 Certificate of Amendment of the Certificate of Incorporation of Fresenius Medical Care Holdings, Inc. under Section 805 of the New York Business Corporation Law dated June 12, 1997 (changing name to Fresenius Medical Care Holdings, Inc., incorporated herein by reference to the Form 10-Q of the Company filed with the Commission on August 14, 1997). Exhibit 3.6 Amended and Restated By-laws of Fresenius Medical Care Holdings, Inc. (incorporated herein by reference to the Form 10-Q of the Company filed with the Commission on August 14, 1997). Exhibit 4.1 Credit Agreement dated as of September 27, 1996 among National Medical Care, Inc. and Certain Subsidiaries and Affiliates, as Borrowers, Certain Subsidiaries and Affiliates, as Guarantors, the Lenders named therein, Nationsbank, N.A., as paying agent and the Bank of Nova Scotia, The Chase Manhattan Bank, Dresdner Bank AG and Nationsbank, N.A., as Managing Agents (incorporated herein by reference to the Form 6-K of Fresenius Medical Care AG filed with the Commission on October 15, 1996). 42 43 Exhibit 4.2 Amendment dated as of November 26, 1996 (amendment to the Credit Agreement dated as of September 27, 1996, incorporated herein by reference to the Form 8-K of Registrant filed with the Commission on December 16, 1996). Exhibit 4.3 Amendment No. 2 dated December 12, 1996 (second amendment to the Credit Agreement dated as of September 27, 1996, incorporated herein by reference to the Form 10-K of Registrant filed with the Commission on March 31, 1997). Exhibit 4.4 Amendment No. 3 dated June 13, 1997 to the Credit Agreement dated as of September 27, 1996 , among National Medical Care, Inc. and Certain Subsidiaries and Affiliates , as Borrowers, Certain Subsidiaries and Affiliates, as Guarantors, the Lenders named therein, NationsBank, N.A., as paying agent and the Bank of Nova Scotia, the Chase Manhattan Bank, N.A., Dresdner Bank AG and NationsBank, N.A. as Managing Agents, as previously amended (incorporated herein by reference to the Form 10-Q of the Registrant filed with the Commission on November 14, 1997). Exhibit 4.5 Amendment No. 4, dated August 26, 1997 to the Credit Agreement dated as of September 27, 1996, among National Medical Care, Inc. and Certain Subsidiaries and Affiliates, as Borrowers, Certain Subsidiaries and Affiliates, as Guarantors, the Lenders named therein, NationsBank, N.A., as paying agent and the Bank of Nova Scotia, the Chase Manhattan Bank, N.A., Dresdner Bank AG and NationsBank, N.A. as Managing Agents, as previously amended (incorporated herein by reference to the Form 10-Q of Registrant filed with Commission on November 14, 1997). Exhibit 4.6 Amendment No. 5 dated December 12, 1997 to the Credit Agreement dated as of September 27, 1996, among National Medical Care, Inc. and Certain Subsidiaries and Affiliates, as Borrowers, Certain Subsidiaries and Affiliates, as Guarantors, the Lenders named therein, NationsBank, N.A., as paying agent and the Bank of Nova Scotia, the Chase Manhattan Bank, N.A., Dresdner Bank AG and NationsBank, N.A. as Managing Agents, as previously amended (incorporated herein by reference to the Form 10-K of Registrant filed with Commission on March 23, 1998). Exhibit 4.7 Form of Consent to Modification of Amendment No. 5 dated December 12, 1997 to the Credit Agreement dated as of September 27, 1996 among National Medical Care, Inc. and Certain Subsidiaries and Affiliates, as Borrowers, Certain Subsidiaries and Affiliates, as Guarantors, the Lenders named therein, NationsBank, N.A., as paying agent and the Bank of Nova Scotia, the Chase Manhattan Bank, N.A., Dresdner Bank AG and NationsBank, N.A. as Managing Agents (incorporated herein by reference to the Form 10-K of Registrant filed with Commission on March 23, 1998). Exhibit 4.8 Amendment No. 6 dated effective June 30, 1998 to the Credit Agreement dated as of September 27, 1996, among National Medical Care, Inc. and Certain Subsidiaries and Affiliates, as Borrowers, Certain Subsidiaries and Affiliates, as Guarantors, the Lenders named therein, NationsBank, N.A., as paying agent and the Bank of Nova Scotia, the Chase Manhattan Bank, N.A., Dresdner Bank AG and NationsBank, N.A. as Managing Agents, as previously amended. Exhibit 4.9 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 4.10 Senior Subordinated Indenture dated November 27, 1996, among Fresenius Medical Care AG, State Street Bank and Trust Company, as successor to Fleet National Bank, as Trustee and the Subsidiary Guarantors named therein (incorporated herein by reference to the Form 10-K of Registrant filed with the Commission on March 31, 1997). Exhibit 4.11 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 4.12 Senior Subordinated Indenture dated as of February 19, 1998 among FMC Trust Finance S.a.r.l. Luxembourg, 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). 43 44 Exhibit 10.1 Employee Benefits and Compensation Agreement dated September 27, 1996 by and among W. R. Grace & Co., National Medical Care, Inc., and W. R. Grace & Co.-- Conn. (incorporated herein by reference to the Registration Statement on Form F-1 of Fresenius Medical Care AG, as amended (Registration No. 333-05922), dated November 22, 1996 and the exhibits thereto). Exhibit 10.2 Purchase Agreement, effective January 1, 1995, between Baxter Health Care Corporation and National Medical Care, Inc., including the addendum thereto (incorporated by reference to the Form SE of Fresenius Medical Care dated July 29, 1996 and the exhibits thereto). Exhibit 10.3 Agreement, dated November 25, 1992 between Bergen Brunswig Drug Company and National Medical Care, Inc., including the addendum thereto (incorporated by reference to the Form SE of Fresenius Medical Care dated July 29, 1996 and the exhibits thereto). Exhibit 10.4 Product Purchase Agreement, effective January 1, 1996, between Amgen, Inc. and National Medical Care, Inc. (incorporated by reference to the Form SE of Fresenius Medical Care dated July 29, 1996 and the exhibits thereto). Exhibit 10.5 Primary Guarantee dated July 31, 1996 (incorporated by reference to the Registrant's Registration Statement on Form S-4 (Registration No. 333-09497) dated August 2, 1996 and the exhibits thereto). Exhibit 10.6 Secondary Guarantee dated July 31, 1996 (incorporated by reference to the Registrant's Registration Statement on Form S-4 (Registration No. 333-09497) dated August 2, 1996 and the exhibits thereto). Exhibit 10.7 Receivables Purchase Agreement dated August 28, 1997 between National Medical Care, Inc. and NMC Funding Corporation (incorporated herein by reference to the Form 10-Q of the Registrant filed with the Commission on November 14, 1997). Exhibit 10.8 Amendment dated as of September 28, 1998 to the Receivables Purchase Agreement dated as of August 28, 1997, by and between NMC Funding Corporation, as Purchaser and National Medical Care, Inc., as Seller. Exhibit 10.9 Transfer and Administration Agreement dated August 28, 1997 among NMC Funding Corporation, National Medical Care, Inc., Enterprise Funding Corporation, the Bank Investors listed therein and NationsBank, N.A., as agent (incorporated herein by reference to the Form 10-Q of the Registrant filed with the Commission on November 14, 1997). Exhibit 10.10 Amendment No. 1 dated as of February 27, 1998 to Transfer and Administration Agreement dated as of August 28, 1997 among NMC Funding Corporation, National Medical Care, Inc., Enterprise Funding Corporation, the Bank Investors listed herein and NationsBank, N.A., as agent (incorporated herein by reference to the Form 10-K of Registrant filed with Commission on March 23, 1998). Exhibit 10.11 Amendment No. 2 dated as of August 25, 1998 to Transfer and Administration Agreement dated us of August 28, 1997 among NMC Funding Corporation as Transferor, National Medical Care, Inc., as Collection Agent, Enterprise Funding Corporation, and Nations Bank, N.A. as agent for Enterprise Funding Corporation and the Bank Investors. Exhibit 10.12 Amendment No. 3 dated as of September 28, 1998 to Transfer and Administration Agreement dated as of August 28, 1997 among NMC Funding Corporation as Transferor, National Medical Care, Inc., as Collection Agent, Enterprise Funding Corporation, and Nations Bank, N.A. as agent for Enterprise Funding Corporation and the Bank Investors. Exhibit 10.13 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). 44 45 Exhibit 10.14 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 10.15 Employment Agreement dated July 1, 1997 by and between Jerry A. Schneider and the Company (incorporated herein by reference to the Form 10-Q of Registrant filed with Commission on May 14, 1998). Exhibit 10.16 Addendum to Employment Agreement dated as of September 18, 1997 by and between Jerry A. Schneider and the Company (incorporated herein by reference to the Form 10-Q of Registrant filed with Commission on May 14, 1998). Exhibit 10.17 Separation Agreement dated as of July 21, 1998 by and between Geoffrey W. Swett and National Medical Care, Inc. Exhibit 11 Statement re: Computation of Per Share Earnings. Exhibit 27 Financial Data Schedule (b) Reports on Form 8-K On July 16, 1998, FMCH filed a report on Form 8-K with respect to FMCH's divestiture of its Non Renal Diagnostic Services and Homecare divisions. On August 5, 1998, FMCH filed a report on Form 8-K showing certain restated financial data of FMC, the parent corporation of the registrant, on a quarterly basis for 1996 and 1997 and the first quarter of 1998. These quarterly statements detailed results of operations between FMC's core and divested non - core businesses. 45 46 SIGNATURES Pursuant to the requirement 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. Fresenius Medical Care Holdings, Inc. DATE: November 12, 1998 /s/ Ben J. Lipps ----------------- ------------------------------------------ NAME: Ben J. Lipps TITLE: President (Chief Executive Officer) DATE: November 12, 1998 /s/ Jerry A. Schneider ----------------- ------------------------------------------ NAME: Jerry Schneider TITLE: Chief Financial Officer 46 EX-4.8 2 AMENDMENT NO. 6 TO CREDIT AGREEMENT 1 EXHIBIT 4.8 AMENDMENT NO. 6 THIS AMENDMENT NO. 6, dated as of June 30, 1998 (the "AMENDMENT") relating to the Credit Agreement referenced below, by and among NATIONAL MEDICAL CARE, INC., a Delaware corporation, certain subsidiaries and affiliates party to the Credit Agreement and identified on the signature pages hereto, and NATIONSBANK, N.A., as Paying Agent for and on behalf of the Lenders. Terms used but not otherwise defined shall have the meanings provided in the Credit Agreement. W I T N E S S E T H WHEREAS, a $2.5 billion credit facility has been extended to National Medical Care, Inc. and certain subsidiaries and affiliates pursuant to the terms of that Credit Agreement dated as of September 27, 1996 (as amended and modified, the "CREDIT AGREEMENT") among National Medical Care, Inc., the other Borrowers, Guarantors and Lenders identified therein, and NationsBank, N.A., as Paying Agent; WHEREAS, the Company has requested the consent of the Paying Agent and Lenders to (i) the assumption by FMC Trust Finance S.a.r.l. Luxembourg, a limited liability company organized under the laws of Luxembourg ("FMC TRUST FINANCE"), or a successor thereof, of the obligations of Holdings with respect to the 9% Senior Subordinated Notes due December 1, 2006 (the "1996 SUBORDINATED NOTES") issued to evidence the loans made to Holdings of the proceeds from the issuance by the FMC Trust of the preferred securities referred to in the definition of "Refinancing Securities" and the common securities of the FMC Trust contemplated by clause (xvi) of the definition of Permitted Investments, (ii) the guaranty by Holdings of the obligations of FMC Trust Finance or its successor under the 1996 Subordinated Notes and (iii) certain related changes to the terms of the 1996 Subordinated Notes, the FMC Trust and the related documentation, which assumption, guaranty and other changes have already been approved by the holders of the Refinancing Securities; WHEREAS, the Company has requested certain other changes to the Credit Agreement more fully set forth herein; WHEREAS, the requested consents and modifications described herein require the consent of the Required Lenders; and WHEREAS, the Required Lenders have consented to the requested modifications on the terms and conditions set forth herein and have authorized the Paying Agent to enter into this Amendment on their behalf to give effect to this Amendment; NOW, THEREFORE, IN CONSIDERATION of these premises and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows: 2 A. The Credit Agreement is amended and modified in the following respects: 1. The Managing Agents and Required Lenders hereby consent to the modification of the Refinancing Securities to permit (i) the assumption by FMC Trust Finance S.a.r.l. Luxembourg, a limited liability company organized under the laws of Luxembourg and a wholly-owned subsidiary of Holdings, of the obligations of Holdings with respect to the 1996 Subordinated Notes, (ii) the guaranty by Holdings of the obligations under the 1996 Subordinated Notes, (iii) the adoption of provisions which, subject to the provisions of the Credit Agreement, would permit Holdings or any wholly-owned subsidiary of Holdings (other than the Company and its Subsidiaries) to assume the obligations of the note issuer thereunder, and (iv) certain related changes to the terms of the 1996 Subordinated Notes, the FMC Trust and the related documentation, a description of which is attached as EXHIBIT A attached hereto, or such other form not materially adverse to the interests of the Lenders, and waive compliance with any provisions of the Credit Agreement to the extent that such modification would conflict with such provisions. 2. In Section 1.1, (a) The following definitions are hereby amended or added to read as follows: "REFINANCING SECURITIES" means (i) the $360,000,000 Aggregate Liquidation Amount of 9% Trust Preferred Securities Due 2006 issued by the FMC Trust pursuant to its Amended and Restated Declaration of Trust dated as of November 27, 1996, as it may be amended, restated or modified as permitted by Section 8.9, and (ii) the 1996 Subordinated Notes. "1996 SUBORDINATED NOTES" means the 9% Senior Subordinated Notes due December 1, 2006 issued to evidence the loans made to Holdings of the proceeds from the issuance by the FMC Trust of its 9% Trust Preferred Securities Due 2006 and the common securities of the FMC Trust issued to Holdings, pursuant to the Senior Subordinated Indenture, dated as of November 27, 1996 among Holdings, the Subsidiary Guarantors therein defined, and State Street Bank and Trust Company, as successor trustee to Fleet National Bank, as it may be amended, supplemented or otherwise modified to permit the assumption of the obligations of the note issuer thereunder by a wholly-owned Subsidiary of Holdings (other than the Company and its Subsidiaries) or Holdings and as permitted by Section 8.9, as such Notes may be assumed by any Subsidiary of Holdings. (b) The definition of "CONSOLIDATED FIXED CHARGES" is hereby amended by inserting the following at the end thereof: 2 3 "; it being understood and agreed that any payment in respect of any Permitted Genu(beta)schein Transaction during such period shall not be a Consolidated Fixed Charge notwithstanding classification or reclassification of the investment securitization issued in connection with such Permitted Genu(beta)schein Transaction as indebtedness under GAAP." (c) The second proviso to the definition of "MATERIAL SUBSIDIARY" is hereby amended as follows: (i) by deleting the words "the subordinated notes given by Holdings to the FMC Trust in connection with the Refinancing Securities" in clause (i) thereof and inserting a reference to the "1996 Subordinated Notes" in place thereof; and (ii) by deleting clause (ii) thereof and substituting the following therefor: "(ii) for purposes of determining whether any special purpose wholly-owned Subsidiary of Holdings that issues or assumes Refinancing Securities, Additional Subdebt and/or Additional Subdebt Securities is a Material Subsidiary hereunder, the proceeds of such Refinancing Securities and/or Additional Subdebt Securities shall not be considered as assets for purposes hereof, to the extent that such proceeds have been lent or contributed to another member of the Consolidated Group, and any interest in respect of any such loan shall not be considered for the purposes of determining Consolidated EBITDA under this definition." (d) The definition of "PERMITTED INVESTMENTS" is hereby amended as follows: (i) by deleting the words "the loan by the FMC Trust to Holdings of the proceeds of the Refinancing Securities (as described in the description of Refinancing Securities in SCHEDULE 1.1)" from clause (xvi) thereof and inserting a reference to "the 1996 Subordinated Notes" in their place; and (ii) by deleting clause (xvii) thereof and substituting therefor the following: "(xvii) Investments by Holdings and its Subsidiaries (other than the Company or its Subsidiaries) in FMC Finance or any wholly-owned Subsidiary of Holdings that issues or assumes Refinancing Securities, Additional Subdebt and/or Additional Subdebt Securities;" (e) Section 8.10(b) is hereby amended by inserting the following sentence at the end thereof: 3 4 "In addition, Holdings shall not make or permit its Subsidiaries to make payments in connection with any put or call option relating to investment securities issued under any Permitted Genu(beta)schein Transaction; provided that Holdings and its Subsidiaries (other than FUSA, the Company and their Subsidiaries) may make such payments in an aggregate amount of up to $75 million so long as no Default or Event of Default shall exist before or after giving effect thereto." 3. The Paying Agent, with the consent and at the discretion of the Required Lenders, hereby consents to the Amendment by and between Holdings and State Street Bank and Trust Company, as successor trustee and collateral agent to Fleet National Bank, to the Pledge and Security Agreement dated as of November 27, 1996 by and between Holdings and Fleet National Bank, in substantially the form annexed hereto as EXHIBIT B, or such other form not less favorable in any material respect to the Lenders. 4. Section 7.9(a) is hereby amended by adding the words "minus (v) any loss (calculated as the difference between the book value of the disposed assets and the net purchase price of such assets) resulting from the disposal of the Company's homecare and diagnostic businesses" at the end of the first sentence thereof. 5. Section 8.1(f) is hereby amended by (i) adding the words "Holdings and" before the words "Foreign Subsidiaries" in the first line thereof and (ii) adding the words "and no more than $50,000,000 of such Funded Debt may be incurred, created or assumed by Holdings (except as a Guaranty Obligation)" at the end of clause (iii) of the proviso. 6. In clause (A) of the proviso to Section 8.4(c)(vi) the reference to "two and one half percent (2 1/2%)" is amended and increased to read "five percent (5%)". 7. In connection with the sale of the Company's homecare and diagnostic businesses: (i) NMC Homecare, Inc. is hereby released from its obligations under the guaranty. (ii) losses from or on account of operations, discontinuation of operations and/or disposal of assets on account of the sale of the Company's homecare and diagnostic business, net of related tax effects, to the extent not considered extraordinary items, shall be excluded from Consolidated Net Income for purposes of determining the Consolidated Leverage Ratio and the Consolidated Fixed Charge Coverage Ratio. 8. The Lenders hereby waive compliance with the provisions of the Credit Agreement as in effect before the execution and delivery of this Amendment No. 6 to the extent, and only to the extent, that any transaction or action of any member of the Consolidated Group would have been permitted by the provisions of the Credit Agreement as amended hereby. 4 5 B. Except as modified hereby, all of the terms and provisions of the Credit Agreement (and Exhibits and Schedules) remain in full force and effect. C. The Company agrees to pay all reasonable costs and expenses of the Paying Agent in connection with the preparation, execution and delivery of this Amendment, including without limitation the reasonable fees and expenses of Moore & Van Allen, PLLC. D. This Amendment may be executed in any number of counterparts, each of which when so executed and delivered shall be deemed an original and its shall not be necessary in making proof of this Amendment to produce or account for more than one such counterpart. E. This Amendment, and the Credit Agreement as amended hereby, shall be governed by and construed and interpreted in accordance with the laws of the State of New York. [Remainder of Page Intentionally Left Blank] 5 6 IN WITNESS WHEREOF, each of the parties hereto has caused a counterpart of this Amendment to be duly executed and delivered as of the date first above written. BORROWERS: NATIONAL MEDICAL CARE, INC., a Delaware corporation By /s/ Ben Lipps ------------------------------------ Ben J. Lipps President FRESENIUS MEDICAL CARE AG By /s/ Hans-Ulrich Sutter ------------------------------------ Hans-Ulrich Sutter Managing Board Member By /s/ Ben Lipps ------------------------------------ Ben J. Lipps Managing Board Member NMC DO BRASIL LTDA., a Brazil corporation By /s/ Joao Padrisui ------------------------------------ Joao Padrisini Manager NATIONAL MEDICAL CARE OF SPAIN, S.A., a Spanish corporation By /s/ Manuel Jose Huete Mendez ------------------------------------ Manuel Jose Huete Mendez Vice President NATIONAL MEDICAL CARE OF TAIWAN, INC., a Delaware corporation By /s/ Thomas Mechtersheimer ------------------------------------ Thomas Mechtersheimer Director 6 7 NMC CENTRO MEDICO NACIONAL, LDA., a Portuguese corporation By /s/ John Allen -------------------------------------------- John Allen Manager NMC DE ARGENTINA, S.A., an Argentine corporation By /s/ Guido Yagupsky -------------------------------------------- Guido Yagupsky Vice President FRESENIUS USA, INC., a Massachusetts corporation By /s/ Ben Lipps -------------------------------------------- Ben J. Lipps President FRESENIUS MEDICAL CARE DEUTSCHLAND GmbH, a German corporation By /s/ Emanuelle Gatti /s/ Hans-Ulrich Sutter ------------------------------------------- Emanuelle Gatti Hans-Ulrich Sutter Managing Board Members FRESENIUS MEDICAL CARE GROUPE FRANCE (formerly known as Fresenius Groupe France S.A.), a French corporation By /s/ Hans-Ulrich Sutter /s/ Emanuelle Gatti ------------------------------------------- Hans-Ulrich Sutter Emanuelle Gatti Managing Board Members FRESENIUS MEDICAL CARE HOLDING, S.p.A., an Italian corporation By /s/ Hans-Ulrich Sutter /s/ Emanuelle Gatti ------------------------------------------- Hans-Ulrich Sutter Emanuelle Gatti Managing Board Members 7 8 FRESENIUS MEDICAL CARE ESPANA S.A., a Spanish corporation By /s/ Emanuelle Gatti ------------------------------------------- Emanuelle Gatti Officer FRESENIUS MEDICAL CARE MAGYAROSZA KfG, a Hungarian corporation By /s/ N. Erhard ------------------------------------------- N. Erhard Board Member GUARANTORS: FRESENIUS MEDICAL CARE HOLDINGS, INC., a New York corporation formerly known as WRG-NY By /s/ Ben Lipps ------------------------------------------- Ben J. Lipps President NATIONAL MEDICAL CARE, INC., a Delaware corporation By /s/ Ben Lipps ------------------------------------------- Ben J. Lipps President BIO-MEDICAL APPLICATIONS MANAGEMENT CO., INC., a Delaware corporation By /s/ Ben Lipps ------------------------------------------- Ben J. Lipps President NMC HOMECARE, INC., a Delaware corporation By /s/ Ben Lipps ------------------------------------------- Ben J. Lipps President 8 9 LIFECHEM, INC., a Delaware corporation By /s/ Ben Lipps ------------------------------------------- Ben J. Lipps President FRESENIUS MEDICAL CARE AG, a German corporation By /s/ Emanuelle Gatti /s/ Hans-Ulrich Sutter ------------------------------------------- Emanuelle Gatti Hans-Ulrich Sutter Managing Board Members FRESENIUS USA, INC., a Massachusetts corporation By /s/ Ben Lipps ------------------------------------------- Ben J. Lipps President FRESENIUS MEDICAL CARE DEUTSCHLAND GmbH, a German corporation By /s/ Emanuelle Gatti /s/ Hans-Ulrich Sutter ------------------------------------------- Emanuelle Gatti Hans-Ulrich Sutter Board Members FRESENIUS MEDICAL CARE GROUPE FRANCE, a French corporation (formerly known as Fresenius Groupe France S.A.) By /s/ Hans-Ulrich Sutter /s/ Emanuelle Gatti ------------------------------------------- Hans-Ulrich Sutter Emanuelle Gatti Board Members FRESENIUS SECURITIES, INC., a California corporation By /s/ Ben Lipps ------------------------------------------- Ben J. Lipps President 9 10 PAYING AGENT: NATIONSBANK, N.A., as Paying Agent for and on behalf of the Lenders By /s/ Ashley M. Crabtree ------------------------------------------- Ashley M. Crabtree Senior Vice President 10 11 CONSENT TO AMENDMENT NO. 6 NationsBank, N.A., as Paying Agent 101 N. Tryon Street, 15th Floor NC1-001-15-04 Charlotte, North Carolina 28255 Attn: Cindy Harmon, Agency Services Re: Credit Agreement dated as of September 27, 1996 (as amended and modified, the "CREDIT AGREEMENT") among National Medical Care, Inc., the other Borrowers, Guarantors and Lenders identified therein and NationsBank, N.A., as Paying Agent. Terms used but not otherwise defined shall have the meanings provided in the Credit Agreement. Amendment No. 6 dated June 30, 1998 (the "SUBJECT AMENDMENT") relating to the Credit Agreement Ladies and Gentlemen: This should serve to confirm our receipt of, and consent to, the Subject Amendment. We hereby authorize and direct you, as Paying Agent for the Lenders, to enter into the Subject Amendment on our behalf in accordance with the terms of the Credit Agreement upon your receipt of such consent and direction from the Required Lenders, and agree that Company and the other Credit Parties may rely on such authorization. Sincerely, --------------------------------- [Name of Lender] By: ------------------------------ Name: Title: 11 12 EXHIBIT A Description of Transactions Relating to the 1996 Subordinated Notes 12 13 EXHIBIT B Form of Amendment to Pledge and Security Agreement 13 EX-10.8 3 AMENDED TO RECEIVABLE PURCHASE AGREEMENT 1 EXHIBIT 10.8 AMENDMENT Dated as of September 28, 1998 to RECEIVABLES PURCHASE AGREEMENT Dated as of August 28, 1997 THIS AMENDMENT (this "Amendment") dated as of September 28, 1998 is entered into by and between NMC FUNDING CORPORATION, a Delaware corporation, as Purchaser (the "Purchaser") and NATIONAL MEDICAL CARE, INC., a Delaware corporation, as Seller (the "Seller"). PRELIMINARY STATEMENT A. The Purchaser and the Seller are parties to that certain Receivables Purchase Agreement dated as of August 28, 1997 (as amended or otherwise modified prior to the date hereof, the "RPA"). Capitalized terms used herein and not otherwise defined shall have the meanings ascribed to them in the RPA. B. The Purchaser and the Seller have agreed to amend the RPA on the terms and conditions hereinafter set forth. NOW, THEREFORE, in consideration of the premises set forth above, and other good and valuable consideration the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows: SECTION 1. Amendments to the RPA. Subject to the satisfaction of the conditions precedent set forth in Section 2 below, the RPA is amended as follows: 1.1. The following new definitions are added to Section 1.1 of the RPA in appropriate alphabetical order: "Receivable Systems" has the meaning specified in Section 3.1(z). "Year 2000 Compliant" has the meaning specified in Section 3.1(z). 1.2. Section 3.1 of the RPA is amended to add, immediately after paragraph (y), the following new paragraph (z): 2 "(z) Year 2000 Compliance. The Seller has (i) initiated a review and assessment of all areas within its and each of its Subsidiaries' business and operations (including those affected by suppliers, vendors and customers) that could be adversely affected by the 'Year 2000 Problem' (that is, the risk that computer applications used by the Seller or any of its Subsidiaries (or suppliers, vendors and customers) may be unable to recognize and perform properly date-sensitive functions involving certain dates prior to and any date after December 31, 1999), (ii) initiated the development of a plan and timeline for addressing the Year 2000 Problem on a timely basis, and (iii) to date, implemented that plan in accordance with that timetable. The Seller believes that all computer applications (including those of its suppliers, vendors and customers) that are material to its or any of its Subsidiaries' business and operations are reasonably expected on a timely basis to be able to perform properly date-sensitive functions for all dates before and after January 1, 2000 (that is, be 'Year 2000 Compliant'), except to the extent that a failure to do so could not reasonably be expected (a) to have a Material Adverse Effect on the Seller or on the transaction documented under this Agreement, or (b) to result in a Termination Event. The Seller (i) has initiated a review and assessment of all computer applications (including, but not limited to those of the Seller, any Transferring Affiliate and any of their respective suppliers, vendors, customers or third party servicers), which are related to or involved in the origination, collection, management or servicing of the Receivables (the 'Receivable Systems') and (ii) believes that such Receivable Systems are Year 2000 Compliant or will be Year 2000 Compliant on or before April 1, 1999 and thereafter. The Seller believes that the costs of all assessment, remediation, testing and integration related to the Seller's plan for becoming Year 2000 Compliant will not have a material adverse effect on the financial condition or operations of the Seller." 1.3. Section 5.1 of the RPA is amended to add, immediately following paragraph (m), the following new paragraphs (n) and (o): "(n) Year 2000 Compliance: Reporting. The Seller will promptly notify the Agent in the event the Seller discovers or determines that any computer application (including those of its suppliers, vendors and customers) (i) that is necessary for the origination, collection, management, or servicing of the Receivables will not be Year 2000 Compliant on or before April 1, 1999 and thereafter, or (ii) that is otherwise material to its or any of its Subsidiaries' business and operations will not be Year 2000 Compliant on a timely basis, except to the extent that, in the case of (ii) above, such failure could not reasonably be expected (a) to have a Material Adverse Effect on the Seller or on the transaction documented under this Agreement, or (b) to result in a Termination Event. Further, the Seller will deliver simultaneously with any quarterly or annual financial statements or reports to be delivered under the Agreement, a certificate signed by an officer of the Seller that no material event, problems or conditions have occurred 3 which in the opinion of management would (i) prevent or materially delay the Seller's plan to become Year 2000 Compliant or (ii) cause Seller's or be likely to cause the representations and warranties or covenants with respect to being or becoming Year 2000 Compliant to no longer be true. (o) YEAR 2000 COMPLIANCE: IMPLEMENTATION: The Seller will cause (i) all computer applications (including those of its suppliers, vendors and customers) that are material to its or any of its Subsidiaries' business and operations to be Year 2000 Compliant on a timely basis, except to the extent that a failure to do so could not reasonably be expected (a) to have a Material Adverse Effect on the Seller or on the transaction documented under this Agreement, or (b) to result in a Termination Event; and (ii) all Receivable Systems to be Year 2000 Compliant at all times on and after April 1, 1999. The Seller will deliver a certificate to the Seller and the Agent, signed by the chief information officer of the Seller, certifying compliance with the foregoing covenant by no later than April 1, 1999." 1.4. Section 8.1 of the RPA is amended (a) to replace the period appearing at the end of clause (xviii) with a semicolon followed by the word "or" and (b) to add the following new clause (xix): "(xix) any failure of the computer applications of the Seller or any Transferring Affiliate(including those of suppliers, vendors and customers of the Seller or any Transferring Affiliate and the Receivables Systems) to be Year 2000 Compliant at any time." SECTION 2. CONDITIONS PRECEDENT. This Amendment shall become effective and be deemed effective as of the date hereof upon the receipt by the Agent of each of the following: (i) counterparts of this Amendment duly executed by the Purchaser and the Seller; and (ii) a reaffirmation of the Parent Agreement, substantially in the form of Exhibit A attached hereto, duly executed by each of FMC and FMCH. SECTION 3. COVENANTS, REPRESENTATIONS AND WARRANTIES OF THE SELLER. 3.1 Upon the effectiveness of this Amendment, the Seller hereby reaffirms (subject to the modifications to Exhibit F to the RPA set forth in the Certificate of even date herewith executed by the Seller) all covenants, representations and warranties made by it in the RPA and agrees that all such covenants, representations and warranties shall be deemed to have been remade as of the effective date of this Amendment. 4 3.2 The Seller hereby represents and warrants that (i) this Amendment constitutes the legal, valid and binding obligation of such party, enforceable against it in accordance with its terms and (ii) upon the effectiveness of this Amendment, no Seller Default or Potential Seller Default shall exist under the RPA. SECTION 4. REFERENCE TO AND EFFECT ON THE RPA. 4.1 Upon the effectiveness of this Amendment, each reference in the RPA to "this Agreement," "hereunder," "hereof," "herein," "hereby" or words of like import shall mean and be a reference to the RPA as amended hereby, and each reference to the RPA in any other document, instrument and agreement executed and/or delivered in connection with the RPA shall mean and be a reference to the RPA as amended hereby. 4.2 Except as specifically amended hereby, the RPA and all other documents, instruments and agreements executed and/or delivered in connection therewith shall remain in full force and effect and are hereby ratified and confirmed. 4.3 The execution, delivery and effectiveness of this Amendment shall not operate as a waiver of any right, power or remedy of the Purchaser or any of its assignees under the RPA or any other document, instrument, or agreement executed in connection therewith, nor constitute a waiver of any provision contained therein. SECTION 5. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS (AS OPPOSED TO THE CONFLICT OF LAW PROVISIONS) AND DECISIONS OF THE STATE OF NEW YORK. SECTION 6. EXECUTION IN COUNTERPARTS. This Amendment may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed to be an original and all of which taken together shall constitute but one and the same instrument. SECTION 7. HEADINGS. Section headings in this Amendment are included herein for convenience of reference only and shall not constitute a part of this Amendment for any other purpose. 5 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed by their respective officers thereunto duly authorized as of the date first written above. NMC FUNDING CORPORATION, as Purchaser By: /s/ James V. Luther ------------------------------------ James V. Luther Assistant Treasurer NATIONAL MEDICAL CARE, INC., as Seller By: /s/ James V. Luther ------------------------------------ James V. Luther Assistant Treasurer 6 EXHIBIT A FORM OF REAFFIRMATION OF PARENT AGREEMENT REAFFIRMATION OF PARENT AGREEMENT September 28, 1998 NMC Funding Corporation Two Ledgemont Center 95 Hayden Avenue Lexington, Massachusetts 02173 NationsBank, N.A., as Agent under the Transfer and Administration Agreement referred to below NationsBank Corporate Center--10th Floor Charlotte, North Carolina 28255 Each of the undersigned, FRESENIUS MEDICAL CARE AG and FRESENIUS MEDICAL CARE HOLDINGS, INC. (i) acknowledges, and consents to, the execution of that certain Amendment No. 3 dated as of September 28, 1998 (the "TAA AMENDMENT") to the Transfer and Administration Agreement, dated as of August 28, 1997, among Enterprise Funding Corporation, NMC Funding Corporation, National Medical Care, Inc., the "Bank Investors" parties thereto and NationsBank, N.A., as agent, (ii) acknowledges, and consents to, the execution of that certain Amendment dated as of September 28, 1998 (the "RPA AMENDMENT") to the Receivables Purchase Agreement, dated as of August 28, 1997, between NMC Funding Corporation and National Medical Care, Inc., (iii) reaffirms all of its obligations under that certain Parent Agreement dated as of August 28, 1997 made by the undersigned and (iv) acknowledges and agrees that, after giving effect to the TAA Amendment and the RPA Amendment, such Parent Agreement remains in full force and effect and such Parent Agreement is hereby ratified and confirmed. 7 FRESENIUS MEDICAL CARE AG By: ---------------------------------- Title: FRESENIUS MEDICAL CARE HOLDINGS, INC. By: ---------------------------------- Title: EX-10.11 4 AMENDMENT NO.2 TO TRANSFER & ADMINISTRATION AGR. 1 EXHIBIT 10.11 AMENDMENT NO. 2 Dated as of August 25, 1998 to TRANSFER AND ADMINISTRATION AGREEMENT Dated as of August 28, 1997 THIS AMENDMENT NO. 2 (this "AMENDMENT") dated as of August 25, 1998 is entered into by and among NMC FUNDING CORPORATION, a Delaware corporation, as Transferor (in such capacity, the "TRANSFEROR"), NATIONAL MEDICAL CARE, INC., a Delaware corporation, as the initial "COLLECTION AGENT", ENTERPRISE FUNDING CORPORATION, a Delaware corporation (the "COMPANY"), and NATIONSBANK, N.A., a national banking association ("NATIONSBANK"), as agent for the Company and the Bank Investors (in such capacity, the "AGENT") and as a Bank Investor. PRELIMINARY STATEMENT A. The Company, the Transferor, the Collection Agent and NationsBank, in its capacity as the Agent and as a Bank Investor, are parties to that certain Transfer and Administration Agreement dated as of August 28, 1997 (as amended or otherwise modified prior to the date hereof, the "TAA"). Capitalized terms used herein and not otherwise defined shall have the meanings ascribed to them in the TAA. B. The Company, the Transferor, the Collection Agent and NationsBank, as Agent and as a Bank Investor, have agreed to amend the TAA on the terms and conditions hereinafter set forth. NOW, THEREFORE, in consideration of the premises set forth above, and other good and valuable consideration the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows: SECTION 1. AMENDMENTS TO THE TAA. Subject to the satisfaction of the conditions precedent set forth in Section 2 below, Section 1.1 the TAA is amended as follows: 2 1.1. The definition of "COMMITMENT TERMINATION DATE" is amended to change the date set forth therein from "August 27, 1998" to "September 28, 1998". 1.2. The definition of "TERMINATION DATE" is amended to change the date set forth in clause (viii) thereof from "August 27, 1998" to "September 28, 1998". SECTION 2. CONDITIONS PRECEDENT. This Amendment shall become effective and be deemed effective as of the date hereof upon the receipt by the Agent of each of the following: (i) counterparts of this Amendment duly executed by the Company, the Transferor, the Collection Agent, the Bank Investor and the Agent; and (ii) a reaffirmation of the Parent Agreement, substantially in the form of Exhibit A attached hereto, duly executed by each of FMC and FMCH. SECTION 3. COVENANTS, REPRESENTATIONS AND WARRANTIES OF THE TRANSFEROR AND THE COLLECTION Agent. 3.1 Upon the effectiveness of this Amendment, each of the Transferor and the Collection Agent hereby reaffirms all covenants, representations and warranties made by it in the TAA and agrees that all such covenants, representations and warranties shall be deemed to have been remade as of the effective date of this Amendment. 3.2 Each of the Transferor and the Collection Agent hereby represents and warrants that (i) this Amendment constitutes the legal, valid and binding obligation of such party, enforceable against it in accordance with its terms and (ii) upon the effectiveness of this Amendment, no Termination Event or Potential Termination Event shall exist under the TAA. SECTION 4. REFERENCE TO AND EFFECT ON THE TAA. 4.1 Upon the effectiveness of this Amendment, each reference in the TAA to "this Agreement," "hereunder," "hereof," "herein," "hereby" or words of like import shall mean and be a reference to the TAA as amended hereby, and each reference to the TAA in any other document, instrument and agreement executed and/or delivered in connection with the TAA shall mean and be a reference to the TAA as amended hereby. 3 4.2 Except as specifically amended hereby, the TAA and all other documents, instruments and agreements executed and/or delivered in connection therewith shall remain in full force and effect and are hereby ratified and confirmed. 4.3 The execution, delivery and effectiveness of this Amendment shall not operate as a waiver of any right, power or remedy of the Company, the Bank Investor or the Agent under the TAA or any other document, instrument, or agreement executed in connection therewith, nor constitute a waiver of any provision contained therein. SECTION 5. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS (AS OPPOSED TO THE CONFLICT OF LAW PROVISIONS) AND DECISIONS OF THE STATE OF NEW YORK. SECTION 6. EXECUTION IN COUNTERPARTS. This Amendment may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed to be an original and all of which taken together shall constitute but one and the same instrument. SECTION 7. HEADINGS. Section headings in this Amendment are included herein for convenience of reference only and shall not constitute a part of this Amendment for any other purpose. 4 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed by their respective officers thereunto duly authorized as of the date first written above. ENTERPRISE FUNDING CORPORATION, as Company By: /s/ Stephen Newman ---------------------------------------- Stephen Newman Vice President NMC FUNDING CORPORATION, as Transferor By: /s/ James V. Luther ---------------------------------------- James V. Luther Assistant Treasurer NATIONAL MEDICAL CARE, INC., as Collection Agent By: /s/ James V. Luther ---------------------------------------- James V. Luther Assistant Treasurer NATIONSBANK, N.A., as Agent and as a Bank Investor By: /s/ Elliott T. Lemon ---------------------------------------- Elliott T. Lemon Vice President 5 EXHIBIT A FORM OF REAFFIRMATION OF PARENT AGREEMENT REAFFIRMATION OF PARENT AGREEMENT August 25, 1998 NMC Funding Corporation Two Ledgemont Center 95 Hayden Avenue Lexington, Massachusetts 02173 NationsBank, N.A., as Agent under the Transfer and Administration Agreement referred to below NationsBank Corporate Center--10th Floor Charlotte, North Carolina 28255 Each of the undersigned, FRESENIUS MEDICAL CARE AG and FRESENIUS MEDICAL CARE HOLDINGS, INC. (i) acknowledges, and consents to, the execution of that certain Amendment No. 2 dated as of August 25, 1998 (the "AMENDMENT") to the Transfer and Administration Agreement, dated as of August 28, 1997, among Enterprise Funding Corporation, NMC Funding Corporation, National Medical Care, Inc., the "Bank Investors" parties thereto and NationsBank, N.A., as agent (as amended, the "TAA"), (ii) reaffirms all of its obligations under that certain Parent Agreement dated as of August 28, 1997 made by the undersigned and (iii) acknowledges and agrees that, after giving effect to the Amendment, such Parent Agreement remains in full force and effect and such Parent Agreement is hereby ratified and confirmed. 6 FRESENIUS MEDICAL CARE AG By: --------------------------------------- Title: FRESENIUS MEDICAL CARE HOLDINGS, INC. By: --------------------------------------- Title: EX-10.12 5 AMENDMENT NO. 3 TO TRANSFER & ADMINISTRATION AGR. 1 EXHIBIT 10.12 AMENDMENT NO. 3 Dated as of September 28, 1998 to TRANSFER AND ADMINISTRATION AGREEMENT Dated as of August 28, 1997 THIS AMENDMENT NO. 3 (this "AMENDMENT") dated as of September 28, 1998 is entered into by and among NMC FUNDING CORPORATION, a Delaware corporation, as Transferor (the "TRANSFEROR"), NATIONAL MEDICAL CARE, INC., a Delaware corporation, as the initial "COLLECTION AGENT", ENTERPRISE FUNDING CORPORATION, a Delaware corporation (the "COMPANY"), and NATIONSBANK, N.A., a national banking association ("NATIONSBANK"), as agent for the Company and the Bank Investors (in such capacity, the "AGENT") and as a Bank Investor. PRELIMINARY STATEMENT A. The Company, the Transferor, the Collection Agent and NationsBank, in its capacity as the Agent and as a Bank Investor, are parties to that certain Transfer and Administration Agreement dated as of August 28, 1997 (as amended or otherwise modified prior to the date hereof, the "TAA"). Capitalized terms used herein and not otherwise defined shall have the meanings ascribed to them in the TAA. B. The Company, the Transferor, the Collection Agent and NationsBank, as Agent and as a Bank Investor, have agreed to amend the TAA on the terms and conditions hereinafter set forth. NOW, THEREFORE, in consideration of the premises set forth above, and other good and valuable consideration the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows: SECTION 1. AMENDMENTS TO THE TAA. Subject to the satisfaction of the conditions precedent set forth in Section 2 below, the TAA is amended as follows: 1.1. The definition of "COMMITMENT TERMINATION DATE" set forth in Section 1.1 of the TAA is amended to change the date set forth therein from "September 28, 1998" to "September 27, 1999". 2 1.2. The definition of "TERMINATION DATE" set forth in Section 1.1 of the TAA is amended to change the date set forth in clause (viii) thereof from "September 28, 1998" to "September 27, 1999". 1.3. The following new definitions are added to Section 1.1 of the TAA in appropriate alphabetical order: "RECEIVABLE SYSTEMS" has the meaning specified in Section 3.1(aa). "YEAR 2000 COMPLIANT" has the meaning specified in Section 3.1(aa). 1.4. Section 3.1 of the TAA is amended to add, immediately after paragraph (z), the following new paragraph (aa): "(aa) YEAR 2000 COMPLIANCE. The Transferor has (i) initiated a review and assessment of all areas within its and each of its Subsidiaries' business and operations (including those affected by suppliers, vendors and customers) that could be adversely affected by the 'Year 2000 Problem' (that is, the risk that computer applications used by the Transferor or any of its Subsidiaries (or suppliers, vendors and customers) may be unable to recognize and perform properly date-sensitive functions involving certain dates prior to and any date after December 31, 1999), (ii) initiated the development of a plan and timeline for addressing the Year 2000 Problem on a timely basis, and (iii) to date, implemented that plan in accordance with that timetable. The Transferor believes that all computer applications (including those of its suppliers, vendors and customers) that are material to its or any of its Subsidiaries' business and operations are reasonably expected on a timely basis to be able to perform properly date-sensitive functions for all dates before and after January 1, 2000 (that is, be 'Year 2000 Compliant'), except to the extent that a failure to do so could not reasonably be expected (a) to have a Material Adverse Effect on the Transferor or on the transaction documented under this Agreement, or (b) to result in a Termination Event. The Transferor (i) has initiated a review and assessment of all computer applications (including, but not limited to, those of the Transferor, the Collection Agent, the Seller, any Transferring Affiliate and any of their respective suppliers, vendors, customers or third party servicers), which are related to or involved in the origination, collection, management or servicing of the Receivables (the 'Receivable Systems') and (ii) believes that such Receivable Systems are Year 2000 Compliant or will be Year 2000 Compliant on or before April 1, 1999 and thereafter. 3 The Company believes that the costs of all assessment, remediation, testing and integration related to the Transferor's plan for becoming Year 2000 Compliant will not have a material adverse effect on the financial condition or operations of the Transferor." 1.5. Section 3.3 of the TAA is amended to add, immediately after paragraph (k), the following new paragraph (l): "(l) YEAR 2000 COMPLIANCE. The Collection Agent has (i) initiated a review and assessment of all areas within its, the Seller's and each Transferring Affiliate's business and operations (including those affected by suppliers, vendors and customers) that could be adversely affected by the 'Year 2000 Problem' (that is, the risk that computer applications used by the Collection Agent, the Seller or any Transferring Affiliate (or suppliers, vendors and customers) may be unable to recognize and perform properly date-sensitive functions involving certain dates prior to and any date after December 31, 1999), (ii) initiated the development of a plan and timeline for addressing the Year 2000 Problem on a timely basis, and (iii) to date, implemented that plan in accordance with that timetable. The Collection Agent believes that all computer applications (including those of its suppliers, vendors and customers) that are material to its, the Seller's or any Transferring Affiliate's business and operations are reasonably expected on a timely basis to be Year 2000 Compliant, except to the extent that a failure to do so could not reasonably be expected (a) to have a Material Adverse Effect on the Collection Agent, the Seller or any Transferring Affiliate or on the transactions contemplated by the Transaction Documents, or (b) to result in a Termination Event. The Collection Agent (i) has initiated a review and assessment of all Receivable Systems and (ii) believes that such Receivable Systems are Year 2000 Compliant or will be Year 2000 Compliant on or before April 1, 1999 and thereafter. The Collection Agent believes that the costs of all assessment, remediation, testing and integration related to the Collection Agent's plan for becoming, and causing the Seller and each Transferring Affiliate to become, Year 2000 Compliant will not have a material adverse effect on the financial condition or operations of the Collection Agent, the Seller or any Transferring Affiliate." 1.6. Section 5.1 of the TAA is amended to add, immediately following paragraph (n), the following new paragraphs (o) and (p): "(o) YEAR 2000 COMPLIANCE: REPORTING. The Transferor will promptly notify the Agent in the event the Transferor discovers or 4 determines that any computer application (including those of its suppliers, vendors and customers) (i) that is necessary for the origination, collection, management, or servicing of the Receivables will not be Year 2000 Compliant on or before April 1, 1999 and thereafter, or (ii) that is otherwise material to its or any of its Subsidiaries' business and operations will not be Year 2000 Compliant on a timely basis, except to the extent that, in the case of (ii) above, such failure could not reasonably be expected (a) to have a Material Adverse Effect on the Transferor or on the transaction documented under this Agreement, or (b) to result in a Termination Event. Further, the Transferor will deliver simultaneously with any quarterly or annual financial statements or reports to be delivered under the Agreement, a certificate signed by an officer of the Transferor that no material event, problems or conditions have occurred which in the opinion of management would (i) prevent or materially delay the Transferor's plan to become Year 2000 Compliant or (ii) cause or be likely to cause the Transferor's representations and warranties or covenants with respect to being or becoming Year 2000 Compliant to no longer be true. (p) YEAR 2000 COMPLIANCE: IMPLEMENTATION: The Transferor will cause (i) all computer applications (including those of its suppliers, vendors and customers) that are material to its or any of its Subsidiaries' business and operations to be Year 2000 Compliant on a timely basis, except to the extent that a failure to do so could not reasonably be expected (a) to have a Material Adverse Effect on the Transferor or on the transaction documented under this Agreement, or (b) to result in a Termination Event; and (ii) all Receivable Systems to be Year 2000 Compliant at all times on and after April 1, 1999. The Transferor will deliver a certificate to the Agent, signed by the chief information officer of the Transferor, certifying compliance with the foregoing covenant by no later than April 1, 1999." 1.7. Section 5.3 of the TAA is amended to add, immediately following paragraph (h), the following new paragraphs (i) and (j): "(i) YEAR 2000 COMPLIANCE: REPORTING. The Collection Agent will promptly notify the Agent in the event the Collection Agent discovers or determines that any computer application (including those of its suppliers, vendors and customers) (i) that is necessary for the origination, collection, management, or servicing of the Receivables by the Collection Agent, the Seller or any Transferring Affiliate will not be Year 2000 Compliant on or before January 1, 1999 and thereafter, or (ii) that is otherwise material to its or the Seller's or any Transferring Affiliate's business and operations will not be Year 2000 Compliant on a timely basis, except to the extent 5 that, in the case of (ii) above, such failure could not reasonably be expected (a) to have a Material Adverse Effect on the Collection Agent, the Seller or any Transferring Affiliate or on the transactions contemplated under the Transaction Documents, or (b) to result in a Termination Event. Further, the Collection Agent will deliver simultaneously with any quarterly or annual financial statements or reports to be delivered under the Agreement, a certificate signed by an officer of the Collection Agent that no material event, problems or conditions have occurred which in the opinion of management would (i) prevent or materially delay the Collection Agent's plan to become, and to cause the Seller and each Transferring Affiliate to become, Year 2000 Compliant or (ii) cause or be likely to cause the Collection Agent's representations and warranties or covenants with respect to the Collection Agent, the Seller and each Transferring Affiliate being or becoming Year 2000 Compliant to no longer be true. (j) YEAR 2000 COMPLIANCE: IMPLEMENTATION: The Collection Agent will cause (i) all computer applications (including those of its suppliers, vendors and customers) that are material to its or any of its Subsidiaries' business and operations to be Year 2000 Compliant on a timely basis, except to the extent that a failure to do so could not reasonably be expected (a) to have a Material Adverse Effect on the Collection Agent or on the transaction documented under this Agreement, or (b) to result in a Termination Event; and (ii) all Receivable Systems to be Year 2000 Compliant at all times on and after April 1, 1999. The Collection Agent will deliver a certificate to the Agent, signed by the chief information officer of the Collection Agent, certifying compliance with the foregoing covenant by no later than April 1, 1999." 1.8. Section 8.1 of the TAA is amended (a) to replace the period appearing at the end of clause (xx) with a semicolon followed by the word "or" and (b) to add the following new clause (xxi): "(xxi) any failure of the computer applications of the Transferor, the Seller, the Collection Agent or any Transferring Affiliate (including those of suppliers, vendors and customers and the Receivables Systems) to be Year 2000 Compliant at any time." SECTION 2. CONDITIONS PRECEDENT. This Amendment shall become effective and be deemed effective as of the date hereof upon the receipt by the Agent of each of the following: (i) counterparts of this Amendment duly executed by the Company, the Transferor, the Collection Agent, the Bank Investor and the Agent; 6 (ii) counterparts of an Amendment, in substantially the form of Exhibit A attached hereto, to the Receivables Purchase Agreement, duly executed by each of the Seller and the Transferor; and (iii) a reaffirmation of the Parent Agreement, substantially in the form of Exhibit B attached hereto, duly executed by each of FMC and FMCH. SECTION 3. COVENANTS, REPRESENTATIONS AND WARRANTIES OF THE TRANSFEROR AND THE COLLECTION Agent. 3.1 Upon the effectiveness of this Amendment, each of the Transferor and the Collection Agent hereby reaffirms (subject to the modifications to Exhibit H to the TAA set forth in the Certificate of even date herewith executed by the Transferor and the Collection Agent) all covenants, representations and warranties made by it in the TAA and agrees that all such covenants, representations and warranties shall be deemed to have been remade as of the effective date of this Amendment. 3.2 Each of the Transferor and the Collection Agent hereby represents and warrants that (i) this Amendment constitutes the legal, valid and binding obligation of such party, enforceable against it in accordance with its terms and (ii) upon the effectiveness of this Amendment, no Termination Event or Potential Termination Event shall exist under the TAA. SECTION 4. REFERENCE TO AND EFFECT ON THE TAA; CONSENT TO AMENDMENT OF RECEIVABLES PURCHASE AGREEMENT. 4.1 Upon the effectiveness of this Amendment, each reference in the TAA to "this Agreement," "hereunder," "hereof," "herein," "hereby" or words of like import shall mean and be a reference to the TAA as amended hereby, and each reference to the TAA in any other document, instrument and agreement executed and/or delivered in connection with the TAA shall mean and be a reference to the TAA as amended hereby. 4.2 Except as specifically amended hereby, the TAA and all other documents, instruments and agreements executed and/or delivered in connection therewith shall remain in full force and effect and are hereby ratified and confirmed. 4.3 The execution, delivery and effectiveness of this Amendment shall not operate as a waiver of any right, power or remedy of the Company, the Bank Investor or the Agent under the TAA or any other document, instrument, or agreement executed in connection therewith, nor constitute a waiver of any provision contained therein. 7 4.4 The Company and NationsBank, as a Bank Investor and as Agent, hereby consent to the execution by the Transferor of an Amendment to the Receivables Purchase Agreement in substantially the form attached as Exhibit A. SECTION 5. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS (AS OPPOSED TO THE CONFLICT OF LAW PROVISIONS) AND DECISIONS OF THE STATE OF NEW YORK. SECTION 6. EXECUTION IN COUNTERPARTS. This Amendment may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed to be an original and all of which taken together shall constitute but one and the same instrument. SECTION 7. HEADINGS. Section headings in this Amendment are included herein for convenience of reference only and shall not constitute a part of this Amendment for any other purpose. 8 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed by their respective officers thereunto duly authorized as of the date first written above. ENTERPRISE FUNDING CORPORATION, as Company By: /s/ Stewart Cutler --------------------------------------- Stewart Cutler Vice President NMC FUNDING CORPORATION, as Transferor By: /s/ James V. Luther --------------------------------------- James V. Luther Assistant Treasurer NATIONAL MEDICAL CARE, INC., as Collection Agent By: /s/ James V. Luther --------------------------------------- James V. Luther Assistant Treasurer NATIONSBANK, N.A., as Agent and as a Bank Investor By: /s/ Elliott T. Lemon --------------------------------------- Elliott T. Lemon Vice President Signature Page Amendment No. 3 9 EXHIBIT A FORM OF AMENDMENT TO RECEIVABLES PURCHASE AGREEMENT (Attached) 10 AMENDMENT Dated as of September 28, 1998 to RECEIVABLES PURCHASE AGREEMENT Dated as of August 28, 1997 THIS AMENDMENT (this "AMENDMENT") dated as of September 28, 1998 is entered into by and between NMC FUNDING CORPORATION, a Delaware corporation, as Purchaser (the "PURCHASER") and NATIONAL MEDICAL CARE, INC., a Delaware corporation, as Seller (the "SELLER"). PRELIMINARY STATEMENT A. The Purchaser and the Seller are parties to that certain Receivables Purchase Agreement dated as of August 28, 1997 (as amended or otherwise modified prior to the date hereof, the "RPA"). Capitalized terms used herein and not otherwise defined shall have the meanings ascribed to them in the RPA. B. The Purchaser and the Seller have agreed to amend the RPA on the terms and conditions hereinafter set forth. NOW, THEREFORE, in consideration of the premises set forth above, and other good and valuable consideration the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows: SECTION 1. AMENDMENTS TO THE RPA. Subject to the satisfaction of the conditions precedent set forth in Section 2 below, the RPA is amended as follows: 1.1. The following new definitions are added to Section 1.1 of the RPA in appropriate alphabetical order: "RECEIVABLE SYSTEMS" has the meaning specified in Section 3.1(z). "YEAR 2000 COMPLIANT" has the meaning specified in Section 3.1(z). 11 1.2. Section 3.1 of the RPA is amended to add, immediately after paragraph (y), the following new paragraph (z): "(z) YEAR 2000 COMPLIANCE. The Seller has (i) initiated a review and assessment of all areas within its and each of its Subsidiaries' business and operations (including those affected by suppliers, vendors and customers) that could be adversely affected by the 'Year 2000 Problem' (that is, the risk that computer applications used by the Seller or any of its Subsidiaries (or suppliers, vendors and customers) may be unable to recognize and perform properly date-sensitive functions involving certain dates prior to and any date after December 31, 1999), (ii) initiated the development of a plan and timeline for addressing the Year 2000 Problem on a timely basis, and (iii) to date, implemented that plan in accordance with that timetable. The Seller believes that all computer applications (including those of its suppliers, vendors and customers) that are material to its or any of its Subsidiaries' business and operations are reasonably expected on a timely basis to be able to perform properly date-sensitive functions for all dates before and after January 1, 2000 (that is, be 'Year 2000 Compliant'), except to the extent that a failure to do so could not reasonably be expected (a) to have a Material Adverse Effect on the Seller or on the transaction documented under this Agreement, or (b) to result in a Termination Event. The Seller (i) has initiated a review and assessment of all computer applications (including, but not limited to those of the Seller, any Transferring Affiliate and any of their respective suppliers, vendors, customers or third party servicers), which are related to or involved in the origination, collection, management or servicing of the Receivables (the 'Receivable Systems') and (ii) believes that such Receivable Systems are Year 2000 Compliant or will be Year 2000 Compliant on or before April 1, 1999 and thereafter. The Seller believes that the costs of all assessment, remediation, testing and integration related to the Seller's plan for becoming Year 2000 Compliant will not have a material adverse effect on the financial condition or operations of the Seller." 1.3. Section 5.1 of the RPA is amended to add, immediately following paragraph (m), the following new paragraphs (n) and (o): "(n) YEAR 2000 COMPLIANCE: REPORTING. The Seller will promptly notify the Agent in the event the Seller discovers or determines that any computer application (including those of its suppliers, vendors and customers) (i) that is necessary for the origination, collection, management, or servicing of the Receivables will not be Year 2000 Compliant on or before April 1, 1999 and thereafter, or (ii) that is otherwise material to its or any of its Subsidiaries' business and operations will not be Year 2000 Compliant on a timely basis, except to the extent that, in the case of (ii) above, such failure could not 12 reasonably be expected (a) to have a Material Adverse Effect on the Seller or on the transaction documented under this Agreement, or (b) to result in a Termination Event. Further, the Seller will deliver simultaneously with any quarterly or annual financial statements or reports to be delivered under the Agreement, a certificate signed by an officer of the Seller that no material event, problems or conditions have occurred which in the opinion of management would (i) prevent or materially delay the Seller's plan to become Year 2000 Compliant or (ii) cause or be likely to cause the Seller's representations and warranties or covenants with respect to being or becoming Year 2000 Compliant to no longer be true. (o) YEAR 2000 COMPLIANCE: IMPLEMENTATION: The Seller will cause (i) all computer applications (including those of its suppliers, vendors and customers) that are material to its or any of its Subsidiaries' business and operations to be Year 2000 Compliant on a timely basis, except to the extent that a failure to do so could not reasonably be expected (a) to have a Material Adverse Effect on the Seller or on the transaction documented under this Agreement, or (b) to result in a Termination Event; and (ii) all Receivable Systems to be Year 2000 Compliant at all times on and after April 1, 1999. The Seller will deliver a certificate to the Seller and the Agent, signed by the chief information officer of the Seller, certifying compliance with the foregoing covenant by no later than April 1, 1999." 1.4. Section 8.1 of the RPA is amended (a) to replace the period appearing at the end of clause (xviii) with a semicolon followed by the word "or" and (b) to add the following new clause (xix): "(xix) any failure of the computer applications of the Seller or any Transferring Affiliate(including those of suppliers, vendors and customers of the Seller or any Transferring Affiliate and the Receivables Systems) to be Year 2000 Compliant at any time." SECTION 2. CONDITIONS PRECEDENT. This Amendment shall become effective and be deemed effective as of the date hereof upon the receipt by the Agent of each of the following: (i) counterparts of this Amendment duly executed by the Purchaser and the Seller; and (ii) a reaffirmation of the Parent Agreement, substantially in the form of Exhibit A attached hereto, duly executed by each of FMC and FMCH. SECTION 3. COVENANTS, REPRESENTATIONS AND WARRANTIES OF THE SELLER. 13 3.1 Upon the effectiveness of this Amendment, the Seller hereby reaffirms (subject to the modifications to Exhibit F to the RPA set forth in the Certificate of even date herewith executed by the Seller) all covenants, representations and warranties made by it in the RPA and agrees that all such covenants, representations and warranties shall be deemed to have been remade as of the effective date of this Amendment. 3.2 The Seller hereby represents and warrants that (i) this Amendment constitutes the legal, valid and binding obligation of such party, enforceable against it in accordance with its terms and (ii) upon the effectiveness of this Amendment, no Seller Default or Potential Seller Default shall exist under the RPA. SECTION 4. REFERENCE TO AND EFFECT ON THE RPA. 4.1 Upon the effectiveness of this Amendment, each reference in the RPA to "this Agreement," "hereunder," "hereof," "herein," "hereby" or words of like import shall mean and be a reference to the RPA as amended hereby, and each reference to the RPA in any other document, instrument and agreement executed and/or delivered in connection with the RPA shall mean and be a reference to the RPA as amended hereby. 4.2 Except as specifically amended hereby, the RPA and all other documents, instruments and agreements executed and/or delivered in connection therewith shall remain in full force and effect and are hereby ratified and confirmed. 4.3 The execution, delivery and effectiveness of this Amendment shall not operate as a waiver of any right, power or remedy of the Purchaser or any of its assignees under the RPA or any other document, instrument, or agreement executed in connection therewith, nor constitute a waiver of any provision contained therein. SECTION 5. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS (AS OPPOSED TO THE CONFLICT OF LAW PROVISIONS) AND DECISIONS OF THE STATE OF NEW YORK. SECTION 6. EXECUTION IN COUNTERPARTS. This Amendment may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed to be an original and all of which taken together shall constitute but one and the same instrument. SECTION 7. HEADINGS. Section headings in this Amendment are included herein for convenience of reference only and shall not constitute a part of this Amendment for any other purpose. 14 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed by their respective officers thereunto duly authorized as of the date first written above. NMC FUNDING CORPORATION, as Purchaser By: /s/ James V. Luther ---------------------------------------- James V. Luther NATIONAL MEDICAL CARE, INC., as Seller By: /s/ James V. Luther ---------------------------------------- James V. Luther 15 EXHIBIT A FORM OF REAFFIRMATION OF PARENT AGREEMENT REAFFIRMATION OF PARENT AGREEMENT September 28, 1998 NMC Funding Corporation Two Ledgemont Center 95 Hayden Avenue Lexington, Massachusetts 02173 NationsBank, N.A., as Agent under the Transfer and Administration Agreement referred to below NationsBank Corporate Center--10th Floor Charlotte, North Carolina 28255 Each of the undersigned, FRESENIUS MEDICAL CARE AG and FRESENIUS MEDICAL CARE HOLDINGS, INC. (i) acknowledges, and consents to, the execution of that certain Amendment No. 3 dated as of September 28, 1998 (the "TAA AMENDMENT") to the Transfer and Administration Agreement, dated as of August 28, 1997, among Enterprise Funding Corporation, NMC Funding Corporation, National Medical Care, Inc., the "Bank Investors" parties thereto and NationsBank, N.A., as agent, (ii) acknowledges, and consents to, the execution of that certain Amendment dated as of September 28, 1998 (the "RPA AMENDMENT") to the Receivables Purchase Agreement, dated as of August 28, 1997, between NMC Funding Corporation and National Medical Care, Inc., (iii) reaffirms all of its obligations under that certain Parent Agreement dated as of August 28, 1997 made by the undersigned and (iv) acknowledges and agrees that, after giving effect to the TAA Amendment and the RPA Amendment, such Parent Agreement remains in full force and effect and such Parent Agreement is hereby ratified and confirmed. 16 FRESENIUS MEDICAL CARE AG By: ---------------------------------- Title: FRESENIUS MEDICAL CARE HOLDINGS, INC. By: ---------------------------------- Title: 17 EXHIBIT B FORM OF REAFFIRMATION OF PARENT AGREEMENT REAFFIRMATION OF PARENT AGREEMENT September 28, 1998 NMC Funding Corporation Two Ledgemont Center 95 Hayden Avenue Lexington, Massachusetts 02173 NationsBank, N.A., as Agent under the Transfer and Administration Agreement referred to below NationsBank Corporate Center--10th Floor Charlotte, North Carolina 28255 Each of the undersigned, FRESENIUS MEDICAL CARE AG and FRESENIUS MEDICAL CARE HOLDINGS, INC. (i) acknowledges, and consents to, the execution of that certain Amendment No. 3 dated as of September 28, 1998 (the "TAA AMENDMENT") to the Transfer and Administration Agreement, dated as of August 28, 1997, among Enterprise Funding Corporation, NMC Funding Corporation, National Medical Care, Inc., the "Bank Investors" parties thereto and NationsBank, N.A., as agent, (ii) acknowledges, and consents to, the execution of that certain Amendment dated as of September 28, 1998 (the "RPA AMENDMENT") to the Receivables Purchase Agreement, dated as of August 28, 1997, between NMC Funding Corporation and National Medical Care, Inc., (iii) reaffirms all of its obligations under that certain Parent Agreement dated as of August 28, 1997 made by the undersigned and (iv) acknowledges and agrees that, after giving effect to the TAA Amendment and the RPA Amendment, such Parent Agreement remains in full force and effect and such Parent Agreement is hereby ratified and confirmed. 18 FRESENIUS MEDICAL CARE AG By: ---------------------------------- Title: FRESENIUS MEDICAL CARE HOLDINGS, INC. By: ---------------------------------- Title: EX-10.17 6 SEPERATION AGREEMENT 1 EXHIBIT 10.17 SEPARATION AGREEMENT This Agreement, by and between National Medical Care, Inc., d/b/a Fresenius Medical Care North America ("FMC"), a corporation having its principal place of business at Two Ledgemont Center, 95 Hayden Avenue, Lexington, MA 02173 and Geoffrey W. Swett ("Swett"), an individual residing at 42 Kings Way, Waltham, Massachusetts 02154. The parties agree as follows: 1. TERMINATION OF EMPLOYMENT. Swett's employment as President of Fresenius Dialysis Services Division and Executive Vice President of FMC shall terminate effective June 22, 1998. From that date, Swett will continue to be employed as a consultant to the Chief Executive Officer of FMC assisting in the transition of the Dialysis Services Division until the July 31, 1998 termination of Swett's employment with FMC. 2. GUARANTEED SALARY CONTINUATION. Swett will continue to be paid bi-weekly for a period of fifty two (52) weeks, beginning August 1, 1998 and ending July 31, 1999 ("Guaranteed Salary Continuation Period"). 3. CONTINGENT ADDITIONAL SALARY CONTINUATION. Despite his good faith best efforts to do so, if Swett has not secured full-time employment by the end of the Guaranteed Salary Continuation Period, FMC will provide him with additional salary continuation for up to an additional fifty two (52) week period or until he finds full-time employment, whichever occurs first, provided he continues to make good faith best efforts to do so. If Swett obtains full-time employment at any time during this additional fifty two (52) week period, he will promptly notify FMC of that fact and the date of his initial employment with his new employer, and FMC's obligation to pay such additional salary continuation shall cease as of such initial employment date, such salary obligation being pro-rated on a daily basis. 4. MANAGEMENT BONUS PLAN PROGRAM. Swett will be eligible for a pro-rata award, based upon his months of service in 1998, under the 1998 Management Bonus Plan. If funding is available for the Plan, Swett will be paid at fifty-eight percent (58%) of the bonus payment he would have received as an active, full-time employee of FMC. Payment will be made on the same date as payment to active FMC executives. 5. PAID-TIME-OFF PAY. Swett will receive a lump sum payment for his accrued but unused accrued Paid-Time-Off on or promptly after July 31, 1998. 6. BENEFITS. MEDICAL AND DENTAL COVERAGE: For as long as Swett is receiving Guaranteed Salary Continuation or Contingent Additional Salary Continuation Payments, he is eligible to 2 continue any coverage under FMC's medical and dental plans on the same basis and to the same extent as currently covered and as may be available to similarly situated employees in the event that 3 changes are subsequently made to such plans. At the end of the Guaranteed Salary Continuation Period or Contingent Additional Salary Continuation Period, he may elect to continue these health and dental benefits under COBRA. FMC will send Swett the documents necessary to elect to do so under separate cover near the end of his Salary Continuation Period. LIFE INSURANCE: Swett's life insurance benefits will continue during the Guaranteed Salary Continuation or Contingent Additional Salary Continuation Period. Any conversion of life insurance at the end of that period may be arranged through the Corporate Human Resources Department. Payment by FMC for medical, dental and life insurance benefits will continue through the period of Guaranteed Salary Continuation or Contingent Additional Salary Continuation on the same basis as though Swett were still employed. LONG AND SHORT TERM DISABILITY BENEFITS: Swett's long and short term disability benefits will cease as of July 31, 1998. 401(k) PLAN: Contributions to FMC's 401(k) Plan may be withdrawn from the plan following Swett's termination of employment in accordance with Internal Revenue Service regulations. Swett may not make contributions to the Plan during the Guaranteed Salary Continuation Period or Contingent Additional Salary Continuation Period. Swett is 100 percent vested in matching company contributions made to the plan on his behalf Corporate Human Resources will provide Swett with information on how to withdraw his funds from the Plan. PENSION PLAN: Swett will stop accruing benefit service under the Pension Plan and the Supplemental Executive Retirement Plan effective July 31, 1998. He is fully vested in both Plans. He will receive a separate letter including a benefit calculation after that date. DEFERRED COMPENSATION PLAN. Swett's account balance under the Deferred Compensation Plan will be paid to him within thirty (30) days of July 31, 1998. 7. FRESENIUS MEDICAL CARE. AG 1998 STOCK INCENTIVE PLAN. Pending approval of the Fresenius Medical Care AG Management Board, 13,889 of Swett's stock options for Preference Shares, equivalent to approximately 41,667 ADS's, will be vested July 31, 1998. Swett will have one (1) year from that date to exercise these options. Should he fail to exercise these options, they will be forfeited at the end of the one (1) year period. 8. OUTPLACEMENT. FMC will provide Swett with executive-level outplacement at Manchester Partners or a reasonably comparable firm of his choosing. 9. REFERENCE. Prior to July 31, 1998, FMC will provide Swett with a mutually acceptable letter of reference. 4 10. UNEMPLOYMENT BENEFITS. If Swett is unemployed at the end of the period of Guaranteed Salary Continuation and Contingent Additional Salary, FMC agrees it will not protest any claim he may file for unemployment compensation. 11. COMPANY PROGRAM. Swett affirms that he will return all Company property, including but not limited to, all keys, files and computer hardware, software and data, in his possession. 12. RELEASE. As a material inducement to FMC to enter into this agreement, and in consideration of the Guaranteed Salary Continuation and the Contingent Additional Salary Continuation Payments and benefits and other consideration to be provided by FMC to Swett, all as is provided in the Agreement, Swett hereby irrevocably and unconditionally releases, acquits and forever discharges FMC, its parents, subsidiaries and affiliates, successors and assigns, officers, employees, directors, and representatives, and all persons related thereto, from any and all charges, complaints, claims, liabilities, obligations, promises, agreements, controversies, damages, actions, causes or action, suits, rights, demands, costs, losses, debts and expenses (including attorney's fees and costs actually incurred), of any nature whatsoever, known or unknown, which he has, or might claim to have, against any of them and which arises out of or is related to the termination of his employment with FMC. This Release includes but is not limited to, all such claims under applicable state or federal law, including without limitation, any claims under the Age Discrimination in Employment Act, 29 U.S.C.ss.621, et seq. 13. CONFIDENTIALITY-DISCLOSURE/NONDISPARAGEMENT. Swett acknowledges his continuing obligation under the Non-Disclosure/Non-Competition Agreement dated September 15, 1992 and further acknowledges that the non-competition obligation remains in effect for one year after he stops receiving guaranteed salary continuation or contingent additional salary continuation. Swett and FMC also agree not to disclose anything about this Agreement except to those who have a reasonable need to know about it. FMC and Swett agree not to say or do anything which would disparage or present unfairly the other, and as to FMC would include, its employees, officers, directors, agents, or affiliates. 14. COOPERATION AND ASSISTANCE Swett and FMC acknowledge that Swett may have information and knowledge which may be useful to FMC in connection with certain legal, regulatory, and corporate administrative proceedings, including but not limited to, various litigation matters, certain regulatory submissions, resignation activities with respect to officerships and directorships, and the Office of the Inspector General investigation. As a material inducement to FMC to enter into this Agreement, and in consideration of the Guaranteed Salary Continuation and the Contingent Additional Salary Continuation Payments and benefits and other consideration to be provided by FMC to Swett, all as provided in the Agreement, Swett acknowledges and confirms that he shall, during the periods of Guaranteed Salary Continuation and Contingent Additional Salary Continuation, cooperate fully with FMC in connection with any such proceeding. Swett and FMC acknowledge that, as used in this paragraph, full cooperation shall mean that Swett will, at the request of FMC, make available to FMC all time, information and assistance reasonably requested of him in connection with these proceedings and, further 5 that Swett shall maintain the confidentiality of information and communications he shares with FMC in connection with providing such assistance consistent with the attorney-client privilege, and the provisions of paragraph 12 of this Agreement and the governing law. 15. CONSULTING. During the Guaranteed Salary Continuation or Contingent Additional Salary Continuation period, Swett may from time to time be requested to consult on operating matters, by the CEO of FMC. For such time requested by the CEO and such services performed, Swett will be compensated at a rate of $200 per hour plus out-of-pocket expenses. All such services 6 are to be presented for payment monthly, invoice to include description of services performed, dates and hours. Invoices submitted to the Vice President of Human Resources and approved by the CEO will be paid within thirty (30) days of receipt. 16. REVIEW PERIOD. Swett understands that he has twenty-one (21) days to review this Agreement, and has the right to retain counsel to review it and to represent him in his discussions with FMC if he wishes to do so. After he executes it, he has seven (7) days to revoke the Agreement, so it will not be effective until seven (7) days have expired after he signs the Agreement and returns it to FMC. 17. ENTIRE AGREEMENT, GOVERNING LAW. This Agreement sets forth the entire agreement of the parties with respect to the subject matter hereof and shall be governed by the law of the Commonwealth of Massachusetts. IN WITNESS WHEREOF, the parties have executed this Separation Agreement to take effect as a sealed instrument, as of the 21st of July, 1998. FRESENIUS MEDICAL CARE NORTH AMERICA /s/ Ben Lipps /s/ Geoffrey W. Swett ------------------------- ----------------------------- Ben J. Lipps Geoffrey W. Swett President and Chief Executive Officer EX-11 7 COMPUTATION OF EARNINGS PER SHARE 1 EXHIBIT 11 FRESENIUS MEDICAL CARE HOLDINGS, INC. AND SUBSIDIARIES WEIGHTED AVERAGE NUMBER OF SHARES AND EARNINGS USED IN PER SHARE COMPUTATION (DOLLARS AND SHARES IN THOUSANDS)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------ ----------------- 1998 1997 1998 1997 ------ ----- ------- ------ The weighted average number of shares of Common Stock were as follows..................... 90,000 90,000 90,000 90,000 ====== ====== ======= ====== Income used in the computation of earnings per share were as follows: THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------ ------------------ 1998 1997 1998 1997 ------- ------ ------- ------- Net Earnings - Continuing Operations ................ $14,165 $9,807 $36,715 $27,587 Dividends paid on preferred stocks .................. (130) (130) (390) (390) ------- ------ ------- ------- Income used in per share computation of earnings ..................................... $14,035 $9,677 $36,325 $27,197 ======= ====== ======= ======= Basic and fully dilutive earnings per share - Continuing Operations .................... $ 0.16 $ 0.11 $ 0.41 $ 0.30 ======= ====== ======= =======
EX-27.1 8 FDS FOR 3-MOS SEP 30,1998
5 0000042872 FRESENIUS MEDICAL CARE HOLDINGS, INC. 1,000 U.S. DOLLARS 3-MOS DEC-31-1998 JUL-01-1998 SEP-30-1998 1 8,797 0 189,882 0 172,677 782,471 501,859 66,524 4,629,480 437,037 0 0 16,318 90,000 1,843,650 4,629,480 114,600 655,652 76,539 411,973 139,454 16,308 54,880 33,037 18,872 14,165 0 0 0 14,165 0.16 0
EX-27.2 9 FDS FOR F/Y END SEP 30, 1998
5 0000042872 FRESNIUS MEDICAL CARE HOLDINGS, INC. 1000 U.S. Dollars YEAR DEC-31-1998 JAN-01-1998 SEP-30-1998 1 8,797 0 189,882 0 172,677 782,471 501,859 66,524 4,629,480 437,037 0 0 16,318 90,000 1,843,650 4,629,480 353,291 1,903,980 238,898 1,197,731 417,872 50,187 155,059 83,131 46,416 36,715 (105,897) 0 0 (69,182) (0.77) 0
-----END PRIVACY-ENHANCED MESSAGE-----