-----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, O7/QMR8K33KvOJ/FJo3r/fD4NKFQMSG2R1AWKZIw/vTMDbPC4JqT9xG0Zl/M3shm fjzHoqYzDQNIXNn9NDTkeA== 0000950135-03-001787.txt : 20030317 0000950135-03-001787.hdr.sgml : 20030317 20030317151215 ACCESSION NUMBER: 0000950135-03-001787 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 20021231 FILED AS OF DATE: 20030317 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FRESENIUS MEDICAL CARE HOLDINGS INC /NY/ 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-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-03720 FILM NUMBER: 03605840 BUSINESS ADDRESS: STREET 1: TWO LEDGEMONT CENTER STREET 2: 95 HAYDEN AVE CITY: LEXINGTON STATE: MA ZIP: 02420 BUSINESS PHONE: 6174029000 FORMER COMPANY: FORMER CONFORMED NAME: GRACE W R & CO /CT/ DATE OF NAME CHANGE: 19900423 FORMER COMPANY: FORMER CONFORMED NAME: GRACE W R & CO /NY/ DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: FRESENIUS NATIONAL MEDICAL CARE HOLDINGS INC DATE OF NAME CHANGE: 19961015 10-K 1 b45677fme10vk.txt FRESENIUS MEDICAL CARE HOLDINGS, INC. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------- FORM 10K FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002 OR | | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] FOR THE TRANSITION PERIOD FROM_____ TO_____ . COMMISSION FILE NUMBER 1-3720 FRESENIUS MEDICAL CARE HOLDINGS, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) NEW YORK 13-3461988 (STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) (JURISDICTION OF INCORPORATION OR ORGANIZATION) 95 HAYDEN AVE., LEXINGTON, MA 02420 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) Registrant's telephone number, including area code: 781-402-9000 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Class D Special Dividend Preferred Stock, par value $.10 per share Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No | | Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to the Form 10-K. Indicate by check mark whether the registrant is an accelerated filer. (As defined in Rule 12b-2 of the Act) Yes | | No |X| State the aggregate market value of the voting stock held by non-affiliates of the registrant. The aggregate market value shall be computed by reference to the price at which the stock was sold, or the average bid and asked prices of such stock, as of a specified date within 60 days prior to the date of filing. (See definition of affiliate in Rule 405). $8,906,159 as of March 14, 2003. 1 Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date: As of March 14, 2003, 90,000,000 shares of common stock. DOCUMENTS INCORPORATED BY REFERENCE Registrant's Definitive Information Statement with respect to its 2002 Annual Meeting of Stockholders, to be filed on or before April 30, 2003. (Part III) 2 TABLE OF CONTENTS PART I Item 1. Business ............................................................................ 4 Item 2. Properties .......................................................................... 24 Item 3. Legal Proceedings ................................................................... 25 Item 4. Submission of Matters to a Vote of Security Holders ................................. 27 PART II ...................................................................................... 27 Item 5. Market Price for Registrant's Common Equity and Related Stockholder Matters ......... 27 Item 6. Selected Financial Data ............................................................. 28 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 29 Item 7A. Quantitative and Qualitative Disclosures About Market Risks ......................... 39 Item 8. Consolidated Financial Statements and Supplementary Data ............................ 40 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure 40 PART III ..................................................................................... 40 Item 10. Directors and Executive Officers of the Registrant .................................. 40 Item 11. Executive Compensation .............................................................. 40 Item 12. Security Ownership of Certain Beneficial Owners and Management ...................... 40 Item 13. Certain Relationships and Related Transactions ...................................... 40 PART IV ...................................................................................... 40 Item 14. Controls and Procedures ............................................................. 40 Item 15. Exhibits, Consolidated Financial Statement Schedules, and Reports on Form 8-K ....... 40
3 PART I ITEM 1. BUSINESS This section contains certain forward-looking statements that are subject to various risks and uncertainties. Such statements include, without limitation, discussions concerning the outlook of Fresenius Medical Care Holdings, Inc. (collectively with all its direct and indirect subsidiaries, the "Company"), government reimbursement, future plans and management's expectations regarding future performance. Actual results could differ materially from those contained in these forward-looking statements due to certain factors including, without limitation, changes in business, economic and competitive conditions, regulatory reforms, foreign exchange rate fluctuations, uncertainties in litigation or investigative proceedings, the realization of anticipated tax deductions, and the availability of financing. These and other risks and uncertainties, which are more fully described elsewhere in this 2002 Form 10-K and in the Company's reports filed from time to time with the Securities and Exchange Commission (the "Commission") could cause the Company's results to differ materially from the results that have been or may be projected by or on behalf of the Company. Fresenius Medical Care Holdings, Inc., a New York corporation, is a subsidiary of Fresenius Medical Care AG, a German corporation ("FMCAG"). The Company conducts its operations through five principal subsidiaries: National Medical Care, Inc. ("NMC"), Fresenius USA Marketing Inc.; Fresenius USA Manufacturing Inc.; and SRC Holding Company, Inc., all Delaware corporations and Fresenius USA Inc., a Massachusetts corporation. The Company is primarily engaged in (i) providing kidney dialysis, and clinical laboratory testing services, and (ii) manufacturing and distributing products and equipment for dialysis treatment. - KIDNEY DIALYSIS AND OTHER SERVICES. The Company is the largest private provider of kidney dialysis and related services in the U.S. At December 31, 2002, the Company owned approximately 1,080 outpatient dialysis facilities in the U.S. (including Puerto Rico), treating approximately 79,600 chronic patients (26.6% of estimated U.S. patients). The Company operated or managed an additional 49 facilities treating approximately another 3,600 patients (1.2% of estimated U.S. patients). Collectively, these company-operated facilities treated 27.8% of the estimated dialysis patients in the U.S. The Company believes its next largest competitor treated approximately 15.0% of U.S. patients. Additionally, the Company provides inpatient dialysis services, therapeutic apheresis, hemoperfusion, and other services under contract to hospitals in the U.S. - DIALYSIS PRODUCTS. The Company manufactures a comprehensive line of dialysis products, including hemodialysis machines, peritoneal dialysis systems and disposable products. The Company manufactures innovative and technologically advanced products, including the Fresenius Polysulfone(TM) dialyzer, which the Company believes is the best-performing, mass-produced dialyzer on the market, and Delflex(R) peritoneal solutions with Safe-Lock(R) connectors. For the year ended December 31, 2002, the Company had net revenues of $3.8 billion, an increase of 4% over 2001 revenues. The Company derives 88% of its revenue from providing dialysis services and 12% from the sale of dialysis products. The following table summarizes revenues by operating segments for the three years ended December 31, 2002, 2001 and 2000.
2002 2001 2000 ------ ------ ------ Dialysis Care $3,294 $3,132 $2,609 Dialysis Products 456 478 480 ------ ------ ------ Total $3,750 $3,610 $3,089 ====== ====== ======
The Company's principal executive office is located at 95 Hayden Avenue, Lexington, MA 02420-9192. Its telephone number is (781) 402-9000. 4 RENAL INDUSTRY OVERVIEW END-STAGE RENAL DISEASE End-stage renal disease ("ESRD") is the state of advanced chronic kidney disease that is characterized by the irreversible loss of kidney function and requires routine dialysis treatment or kidney transplantation to sustain life. A normally functioning human kidney removes waste products and excess water from the blood, preventing toxin buildup, eventual poisoning of the body and water overload. Chronic kidney disease can be caused by a number of conditions, primarily nephritis, inherited diseases, hypertension and diabetes. Nearly 60% of all people with ESRD acquire the disease as a complication of one or more of these primary conditions. Based on the most recent information published by the Centers for Medicare & Medicaid Services ("CMS") of the Department of Health and Human Services ("HHS"), the number of patients in the U.S. who received chronic dialysis grew from approximately 66,000 in 1982 to approximately 285,980 at December 31, 2001 or at a compound annual rate of 8.0%. The Company attributes the continuing growth in the number of dialysis patients principally to an increase in general life expectancy and, thus, the overall aging of the general population, the shortage of donor organs for kidney transplants, improved dialysis technology that has expanded the patient population able to undergo life prolonging dialysis and better treatment and survival of patients with hypertension, diabetes and other illnesses that lead to ESRD. Moreover, improved technology has enabled older patients and those who previously could not tolerate dialysis due to other illnesses to benefit from this life-prolonging treatment. There are currently only two methods for the treatment of ESRD: dialysis and kidney transplantation. Transplants are limited by the scarcity of compatible kidneys. Approximately 14,630 patients received kidney transplants in the U.S. during 2001; an increase of 2% over 2000. Therefore, most patients suffering from ESRD must rely on dialysis, which is the removal of toxic waste products and excess fluids from the body by artificial means. There are two major dialysis modalities commonly used today, hemodialysis and peritoneal dialysis. Generally, the method of treatment used by an ESRD patient is chosen by the physician in consultation with the patient, and is based on the patient's medical conditions and needs. According to CMS data, as of December 31, 2001, there were approximately 4,080 Medicare-certified dialysis treatment centers in the U.S. Ownership of these centers was fragmented. The Company estimates that at that time, the five largest multi-facility providers accounted for approximately 2,460 facilities (60% of facilities) and 189,400 patients (66% of patients). The remaining 34% of patients were divided among smaller multi-facility providers, freestanding facilities (many privately owned by physicians) and hospital-affiliated facilities. The Company believes that these proportions remained similar in 2002. The Company estimates that the five multi-center providers accounted for approximately 199,000 patients, or 67% of estimated U.S. patients at December 31, 2002. According to CMS, as of December 31, 2001, approximately 91% of dialysis patients in the U.S. received in-center treatment (virtually all hemodialysis) and approximately 9% were treated at home. Of those treated at home, more than 95% received peritoneal dialysis. TREATMENT OPTIONS FOR ESRD Hemodialysis. Hemodialysis removes waste products and excess fluids from the blood extracorporeally. In hemodialysis, the blood flows outside the body by means of plastic tubes known as bloodlines into a specially designed filter, a dialyzer, which functions as an artificial kidney by separating waste products and excess water from the blood by diffusion and ultrafiltration. Dialysis solution removes the waste products and excess water, and the cleansed blood is returned to the patient. The movement of the blood and dialysis solution is controlled by a hemodialysis machine, which pumps blood, adds anti-coagulants, regulates the purification process and controls the mixing of dialysis solution and the rate of its flow through the system. This machine may also monitor and record the patient's vital signs. Hemodialysis patients generally receive treatment three times per week, typically for two and one-half to four hours or longer per treatment. The majority of hemodialysis patients receive treatment at outpatient dialysis clinics, such as ours, where hemodialysis treatments are performed with the assistance of a nurse or dialysis technician under the general supervision of a physician. 5 Peritoneal Dialysis. Peritoneal dialysis removes waste products and excess fluids from the blood by use of the peritoneum, the membrane lining covering the internal organs located in the abdominal area. Most peritoneal dialysis treatments are self-administered by patients in their own homes and workplaces, either by a treatment known as continuous ambulatory peritoneal dialysis ("CAPD") or by a treatment introduced by Fresenius USA in 1980 known as continuous cycling peritoneal dialysis ("CCPD"). In both of these treatments, the patient has a catheter surgically implanted to provide access to the peritoneal cavity. Using this catheter, a sterile dialysis solution is introduced into the peritoneal cavity and the peritoneum operates as the dialyzing membrane. A typical CAPD peritoneal dialysis program involves the introduction and disposal of solution four times a day. With CCPD a machine is used to "cycle" solution to and from the patient's peritoneum during sleep. STRATEGY The Company's objective is to focus on generating revenue growth that exceeds market growth of the dialysis industry, as measured by growth in patient population, while maintaining the Company's leading position in the market and increasing earnings at a faster pace than revenue growth. The Company's dialysis services and product businesses have grown faster than the market in terms of revenues over the past five years, and the Company believes that it is well positioned to continue growth by focusing on the following strategies: - Continue to Provide High Standards of Patient Care. The Company believes that its reputation for providing high standards of patient care is a competitive advantage. - Differentiate Our Patient Care Programs from that of Our Competitors. The Company believes that its UltraCare(TM) patient care program now offered at its dialysis facilities will distinguish and differentiate the Company's patient care programs from that of our competitors. UltraCare(TM) therapy employs single-use high flux polysulfone dialyzers, on-line quality measurement, and ultra pure dialysate. The Company's shift from multi-use to single-use dialyzers has increased the Company's per treatment dialyzer costs. These cost increases have been offset, however, by (i) the Company's ability to achieve economies of scale in the production of these dialyzers, due to its large-scale single-use dialzyer manufacturing capacity, (ii) implementation of a new staffing model based on single use that reduces the personnel costs per treatment, and (iii) automated controls in the Company's new 2008 Series dialysis machine that reduce concentrate usage and associated costs. - Expand Presence in the U.S. The Company intends to continue to take advantage of its reputation and market recognition by acquiring and establishing new dialysis clinics within attractive markets. - Increase Spectrum of Dialysis Services. One of the Company's objectives is to continue to expand its role within the broad spectrum of services provided to dialysis patients. The Company implemented this strategy by providing expanded and enhanced patient services, including laboratory services, to both its own clinics and those operated by third parties. The Company estimates that Spectra Renal Management ("SRM") provides laboratory services for approximately 39% of the ESRD patients in the United States. The 6 Company has developed disease state management methodologies which involve the coordination of total patient care for ESRD patients, that it believes are attractive to managed care payors. The Company has formed Optimal Renal Care, LLC, a joint venture with The Permanente Federation. The Company has also formed Renaissance Health Care as a joint venture with participating nephrologists. The Company provides ESRD and Chronic Kidney Disease programs to more than 3,000 patients. The Company also operates a surgical center for the management and care of vascular access for patients which decreases hospitalization. - Continue to Offer Complete Dialysis Product Lines. The Company offers broad and competitive hemodialysis and peritoneal dialysis product lines. These product lines enjoy broad market acceptance and enable the Company to provide the customer with a single source for all of their dialysis machines, systems and disposable products. During the year ended December 31, 2002 the Company's product revenues were derived approximately 24% from machine sales and 76% from sales of disposable products. - Extend Our Position as an Innovator in Product and Process Technology. The Company is committed to technological leadership in both hemodialysis and peritoneal dialysis products. FMCAG has a global research and development team with more than 200 members focused on developing dialysis systems that are safer, more effective and easier to use and that can be easily customized to meet the differing needs of customers around the world. The Company believes that its extensive expertise in patient treatment and clinical data will further enhance its ability to develop more effective products and treatment methodologies. The Company's ability to manufacture dialysis products on a cost-effective and competitive basis results in large part from our process technologies. Over the past several years, the Company has reduced manufacturing costs per unit through development of proprietary manufacturing technologies that have streamlined and automated its production processes. - Expand into Related Services. Fresenius Medical Care Cardiovascular Resources Holdings ("FMC-CVR"), in which the Company owns a 45% equity interest, is a leading provider of perfusion and related cardiovascular services. The addition of this business provides a strong nationwide platform for expansion and innovation in the extracorporeal service business which compliments our extracorporeal dialysis service business well. For a description of other elements of the Company's strategy see "--Dialysis Services" and "--Dialysis Products Business." For additional information in respect to the Company's industry segments, see Notes to Consolidated Financial Statements - Note 19, "Industry Segments and Information about Foreign Operations." DIALYSIS SERVICES OVERVIEW The Company is the largest provider of kidney dialysis and related services in the U.S. to patients suffering from chronic kidney disease. The Company also provides clinical laboratory testing services for dialysis patients (Company owned and non-Company owned clinics). The Company's provider business is primarily operated through the Dialysis Services business unit ("Dialysis Services"). Clinical laboratory testing services are primarily provided by SRM. DIALYSIS SERVICES As of December 31, 2002, the Company owned approximately 1,080 dialysis centers in the U.S. (including Puerto Rico). The centers are generally concentrated in areas of high population density. In 2002, the Company acquired 11 existing centers, developed 64 new centers and consolidated or sold 13 centers. The number of patients treated at the Company's centers has increased from approximately 76,600 at December 31, 2001 to approximately 79,600 at December 31, 2002. 7 With the Company's large patient population, it has developed the PSP database which enables it to improve dialysis treatment outcomes and improve the quality and effectiveness of dialysis products. In addition to the Company's patient database, it believes that local physicians, hospitals and managed care plans refer their ESRD patients to its clinics for treatment due to: - its reputation for quality patient care and treatment; - its extensive network of dialysis clinics, which enables physicians to refer their patients to conveniently located clinics; and - its reputation for technologically advanced products for dialysis treatment. The Company treats approximately 28% of the dialysis patients in the U.S., including those patents treated in clinics the Company manages. Based on publicly available reports, the Company believes its next largest competitor treats approximately 15.0% of U.S. dialysis patients. For the year 2002, dialysis services accounted for 88% of the Company's total revenue. At the Company's centers, hemodialysis treatments are provided at individual "stations" through the use of dialysis machines. A nurse or dialysis technician attaches the necessary tubing to the patient and monitors the dialysis equipment and the patient's vital signs. The capacity of a center is a function of the number of stations and such factors as the type of treatment, patient requirements, length of time per treatment and local operating practices and ordinances regulating hours of operation. Each of the Company's dialysis centers is under the general supervision of a medical director ("Medical Director"), who is a physician. See "Patient, Physician and Other Relationships." Each dialysis center also has an administrator or clinic manager who supervises the day-to-day operations of the facility and the staff. The staff typically consists of registered nurses, licensed practical nurses, patient care technicians, a social worker, a registered dietician, a unit clerk and biomedical technicians. As part of the dialysis therapy, the Company provides various related services to ESRD patients in the U.S. at its dialysis centers, including the administration of erythropoietin ("EPO"), a bioengineered protein that stimulates the production of red blood cells. EPO is used to treat anemia, a medical complication frequently experienced by ESRD patients, and is administered to most of the Company's patients. EPO is produced by a single source manufacturer, Amgen Inc., and any interruption of supply could materially adversely affect the Company's business and results of operations. The Company's current contract with Amgen Inc. covers the period from January 2002 to December 2003 with price guarantees and volume and outcome based discounts. The Company's centers also offer services for home dialysis patients, the majority of whom are treated with peritoneal dialysis. For such patients, the Company provides certain materials, training and patient support services, including clinical monitoring, supply of EPO, follow-up assistance and arrangements for the delivery of the supplies to the patient's residence. See "--Regulatory and Legal Matters-- Reimbursement" and "--Legal Proceedings" for a discussion of billing for such products and services. The Company also provides dialysis services under contract to hospitals in the U.S. on an "as needed" basis for patients suffering from acute kidney failure and for ESRD patients who are hospitalized. The Company services these patients either at their bedside, using portable dialysis equipment, or at a dialysis site maintained by the hospital. 8 FRESENIUS ULTRACARE(TM) PROGRAM In 2002, the Company started a new program in the Dialysis Services group called UltraCare(TM). This program combines the latest of the Company's product technology with the Company's highly trained and skilled staff and is designed to offer our patients an unsurpassed level of care. The basis for this form of treatment is the Optiflux Polysulfone single use dialyzer. These dialyzers deliver the highest level of blood clearance and are the most efficient dialyzer available. Optiflux Dialyzers are combined with our 2008 Series Hemodialysis Delivery System, which has several systems to allow the tailoring of treatment to meet the individual needs of patients, as well as advanced online patient monitoring. Staff will be alerted if clearance is less than target, and treatment can be adjusted. ACQUISITIONS The Company's growth in revenues and operating earnings in prior years has resulted, in significant part, from its ability to effect acquisitions of health care businesses, particularly dialysis centers, on reasonable terms. The Company paid aggregate consideration, for acquisitions of new clinics of approximately $37 million in 2002 and approximately $388 million in cash and FMCAG preference shares, in 2001. The Company regularly evaluates and explores opportunities with various other health care companies and other businesses regarding acquisitions and joint business ventures. In 2002, the Company completed new acquisitions and acquisitions of previously managed clinics totaling 11 dialysis facilities in the U.S. providing care to approximately 960 patients. These acquisitions and agreements expand the Company's presence in selected key areas of the United States. QUALITY ASSURANCE IN DIALYSIS CARE At each of the Company's dialysis clinics, a quality assurance committee is responsible for reviewing quality of care data, setting goals for quality enhancement and monitoring the progress of quality assurance initiatives. The Company believes that it enjoys a reputation of providing high quality care to dialysis patients. In 2002, the Company continued to develop and implement programs to assist in achieving its quality goals. The Company's Access Intervention Management Program ("AIM"), started in 2001, detects and corrects arteriovenous access failure in hemodialysis treatment, which is the major cause of hospitalization and morbidity. SOURCES OF DIALYSIS SERVICES NET REVENUES The following table provides information for the periods indicated regarding the percentage of the Company's U.S. dialysis treatment services net revenues provided by (a) the Medicare ESRD program, (b) private/alternative payors, such as commercial insurance and private funds, (c) Medicaid and other government sources and (d) hospitals.
YEAR ENDED DECEMBER 31, -------------------------- 2002 2001 2000 ------ ------ ------ Medicare ESRD program ....... 61.5% 59.7% 59.1% Private/alternative payors .. 29.5 31.2 32.1 Medicaid and other government sources ..................... 4.5 4.6 4.2 Hospitals ................... 4.5 4.5 4.6 ------ ------ ------ Total ..................... 100.0% 100.0% 100.0% ====== ====== ======
9 Under the Medicare ESRD program, Medicare reimburses dialysis providers for the treatment of certain individuals who are diagnosed as having ESRD, regardless of age or financial circumstances. PATIENT, PHYSICIAN AND OTHER RELATIONSHIPS The Company believes that its success in establishing and maintaining dialysis centers in the U.S. depends in significant part upon its ability to obtain the acceptance of, and referrals from, local physicians, hospitals and managed care plans. A dialysis patient generally seeks treatment at a center that is convenient to the patient and at which the patient's nephrologist has staff privileges. The conditions for coverage under the Medicare ESRD program require that treatment at a dialysis center be under the general supervision of a Medical Director. Generally, the Medical Director must be board certified or board eligible in internal medicine and have at least 12 months of training or experience in the care of patients at ESRD centers. The Company's Medical Directors maintain their own private practices. 10 COMPETITION Dialysis Services. The dialysis services industry is highly competitive. The Company's major competitors in dialysis services include Gambro AB, DaVita, Inc. (formerly Total Renal Care Inc.) and Renal Care Group, Inc. Ownership of dialysis centers in the U.S. is fragmented, with a large number of operators each owning 10 or fewer centers and a small number of larger providers, the largest of which is the Company. Consolidation of the industry has been ongoing over the last decade. In urban areas, where many of the Company's dialysis centers are located, there frequently are many competing centers in proximity to the Company's centers. The Company experiences direct competition from time to time from former Medical Directors, former employees or referring physicians who establish their own centers. Furthermore, other health care providers or product manufacturers, some of which have significant operations or resources, may decide to enter the dialysis services business in the future. Because services to the majority of patients in the U.S. are primarily reimbursed under government programs, competition for patients is based primarily on quality and accessibility of service and the ability to obtain referrals from physicians and hospitals. However, extension of periods during which commercial insurers are primarily responsible for reimbursement and the growth of managed care has placed greater emphasis on service costs for patients with private insurance coverage. LABORATORY SERVICES The Company provides clinical laboratory testing services through its SRM business unit. SRM is the leading U.S. dialysis clinical laboratory providing blood, urine and other bodily fluid testing services to assist physicians in determining whether a dialysis patient's therapy regimen, diet and medicines remain optimal. SRM laboratories are located in New Jersey and Northern California. In 2002, SRM performed over 36 million tests for more than 115,000 dialysis patients in 1713 clinics across the United States. SRM also provided testing services to clinical research projects and others. The Company plans to expand SRM into related markets such as hospital dialysis units and physician office practices to offer assistance with the pre-ESRD patient base. COMPETITION SRM competes in the U.S. with large nationwide laboratories, dedicated dialysis laboratories and numerous local and regional laboratories, including hospital laboratories. In the laboratory services market, companies compete on the basis of performance, including quality of laboratory testing, timeliness of reporting test results and cost-effectiveness. The Company believes that SRM's services are competitive in these areas. 11 DIALYSIS PRODUCTS The Company manufactures and distributes equipment and disposable products for the treatment of kidney failure using both hemodialysis and peritoneal dialysis. Such products include hemodialysis machines, peritoneal dialysis cyclers and related equipment, dialyzers, peritoneal dialysis solutions in flexible plastic bags, hemodialysis concentrates and solutions, granulate mixes, bloodlines, disposable tubing assemblies and equipment for water treatment in dialysis centers. Other products manufactured by third parties and distributed by the Company include dialyzers, special blood access needles, heparin (used to prevent blood clotting) and commodity supplies such as bandages, clamps and syringes. OVERVIEW The following table shows actual net revenues of the Company's products business for 2002, 2001 and 2000 related to hemodialysis products, peritoneal dialysis products and other activities, principally technical service:
YEAR ENDED DECEMBER 31, (DOLLARS IN THOUSANDS) ------------------------------------------------------------------------------------- 2002 2001 2000 ----------------------- ----------------------- ----------------------- Total % of Total % of Total % of Revenues Total Revenues Total Revenues Total -------- -------- -------- -------- -------- -------- Hemodialysis Products $343,470 75% $340,841 71% $334,447 70% Peritoneal Dialysis Products 71,582 16 83,653 18 90,985 19 Other 41,449 9 53,324 11 54,635 11 -------- -------- -------- -------- -------- -------- Total $456,501 100% $477,818 100% $480,067 100% ======== ======== ======== ======== ======== ========
HEMODIALYSIS PRODUCTS The Company believes that it is a leader in the hemodialysis product field and continually strives to extend and improve the capabilities of its hemodialysis systems to offer an advanced treatment mode at reasonable cost. The Company, through its Dialysis Products business unit ("Dialysis Products"), offers a comprehensive hemodialysis product line. Dialysis Machines. The Company assembles, tests and calibrates hemodialysis machines and sells these machines in the U.S., Canada and Mexico. Components for these machines are provided by FMCAG and other suppliers. The Company sells its dialysis machines as Series 2008H and 2008K models in the U.S. The Company's dialysis machines offer the following features and advantages: - Volumetric dialysate balancing and ultrafiltration control system. This system, was introduced in 1977, provides for safe and more efficient use of highly permeable dialyzers, permitting faster dialysis with controlled rates of fluid removal; - Proven hydraulic systems, providing reliable operation and servicing flexibility; - Compatibility with all manufacturers' dialyzers and a wide variety of blood-lines and dialysis solutions, permitting maximum flexibility in both treatment and disposable products usage; - Modular design, which permits us to offer dialysis clinics a broad range of options to meet specific patient or regional treatment requirements. Modular design also allows upgrading through module substitution without the need to replace the entire machine; - Additional modules that provide monitoring and response capability for selected bio-physical patient parameters, such as body temperature, relative blood volume and electrolyte balances. This concept, known as physiological dialysis, permits hemodialysis treatments with lower incidence of a variety of symptoms or side effects, which still occur frequently in standard hemodialysis. Our most recent module, the Blood Volume Monitor(TM) controls removal of excess fluid from the patient; - Sophisticated microprocessor controls, and display and readout panels that are adaptable to meet local language requirements; 12 - Battery backup, which continues operation of the blood circuit and all protective systems for 15 to 20 minutes following a power failure; - Online clearance, measurement of dialyzer clearance for quality assurance with the On-Line Clearance Module, providing immediate effective clearance information, real time treatment outcome monitoring, and therapy adjustment during dialysis without requiring invasive procedures or blood samples; - On-line data collection capabilities and computer interfacing with our Hypercare module and FDS08(R) system. Our machines can: - monitor and assess prescribed therapy; - connect a large number of hemodialysis machines and peripheral devices, such as patient scales, blood chemistry analyzers and blood pressure monitors, to a personal computer network; - enter nursing records automatically at bedside to register and document patient treatment records, facilitate billing, and improve record-keeping and staff efficiency; - adapt to new data processing devices and trends; - perform home hemodialysis with remote monitoring by a staff caregiver; and - record and analyze trends in medical outcome factors in hemodialysis patients; and Dialyzers. The Company manufactures dialyzers using hollow fiber polysulfone membranes, a synthetic material. While competitors currently sell polysulfone membranes in the market, the Company developed and is the only manufacturer with more than 15 years' experience in applying the technology required to mass produce polysulfone membranes. The Company believes that polysulfone offers the following superior performance characteristics compared to other materials used in dialyzers: - higher biological compatibility, resulting in reduced incidence of adverse reactions to the fibers; - greater capacity to clear uremic toxins from patient blood during dialysis, permitting more thorough, more rapid dialysis, resulting in shorter treatment time; and - a complete range of permeability, or membrane pore size, which permits dialysis at prescribed rates -- high flux, medium flux and low flux, for acute dialysis, and allows tailoring of dialysis therapy to individual patients. The Company's full line of polysulfone dialyzers includes the new F Series Optiflux family as well as the traditional reuse and non-reuse dialyzers including the F70NR, F50NR and F7NR series of single-use polysulfone dialyzers. Single use dialyzers are becoming more popular, and the Company has increased production of single-use dialyzers at its Ogden, Utah facility to meet demand for these products. Single Use Dialyzers. The Company has nearly completed a $65 million capital commitment to significantly expand the capacity of its dialyzer manufacturing plant in Ogden, Utah through the addition of three new dialyzer assembly lines. 13 Other Hemodialysis Products. The Company manufactures and distributes arterial, venous, single needle and pediatric bloodlines. The Company produces both liquid and dry dialysate concentrates. Liquid dialysate concentrate is mixed with purified water by the hemodialysis machine to produce dialysis solution, which is used in hemodialysis treatment to remove the waste products and excess water from the patient's blood. Dry acid concentrate requires less storage space. The Company also produces dialysis solutions in bags, as well as connection systems for central concentrate supplies and devices for mixing dialysis solutions and supplying them to hemodialysis machines. Other distributed products include solutions for priming bloodlines, disinfecting and decalcifying hemodialysis machines, fistula needles, hemodialysis catheters, and products for acute renal treatment. PERITONEAL DIALYSIS PRODUCTS The Company offers a full line of peritoneal dialysis products. The Company manufactures peritoneal dialysis solutions in bags, peritoneal dialysis cycling machines for CCPD and disposable products for both CAPD and CCPD, such as tubing, sterile solutions and sterile kits to prepare patients for dialysis. CAPD Systems. The Company manufactures standard and specialized peritoneal dialysis solutions. The Company believes that its peritoneal dialysis products offer significant advantages for CAPD, including: - ease of use and greater protection against contamination by touch than other peritoneal dialysis systems presently available. Its products incorporate our Safe-Lock(R) connection system for introducing and draining dialysis solution into and from the abdominal cavity; - suitability for all peritoneal dialysis patients through the Inpersol(R) and Safe-Lock(R) product lines. Inpersol products are interchangeable with those of other manufacturers; Safe-Lock(R) products may be used only by peritoneal dialysis patients whose catheters include the Safe-Lock connector, which attaches to a solution bag fitted with the other part; and - higher solution bag volumes with our new Premier twin-bag system which provides solution container and pre-attached tubing set in one package. The higher solution volumes permit larger dosages without increasing the number of required daily solution exchanges performed by the patient. CCPD Products. The Company introduced the first peritoneal dialysis cycler machine in 1980. The Company believes that CCPD therapy offers benefits over CAPD therapy for patients who need more therapy due to body size, ultrafiltration loss or other reasons. In a standard CAPD program, a patient manually introduces two liters of fresh peritoneal dialysis solution and drains the used solution four times over a 24-hour period. Treatment occurs seven days per week and the patient must perform the treatment while awake. With CCPD therapy, the cycler automatically delivers a prescribed volume of dialysis solution into the peritoneal cavity through an implanted catheter, allows the solution to dwell for a specified time, and completes the process by draining the solution. CCPD therapy offers the following benefits over CAPD: - Solution exchanges take place automatically, which may reduce the risk of peritonitis due to less frequent handling of the catheter and connections; 14 - The patient can cycle at home, throughout the night while asleep. The patient has complete daytime freedom, wearing only the surgically implanted catheter and capping device; and - CCPD delivers more effective therapy than CAPD due to the supine position of the patient during the night, higher volume exchanges and preferable cycle management. The Company's cycling equipment incorporates microprocessor technology, and the patient, hospital or clinic staff can easily program it to perform specific prescribed therapy for a given patient. Since all components are monitored and programmable, these machines allow the physician to prescribe any of a number of current therapy procedures. Our CCPD products and therapies include: - PD-PLUS(R), a variant on CCPD therapy the Company introduced in 1994. PD-PLUS(R) therapy can only be performed using the Fresenius Freedom(TM) Cycler and special tubing using Safe-Lock(R) connectors; and - IQcard(TM), for use with the Freedom(TM) Cycler PD-PLUS(R) to monitor CCPD therapy for a full treatment history and improved therapy compliance. Other Peritoneal Dialysis Products. The Company also manufactures and distributes pediatric treatment systems for administration of low volumes of dialysis solutions, assist devices to facilitate automated bag exchange for handicapped patients, catheters, catheter implantation instruments, silicon glue, Pack-PD(R) (a computer program which analyzes patient and peritoneal characteristics to present a range of treatment options for individual therapies), disinfectants, bag heating plates, adapters, and products to assist and enhance connector sterility. The Company also provides scientific and patient information products, including support materials, such as brochures, slides, videos, instructional posters and training manuals. MARKETING, DISTRIBUTION AND SERVICE Most of the Company's products are sold to hospitals, clinics and specialized treatment centers. With its comprehensive product line and years of experience in dialysis, the Company believes that it has been able to establish and maintain very close relationships with its clinic customer base. The Company maintains a direct sales force of trained salespersons engaged in the sale of both hemodialysis and peritoneal dialysis products. In the Company's distribution system, products are shipped from factories to central warehouses. Dialysis products are distributed from these central warehouses to regional warehouses. The Company then distributes peritoneal dialysis products to the patient at home, and ships hemodialysis products directly to dialysis clinics and other customers. The Company offers customer service, training and education, and technical support such as field service, spare parts, repair shops, maintenance, and warranty regulation. The Company also provides training sessions on the Company's equipment. MANUFACTURING OPERATIONS The Company assembles, tests, and calibrates equipment, including hemodialysis machines, dialyzer reuse devices and peritoneal dialysis cyclers, at its facility in Walnut Creek, California. Components of the Company's hemodialysis machines are supplied by FMCAG as well as other suppliers. The Company has experienced no difficulties in obtaining sufficient quantities of such components. The Company owns a 590,000 square-foot facility in Ogden, Utah which operates as a fully integrated manufacturing and research and development facility for polysulfone dialyzers and peritoneal dialysis solutions. This facility uses automated equipment for the production of polysulfone dialyzers and sterile solutions in flexible plastic containers. The Company believes that it is the principal manufacturer of polysulfone dialyzers in the U.S. The Company has nearly completed a $65 million capital commitment to significantly expand the capacity of its dialyzer manufacturing plant in Ogden, Utah through the addition of three new dialyzer assembly lines. 15 While the Company obtains the film used in the manufacture of its plastic bags used with its peritoneal solutions from one supplier located in the Netherlands, the Company believes that there are readily available alternative sources of supply for which the FDA could grant expedited approval. The Company also manufactures dialysis products at additional plants. Bloodlines and PD sets are produced at a facility in Reynosa, Mexico, and concentrates are produced at five facilities in the U.S. Each step in the manufacture of the Company's products, from the initial processing of raw materials through the final packaging of the completed product, is carried out under controlled quality assurance procedures required by law and under Good Manufacturing Practices ("GMP"), as well as under comprehensive quality management systems, such as the internationally recognized ISO 9000-9004 and CE Mark standards, which are mandated by regulatory authorities in the countries in which the Company operates. The facilities in Ogden, Utah and Reynosa, Mexico received ISO 9001 certification in 1999. The facility in Walnut Creek, California received ISO 9001 certification in 2000. SOURCES OF SUPPLY Raw materials essential to the Company's dialysis products business are purchased worldwide from numerous suppliers and no serious shortages or delays in obtaining raw materials have been encountered. To assure continuous high quality, the Company has single supplier agreements for many of its polymers, including polysulfone, polyvinylpyrrolidone, and polyurethane for dialyzer production, and for certain other raw materials. Wherever single supplier agreements exist, the Company believes alternative suppliers are available. However, use of raw materials obtained from alternative suppliers could cause costs to rise due to necessary adjustments in the production process or interruptions in supply. Incoming raw materials for solutions undergo tests, such as, infrared, ultraviolet and physical and chemical analyses to assure quality and consistency. During the production cycle, sampling and testing take place in accordance with established quality assurance procedures to ensure the finished product's sterility, safety and potency. Pressure, temperature and time for various processes are monitored to assure consistency of semi-finished goods. Environmental conditions are monitored to assure that particulate and bacteriological levels do not exceed specified maximums. The Company maintains continuing quality control and Good Manufacturing Policies education and training programs for its employees. See "Regulatory and Legal Matters." Dialysis Products Material Management Department (MMD) is responsible for providing production plans to the manufacturing facilities and supplying products to the Company's distribution centers. The Distribution department operates a national network of distribution centers that are strategically located in the U.S. to ensure high service levels to the Company's own clinics, external customers, home-based patients and hospitals. The Company's routing software enables it to distribute its supplies to best accommodate customer requests while maintaining operational efficiency. NEW PRODUCT INTRODUCTIONS The Company remains strongly focused on the development of new products, technologies, and treatment concepts to optimize the quality of treatment for dialysis patients in coordination with the FMCAG research and development team. The Company's research and development expenditures were $9.2 million and $5.5 million in 2002 and 2001, respectively. The Company introduced the following new or enhanced products in 2002: - High performance, single use Optiflux series dialyzer at the end of 2001. Optiflux polusulfone dialyzers are engineered to deliver superior small (urea) and middle molecular weight solute clearance through the use of NCS coupled with superior membrance composition and biocompatability. Optiflux dialyzers accounted for 18% of the dialyzers the Company sold in the U.S. during 2002. Two new models of Optiflux dialyzers were introduced this year. The Optiflux dialyzer is the fastest growing, best selling dialyzer in the U.S. - UltraCare 2008 enhancements. Added auto flow and idle modes to the 2008 series of machines, as well as special display screens user interface. - Newton IQ for Peritoneal Dialysis. Cycler designed to take advantage of higher flow rates available with gravity flow and drain. Improved software includes persciption upload, evaluated through clinical studies in 2002. - Online Clearence Monitor. Monitors patient access flow rate without the need for additional equipment or specially trained personnel. Provides immediate information on treatment efficiency. 16 - Premier(TM) Plus Double Bag for Peritoneal Dialysis. Twin bag system incorporating solution, bag, and tubing. Uses Safe-lock(TM) connect and Snap(TM) disconnect features. Fewer connections lower patient risk of infection. PATENTS, TRADEMARKS AND LICENSES The Company believes that its success will depend, in large part, on FMCAG's technology. While FMCAG, as a standard practice, obtains such legal protections it believes are appropriate for its intellectual property, such intellectual property may be subject to infringement or invalidation claims. In addition, technological developments in ESRD therapy could reduce the value of FMCAG's existing intellectual property. This reduction could be rapid and unanticipated. COMPETITION The markets in which the Company sells its dialysis products are highly competitive. Among the Company's competitors in the sale of hemodialysis and peritoneal dialysis products are Gambro AB, Baxter International Inc., Asahi Medical Co., Ltd., B. Braun Melsungen AG, Nissho Corporation (including Nissho Nipro Corporation Ltd.), Nikkiso Co., Ltd., Terumo Medical Corporation and Toray Medical Co., Ltd. Some the Company's competitors possess greater financial, marketing and research and development resources than the Company. EMPLOYEES At December 31, 2002, the Company employed approximately 31,183 employees, including part-time and per diem employees. Such persons are employed by the Company's principal businesses as follows: dialysis treatment and laboratory services, approximately 26,623 employees; and dialysis products, approximately 4,560 employees. Medical Directors of the Company's dialysis centers are retained as independent contractors and are excluded from the employee total. Management believes that its relations with its employees are good. Approximately 1,946 or 6% of the Company's employees are covered by union agreements. 17 REGULATORY AND LEGAL MATTERS REGULATORY OVERVIEW The operations of the Company are subject to extensive governmental regulation at the federal, state and local levels regarding the operation of dialysis centers, laboratories and manufacturing facilities, the provision of quality health care for patients, the maintenance of occupational, health, safety and environmental standards and the provision of accurate reporting and billing for governmental payments and/or reimbursement. Any failure by the Company or its subsidiaries to receive required licenses, certifications or other approvals for new facilities, significant delays in such receipt, loss of its various federal certifications, termination of licenses under the laws of any state or other governmental authority or changes resulting from health care reform or other government actions that reduce reimbursement or reduce or eliminate coverage for particular services rendered by the Company or its subsidiaries could have a material adverse effect on the business, financial condition and results of operations of the Company. The Company must comply with legal and regulatory requirements under which it operates, including the federal Medicare and Medicaid Fraud and Abuse Amendments of 1977, as amended (the "anti-kickback statute"), the federal restrictions on certain physician referrals (commonly known as the "Stark Law"), federal rules under the Health Insurance Portability and Accountability Act of 1996 that protect the privacy of patient medical records and prohibit inducements to patients to select a particular health care provider (commonly known as "HIPAA") and other fraud and abuse laws and similar state statutes, as well as similar laws in other countries. Moreover, there can be no assurance that applicable laws, or the regulations thereunder, will not be amended, or that enforcement agencies or the courts will not make interpretations inconsistent with those of the Company, any one of which could have a material adverse effect on its business, reputation, financial condition and results of operations of the Company. Sanctions for violations of these statutes may include criminal or civil penalties, such as imprisonment, fines or forfeitures, denial of payments, and suspension or exclusion from the Medicare and Medicaid programs. In the U.S., these laws have been broadly interpreted by a number of courts, and significant government funds and personnel have been devoted to their enforcement because such enforcement has become a high priority for the federal government and some states. The Company, and the health care industry in general, will continue to be subject to extensive federal, state and foreign regulation, the full scope of which cannot be predicted. The Company has entered into a corporate integrity agreement with the U.S. government which requires that the Company staff and maintain a comprehensive compliance program, including a written code of conduct, training program and compliance policies and procedures. The corporate integrity agreement requires annual audits by an independent review organization and periodic reporting to the government. The corporate integrity agreement permits the U.S. government to exclude the Company and its subsidiaries from participation in U.S. federal health care programs if there is a material breach of the agreement that is not cured by the Company within thirty days after the Company receives written notice of the breach. PRODUCT REGULATION In the U.S., the FDA and comparable state regulatory agencies impose requirements on certain subsidiaries of the Company as a manufacturer and a seller of medical products and supplies under their jurisdiction. These require that products be manufactured in accordance with GMP and that the Company comply with FDA requirements regarding the design, safety, advertising, labeling, recordkeeping, distribution, and reporting of adverse events related to the use of its products. In addition, in order to clinically test, produce and market certain medical products and other disposables (including hemodialysis and peritoneal dialysis equipment and solutions, dialyzers, bloodlines and other disposables) for human use, the Company must satisfy mandatory procedures and safety and efficacy requirements established by the FDA or comparable state and foreign governmental agencies. Such rules generally require that products be approved by the FDA as safe and effective for their intended use prior to being marketed. The Company's peritoneal dialysis solutions have been designated as drugs by the FDA and, as such, are subject to additional FDA regulation under the Food, Drug and Cosmetic Act of 1938 ("FDC Act"). FACILITIES AND OPERATIONAL REGULATION The Clinical Laboratory Improvement Amendments of 1988 ("CLIA") subject virtually all clinical laboratory testing facilities, including those of the Company, to the jurisdiction of HHS. CLIA establishes national standards for assuring the quality of laboratories based upon the complexity of testing performed by a laboratory. Certain operations of the Company 18 are also subject to federal laws governing the repackaging and dispensing of drugs and the maintenance and tracking of certain life sustaining and life-supporting equipment. The operations of the Company are subject to various U.S. Department of Transportation, Nuclear Regulatory Commission and Environmental Protection Agency requirements and other federal, state and local hazardous and medical waste disposal laws. As currently in effect, laws governing the disposal of hazardous waste do not classify most of the waste produced in connection with the provision of dialysis, or laboratory services as hazardous, although disposal of nonhazardous medical waste is subject to specific state regulation. However, the Company's laboratory businesses do generate hazardous waste which is subject to specific disposal requirements. The operations of the Company are also subject to various air emission and wastewater discharge regulations. Federal, state and local regulations require the Company to meet various standards relating to, among other things, the management of facilities, personnel qualifications and licensing, maintenance of proper records, equipment, quality assurance programs, the operation of pharmacies, and dispensing of controlled substances. All of the operations of the Company in the U.S. are subject to periodic inspection by federal and state agencies and other governmental authorities to determine if the operations, premises, equipment, personnel and patient care meet applicable standards. To receive Medicare reimbursement, the Company's dialysis centers, renal diagnostic support business and laboratories must be certified by CMS. All of the Company's dialysis centers, and laboratories that furnish Medicare services have the required certification. Certain facilities of the Company and certain of their employees are also subject to state licensing statutes and regulations. These statutes and regulations are in addition to federal and state rules and standards that must be met to qualify for payments under Medicare, Medicaid and other government reimbursement programs. Licenses and approvals to operate these centers and conduct certain professional activities are customarily subject to periodic renewal and to revocation upon failure to comply with the conditions under which they were granted. The Occupational Safety and Health Administration ("OSHA") regulations require employers to provide employees who work with blood or other potentially infectious materials with prescribed protections against blood-borne and air-borne pathogens. The regulatory requirements apply to all health care facilities, including dialysis centers and laboratories, and require employers to make a determination as to which employees may be exposed to blood or other potentially infectious materials and to have in effect a written exposure control plan. In addition, employers are required to provide hepatitis B vaccinations, personal protective equipment, blood-borne pathogens training, post-exposure evaluation and follow-up, waste disposal techniques and procedures, engineering and work practice controls and other OSHA-mandated programs for blood-borne and air-borne pathogens. Some states in which the Company operates have Certificate of Need ("CON") laws that require any person or entity seeking to establish a new health care service or to expand an existing service to apply for and receive an administrative determination that the service is needed. The Company currently operates in 13 states, including the District of Columbia and Puerto Rico that have CON laws applicable to dialysis centers. These requirements may, as a result of a state's internal determination of its dialysis services needs, prevent entry to new companies seeking to provide services in these states, and may constrain the Company's ability to expand its operations in these states. New York law prohibits ownership by a corporation of any stock in another corporation that is licensed in New York to operate certain health facilities, including dialysis providers. Therefore, the Company does not own dialysis facilities in New York, but rather works within the framework of New York's laws to establish alternative contractual arrangements with New York dialysis facilities. REIMBURSEMENT DIALYSIS SERVICES. The Company's dialysis centers provide outpatient hemodialysis treatment and related services for ESRD patients. In addition, some of the Company's centers offer services for the provision of peritoneal dialysis and hemodialysis treatment at home, and dialysis for hospitalized patients The Medicare program is the primary source of Dialysis Services revenues from dialysis treatment. For example, in 2002, approximately 61% of Dialysis Services revenues resulted from Medicare's ESRD program. As described below, Dialysis Services is reimbursed by the Medicare program in accordance with the Composite Rate for certain products and services rendered at the Company's dialysis centers. As described hereinafter, other payment methodologies apply to Medicare reimbursement for other products and services provided at the Company's dialysis centers and for products (such as those sold by the Company) and support services furnished to ESRD patients receiving dialysis treatment at home (such as those of Dialysis Products). Medicare reimbursement rates are fixed in advance and are subject to adjustment from time to time by the U.S. Congress. Although this form of reimbursement limits the allowable charge per treatment, it provides the Company with predictable per treatment revenues. Certain items and services that the Company furnishes at its dialysis centers are not included in the Composite Rate and are eligible for separate Medicare reimbursement, typically on the basis of established fee schedule amounts. Such items and services include certain drugs (such as EPO), blood transfusions and certain diagnostic tests. 19 Medicare payments are subject to change by legislation, regulations and pursuant to deficit reduction measures. The Composite Rate was unchanged from commencement of the ESRD program in 1972 until 1983. From 1983 through December 1990, numerous congressional actions resulted in a net reduction of the average reimbursement rate from $138 per treatment in 1983 to approximately $125 per treatment in 1990. Congress increased the ESRD reimbursement rate, effective January 1, 1991, to an average rate of $126 per treatment. Effective January 1, 2000, the reimbursement rate was increased by 1.2%. In December 2000 an additional increase of 2.4% was approved for the year 2001. Accordingly, there was a 1.2% reimbursement increase on January 1, 2001. A second increase was delayed until April 1, 2001, when rates were increased 1.6% to make up for the delay. The Company is unable to predict what, if any, future changes may occur in the rate of Medicare reimbursement. Any significant decreases in the Medicare reimbursement rates could have a material adverse effect on the Company's provider business and, because the demand for products is affected by Medicare reimbursement, on its products business. Increases in operating costs that are affected by inflation, such as labor and supply costs, without a compensating increase in reimbursement rates, also may adversely affect the Company's business and results of operations. For Medicare-primary patients, the patient or third-party insurance payors, including employer-sponsored health insurance plans, commercial insurance carriers and the Medicaid program, are responsible for paying any co-payment amounts for approved services not paid by Medicare (typically the annual deductible and 20% co-insurance), subject to the specific coverage policies of such payors. Each third-party payor, including Medicaid, makes payment under contractual or regulatory reimbursement provisions which may or may not cover the full 20% co-payment or annual deductible. Where the patient has no third-party insurance or the third party insurance does not cover copayment or deductible and the patient is responsible for paying the co-payments or the deductible, which the Company frequently does not collect fully despite reasonable collection efforts. Under an advisory opinion from the Office of the Inspector General, subject to specified conditions, the Company and the other similarly situated providers may make contributions to a non-profit organization that has agreed to make premium payments for supplemental medical insurance and/or medigap insurance on behalf of indigent ESRD patients, including patients of the Company. LABORATORY TESTS. A substantial portion of SRM's net revenues are derived from Medicare, which pays for clinical laboratory services provided to dialysis patients in two ways. First, payment for certain routine tests is included in the Composite Rate paid to the centers. As to such services, the dialysis centers obtain the services from a laboratory and pay the laboratory for such services. In accordance with industry practice, SRM usually provides such testing services under capitation agreements with its customers pursuant to which it bills a fixed amount per patient per month to cover the laboratory tests included in the Composite Rate at the designated frequencies. In October 1994, the OIG issued a special fraud alert in which it stated its view that the industry practice of providing tests covered by the Composite Rate at below fair market value raised issues under the anti-kickback statutes, as such an arrangement with an ESRD facility appeared to be an offer of something of value (Composite Rate tests at below market value) in return for the ordering of additional tests billed directly to Medicare. See "--Anti-kickback Statutes, False Claims Act, Stark Law and Fraud and Abuse Laws" for a description of this statute. Second, laboratory tests performed by SRM for Medicare beneficiaries that are not included in the Composite Rate are separately billable directly to Medicare. Such tests are paid at 100% of the Medicare fee schedule amounts, which are limited by national ceilings on payment rates, called National Limitation Amounts ("NLAs"). Congress has periodically reduced the fee schedule rates and the NLAs, with the most recent reductions in the NLAs occurring in January 1998. (As part of the Balanced Budget Act of 1997, Congress lowered the NLAs from 76% to 74% effective January 1, 1998.) Congress has also approved a five year freeze on the inflation updates based on the Consumer Price Index (CPI) for 1998-2002. EPO. Future changes in the EPO reimbursement rate, inclusion of EPO in the Medicare Composite Rate, changes in the typical dosage per administration or increases in the cost of EPO purchased by NMC could adversely affect the Company's business and results of operations, possibly materially. COORDINATION OF BENEFITS. Medicare entitlement begins for most patients in the fourth month after the initiation of chronic dialysis treatment at a dialysis center. During the first three months, considered to be a waiting period, the patient or patient's insurance, Medicaid or a state renal program are responsible for payment. Patients who are covered by Medicare and are also covered by an employer group health plan ("EGHP") are subject to a 30 month coordination period during which the EGHP is the primary payor and Medicare the secondary payor. During 20 this coordination period the EGHP pays a negotiated rate or in the absence of such a rate, the Company's standard rate or a rate defined by its plan documents. The payments are generally higher than the Medicare Composite Rate. Employee group health insurance will therefore generally cover a total of 33 months, the 3 month waiting period plus the 30 month coordination period. POSSIBLE CHANGES IN MEDICARE. Legislation or regulations may be enacted in the future that could substantially modify or reduce the amounts paid for services and products offered by the Company and its subsidiaries. It is also possible that statutes may be adopted or regulations may be promulgated in the future that impose additional eligibility requirements for participation in the federal and state health care programs. Such new legislation or regulations may adversely affect the Company's businesses and results of operations, possibly materially. HEALTH CARE LAWS Various operations of the Company are subject to federal and state statutes and regulations governing financial relationships between health care providers and potential referral sources and reimbursement for services and items provided to Medicare and Medicaid patients. Such laws include the anti-kickback statute, health care fraud statutes, the False Claims Act, the Stark Law, other federal fraud and abuse laws and similar state laws. These laws apply because the Company's Medical Directors and other physicians with whom the Company has financial relationships refer patients to, and order diagnostic and therapeutic services from, the Company's dialysis centers and other operations. As is generally true in the dialysis industry, at each dialysis facility a small number of physicians account for all or a significant portion of the patient referral base. An ESRD patient generally seeks treatment at a center that is convenient to the patient and at which the patient's nephrologist has staff privileges. ANTI-KICKBACK STATUTES The federal anti-kickback statute establishes criminal prohibitions against and civil penalties for the knowing and willful solicitation, receipt, offer or payment of any remuneration, whether direct or indirect, in return for or to induce the referral of patients or the ordering or purchasing of items or services payable in whole or in part under Medicare, Medicaid or other federal health care programs. Sanctions for violations of the anti-kickback statute include criminal and civil penalties, such as imprisonment or criminal fines of up to $25,000 per violation, and civil penalties of up to $50,000 per violation, and exclusion from the Medicare or Medicaid programs and other federal programs. In addition, certain provisions of federal criminal law that may be applicable provide that if a corporation is found guilty of a criminal offense it may be fined no more than twice any pecuniary gain to the corporation, or, in the alternative, no more than $500,000 per offense. Some states also have enacted statutes similar to the anti-kickback statute, which may include criminal penalties, applicable to referrals of patients regardless of payor source, and may contain exceptions different from state to state and from those contained in the federal anti-kickback statute. FALSE CLAIMS ACT AND RELATED CRIMINAL PROVISIONS The federal False Claims Act (the "False Claims Act") imposes civil penalties for knowingly making or causing to be made false claims with respect to governmental programs, such as Medicare and Medicaid, for services not rendered, or for misrepresenting actual services rendered, in order to obtain higher reimbursement. Moreover, private individuals may bring qui tam or "whistle blower" suits against providers under the False Claims Act, which authorizes the payment of a portion of any recovery to the individual bringing suit. Such actions are initially required to be filed under seal pending their review by the Department of Justice. A few federal district courts have recently interpreted the False Claims Act as applying to claims for reimbursement that violate the anti-kickback statute or federal physician self-referral law under certain circumstances. The False Claims Act generally provides for the imposition of civil penalties of $5,500 to $11,000 per claim and for treble damages, resulting in the possibility of substantial financial penalties for small billing errors that are replicated in a large number of claims, as each individual claim could be deemed to be a separate violation of the False Claims Act. Criminal provisions that are similar to the False Claims Act provide that if a corporation is convicted of presenting a claim or 21 making a statement that it knows to be false, fictitious or fraudulent to any federal agency it may be fined not more than twice any pecuniary gain to the corporation, or, in the alternative, no more than $500,000 per offense. Some states also have enacted statutes similar to the False Claims Act which may include criminal penalties, substantial fines, and treble damages. THE HEALTH INSURANCE PORTABILITY AND ACCOUNTABILITY ACT OF 1996 HIPAA was enacted in August 1996 and expanded federal fraud and abuse laws by increasing their reach to all federal health care programs, establishing new bases for exclusions and mandating minimum exclusion terms, creating an additional exception to the anti-kickback penalties for risk-sharing arrangements, requiring the Secretary of HHS to issue advisory opinions, increasing civil money penalties to $10,000 (formerly $2,000) per item or service and assessments to three times (formerly twice) the amount claimed, creating a specific health care fraud offense and related health fraud crimes, and expanding investigative authority and sanctions applicable to health care fraud. It also prohibits provider payments which could be deemed an inducement to patient selection of a provider. The law expands criminal sanctions for health care fraud involving any governmental or private health benefit program, including freezing of assets and forfeiture of property traceable to commission of a health care offense. HIPAA established a health care fraud statute which prohibits knowingly and willfully executing a scheme or artifice to defraud any "health care benefit program," which includes any public or private plan or contract affecting commerce under which any medical benefit, item, or service is provided to any individual, and includes any individual or entity who is providing a medical benefit, item, or service for which payment may be made under the plan or contract. HIPAA regulations establish national standards for certain electronic health care transactions, the use and disclosure of certain individually identifiable patient health information, and the security of the electronic systems maintaining this information. These are commonly known as the HIPAA transaction and code set standards, privacy standards, and security standards. Health insurance payers and healthcare providers like the Company must comply with the new HIPAA standards. Violations of these HIPAA standards may include civil money penalties and potential criminal sanctions. BALANCED BUDGET ACT OF 1997 The Balanced Budget Act of 1997 ("the BBA") contained material adjustments to both the Medicare and Medicaid programs, as well as further expansion of the federal fraud and abuse laws. Specifically, the BBA created a civil monetary penalty for violations of the federal anti-kickback statute whereby violations will result in damages equal to three times the amount involved as well as a penalty of $50,000 per violation. In addition, the new provisions expanded the exclusion requirements so that any person or entity convicted of three health care offenses is automatically excluded from federally funded health care programs for life. Individuals or entities convicted of two offenses are subject to mandatory exclusion of 10 years, while any provider or supplier convicted of any felony may be denied entry into the Medicare program by the Secretary of HHS if deemed to be detrimental to the best interests of the Medicare program or its beneficiaries. The BBA also provides that any person or entity that arranges or contracts with an individual or entity that has been excluded from a federally funded health care program will be subject to civil monetary penalties if the individual or entity "knows or should have known" of the sanction. STARK LAW The original Stark Law, known as "Stark I" and enacted as part of the Omnibus Budget Reconciliation Act of 1989, prohibits a physician from referring Medicare patients for clinical laboratory services to entities with which the physician (or an immediate family member) has a financial relationship, unless an exception applies. Sanctions for violations of the Stark Law may include denial of payment, refund obligations, civil monetary penalties and exclusion of the provider from the Medicare and Medicaid programs. The Stark Law prohibits the entity receiving the referral from filing a claim or billing for services arising out of the prohibited referral. Provisions of OBRA 93, known as "Stark II," amended Stark I to revise and expand upon various statutory exceptions, to expand the services regulated by the statute to a list of "Designated Health Services," and expanded the reach of the statute to the Medicaid program. The provisions of Stark II generally became effective on January 1, 1995, with the first phase of Stark II regulations finalized on January 4, 2001. Most portions of the Phase I regulations became effective in 2002. The additional Designated Health Services include: physical therapy services; occupational therapy services; radiology services and certain other imaging services; durable medical equipment and supplies; parenteral and enteral nutrients, equipment and supplies; prosthetics, orthotics, and prosthetic devices and supplies; home health services; outpatient prescription drugs; and inpatient and outpatient hospital services. Phase I of the final regulations implementing the Stark Law contains an exception for erythropoietin (EPO) and certain other dialysis-related outpatient prescription drugs furnished 22 in or by an ESRD facility under many circumstances. Further, the final regulations also adopt a definition of DME which effectively excludes ESRD equipment and supplies from the category of Designated Health Services Phase II of the final regulations to the Stark Law, which will address many of the compensation exceptions, has not yet been released. Several states in which the Company operates have enacted self-referral statutes similar to the Stark Law. Such state self-referral laws may apply to referrals of patients regardless of payor source and may contain exceptions different from each other and from those contained in the Stark Law. OTHER FRAUD AND ABUSE LAWS The Company's operations are also subject to a variety of other federal and state fraud and abuse laws, principally designed to ensure that claims for payment to be made with public funds are complete, accurate and fully comply with all applicable program rules. The civil monetary penalty provisions are triggered by violations of numerous rules under the Medicare statute, including the filing of a false or fraudulent claim and billing in excess of the amount permitted to be charged for a particular item or service. Violations may also result in suspension of payments, exclusion from the Medicare and Medicaid programs, as well as other federal health care benefit programs, or forfeiture of assets. In addition to the statutes described above, other criminal statutes may be applicable to conduct that is found to violate any of the statutes described above. HEALTH CARE REFORM Health care reform is considered by many in the U.S. to be a national priority. Members of Congress from both parties and officials from the executive branch are continuing to consider many health care proposals, some of which are comprehensive and far-reaching in nature. Several states are also currently considering health care proposals. It cannot be predicted what additional action, if any, the federal government or any state may ultimately take with respect to health care reform or when any such action will be taken. Health care reform may bring radical changes in the financing and regulation of the health care industry, which could have a material adverse effect on the business of the Company and the results of its operations. 23 ITEM 2. PROPERTIES The table below describes the Company's principal facilities as of the date hereof.
FLOOR AREA (APPROXIMATE CURRENTLY OWNED LOCATION SQUARE FEET) OR LEASED USE -------- ------------ --------- --- Lexington, Massachusetts 200,000 leased Corporate headquarters and administration. Walnut Creek, California 85,000 leased Manufacture of hemodialysis machines and peritoneal dialysis cyclers; research and development. 17,500 leased Warehouse Space - Machine components Ogden, Utah 590,000 owned Manufacture polysulfone membranes and dialyzers and peritoneal dialysis solutions; research and development. Delran, New Jersey 42,000 leased Manufacture of liquid hemodialysis concentrate solutions. Perrysburg, Ohio 35,000 leased Manufacture of dry hemodialysis concentrates. Livingston, California 32,000 leased Manufacture of liquid hemodialysis concentrates. Irving, Texas 70,000 leased Manufacture of liquid hemodialysis solution. Reynosa, Mexico 150,000 leased Manufacture of bloodlines. Fremont, California 72,000 leased Clinical laboratory testing Rockleigh, New Jersey 85,000 leased Clinical Laboratory testing
- ---------- The lease on the Walnut Creek facility expires in 2012. The Company leases 16 warehouses throughout the U.S. These warehouses are used as regional distribution centers for the Company's peritoneal dialysis products business. All such warehouses are subject to leases with remaining terms not exceeding ten years. At December 31, 2002, the Company distributed its products through all these 16 warehouse facilities. The Company leases its corporate headquarters in Lexington, Massachusetts. This lease expires on October 31, 2007. The Company's subsidiaries lease most of the dialysis centers, manufacturing, laboratory, distribution and administrative and sales facilities in the U.S. on terms which the Company believes are customary in the industry. 24 ITEM 3. LEGAL PROCEEDINGS COMMERCIAL LITIGATION The Company was formed as a result of a series of transactions pursuant to the Agreement and Plan of Reorganization (the "Merger") dated as of February 4, 1996 by and between W.R. Grace & Co. and Fresenius AG. At the time of the Merger, a W.R. Grace & Co. subsidiary known as W.R. Grace & Co.-Conn. had, and continues to have, significant potential liabilities arising out of product-liability related litigation, pre-Merger tax claims and other claims unrelated to NMC, which was Grace's dialysis business prior to the Merger. In connection with the Merger, W.R. Grace & Co.-Conn. agreed to indemnify the Company, FMCH and NMC against all liabilities of W.R. Grace & Co., whether relating to events occurring before or after the Merger, other than liabilities arising from or relating to NMC's operations. W.R. Grace & Co. and certain of its subsidiaries filed for reorganization under Chapter 11 of the U.S. Bankruptcy Code (the "Grace Chapter 11 Proceedings") on April 2, 2001. Pre-Merger tax claims or tax claims that would arise if events were to violate the tax-free nature of the Merger, could ultimately be the obligation of the Company. In particular, W. R. Grace & Co. has disclosed in its filings with the Securities and Exchange Commission that: its tax returns for the 1993 to 1996 tax years are under audit by the Internal Revenue Service (the "Service"); W. R. Grace & Co. has received the Service's examination report on tax periods 1993 to 1996; that during those years Grace deducted approximately $122,100 in interest attributable to corporate owned life insurance ("COLI") policy loans; that W.R. Grace & Co. has paid $21,200 of tax and interest related to COLI deductions taken in tax years prior to 1993; that a U.S. District Court ruling has denied interest deductions of a taxpayer in a similar situation and that W.R. Grace & Co. is seeking a settlement of the Service's claims. Subject to certain representations made by W.R. Grace & Co., the Company and Fresenius AG, W.R. Grace & Co. and certain of its affiliates agreed to indemnify the Company against this and other pre-Merger and Merger related tax liabilities. Prior to and after the commencement of the Grace Chapter 11 Proceedings, class action complaints were filed against W.R. Grace & Co. and the Company by plaintiffs claiming to be creditors of W.R. Grace & Co.- Conn., and by the asbestos creditors' committees on behalf of the W.R. Grace & Co. bankruptcy estate in the Grace Chapter 11 Proceedings, alleging among other things that the Merger was a fraudulent conveyance, violated the uniform fraudulent transfer act and constituted a conspiracy. All such cases have been stayed and transferred to or are pending before the U.S. District Court as part of the Grace Chapter 11 Proceedings. On February 6, 2003, the Company reached a definitive agreement with the asbestos creditors' committees on behalf of the W.R. Grace and Co. bankruptcy estate in the matters pending in the Grace Chapter 11 Proceedings (the "Settlement Agreement") for the settlement of all fraudulent conveyance claims against it and other claims related to the Company that arise out of the bankruptcy of W.R. Grace & Co. Under the terms of the Settlement Agreement, fraudulent conveyance and other claims raised on behalf of asbestos claimants will be dismissed with prejudice and the Company will receive protection against existing and potential future W.R. Grace & Co. related claims, including fraudulent conveyance and asbestos claims, and indemnification against income tax claims related to the non-NMC members of the W.R. Grace & Co. consolidated tax group upon confirmation of a W.R. Grace & Co. bankruptcy reorganization plan that contains such provision. Under the Settlement Agreement, the Company will pay a total of $115,000 to the W.R. Grace & Co. bankruptcy estate, or as otherwise directed by the Court, upon plan confirmation. No admission of liability has been or will be made. The Settlement Agreement is subject to the approval of the U.S. District Court. The foregoing summary of the material terms of the Settlement Agreement is qualified in its entirety by reference to the full text of the Settlement Agreement. The Settlement Agreement has been filed as an exhibit to the Company's annual report for 2002 to the Securities and Exchange Commission. Subsequent to the Merger, W.R. Grace & Co. was involved in a multi-step transaction involving Sealed Air Corporation (formerly known as Grace Holding, Inc.). The Company is engaged in litigation with Sealed Air Corporation ("Sealed Air") to confirm the Company's entitlement to indemnification from Sealed Air for all losses and expenses incurred by the Company relating to pre-Merger tax liabilities and Merger-related claims. Under the Settlement Agreement, upon confirmation of a plan that satisfies the conditions to the Company's payment obligation, this litigation will be dismissed with prejudice. Since 1997, the Company, NMC, and certain NMC subsidiaries have been engaged in litigation with various insurance companies concerning allegations of inappropriate billing practices for nutritional therapy and diagnostic and clinical laboratory tests and misrepresentations. These claims against the Company seek unspecified damages and costs. The Company, NMC and its subsidiaries believe that there are substantial defenses to the claims asserted, and intend to vigorously defend all lawsuits. The Company has filed counterclaims against the plaintiffs in these matters based on inappropriate claim denials and delays in claim payments. Other private payors have contacted the Company and may assert 25 that NMC received excess payments and, similarly, may join the lawsuits or file their own lawsuit seeking reimbursement and other damages. Although the ultimate outcome on the Company of these proceedings cannot be predicted at this time, an adverse result could have a material adverse effect on the Company's business, financial condition and results of operations. OTHER LITIGATION AND POTENTIAL EXPOSURES From time to time, the Company is a party to or may be threatened with other litigation arising in the ordinary course of its business. Management regularly analyzes current information including, as applicable, the Company's defenses and insurance coverage and, as necessary, provides accruals for probable liabilities for the eventual disposition of these matters. The Company, like other health care providers, conducts its operations under intense government regulation and scrutiny. The Company must comply with regulations which relate to or govern the safety and efficacy of medical products and supplies, the operation of manufacturing facilities, laboratories and dialysis clinics, and environmental and occupational health and safety. The Company must also comply with the Anti-Kickback Statute, the False Claims Act, the Stark Statute, and other federal and state fraud and abuse laws. Applicable laws or regulations may be amended, or enforcement agencies or courts may make interpretations that differ from the Company's or the manner in which the Company conduct its business. Enforcement has become a high priority for the federal government and some states. In addition, the provisions of the False Claims Act authorizing payment of a portion of any recovery to the party bringing the suit encourage private plaintiffs to commence "whistle blower" actions. By virtue of this regulatory environment, as well as our corporate integrity agreement with the government, the Company expects that its business activities and practices will continue to be subject to extensive review by regulatory authorities and private parties, and expects continuing inquiries, claims and litigation relating to its compliance with applicable laws and regulations. The Company may not always be aware that an inquiry or action has begun, particularly in the case of "whistle blower" actions, which are initially filed under court seal. The Company operates large number facilities throughout the U.S. In such a decentralized system, it is often difficult to maintain the desired level of oversight and control over the thousands of individuals employed by many affiliated companies. The Company relies upon its management structure, regulatory and legal resources, and the effective operation of its compliance program to direct, manage and monitor the activities of these employees. On occasion, the Company may identify instances where employees, deliberately or inadvertently, have submitted inadequate or false billings. The actions of such persons may subject the Company and its subsidiaries to liability under the Anti-Kickback Statute, the Stark Statute and False Claims Act, among other laws. Physicians, hospitals and other participants in the health care industry are also subject to a large number of lawsuits alleging professional negligence, malpractice, product liability, worker's compensation or related claims, many of which involve large claims and significant defense costs. The Company has been subject to these suits due to the nature of its business and the Company expects that those types of lawsuits may continue. Although the Company maintains insurance at a level which it believes to be prudent, the Company cannot assure that the coverage limits will be adequate or that insurance will cover all asserted claims. A successful claim against the Company or any of its subsidiaries in excess of insurance coverage could have a material adverse effect upon the Company and the results of its operations. Any claims, regardless of their merit or eventual outcome, also may have a material adverse effect on the Company's reputation and business. The Company has also had claims asserted against it and has had lawsuits filed against it relating to businesses that it has acquired or divested. These claims and suits relate both to operation of the businesses and to the acquisition and divestiture transactions. The Company has asserted its own claims, and claims for indemnification. Although the ultimate outcome on the Company cannot be predicted at this time, an adverse result could have a material adverse effect upon the Company's business, financial condition, and results of operations. ACCRUED SPECIAL CHARGE FOR LEGAL MATTERS At December 31, 2001, the Company recorded a pre-tax special charge of $258,000 to reflect anticipated expenses associated with the continued defense and resolution of pre-Merger tax claims, Merger-related claims, and commercial insurer claims. The costs associated with the Settlement Agreement will be charged against this accrual. While the Company believes that its remaining accruals reasonably estimate the Company's currently anticipated costs related to the continued defense and resolution of the remaining matters, no assurances can be given that the actual costs incurred by the Company will not exceed the amount of these accruals. 26 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None PART II ITEM 5. MARKET PRICE FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS All of the Company's common stock is held by FMCAG. The NMC Credit Facilities and the indentures pertaining to the Senior Subordinated Notes of FMCAG and one of its subsidiaries impose certain limits on the Company's payment of dividends. See Item 7 - "Management's Discussion and Analysis of Financial Condition and Results of Operations". FRESENIUS MEDICAL CARE HOLDINGS CLASS D PREFERRED SHARES On February 4, 2003, the Company announced it was exercising its right to redeem all of its outstanding shares of the Class D Preferred Stock ("Class D Shares"). The Class D Shares were issued to the common shareholders of W.R. Grace & Co. in connection with the 1996 reorganization involving W.R. Grace and Fresenius AG. Class D Shares that have been properly transferred to, and received by, the redemption agent will be redeemed commencing on March 28, 2003 at a redemption price of $0.10 per share. The Company intends to redeem the 89 million outstanding Class D Shares at a total cash outflow of approximately $8,900. This transaction will have no earnings impact on the Company. After March 28, 2003 the Class D Shares will cease to be deemed issued and outstanding shares of the Company's capital stock and will be restored to the status of authorized but unissued shares of preferred stock. 27 ITEM 6. SELECTED FINANCIAL DATA
YEAR ENDED DECEMBER 31, -------------------------------------------------------- (Dollars in Millions, Except Shares and Per Share Data) 2002 2001 2000 1999 1998 -------- -------- -------- -------- -------- Statement of Operations Data Continuing Operations Net sales $ 3,750 $ 3,609 $ 3,089 $ 2,815 $ 2,571 Cost of Sales 2,650 2,510 2,109 1,880 1,707 -------- -------- -------- -------- -------- Gross Profit 1,100 1,099 980 935 864 Selling, general and administrative and research and development 605 675 560 540 529 Special charge for settlement of investigation and related costs -- -- -- 601 -- Special charge for legal matters -- 258 -- -- -- -------- -------- -------- -------- -------- Operating income (loss) 495 166 420 (206) 335 Interest expense (net) 210 226 187 202 209 Interest expense on settlement of investigation (net) -- -- 30 -- -- -------- -------- -------- -------- -------- Income (loss) from continuing operations before income taxes, extraordinary item and cumulative effect of changes in accounting for start up costs 285 (60) 203 (408) 126 Provision (benefit) for income tax 114 19 98 (81) 74 -------- -------- -------- -------- -------- Net income (loss) from continuing operations before extraordinary item and cumulative effect of changes in accounting for start up costs 171 (79) 105 (327) 52 Extraordinary loss on early redemption of borrowings from affiliates, net of tax benefit of $6 10 -- -- -- -- -------- -------- -------- -------- -------- Net income (loss) from continuing operations before cumulative effect of change in accounting for start up costs $ 161 $ (79) $ 105 $ (327) $ 52 -------- -------- -------- -------- -------- Discontinued Operations Loss from discontinued operations, net of income taxes -- -- -- -- (9) Loss on disposal of discontinued operations, net of income tax Benefit -- -- -- -- (97) -------- -------- -------- -------- -------- Loss from discontinued operations -- -- -- -- (106) -------- -------- -------- -------- -------- Cumulative effect of change in accounting for start up costs, net of tax benefit -- -- -- -- (5) Net income (loss) $ 161 $ (79) $ 105 $ (327) $ (59) ======== ======== ======== ======== ======== Net Income (loss) Per Common and Common Equivalent Share: Continuing Operations $ 1.89 $ (0.89) $ 1.16 $ (3.64) $ 0.57 Extraordinary loss (0.10) -- -- -- -- Discontinued Operations -- -- -- -- (1.18) Cumulative effect of accounting change -- -- -- -- (0.05) Net Income 1.79 (0.89) 1.16 (3.64) (0.66) Weighted average number of shares of Common stock and common stock equivalents: 90,000 90,000 90,000 90,000 90,000 Primary (000's)
AT DECEMBER 31, -------------------------------------------------------- 2002 2001 2000 1999 1998 -------- -------- -------- -------- -------- Balance Sheet Data: Working capital (deficit) $ (73) $ (176) $ (154) $ (456) $ 294 Total assets 5,010 5,003 4,553 4,645 4,613 Total long term debt and capital lease obligations 618 302 589 616 1,014 Mandatorily redeemable preferred securities 771 692 305 -- -- Stockholders' equity 1,723 1,598 1,726 1,622 1,949
28 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following is a discussion of the financial condition and results of operations of the Company. The discussion should be read in conjunction with the consolidated financial statements included elsewhere in this document. This section contains certain forward-looking statements that are subject to various risks and uncertainties. Such statements include, without limitation, discussions concerning the outlook of the Company, government reimbursement, future plans and management's expectations regarding future performance. Actual results could differ materially from those contained in these forward-looking statements due to certain factors including, without limitation, changes in business, economic and competitive conditions, regulatory reforms, foreign exchange rate fluctuations, uncertainties in litigation or investigative proceedings, the realization of anticipated tax deductions, and the availability of financing. These and other risks and uncertainties, which are more fully described elsewhere in this Item 7 and in the Company's reports filed from time to time with the Commission, could cause the Company's results to differ materially from the results that have been or may be projected by or on behalf of the Company. OVERVIEW The Company is primarily engaged in (a) providing kidney dialysis and clinical laboratory testing services and (b) manufacturing and distributing products and equipment for dialysis treatment. Throughout the Company's history, a significant portion of the Company's growth has resulted from the development of new dialysis centers and the acquisition of existing dialysis centers, as well as from the acquisition and development of complementary businesses in the health care field. The Company derives a significant portion of its net revenues from Medicare, Medicaid and other government health care programs (approximately 59% in 2002). The reimbursement rates under these programs, including the Composite Rate, the reimbursement rate for EPO, and the reimbursement rate for other dialysis and non-dialysis related services and products, as well as other material aspects of these programs, have in the past and may in the future be changed as a result of deficit reduction and health care reform measures. The Company also derives a significant portion of its net revenues from reimbursement by non-government payors. Historically, reimbursement rates paid by these payors generally have been higher than Medicare and other government program rates. However, non-government payors are imposing cost containment measures that are creating significant downward pressure on reimbursement levels that the Company receives for its services and products. SPECIAL CHARGE FOR LEGAL MATTERS In the fourth quarter of 2001, the Company recorded a $258 million ($177 million after tax) special charge to address 1996 merger-related legal matters, estimated liabilities and legal expenses arising in connection with the Grace Chapter 11 Proceedings and the cost of resolving pending litigation and other disputes with certain commercial insurers. The Company accrued $172 million principally representing a provision for income taxes payable for the years prior to the 1996 merger for which the Company has been indemnified by W.R. Grace, but may ultimately be obligated to pay as a result of Grace's Chapter 11 Proceedings. In addition, that amount included the estimated costs of defending the Company in all litigation arising out of Grace's Chapter 11 Proceedings. The Company included $55 million in the special charge to provide for settlement obligations, legal expenses and the resolution of disputed accounts receivable relating to various insurance companies. The remaining amount of the special charge ($31 million) was accrued mainly for (i) assets and receivables that are impaired in connection with other legal matters and (ii) anticipated expenses associated with the continued defense and resolution of the legal matters. At December 31, 2002, there is a remaining balance of $191 million for the accrual for the special charge for legal matters. The Company believes that these reserves are adequate for the settlement of all matters described above. During the year ended December 31, 2002, $33 million in charges were applied against the accrued special charge for legal matters. See also Note 17 - "Commitments and contingencies - Accrued Special Charge for Legal Matters." 29 RESULTS OF OPERATIONS The following table summarizes certain operating results of the Company by principal business unit for the periods indicated. Intercompany eliminations primarily reflect sales of medical supplies by Dialysis Products to Dialysis Services.
YEAR ENDED DECEMBER 31, ----------------------------- (DOLLARS IN MILLIONS) 2002 2001 2000 ------- ------- ------- NET REVENUES Dialysis Services ..................... $ 3,311 $ 3,149 $ 2,625 Dialysis Products ..................... 763 755 717 Intercompany Eliminations ............. (324) (295) (253) ------- ------- ------- Net Revenues .............................. $ 3,750 $ 3,609 $ 3,089 ======= ======= ======= Operating Earnings: Dialysis Services ..................... $ 411 $ 422 $ 403 Dialysis Products ..................... 143 138 118 ------- ------- ------- Operating Earnings ........................ 554 560 521 ------- ------- ------- Other Expenses: General Corporate ..................... $ 50 $ 131 $ 97 Research & Development ................ 9 5 4 Interest Expense, Net ................. 210 226 187 Interest Expense on Settlement, Net ... -- -- 30 Special Charge for Legal Matters ...... -- 258 -- ------- ------- ------- Total Other Expenses ...................... 269 620 318 ------- ------- ------- Income (Loss) Before Income Taxes and Extraordinary Item ..................... 285 (60) 203 Provision for Income Taxes ................ 114 19 98 ------- ------- ------- Net Income (Loss) Before Extraordinary Item $ 171 $ (79) $ 105 ------- ------- ------- Extraordinary Loss ........................ 10 -- -- ------- ------- ------- Net Income (Loss) ......................... $ 161 $ (79) $ 105 ------- ------- -------
30 YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001 Net revenues for the year ended December 31, 2002 increased by $141 million (4%) over the year ended December 31, 2001. Excluding the extraordinary loss on the early redemption of borrowings from affiliates of $10 million after tax in 2002 and the special charge for the settlement of legal matters in 2001 of $258 million ($177 after tax), net income for 2002 increased by 74% to $171 million as compared to $98 million in 2001. This increase results from the elimination of amortization for goodwill and intangible assets with indefinite useful lives in accordance with SFAS No. 142 that was adopted effective January 1, 2002. Had SFAS No. 142 been adopted as of January 1, 2001 net earnings would have decreased by 10% ($19 million) from $190 million in 2001. DIALYSIS SERVICES Dialysis Services net revenues increased by 5% to $3,294 million (net of $17 million of intercompany sales) as compared to $3,132 million in 2001 due to growth in base business. The growth in base business revenue is primarily related to treatment growth. For the years ended 2002 and 2001, EPO represented approximately 27% of dialysis services revenue. At December 31, 2002, approximately 79,600 patients were being treated in approximately 1,080 clinics that the Company owns, operates or manages compared to approximately 76,600 patents treated in approximately 1,030 clinics at December 31, 2001. The average revenue rate per treatment, excluding laboratory testing revenue increased from $273 in 2001 to $274 in 2002. Including laboratory testing revenues, the average revenue per treatment increased from $284 in 2001 to $285 in 2002. Dialysis Services operating earnings decreased by 3% ($11 million) in 2002 as compared to 2001 resulting in a decrease in operating margin from 13.5 % in 2001 to 12.5 % in 2002. The reduction in operating earnings and margin is primarily due to costs associated with the conversion to single use dialyzers, price increases for EPO, higher bad debt expense, increased facility costs, other general cost increases and one-time severance and other payroll costs related to workforce reductions partially offset by the elimination of amortization of goodwill and intangible assets with indefinite useful lives in accordance with SFAS 142 which was adopted effective January 1, 2002. Had SFAS 142 been adopted as of January 1, 2001 operating earnings would have decreased by 10% to $411 million as compared to $457 million in 2001 resulting in a decrease in operating margin from 14.6% in 2001 to 12.5% in 2002. DIALYSIS PRODUCTS Dialysis Products gross revenues increased by 1% to $763 million in 2002 as compared to $755 million in 2001. Internal sales to Dialysis Services increased by 10% to $306 million from $278 million in 2001 and were partially offset by a decrease in external sales of 4% to $457 million as compared to $477 million in 2001. Dialysis Product external sales include both (i) sales of machines to a third party leasing company which are leased back by Dialysis Services and (ii) Method II PD revenues for Dialysis Service patients. Dialysis Products measures its external sales performance based on sales to the "net available external market." The net available external market excludes machine sales and Method II revenues involving Dialysis Services as well as sales to other vertically integrated dialysis companies. Net available external market sales increased by 6% to $373 million in 2002 as compared to $351 million in 2001. Operating earnings increased by 4% to $143 million in 2002 as compared to $138 million in 2001 resulting in an improvement in operating margin from 28.9% in 2001 to 31.3% in 2002. The improvement in operating earnings and margin is primarily due to the reduction in amortization due to the implementation of SFAS 142 effective January 1, 2002 and improvements in gross margin partially offset by increases in operating expenses. Had SFAS 142 been adopted as of January 1, 2001 operating earnings would have decreased by 2% to $143 million as compared to $146 million in 2001. The operating margin of 31.3% in 2002 continues to show improvement over a 2001 operating margin of 30.6% after adjustment for SFAS 142 due to favorability in gross margin partially offset by increases in operating expenses. OTHER EXPENSES Excluding the effect of the special charge for legal matters of $258 million in 2001, other expenses have decreased by 26% to $269 million as compared to $362 million in 2001 due to decreases in general corporate expenses resulting primarily from the elimination of amortization expense for goodwill and other intangible assets with indefinite useful lived assets according to SFAS 142 which was adopted effective January 1, 2002. Had SFAS 142 been adopted as of January 1, 2001 other expenses would have decreased by 10% or $30 million due to decreased interest expense, reductions in general corporate costs and a one-time gain on the curtailment of the Company's employee retirement plans partially offset by 31 increased research and development costs. The improvement in interest expense is due to an overall reduction in outstanding debt as well as a change in the mix of debt instruments. EXTRAORDINARY LOSS On June 27, 2002, the Company repaid its intercompany debt to FMC Finance S.a.r.l. in the amount of $351 million, originally due in 2006, utilizing funds borrowed under its senior credit facility. An extraordinary loss of $10 million, net of a tax benefit of $6 million, was recorded for the premium owed to FMC Finance S.a.r.l. in the event of the early retirement of this obligation in accordance with the terms of the intercompany debt agreement. INCOME TAXES The Company has recorded income tax provisions of $114 million and $19 million in 2002 and 2001, respectively. Approximately $81 million of the increased provision is related to the tax benefits resulting from the special charge for settlement of legal matters recorded in 2001. Increased state tax provisions and other adjustments to earnings generate the remaining increase in provision in 2002. YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000 Net revenues for the year ended December 31, 2001 increased by 17% ($520 million) over the comparable period in 2000. Excluding the effects of the special charge for legal matters of $258 million ($177 million after tax) recorded in the fourth quarter 2001, net income for the year 2001 would have decreased by 7% ($7 million) as a result of increased operating earnings ($39 million), offset by increased corporate expense ($34 million, including foreign exchange losses of $15 million), interest expense ($9 million) and income taxes ($2 million). DIALYSIS SERVICES Dialysis Services net revenues increased by 20% to $3,132 million (net of $17 million of intercompany sales); 10% attributable to base business revenue growth and 10% to acquisitions. The increase in dialysis services revenue resulted primarily from a $404 million (15%) increase in treatment volume, reflecting both base business growth and the impact of 2001 and 2000 acquisitions. Revenue was also favorably impacted by an increase in revenue per treatment of approximately $118 million (5%) as an aggregate result of increased Medicare reimbursement rates, increased ancillary services and introduction of perfusion services, as compared to 2000. For the year 2001 EPO represented approximately 27% of dialysis services revenue and approximately 24% of total revenue. Medicare reimbursement rates increased 1.2% as of January 1, 2001 due to legislation passed in January 2000. Additional legislation passed during the fourth quarter 2000 provided for an additional 1.2% rate increase. However, this second increase was delayed until April 1, 2001 at which time rates were increased to make up for this delay. Dialysis Services operating earnings grew by 5% in 2001 due primarily to increased treatment volume, improved treatment rates, increased ancillary services and increased earnings from laboratory testing. The operating earnings margin decreased 2% from 15.4% in 2000 to 13.4% in 2001. This was mainly due to delayed earnings contributed from the Everest acquisition, expenses caused by dialysis services converting from re-use to single use dialyzers, an increase in personnel expenses not fully compensated for by the increase in reimbursement rates, higher bad debt expenses relating to changes in payor mix and aging of accounts receivable and increased costs to certify new clinics. The lower operating earnings contribution from Everest was caused by transition and integration costs that occurred during the first half of the year. DIALYSIS PRODUCTS Dialysis Products net revenues decreased slightly to $477 million (net of $278 million of intercompany sales). This is primarily attributable to a shortfall in reuse dialyzer sales, increased sales of single use dialyzers and a loss of large sales accounts. Dialysis Products operating earnings increased by 17% to $138 million. This increase was primarily the result of decreased freight and distribution costs (4%), improvements in gross margin (4%), and reductions in other manufacturing and operating costs (9%). OTHER EXPENSES Excluding the effects of the special charge for legal matters of $258 million recorded in the fourth quarter of 2001, the 32 Company's other expenses for 2001 increased by 14% ($44 million) over the comparable period of 2000. General corporate expenses increased by $34 million and interest expense increased by $9 million. The increases in general corporate expenses were primarily due to foreign exchange fluctuations ($15 million resulting from $7 million foreign exchange losses in 2001 versus $8 million foreign exchange gains in 2000), increased health and general liability insurance costs ($8 million), increased legal fees ($2 million) and increases in other general expenses ($9 million). The increase of $9 million in interest expense is the net result of increased expenses of $39 million related to a change in mix of debt instruments offset by $30 million decrease in interest expense recorded in 2000 related to the settlement of the OIG investigation in 2000. INCOME TAXES The Company has recorded income tax provisions of $19 million and $98 million for the years 2001 and 2000, respectively. Excluding the tax benefit of $81 million for the special charge for legal matters, the effective income tax rate of 2001 is higher than 2000 due primarily to non-deductible merger goodwill. LIQUIDITY AND CAPITAL RESOURCES YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001 The Company's cash requirements in 2002 and 2001, including acquisitions and capital expenditures, were funded by cash generated by operations, additional intercompany borrowings, borrowings under its credit facility and proceeds from a receivable financing facility. The Company generated cash from operations of $322 million in 2002 as compared to $354 million during 2001. The decrease in operating cash of $32 million is primarily related to higher interest payments of $44 million, increased tax payments of $62 million and payments related to the special charge for settlement of legal matters of $25 million partially offset by improvements in accounts receivable of $73 million resulting from favorable cash collections, improvements in inventory management of $20 million and net other movement in working capital of $6 million. The strong cash collections in 2002 resulted in approximately a nine-day decrease in days sales outstanding. Cash from operations is impacted by the profitability of our business and the development of working capital, especially accounts receivable. The profitability of our business depends significantly on reimbursement rates. Approximately 88% of the Company's revenues are generated from the provision of dialysis services with approximately 66% of this revenue reimbursed by government funded Medicare and Medicaid programs. Legislative changes may affect the reimbursement rates under these programs for the services that we provide. A decrease in reimbursement rates could have a material adverse effect on our business, financial condition and results of operations and the Company's ability to generate cash flow. Net cash used in investing activities was $143 million in 2002 as compared to $436 million in 2001. The Company funded its acquisitions and capital expenditures primarily through cash flows from operations in 2002 and cash flows from operations and intercompany borrowings in 2001. The decrease in cash used in investing is related to decreased acquisition spending ($252 million) and reductions in capital expenditures ($19 million) and equity investments ($22 million). During 2001, the Company completed the acquisition of Everest Healthcare for a purchase price of approximately $365 million. Approximately $99 million of the purchase price was funded by the issuance of 2.25 million FMCAG preference shares to the Everest shareholders. The remaining purchase price was paid in cash of approximately $266 million, including debt assumed. The remaining $23 million of acquisition spending in 2001 was for the purchase of small groups of clinics or individual clinics. Acquisition spending in 2002 was approximately $37 million with no individually significant transactions such as the Everest acquisition in 2001. Capital expenditures totaling $105 million and $125 million in 2002 and 2001, respectively, were made for new clinics, improvements to existing clinics, a buyout of operating leases for dialysis machines and expansion and maintenance of production facilities. During 2001, the Company made an investment of approximately $22 million in FMC Cardiovascular Resources for a 45% equity interest in that venture. There were no similar significant investments in 2002. The Company has financed the expansion of its dialyzer production capacity by entering into sales-leaseback transactions with independent financing companies. Under these financing arrangements the assets are sold to the financing company at construction costs and then leased-back under operating leases. Financing of $25 million and $28 million was obtained in 2002 and 2001, respectively, under these types of arrangements. Accordingly, these amounts are not reported as capital expenditures. Net cash flows used in financing activities were $176 million in 2002 as compared to cash flows provided by financing activities of $75 million in 2001 for a change in cash used in financing activities of $251 million. Cash used in financing activities in 2002 is principally related to the repayment of borrowings from affiliates of $366 million, including a premium of $16 million for the early redemption. Approximately $165 million was drawn down under the Company's credit facility to partially offset this use of cash. During 2001, cash was provided by financing activities primarily due to an increase in borrowings from affiliates of $169 million partially offset by payments of $86 million related to the settlement of the investigation in 1999. Also in 2001, the Company received proceeds of $284 million from the issuance of mandatorily redeemable preferred securities that were used to pay-down external debt and capital leases of $290 million. The Company has an asset securitization facility (the "Accounts Receivable Facility") whereby receivables are sold to NMC Funding Corporation (the "Transferor"), a wholly owned subsidiary, and subsequently the Transferor transfers and assigns percentage ownership interests in receivables to certain bank investors. The maximum borrowing limit available under the Accounts Receivable Facility is $560 million at December 31, 2002. The facility matures on October 23, 2003. For the twelve months ended December 31, 2002, the Company increased its borrowings under the Accounts Receivable Facility by $3 million to $445 million. Outstanding amounts under the Accounts Receivable Facility are reflected as reductions in accounts receivable. Cash from short-term borrowings can be generated by borrowings under the Accounts Receivable Facility and through borrowings from affiliates. Long-term financing is provided by the revolving credit portion of our senior credit facility and the issuance of mandatorily redeemable preferred securities. We believe that our existing credit facilities, cash generated from operations and other current sources of financing are sufficient to meet our foreseeable cash requirements. At December 31, 2002, the Company had approximately $381 million of borrowing capacity available under revolving portion of our senior credit facility. On February 21, 2003 the Company and FMCAG entered into an amended and restated credit agreement ("2003 Senior Credit Agreement") with the Bank of America N. A., Credit Suisse First Boston, Dresdner Bank AG New York, JPMorgan Chase Bank, the Bank of Nova Scotia, and certain other financial institutions. Pursuant to the agreement, the Lenders have made available to the Company and certain subsidiaries and affiliates an aggregate of up to $1.5 billion through three credit facilities. The three facilities are a revolving facility of $500 million and two term loan facilities of $500 million each. The Company used the initial borrowings under the 2003 Senior Credit Agreements to refinance outstanding borrowings under our prior senior credit agreement and for general corporate purposes (See Note 21 of the Consolidated Financial Statements). The 2003 Senior Credit Agreement includes covenants that require FMCAG to maintain certain financial ratios or meet other financial tests. Under the Senior Credit Agreement, FMCAG is obligated to maintain a minimum consolidated net worth, a minimum consolidated fixed charge ratio (ratio of earnings before interest, taxes, depreciation, amortization and rent to fixed charges) and a certain consolidated leverage ratio (ratio of consolidated funded debt to EBITDA). In addition, the 2003 Senior Credit Agreement includes other covenants which, among other things, restrict or have the effect of restricting the Company's ability to dispose of assets, incur debt, pay dividends, create liens or make capital expenditures, investments or acquisitions. The breach of any of the covenants could result in a default under the credit agreement. In default, the outstanding balance under the 2003 Senior Credit Agreement becomes due. 33 OBLIGATIONS
CONTRACTUAL CASH OBLIGATIONS PAYMENTS DUE BY PERIOD OF ------------------------------------------- TOTAL 1 YEAR 1-5 YEARS OVER 5 YEARS ---------- ---------- ---------- ------------ Mandatorily Redeemable Preferred Securities $ 771,209 $ 771,209 -- $ -- Long Term Debt 618,740 1,840 616,900 -- Capital Lease Obligations 1,583 463 1,120 -- Operating Leases 970,691 202,985 640,172 127,534 Unconditional Purchase Obligation 170,824 58,995 78,619 33,210 Borrowings from Affiliates 970,087 315,394 -- 654,693 ---------- ---------- ---------- ---------- Total Contractual Cash Obligations $3,503,134 $1,350,886 $1,336,811 $ 815,437 ========== ========== ========== ==========
OTHER COMMERCIAL COMMITMENTS EXPIRATION PER PERIOD OF ------------------------------------------- TOTAL 1 YEAR 1-5 YEARS OVER 5 YEARS ---------- ---------- ---------- ------------ Unused Senior Credit Lines $ 165,000 $ -- $ 165,000 $ -- Standby Letters of Credit 215,845 -- 215,845 -- ---------- ---------- ---------- ---------- Total Other Commercial Commitments $ 380,845 $ -- $ 380,845 $ -- ========== ========== ========== ==========
34 YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000 The Company's cash requirements in 2001 and 2000, including acquisitions and capital expenditures, have been funded by cash generated from operations, additional intercompany borrowings, borrowings under the credit facility ("NMC Credit Facility"), and net increases in a receivable financing facility. Cash from operations has increased by $91 million from $263 million in 2000 to $354 million in 2001. The improvement is primarily related to favorable changes in operating assets and liabilities of $382 million offset by decreased earnings ($184 million, including the special charge for legal matters) and decreases in net income adjustments of $107 million. The movement in operating assets and liabilities includes the collection of $5 million related to IDPN receivables. Increases in accounts receivable of $133 million for the period ended December 31, 2001 are primarily due to the Company's revenue growth and the impact of acquisitions, offset by a two day reduction in days sales outstanding. Decreases in accounts payable were primarily due to timing of disbursements. Cash on hand was $27 million and $33 million at December 31, 2001 and 2000, respectively. Net cash flows used in investing activities totaled $436 million in 2001 compared to $220 million in 2000. The Company funded its acquisitions and capital expenditures primarily through cash flows from operations and intercompany borrowings. Cash expenditures for acquisitions totaled $289 million in 2001 (including Everest for $266 million) and $116 million in 2000, respectively, net of cash acquired. In 2001, the Company also funded another $99 million in consideration for Everest through the issuance of 2.25 million FMCAG preference shares. Capital expenditures of $125 million and $104 million in 2001 and 2000, respectively, were made for new clinics, improvements to existing clinics and expansion and maintenance of production facilities. Net cash flows provided by financing activities totaled $75 million in 2001 compared to net cash flows used of $23 million in 2000. For the twelve months ended December 31, 2001, the Company made final payments to the U.S. Government totaling $86 million pursuant to the January 2000 Settlement Agreement. In addition, debt and capital lease obligations decreased by $290 million, primarily due to the pay down of the Company's credit facility of $282 million. Proceeds from financing activities in 2001 included $284 million (net of mark to market change of $5 million) for the issuance of mandatorily redeemable preferred stock to an affiliated company. The Company has an asset securitization facility (the "Accounts Receivable Facility") whereby receivables of NMC and certain affiliates are sold to NMC Funding Corporation (the "Transferor"), a wholly-owned subsidiary of NMC, and subsequently the Transferor transfers and assigns percentage ownership interests in receivables to certain bank investors. The amount of the accounts receivable facility was last amended on December 21, 2001, when the Company increased the accounts receivable facility to $560 million and extended its maturity to October 24, 2002. For the twelve months ended December 31, 2001, the Company had decreased its borrowings under the accounts receivable facility by $3 million from $445 million at December 31, 2000 to $442 million at December 31, 2001. Outstanding amounts under the Accounts Receivable Facility are reflected as reductions in accounts receivable. The Company's capacity to generate cash from the accounts receivable facility depends on the availability of sufficient accounts receivable that meet certain criteria defined in the agreement with the third party funding corporation. A lack of availability of such accounts receivable may have a material impact on the Company's ability to utilize the facility for its financial needs. CRITICAL ACCOUNTING POLICIES The Company has identified the following selected accounting policies and issues that the Company believes are critical to understand the financial reporting risks presented in the current economic environment. These matters and judgments, and uncertainties affecting them, are also essential to understand the Company's reported and future operating results. See Notes to Consolidated Financial Statements - Note 2, "Summary of Significant Accounting Policies" included in the Company's 2002 report on Form 10-K. RECOVERABILITY OF GOODWILL AND INTANGIBLE ASSETS The growth of the Company's business through acquisitions has created a significant amount of intangible assets, including goodwill, patient relationships, tradenames and other intangibles. At December 31, 2002, the carrying amount of 35 net intangible assets amounted to $3,427 million representing approximately 68% of the Company's total assets. In accordance with Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, the Company reviews the carrying value of our long-lived assets for impairment at least once a year, at the end of the year, or whenever events or changes in circumstances indicate that the carrying amount of assets might be impaired. To comply with the provisions of SFAS No. 142, the fair value of the reporting unit is compared to the reporting unit's carrying amount. The Company estimates the fair value of each reporting unit using estimated future cash flows for the unit discounted by a weighted average cost of capital specific to that unit. Estimated cash flows are based on our budgets for the next three years, and projections for the following years based on an expected growth rate. The growth rate is based on industry and internal projections. The discount rates reflect any inflation in local cash flows and risks inherent to each reporting unit. If the fair value of the reporting unit is less than its carrying value, a second step is performed which compares the fair value of the reporting unit's goodwill to the carrying value of its goodwill. If the fair value of the goodwill is less than its carrying value, the difference is recorded as an impairment charge. A prolonged downturn in the healthcare industry with lower than expected increases in reimbursement rates and/or higher than expected costs for providing healthcare services could adversely affect our estimated future cashflows. Future adverse changes in a reporting unit's economic environment might affect the discount rate. A decrease in our estimated future cash flows and/or a decline in the macroeconomic environment could result in impairment charges to goodwill and other intangible assets which could materially and adversely affect our future financial position and operating results. LEGAL CONTINGENCIES The Company is a party to certain litigation including the commercial insurer litigation, W.R. Grace & Co. bankruptcy and Sealed Air Corporation indemnification litigation and other litigation arising in the ordinary course of the Company's business as described in Note 17 "Commitments and Contingencies" in the Company's Consolidated Financial Statements. The outcome of these matters may have a material effect on the Company's financial position, results of operations or cash flows. The Company regularly analyzes current information relating to these litigation matters and provides accruals for probable contingent losses including the estimated legal expenses to resolve the matter. In its decisions regarding the recording of litigation accruals, the Company considers the probability of an unfavorable outcome and its ability to make a reasonable estimate of the amount of contingent loss. If an unfavorable outcome is probable but the amount of loss cannot be reasonably estimated by management, appropriate disclosure is provided, but no contingent losses are accrued. The mere filing of a suit or formal assertion of a claim or assessment does not necessarily require the recording of an accrual. REVENUE RECOGNITION Revenues are recognized on the date services and related products are provided/shipped and are recorded at amounts estimated to be received under reimbursement arrangements with third-party payors, including Medicare and Medicaid. Retroactive adjustments are accrued on an estimated basis in the period the related services are rendered and adjusted in future periods as final settlements are determined. The Company records an allowance for estimated uncollectible accounts receivable based upon an analysis of historical collection experience. The analysis considers differences in collection experience by payor mix and aging of the accounts receivable. From time to time, the Company reviews the accounts receivable for changes in historical collection experience to ensure the appropriateness of the allowances. A significant change in collection experience, a deterioration of the aging of accounts receivable, or a significant change in the mix of payers may adversely affect the Company's estimate of the allowance for doubtful accounts. Consequently, it is possible that our future operating results could be materially and adversely affected by additional charges for bad debt and our cash flows may be reduced by lower collection of receivables. Net Revenues from machine sales to a third party leasing company where there is a leaseback of the machines by the Dialysis Services Division were $30.5 million, $46.2 million, and $54.5 million for the twelve months ended December 31, 2002, 2001, and 2000, respectively. The profits on these sales are deferred and amortized to earnings over the lease terms. 36 SELF INSURANCE PROGRAMS The Company is self-insured for professional, product and general liability, auto and worker's compensation claims up to predetermined amounts above which third party insurance applies. Estimates include ultimate costs for both reported and incurred but not reported claims. IMPACT OF INFLATION A substantial portion of the Company's net revenue is subject to reimbursement rates which are regulated by the federal government and do not automatically adjust for inflation. Moreover, non-governmental payors continue to exert downward pressure on reimbursement levels. Increased operating costs that are subject to inflation, such as labor and supply costs, without a compensating increase in reimbursement rates, may adversely affect the Company's business and results of operations. RECENTLY ISSUED ACCOUNTING STANDARDS In July 2001, the FASB issued SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. Provisions of SFAS 142 related to acquisitions completed after July 1, 2001 were adopted effective as of July 1, 2001. The Company adopted all other provisions of SFAS 142 effective January 1, 2002. The effect on prior years income is described in Note 7 of the Consolidated Financial Statements. In August 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations ("SFAS 143"). SFAS 143 addresses the reporting requirements for the retirement of tangible long-lived assets and asset retirement costs. SFAS 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs must be capitalized as part of the carrying amount of the long-lived asset. The Company will adopt SFAS No. 143 effective January 1, 2003. The adoption of SFAS No. 143 will not have a material impact on the Company's financial statements. In October 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets ("SFAS 144"). SFAS 144 requires that those long-lived assets be measured at the lower of carrying amount or fair value less selling costs. SFAS 144 also broadens the reporting of discontinued operations and provides that discontinued operations will no longer be measured at net realizable value or include amounts for operating losses that have not yet occurred. SFAS No. 144 was adopted effective January 1, 2002. The adoption of SFAS 144 did not have an impact on the Company's financial statements. In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13 and Technical Corrections ("SFAS 145"). SFAS 145 rescinds Statement No. 4 and requires the criteria under Opinion 30 to determine if losses from extinguishment of debt should be classified as extraordinary items. SFAS 145 amends Statement No. 13 to require that certain lease modifications that have economic effects similar to sale-leaseback arrangements be accounted for in a similar manner as sale-leaseback transactions. The Company will adopt SFAS No. 145 as related to SFAS No. 4 effective January 1, 2003. In the first quarter 2002, the Company reported an extraordinary loss of $9.8 million for the early redemption of borrowings from affiliates. This extraordinary loss will be reclassified and presented as a loss from operating earnings. The Company adopted the remaining provisions of SFAS 145 effective April 1, 2002. In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities (SFAS 146). SFAS 146 nullifies EITF 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). The principal difference between this statement and EITF 94-3 relates to the requirements for the recognition of a liability for a cost associated with an exit or disposal activity. SFAS 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under EITF 94-3, a liability for an exit cost was recognized at the date of an entity's commitment to an exit plan. The provisions of SFAS 146 are effective for exit or disposal activities that are initiated after December 31, 2002. In November 2002, the FASB issued FASB Interpretation No. 45 ("Fin 45"), Guarantor's Accounting and Disclosure Requirements for Guarantees of Indebtedness of Others. FIN 45 requires a guarantor to recognize a liability measured at fair value at the inception of a guarantee for obligations undertaken, including its obligation to stand ready to perform over the term of the guarantee. The initial recognition and measurement provisions are applicable prospectively to guarantees issued or modified after December 31, 2002. FIN 45 also clarifies and expends the disclosure requirements related to guarantees and product warranties. The Company adopted those disclosures on December 31, 2002. 37 In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure - an amendment of FASB Statement No. 123. Accounting for Stock-Based Compensation to provide alternative methods for a change to the fair value based method of accounting for stock-based employee compensation. It also amends the disclosure requirements of SFAS No. 123 to require disclosures in both annual and interim financial statements of the method of accounting for stock-based employee compensation and the effect the method used had on reported results. The Company adopted the annual disclosure requirement on December 31, 2002. In January 2003, the Financial Accounting Standards Board issued FASB Interpretation No. 46 ("Fin 46") Consolidation of Variable Interest Entities. FIN 46 addresses the consolidation of variable interest entities by the primary beneficiary, when the total equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated support from other parties and / or the equity investor lacks certain essential characteristics of a controlling financial interest. FIN 46 requires existing variable interest entities to be consolidated if those entities do not effectively disburse risk among the parties involved. The interpretation becomes effective at various dates in 2003 and provides various transition rules. The adoption of FIN 46 has no material impact on the Company's financial statements. 38 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to market risks due to changes in interest rates and foreign currency rates. The Company uses derivative financial instruments, including interest rate swaps and foreign exchange contracts, as part of its market risk management strategy. These instruments are used as a means of hedging exposure to interest rate and foreign currency fluctuations in connection with debt obligations and purchase commitments. The Company does not hold or issue derivative instruments for trading or speculative purposes. Hedge accounting is applied if the derivative reduces the risk of the underlying hedged item and is designated at inception as a hedge. Additionally, changes in the value of the derivative must result in payoffs that are highly correlated to the changes in value of the hedged item. Derivatives are measured for effectiveness both at inception and on an ongoing basis. The Company enters into foreign exchange contracts that are designated as, and effective as, hedges for forecasted purchase transactions. Also, since the Company carries a substantial amount of floating rate debt, the Company uses interest rate swaps to synthetically change certain variable-rate debt obligations to fixed-rate obligations to mitigate the impact of interest rate fluctuations. Gains and losses on foreign exchange contracts accounted for as hedges are deferred in other assets or liabilities. The deferred gains and losses are recognized as adjustments to the underlying hedged transaction when the future sales or purchases are recognized. Interest rate swap payments and receipts are recorded as part of interest expense. The fair value of the swap contracts is recognized in other liabilities in the financial statements. Cash flows from derivatives are recognized in the consolidated statement of cash flows in the same category as the item being hedged. At December 31, 2002, the fair value of the Company's interest rate agreements, which consisted entirely of interest rate swaps, is recorded as a liability valued at approximately $99.2 million. The table below presents information on the Company's significant debt obligations, some of which are subject to interest rate changes, and the interest rate protection agreement used to hedge both long-term and short-term obligations.
Interest Rate Exposure December 31, 2002 ($ millions) 2003 2004 2005 Thereafter Totals ---- ---- ---- ---------- ------ Principal Payments Due on NMC Credit Facility $617 $ 617 Variable Interest Rate of approx. 2.55% Principal Payments Due on A/R Facility $445 $ 445 Variable Interest Rate of approx. 1.49% Borrowings from Affiliates Variable Interest Rate of 2.07%-2.73% $315 $ 315 Fixed Interest Rate = 8.43% $435 $ 435 Fixed Interest Rate = 8.25% $219 $ 219 Interest Rate Agreements (notional amounts) $250 $800 $1,050 Average Fixed Pay Rate = 5.51% 6.33% 5.26% Receive Rate = 3-Month LIBOR
At December 31, 2002, the fair value of the Company's foreign exchange contracts, which consisted entirely of forward agreements, is recorded as an asset valued at approximately $84.8 million. The Company had outstanding contracts covering the purchase of 638.2 million Euros ("EUR") at an average contract price of $.9037 per EUR, for delivery between January 2003 and May 2004, contracts for the purchases of 168 million Mexican Pesos at an average contract price of 10.3324 pesos per US dollar, and contracts for the delivery of 14.2 million Canadian Dollars at an average contract price of $.6347 per Canadian Dollar. The Company's hedging strategy vis-a-vis the above-mentioned market risks has not changed significantly from 2001 to 2002. For additional information, see also "Notes to Consolidated Financial Statements - Note 2. Summary of Significant Accounting Policies - Derivative Financial Instruments" and "Notes to Consolidated Financial Statements - Note 15. Financial Instruments". 39 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information called for by this item is indexed in Item 15 of this Report and contained on the pages following the signature page hereof. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT ITEM 11. EXECUTIVE COMPENSATION ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS In accordance with General Instruction G. (3) to Form 10-K, the information required by Part III is incorporated by reference to the Company's definitive information statement to be filed by April 30, 2003. PART IV ITEM 14. CONTROLS AND PROCEDURES The Company's management, including the Chief Executive Officer and Chief Financial Officer, have conducted an evaluation of the effectiveness of the Company's disclosure controls and procedures within 90 days prior to the filing of this report, as contemplated by Securities Exchange Act Rule 13a-14. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the disclosure controls and procedures are effective in alerting them in a timely manner that all material information required to be filed in this annual report has been made known to them. There have been no significant changes to internal controls, or in factors that could significantly affect internal controls, subsequent to the date the Chief Executive Officer and the Chief Financial Officer completed their evaluation. ITEM 15. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) Index to Consolidated Financial Statements The following consolidated financial statements are filed with this report: Report of Independent Auditors. Consolidated Statements of Operations for the Years Ended December 31, 2002, 2001, and 2000. Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2002, 2001, and 2000. Consolidated Balance Sheets as of December 31, 2002 and 2001. Consolidated Statements of Cash Flows for the Years Ended December 31, 2002, 2001, and 2000. Consolidated Statements of Changes in Equity for the Years Ended December 31, 2002, 2001, and 2000. Schedule of Valuation and Qualifying Accounts as of December 31, 2002, 2001, and 2000. Notes to Consolidated Financial Statements. 40 The Company is a majority-owned subsidiary of Fresenius Medical Care AG. The operating results and other financial information of the Company included in this report are not necessarily indicative of the operating results and financial condition of Fresenius Medical Care AG at the dates or for the periods presented herein. Users of the Company's financial statements wishing to obtain financial and other information regarding Fresenius Medical Care AG should consult the Annual Report on Form 20-F of Fresenius Medical Care AG, which will be filed with the Securities and Exchange Commission and the New York Stock Exchange. (b) Reports on Form 8-K. On November 29, 2002, FMCAG, the parent corporation of the Company, announced an agreement in principle for the settlement of all fraudulent conveyance claims against it and other claims related to the Company that arises out of the bankruptcy of W.R. Grace & Co. c) Exhibits. Exhibits. The following exhibits are filed or incorporated by reference as required by Item 601 of Regulation S-K.
EXHIBIT NO. DESCRIPTION - ----------- ----------- Exhibit 3.1 Certificate of Incorporation of Fresenius Medical Care Holdings, Inc. (f/k/a W. R. Grace & Co.) under Section 402 of the New York Business Corporation Law dated March 23, 1988 (incorporated herein by reference to the Form 8-K of the Company filed on May 9, 1988). Exhibit 3.2 Certificate of Amendment of the Certificate of Incorporation of Fresenius Medical Care Holdings, Inc. (f/k/a W. R. Grace & Co.) under Section 805 of the New York Business Corporation Law dated May 25, 1988 (changing the name to W. R. Grace & Co., incorporated herein by reference to the Form 8-K of the Company filed on May 9, 1988). Exhibit 3.3 Certificate of Amendment of the Certificate of Incorporation of Fresenius Medical Care Holdings, Inc. (f/k/a W. R. Grace & Co.) under Section 805 of the New York Business Corporation Law dated September 27, 1996 (incorporated herein by reference to the Form 8-K of the Company filed with the Commission on October 15, 1996). Exhibit 3.4 Certificate of Amendment of the Certificate of Incorporation of Fresenius Medical Care Holdings, Inc. (f/k/a W. R. Grace & Co.) under Section 805 of the New York Business Corporation Law dated September 27, 1996 (changing the name to Fresenius National Medical Care Holdings, Inc., incorporated herein by reference to the Form 8-K of the Company filed with the Commission on October 15, 1996). Exhibit 3.5 Certificate of Amendment of the Certificate of Incorporation of Fresenius Medical Care Holdings, Inc. under Section 805 of the New York Business Corporation Law dated June 12, 1997 (changing name to Fresenius Medical Care Holdings, Inc., incorporated herein by reference to the Form 10-Q of the Company filed with the Commission on August 14, 1997). Exhibit 3.6 Certificate of Amendment of the Certificate of Incorporation of Fresenius Medical Care Holdings, Inc. dated July 6, 2001 (authorizing action by majority written consent of the shareholders) (incorporated herein by reference to the Form 10-Q of the Company filed with the Commission on August 14, 2001). Exhibit 3.7 Amended and Restated By-laws of Fresenius Medical Care Holdings, Inc. (incorporated herein by reference to the Form 10-Q of the Company filed with the Commission on August 14, 1997). Exhibit 4.1 Credit Agreement dated as of September 27, 1996 among National Medical Care, Inc. and Certain Subsidiaries and Affiliates, as Borrowers, Certain Subsidiaries and Affiliates, as Guarantors, the Lenders named therein, NationsBank, N.A., as paying agent and The Bank of Nova Scotia, The Chase Manhattan Bank, Dresdner Bank AG and Bank of America, N.A. (formerly known as NationsBank, N.A.), as Managing Agents (incorporated herein by reference to the Form 6-K of Fresenius Medical Care AG filed with the Commission on October 15, 1996).
41 Exhibit 4.2 Amendment dated as of November 26, 1996 (amendment to the Credit Agreement dated as of September 27, 1996, incorporated herein by reference to the Form 8-K of Registrant filed with the Commission on December 16, 1996). Exhibit 4.3 Amendment No. 2 dated December 12, 1996 (second amendment to the Credit Agreement dated as of September 27, 1996, incorporated herein by reference to the Form 10-K of Registrant filed with the Commission on March 31, 1997). Exhibit 4.4 Amendment No. 3 dated June 13, 1997 to the Credit Agreement dated as of September 27, 1996, among National Medical Care, Inc. and Certain Subsidiaries and Affiliates, as Borrowers, Certain Subsidiaries and Affiliates, as Guarantors, the Lenders named therein, Bank of America, N.A. (formerly known as NationsBank, N.A.), as paying agent and The Bank of Nova Scotia, The Chase Manhattan Bank, Dresdner Bank AG and Bank of America, N.A. (formerly known as NationsBank, N.A.), as Managing Agents, as previously amended (incorporated herein by reference to the Form 10-Q of the Registrant filed with the Commission on November 14, 1997). Exhibit 4.5 Amendment No. 4, dated August 26, 1997 to the Credit Agreement dated as of September 27, 1996, among National Medical Care, Inc. and Certain Subsidiaries and Affiliates, as Borrowers, Certain Subsidiaries and Affiliates, as Guarantors, the Lenders named therein, Bank of America, N.A. (formerly known as NationsBank, N.A.), as paying agent and The Bank of Nova Scotia, The Chase Manhattan Bank, Dresdner Bank AG and Bank of America, N.A. (formerly known as NationsBank, N.A.), as Managing Agents, as previously amended (incorporated herein by reference to the Form 10-Q of Registrant filed with Commission on November 14, 1997). Exhibit 4.6 Amendment No. 5 dated December 12, 1997 to the Credit Agreement dated as of September 27, 1996, among National Medical Care, Inc. and Certain Subsidiaries and Affiliates, as Borrowers, Certain Subsidiaries and Affiliates, as Guarantors, the Lenders named therein, Bank of America, N.A. (formerly known as NationsBank, N.A.), as paying agent and The Bank of Nova Scotia, The Chase Manhattan Bank, Dresdner Bank AG and Bank of America, N.A. (formerly known as NationsBank, N.A.), as Managing Agents, as previously amended (incorporated herein by reference to the Form 10-K of Registrant filed with Commission on March 23, 1998). Exhibit 4.7 Form of Consent to Modification of Amendment No. 5 dated December 12, 1997 to the Credit Agreement dated as of September 27, 1996 among National Medical Care, Inc. and Certain Subsidiaries and Affiliates, as Borrowers, Certain Subsidiaries and Affiliates, as Guarantors, the Lenders named therein, Bank of America, N.A. (formerly known as NationsBank, N.A.), as paying agent and The Bank of Nova Scotia, The Chase Manhattan Bank, Dresdner Bank AG and Bank of America, N.A. (formerly known as NationsBank, N.A.), as Managing Agents (incorporated herein by reference to the Form 10-K of Registrant filed with Commission on March 23, 1998). Exhibit 4.8 Amendment No. 6 dated effective September 30, 1998 to the Credit Agreement dated as of September 27, 1996, among National Medical Care, Inc. and Certain Subsidiaries and Affiliates, as Borrowers, Certain Subsidiaries and Affiliates, as Guarantors, the Lenders named therein, Bank of America, N.A. (formerly known as NationsBank, N.A.), as paying agent and The Bank of Nova Scotia, The Chase Manhattan Bank, N.A., Dresdner Bank AG and Bank of America, N.A. (formerly known as NationsBank, N.A.), as Managing Agents, as previously amended (incorporated herein by reference to the Form 10-Q of Registrant filed with Commission on November 12, 1998). Exhibit 4.9 Amendment No. 7 dated as of December 31, 1998 to the Credit Agreement dated as of September 27, 1996 among National Medical Care, Inc. and Certain Subsidiaries and Affiliates, as Borrowers, Certain Subsidiaries and Affiliates Guarantors, the Lenders named therein, Bank of America, N.A. (formerly known as NationsBank, N.A.), paying agent and The Bank of Nova Scotia, The Chase Manhattan Bank, Dresdner Bank A. G. and Bank of America, N.A. (formerly known as NationsBank, N.A.). as Managing Agents, (incorporated herein by reference to the Form 10-K of registrant filed with Commission on March 9, 1999). Exhibit 4.10 Amendment No. 8 dated as of June 30, 1999 to the Credit Agreement dated as of September 27, 1996 among National Medical Care, Inc. and Certain Subsidiaries and Affiliates, as Borrowers, Certain Subsidiaries and Affiliates Guarantors, the Lenders named therein, Bank of America, N.A. (formerly known as NationsBank, N.A.), as paying agent and The Bank of Nova Scotia, The Chase Manhattan Bank, Dresdner
42 Bank A.G. and Bank of America, N.A. (formerly known as NationsBank, N.A.), as Managing Agent (incorporated herein by reference to the Form 10-K of registrant filed with Commission on March 30, 2000). Exhibit 4.11 Amendment No. 9 dated as of December 15, 1999 to the Credit Agreement dated as of September 27, 1996 among National Medical Care, Inc. and Certain Subsidiaries and Affiliates, as Borrowers, Certain Subsidiaries and Affiliates Guarantors, the Lenders named therein, Bank of America, N.A. (formerly known as NationsBank, N.A.), as paying agent and The Bank of Nova Scotia, The Chase Manhattan Bank, Dresdner Bank A.G. and Bank of America, N.A. (formerly known as NationsBank, N.A.), as Managing Agent (incorporated herein by reference to the Form 10-K of registrant filed with Commission on March 30, 2000). Exhibit 4.12 Amendment No. 10 dated as of September 21, 2000 to the Credit Agreement dated as of September 27, 1996 among National Medical Care, Inc. and Certain Subsidiaries and Affiliates, as Borrowers, Certain Subsidiaries and Affiliates Guarantors, the Lenders named therein, Bank of America, N.A. (formerly known as NationsBank, N.A.), as paying agent and The Bank of Nova Scotia, The Chase Manhattan Bank, Dresdner Bank A.G. and Bank of America, N.A. (formerly known as NationsBank, N.A.), as Managing Agent (incorporated herein by reference to the Form 10-K of registrant filed with Commission on November 11, 2000). Exhibit 4.13 Amendment No. 11 dated as of May 31, 2001 to the Credit Agreement dated as of September 27, 1996 among National Medical Care, Inc. and Certain Subsidiaries and Affiliates, as Borrowers, Certain Subsidiaries and Affiliates Guarantors, the Lenders named therein, Bank of America, N.A. (formerly known as NationsBank, N.A). as paying agent and The Bank of Nova Scotia, The Chase Manhattan Bank, Dresdner Bank A.G. and Bank of America, N.A. (formerly known as NationsBank, N.A.), as Managing Agent (incorporated by reference to the Registration Statement on Form F-4 of Fresenius Medical Care AG (Registration No. 333-66558)). Exhibit 4.14 Amendment No. 12 dated as of June 30, 2001 to the Credit Agreement dated as of September 27, 1996 among National Medical Care, Inc. and Certain Subsidiaries and Affiliates, as Borrowers, Certain Subsidiaries and Affiliates Guarantors, the Lenders named therein, Bank of America, N.A. (formerly known as NationsBank, N.A.), as paying agent and The Bank of Nova Scotia, The Chase Manhattan Bank, Dresdner Bank A.G. and Bank of America, N.A. (formerly known as NationsBank, N.A.), as Managing Agent (incorporated by reference to the Registration Statement on Form F-4 of Fresenius Medical Care AG (Registration No. 333-66558)). Exhibit 4.15 Amendment No. 13 dated as of December 17, 2001 to the Credit Agreement dated as of September 27, 1996 among National Medical Care, Inc. and Certain Subsidiaries and Affiliates, as Borrowers, Certain Subsidiaries and Affiliates Guarantors, the Lenders named therein, Bank of America, N.A. (formerly known as NationsBank, N.A.), as paying agent and The Bank of Nova Scotia, The Chase Manhattan Bank, Dresdner Bank A.G. and Bank of America, N.A. (formerly known as NationsBank, N.A.), as Managing Agent (incorporated herein by reference to the Form 10-K of Registrant filed with Commission on April 1, 2001). Exhibit 4.16 Amendment No. 14 dated as of February 22, 2002 to the Credit Agreement dated as of September 27, 1996 among National Medical Care, Inc. and Certain Subsidiaries and Affiliates, as Borrowers, Certain Subsidiaries and Affiliates Guarantors, the Lenders named therein, Bank of America, N.A. (formerly known as NationsBank, N. A.), as paying agent and The Bank of Nova Scotia, The Chase Manhattan Bank, Dresdner Bank A.G. and Bank of America, N. A. (formerly known as NationsBank, N. A. ), as Managing Agent (incorporated herein by reference to the Form 10-Q of Registrant filed with Commission on November 14, 2002). Exhibit 4.17 Amendment No. 15 dated as of December 5, 2002 to the Credit Agreement, by and among National Medical Care, Inc. and Certain Subsidiaries and Affiliates party to the Credit Agreement, and identified therein, and Bank of America, N. A. (formerly known as NationsBank, N. A.), as paying Agent for and on behalf of the Lenders (filed herewith). Exhibit 4.18 Fresenius Medical Care AG 1996 Stock Incentive Plan (incorporated herein by reference to the Fresenius Medical Care AG's Registrant Statement on Form S-8 dated October 1, 1996). Exhibit 4.19 Fresenius Medical Care AG 1998 Stock Incentive Plan as amended effective as of August 3, 1998 (incorporated herein by reference to the Form 10-Q of Registrant filed with Commission on May 14, 1998).
43 Exhibit 4.20 Fresenius Medical Care AG 2001 International Stock Incentive Plan (incorporated by reference to the Registration Statement on Form F-4 of Fresenius Medical Care AG filed August 2, 2001 (Registration No. 333-66558)). Exhibit 4.21 Senior Subordinated Indenture dated as of February 19, 1998, among Fresenius Medical Care AG, State Street Bank and Trust Company as Trustee and Fresenius Medical Care Holdings, Inc., and Fresenius Medical Care AG, as Guarantors with respect to the issuance of 7 7/8% Senior Subordinated Notes due 2008 (incorporated herein by reference to the Form 10-K of Registrant filed with Commission on March 23, 1998). Exhibit 4.22 Senior Subordinated Indenture dated as of February 19, 1998 among FMC Trust Finance S.a.r.l. Luxemborg, as Insurer, State Street Bank and Trust Company as Trustee and Fresenius Medical Care Holdings, Inc., and Fresenius Medical Care AG, as Guarantors with respect to the issuance of 7 3/8% Senior Subordinated Notes due 2008 (incorporated herein by reference to the Form 10-K of Registrant filed with Commission on March 23, 1998). Exhibit 4.23 Senior Subordinated Indenture dated as of June 6, 2001 among Fresenius Medical Care AG, FMC Trust Finance S.a.r.l. Luxemborg - III, Fresenius Medical Care Holdings, Inc., Fresenius Medical Care Deutschland GmbH and State Street Bank and Trust Company with respect to 7 7/8% Senior Subordinated Notes due 2011 (incorporated herein by reference to the Registration Statement on Form F-4 of Fresenius Medical Care AG dated August 2, 2001 (Registration No. 333-66558)). Exhibit 4.24 Senior Subordinated Indenture dated as of June 15, 2001 among Fresenius Medical Care AG, FMC Trust Finance S.a.r.l. Luxemborg - III, Fresenius Medical Care Holdings, Inc., Fresenius Medical Care Deutschland GmbH and State Street Bank and Trust Company with respect to 7 7/8% Senior Subordinated Notes due 2011 (incorporated herein by reference to the Registration Statement on Form F-4 of Fresenius Medical Care AG dated August 2, 2001 (Registration No. 333-66558)). Exhibit 10.1* Product Purchase Agreement effective January 1, 2002 between Amgen USA, Inc. and National Medical Care, Inc. (incorporated by reference to the Form 10-Q of the Registrant filed with the Commission on May 15, 2002). Exhibit 10.2 Receivables Purchase Agreement dated August 28, 1997 between National Medical Care, Inc. and NMC Funding Corporation (incorporated herein by reference to the Form 10-Q of the Registrant filed with the Commission on November 14, 1997). Exhibit 10.3 Amendment dated as of September 28, 1998 to the Receivables Purchase Agreement dated as of August 28, 1997, by and between NMC Funding Corporation, as Purchaser and National Medical Care, Inc., as Seller (incorporated herein by reference to the Form 10-Q of Registrant filed with Commission on November 12, 1998). Exhibit 10.4 Second Amended and Restated Transfer and Administrative agreement dated as of September 24, 2002 among NMC Funding Corporation, National Medical Care, Inc., Enterprise Funding Corporation, Compass US Acquisition, LLC, Giro Multifunding Corporation, the Bank Investors listed therein, WestLB AG, New York Branch (formerly known as Westdeutsche Landesbank Girozentrale, New York Branch), as an administrative agent and Bank of America, N.A., as an administrative agent (incorporated herein by reference to the Form 10-Q of Registrant filed with Commission on November 14, 2002). Exhibit 10.5 Amendment No. 1 dated as of October 22, 2002 to the Second Amended and Restated Transfer and Administrative agreement dated as of September 24, 2002 among NMC Funding Corporation, National Medical Care, Inc., Enterprise Funding Corporation, Compass US Acquisition, LLC, Giro Multifunding Corporation, the Bank Investors listed therein, WestLB AG, New York Branch (formerly known as Westdeutsche Landesbank Girozentrale, New York Branch), as an administrative agent and Bank of America, N.A., as an administrative agent (incorporated herein by reference to the Form 10-Q of Registrant filed with Commission on November 14, 2002). Exhibit 10.6 Amendment No. 2 dated as of November 8, 2002 to the Second Amended and Restated Transfer and Administrative agreement dated as of September 24, 2002 among NMC Funding Corporation, National Medical Care, Inc., Enterprise Funding Corporation, Compass US Acquisition, LLC, Giro Multifunding Corporation, Asset One Securitization, LLC, the Bank Investors listed therein, WestLB AG, New York
44 Branch (formerly known as Westdeutsche Landesbank Girozentrale, New York Branch), as an administrative agent and Bank of America, N.A., as an administrative agent, (filed herewith). Exhibit 10.7 Amendment No. 3 dated as of December 18, 2002 to the Second Amended and Restated Transfer and Administrative agreement dated as of September 24, 2002 among NMC Funding Corporation, National Medical Care, Inc., Enterprise Funding Corporation, Compass US Acquisition, LLC, Giro Multifunding Corporation, Asset One Securitization, LLC, the Bank Investors listed therein, WestLB AG, New York Branch (formerly known as Westdeutsche Landesbank Girozentrale, New York Branch), as an administrative agent and Bank of America, N.A., as an administrative agent, (filed herewith). Exhibit 10.8 Employment Agreement dated January 1, 1992 by and between Ben J. Lipps and Fresenius USA, Inc. (incorporated herein by reference to the Annual Report on Form 10-K of Fresenius USA, Inc., for the year ended December 31, 1992). Exhibit 10.9 Modification to FUSA Employment Agreement effective as of January 1, 1998 by and between Ben J. Lipps and Fresenius Medical Care AG (incorporated herein by reference to the Form 10-Q of Registrant filed with Commission on May 14, 1998). Exhibit 10.10 Employment Agreement dated March 15, 2000 by and between Jerry A. Schneider and National Medical Care, Inc (incorporated herein by reference to the Form 10-Q of Registrant filed with Commission on May 12, 2000). Exhibit 10.11 Employment Agreement dated March 15, 2000 by and between Ronald J. Kuerbitz and National Medical Care, Inc. (incorporated herein by reference to the Form 10-Q of Registrant filed with Commission on May 12, 2000). Exhibit 10.12 Employment Agreement dated March 15, 2000 by and between J. Michael Lazarus and National Medical Care, Inc. (incorporated herein by reference to the Form 10-Q of Registrant filed with Commission on May 12, 2000). Exhibit 10.13 Employment Agreement dated March 15, 2000 by and between Robert "Rice" M. Powell, Jr. and National Medical Care, Inc. (incorporated herein by reference to the Form 10-K of Registrant filed with Commission on April 2, 2001). Exhibit 10.14 Employment Agreement dated July 1, 2002 by and between John F. Markus and National Medical Care, Inc. (incorporated herein by reference to the Form 10-Q of Registrant filed with Commission on August 14, 2002). Exhibit 10.15 Employment Agreement dated October 15, 2002 by and between Mats Wahlstrom and National Medical Care, Inc. (filed herewith). Exhibit 10.16 Subordinated Loan Note dated as of May 18, 1999, among National Medical Care, Inc. and certain Subsidiaries with Fresenius AG as lender (incorporated herein by reference to the Form 10-Q of Registrant filed with Commission on November 22, 1999). Exhibit 10.17 Corporate Integrity Agreement between the Offices of Inspector General of the Department of Health and Human Services and Fresenius Medical Care Holdings, Inc. dated as of January 18, 2000 (incorporated herein by reference to the Form 8-K of the Registrant filed with the Commission on January 21, 2000). Exhibit 10.18 Settlement Agreement dated as of February 6, 2003 by and among the Company, National Medical Care, Inc., the Official Committee of Asbestos Personal Injury Claimants, and the Official Committee of Asbestos Property Damage Claimants of W.R. Grace & Co. (filed herewith). Exhibit 11 Statement re: Computation of Per Share Earnings. Exhibit 99.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
45 Exhibit 99.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
* Confidential treatment has been requested as to certain portions of this Exhibit Schedule II Valuation and Qualifying Accounts SIGNATURES Pursuant to the requirements of Section 13 of 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: March 14, 2003 FRESENIUS MEDICAL CARE HOLDINGS, INC. By: /s/ Ben J. Lipps Ben J. Lipps, President (Chief Executive Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
NAME TITLE DATE ---- ----- ---- /s/ Ben J. Lipps President and Director March 17, 2003 - ---------------- Ben J. Lipps (Chief Executive Officer) /s/ Jerry A. Schneider Chief Financial Officer, Treasurer and Director March 17, 2003 - ---------------------- Jerry A. Schneider (Chief Financial and Accounting Officer)
46 CERTIFICATIONS CHIEF EXECUTIVE OFFICER I, Ben J. Lipps, certify that: 1. I have reviewed this Annual Report on Form 10-K of Fresenius Medical Care Holdings, Inc. 2. Based on my knowledge, this Annual Report does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Annual Report. 3. Based on my knowledge, the financial statements, and other financial information included in this Annual Report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this Annual Report. 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Annual Report is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this Annual Report (the "Evaluation Date"); and c. presented in this Annual Report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this Annual Report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 17, 2003 /s/ Ben J. Lipps Ben J. Lipps President and Chief Executive Officer 47 CHIEF FINANCIAL OFFICER I, Jerry A. Schneider, certify that: 1. I have reviewed this Annual Report on Form 10-K of Fresenius Medical Care Holdings, Inc. 2. Based on my knowledge, this Annual Report does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Annual Report. 3. Based on my knowledge, the financial statements, and other financial information included in this Annual Report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this Annual Report. 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Annual Report is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this Annual Report (the "Evaluation Date"); and c. presented in this Annual Report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this Annual Report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 17, 2003 /s/ Jerry A. Schneider Jerry A. Schneider Chief Financial Officer 48 INDEPENDENT AUDITORS' REPORT To the Shareholders Fresenius Medical Care Holdings, Inc. We have audited the accompanying consolidated balance sheets of Fresenius Medical Care Holdings, Inc. and its subsidiaries (the "Company") as of December 31, 2002 and 2001 and the related consolidated statements of operations, comprehensive income, cash flows and changes in equity for each of the years in the three-year period ended December 31, 2002. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2002 and 2001, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2002 in conformity with accounting principles generally accepted in the United States of America. As discussed in Note 2 to the consolidated financial statements, effective January 1, 2002, Fresenius Medical Care Holdings, Inc. adopted Statement of Financial Accounting Standards No. 142 "Goodwill and Other Intangible Assets." KPMG LLP January 31, 2003 Boston, MA 49 FRESENIUS MEDICAL CARE HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
TWELVE MONTHS ENDED DECEMBER 31, --------------------------------------------- 2002 2001 2000 ----------- ----------- ----------- NET REVENUES Health care services ........................................... $ 3,293,510 $ 3,131,733 $ 2,609,108 Medical supplies ............................................... 456,501 477,818 480,067 ----------- ----------- ----------- 3,750,011 3,609,551 3,089,175 ----------- ----------- ----------- EXPENSES Cost of health care services ................................... 2,335,820 2,178,085 1,768,914 Cost of medical supplies ....................................... 314,139 332,770 339,908 General and administrative expenses ............................ 357,077 335,961 269,574 Provision for doubtful accounts ................................ 98,632 85,448 62,949 Depreciation and amortization .................................. 139,750 246,819 222,870 Research and development ....................................... 9,222 5,462 4,127 Interest expense, net, and related financing costs including $118,983 $134,557 and $110,746 of interest with affiliates . 210,348 226,480 187,315 Interest expense on settlement of investigation, net ........... -- -- 29,947 Special charge for legal matters ............................... -- 258,159 -- ----------- ----------- ----------- 3,464,988 3,669,184 2,885,604 ----------- ----------- ----------- INCOME (LOSS) BEFORE INCOME TAXES AND EXTRAORDINARY ITEM ............ 285,023 (59,633) 203,571 PROVISION FOR INCOME TAXES .......................................... 113,924 19,623 98,321 ----------- ----------- ----------- NET INCOME (LOSS) BEFORE EXTRAORDINARY ITEM ......................... 171,099 (79,256) 105,250 Extraordinary loss on early redemption of borrowings from affiliates, net of tax benefit of $6,520 ..................................... 9,780 -- -- ----------- ----------- ----------- NET INCOME (LOSS) ................................................... $ 161,319 $ (79,256) $ 105,250 =========== =========== =========== Basic and fully dilutive net income (loss) before extraordinary item per share ........................................................... $ 1.89 $ (0.89) $ 1.16 Extraordinary loss per share ........................................ $ (0.10) $ -- $ -- Basic and fully dilutive net income (loss) per share ................ $ 1.79 $ (0.89) $ 1.16
See accompanying Notes to Consolidated Financial Statements 50 FRESENIUS MEDICAL CARE HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (DOLLARS IN THOUSANDS)
TWELVE MONTHS ENDED DECEMBER 31, --------------------------------------- 2002 2001 2000 --------- --------- --------- NET INCOME (LOSS) $ 161,319 $ (79,256) $ 105,250 Other comprehensive income Foreign currency translation adjustments 607 (130) (174) Minimum pension liability, (net of deferred tax of $12,905) (19,357) -- -- Derivative instruments, (net of deferred tax of $15,856 and $26,514, respectively) (14,086) (50,929) -- Other 230 -- -- --------- --------- --------- Total other comprehensive loss (32,606) (51,059) (174) --------- --------- --------- COMPREHENSIVE INCOME (LOSS) $ 128,713 $(130,315) $ 105,076 ========= ========= =========
See accompanying Notes to Consolidated Financial Statements 51 FRESENIUS MEDICAL CARE HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS)
DECEMBER 31, ---------------------------- 2002 2001 ----------- ----------- ASSETS Current Assets: Cash and cash equivalents ............................. $ 30,013 $ 26,786 Accounts receivable, less allowances of $121,620 and $103,859 ...................................... 387,222 423,912 Inventories ........................................... 185,892 202,221 Deferred income taxes ................................. 157,353 196,831 Other current assets .................................. 128,619 119,592 ----------- ----------- Total Current Assets ............................. 889,099 969,342 ----------- ----------- Properties and equipment, net .............................. 531,081 520,620 ----------- ----------- Other Assets: Goodwill .............................................. 2,934,581 2,889,174 Intangible assets, net of accumulated amortization of $299,916 and $259,356 ............................ 491,988 529,370 Other assets and deferred charges..................... 163,595 94,460 ----------- ----------- Total Other Assets ............................... 3,590,164 3,513,004 ----------- ----------- Total Assets ............................................... $ 5,010,344 $ 5,002,966 =========== =========== LIABILITIES AND EQUITY Current Liabilities: Current portion of long-term debt and capitalized lease obligations ........................................ 2,303 152,046 Current portion of borrowing from affiliates .......... 315,394 291,360 Accounts payable ...................................... 100,603 125,530 Accrued liabilities ................................... 261,888 231,378 Accrued special charge for legal matters .............. 191,130 221,812 Net accounts payable to affiliates .................... 28,897 39,934 Accrued income taxes .................................. 61,754 83,654 ----------- ----------- Total Current Liabilities ........................ 961,969 1,145,714 Long-term debt ............................................. 616,900 300,600 Non-current borrowings from affiliates ..................... 654,693 1,005,669 Capitalized lease obligations .............................. 1,120 1,675 Deferred income taxes ...................................... 96,453 113,046 Other liabilities .......................................... 185,200 146,170 ----------- ----------- Total Liabilities ................................ 2,516,335 2,712,874 ----------- ----------- Mandatorily Redeemable Preferred Securities ................ 771,209 692,330 ----------- ----------- Equity: Preferred stock, $100 par value ......................... 7,412 7,412 Preferred stock, $.10 par value ......................... 8,906 8,906 Common stock, $1 par value; 300,000,000 shares authorized; outstanding 90,000,000 ................... 90,000 90,000 Paid in capital ......................................... 1,942,755 1,945,014 Retained deficit ........................................ (242,846) (402,749) Accumulated comprehensive loss .......................... (83,427) (50,821) ----------- ----------- Total Equity ....................................... 1,722,800 1,597,762 ----------- ----------- Total Liabilities and Equity ............................... $ 5,010,344 $ 5,002,966 =========== ===========
See accompanying Notes to Consolidated Financial Statements. 52 FRESENIUS MEDICAL CARE HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
TWELVE MONTHS ENDED DECEMBER 31, ----------------------------------------- 2002 2001 2000 --------- --------- --------- Cash Flows from Operating Activities: Net income (loss) ......................................... $ 161,319 $ (79,256) $ 105,250 Adjustments to reconcile net income to net cash from Operating activities: Depreciation and amortization ........................ 139,750 246,819 222,870 Extraordinary loss on early redemption of borrowings from affiliates ......................... 9,780 -- -- Provision for doubtful accounts ...................... 98,632 85,448 62,949 Deferred income taxes ................................ 52,879 (68,302) 84,900 Loss on disposal of properties and equipment ......... 2,451 965 970 Changes in operating assets and liabilities, net of effects of purchase acquisitions and foreign exchange: Increase in accounts receivable ...................... (73,888) (133,225) (194,772) Decrease (increase) in inventories ................... 15,825 (5,401) (7,472) (Increase) decrease in other current assets .......... (9,039) 21,345 (6,025) Decrease in IDPN receivables ......................... -- 5,189 53,962 Increase in other assets and deferred charges ........ (10,029) (3,561) (3,025) (Decrease) increase in accounts payable .............. (24,486) (31,810) 5,976 (Decrease) increase in accrued income taxes .......... (16,409) 72,179 (908) Increase (decrease) in accrued liabilities ........... 27,216 (10,922) (65,227) (Decrease) increase in accrued special charge for legal matters ...................................... (24,969) 221,812 -- (Decrease) increase in other long-term liabilities ... (13,405) 2,187 12,035 Net changes due to/from affiliates ................... (10,982) 38,213 (6,044) Other, net ........................................... (2,814) (7,335) (2,126) --------- --------- --------- Net cash provided by operating activities ................. 321,831 354,345 263,313 --------- --------- --------- Cash Flows from Investing Activities: Capital expenditures ................................. (105,210) (124,621) (104,199) Payments for acquisitions, net of cash acquired ...... (37,051) (288,924) (115,601) Increase in other assets ............................. (1,000) (22,754) -- --------- --------- --------- Net cash used in investing activities ..................... (143,261) (436,299) (219,800) --------- --------- --------- Cash Flows from Financing Activities: Payments on settlement of investigation .............. -- (85,920) (386,815) Net (decrease) increase in borrowings from affiliates (326,942) 168,521 (32,947) Premium on early redemption of debt .................. (16,300) -- -- Cash dividends paid on preferred stock ............... (520) (520) (520) Proceeds from mandatorily redeemable preferred securities ......................................... -- 284,403 305,500 Net increase (decrease) from receivable financing facility ........................................... 3,249 (3,300) 110,300 Net increase (decrease) on debt and capitalized leases 164,577 (290,324) (17,660) Other, net ........................................... -- 2,628 (647) --------- --------- --------- Net cash (used in) provided by financing activities ....... (175,936) 75,488 (22,789) --------- --------- --------- Effects of changes in foreign exchange rates ................... 593 (75) 40 --------- --------- --------- Change in cash and cash equivalents ............................ 3,227 (6,541) 20,764 Cash and cash equivalents at beginning of period ............... 26,786 33,327 12,563 --------- --------- --------- Cash and cash equivalents at end of period ..................... $ 30,013 $ 26,786 $ 33,327 ========= ========= =========
See accompanying Notes to Consolidated Financial Statements 53 FRESENIUS MEDICAL CARE HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
TWELVE MONTHS ENDED ----------------------------------------- 2002 2001 2000 --------- --------- --------- Supplemental disclosures of cash flow information: Cash paid during the period for: Interest .............................................. $ 182,865 $ 196,289 $ 223,847 Interest on mandatorily redeemable preferred securities 57,018 -- -- Income taxes paid, net ................................ 77,962 16,024 14,882 Details for Acquisitions: Assets acquired ............................................ 44,114 423,202 117,935 Liabilities assumed ........................................ (7,063) (34,156) (2,334) Equity consideration ....................................... -- (99,479) -- --------- --------- --------- Cash paid .................................................. 37,051 289,567 115,601 Less cash acquired ......................................... -- 643 -- --------- --------- --------- Net cash paid for acquisitions ............................. $ 37,051 $ 288,924 $ 115,601 ========= ========= =========
See accompanying Notes to Consolidated Financial Statements 54 FRESENIUS MEDICAL CARE HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Preferred Stocks Common Stock ----------------------- ----------------------- Paid in Shares Amount Shares Amount Capital ---------- ------- ---------- ------- ----------- BALANCE, DECEMBER 31, 1999 89,136,435 $16,318 90,000,000 $90,000 $ 1,943,034 Net Loss -- -- -- -- -- Cash dividends on preferred stock -- -- -- -- -- Other comprehensive income -- -- -- -- -- Other adjustments -- -- -- -- (647) ---------- ------- ---------- ------- ----------- BALANCE, DECEMBER 31, 2000 89,136,435 $16,318 90,000,000 $90,000 $ 1,942,387 ========== ======= ========== ======= =========== Net Income -- -- -- -- -- Cash dividends on preferred stock -- -- -- -- -- Other comprehensive income - FX -- -- -- -- -- Other comprehensive income - FAS 133 -- -- -- -- -- Other adjustments -- -- -- -- 2,627 ---------- ------- ---------- ------- ----------- BALANCE, DECEMBER 31, 2001 89,136,435 $16,318 90,000,000 $90,000 $ 1,945,014 ========== ======= ========== ======= =========== Net Income -- -- -- -- -- Cash dividends on preferred stock -- -- -- -- -- Minimum pension liability -- -- -- -- -- Other comprehensive income - FX -- -- -- -- -- Other comprehensive income -FAS 133 -- -- -- -- -- Transfer of foreign subsidiary to FMC AG -- -- -- -- (2,259) ---------- ------- ---------- ------- ----------- BALANCE, DECEMBER 31, 2002 89,136,435 $16,318 90,000,000 $90,000 1,942,755 ========== ======= ========== ======= ===========
Retained Accumulated Earnings Comprehensive Total (Deficit) Income Equity --------- -------- ----------- BALANCE, DECEMBER 31, 1999 $(427,703) $ 412 $ 1,622,061 Net Loss 105,250 -- 105,250 Cash dividends on preferred stock (520) -- (520) Other comprehensive income -- (174) (174) Other adjustments -- -- (647) --------- -------- ----------- BALANCE, DECEMBER 31, 2000 $(322,973) $ 238 1,175,970 ========= ======== =========== Net Income (79,256) -- (79,256) Cash dividends on preferred stock (520) -- (520) Other comprehensive income - FX -- (130) (130) Other comprehensive income - FAS 133 -- (50,929) (50,929) Other adjustments -- -- 2,627 --------- -------- ----------- BALANCE, DECEMBER 31, 2001 $(402,749) (50,821) 1,597,762 ========= ======== =========== Net Income 161,319 -- 161,319 Cash dividends on preferred stock (520) -- (520) Minimum pension liability -- (19,357) (19,357) Other comprehensive income - FX -- 607 607 Other comprehensive income -FAS 133 -- (14,086) (14,086) Transfer of foreign subsidiary to FMCAG (896) 230 (2,925) --------- -------- ----------- BALANCE, DECEMBER 31, 2002 $(242,846) (83,427) 1,722,800 ========= ======== ===========
See accompanying Notes to Consolidated Financial Statements 55 FRESENIUS MEDICAL CARE HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) NOTE 1. THE COMPANY Fresenius Medical Care Holdings, Inc., a New York corporation ("the Company") is a subsidiary of Fresenius Medical Care AG, a German corporation ("FMCAG"). The Company conducts its operations through five principal subsidiaries, National Medical Care, Inc. ("NMC"); Fresenius USA Marketing, Inc., Fresenius USA Manufacturing, Inc., and SRC Holding Company, Inc. ("SRC"), all Delaware corporations and Fresenius USA, Inc., a Massachusetts corporation. The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries and those financial statements where the Company controls professional corporations in accordance with Emerging Issues Task Force Issue 97-2. The Company is primarily engaged in (i) providing kidney dialysis services, and clinical laboratory testing, and (ii) manufacturing and distributing products and equipment for dialysis treatment. BASIS OF PRESENTATION BASIS OF CONSOLIDATION The consolidated financial statements in this report at December 31, 2002, 2001 and 2000, respectively, have been prepared in accordance with accounting principles generally accepted in the United States of America. These consolidated financial statements reflect all adjustments that, in the opinion of management, are necessary for the fair presentation of the consolidated results for all periods presented. NET INCOME PER SHARE Basic net income per share are computed by dividing net income available to common shareholders by the weighted-average number of common shares outstanding during the year. Diluted net income per share includes the effect of all dilutive potential common shares that were outstanding during the year. The number of shares used to compute basic and diluted net income per share was 90,000 in all periods as there were no potential common shares and no adjustments to income available to common shareholders to be considered for purposes of the diluted net income per share calculation.
TWELVE MONTHS ENDED DECEMBER 31, ---------------------------------------- 2002 2001 2000 --------- -------- --------- The weighted average number of shares of Common Stock were as follows ..................... 90,000 90,000 90,000 ========= ======== =========
Net income (loss) used in the computation of net income per share is as follows:
TWELVE MONTHS ENDED DECEMBER 31, ---------------------------------------- 2002 2001 2000 --------- -------- --------- NET INCOME BEFORE EXTRAORDINARY ITEM Net income (loss) before extraordinary item ........ $ 171,099 $(79,256) $ 105,250 Dividends paid on preferred stocks ................. (520) (520) (520) --------- -------- --------- Income (loss) available to common shareholders ..... $ 170,579 $(79,776) $ 104,730 ========= ======== ========= Basic and fully dilutive net income (loss) before extraordinary item per share .................... $ 1.89 $ (0.89) $ 1.16 ========= ======== =========
56
TWELVE MONTHS ENDED DECEMBER 31, ---------------------------------------- 2002 2001 2000 --------- -------- --------- NET INCOME Net income (loss) .................................. $ 161,319 $(79,256) $ 105,250 Dividends paid on preferred stocks ................. (520) (520) (520) --------- -------- --------- Income (loss) available to common shareholders ..... $ 160,799 $(79,776) $ 104,730 ========= ======== ========= Basic and fully dilutive net income (loss) per share $ 1.79 $ (0.89) $ 1.16 ========= ======== =========
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES USE OF ESTIMATES The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions affecting the reported amounts of assets and liabilities (including disclosed amounts of contingent assets and liabilities) at the dates of the consolidated financial statements and the reported revenues and expenses during the reporting periods. Actual amounts could differ from those estimates. CASH EQUIVALENTS Cash equivalents consist of highly liquid instruments with maturities of three months or less when purchased. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES Effective January 1, 2001, the Company adopted the provisions of SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities and the related amendments of SFAS No. 138. The cumulative effect of adopting SFAS 133 as of January 1, 2001 was not material to the Company's consolidated financial statements. The Company is exposed to market risk due to changes in interest rates and foreign currencies. The Company uses derivative financial instruments, including interest rate swaps and foreign exchange contracts, as part of its risk management strategy. These instruments are used as a means of hedging exposure to interest rate and foreign currency fluctuations in connection with debt obligations, forecasted raw material purchases and other obligations and Euro denominated mandatorily redeemable preferred stock. The interest rate swaps are designated as cash flow hedges effectively converting certain variable interest rate payments into fixed interest rate payments. After tax losses of $19.5 million ($32.6 million pretax) for the twelve months ended December 31, 2002 and after tax losses of $40.0 million ($66.6 million pretax) for the twelve months ended December 31, 2001 were deferred in other comprehensive income. Interest payable and receivable under the swap terms are accrued and recorded as adjustments to interest expense at each reporting date. The Company enters into forward rate agreements that are designated and effective as hedges of forecasted raw material purchases and other obligations. After tax gains of $1.3 million ($2.2 million pretax) for the twelve months ended December 31, 2002 and after tax losses of $0.4 million ($0.6 million pretax) for the twelve months ended December 31, 2001 were deferred in other comprehensive income and will be reclassified into cost of sales in the period during which the hedged transactions affect earnings. All deferred amounts will be reclassified into earnings within the next twelve months. The Company enters into forward rate agreements that are designated and effective as hedges of changes in the fair value of the Euro denominated mandatorily redeemable preferred stock. Changes in fair value are recorded in earnings and offset against gains and losses resulting from the underlying exposures. After tax losses of $0.6 million ($1.0 million pretax) for the twelve months ended December 31, 2002 and after tax gains of $6.8 million ($11.4 million pretax) for the twelve months ended December 31, 2001 were deferred in other comprehensive income. Ineffective amounts had no material impact on earnings for the twelve months ended December 31, 2002 and 2001. 57 Periodically, the Company enters into derivative instruments with related parties to form a natural hedge for currency exposures on intercompany obligations. These instruments are reflected in the consolidated balance sheets at fair value with changes in fair value recognized in earnings. Pre-tax (gains) losses recorded in the consolidated statements of operations for the twelve months ended December 31, 2002 and 2001 were ($13.7) million and $4.8 million, respectively. EVEREST ACQUISITION On January 8, 2001, FMCAG acquired Everest Healthcare Services Corporation (now known as Everest Healthcare Holdings, Inc., "Everest") through a merger of Everest into a subsidiary of FMCAG at a purchase price of $365 million. Approximately $99 million of the purchase price was funded by the issuance of 2.25 million FMCAG preference shares to the Everest shareholders. The remaining purchase price was paid with cash of $266 million, including assumed debt. Everest owned, operated or managed approximately 70 clinic facilities providing therapy to approximately 6,800 patients in the United States. Everest also operated extracorporeal blood services and acute dialysis businesses that provide acute dialysis, apheresis and hemoperfusion services to approximately 100 hospitals. On August 22, 2001 FMCAG transferred its interests in Everest to the Company at its book value. There was no gain or loss recorded on this sale as it is a transfer between entities under common control. The consolidated operations and cash flows of the Company for the comparable periods in 2001 include the consolidated operations and cash flows of Everest retroactive to January 1, 2001. REVENUE RECOGNITION Revenues are recognized on the date services and related products are provided/shipped and are recorded at amounts estimated to be received under reimbursement arrangements with third-party payors, including Medicare and Medicaid. The Company establishes appropriate allowances based upon factors surrounding credit risks of specific third party payors, historical trends and other information. Retroactive adjustments are accrued on an estimated basis in the period the related services are rendered and adjusted in future periods as final settlements are determined. Net Revenues from machines sales for 2002, 2001 and 2000 include $30.5 million, $46.2 million and $54.5 million, respectively, of net revenues for machines sold to a third party leasing company which are utilized by the dialysis services division to provide services to our customers. The profits on these sales are deferred and amortized to earnings over the lease terms. CONCENTRATION OF CREDIT RISK The Company is engaged in providing kidney dialysis treatment, clinical laboratory testing and other ancillary services and in the manufacture and sale of products for all forms of kidney dialysis principally to health care providers throughout the world. The Company performs ongoing evaluations of its customers' financial condition and, generally, requires no collateral. A significant percentage of the Company's health care services revenues are paid by and subject to regulations under governmental programs, primarily Medicare and Medicaid, health care programs administered by the United States government. INVENTORIES Inventories are stated at the lower of cost (first-in, first-out method) or market. PROPERTIES AND EQUIPMENT Properties and equipment are stated at cost. Significant improvements are capitalized; repairs and maintenance costs that do not extend the lives of the assets are charged to expense as incurred. Property and equipment under capital leases are stated at the present value of future minimum lease payments at the inception of the lease. The cost and accumulated depreciation of assets sold or otherwise disposed of are removed from the accounts, and any resulting gain or loss is included in income when the assets are disposed. The cost of properties and equipment is depreciated over estimated useful lives on a straight - line basis as follows: buildings - 20 to 40 years, equipment and furniture - 3 to 10 years, equipment under capital leases and leasehold improvements - the shorter of the lease term or useful life. For income tax purposes, depreciation is calculated using accelerated methods to the extent permitted. The Company capitalizes interest on borrowed funds during construction periods. Interest capitalized during 2002, 2001 and 2000 was $4,143, $3,397, and $2,705 respectively. 58 EXCESS OF COST OVER THE FAIR VALUE OF NET ASSETS ACQUIRED AND OTHER INTANGIBLE ASSETS In July 2001, the Financial Accounting Standards Board ("FASB") issued and the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 141, Business Combinations. Accordingly, the purchase method of accounting is used for all business combinations. Intangible assets acquired in a purchase method business combination are recognized and reported apart from goodwill, pursuant to the criteria specified by SFAS No. 141. The Company adopted SFAS No. 142, Goodwill and Other Intangible Assets, effective January 1, 2002. Upon adoption of SFAS No. 142, pursuant to SFAS No. 141, the Company evaluated its existing intangible assets and goodwill that were acquired in prior purchase business combinations and reclassified amounts allocated to assembled workforce to goodwill in order to conform with the new criteria in SFAS No. 141. Upon adoption of SFAS No. 142 the Company reassessed the useful lives and residual values of all intangible assets acquired with finite useful lives, and had no significant amortization period adjustments. The Company identified trade names and management contracts as other intangible assets with indefinite useful lives. Prior to the adoption of SFAS No. 142, goodwill was amortized over an estimated useful life of 40 years. As of January 1, 2002, in accordance with SFAS No. 142, goodwill and identifiable intangibles with indefinite lives are no longer amortized, but tested annually for impairment. To implement the provisions of SFAS No. 142 and to evaluate the recoverability of goodwill, the Company identified its reporting units and determined the carrying value of each reporting unit by assigning the assets and liabilities, including the existing goodwill and intangible assets, to those reporting units. In the next step the Company compared the fair value of each reporting unit to the reporting unit's carrying amount. Fair value was determined using a discounted cash flow approach. In the event that the fair value of a reporting unit is less than its book value, a second step would be performed that compares the fair value of the reporting unit's goodwill to the carrying value of its goodwill. If the fair value of the goodwill is less than the book value, the difference is recorded as an impairment charge. To evaluate the recoverability of other intangible assets with indefinite useful lives, the Company compares the fair values of intangible assets with their carrying value. The fair value of an intangible asset is determined using a discounted cash flow approach. In connection with its annual impairment tests the Company determined that there was no impairment of goodwill or other intangible assets. Accordingly, the Company did not record any impairment charges in 2002. For further information refer to Note 7. In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which was adopted by the Company effective January 1, 2002. SFAS No. 144 modifies the existing guidance in SFAS No. 121 and APB Opinion No. 30. Goodwill is evaluated annually for impairment under SFAS No. 142. In accordance with SFAS No. 144, the Company reviews the carrying value of its long lived assets or asset groups to be held and used for impairment whenever events or changes in circumstances indicate that the carrying value of these assets may not be recoverable. Recoverability of these assets is measured by a comparison of the carrying value of an asset to the future net cash flow directly associated with the asset. If assets are considered to be impaired, the impairment recognized is the amount by which the carrying value exceeds the fair value of the asset. The Company uses various valuation factors, including market prices and present value techniques to assess fair value. In accordance with SFAS No. 144, long lived assets to be disposed of by sale are reported at the lower of carrying value or fair value less cost to sell and depreciation is ceased. Long lived assets to be disposed of other than by sale are considered to be held and used until disposal. DEBT ISSUANCE COSTS Costs related to the issuance of debt are amortized over the term of the related obligation. SELF INSURANCE PROGRAMS The Company is self insured for professional, product and general liability, auto and worker's compensation claims up to predetermined amounts above which third party insurance applies. Estimates include ultimate costs for both reported and incurred but not reported claims. 59 FOREIGN CURRENCY TRANSLATION The Company follows the provisions of Statement of Financial Accounting Standards No. 52, "Foreign Currency Translation". Substantially all assets and liabilities of the Company's foreign subsidiaries are translated at year end exchange rates, while revenue and expenses are translated at exchange rates prevailing during the year. Adjustments for foreign currency translation fluctuations are excluded from net earnings and are deferred in the cumulative translation adjustment component of equity. In addition, the translation of certain intercompany borrowings denominated in foreign currencies, which are considered foreign equity investments, is included in the cumulative translation adjustment. Gains and losses resulting from the translation of revenues and expenses and intercompany borrowings, which are not considered equity investments, are included in general and administrative expense. Translation gains (losses) amounted to $14,842, ($4,519) and $5,927 for the twelve months ended December 31, 2002, 2001, and 2000 respectively. INCOME TAXES Deferred income taxes are provided for temporary differences between the reporting of income and expense for financial reporting and tax return purposes. Deferred tax liabilities or assets at the end of each period are determined using the tax rates then in effect for the periods when taxes are actually expected to be paid or recovered. Accordingly, income tax expense provisions will increase or decrease in the period in which a change in tax rates is enacted. RESEARCH AND DEVELOPMENT Research and development costs are expensed as incurred. LEGAL COSTS The Company accrues for loss contingencies when they are probable and can be reasonably estimated. Included in the Company's accrual is an estimate of the legal costs associated with the contingencies. COMPREHENSIVE INCOME Comprehensive income consists of net income (loss), foreign currency translation adjustments, minimum pension liability adjustments and changes in derivative instruments and is presented in the consolidated statements of comprehensive income. NEW PRONOUNCEMENTS In July 2001, the FASB issued SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. Provisions of SFAS 142 related to acquisitions completed after July 1, 2001 were adopted effective as of July 1, 2001. The Company adopted all other provisions of SFAS 142 effective January 1, 2002. The effect on prior years income is described in Note 7 of the Consolidated Financial Statements. In August 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations ("SFAS 143"). SFAS 143 addresses the reporting requirements for the retirement of tangible long-lived assets and asset retirement costs. SFAS 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs must be capitalized as part of the carrying amount of the long-lived asset. The Company will adopt SFAS No. 143 effective January 1, 2003. The adoption of SFAS No. 143 will not have a material impact on the Company's financial statements. In October 2001, the FASB issued SFAS No.144, Accounting for the Impairment or Disposal of Long-Lived Assets ("SFAS 144"). SFAS 144 requires that those long-lived assets be measured at the lower of carrying amount or fair value less selling costs. SFAS 144 also broadens the reporting of discontinued operations and provides that discontinued operations will no longer be measured at net realizable value or include amounts for operating losses that have not yet occurred. SFAS No. 144 was adopted effective January 1, 2002. The adoption of SFAS 144 did not have an impact on the Company's financial statements. In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13 and Technical Corrections ("SFAS 145"). SFAS 145 rescinds Statement No. 4 and requires the criteria under Opinion 30 to determine if losses from extinguishment of debt should be classified as extraordinary items. SFAS 145 amends Statement No. 13 to require that certain lease modifications that have economic effects similar to sale-leaseback arrangements be accounted for in a similar manner as sale-leaseback transactions. The Company will adopt SFAS No. 145 as related to SFAS 60 No. 4 effective January 1, 2003. In the second quarter 2002, the Company reported an extraordinary loss of $9.8 million for the early redemption of borrowings from affiliates. This extraordinary loss will be reclassified and presented as a loss from operating earnings. The Company adopted the remaining provisions of SFAS 145 effective April 1, 2002. In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities (SFAS 146). SFAS 146 nullifies EITF 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). The principal difference between this statement and EITF 94-3 relates to the requirements for the recognition of a liability for a cost associated with an exit or disposal activity. SFAS 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under EITF 94-3, a liability for an exit cost was recognized at the date of an entity's commitment to an exit plan. The provisions of SFAS 146 are effective for exit or disposal activities that are initiated after December 31, 2002. In November 2002, the FASB issued FASB Interpretation No. 45 ("Fin 45"), Guarantor's Accounting and Disclosure Requirements for Guarantees of Indebtedness of Others. FIN 45 requires a guarantor to recognize a liability measured at fair value at the inception of a guarantee for obligations undertaken, including its obligation to stand ready to perform over the term of the guarantee. The initial recognition and measurement provisions are applicable prospectively to guarantees issued or modified after December 31, 2002. FIN 45 also clarifies and expends the disclosure requirements related to guarantees and product warranties. The Company adopted those disclosures on December 31, 2002. See Note 15, Financial Instruments - "Fair Value and Financial Instruments." In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure - an amendment of FASB Statement No. 123. SFAS 148 provides alternative methods for a change to the fair value based method of accounting for stock-based employee compensation. It also amends the disclosure requirements of SFAS No. 123 to require disclosures in both annual and interim financial statements of the method of accounting for stock-based employee compensation and the effect the method used had on reported results. The Company adopted the annual disclosure requirement on December 31, 2002. See Note 14, Equity - "Stock Options." In January 2003, the Financial Accounting Standards Board issued FASB Interpretation No. 46 ("FIN 46") Consolidation of Variable Interest Entities. FIN 46 addresses the consolidation of variable interest entities by the primary beneficiary, when the total equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated support from other parties and/ or the equity investor lacks certain essential characteristics of a controlling financial interest. FIN 46 requires existing variable interest entities to be consolidated if those entities do not effectively disburse risk among the parties involved. The interpretation becomes effective at various dates in 2003 and provides various transition rules. The adoption of FIN 46 has no material impact on the Company's financial statements. RECLASSIFICATION Certain 2001 and 2000 amounts have been reclassified to conform with the 2002 presentation. NOTE 3. ACQUISITIONS The Company acquired certain health care facilities for a total consideration of $37,051, $388,403 and $115,601 for the twelve months ended December 31, 2002, 2001 and 2000, respectively. These acquisitions have been accounted for as purchase transactions and, accordingly, are included in the results of operations from the dates of acquisition. The excess of the total acquisition costs over the fair value of tangible net assets acquired was $36,267, $321,728 and $93,417 for the twelve months ended December 31, 2002, 2001 and 2000, respectively. Had the acquisitions that occurred during the twelve months ended December 31, 2002 been consummated on January 1, 2001, unaudited proforma net revenues for the twelve months ended December 31, 2002 and 2001 would have been $3,774,907 and $3,770,445, respectively. Unaudited proforma net income would have been $162,238 ($1.80 net income per share) and $(77,606) ($0.87 net loss per share) for the twelve months ended December 31, 2002 and 2001, respectively. Had the acquisitions that occurred during the twelve months ended December 31, 2001 been consummated on January 1, 2000, unaudited proforma net revenues for the twelve months ended December 31, 2001 and 2000 would have been $3,614,291 and $3,358,910 respectively. Unaudited proforma net income (loss) would have been ($78,942) ($0.88 net loss per share) and $97,015 ($1.07 net income per share) for the twelve months ended December 31, 2001 and 2000, respectively. 61 NOTE 4. OTHER BALANCE SHEET ITEMS
DECEMBER 31, -------------------------- 2002 2001 ---------- ---------- INVENTORIES Raw materials $ 44,670 $ 40,834 Manufactured goods in process 11,127 11,053 Manufactured and purchased inventory available for sale 70,127 84,789 ---------- ---------- 125,924 136,676 Health care supplies 59,968 65,545 ---------- ---------- Total $ 185,892 $ 202,221 ========== ==========
Under the terms of certain purchase commitments, the Company is obligated to purchase raw materials and health care supplies of $170,824 of which $58,995 is committed at December 31, 2002 for fiscal year 2003. The terms of these agreements run 1 to 6 years. OTHER CURRENT ASSETS Miscellaneous accounts receivable $ 72,645 $ 66,656 Deposits and prepaid expenses 55,974 52,936 ---------- ---------- Total $ 128,619 $ 119,592 ========== ========== GOODWILL AND OTHER INTANGIBLE ASSETS: Goodwill, less accumulated amortization of $459,687 and $459,687 $2,934,581 $2,889,174 ========== ========== OTHER INTANGIBLE ASSETS: Patient relationships, less accumulated amortization of $189,277 and $155,769 47,169 77,721 Tradename, less accumulated amortization of $31,376 and $31,376 210,135 209,454 Management Contracts, less accumulated amortization of $21,908 and $21,908 183,057 183,056 Other intangible assets, less accumulated amortization of $57,355 and $50,406 51,627 59,139 ---------- ---------- Total Other Intangible Assets $ 491,988 $ 529,370 ========== ========== ACCRUED LIABILITIES Accrued salaries and wages $ 74,636 $ 62,056 Accounts receivable credit balances 63,747 57,386 Accrued insurance 43,072 39,047 Accrued operating expenses 21,416 22,638 Accrued physician compensation 18,782 17,436 Accrued interest 18,993 16,492 Accrued other 21,242 16,323 ---------- ---------- Total $ 261,888 $ 231,378 ========== ==========
Accounts receivable credit balances principally reflect overpayments from third party payors and are in the process of repayment. 62 NOTE 5. SALE OF ACCOUNTS RECEIVABLE The Company, has an asset securitization facility (the "Accounts Receivable Facility") whereby receivables of NMC and certain affiliates are sold to NMC Funding Corporation (the "Transferor"), a wholly-owned subsidiary of NMC, and subsequently the Transferor transfers and assigns percentage ownership interests in the receivables to certain bank investors. NMC Funding Corporation is not consolidated as it does not meet the control criteria of SFAS No. 140. The retained interest in accounts receivable is reflected on the face of the balance sheet net of uncollectable accounts to approximate fair value. The Company has a servicing obligation to act as collection agent on behalf of the Transferor. The maturity of the Accounts Receivable Facility has been extended to October 23, 2003. At December 31, 2002 and 2001, $445,249 and $442,000, respectively, had been received pursuant to such sales and are reflected as reductions to accounts receivable. The Transferor pays interest to the bank investors, calculated based on the commercial paper rates for the particular tranches selected. The effective interest rate was approximately 1.48% for $429,249 and 1.89% for $16,000 at year-end 2002. Under the terms of the agreement, new interests in accounts receivable are sold without recourse as collections reduce previously sold accounts receivables. The cost related to such sales are expensed as incurred and recorded as interest expense and related financing costs. There were no gains or losses on these transactions. NOTE 6. DEBT Long-term debt to outside parties consists of:
DECEMBER 31, -------------------------- 2002 2001 -------- -------- NMC Credit Facility $616,900 $450,600 Other 1,840 27 -------- -------- 618,740 450,627 Less amounts classified as current 1,840 150,027 -------- -------- $616,900 $300,600 ======== ========
In September 1996, NMC entered into a credit agreement with a group of banks (collectively, the "Lenders"), pursuant to which the Lenders made available to NMC and certain specified subsidiaries and affiliates an aggregate of $2,000,000 through two credit facilities (collectively, the "NMC Credit Facility"). The NMC Credit Facility, as amended, includes: (i) a revolving credit facility of up to $1,000,000 for up to seven years (of which up to $250,000 is available for letters of credit, up to $450,000 is available for borrowings in certain non-U.S. currencies, up to $50,000 is available as swing lines in U.S. dollars and up to $20,000 is available as swing lines in certain non-U.S. currencies) ("Facility 1") and (ii) a term loan facility of $1,000,000 for up to seven years ("Facility 2"). Both the revolving credit facility and the term loan facility are scheduled to expire on September 30, 2003. Loans under the NMC Credit Facility bear interest at one of the following rates, at either (i) LIBOR plus an applicable margin or (ii) a base rate equal to the sum of (1) the higher from time to time of (A) the prime rate of Bank of America, N.A. or (B) the federal funds rate plus 0.50% and (2) an applicable margin. A commitment fee is payable to the Lenders equal to a percentage per annum applied against the unused portion of the NMC Credit Facility. In addition to scheduled quarterly principal payments under Facility 2, the NMC Credit Facility will be reduced by certain portions of the net cash proceeds from certain sales of assets, sales of accounts receivable and the issuance of subordinated debt and equity securities. All borrowings outstanding under Facility 1 are due and payable at September 30, 2003. Prepayments are permitted at any time without penalty, except in certain defined periods. The NMC Credit Agreement contains certain affirmative and negative covenants with respect to the Company, NMC and its subsidiaries, customary for this type of agreement. In December, 2001, a covenant was modified to reflect pending commercial payor litigation arising from this investigation. In February, 2002, an amendment was obtained to certain covenants that would have been affected by the special charge for potential liabilities and costs resulting from the W.R. Grace bankruptcy filing and for settlements and expenses related to commercial insurance litigation. At December 31, 2001, after receipt of the amendment, the Company was in compliance with all such covenants. In February 1998, $250,000 of Facility 2 was repaid, primarily using borrowings from affiliates. The voluntary prepayment reduced the available financing under the agreement to $1,750,000. The Company has made all of its scheduled 63 principal payments, reducing the amount available under the NMC Credit Facility at the end of 2002 and 2001 to $1,277,500 and $1,427,500, respectively. At December 31, 2002 and 2001 the Company had available $381,000 and $697,000, respectively, of additional borrowing capacity under the NMC Credit Facility including $216,000 and $216,000 respectively, available for additional letters of credit. In addition, at December 31, 2002, FMCAG had outstanding debt under the credit facility of $245,000. On February 21, 2003, the Company entered into an amended and restated agreement, which revised the NMC Credit Facility (See Note 21, Subsequent Events, 2003 Senior Credit Facility). Accordingly, the amounts due under the NMC Credit Facility in 2003 have been classified as long term debt. Borrowings from affiliates consists of:
DECEMBER 31, -------------------------- 2002 2001 ---------- ---------- Fresenius Medical Care AG borrowings primarily at interest rates approximating 2.22% and 2.85%, respectively ........ $ 214,000 $ 191,967 RTC Holdings International, Inc. borrowings at interest rates approximating 2.70% ....................................... 11,000 -- Fresenius AG borrowing at interest rates approximating 2.22% and 2.73%, respectively ............................. 6,000 15,000 Fresenius Medical Care Trust Finance S.a.r.l. borrowings at interest rates ranging between 8.25% and 8.43% ............ 654,244 1,005,239 Franconia Acquisition, LLC at interest rates approximating 1.69% and 2.40%, respectively ............................. 83,721 83,721 Other ....................................................... 1,122 1,102 ---------- ---------- 970,087 1,297,029 Less amounts classified as current .......................... 315,394 291,360 ---------- ---------- Total ....................................................... $ 654,693 $1,005,669 ========== ==========
Scheduled maturities of long-term debt and borrowings from affiliates are as follows: 2003 $ 317,234 2004 55,000 2005 105,000 2006 105,000 2007 351,900 2008 and thereafter 654,693 ---------- Total $1,588,827 ==========
64 NOTE 7. GOODWILL AND OTHER INTANGIBLE ASSETS - ADOPTION OF SFAS 142 The table below shows net income as reported for the twelve months ended December 31, 2002, 2001, and 2000 and net income as adjusted for the twelve months ended December 31, 2002, 2001, and 2000 as if SFAS 142 has been adopted January 1, 2000. The adjusted amounts have been tax effected.
TWELVE MONTHS ENDED DECEMBER 31, ------------------------------------- ($000) 2002 2001 2000 -------- -------- -------- Net Income $161,319 $(79,256) $105,250 Net Income Adjusted $161,319 $ 13,022 $192,338
Reconciliation of net income to adjusted net income and net income per share to adjusted net income per share.
TWELVE MONTHS ENDED DECEMBER 31, ---------------------------------------------- ($000 EXCEPT FOR NET INCOME PER SHARE) 2002 2001 2000 ----------- ----------- ----------- Reported Net Income $ 161,319 $ (79,256) $ 105,250 Addback: Amortization -- 92,278 87,088 ----------- ----------- ----------- Adjusted Net Income $ 161,319 $ 13,022 $ 192,338 =========== =========== =========== BASIC AND FULLY DILUTIVE NET INCOME PER SHARE: Reported $ 1.79 $ (0.89) $ 1.16 Addback: Amortization -- 1.03 0.97 ----------- ----------- ----------- Adjusted net income per share $ 1.79 $ 0.14 $ 2.13 =========== =========== ===========
The total pre-tax amortization expense associated with goodwill and specific indefinite lived intangible assets recognized during the twelve months ended December 31, 2001 and 2000 totaled $106,834 and $101,828, respectively. The effective tax rate for the SFAS 142 adjustment of amortization was 13.6% for 2001 and 14.5% for 2000. The effective tax rate is less than the corporate statutory rate primarily due to permanent differences related to non-deductible goodwill. The gross carrying value and accumulated amortization of amortizable intangible assets is as follows:
DECEMBER, 31 2002 DECEMBER 31, 2001 --------------------------- --------------------------- GROSS GROSS CARRYING ACCUMULATED CARRYING ACCUMULATED VALUE AMORTIZATION VALUE AMORTIZATION --------- ------------ --------- ------------ Patient Relationships $ 236,446 $(189,277) $ 233,490 $(155,769) Other Intangibles $ 108,982 $ (57,356) $ 109,545 $ (50,406)
The balance of goodwill at December 31, 2001 was $2,889,174. Goodwill acquired during the year was $45,407. The balance of goodwill at December 31, 2002 was $2,934,581. Amortization expense for amortizable intangible assets at December 31, 2002 was $41,965. Amortization expense is estimated to be $21,400 for 2003, $17,400 for 2004, $14,000 for 2005, and $10,700 for 2006. NOTE 8. SPECIAL CHARGE FOR LEGAL MATTERS In the fourth quarter of 2001, the Company recorded a $258 million ($177 million after tax) special charge to address 1996 merger-related legal matters, estimated liabilities and legal expenses arising in connection with the Grace Chapter 11 Proceedings and the cost of resolving pending litigation and other disputes with certain commercial insurers (see Note 17). The Company accrued $172 million principally representing a provision for income taxes payable for the years prior to the 1996 merger for which the Company has been indemnified by W.R. Grace, but may ultimately be obligated to pay as a result of Grace's Chapter 11 Proceedings. In addition, that amount included the estimated costs of defending the Company in all litigation arising out of Grace's Chapter 11 Proceedings (see Note 17). 65 The Company included $55 million in the special charge to provide for settlement obligations, legal expenses and the resolution of disputed accounts receivable relating to various insurance companies (see Note 17). The remaining amount of the special charge ($30 million) was accrued mainly for (i) assets and receivables that are impaired in connection with other legal matters and (ii) anticipated expenses associated with the continued defense and resolution of the legal matters. At December 31, 2002, there is a remaining balance of $191 million for the accrual for the special charge for legal matters. The Company believes that these reserves are adequate for the settlement of all matters described above. During the year ended December 31, 2002, $33 million in charges were applied against the accrued special charge for legal matters. NOTE 9. SPECIAL CHARGE FOR SETTLEMENT OF INVESTIGATION AND RELATED COSTS RECORDED IN 1999 On January 18, 2000, the Company, NMC and certain affiliated companies executed definitive agreements (the "Settlement Agreements") with the United States Government (the "Government") to settle (i) matters concerning violations of federal laws and (ii) NMC's claims with respect to outstanding Medicare receivables for nutrition therapy (collectively, the "Settlement"). In 2001, the Company remitted final payment of $85.9 million pursuant to the Settlement. In addition, the Company received final payment of $5.2 million in the first quarter of 2001 from the Government, related to the Company's claims for outstanding Medicare receivables. NOTE 10. INCOME TAXES Income (loss) before income taxes are as follows:
TWELVE MONTHS ENDED DECEMBER 31, ----------------------------------------------- 2002 2001 2000 --------- --------- --------- Domestic $ 268,122 $ (61,655) $ 201,305 Foreign 601 2,022 2,266 --------- --------- --------- Total income (loss) before income taxes $ 268,723 $ (59,633) $ 203,571 ========= ========= =========
The provision (benefit) for income taxes are as follows:
TWELVE MONTHS ENDED DECEMBER 31, ----------------------------------------------- 2002 2001 2000 --------- --------- --------- Current tax expense Federal $ 41,224 $ 71,021 $ 2,616 State 12,150 15,675 10,195 Foreign 1,151 1,229 610 --------- --------- --------- Total current 54,525 87,925 13,421 Deferred tax expense (benefit) Federal 48,916 (53,396) 79,858 State 4,117 (15,077) 4,712 Foreign (154) 171 330 --------- --------- --------- Total deferred tax expense (benefit) 52,879 (68,302) 84,900 --------- --------- --------- Total provision $ 107,404 $ 19,623 $ 98,321 ========= ========= =========
The total provision of $107,404 is net of the deferred tax benefit on the early redemption of borrowings from affiliates of $6,250. Deferred tax liabilities (assets) are comprised of the following:
DECEMBER 31, ---------------------------- 2002 2001 --------- --------- Reserves and other accrued liabilities $(110,772) $(138,442) Depreciation and amortization 151,553 148,608 Special charge not currently deductible (46,580) (67,760) Derivatives (42,370) (26,514) Minimum additional pension liability (12,905) -- Other 174 323 --------- --------- Net deferred tax asset $ (60,900) $ (83,785) ========= =========
66 The provision (benefit) for income taxes for the twelve months ended December 31, 2002, 2001, and 2000 differs from the amount of income taxes determined by applying the applicable statutory federal income tax rate to pretax earnings as a result of the following differences:
TWELVE MONTHS ENDED DECEMBER 31, --------------------------------------- 2002 2001 2000 ------ ------ ------ Statutory federal tax rate (benefit) 35.0% (35.0%) 35.0% State income taxes, net of federal tax benefit 4.0 0.7 4.7 Amortization of goodwill -- 38.2 10.2 Special charge for legal matters -- 31.6 -- Government Settlement -- -- (2.3) Foreign losses and taxes 0.3 0.7 0.6 Other 0.7 (3.3) 0.1 ------ ------ ------ Effective tax rate 40.0% 32.9% 48.3% ====== ====== ======
The net increase (decrease) in the valuation allowance for deferred tax assets was $4,221, $1,097 and $(2,407) for the twelve months ended December 31, 2002, 2001, and 2000, respectively. It is the Company's expectation that it is more likely than not to generate future taxable income to utilize its net deferred tax asset. The changes for all three years relate to activities incurred by foreign subsidiaries. At December 31, 2002, there were approximately $18,764 of foreign net operating losses, the majority of which expire within seven years. Provision has not been made for additional federal, state, or foreign taxes on $5,595 of undistributed earnings of foreign subsidiaries. Those earnings have been, and will continue to be reinvested. The earnings could be subject to additional tax if they were remitted as dividends, if foreign earnings were loaned to the Company or a U.S. affiliate or if the Company should sell its stock in the subsidiaries. The Company estimates that the distribution of these earnings would result in $2,238 of additional foreign withholding and federal income taxes. The Internal Revenue Service has proposed federal income tax deficiencies for the years 1997 and 1998. The Company is contesting these proposed deficiencies and believes that adequate provision has been made for any adjustment that may result from this tax examination. NOTE 11. PROPERTIES AND EQUIPMENT
DECEMBER 31, ---------------------------- 2002 2001 --------- --------- Land and improvements $ 5,423 $ 5,211 Buildings 69,876 69,874 Capitalized lease property 613 613 Leasehold improvements 381,214 315,260 Equipment and furniture 492,128 459,790 Construction in progress 36,321 51,817 --------- --------- 985,575 902,565 Accumulated depreciation and amortization (454,494) (381,945) --------- --------- Properties and equipment, net $ 531,081 $ 520,620 ========= =========
Depreciation expense relating to properties and equipment amounted to $97,785, $91,328 and $80,034 for the years ended December 31, 2002, 2001 and 2000, respectively. Included in properties and equipment as of December 31, 2002, and 2001 were $30,726 and $28,804, respectively, of peritoneal dialysis cycler machines which the Company leases to customers with end-stage renal disease on a month-to-month basis. Rental income for the peritoneal dialysis cycler machines was $11,614, $13,108, and $12,472 for the twelve months ended December 31, 2002, 2001 and 2000, respectively. 67 LEASES In June 2001, the Company entered into an amended operating lease arrangement with a bank that covers approximately $77,378 of equipment in its dialyzer manufacturing facility in Ogden, Utah. The agreement has a basic term expiration date of January 1, 2010, renewal options and a purchase option at the greater of 20% of the original cost or the fair market value. In September 2001, the Company entered into an additional operating lease agreement for the financing of approximately $15,798 of new equipment for the expansion of the Ogden, Utah manufacturing facility. The agreement has an expiration date of September 28, 2011 with a one year renewal option and an option to purchase at fair market value There is an early purchase option on October 2, 2006 for 70% of the original cost, and a second early purchase option at January 2, 2010 for the greater of fair market value or 40% of the original cost. In June 2002, the Company entered into an additional operating lease agreement for the financing of approximately $19,500 of new equipment for the expansion of the Ogden, Utah manufacturing facility. The agreement has an expiration date of September 28, 2011 with a one year renewal option and option to purchase at fair market value. There is an early purchase option on January 2, 2010 for the greater of fair market value or 30% of the original cost. In December 2002, the Company entered into an additional operating lease agreement for the financing of approximately $1,900 of new equipment for the expansion of the Ogden, Utah manufacturing facility. The agreement has an expiration date of September 28, 2011 with a three month renewal option. There is an early purchase option on January 2, 2010 for 34% of the original cost. In December 2002, the Company entered into an additional operating lease agreement for the financing of approximately $3,160 of new equipment for the expansion of the Reynosa Tamaulipas, Mexico manufacturing facility. The agreement has an expiration date of June 30, 2007 with a six month renewal option and a purchase option at the fair market value of the equipment not to exceed 12% of the original cost. There is an early purchase option on December 31, 2006 for 23% of the original cost. Future minimum payments under noncancelable leases (principally for clinics, offices and equipment) as of December 31, 2002 are as follows:
OPERATING LEASES CAPITAL LEASES TOTAL ------------- -------------- ----------- 2003 $ 202,985 $ 879 $ 203,864 2004 226,197 422 226,619 2005 168,509 512 169,021 2006 158,244 -- 158,244 2007 87,223 -- 87,223 2008 and beyond 127,534 -- 127,534 ------------- ------------- ----------- Total minimum payments $ 970,692 $ 1,813 $ 972,505 ============= =========== Less interest and operating costs 231 ------------- Present value of minimum lease Payments ($463 payable in 2003). $ 1,582 =============
Rental expense for operating leases was $220,234, $195,830 and $157,335 for the years ended December 31, 2002, 2001 and 2000, respectively. Amortization of properties under capital leases amounted to $153, $180, and $369 for the years ended December 31, 2002, 2001 and 2000, respectively. Lease agreements frequently include renewal options and require that the Company pay for utilities, taxes, insurance and maintenance expenses. Options to purchase are also included in some lease agreements, particularly capital leases. 68 NOTE 12. MANDATORILY REDEEMABLE PREFERRED SECURITIES During 2001 and 2000, a wholly-owned subsidiary of the Company issued shares of various series of Preferred Stock ("Redeemable Preferred Securities") to NMC which were then transferred to FMCAG for proceeds totaling $392,037 in 2001 and $305,500 in 2000. No Redeemable Preferred Securities were issued during the twelve months ended December 31, 2002. The table below provides information for Redeemable Preferred Securities for the periods indicated.
DECEMBER 31, DECEMBER 31, MANDATORILY REDEEMABLE PREFERRED SECURITIES 2002 2001 ------------ ------------ Series A Preferred Stock, 1,000 shares .. $ 113,500 $ 113,500 Series B Preferred Stock, 300 shares .... 34,000 34,000 Series C Preferred Stock, 1,700 shares .. 192,000 192,000 Series D Preferred Stock, 870 shares .... 97,500 97,500 Series E Preferred Stock, 1,300 shares .. 147,500 147,500 Series F Preferred Stock, 980 shares .... 113,037 113,037 --------- --------- 697,537 697,537 Mark to Market Adjustment ............... 73,672 (5,207) --------- --------- Total ................................... $ 771,209 $ 692,330 ========= =========
These securities are similar in substance except for the order of preference both as to dividends and liquidation, dissolution or winding-up of the subsidiary. The order of preference among the various series corresponds to the alphabetical order of Series A through Series F. In addition, the holders of the Redeemable Preferred Securities are entitled to receive dividends in an amount of dollars per share that varies from approximately 3% to 8% of the purchase price depending on the Series. The dividends will be declared and paid in cash at least annually. All the Redeemable Preferred Securities have a par value of $.01 per share. Upon liquidation or dissolution or winding up of the issuer of the Redeemable Preferred Securities, the holders of the Redeemable Preferred Securities are entitled to an amount equal to the liquidation preference for each share of stock plus an amount equal to all accrued and unpaid dividends thereon through the date of distribution. The liquidation preference is the sum of the issuance price plus, for each year or portion thereof, an amount equal to one-half of one percent of the issue price, not to exceed 5%. Redeemable Preferred Securities (Series A and C) originally due to be sold to the Company in 2002 for Euro 341,385 had their redemption dates extended until October and November 2003, respectively. The other Redeemable Preferred Securities will be sold back to the Company two years from their respective date of issuance for a total amount equal to Euros 160,388 (Series B and F) and US dollars $245,000 (Series D and E) plus any accrued and unpaid dividends. Dividends were recorded and classified as part of interest expense in the consolidated statement of operations in the amounts of $41,583 and $32,946 in the twelve month periods ended December 31, 2002 and 2001, respectively. In March and December 2002, cash dividend payments were made totaling $29,860 and $27,158, respectively. The Euro Redeemable Preferred Securities are deemed to be a Euro liability and the risk of foreign currency fluctuations are hedged through forward currency contracts. The Company records mark to market adjustments based on fluctuations in currency rates and records the offset to accumulated comprehensive income. The holders of the Redeemable Preferred Securities have the same participation rights as the holders of all other classes of capital stock of the issuing subsidiary. 69 NOTE 13. PENSION AND OTHER POST RETIREMENT BENEFITS DEFINED BENEFIT PENSION PLANS Substantially all domestic employees are covered by NMC's non-contributory, defined benefit pension plan. Each year NMC contributes at least the minimum required by the Employee Retirement Income Security Act of 1974, as amended. Plan assets consist primarily of publicly traded common stock, fixed income securities and cash equivalents. During the first quarter of 2002, the Company recorded a gain of approximately $12.6 million resulting from the curtailment of the Company's defined benefit and supplemental executive retirement plans. Under the curtailment amendment, no additional defined benefits for future services will be earned by substantially all employees eligible for the plan. The Company has retained all employee pension obligations as of the curtailment date for the fully-vested and frozen benefits for all employees. The following provides a reconciliation of benefit obligations, plan assets, and funded status of the plans.
TWELVE MONTHS ENDED DECEMBER 31, ----------------------------------------- 2002 2001 2000 --------- --------- --------- CHANGE IN BENEFIT OBLIGATION Benefit obligation at beginning of year $ 124,022 $ 105,441 $ 87,737 Service Cost 2,820 11,050 9,987 Interest Cost 8,320 7,708 6,713 Actuarial (Gain)/Loss 19,646 2,871 3,752 Benefits Paid (2,558) (3,048) (2,748) Effect of Curtailment (21,660) -- -- --------- --------- --------- Benefit obligation at end of year $ 130,590 $ 124,022 $ 105,441 --------- --------- --------- CHANGE IN PLAN ASSETS Fair value of plan assets at beginning of year 83,354 81,948 86,794 Actual return on plan assets (8,830) (4,558) (2,098) Employer contribution 6,034 9,012 -- Benefits paid (2,558) (3,048) (2,748) --------- --------- --------- Fair value of plan assets at end of year $ 78,000 $ 83,354 $ 81,948 --------- --------- --------- FUNDED STATUS AND STATEMENT OF FINANCIAL POSITION Funded Status (52,590) (40,668) (23,493) Unrecognized actuarial net (gain)/loss 29,912 2,868 (14,367) Unrecognized prior service cost -- (3) (4) --------- --------- --------- Accrued benefit costs $ (22,678) $ (37,803) $ (37,864) --------- --------- --------- Accumulated Benefit Obligation $(129,264) $(101,590) $ (81,948) Fair value of plan assets at end of year 78,000 83,354 81,948 --------- --------- --------- Unfunded accrued benefit liability (51,264) (18,236) -- Accrued benefit costs 22,678 37,803 37,864 --------- --------- --------- Additional minimum liability $ (28,586) $ * $ * --------- --------- ---------
*No additional minimum liability is required since the unfunded accrued benefit liability is less than the accrued benefit costs. AMOUNTS RECOGNIZED IN STATEMENT OF FINANCIAL POSITION CONSIST OF : Accrued benefit costs $ (22,678) $ (37,803) $ (37,864) Accumulated other comprehensive income (28,586) -- -- --------- --------- --------- Net amount recognized $ (51,264) $ (37,803) $ (37,864) --------- --------- --------- WEIGHTED - AVERAGE ASSUMPTIONS AS OF DECEMBER 31, Discount rate 6.75% 7.50% 8.00% Expected return of plan assets 8.50 10.0 9.70 Rate of compensation increase 4.50 4.50 4.50
70 COMPONENTS OF NET PERIODIC BENEFIT COST Service Cost $ 2,820 $ 11,050 $ 9,987 Interest Cost 8,320 7,708 6,713 Expected return on plan assets (7,612) (8,430) (8,345) Net Amortization -- (1,377) (2,430) Effect of curtailment (12,620) -- -- --------- --------- --------- Net periodic (benefit) costs $ (9,092) $ 8,951 $ 5,925 --------- --------- ---------
NMC's supplemental executive retirement plan provides certain key executives with benefits in excess of normal pension benefits. This plan was also curtailed during the first quarter 2002. The projected benefit obligation was $5,821 and $6,513 at December 31, 2002 and 2001, respectively. Pension expense for this plan, for the twelve months ended December 31, 2002, 2001 and 2000 was $529, $1,070 and $983, respectively. The Company recorded $1,565 to accumulated other comprehensive income to recognize the additional minimum liability for this plan related to the excess of the accumulated benefit obligation over the fair value of plan assets and accrued pension benefits at December 31, 2002. No additional minimum liability was recognized at December 31, 2001. NMC does not provide any postretirement benefits to its employees other than those provided under its pension plan and supplemental executive retirement plan. DEFINED CONTRIBUTION PLANS The Company's employees are eligible to join 401 (k) Savings Plan once they have achieved a minimum of 90 days of service and if they have more than 900 hours of service before their one year anniversary date. Under the provisions of the 401(k) plan, employees are allowed to contribute up to 16% of their salaries. The Company contributes 50% of their savings up to 6% of saved pay after one year. The Company's total contributions for the years ended December 31, 2002, 2001 and 2000 was $12,974, $10,647 and $8,786, respectively. EVEREST EMPLOYEES' RETIREMENT PLAN AND TRUST The Company's Everest employees participated in the Everest Employees Retirement Plan ("Everest Plan"), a non-contributory defined benefit pension plan. The defined benefit plan covered all the employees of Everest and a related party with common ownership, Nephrology Associates of Northern Illinois, Ltd ("NANI"), who met certain eligibility requirements. Retirement benefit payments were based on years of credited service and average compensation over the final five years of employment. The funding policy was to contribute annually amounts, which were deductible for federal income tax purposes. Effective May 16, 1996, all participant plan benefits in the defined benefit plans were frozen. Everest and NANI ceased funding the defined benefit plans as of May 16, 1996 and no additional years of benefit service were accrued by plan participants subsequent to that date. The projected benefit obligation was $7,807 and $7,418 at December 31, 2002 and 2001, respectively. There was a pension benefit of $27 for this plan for the year ended December 31, 2002. There was no pension benefit or expense for 2001 or 2000. The Company recorded $2,110 to accumulated other comprehensive income to recognize the additional minimum liability for this plan related to the excess of the accumulated benefit obligation over the fair value of plan assets and accrued pension benefits at December 31, 2002. No additional minimum liability was recognized at December 31, 2001. 71 NOTE 14. EQUITY PREFERRED STOCK At December 31, 2002 and 2001, the components of the Company's preferred stocks as presented in the Consolidated Balance Sheets and the Consolidated Statements of Changes in Equity are as follows: PREFERRED STOCKS, $100 PAR VALUE - - 6% Cumulative (1); 40,000 shares authorized; 36,460 outstanding $3,646 - - 8% Cumulative Class A (2); 50,000 shares authorized; 16,176 outstanding 1,618 - - 8% Noncumulative Class B (2); 40,000 shares authorized; 21,483 outstanding 2,148 ------ $7,412
PREFERRED STOCKS, $.10 PAR VALUE - - Noncumulative Class D (3); 100,000,000 shares authorized; 89,062,316 outstanding 8,906 ------- Total Preferred: See Note 21. Subsequent Events, "Class D Preferred Stock". $16,318 =======
(1) 160 votes per share (2) 16 votes per share (3) 1/10 vote per share STOCK OPTIONS In 1996, FMCAG adopted a stock incentive plan (the "FMCAG Plan") under which the Company's key management and executive employees are eligible. Under the FMCAG Plan, eligible employees will have the right to acquire Preference Shares of FMCAG. Options granted under the FMCAG Plan will be evidenced by a non-transferable convertible bond and corresponding non-recourse loan to the employee, secured solely by the bond with which it was made. The bonds mature in ten years and are generally fully convertible after three to five years. Each convertible bond, which is DM denominated, entitles the holder thereof to convert the bond in Preference Shares equal to the face amount of the bond divided by the Preference Share's nominal value. During 1998, the FMCAG adopted a new stock incentive plan ("FMCAG 98 Plan") under which the Company's key management and executive employees are eligible. Under the FMCAG 98 Plan, eligible employees will have the right to acquire Preference Shares of FMCAG. Options granted under the FMCAG 98 Plan will be evidenced by a non-transferable convertible bond and a corresponding non-recourse loan to the employee, secured solely by the bond with which it was made. Each convertible bond, which is DM denominated, will entitle the holder thereof to convert the bond in Preference Shares equal to the face amount of the bond divided by the Preference Share's nominal value. Effective September 2001, no additional Grants or Options will be awarded under the FMCAG 98 Plan. On May 23, 2001, by resolution of the FMCAG shareholders at the annual general meeting, the FMCAG 98 Plan was replaced by a new plan (FMCAG International Plan). The management board was empowered to issue convertible bonds with a total value of $10,240 to the members of the management board and to other employees of the Company entitling a total subscription of up to 4 million non-voting Preference shares. The convertible bonds have a par value of $2.56 and are interest bearing at a rate of 5.5%. Purchase of the bonds is funded by a non-recourse loan secured by the bond with respect to which the loan was made. The Company has the right to offset its obligation on a convertible bond against the employee obligation on the related loan; therefore, the convertible bond obligations and employee loan receivables are not reflected in the Company's consolidated financial statements. The bonds mature in ten years and are generally fully convertible after three years. The bonds may be issued either as convertible bonds, which are subject to a stock price target or convertible bonds without a stock price target. In the case of convertible bonds which are subject to a stock price target the conversion right is exercisable only if the market price of the preference shares increased by 25% or more over the grant-date price subsequent 72 to the day of grant for at least one day prior to exercise. Participants have the right to opt for convertible bonds with or without the stock price target. In order to create an incentive to select convertible bonds which depend on the stock price target, the number of convertible bonds awarded to those employees who select the bonds without a stock price target will be reduced by 15%. Each convertible bond entitles the holder thereof, upon payment of a conversion price to convert the bond into one Preference share. The conversion price of the convertible bonds which are not subject to the stock price target is determined by the average price of the Preference shares during the last 30 trading days prior to the date of grant. The conversion price of the convertible bonds subject to a stock price target is equal to 125% of the average price of the preference shares during the last 30 preceding days prior to the grant date. The Managing Board and Supervisory Board of FMCAG are authorized to issue up to 20% of the total number of convertible bonds each year up to May 22, 2006. The plan is valid until the last convertible bond issued under this plan is terminated or converted. The following table summarizes the preference shares available at December 31, 2002 under each of the plans.
FMCAG FMCAG PLAN FMCAG 98 PLAN INTERNATIONAL PLAN ---------- --------------- ------------------ BALANCE AT DECEMBER 31, 1999 280,999 1,455,855 -- Granted -- 653,325 -- Exercised -- (303,123) -- Canceled/Forfeited (75,833) (13,203) -- ---------- ---------- ---------- BALANCE AT DECEMBER 31, 2000 205,166 1,792,854 -- Granted -- 183,007 414,264 Exercised -- (131,820) -- Canceled/Forfeited -- (154,110) -- ---------- ---------- ---------- BALANCE AT DECEMBER 31, 2001 205,166 1,689,931 414,264 Granted -- -- -- Exercised -- (9,797) -- Canceled/Forfeited (45,000) (64,931) (16,850) ---------- ---------- ---------- BALANCE AT DECEMBER 31, 2002 160,166 1,615,203 397,414 ========== ========== ========== EXERCISABLE AT DECEMBER 31, 2002 68,689 1,322,745 -- ========== ========== ==========
NOTE 15. FINANCIAL INSTRUMENTS MARKET RISK The Company is exposed to market risks due to changes in interest rates and foreign currency rates. The Company uses derivative financial instruments, including interest rate swaps and foreign exchange contracts, as part of its risk management strategy. These instruments are used as a means of hedging exposure to interest rate and foreign currency fluctuations in connection with firm commitments and debt obligations. The Company does not hold or issue derivative instruments for trading or speculative purposes. The mark-to-market valuations of the financial instruments and of associated underlying exposures are closely monitored at all times. The Company uses portfolio sensitivities and stress tests to monitor risk. Overall financial strategies and the effects of using derivatives are reviewed periodically. FOREIGN CURRENCY CONTRACTS The Company uses foreign exchange contracts as a hedge against foreign exchange risks associated with the settlement of foreign currency denominated payables and firm commitments. At December 31, 2002 and 2001, the Company had outstanding foreign currency contracts for the purchase of Euros ("EUR") totaling $576,741 and $476,378, respectively, contracts for the purchase of 168,000 Mexican Pesos, and contracts for the sale of 14,200 Canadian Dollars. The contracts outstanding at December 31, 2002 include forward contracts for purchase of EUR at rates ranging from $0.8719 to $0.9676 per EUR, forward contracts for the purchase of Mexican Pesos at rates ranging from 10.295 to 11.101 per US$, and outright sale contracts for 73 Canadian Dollars at rates ranging from $0.6283 to $0.6539 per Canadian Dollar. All contracts are for periods between January 2003 and May 2004. The fair value of currency contracts are the estimated amounts that the Company would receive or pay to terminate the agreement at the reporting date, taking into account the current exchange rates and the current creditworthiness of the counterparties. At December 31, 2002 and 2001, the Company would have received (paid) approximately $84,821 and ($13,340), respectively, to terminate the contracts. INTEREST RATE AGREEMENTS At December 31, 2002 and 2001, the Company had interest rate swaps and option agreements outstanding with various commercial banks for notional amounts totaling $1,050,000. All of these agreements were entered into for other than trading purposes. During 2002, the Company extended $600,000 of interest rate swaps due to expire in 2003 until 2006 through 2009 with an average reduction in interest rate of 1.77%. There were no amounts paid or received for these extensions. The contracts mature at various dates between May 2004 and December 2009. For a notional amount of $1,050,000, the interest rate swaps effectively change the Company's interest rate exposure on its variable-rate loans under the NMC Credit Facility (drawn as of December 31, 2002: $616,900), draw downs under the receivables financing facility (drawn as of December 31, 2002: $445,000), to fixed rates of interest approximating 6.88%. Under the NMC Credit Facility, the Company agreed to maintain at least $500,000 of interest rate protection. The fair value of the interest rate swaps and options is the estimated amount that the Company would receive or pay to terminate the agreements. The fair value of these agreements at December 31, 2002 and December 31, 2001 would require the Company to pay approximately $99,200 and $66,600 respectively. These estimates are subjective in nature and involve uncertainties and matters of significant judgement and therefore cannot be determined with precision. Changes in assumptions significantly affect the estimates. CREDIT RISK The Company is exposed to credit risk to the extent of potential nonperformance by counterparties on financial instruments. As of December 31, 2002, the Company's credit exposure was insignificant and limited to the fair value stated above; the Company believes the risk of incurring losses due to credit risk is remote. FAIR VALUE OF OTHER FINANCIAL INSTRUMENTS At December 31, 2002 and 2001, the carrying value of cash, cash equivalents, accounts receivable, prepaid expenses, accounts payable, accrued expenses, short-term borrowings and current liabilities approximated their fair values, based on the short-term maturities of these instruments. Mandatorily redeemable preferred securities with related parties are mark to market at each balance sheet date and reflect their fair value. The Company's long-term bank debt represents borrowings primarily from a syndicated bank credit facility. The long-term bank debt is valued at its carrying amount because the actual drawings under the facility carry interest on a variable basis which reflects actual money market conditions, plus specific margins which represent Company-related performance ratios as well as the entire set of terms and conditions including covenants as determined in the 2003 Senior Credit Agreement. In addition, the Company is a "Subsidiary Guarantor" along with its parent company, FMCAG, for the issuance of Trust Preferred Securities on the books of FMCAG at a carrying value of $1,145,281 and $1,428,768, at December 31, 2002 and 2001 respectively. FMCAG and Subsidiary Guarantors guarantee the Trust Preferred Securities through a series of undertakings. At December 31, 2002 the carrying value of the Trust Preferred Securities exceeded the fair value by $34,978. At December 31, 2001, the fair value of these Trust Preferred Securities exceeded the carrying value by $4,506. The fair value of these Trust Preferred Securities is based upon market quotes. 74 NOTE 16. RELATED PARTY TRANSACTIONS AND ALLOCATIONS SERVICES Related party transactions pertaining to services performed and products purchased/sold between affiliates are recorded as net accounts payable to affiliates on the balance sheet. At December 31, 2002 and 2001, the Company had net accounts payable of $28,897 and $39,934, respectively. BORROWINGS WITH AFFILIATES The Company has various outstanding borrowings with FMCAG and affiliates. The funds were used for general corporate purposes. The loans are due at various maturities. See Note 6 - "Debt, - Borrowings from Affiliates" for details and See Note 12 - "Mandatorily Redeemable Preferred Securities." 75 NOTE 17. COMMITMENTS AND CONTINGENCIES COMMERCIAL LITIGATION The Company was formed as a result of a series of transactions pursuant to the Agreement and Plan of Reorganization (the "Merger") dated as of February 4, 1996 by and between W.R. Grace & Co. and Fresenius AG. At the time of the Merger, a W.R. Grace & Co. subsidiary known as W.R. Grace & Co.-Conn. had, and continues to have, significant potential liabilities arising out of product-liability related litigation, pre-Merger tax claims and other claims unrelated to NMC, which was Grace's dialysis business prior to the Merger. In connection with the Merger, W.R. Grace & Co.-Conn. agreed to indemnify the Company, and NMC against all liabilities of W.R. Grace & Co., whether relating to events occurring before or after the Merger, other than liabilities arising from or relating to NMC's operations. W.R. Grace & Co. and certain of its subsidiaries filed for reorganization under Chapter 11 of the U.S. Bankruptcy Code (the "Grace Chapter 11 Proceedings") on April 2, 2001. Pre-Merger tax claims or tax claims that would arise if events were to violate the tax-free nature of the Merger, could ultimately be the obligation of the Company. In particular, W. R. Grace & Co. has disclosed in its filings with the Securities and Exchange Commission that: its tax returns for the 1993 to 1996 tax years are under audit by the Internal Revenue Service (the "Service"); W. R. Grace & Co. has received the Service's examination report on tax periods 1993 to 1996; that during those years Grace deducted approximately $122,100 in interest attributable to corporate owned life insurance ("COLI") policy loans; that W.R. Grace & Co. has paid $21,200 of tax and interest related to COLI deductions taken in tax years prior to 1993; that a U.S. District Court ruling has denied interest deductions of a taxpayer in a similar situation and that W.R. Grace & Co. is seeking a settlement of the Service's claims. Subject to certain representations made by W.R. Grace & Co., the Company and Fresenius AG, W.R. Grace & Co. and certain of its affiliates agreed to indemnify the Company against this and other pre-Merger and Merger related tax liabilities. Prior to and after the commencement of the Grace Chapter 11 Proceedings, class action complaints were filed against W.R. Grace & Co. and the Company by plaintiffs claiming to be creditors of W.R. Grace & Co.- Conn., and by the asbestos creditors' committees on behalf of the W.R. Grace & Co. bankruptcy estate in the Grace Chapter 11 Proceedings, alleging among other things that the Merger was a fraudulent conveyance, violated the uniform fraudulent transfer act and constituted a conspiracy. All such cases have been stayed and transferred to or are pending before the U.S. District Court as part of the Grace Chapter 11 Proceedings. On February 6, 2003, the Company reached a definitive agreement with the asbestos creditors' committees on behalf of the W.R. Grace and Co. bankruptcy estate in the matters pending in the Grace Chapter 11 Proceedings (the "Settlement Agreement") for the settlement of all fraudulent conveyance claims against it and other claims related to the Company that arise out of the bankruptcy of W.R. Grace & Co. Under the terms of the Settlement Agreement, fraudulent conveyance and other claims raised on behalf of asbestos claimants will be dismissed with prejudice and the Company will receive protection against existing and potential future W.R. Grace & Co. related claims, including fraudulent conveyance and asbestos claims, and indemnification against income tax claims related to the non-NMC members of the W.R. Grace & Co. consolidated tax group upon confirmation of a W.R. Grace & Co. bankruptcy reorganization plan that contains such provision. Under the Settlement Agreement, the Company will pay a total of $115,000 to the W.R. Grace & Co. bankruptcy estate, or as otherwise directed by the Court, upon plan confirmation. No admission of liability has been or will be made. The Settlement Agreement is subject to the approval of the U.S. District Court. The foregoing summary of the material terms of the Settlement Agreement is qualified in its entirety by reference to the full text of the Settlement Agreement. The Settlement Agreement has been filed as an exhibit to the Company's annual report for 2002 to the Securities and Exchange Commission. Subsequent to the Merger, W.R. Grace & Co. was involved in a multi-step transaction involving Sealed Air Corporation (formerly known as Grace Holding, Inc.). The Company is engaged in litigation with Sealed Air Corporation ("Sealed Air") to confirm the Company's entitlement to indemnification from Sealed Air for all losses and expenses incurred by the Company relating to pre-Merger tax liabilities and Merger-related claims. Under the Settlement Agreement, upon confirmation of a plan that satisfies the conditions to the Company's payment obligation, this litigation will be dismissed with prejudice. Since 1997, the Company, NMC, and certain NMC subsidiaries have been engaged in litigation with various insurance companies concerning allegations of inappropriate billing practices for nutritional therapy and diagnostic and clinical laboratory tests and misrepresentations. These claims against the Company seek unspecified damages and costs. The Company, NMC and its subsidiaries believe that there are substantial defenses to the claims asserted, and intend to vigorously defend all lawsuits. The Company has filed counterclaims against the plaintiffs in these matters based on inappropriate claim denials and delays in claim payments. Other private payors have contacted the Company and may assert that NMC received excess payments and, similarly, may join the lawsuits or file their own lawsuit seeking reimbursement and other damages. Although the ultimate outcome on the Company of these proceedings cannot be predicted at this time, an adverse result could have a material adverse effect on the Company's business, financial condition and results of operations. 76 OTHER LITIGATION AND POTENTIAL EXPOSURES From time to time, the Company is a party to or may be threatened with other litigation arising in the ordinary course of its business. Management regularly analyzes current information including, as applicable, the Company's defenses and insurance coverage and, as necessary, provides accruals for probable liabilities for the eventual disposition of these matters. The Company, like other health care providers, conducts its operations under intense government regulation and scrutiny. The Company must comply with regulations which relate to or govern the safety and efficacy of medical products and supplies, the operation of manufacturing facilities, laboratories and dialysis clinics, and environmental and occupational health and safety. The Company must also comply with the Anti-Kickback Statute, the False Claims Act, the Stark Statute, and other federal and state fraud and abuse laws. Applicable laws or regulations may be amended, or enforcement agencies or courts may make interpretations that differ from the Company's or the manner in which the Company conduct its business. Enforcement has become a high priority for the federal government and some states. In addition, the provisions of the False Claims Act authorizing payment of a portion of any recovery to the party bringing the suit encourage private plaintiffs to commence "whistle blower" actions. By virtue of this regulatory environment, as well as our corporate integrity agreement with the government, the Company expects that its business activities and practices will continue to be subject to extensive review by regulatory authorities and private parties, and expects continuing inquiries, claims and litigation relating to its compliance with applicable laws and regulations. The Company may not always be aware that an inquiry or action has begun, particularly in the case of "whistle blower" actions, which are initially filed under court seal. The Company operates large number facilities throughout the U.S. In such a decentralized system, it is often difficult to maintain the desired level of oversight and control over the thousands of individuals employed by many affiliated companies. The Company relies upon its management structure, regulatory and legal resources, and the effective operation of its compliance program to direct, manage and monitor the activities of these employees. On occasion, the Company may identify instances where employees, deliberately or inadvertently, have submitted inadequate or false billings. The actions of such persons may subject the Company and its subsidiaries to liability under the Anti-Kickback Statute, the Stark Statute and False Claims Act, among other laws. Physicians, hospitals and other participants in the health care industry are also subject to a large number of lawsuits alleging professional negligence, malpractice, product liability, worker's compensation or related claims, many of which involve large claims and significant defense costs. The Company has been subject to these suits due to the nature of its business and the Company expects that those types of lawsuits may continue. Although the Company maintains insurance at a level which it believes to be prudent, the Company cannot assure that the coverage limits will be adequate or that insurance will cover all asserted claims. A successful claim against the Company or any of its subsidiaries in excess of insurance coverage could have a material adverse effect upon the Company and the results of its operations. Any claims, regardless of their merit or eventual outcome, also may have a material adverse effect on the Company's reputation and business. The Company has also had claims asserted against it and has had lawsuits filed against it relating to businesses that it has acquired or divested. These claims and suits relate both to operation of the businesses and to the acquisition and divestiture transactions. The Company has asserted its own claims, and claims for indemnification. Although the ultimate outcome on the Company cannot be predicted at this time, an adverse result could have a material adverse effect upon the Company's business, financial condition, and results of operations. ACCRUED SPECIAL CHARGE FOR LEGAL MATTERS At December 31, 2001, the Company recorded a pre-tax special charge of $258,000 to reflect anticipated expenses associated with the continued defense and resolution of pre-Merger tax claims, Merger-related claims, and commercial insurer claims. The costs associated with the Settlement Agreement will be charged against this accrual. While the Company believes that its remaining accruals reasonably estimate the Company's currently anticipated costs related to the continued defense and resolution of the remaining matters, no assurances can be given that the actual costs incurred by the Company will not exceed the amount of these accruals. 77 NOTE 18. SIGNIFICANT RELATIONS For the periods presented, approximately 66% of the Company's health care services net revenues are paid by and subject to regulations under governmental programs, primarily Medicare and Medicaid. The Company maintains reserves for losses related to these programs, including uncollectible accounts receivable, and such losses have been within management's expectations. Revenues from EPO accounted for approximately 27% of the Dialysis Services net revenues for the twelve months ended December 31, 2002 and materially contribute to Dialysis Services operating earnings. EPO is produced by a single source manufacturer, Amgen, Inc., and any interruption of supply could materially adversely affect the Company's business and results of operations. NOTE 19. INDUSTRY SEGMENTS AND INFORMATION ABOUT FOREIGN OPERATIONS The Company adopted SFAS No. 131, Disclosure about Segments of an Enterprise and Related Information during the fourth quarter of 1998. SFAS No. 131 established the standards for reporting information about operating statements in annual financial statements and requires selected information about operating segments in interim financial reports issued to stockholders. The Company's reportable segments are Dialysis Services and Dialysis Products. For purposes of segment reporting, the Dialysis Services Division and Spectra Renal Management are combined and reported as Dialysis Services. These divisions are aggregated because of their similar economic classifications. These include the fact that they are both health care service providers whose services are provided to a common patient population, and both receive a significant portion of their net revenue from Medicare and other government and non-government third party payors. The Dialysis Products segment reflects the activity of the Dialysis Products Division only. The accounting policies of the operating segments are the same as those described in the summary of significant accounting policies. The Company generally evaluates division operating performance based on Earnings Before Interest and Taxes (EBIT) but does use Earning Before Interest, Taxes, Depreciation and Amortization (EBITDA) in some cases. The table below provides information for the years ended December 31, 2002, 2001 and 2000 pertaining to the Company's operations by geographic area.
UNITED STATES ASIA/PACIFIC TOTAL ------------- ------------ ---------- NET REVENUES FOR TWELVE MONTHS ENDED 2002 $3,749,495 $ 516 $3,750,011 2001 3,605,350 4,201 3,609,551 2000 3,085,320 3,855 3,089,175 OPERATING EARNINGS FOR TWELVE MONTHS ENDED 2002 $ 552,921 $ 744 $ 553,665 2001 559,319 631 559,950 2000 520,790 30 520,820 TOTAL ASSETS AT DECEMBER 31, 2002 3,288,919 4,551 3,293,470 2001 3,287,097 9,420 3,296,517 2000 2,810,514 10,394 2,820,908
The table below provides information for the years ended December 31, 2002, 2001 and 2000 pertaining to the Company's two industry segments.
LESS DIALYSIS DIALYSIS INTERSEGMENT SERVICES PRODUCTS SALES TOTAL ---------- -------- ------------ ---------- NET REVENUES FOR TWELVE MONTHS ENDED 2002 $3,311,001 $762,999 $323,989 $3,750,011 2001 3,149,223 755,103 294,775 3,609,551 2000 2,624,520 716,757 252,102 3,089,175 OPERATING EARNINGS FOR TWELVE MONTHS ENDED 2002 410,202 143,463 -- 553,665 2001 422,030 137,920 -- 559,950 2000 402,887 117,933 -- 520,820
78 ASSETS AT DECEMBER 31 2002 2,657,692 635,778 -- 3,293,470 2001 2,650,561 645,956 -- 3,296,517 2000 2,176,055 644,853 -- 2,820,908 CAPITAL EXPENDITURES FOR TWELVE MONTHS ENDED 2002 90,721 14,000 -- 104,721 2001 85,465 37,749 -- 123,214 2000 72,421 28,775 -- 101,196 DEPRECIATION AND AMORTIZATION OF PROPERTIES AND EQUIPMENT FOR TWELVE MONTHS ENDED 2002 105,243 17,289 -- 122,532 2001 146,986 24,196 -- 171,182 2000 120,985 23,749 -- 144,734
The table below provides the reconciliations of reportable segment operating earnings, assets, capital expenditures, and depreciation and amortization to the Company's consolidated totals.
TWELVE MONTHS ENDED DECEMBER 31, --------------------------------------------- SEGMENT RECONCILIATION 2002 2001 2000 ----------- ----------- ----------- INCOME (LOSS) BEFORE INCOME TAXES: Total operating earnings for reportable segments $ 553,665 $ 559,950 $ 520,820 Corporate G&A (including foreign exchange) (49,072) (129,482) (95,860) Research and development expense (9,222) (5,462) (4,127) Net interest expense (210,348) (226,480) (187,315) Interest expense on settlement of investigation, net -- -- (29,947) Special charge for legal matters -- (258,159) -- ----------- ----------- ----------- Income (Loss) before income taxes and extraordinary item $ 285,023 $ (59,633) $ 203,571 =========== =========== =========== ASSETS: Total assets for reportable segments $ 3,293,470 $ 3,296,517 $ 2,820,908 Intangible assets not allocated to segments 1,876,780 1,888,873 1,934,643 Accounts receivable facility (445,249) (442,000) (445,300) IDPN accounts receivable -- -- 5,189 Corporate assets and other 285,343 259,576 237,918 ----------- ----------- ----------- Total Assets $ 5,010,344 $ 5,002,966 $ 4,553,358 =========== =========== =========== CAPITAL EXPENDITURES Total capital expenditures for reportable segments $ 104,721 $ 123,214 $ 101,196 Corporate capital expenditures 489 1,407 3,003 ----------- ----------- ----------- Total Capital Expenditures $ 105,210 $ 124,621 $ 104,199 =========== =========== =========== DEPRECIATION AND AMORTIZATION: Total depreciation and amortization for reportable segments $ 122,532 $ 171,182 $ 144,734 Corporate depreciation and amortization 17,218 75,637 78,136 ----------- ----------- ----------- Total Depreciation and Amortization $ 139,750 $ 246,819 $ 222,870 =========== =========== ===========
79 NOTE 20. QUARTERLY SUMMARY (UNAUDITED)
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER ----------- ----------- ----------- ----------- 2002 Net revenues $ 893,904 $ 930,400 $ 948,645 $ 977,062 Cost of health care services and medical supplies 636,778 656,764 671,953 684,464 Operating expenses 134,944 144,312 164,354 161,071 Interest expense, net 55,023 55,818 50,543 48,964 ----------- ----------- ----------- ----------- Total expenses 826,745 856,894 886,850 894,499 ----------- ----------- ----------- ----------- Income before income taxes and extraordinary item 67,159 73,506 61,795 82,563 Provision for income taxes 26,701 29,032 25,387 32,804 ----------- ----------- ----------- ----------- Net Income before extraordinary item 40,458 44,474 36,408 49,759 Extraordinary loss on early redemption of borrowings net of tax benefit $6,520 -- 9,780 -- -- =========== =========== =========== =========== Net income $ 40,458 $ 34,694 $ 36,408 $ 49,759 =========== =========== =========== =========== Basic and fully dilutive net income before extraordinary item per share $ 0.45 $ 0.49 $ 0.40 $ 0.55 ----------- ----------- ----------- ----------- Basic and fully dilutive net income per share $ 0.45 $ 0.39 $ 0.40 $ 0.55 ----------- ----------- ----------- -----------
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER ----------- ----------- ----------- ----------- 2001 Net revenues $ 868,276 $ 903,791 $ 916,508 $ 920,976 Cost of health care services and medical supplies 602,266 619,588 633,530 655,471 Operating expenses 167,575 167,930 162,356 175,829 Interest expense, net 55,478 55,149 59,457 56,396 Special Charge for legal matters -- -- -- 258,159 ----------- ----------- ----------- ----------- Total expenses 825,319 842,667 855,343 1,145,855 ----------- ----------- ----------- ----------- Income (loss) before income taxes 42,957 61,124 61,165 (224,879) Provision (benefit) for income taxes 20,510 29,650 29,219 (59,756) ----------- ----------- ----------- ----------- Net income (loss) $ 22,447 $ 31,474 $ 31,946 $ (165,123) =========== =========== =========== =========== Basic and fully dilutive net income (loss)per share $ 0.25 $ 0.35 $ 0.35 $ (1.84) ----------- ----------- ----------- -----------
The first and second quarter of 2001 have been restated to include the results of operations of Everest. See Note 2 - "Summary of Significant Accounting Policies - Everest Acquisition." 80 NOTE 21. SUBSEQUENT EVENTS 2003 SENIOR CREDIT AGREEMENT On February 21, 2003, the Company entered into an amended and restated credit agreement (hereafter "2003 Senior Credit Agreement") with Bank of America N.A, Credit Suisse First Boston, Dresdner Bank AG New York, JPMorgan Chase Bank, The Bank of Nova Scotia and certain other lenders (collectively, the "Lenders"), pursuant to which the Lenders have made available to the Company and certain subsidiaries and affiliates an aggregate of up to $1,500,000 through three credit facilities: - - a revolving credit facility of up to $500,000 (of which up to $250,000 is available for letters of credit, up to $300,000 is available for borrowings in certain non-U.S. currencies, up to $75,000 is available as swing lines in U.S. dollars, up to $250,000 is available as a competitive loan facility and up to $50,000 is available as swing lines in certain non-U.S. currencies, the total of which cannot exceed $500,000) which will be due and payable on October 31, 2007. - - a term loan facility ("Loan A") of $500,000, also scheduled to expire on October 31, 2007. The terms of the 2003 Senior Credit Agreement require payments that permanently reduce the term loan facility. The repayment begins in the third quarter of 2004 and amounts to $25,000 per quarter. The remaining amount outstanding is due on October 31, 2007. - - a term loan facility ("Loan B") of $500,000, scheduled to expire February 21, 2010 with a repayment provision that if the Trust Preferred Securities due February 1, 2008 are not repaid, refinanced or have their maturity extended, repayment will be due on October 31, 2007. The terms of the Loan B require repayments of 0.25% per quarter beginning with the second quarter of 2003. Loans under the 2003 Senior Credit Agreement bear interest at a base rate determined in accordance with the agreement. For the revolving credit facility and Loan A, interest will be at a rate equal to LIBOR plus an applicable margin, or an alternate base rate, defined as the higher of the Bank of America prime rate or the Federal Funds rate plus the applicable margin. The applicable margin is variable and depends on the ratio of EBITDA and funded debt as defined in the credit agreement. The interest rate for Loan B is LIBOR plus a percentage in accordance with the agreement. Fees are also payable at a percentage per annum on the portion of the 2003 Senior Credit Agreement not used. In addition to scheduled principal payments, the 2003 Senior Credit Agreement will be reduced by portions of the net cash proceeds from certain sales of assets, securitization transactions and the issuance of subordinated debt and equity securities. The 2003 Senior Credit Agreement contains affirmative and negative covenants with respect to the Company and its subsidiaries and other payment restrictions substantially similar to the previous 1996 Senior Credit Agreement. Some of the limitations imposed by the covenant are the indebtedness of the Company, investments by the Company, and require the Company to maintain certain ratios defined in the agreement. CLASS D PREFERRED STOCK On February 4, 2003, the Company announced it was exercising its right to redeem all of its outstanding shares of the Class D Preferred Stock ("Class D Shares"). The Class D Shares were issued to the common shareholders of W.R. Grace & Co. in connection with the 1996 reorganization involving W. R. Grace and Fresenius Medical Care. Class D Shares that have been properly transferred to, and received by, the redemption agent will be redeemed commencing on March 28, 2003 at a redemption price of $0.10 per share. FMCH intends to redeem the 89 million outstanding Class D Shares at a total cash outflow of approximately $8,900. This transaction will have no earnings impact for the Company. After March 28, 2003 the Class D Shares will cease to be deemed issued and outstanding shares of the Company's capital stock and will be restored to the status of authorized but unissued shares of preferred stock. 81 To the Shareholders Fresenius Medical Care Holdings, Inc. Under the date of January 31, 2003, we reported on the consolidated balance sheets of Fresenius Medical Care Holdings, Inc. and its subsidiaries (the "Company") as of December 31, 2002 and 2001 and the related consolidated statements of operations, comprehensive income, changes in equity and cash flows for each of the years in the three year period ended December 31, 2002 as included in the annual report on Form 10-K for the year 2002. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related consolidated financial statement schedule. This consolidated financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this consolidated financial statement schedule based on our audits. In our opinion, such consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. KPMG LLP January 31, 2003 Boston, MA 82 SCHEDULE II FRESENIUS MEDICAL CARE HOLDINGS, INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS (DOLLARS IN THOUSANDS) FOR THE TWELVE MONTHS ENDED DECEMBER 31, 2002
ADDITIONS (DEDUCTIONS) ---------------------------- CHARGED BALANCE AT (CREDITED) TO BEGINNING OF COSTS AND BALANCE AT YEAR EXPENSES OTHER NET END OF PERIOD ------------ -------------- --------- ------------- DESCRIPTION Valuation and qualifying accounts deducted from assets: Allowances for notes and accounts receivable $103,859 98,632 (80,871) $121,620
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 2001
ADDITIONS (DEDUCTIONS) ---------------------------- CHARGED BALANCE AT (CREDITED) TO BEGINNING OF COSTS AND BALANCE AT YEAR EXPENSES OTHER NET END OF PERIOD ------------ -------------- --------- ------------- DESCRIPTION Valuation and qualifying accounts deducted from assets: Allowances for notes and accounts receivable $ 80,466 85,448 (62,055) $103,859
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 2000
ADDITIONS (DEDUCTIONS) ---------------------------- CHARGED BALANCE AT (CREDITED) TO BEGINNING OF COSTS AND BALANCE AT YEAR EXPENSES OTHER NET END OF PERIOD ------------ -------------- --------- ------------- DESCRIPTION Valuation and qualifying accounts deducted from assets: Allowances for notes and accounts receivable $ 63,012 62,949 (45,495) $ 80,466
83 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION - ----------- ----------- Exhibit 3.1 Certificate of Incorporation of Fresenius Medical Care Holdings, Inc. (f/k/a W. R. Grace & Co.) under Section 402 of the New York Business Corporation Law dated March 23, 1988 (incorporated herein by reference to the Form 8-K of the Company filed on May 9, 1988). Exhibit 3.2 Certificate of Amendment of the Certificate of Incorporation of Fresenius Medical Care Holdings, Inc. (f/k/a W. R. Grace & Co.) under Section 805 of the New York Business Corporation Law dated May 25, 1988 (changing the name to W. R. Grace & Co., incorporated herein by reference to the Form 8-K of the Company filed on May 9, 1988). Exhibit 3.3 Certificate of Amendment of the Certificate of Incorporation of Fresenius Medical Care Holdings, Inc. (f/k/a W. R. Grace & Co.) under Section 805 of the New York Business Corporation Law dated September 27, 1996 (incorporated herein by reference to the Form 8-K of the Company filed with the Commission on October 15, 1996). Exhibit 3.4 Certificate of Amendment of the Certificate of Incorporation of Fresenius Medical Care Holdings, Inc. (f/k/a W. R. Grace & Co.) under Section 805 of the New York Business Corporation Law dated September 27, 1996 (changing the name to Fresenius National Medical Care Holdings, Inc., incorporated herein by reference to the Form 8-K of the Company filed with the Commission on October 15, 1996). Exhibit 3.5 Certificate of Amendment of the Certificate of Incorporation of Fresenius Medical Care Holdings, Inc. under Section 805 of the New York Business Corporation Law dated June 12, 1997 (changing name to Fresenius Medical Care Holdings, Inc., incorporated herein by reference to the Form 10-Q of the Company filed with the Commission on August 14, 1997). Exhibit 3.6 Certificate of Amendment of the Certificate of Incorporation of Fresenius Medical Care Holdings, Inc. dated July 6, 2001 (authorizing action by majority written consent of the shareholders) (incorporated herein by reference to the Form 10-Q of the Company filed with the Commission on August 14, 2001). Exhibit 3.7 Amended and Restated By-laws of Fresenius Medical Care Holdings, Inc. (incorporated herein by reference to the Form 10-Q of the Company filed with the Commission on August 14, 1997). Exhibit 4.1 Credit Agreement dated as of September 27, 1996 among National Medical Care, Inc. and Certain Subsidiaries and Affiliates, as Borrowers, Certain Subsidiaries and Affiliates, as Guarantors, the Lenders named therein, NationsBank, N.A., as paying agent and The Bank of Nova Scotia, The Chase Manhattan Bank, Dresdner Bank AG and Bank of America, N.A. (formerly known as NationsBank, N.A.), as Managing Agents (incorporated herein by reference to the Form 6-K of Fresenius Medical Care AG filed with the Commission on October 15, 1996). Exhibit 4.2 Amendment dated as of November 26, 1996 (amendment to the Credit Agreement dated as of September 27, 1996, incorporated herein by reference to the Form 8-K of Registrant filed with the Commission on December 16, 1996). Exhibit 4.3 Amendment No. 2 dated December 12, 1996 (second amendment to the Credit Agreement dated as of September 27, 1996, incorporated herein by reference to the Form 10-K of Registrant filed with the Commission on March 31, 1997). Exhibit 4.4 Amendment No. 3 dated June 13, 1997 to the Credit Agreement dated as of September 27, 1996, among National Medical Care, Inc. and Certain Subsidiaries and Affiliates, as Borrowers, Certain Subsidiaries and Affiliates, as Guarantors, the Lenders named therein, Bank of America, N.A. (formerly known as NationsBank, N.A.), as paying agent and The Bank of Nova Scotia, The Chase Manhattan Bank, Dresdner Bank AG and Bank of America, N.A. (formerly known as NationsBank, N.A.), as Managing Agents, as previously amended (incorporated herein by reference to the Form 10-Q of the Registrant filed with the Commission on November 14, 1997).
84 Exhibit 4.5 Amendment No. 4, dated August 26, 1997 to the Credit Agreement dated as of September 27, 1996, among National Medical Care, Inc. and Certain Subsidiaries and Affiliates, as Borrowers, Certain Subsidiaries and Affiliates, as Guarantors, the Lenders named therein, Bank of America, N.A. (formerly known as NationsBank, N.A.), as paying agent and The Bank of Nova Scotia, The Chase Manhattan Bank, Dresdner Bank AG and Bank of America, N.A. (formerly known as NationsBank, N.A.), as Managing Agents, as previously amended (incorporated herein by reference to the Form 10-Q of Registrant filed with Commission on November 14, 1997). Exhibit 4.6 Amendment No. 5 dated December 12, 1997 to the Credit Agreement dated as of September 27, 1996, among National Medical Care, Inc. and Certain Subsidiaries and Affiliates, as Borrowers, Certain Subsidiaries and Affiliates, as Guarantors, the Lenders named therein, Bank of America, N.A. (formerly known as NationsBank, N.A.), as paying agent and The Bank of Nova Scotia, The Chase Manhattan Bank, Dresdner Bank AG and Bank of America, N.A. (formerly known as NationsBank, N.A.), as Managing Agents, as previously amended (incorporated herein by reference to the Form 10-K of Registrant filed with Commission on March 23, 1998). Exhibit 4.7 Form of Consent to Modification of Amendment No. 5 dated December 12, 1997 to the Credit Agreement dated as of September 27, 1996 among National Medical Care, Inc. and Certain Subsidiaries and Affiliates, as Borrowers, Certain Subsidiaries and Affiliates, as Guarantors, the Lenders named therein, Bank of America, N.A. (formerly known as NationsBank, N.A.), as paying agent and The Bank of Nova Scotia, The Chase Manhattan Bank, Dresdner Bank AG and Bank of America, N.A. (formerly known as NationsBank, N.A.), as Managing Agents (incorporated herein by reference to the Form 10-K of Registrant filed with Commission on March 23, 1998). Exhibit 4.8 Amendment No. 6 dated effective September 30, 1998 to the Credit Agreement dated as of September 27, 1996, among National Medical Care, Inc. and Certain Subsidiaries and Affiliates, as Borrowers, Certain Subsidiaries and Affiliates, as Guarantors, the Lenders named therein, Bank of America, N.A. (formerly known as NationsBank, N.A.), as paying agent and The Bank of Nova Scotia, The Chase Manhattan Bank, N.A., Dresdner Bank AG and Bank of America, N.A. (formerly known as NationsBank, N.A.), as Managing Agents, as previously amended (incorporated herein by reference to the Form 10-Q of Registrant filed with Commission on November 12, 1998). Exhibit 4.9 Amendment No. 7 dated as of December 31, 1998 to the Credit Agreement dated as of September 27, 1996 among National Medical Care, Inc. and Certain Subsidiaries and Affiliates, as Borrowers, Certain Subsidiaries and Affiliates Guarantors, the Lenders named therein, Bank of America, N.A. (formerly known as NationsBank, N.A.), paying agent and The Bank of Nova Scotia, The Chase Manhattan Bank, Dresdner Bank A. G. and Bank of America, N.A. (formerly known as NationsBank, N.A.). as Managing Agents, (incorporated herein by reference to the Form 10-K of registrant filed with Commission on March 9, 1999). Exhibit 4.10 Amendment No. 8 dated as of June 30, 1999 to the Credit Agreement dated as of September 27, 1996 among National Medical Care, Inc. and Certain Subsidiaries and Affiliates, as Borrowers, Certain Subsidiaries and Affiliates Guarantors, the Lenders named therein, Bank of America, N.A. (formerly known as NationsBank, N.A.), as paying agent and The Bank of Nova Scotia, The Chase Manhattan Bank, Dresdner Bank A.G. and Bank of America, N.A. (formerly known as NationsBank, N.A.), as Managing Agent (incorporated herein by reference to the Form 10-K of registrant filed with Commission on March 30, 2000). Exhibit 4.11 Amendment No. 9 dated as of December 15, 1999 to the Credit Agreement dated as of September 27, 1996 among National Medical Care, Inc. and Certain Subsidiaries and Affiliates, as Borrowers, Certain Subsidiaries and Affiliates Guarantors, the Lenders named therein, Bank of America, N.A. (formerly known as NationsBank, N.A.), as paying agent and The Bank of Nova Scotia, The Chase Manhattan Bank, Dresdner Bank A.G. and Bank of America, N.A. (formerly known as NationsBank, N.A.), as Managing Agent (incorporated herein by reference to the Form 10-K of registrant filed with Commission on March 30, 2000). Exhibit 4.12 Amendment No. 10 dated as of September 21, 2000 to the Credit Agreement dated as of September 27, 1996 among National Medical Care, Inc. and Certain Subsidiaries and Affiliates, as Borrowers, Certain
85 Subsidiaries and Affiliates Guarantors, the Lenders named therein, Bank of America, N.A. (formerly known as NationsBank, N.A.), as paying agent and The Bank of Nova Scotia, The Chase Manhattan Bank, Dresdner Bank A.G. and Bank of America, N.A. (formerly known as NationsBank, N.A.), as Managing Agent (incorporated herein by reference to the Form 10-K of registrant filed with Commission on November 11, 2000). Exhibit 4.13 Amendment No. 11 dated as of May 31, 2001 to the Credit Agreement dated as of September 27, 1996 among National Medical Care, Inc. and Certain Subsidiaries and Affiliates, as Borrowers, Certain Subsidiaries and Affiliates Guarantors, the Lenders named therein, Bank of America, N.A. (formerly known as NationsBank, N.A). as paying agent and The Bank of Nova Scotia, The Chase Manhattan Bank, Dresdner Bank A.G. and Bank of America, N.A. (formerly known as NationsBank, N.A.), as Managing Agent (incorporated by reference to the Registration Statement on Form F-4 of Fresenius Medical Care AG (Registration No. 333-66558)). Exhibit 4.14 Amendment No. 12 dated as of June 30, 2001 to the Credit Agreement dated as of September 27, 1996 among National Medical Care, Inc. and Certain Subsidiaries and Affiliates, as Borrowers, Certain Subsidiaries and Affiliates Guarantors, the Lenders named therein, Bank of America, N.A. (formerly known as NationsBank, N.A.), as paying agent and The Bank of Nova Scotia, The Chase Manhattan Bank, Dresdner Bank A.G. and Bank of America, N.A. (formerly known as NationsBank, N.A.), as Managing Agent (incorporated by reference to the Registration Statement on Form F-4 of Fresenius Medical Care AG (Registration No. 333-66558)). Exhibit 4.15 Amendment No. 13 dated as of December 17, 2001 to the Credit Agreement dated as of September 27, 1996 among National Medical Care, Inc. and Certain Subsidiaries and Affiliates, as Borrowers, Certain Subsidiaries and Affiliates Guarantors, the Lenders named therein, Bank of America, N.A. (formerly known as NationsBank, N.A.), as paying agent and The Bank of Nova Scotia, The Chase Manhattan Bank, Dresdner Bank A.G. and Bank of America, N.A. (formerly known as NationsBank, N.A.), as Managing Agent (incorporated herein by reference to the Form 10-K of Registrant filed with Commission on April 1, 2001). Exhibit 4.16 Amendment No. 14 dated as of February 22, 2002 to the Credit Agreement dated as of September 27, 1996 among National Medical Care, Inc. and Certain Subsidiaries and Affiliates, as Borrowers, Certain Subsidiaries and Affiliates Guarantors, the Lenders named therein, Bank of America, N.A. (formerly known as NationsBank, N. A.), as paying agent and The Bank of Nova Scotia, The Chase Manhattan Bank, Dresdner Bank A.G. and Bank of America, N. A. (formerly known as NationsBank, N. A. ), as Managing Agent (incorporated herein by reference to the Form 10-Q of Registrant filed with Commission on November 14, 2002). Exhibit 4.17 Amendment No. 15 dated as of December 5, 2002 to the Credit Agreement, by and among National Medical Care, Inc. and Certain Subsidiaries and Affiliates party to the Credit Agreement, and identified therein, and Bank of America, N. A. (formerly known as NationsBank, N. A.), as paying Agent for and on behalf of the Lenders (filed herewith). Exhibit 4.18 Fresenius Medical Care AG 1996 Stock Incentive Plan (incorporated herein by reference to the FMC AG's Registrant Statement on Form S-8 dated October 1, 1996). Exhibit 4.19 Fresenius Medical Care AG 1998 Stock Incentive Plan as amended effective as of August 3, 1998 (incorporated herein by reference to the Form 10-Q of Registrant filed with Commission on May 14, 1998). Exhibit 4.20 Fresenius Medical Care AG 2001 International Stock Incentive Plan (incorporated by reference to the Registration Statement on Form F-4 of Fresenius Medical Care AG filed August 2, 2001 (Registration No. 333-66558)). Exhibit 4.21 Senior Subordinated Indenture dated as of February 19, 1998, among Fresenius Medical Care AG, State Street Bank and Trust Company as Trustee and Fresenius Medical Care Holdings, Inc., and Fresenius Medical Care AG, as Guarantors with respect to the issuance of 7 7/8% Senior Subordinated Notes due 2008 (incorporated herein by reference to the Form 10-K of Registrant filed with Commission on March 23, 1998). Exhibit 4.22 Senior Subordinated Indenture dated as of February 19, 1998 among FMC Trust Finance S.a.r.l. Luxemborg, as Insurer, State Street Bank and Trust Company as Trustee and Fresenius Medical Care Holdings, Inc., and Fresenius Medical Care AG, as Guarantors with respect to the issuance of 7 3/8% Senior
86 Subordinated Notes due 2008 (incorporated herein by reference to the Form 10-K of Registrant filed with Commission on March 23, 1998). Exhibit 4.23 Senior Subordinated Indenture dated as of June 6, 2001 among Fresenius Medical Care AG, FMC Trust Finance S.a.r.l. Luxemborg - III, Fresenius Medical Care Holdings, Inc., Fresenius Medical Care Deutschland GmbH and State Street Bank and Trust Company with respect to 7 7/8% Senior Subordinated Notes due 2011 (incorporated herein by reference to the Registration Statement on Form F-4 of Fresenius Medical Care AG dated August 2, 2001 (Registration No. 333-66558)). Exhibit 4.24 Senior Subordinated Indenture dated as of June 15, 2001 among Fresenius Medical Care AG, FMC Trust Finance S.a.r.l. Luxemborg - III, Fresenius Medical Care Holdings, Inc., Fresenius Medical Care Deutschland GmbH and State Street Bank and Trust Company with respect to 7 7/8% Senior Subordinated Notes due 2011 (incorporated herein by reference to the Registration Statement on Form F-4 of Fresenius Medical Care AG dated August 2, 2001 (Registration No. 333-66558)). Exhibit 10.1* Product Purchase Agreement effective January 1, 2002 between Amgen USA, Inc. and National Medical Care, Inc. (incorporated by reference to the Form 10-Q of the Registrant filed with the Commission on May 15, 2002). Exhibit 10.2 Receivables Purchase Agreement dated August 28, 1997 between National Medical Care, Inc. and NMC Funding Corporation (incorporated herein by reference to the Form 10-Q of the Registrant filed with the Commission on November 14, 1997). Exhibit 10.3 Amendment dated as of September 28, 1998 to the Receivables Purchase Agreement dated as of August 28, 1997, by and between NMC Funding Corporation, as Purchaser and National Medical Care, Inc., as Seller (incorporated herein by reference to the Form 10-Q of Registrant filed with Commission on November 12, 1998). Exhibit 10.4 Second Amended and Restated Transfer and Administrative agreement dated as of September 24, 2002 among NMC Funding Corporation, National Medical Care, Inc., Enterprise Funding Corporation, Compass US Acquisition, LLC, Giro Multifunding Corporation, the Bank Investors listed therein, WestLB AG, New York Branch (formerly known as Westdeutsche Landesbank Girozentrale, New York Branch), as an administrative agent and Bank of America, N.A., as an administrative agent (incorporated herein by reference to the Form 10-Q of Registrant filed with Commission on November 14, 2002). Exhibit 10.5 Amendment No.1 dated as of October 22, 2002 to the Second Amended and Restated Transfer and Administrative agreement dated as of September 24, 2002 among NMC Funding Corporation, National Medical Care, Inc., Enterprise Funding Corporation, Compass US Acquisition, LLC, Giro Multifunding Corporation, the Bank Investors listed therein, WestLB AG, New York Branch (formerly known as Westdeutsche Landesbank Girozentrale, New York Branch), as an administrative agent and Bank of America, N.A., as an administrative agent (incorporated herein by reference to the Form 10-Q of Registrant filed with Commission on November 14, 2002). Exhibit 10.6 Amendment No.2 dated as of November 8, 2002 to the Second Amended and Restated Transfer and Administrative agreement dated as of September 24, 2002 among NMC Funding Corporation, National Medical Care, Inc., Enterprise Funding Corporation, Compass US Acquisition, LLC, Giro Multifunding Corporation, Asset One Securitization, LLC, the Bank Investors listed therein, WestLB AG, New York Branch (formerly known as Westdeutsche Landesbank Girozentrale, New York Branch), as an administrative agent and Bank of America, N.A., as an administrative agent, filed herewith). Exhibit 10.7 Amendment No.3 dated as of December 18, 2002 to the Second Amended and Restated Transfer and Administrative agreement dated as of September 24, 2002 among NMC Funding Corporation, National Medical Care, Inc., Enterprise Funding Corporation, Compass US Acquisition, LLC, Giro Multifunding Corporation, Asset One Securitization, LLC, the Bank Investors listed therein, WestLB AG, New York Branch (formerly known as Westdeutsche Landesbank Girozentrale, New York Branch), as an administrative agent and Bank of America, N.A., as an administrative agent, filed herewith).
87 Exhibit 10.8 Employment Agreement dated January 1, 1992 by and between Ben J. Lipps and Fresenius USA, Inc. (incorporated herein by reference to the Annual Report on Form 10-K of Fresenius USA, Inc., for the year ended December 31, 1992). Exhibit 10.9 Modification to FUSA Employment Agreement effective as of January 1, 1998 by and between Ben J. Lipps and Fresenius Medical Care AG (incorporated herein by reference to the Form 10-Q of Registrant filed with Commission on May 14, 1998). Exhibit 10.10 Employment Agreement dated March 15, 2000 by and between Jerry A. Schneider and National Medical Care, Inc (incorporated herein by reference to the Form 10-Q of Registrant filed with Commission on May 12, 2000). Exhibit 10.11 Employment Agreement dated March 15, 2000 by and between Ronald J. Kuerbitz and National Medical Care, Inc. (incorporated herein by reference to the Form 10-Q of Registrant filed with Commission on May 12, 2000). Exhibit 10.12 Employment Agreement dated March 15, 2000 by and between J. Michael Lazarus and National Medical Care, Inc. (incorporated herein by reference to the Form 10-Q of Registrant filed with Commission on May 12, 2000). Exhibit 10.13 Employment Agreement dated March 15, 2000 by and between Robert "Rice" M. Powell, Jr. and National Medical Care, Inc. (incorporated herein by reference to the Form 10-K of Registrant filed with Commission on April 2, 2001). Exhibit 10.14 Employment Agreement dated July 1, 2002 by and between John F. Markus and National Medical Care, Inc. (incorporated herein by reference to the Form 10-Q of Registrant filed with Commission on August 14, 2002). Exhibit 10.15 Employment Agreement dated October 15, 2002 by and between Mats Wahlstrom and National Medical Care, Inc. (filed herewith). Exhibit 10.16 Subordinated Loan Note dated as of May 18, 1999, among National Medical Care, Inc. and certain Subsidiaries with Fresenius AG as lender (incorporated herein by reference to the Form 10-Q of Registrant filed with Commission on November 22, 1999). Exhibit 10.17 Corporate Integrity Agreement between the Offices of Inspector General of the Department of Health and Human Services and Fresenius Medical Care Holdings, Inc. dated as of January 18, 2000 (incorporated herein by reference to the Form 8-K of the Registrant filed with the Commission on January 21, 2000). Exhibit 10.18 Settlement Agreement dated as of February 6, 2003 by and among the Company, National Medical Care, Inc., the Official Committee of Asbestos Personal Injury Claimants, and the Official Committee of Asbestos Property Damage Claimants of W.R. Grace & Co. (filed herewith). Exhibit 11 Statement re: Computation of Per Share Earnings. Exhibit 99.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Exhibit 99.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
* Confidential treatment has been requested as to certain portions of this Exhibit 88 EX-4.17 3 b45677fmexv4w17.txt AMEND # 15 DATED 12/5/02 TO CREDIT AGREEMENT EXHIBIT 4.17 AMENDMENT NO. 15 THIS AMENDMENT NO. 15, dated as of December 5, 2002 (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 BANK OF AMERICA, N.A., (formerly known as 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 the Lenders identified therein, and NationsBank, N.A., as Paying Agent; WHEREAS, the Company has requested modification of certain covenants and 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: 1. The Credit Agreement is amended and modified in the following respects: 1.1 In Section 7.9, the Consolidated Leverage Ratio covenant in subsection (b) is hereby amended to read as follows: (b) Consolidated Leverage Ratio. There shall be maintained as of the end of each fiscal quarter ending on or after December 31, 2002 a Consolidated Leverage Ratio of not greater than 3.25:1.0. 1.2 Section 8.10 is hereby amended by inserting at the end thereof, the following: "; provided, that, without regard to the amounts set forth in clause (ii) hereof, WRG-NY may redeem the New Preferred Stock in an aggregate amount up to $9 million." 2. The effectiveness of this Amendment is subject to receipt by the Paying Agent of the following: (i) copies of this Amendment executed by the Company and the other members of the Consolidated Group identified on the signature pages hereto, (ii) the consent of the Required Lenders; and (iii) an amendment fee in an amount equal to seven and one-half basis points (0.075%) of the aggregate amount of Commitments held by the Lenders consenting to this Amendment for the ratable benefit of such consenting Lenders. 3. Except as modified hereby, all of the terms and provisions of the Credit Agreement (and Exhibits and Schedules) remain in full force and effect. 4. The Credit Parties hereby affirm (i) the representations and warranties set out in Section 6 of the Credit Agreement are true and correct as of the date hereof (except those which expressly relate to an earlier period) and (ii) no Default or Event of Default presently exists. 5. 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. 6. This Amendment may be executed in any number of counterparts, each of which when so executed and delivered shall be deemed an original and it shall not be necessary in making proof of this Amendment to produce or account for more than one such counterpart. 7. 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] 2 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/ Marc Lieberman ------------------------------------------ Name: Marc Lieberman Title: Treasurer FRESENIUS MEDICAL CARE AG By /s/ Ulf Markus Schneider ------------------------------------------ Name: Dr. Ulf Markus Schneider Title: Member of the Management Board By /s/ Rainer Runte ------------------------------------------ Name: Dr. Rainer Runte Title: Deputy member of the Management Board NMC DO BRASIL LTDA., a Brazil corporation By /s/ Horst Radtke/Armin Karch Name: Horst Radtke/Armin Karch Title: Manager NATIONAL MEDICAL CARE OF SPAIN, S.A., a Spanish corporation By /s/ Dr. Emanuele Gatti/Ricardo Arias Duval ------------------------------------------ Name: Dr. Emanuele Gatti/Ricardo Arias Duval Title: Manager NATIONAL MEDICAL CARE OF TAIWAN, INC., a Delaware corporation By /s/ Marc Lieberman ------------------------------------------ Name: Marc Lieberman Title: Treasurer NMC CENTRO MEDICO NACIONAL, LDA., a Portuguese corporation By /s/ Ricardo Da Silva/John Allen ------------------------------------------ Name: Ricardo Da Silva/John Allen Title: Manager NATIONAL MEDICAL CARE, INC. AMENDMENT NO. 15 FRESENIUS MEDICAL CARE ARGENTINA, S.A., as successor by merger to NMC DE ARGENTINA, S.A., an Argentine corporation By /s/ Dr. Guido Yagupsky/Horst Radtke ------------------------------------------ Name: Dr. Guido Yagupsky/Horst Radtke Title: Board of Directors FRESENIUS USA, INC., a Massachusetts corporation By /s/ Jerry Schneider ------------------------------------------ Name: Jerry Schneider Title: Chief Financial Officer FRESENIUS MEDICAL CARE DEUTSCHLAND GmbH, a German corporation By /s/ Rolf Groos ------------------------------------------ Name: Rolf Groos Title: Managing Director By /s/ Norbert Weber ------------------------------------------ Name: Norbert Weber Title: Managing Director FRESENIUS MEDICAL CARE GROUPE FRANCE (formerly known as Fresenius Groupe France S.A.), a French corporation By /s/ Udo Werle/Dr. Emanuele Gatti ------------------------------------------ Name: Udo Werle/Dr. Emanuele Gatti Title: Board of Directors FRESENIUS MEDICAL CARE ITALIA, S.p.A., an Italian corporation By /s/ Dr. Emanuele Gatti/Rolf Groos ------------------------------------------ Name: Dr. Emanuele Gatti/Rolf Groos Title: Board of Directors FRESENIUS MEDICAL CARE ESPANA S.A., a Spanish corporation By /s/ Dr. Emanuele Gatti/Ricardo Arias Duval ------------------------------------------ Name: Dr. Emanuele Gatti/Ricardo Arias Duval Title: Board of Directors NATIONAL MEDICAL CARE, INC. AMENDMENT NO. 15 FRESENIUS MEDICAL CARE MAGYAROSZA KfG, a Hungarian corporation By /s/ Norman Erhard ------------------------------------------ Name: Norman Erhard Title: Manager BIO-MEDICAL APPLICATIONS OF ALABAMA, INC. By: /s/ Marc Lieberman ----------------------------------------- Name: Marc Lieberman Title: Treasurer BIO-MEDICAL APPLICATIONS OF FLORIDA, INC. By: /s/ Marc Lieberman ----------------------------------------- Name: Marc Lieberman Title: Treasurer BIO-MEDICAL APPLICATIONS OF GEORGIA, INC. By: /s/ Marc Lieberman ----------------------------------------- Name: Marc Lieberman Title: Treasurer BIO-MEDICAL APPLICATIONS OF INDIANA, INC. By: /s/ Marc Lieberman ----------------------------------------- Name: Marc Lieberman Title: Treasurer BIO-MEDICAL APPLICATIONS OF KENTUCKY, INC. By: /s/ Marc Lieberman ----------------------------------------- Name: Marc Lieberman Title: Treasurer BIO-MEDICAL APPLICATIONS OF LOUISIANA, LLC By: /s/ Marc Lieberman ----------------------------------------- Name: Marc Lieberman Title: Treasurer NATIONAL MEDICAL CARE, INC. AMENDMENT NO. 15 BIO-MEDICAL APPLICATIONS OF MARYLAND, INC. By: /s/ Marc Lieberman ----------------------------------------- Name: Marc Lieberman Title: Treasurer BIO-MEDICAL APPLICATIONS OF MASSACHUSETTS, INC. By: /s/ Marc Lieberman ----------------------------------------- Name: Marc Lieberman Title: Treasurer BIO-MEDICAL APPLICATIONS OF NORTH CAROLINA, INC. By: /s/ Marc Lieberman ----------------------------------------- Name: Marc Lieberman Title: Treasurer BIO-MEDICAL APPLICATIONS OF OHIO, INC. By: /s/ Marc Lieberman ----------------------------------------- Name: Marc Lieberman Title: Treasurer BIO-MEDICAL APPLICATIONS OF PENNSYLVANIA, INC. By: /s/ Marc Lieberman ----------------------------------------- Name: Marc Lieberman Title: Treasurer BIO-MEDICAL APPLICATIONS OF SOUTH CAROLINA, INC. By: /s/ Marc Lieberman ----------------------------------------- Name: Marc Lieberman Title: Treasurer BIO-MEDICAL APPLICATIONS OF TEXAS, INC. By: /s/ Marc Lieberman ----------------------------------------- Name: Marc Lieberman Title: Treasurer NATIONAL MEDICAL CARE, INC. AMENDMENT NO. 15 BIO-MEDICAL APPLICATIONS OF VIRGINIA, INC. By: /s/ Marc Lieberman ----------------------------------------- Name: Marc Lieberman Title: Treasurer LIFECHEM, INC., a Delaware corporation By /s/ Marc Lieberman ------------------------------------------ Name: Marc Lieberman Title: Treasurer GUARANTORS: FRESENIUS MEDICAL CARE HOLDINGS, INC., a New York corporation formerly known as WRG-NY By /s/ Jerry Schneider ------------------------------------------ Name: Jerry Schneider Title: Chief Financial Officer NATIONAL MEDICAL CARE, INC., a Delaware corporation By /s/ Marc Lieberman ------------------------------------------ Name: Marc Lieberman Title: Treasurer BIO-MEDICAL APPLICATIONS MANAGEMENT CO., INC., a Delaware corporation By /s/ Marc Lieberman ------------------------------------------ Name: Marc Lieberman Title: Treasurer FRESENIUS MEDICAL CARE AG, a German corporation By /s/ Dr. Emanuele Gatti ------------------------------------------ Name: Dr. Emanuele Gatti Title: Member of the Management Board By /s/ Roberto Fuste ------------------------------------------ Name: Roberto Fuste Title: Member of the Management Board NATIONAL MEDICAL CARE, INC. AMENDMENT NO. 15 FRESENIUS USA, INC., a Massachusetts corporation By /s/ Jerry Schneider ------------------------------------------ Name: Jerry Schneider Title: Chief Financial Officer FRESENIUS MEDICAL CARE DEUTSCHLAND GmbH, a German corporation By /s/ Dr. Emanuele Gatti ------------------------------------------ Name: Rolf Groos Title: Board of Directors By /s/ Dr. Rainer Runte ------------------------------------------ Name: Dr. Rainer Runte Title: Procurist FRESENIUS MEDICAL CARE GROUPE FRANCE, a French corporation (formerly known as Fresenius Groupe France S.A.) By /s/ Udo Werle/Dr. Emanuele Gatti ------------------------------------------ Name: Udo Werle/Dr. Emanuele Gatti Title: Board of Directors FRESENIUS SECURITIES, INC., a California corporation By /s/ Marc Lieberman ------------------------------------------ Name: Marc Lieberman Title: Treasurer NEOMEDICA, INC., a Delaware corporation By /s/ Marc Lieberman ------------------------------------------ Name: Marc Lieberman Title: Treasurer FMC FINANCE S.A., a Luxembourg corporation By /s/ John Allen ------------------------------------------ Name: John Allen Title: Board of Directors NATIONAL MEDICAL CARE, INC. AMENDMENT NO. 15 FMC TRUST FINANCE S.a.r.l. LUXEMBOURG, a Luxembourg corporation By /s/ Andrea Stopper ------------------------------------------ Name: Dr. Andrea Stopper Title: Board of Directors FMC TRUST FINANCE S.a.r.l. LUXEMBOURG III, a Luxembourg corporation By /s/ Gabriele Dux ------------------------------------------ Name: Gabriele Dux Title: Board of Directors QCI HOLDINGS, INC., a Delaware corporation By /s/ Marc Lieberman ------------------------------------------ Name: Marc Lieberman Title: Treasurer SRC HOLDINGS, INC., a Delaware corporation By /s/ Marc Lieberman ------------------------------------------ Name: Marc Lieberman Title: Treasurer NATIONAL MEDICAL CARE, INC. AMENDMENT NO. 15 PAYING AGENT: BANK OF AMERICA, N.A. (formerly known as NationsBank, N.A.), as Paying Agent for and on behalf of the Lenders By /s/ RICHARD L. NICHOLS, JR. ------------------------------------------ Name: Richard L. Nichols, Jr. Title: Managing Director NATIONAL MEDICAL CARE, INC. AMENDMENT NO. 15 CONSENT TO AMENDMENT NO. 15 Bank of America, N.A. (formerly known as NationsBank, N.A.), as Paying Agent 101 N. Tryon Street, 15th Floor NC1-001-15-04 Charlotte, North Carolina 28255 Attn: James D. Young, 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. (now known as Bank of America, N.A.), as Paying Agent. Terms used but not otherwise defined shall have the meanings provided in the Credit Agreement. Amendment No. 15 dated December 5, 2002 (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: NATIONAL MEDICAL CARE, INC. AMENDMENT NO. 15 EX-10.6 4 b45677fmexv10w6.txt AMEND #2, DATED 11/8/02 TO TRANSFER & ADMN AGRMNT EXHIBIT 10.6 AMENDMENT NO. 2 Dated as of November 8, 2002 to SECOND AMENDED AND RESTATED TRANSFER AND ADMINISTRATION AGREEMENT Dated as of September 24, 2002 THIS AMENDMENT NO. 2 (this "Amendment") dated as of November 8, 2002 is entered into by and among NMC FUNDING CORPORATION, a Delaware corporation, as Transferor, NATIONAL MEDICAL CARE, INC., a Delaware corporation, as Collection Agent, ENTERPRISE FUNDING CORPORATION, a Delaware corporation ("Enterprise"), as a Conduit Investor, COMPASS US ACQUISITION, LLC, a Delaware limited liability company ("Compass"), as a Conduit Investor, GIRO MULTI-FUNDING CORPORATION, a bankruptcy-remote special purpose company incorporated in Delaware ("GMFC"), as a Conduit Investor, the FINANCIAL INSTITUTIONS PARTIES HERETO as Class A Bank Investors, BANK OF AMERICA, N.A. ("Bank of America"), as Class B Investor, WESTLB AG, NEW YORK BRANCH ("WestLB"), as an Administrative Agent, BAYERISCHE LANDESBANK, NEW YORK BRANCH ("BLB"), as an Administrative Agent and BANK OF AMERICA, N.A., as an Administrative Agent and as Agent, ASSET ONE SECURITIZATION, LLC ("Asset One"), as a new Conduit Investor, and SOCIETE GENERALE ("SG"), as a new Class A Bank Investor and a new Administrative Agent. PRELIMINARY STATEMENTS A. The Transferor, the Collection Agent, Compass, Enterprise, GMFC, the Class A Bank Investors, the Class B Investor, WestLB, as an Administrative Agent, BLB, as an Administrative Agent, and Bank of America, as an Administrative Agent and as Agent, are parties to that certain Second Amended and Restated Transfer and Administration Agreement dated as of September 24, 2002 (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 parties hereto have agreed to add Asset One as a "Conduit Investor" under the TAA and SG as a "Class A Bank Investor" and "Administrative Agent" under the TAA. In connection therewith, the existing Conduit Investors will assign a portion of the outstanding Transferred Interests and Net Investment held by them to Asset One (or, if Asset One shall decline to accept such assignment, to SG as the Class A Bank Investor for Asset One) such that, from and after such assignment, the percentage of the outstanding Transferred Interests and Net Investment held by each Related Group will be proportional to their respective Related Group Limits. C. In addition, the parties hereto 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 TAA. Subject to the satisfaction of the conditions precedent set forth in Section 3 below, effective as of the Effective Date (as defined below), the TAA is amended as follows: 1.1 The definition of "Administrative Agent" in Section 1.1 of the TAA is amended and restated in its entirety to read as follows: "Administrative Agent" means (i) Bank of America as administrative agent for the Related Group that includes Enterprise, (ii) WestLB, as administrative agent for the Related Group that includes Compass, (iii) BLB, as administrative agent for the Related Group that includes GMFC, (iv) Bank of America, as administrative agent for the Related Group that includes the Class B Investors or (v) Societe Generale, as administrative agent for the Related Group that includes Asset One. 1.2 The following definition is added to Section 1.1 of the TAA in appropriate alphabetical order: "Asset One" means Asset One Securitization, LLC, a limited liability company organized under the laws of Delaware, together with its successors and permitted assigns. 1.3 The definition of "Conduit Investor" in Section 1.1 of the TAA is amended and restated in its entirety to read as follows: "Conduit Investor" means Enterprise, Compass, GMFC or Asset One. 1.4 The definition of "CP Tranche Period" is amended to add the following at the end of such definition: "In no event shall a CP Tranche Period for Asset One exceed 45 days." 1.5 The definition of "Fee Letter" in Section 1.1 of the TAA is amended and restated in its entirety to read as follows: "Fee Letter" means (i) the letter agreement dated January 31, 2002 among the Transferor, Enterprise and Bank of America with respect to the fees to be paid by the Transferor hereunder in respect of the Related Group that includes Enterprise, as amended, modified or supplemented from time to time, (ii) the letter agreement dated January 31, 2002 between the Transferor, Compass and WestLB with respect to the fees to be paid by the Transferor hereunder with respect to the Related Group that includes Compass, as amended, modified or supplemented from time to time, (iii) the letter agreement dated October 26, 2000 between the Transferor, GMFC and BLB with respect 2 to the fees to be paid by the Transferor hereunder with respect to the Related Group that includes GMFC, as amended, modified or supplemented from time to time or (iv) the letter agreement dated November 12, 2002 between the Transferor, Asset One and SG with respect to the fees to be paid by the Transferor hereunder with respect to the Related Group that includes Asset One, as amended, modified or supplemented from time to time. 1.6 The definition of "Related Group" in Section 1.1 of the TAA is amended and restated in its entirety to read as follows: "Related Group" means any of the following groups: (i) Enterprise, as a Conduit Investor, Bank of America, N.A and Landesbank Hessen-Thueringen Girozentrale, as a Class A Bank Investors, and Bank of America, N.A. as an Administrative Agent, together with their respective successors and permitted assigns, (ii) Compass, as a Conduit Investor, Landesbank Hessen-Thueringen Girozentrale, as a Class A Bank Investor and WestLB, as a Class A Bank Investor and as an Administrative Agent, together with their respective successors and permitted assigns, (iii) GMFC, as a Conduit Investor, and BLB, as a Class A Bank Investor and as an Administrative Agent, together with their respective successors and permitted assigns and (iv) Asset One, as a Conduit Investor, and Societe Generale, as a Class A Bank Investor and as an Administrative Agent, together with their respective successors and permitted assigns. 1.7 The following definition is added to Section 1.1 of the TAA in appropriate alphabetical order: "SG" means Societe Generale together with its successors and permitted assigns. 1.8 The second sentence of Section 9.7(b) is amended to delete the words "S&P and Moody's" and to substitute therefor the words "each applicable Rating Agency". 1.9 Section 10.3 of the TAA is amended to add the following notice addresses for Asset One and SG, respectively: If to Asset One: Asset One Securitization, LLC c/o AMACAR Group, LLC 6525 Morrison Boulevard, Suite 318 Charlotte, North Carolina 28211 Attention: Douglas K. Johnson Tel: 704/365-0569 Fax: 704/365-1362 If to the Administrative Agent for Asset One: Societe Generale 1221 Avenue of the Americas 3 New York, New York 10020 Attention: Chin-Eav Eap Tel: 212/278-6000 Fax: 212/278-7320 1.10 Schedule I to the TAA is hereby amended to add the following as the notice address for SG in its capacity as a Class A Bank Investor. SOCIETE GENERALE 1221 Avenue of the Americas New York, New York 10020 Attention: Chin-Eav Eap Tel: 212/278-6000 Fax: 212/ 278-7320 1.11 Schedule II to the TAA is hereby amended in its entirety to read as set forth on the New Schedule II attached hereto. SECTION 2. Addition of New Investor: Assignment and Acceptance; Special Adjustment. (a) Each of the parties hereto agrees that, effective as of the Effective Date, (i) Asset One shall become a party to the TAA as a Conduit Investor and (ii) SG shall become a party to the TAA as a Class A Bank Investor and as an Administrative Agent. (b) Effective upon receipt of the Purchase Price (as defined below) on the Effective Date, each of Enterprise and Compass (each an "Assignor") hereby sells, grants, assigns and conveys to Asset One (or, if Asset One shall elect not to accept such assignment, to SG as the Class A Bank Investor for Asset One), without recourse, warranty, or representation of any kind, except as specifically provided herein, an undivided percentage ownership interest in such Assignor's right, title and interest in and to the outstanding Transferred Interests and Net Investment in the respective amounts and percentages necessary so that, from and after such sale and the adjustment described in paragraph (f) below, the percentage of the outstanding Transferred Interests and Net Investment held by each Related Group shall be proportional to their respective Related Group Limits (determined after giving effect to the amendments described in Section 1 above). Asset One may in its discretion (and if Asset One declines to do so, then SG as the related Class A Bank Investor shall) purchase and accept such grant, assignment and conveyance from the respective Assignors. (c) Asset One or SG, as applicable, agrees that the purchase price payable by it to the respective Assignors in respect of each assignment pursuant to clause (b) above (the "Purchase Price") shall be as set forth on Schedule III attached hereto. Such amount shall be payable on the Effective Date by wire transfer of immediately available funds to the respective Administrative Agents for the Assignors by no later than 1:00 P.M. (New York time) on the Effective Date. 4 (d) Each Assignor hereby represents and warrants to Asset One and SG that such Assignor owns the interest in the Transferred Interests and Net Investment being sold and assigned hereby for its own account and has not sold, transferred or encumbered any or all of its interest in such Transferred Interests and Net Investment to any other party. (e) Each of Asset One and SG hereby acknowledges and agrees that, except for each Assignor's representations and warranties contained in paragraph (d) above, it has entered into this Agreement on the basis of its own independent investigation and has not relied upon, and will not rely upon, any explicit or implicit written or oral representation, warranty or other statement of the Agent, any other Investor or any other Administrative Agent concerning the authorization, execution, legality, validity, effectiveness, genuiness, enforceability or sufficiency of the TAA, any other Transaction Document, any Receivable, or any other instrument or document related to the foregoing. (f) The parties hereto acknowledge that a further adjustment to the Net Investment held by the Related Groups is required in order to ensure that the Net Investment held by each Related Group is proportional to their respective Related Group Limits. Accordingly, on the Effective Date (i) the Transferor shall make a special Incremental Transfer to be funded solely by the Related Group that includes GMFC in an amount equal to $6,475,857.14 and (ii) the Transferor shall make a special payment to the Administrative Agent for Compass in an amount equal to $5,829,928.57 and a special payment to the Administrative Agent for Enterprise in an amount equal to $645,928.57, which special payments shall be applied to reduce the portion of the Net Investment held by Compass and Enterprise, respectively. Such special payments shall be made by the Transferor by no later than 1:00 P.M. (New York time) on the Effective Date. SECTION 3. Conditions Precedent. This Amendment shall become effective and be deemed effective as of the date (the "Effective Date") which is the later of (i) November 12, 2002 and (ii) the date on which the following conditions precedent have been satisfied: (a) the Agent shall have received counterparts of this Amendment duly executed by the Transferor, the Collection Agent, Asset One, SG, the Conduit Investors, the Class A Bank Investors, the Class B Investor, the Administrative Agents and the Agent; (b) SG shall have received a Fee Letter duly executed by each of the Transferor, Asset One and SG; and (c) SG shall have received confirmation from each of S&P and Fitch that (i) the Transferred Interest will be treated as an "A-3" (or better) asset for Asset One for purposes of the documents governing Asset One's commercial paper program and (ii) the execution and delivery of this Amendment by Asset One will not result in the reduction or withdrawal of the then current ratings of Asset One's Commercial Paper. 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. ENTERPRISE FUNDING CORPORATION, as a Conduit Investor By: /s/ Frank B. Bilotta ------------------------------------ Name: Frank B. Bilotta Title: Vice President COMPASS US ACQUISITION, LLC, as a Conduit Investor By: /s/ Douglas K. Johnson ------------------------------------ Name: Douglas K. Johnson Title: President GIRO MULTI-FUNDING CORPORATION, as a Conduit Investor By: /s/ Kevin Burns ------------------------------------ Name: Kevin Burns Title: Vice President NMC FUNDING CORPORATION, as Transferor By: /s/ Marc Lieberman ------------------------------------ Name: Marc Lieberman Title: Treasurer NATIONAL MEDICAL CARE, INC., as Collection Agent By: /s/ Marc Lieberman ------------------------------------ Name: Marc Lieberman Title: Treasurer Signature Page to Amendment No. 2 BANK OF AMERICA, N.A., as Agent, as an Administrative Agent and as a Class A Bank Investor By: /s/ John K. Svolos ------------------------------------ Name: John K. Svolos Title: Principal WESTLB AG, NEW YORK BRANCH, as an Administrative Agent and as a Class A Bank Investor By: /s/ Christian C. Brune ------------------------------------ Name: Christian C. Brune Title: Director, Global Securitization Americas By: /s/ Michael Cheng ------------------------------------ Name: Michael Cheng Title: Associate Director Securitization BAYERISCHE LANDESBANK, NEW YORK BRANCH, as an Administrative Agent and as a Class A Bank Investor By: /s/ Alexander Kohnert ------------------------------------ Name: Alexander Kohnert Title: First Vice President By: /s/ Lori-Ann Wynter ------------------------------------ Name: Lori-Ann Wynter Title: Vice President LANDESBANK HESSEN-THUERINGEN GIROZENTRALE, as a Class A Bank Investor By: /s/ Martin Scheele ------------------------------------ Name: Dr. Martin Scheele Title: Vice President By: /s/ Jens Doring ------------------------------------ Name: Jens Doring Title: Associate Signature Page to Amendment No. 2 BANK OF AMERICA, N.A., as a Class B Investor By: /s/ Philip S. Durand ------------------------------------ Name: Philip S. Durand Title: Managing Director ASSET ONE SECURITIZATION, LLC, as a Conduit Investor By: /s/ Evelyn Echevarria ------------------------------------ Name: Evelyn Echevarria Title : Vice President SOCIETE GENERALE, as an Administrative Agent and as a Class A Bank Investor By: /s/ Chin-Eav Eap ------------------------------------ Name: Chin-Eav Eap Title: Vice President By: /s/ Paul Schmieder ------------------------------------ Name: Paul Schmieder Title: Director Signature Page to Amendment No. 2 NEW SCHEDULE II to SECOND AMENDED AND RESTATED TRANSFER AND ADMINISTRATION AGREEMENT A. COMMITMENTS OF CLASS A BANK INVESTORS
Class A Bank Investor Commitment - --------------------- ---------- Bank of America, N.A $155,000,000 WestLB AG, New York Branch $150,000,000 Bayerische Landesbank, New York Branch $120,000,000 Landesbank Hessen - Thueringen Girozentrale $ 75,000,000(1) Societe Generale $ 60,000,000
B. COMMITMENTS OF CLASS B INVESTORS
Class B Investor Commitment - ---------------- ---------- Bank of America, N.A $ 16,000,000
- ---------- (1) Landesbank Hessen - Thueringen Girozentrale is a member of both the Compass and the Enterprise Related Groups. The portion of its Commitment included in the Compass Related Group is $50,000,000. The portion of its Commitment included in the Enterprise Related Group is $25,000,000. SCHEDULE III PURCHASE PRICE PAYABLE TO ASSIGNORS To: Enterprise Funding Corporation $32,339,285.71 Compass US Acquisition, LLC $16,169,642.86
EX-10.7 5 b45677fmexv10w7.txt AMEND #3, DATED 12/18/02 TO TRANSFER & ADMN AGRMNT EXHIBIT 10.7 AMENDMENT NO. 3 Dated as of December 18, 2002 to SECOND AMENDED AND RESTATED TRANSFER AND ADMINISTRATION AGREEMENT Dated as of September 24, 2002 THIS AMENDMENT NO. 3 (this "Amendment") dated as of December 18, 2002 is entered into by and among NMC FUNDING CORPORATION, a Delaware corporation, as Transferor, NATIONAL MEDICAL CARE, INC., a Delaware corporation, as Collection Agent, ENTERPRISE FUNDING CORPORATION, a Delaware corporation ("Enterprise"), as a Conduit Investor, COMPASS US ACQUISITION, LLC, a Delaware limited liability company ("Compass"), as a Conduit Investor, GIRO MULTI-FUNDING CORPORATION, a bankruptcy-remote special purpose company incorporated in Delaware ("GMFC"), as a Conduit Investor, ASSET ONE SECURITIZATION, LLC ("Asset One"), as a Conduit Investor, the FINANCIAL INSTITUTIONS PARTIES HERETO as Class A Bank Investors, BANK OF AMERICA, N.A. ("Bank of America"), as Class B Investor, WESTLB AG, NEW YORK BRANCH ("WestLB"), as an Administrative Agent, BAYERISCHE LANDESBANK, NEW YORK BRANCH ("BLB"), as an Administrative Agent, SOCIETE GENERALE ("SG"), as an Administrative Agent and BANK OF AMERICA, N.A., as an Administrative Agent and as Agent. PRELIMINARY STATEMENTS A. The Transferor, the Collection Agent, Compass, Enterprise, GMFC, Asset One, the Class A Bank Investors, the Class B Investor, WestLB, as an Administrative Agent, BLB, as an Administrative Agent, SG, as an Administrative Agent and Bank of America, as an Administrative Agent and as Agent, are parties to that certain Second Amended and Restated Transfer and Administration Agreement dated as of September 24, 2002 (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 parties hereto 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 TAA. Effective as of the Effective Date (as defined below), the TAA is amended as follows: 1.1 Clause (a) of the definition of "Concentration Factor" in Section 1.1 of the TAA is amended in its entirety to read as follows: "(a) in the case of any Commercial Obligor or Hospital Obligor that does not have a Special Concentration Limit (as defined below), 5% of the Class A Net Investment outstanding on such date; provided that, subject to clause (c) below, (i) for so long as Aetna Inc. is rated at least BBB- by Standard & Poor's and at least Baa3 by Moody's and, if rated by Fitch Ratings ("Fitch"), at least BBB- by Fitch, the Concentration Factor for Aetna Inc. shall be 7.0% of the Class A Net Investment outstanding on such date, (ii) for so long as Cigna Corp. is rated at least A- by Standard & Poor's and at least A3 by Moody's and, if rated by Fitch, at least A- by Fitch, the Concentration Factor for Cigna Corp. shall be 10% of the Class A Net Investment outstanding on such date, (iii) for so long as clause (ii) does not apply but Cigna Corp. is rated at least BBB+ by Standard & Poor's and at least Baa1 by Moody's and, if rated by Fitch, at least BBB+ by Fitch, the Concentration Factor for Cigna Corp. shall be 7% of the Class A Net Investment outstanding on such date and (iv) for so long as United Healthcare Corporation is rated at least A- by Standard & Poor's and at least A3 by Moody's and, if rated by Fitch, at least A- by Fitch, the Concentration Factor for United Healthcare Corporation shall be 10% of the Class A Net Investment outstanding on such date;". 1.3 The definition of "Defaulted Receivable" in Section 1.1 of the TAA is amended to delete the words "from the original due date" and to substitute therefor the words "from the original due date when a contract exists with an Originating Entity that is part of the dialysis products division of the Parent Group and otherwise from the original invoice date". 1.4 The definition of "Delinquent Receivable" in Section 1.1 of the TAA is amended to delete the words "from the original due date" and to substitute therefor the words "from the original due date when a contract exists with an Originating Entity that is part of the dialysis products division of the Parent Group and otherwise from the original invoice date". SECTION 2. Conditions Precedent. This Amendment shall become effective and be deemed effective as of the date (the "Effective Date") on which the following conditions precedent have been satisfied: (a) the Agent shall have received counterparts of this Amendment duly executed by the Transferor, the Collection Agent, the Conduit Investors, the Class A Bank Investors, the Class B Investor, the Administrative Agents and the Agent; and (b) to the extent requested by any Conduit Investor, such Conduit Investor shall have received confirmation from each applicable Rating Agency that the execution and delivery of this Amendment will not result in the reduction or withdrawal of the then current ratings of its Commercial Paper. 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 a Conduit Investor By: /s/ Kevin P. Burns ---------------------------------------- Name: Kevin P. Burns Title: Vice-President COMPASS US ACQUISITION, LLC, as a Conduit Investor By: /s/ Douglas K. Johnson ---------------------------------------- Name: Douglas K. Johnson Title: President: GIRO MULTI-FUNDING CORPORATION, as a Conduit Investor By: /s/ Frank B. Bilotta ---------------------------------------- Name: Frank B. Bilotta Title: Vice President NMC FUNDING CORPORATION, as Transferor By: /s/ Marc Lieberman ---------------------------------------- Name: Marc Lieberman Title: Treasurer NATIONAL MEDICAL CARE, INC., as Collection Agent By: /s/ Marc Lieberman ---------------------------------------- Name: Marc Lieberman Title: Treasurer Signature Page to Amendment No. 3 BANK OF AMERICA, N.A., as Agent, as an Administrative Agent and as a Class A Bank Investor By: /s/ John K. Svolos ---------------------------------------- Name: John K. Svolos Title: Principal WESTLB AG, NEW YORK BRANCH, as an Administrative Agent and as a Class A Bank Investor By: /s/ Christian C. Brune ---------------------------------------- Name: Christian C. Brune Title: Director, Global Securitization Americas By: /s/ Anne Lacombe ---------------------------------------- Name: Anne Lacombe Title: Director BAYERISCHE LANDESBANK, NEW YORK BRANCH, as an Administrative Agent and as a Class A Bank Investor By: /s/ Alexander Kohnert ---------------------------------------- Name: Alexander Kohnert Title: Senior Vice President By: /s/ Lori-Ann Wynter ---------------------------------------- Name: Lori-Ann Wynter Title: Vice President LANDESBANK HESSEN-THUERINGEN GIROZENTRALE, as a Class A Bank Investor By: /s/ Martin Scheele ---------------------------------------- Name: Dr. Martin Scheele Title: Vice President By: /s/ Jens Doring ---------------------------------------- Name: Jens Doring Title: Associate Signature Page to Amendment No. 3 BANK OF AMERICA, N.A., as a Class B Investor By: /s/ Richard L. Nichols, Jr. ---------------------------------------- Name: Richard L. Nichols, Jr. Title: Managing Director ASSET ONE SECURITIZATION, LLC, as a Conduit Investor By: /s/ Doris J. Hearn ---------------------------------------- Name: Doris J. Hearn Title : Vice President SOCIETE GENERALE, as an Administrative Agent and as a Class A Bank Investor By: /s/ Evelyn Echevarria ---------------------------------------- Name: Evelyn Echevarria Title : Vice President By: /s/ Sharyanne McSwain ---------------------------------------- Name: Sharyanne McSwain Title: Director Signature Page to Amendment No. 3 EX-10.15 6 b45677fmexv10w15.txt EMPLOYMENT AGREEMENT, DATED 10/15/02 - WAHLSTROM EXHIBIT 10.15 [FRESENIUS MEDICAL CARE LOGO] EMPLOYMENT AGREEMENT THIS AGREEMENT, is made and entered into this 15th day of October, 2002, by and between Fresenius Medical Care North America ("FMC" or the "EMPLOYER"), with principal offices located at 95 Hayden Avenue, Lexington, MA 02420 and Mats Wahlstrom ("EMPLOYEE") currently residing at 3301 Oak Street, Wheat Ridge, CO 80033. WITNESSETH: WHEREAS, the parties hereto desire to express the terms and conditions of such employment. NOW THEREFORE, it is understood and agreed to between the parties as follows: 1. EMPLOYMENT. Effective February 24, 2003, FMC shall employ EMPLOYEE as Senior Vice President and President of Fresenius Medical Services, and EMPLOYEE hereby accepts the employment upon the terms and conditions of this Agreement. 2. TERM. The following terms of this Agreement shall be effective as of February 24, 2003 for a period of one (1) year from that date ("Initial Term"), and continue thereafter, unless terminated in accordance with the provisions hereinafter stated. THE INITIAL TERM SHALL BE RENEWED BY SUCCESSIVE ONE (1) YEAR PERIODS UNLESS EMPLOYEE GIVES WRITTEN NOTICE OF NON-RENEWAL TO FMC AT LEAST THIRTY (30) DAYS PRIOR TO ANY TERMINATION DATE. THE INITIAL TERM AND ANY SUBSEQUENT RENEWAL PERIODS SHALL BE CALLED THE "EMPLOYMENT TERM." 3. DUTIES AND RESPONSIBILITIES. EMPLOYEE shall serve full time as FMC's Senior Vice President and President of Fresenius Medical Services and will have full management responsibility for the dialysis services organization in North America. EMPLOYEE shall report directly to Ben J. Lipps, President and Chief Executive Officer of Fresenius Medical Care NA. EMPLOYEE shall to the best of his ability and experience competently, loyally, diligently and conscientiously perform all of the duties and obligations expressly or implicitly required under this Agreement. EMPLOYEE further agrees that, in conducting business in the interest of the EMPLOYER, he will not engage in, knowingly permit others under his control to carry on, or induce others to engage in any practice or commit any acts in violation of any federal or state or local law or ordinance. EMPLOYEE shall be permitted to continue to serve as a member of the Board of Directors for the following organizations: Prosta Lund Corporation, Getinge Corporation, and the Colorado Venture Center. EMPLOYEE may continue to serve on these boards so long as it does not interfere with his responsibilities to Fresenius Medical Care North America. Further, EMPLOYEE shall be permitted to provide assistance to Gambro Healthcare Inc. with respect to the current governmental investigation of its activities during the term of his employment with Gambro Healthcare, Inc. 4. COMPENSATION AND BENEFITS. (a) Base Salary. EMPLOYER shall pay EMPLOYEE for all services rendered a base salary of Six Hundred Fifty Thousand Dollars and No Cents ($650,000.00) per year, (the "Base Salary"), payable in accordance with FMC's payroll procedures, subject to customary withholding and employment taxes. At the end of each year of employment hereunder, EMPLOYEE's performance for the prior year shall be reviewed and evaluated. If EMPLOYEE's performance is satisfactory, EMPLOYEE shall receive an increase in his base salary commensurate with level of achievement. (b) Incentive Compensation. During EMPLOYEE's employment with FMC, EMPLOYEE shall be entitled to participate in FMC's Management Bonus Plan and any other such incentive compensation plans as are now available or may become available to other similarly positioned senior executives of FMC. EMPLOYEE will be in the FMC Management Bonus Plan at a target level bonus of fifty percent (50%) and the maximum bonus is one hundred percent (100%) of Base Salary. Funding for the plan is based upon attainment of specific individual and company financial objectives. EMPLOYEE's entitlement to a bonus under the Management Bonus Plan will be governed by the terms of that Plan. Bonus payment is based on the following schedule: 1. Performance Year Budget Year 2. Measurement FMC EBIT 3. Payout Schedule 95% EBIT 0% of annual salary 100% EBIT 50% of annual salary 110% EBIT 100% of annual salary EBIT performance above 95% would have a graduated payout of bonus up to 100% of base salary at 110% EBIT. (c) Retention Incentive Plan. EMPLOYEE shall be eligible to receive a retention bonus in the amount of Fifty Thousand Dollars and No Cents ($50,000.00) per year for a period of five (5) years. Payment of retention bonus is subject to customary withholding and employment taxes and would occur in March of 2004, 2005, 2006, 2007 and 2008. EMPLOYEE must be active in status and performing all duties and responsibilities of his position to receive this bonus. (d) Stock Plan. EMPLOYEE shall be eligible to participate in the current Fresenius Medical Care AG 2001 Stock Incentive Plan, (the "Stock Plan"), subject to IRS approval of such respective Stock Plans. Preference Shares are traded on the Frankfort Stock Exchange. EMPLOYEE will be recommended to receive 48,000.00 Preference Share Options. A vesting schedule will be recommended to the Fresenius Medical Care AG Management Board such that 16,000 shares will vest two (2) years from the date of approval by the Management Board and 16,000 will vest on each of the next two (2) anniversaries of the grant. Option 2 price will be recommended to be determined by the average Preference Share price over the previous 30-day full calendar month before the month in which the grant is approved. EMPLOYEE will be recommended to be fully vested in the 48,000 Preference Share options at the end of four (4) years from date of grant. EMPLOYEE shall be eligible to receive additional option grants if approved by the Fresenius Medical Care AG Management Board. (e) Benefits Program. EMPLOYEE shall continue to be eligible to participate in the group benefits program at the senior executive level as now established or which subsequently become available. (f) Life Insurance. EMPLOYER will be provided with life insurance in accordance with FMC's policy, currently capped at Four Hundred Thousand Dollars ($400,000). EMPLOYEE will be provided with the opportunity to purchase supplemental life insurance of an additional Six Hundred Thousand Dollars ($600,000) beyond the current policy of coverage at his own expense, with proof of good health. (g) Automobile. EMPLOYEE will be provided with a company car allowance of Seven Hundred Dollars ($700) paid monthly and treated as ordinary income. (h) Financial Planning/Tax Preparation. EMPLOYEE will be provided with an allowance of Three Thousand Dollars ($3,000) to be paid based upon submitted documentation of expenses incurred as a result of financial planning assistance or income tax preparation. Reimbursement will be treated as ordinary income. (i) Expenses. EMPLOYEE will be reimbursed for travel and other expenses related to the performance of his duties under the Agreement and in accordance with the EMPLOYER's policies. (j) Vacation/PTO. EMPLOYEE shall be allowed to carry-over up to two hundred (200) hours from year-to-year without losing such time. EMPLOYEE shall also accrue PTO days at the maximum available to senior executives under the Executive Vacation Policy which currently provides for thirty (30) days of PTO per year. (k) Relocation Assistance. As this position is located in Lexington, MA, EMPLOYEE shall be eligible for FMCNA relocation benefits. Under FMC's policy, all reasonable costs of purchasing and selling a house and moving of household goods are paid by the EMPLOYER. In addition, EMPLOYER will identify temporary housing for EMPLOYEE and dependents for whatever period is necessary. During the period of temporary housing, EMPLOYER will cover costs for return home trips to primary residence and will provide financial assistance with regard to taxes associated with IRS relocation policies. (i) Secondary Office Space - EMPLOYER will make available office space in geographic proximity to permanent residence located in the Denver, Colorado area. 3 (l) Indemnification. EMPLOYER agrees to indemnify EMPLOYEE with respect to certain matters as provided in "Exhibit A", which is attached hereto and incorporated herein. 5. TERMINATION OF EMPLOYMENT. EMPLOYEE's employment hereunder may be terminated under the following circumstances: (a) Death. EMPLOYEE's employment hereunder shall terminate upon his death. (b) Total Disability. The EMPLOYER may terminate EMPLOYEE's employment hereunder upon EMPLOYEE becoming "Totally Disabled." For purposes of this Agreement, EMPLOYEE shall be "Totally Disabled" if EMPLOYEE is physically or mentally incapacitated so as to render EMPLOYEE incapable of performing EMPLOYEE's usual and customary duties under this Agreement for a period one hundred eighty (180) days out of any twelve (12) months period. EMPLOYEE's receipt of Social Security disability benefits or disability benefits under a Company-sponsored long-term disability plan shall be deemed conclusive evidence of Total Disability for purpose of this Agreement; provided, however, that in the absence of EMPLOYEE's receipt of such Social Security or long-term disability benefits, a physician mutually acceptable to EMPLOYEE and FMC may make such determination in accordance with the terms of this sub-section. (c) Voluntary Termination. EMPLOYER or EMPLOYEE may terminate EMPLOYEE's employment hereunder at any time after providing written notice to the other party. The EMPLOYEE is required to give the EMPLOYER at least thirty (30) days written notice if he wishes to terminate his employment pursuant to this provision. (d) Termination by the EMPLOYER for Cause. The EMPLOYER may terminate EMPLOYEE's employment for Cause at any time after providing thirty (30) days' written notice to EMPLOYEE. Such notice shall specify in reasonable detail the nature of the Cause, and during such thirty (30) day period, EMPLOYEE shall have the opportunity to cure the stated Cause, if at all possible. If EMPLOYEE fails to cure a stated Cause or if such Cause cannot be cured, EMPLOYEE's employment hereunder shall terminate at the end of the thirty (30) day period, but without prejudice to EMPLOYEE's right to contest the existence of any stated Cause or to contest the fact that the Cause has not been cured. For purposes of this Agreement, the term "Cause" shall mean, with respect to the EMPLOYEE, any of the following: (i) conviction of EMPLOYEE of a felony; (ii) deliberate and continual refusal to satisfactorily perform material employment duties reasonably requested by the EMPLOYER; (iii) fraud or embezzlement determined in accordance with the EMPLOYER's normal, internal investigative procedures consistently applied in comparable circumstances to employees; (iv) failure to obtain and maintain in good order any licenses required for EMPLOYEE to perform his duties under this Agreement; or (v) a breach of any of the covenants set forth in Section 7 below. 4 (e) Termination of EMPLOYEE for Cause. This Agreement may be terminated by EMPLOYEE in the event of a breach of FMC or any of its obligations under this Agreement, or in the event that EMPLOYEE's duties and responsibilities or his Base Salary and Incentive Compensation terms are diminished or reduced, provided EMPLOYEE gives FMC written notice specifying the manner in which EMPLOYEE believes FMC has breached this Agreement, or reduced or diminished his duties and responsibilities or his Base Salary and Incentive Compensation terms, and FMC has thirty (30) days from receipt of such notice to cure such breach, or in the case of other than a non-payment of money breach, if such breach cannot be cured within thirty (30) days, to commence a good faith effort to cure. (f) Notice of Termination. Any termination by the EMPLOYER or the EMPLOYEE under this Agreement shall be communicated by notice of termination to the other party hereto. For purposes of this Agreement, a Notice of Termination shall mean a notice in writing which shall indicate the specific termination provision in this Agreement relied upon to terminate EMPLOYEE's employment and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of EMPLOYEE's employment under the provision so indicated. 6. COMPENSATION FOLLOWING TERMINATION OF EMPLOYMENT. (a) Under all circumstances, upon termination the EMPLOYEE shall be entitled to receive: (i) Any accrued but unpaid Base Salary for services rendered to the date of termination; and (ii) Any benefits to which EMPLOYEE may be entitled upon termination pursuant to the plans, policies and arrangements referred to in Section 4 hereof shall be determined and paid in accordance with the terms of such plans, policies and arrangements. Upon any such termination, EMPLOYEE shall have the right to exercise his Vested Stock Options in accordance with the terms of the plan. Should he fail to exercise these options within this period, they will be forfeited at the end of that period. (b) In the event that EMPLOYEE's employment hereunder is voluntarily terminated by the EMPLOYER in accordance with Section 5(c), EMPLOYER fails to employ EMPLOYEE as provided in Section 1, or in the event that EMPLOYEE's employment hereunder is terminated by the EMPLOYEE in accordance with Section 5(e), the EMPLOYEE shall also be entitled to receive: (i) A payment equal to eighteen (18) months Base Salary, at the rate in effect on the date of termination of employment, such amount to be paid as salary continuation with benefits. EMPLOYEE may request and FMC will agree that any remaining salary continuation be paid in a lump sum. 5 If a lump sum is selected, all benefits entitlement will cease as of the date of such payment; and (ii) Executive outplacement if EMPLOYEE's position is eliminated or materially reduced in scope as a result of restructuring or a change of control of the company; and (iii) A pro-rated portion of the EMPLOYEE's annual bonus as of the termination of work date calculated based on the greater of the current annual target bonus and the previous year's actual annual bonus. (c) Any stock options or other awards will continue to vest in accordance with the terms of the award and the plan pursuant to which it was made. If the terms of any award and governing plan are silent with respect to termination of employment, such award will lapse immediately upon such termination. 7. NON-DISCLOSURE/NON COMPETITION AGREEMENT. EMPLOYEE acknowledges that during the term of employment with EMPLOYER, he will have access to and become acquainted with Confidential Information of the EMPLOYER. Confidential Information means all information related to the present or planned business of FMC that has not been released publicly by authorized representatives of FMC, and shall include but not be limited to, trade secrets and know-how, inventions, marketing and sales programs, employee, customer, patient and supplier information, information from patient medical records, financial data, pricing information regulatory approval and reimbursement strategies, data, operations and clinical manuals. Notwithstanding anything to the contrary herein, the following shall not be considered Confidential Information: (i) information which, at the time of disclosure, is in the public domain; (ii) information which, after disclosure, becomes part of the public domain through no fault of EMPLOYEE; (iii) information which, at the time of disclosure, can be shown by written documentation to have been in possession of EMPLOYEE, free of any obligation to keep it confidential; (iv) information which can be shown to have been independently developed by EMPLOYEE; and (v) information which can be shown to have been acquired after disclosure from a third party who did not receive it directly or indirectly from EMPLOYER and who did not require that such information be held in confidence. EMPLOYEE agrees not to use or disclose, directly or indirectly, any Confidential Information of FMC at any time and in any manner, except as required in the course of his employment with FMC or with the express written authority of FMC. EMPLOYEE understands that his non-disclosure obligations will continue following his termination of employment. EMPLOYEE agrees that, except as hereinafter provided, during the term of his employment, and for a period of one (1) year immediately after, he leaves the employment of FMC for any reason or the end of the period during which EMPLOYEE continues to receive salary continuation after leaving the employment of FMC, whichever 6 is greater, EMPLOYEE will not directly or indirectly for his own benefit or the benefit of others: (a) render services for a competing organization in connection with competing products as an employee, officer, agent, broker, consultant, partner, stockholder (except that EMPLOYEE may own three percent (3%) or less of the equity securities of any publicly-traded company); (b) hire or seek to persuade any employee of FMC to discontinue employment or to become employed in any competing organization or seek to persuade any independent contractor or supplier to discontinue its relationship with FMC; and (c) solicit, direct, take away or attempt to take away any business or customers of FMC. Nothing in this Agreement would preclude EMPLOYEE from working for a competitor of FMC's subsequent to termination of EMPLOYEE's employment provided EMPLOYEE will not be engaged, directly or indirectly, in any business in which FMC is actively engaged at the time of EMPLOYEE's termination or in any new business which FMC is in the process of setting up in which EMPLOYEE had direct involvement while employed by FMC. EMPLOYEE also agrees to inform FMC of any such employment with a competitor before beginning such employment. 8. ENFORCEMENT OF COVENANTS. (a) Termination of Employment and Forfeiture of Compensation. EMPLOYEE agrees that in the event it is determined that EMPLOYEE has materially breached any of the covenants referenced in Section 5(d)(v) hereof during EMPLOYEE's employment, the EMPLOYER shall have the right to terminate EMPLOYEE's employment for "Cause." (b) Right to Injunction. EMPLOYEE acknowledges that a breach of the covenants set forth in Section 7 hereof will cause irreparable damage to the EMPLOYER with respect to which the EMPLOYER's remedy at law for damages will be inadequate. Therefore, in the event of breach of the covenants set forth in this section by EMPLOYEE, EMPLOYEE and the EMPLOYER agree that the EMPLOYER shall be entitled to seek the following particular forms of relief, in addition to remedies otherwise available to it at law or equity: injunctions, both preliminary and permanent, enjoining or restraining such breach and EMPLOYEE hereby consents to the issuance thereof forthwith and without bond by any court of competent jurisdiction. (c) Separability of Covenants. The covenants contained in Section 7 hereof constitute a series of separate covenants, one for each applicable State in the United States and the District of Columbia, and one for each applicable foreign country. If in any judicial proceeding, a court shall hold that any of the covenants set forth in Section 7 exceed the time, geographic, or occupational limitations 7 permitted by applicable laws, EMPLOYEE and the EMPLOYER agree that such provisions shall and are hereby reformed to the maximum time, geographic, or occupational limitations permitted by such laws. Further, in the event a court shall hold unenforceable any of the separate covenants deemed included herein, then such unenforceable covenant or covenants shall be deemed eliminated from the provisions of this Agreement for the purpose of such proceeding to the extent necessary to permit the remaining separate covenants to be enforced in such proceeding. EMPLOYEE and the EMPLOYER further agree that the covenants in Section 7 shall each be construed as a separate agreement independent of any other provisions of this Agreement, and the existence of any claim or cause of action by Employee against the Company whether predicated on this Agreement or otherwise, shall not constitute a defense to the enforcement by the Company of any of the covenants in Section 7. 9. FMC DOCUMENTS AND EQUIPMENT. All documents and equipment relating to the business of FMC, whether prepared by EMPLOYEE or otherwise coming into EMPLOYEE's possession, are the exclusive property of FMC, and must not be removed from the premises of FMC except as required in the course of employment. Any such documents and equipment must be returned to FMC when EMPLOYEE leaves the employment of FMC. 10. WITHHOLDING OF TAXES. The EMPLOYER may withhold from any compensation and benefits payable under this Agreement all applicable federal, state, local, or other taxes. 11. ENTIRE AGREEMENT AND AMENDMENTS. This Agreement shall constitute the entire agreement between the parties and supersedes all existing agreements between them, whether oral or written, with respect to the subject matter hereof. Any waiver, alteration, or modification of any of the provisions of this Agreement, or cancellation or replacement of this Agreement shall be accomplished in writing and signed by the respective parties. 12. NOTICES. Any notice, consent, request or other communication made or given in connection with this Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by registered or certified mail, return receipt requested, to those listed below at their following respective addresses or at such other address as each may specify by notice to the others: To the Employer: Fresenius Medical Care North America Corporate Headquarters Two Ledgemont Center 95 Hayden Avenue Lexington, MA 02420-9192 Attention: Vice President, Human Resources 8 To Employee: At the address for Employee set forth above or such other address as supplied by EMPLOYER to FMC. 13. GOVERNING LAW. This Agreement shall be construed in accordance with, and the rights of the parties shall be governed by, the laws of the Commonwealth of Massachusetts. 14. SEPARABILITY. If any term or provision of this Agreement is declared illegal or unenforceable by any court of competent jurisdiction and cannot be modified to be enforceable, such term or provision shall immediately become null and void, leaving the remainder of this Agreement in full force and effect. IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by the undersigned duly authorized persons as of the day and year first stated above. NATIONAL MEDICAL, INC. d/b/a FRESENIUS MEDICAL CARE NORTH WITNESS AMERICA, EMPLOYER By:/s/ Ben J. Lipps 10/20/2002 - ------------------- ------------------ ---------- Ben J. Lipps (DATE) President and Chief Executive Officer WITNESS MATS WAHLSTROM /s/ Ronald Kuerbitz /s/ Mats Wahlstrom 10/15/2002 - ------------------- ------------------ ---------- (DATE) 9 EXHIBIT "A" INDEMNIFICATION EMPLOYER agrees to indemnify EMPLOYEE up to a maximum aggregate amount of Two Hundred Fifty Thousand Dollars ($250,000) with respect to any loss or claim arising from the failure or refusal of Gambro Healthcare Inc., or its affiliates, (hereinafter collectively "Gambro") to meet any obligation to pay, or any obligation to indemnify EMPLOYEE with respect to the payment of, legal fees and related expenses incurred by EMPLOYEE in connection with the pending investigation of Gambro by the Office of Inspector General Department of Health and Human Services and the United States Justice Department. Further, EMPLOYER agrees to indemnify, defend and hold harmless EMPLOYEE with respect to any loss, liability or claim by Gambro, including damages, attorneys fees and costs, arising out of EMPLOYEE's relationship or dealings with EMPLOYER, including EMPLOYER's offer of employment to EMPLOYEE, EMPLOYEE's acceptance of such offer of employment, EMPLOYEE's preparation for and performance of the duties of his employment with EMPLOYER, except such acts as are outside the scope of his employment with EMPLOYER and are performed without the knowledge of EMPLOYER. 10 EX-10.18 7 b45677fmexv10w18.txt SETTLEMENT AGREEMENT DATED 2/6/03 Exhibit 10.18 IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE In re: ) Chapter 11 ) W.R. GRACE & CO., et al., ) Case Nos. 01-1139 through 01-1200 ) Debtors. ) ___________________________________________) ) OFFICIAL COMMITTEE OF ASBESTOS ) PERSONAL INJURY CLAIMANTS, et al., ) ) Plaintiffs, ) ) -against- ) Adv. No. 02-2210 ) [LEAD DOCKET] SEALED AIR CORPORATION and ) CRYOVAC, INC., ) ) Defendants. ) ___________________________________________) ) OFFICIAL COMMITTEE OF ASBESTOS ) PERSONAL INJURY CLAIMANTS and ) OFFICIAL COMMITTEE OF ASBESTOS ) PROPERTY DAMAGE CLAIMANTS OF ) W.R. GRACE & CO., suing in behalf of the ) Chapter 11 Bankruptcy Estate of W.R. ) GRACE & CO., et al., ) ) Plaintiffs, ) ) -against- ) Adv. No. 02-2211 ) FRESENIUS MEDICAL CARE HOLDINGS, ) Affects Docket 02-2211 only INC. and NATIONAL MEDICAL CARE, INC. ) ) Defendants. ) SETTLEMENT AGREEMENT AND RELEASE OF CLAIMS This Settlement Agreement and Release of Claims (the "Agreement") is made as of the 6th day of February, 2003, by and among Fresenius Medical Care Holdings, Inc. (taxpayer identification number 13-3461988) ("FMCH"), National Medical Care, Inc. (taxpayer identification number 04-2835488) ("NMC"), the Official Committee of Asbestos Personal Injury Claimants (the "PI Committee"), and the Official Committee of Asbestos Property Damage Claimants (the "PD Committee," and collectively with the PI Committee, the "Asbestos Committees"), both of the Asbestos Committees in their respective capacities as plaintiffs on behalf of the estates of the Debtors in the Asbestos Claimants' Adversary Proceeding. ARTICLE I DEFINITIONS Capitalized terms used in this Agreement shall have the meanings (such meanings to be equally applicable to both the singular and the plural forms of the terms defined) assigned to such terms in Appendix A attached hereto or in the Preamble above. Appendix A is incorporated herein by reference, and is fully part of this Agreement. ARTICLE II TERMS OF SETTLEMENT OF CLAIMS 2.01 Moving Parties to Seek Approval of Settlement. Within thirty (30) days of the Settlement Execution Date, the Moving Parties shall move the Court to enter an order binding on all of the Estate Parties (including the Settling Parties) approving this Agreement and obligating each of the Estate Parties to the terms and conditions of this Agreement as if each of the Estate Parties had executed this Agreement. 2.02 Preconditions to Settlement Payment Obligation. As a condition precedent to the obligation of the NMC Defendants to make the Settlement Payment, each and every of the following preconditions shall have occurred, unless the NMC Defendants, in their sole discretion, have provided written notice to the other Settling Parties and the Court that they waive one or more of the preconditions: (A) Releases by the Estate Parties. The Plan of Reorganization shall provide that: (i) upon the making of the Settlement Payment, the Asbestos Committees and the Estate Parties will fully, finally, and forever release, relinquish and discharge each and every of the NMC Defendants from any and all Grace-Related Claims that the Asbestos Committees or the Estate Parties have asserted or could have asserted in this or any other forum against any of the NMC Defendants; and (ii) prior to the making of the Settlement Payment, the Asbestos Committees and the Estate Parties will deliver to the NMC Defendants the Release that is attached as Appendix B hereto, which by its terms shall become effective upon the making of the Settlement Payment. (B) Releases by Plan Claimants. The Plan of Reorganization shall provide that any Person that votes in favor of the Plan or that receives property under the Plan shall thereby be deemed, upon the making of the Settlement Payment, to have fully and finally released each and every of the NMC Defendants from all Grace-Related Claims that such Person has asserted or could have asserted in this or any other forum against any of the NMC Defendants. (C) Releases by Trust Claimants. The Plan of Reorganization shall provide for the establishment of a trust or trusts under state law and pursuant to Section 524(g) of the Bankruptcy Code (the "Asbestos Trust"), and the Plan of Reorganization further shall provide that any Person that receives property from the Asbestos Trust shall thereby be deemed, upon and after the making of the Settlement Payment, to have fully and finally released each and every -2- of the NMC Defendants from all Grace-Related Claims that the Person has asserted or could have asserted in this or any other forum against any of the NMC Defendants. (D) Bar Order. The Court shall have issued, pursuant to Section 105(a) of the Bankruptcy Code, a Final Order, effective upon the making of the Settlement Payment, permanently and forever enjoining, restraining and barring any Person from commencing or continuing any suit, action or other proceeding, or from taking any other action, for the purpose of, directly or indirectly, collecting, recovering, or receiving payment of, or with respect to, any Grace-Related Claim against any of the NMC Defendants. (E) Channelling Injunction. In addition to the injunction described in (D) above, the Final Order confirming the Plan of Reorganization shall provide that, effective upon the making of the Settlement Payment, the NMC Defendants shall receive the full benefits and protections of an injunction entered pursuant to section 524(g) of the Bankruptcy Code, which injunction shall permanently bar any Person from commencing or continuing any suit, action, or other proceeding, or from taking any other action for the purpose of, directly or indirectly, collecting, recovering, or receiving payment of, or with respect to, any Asbestos-Related Claim that the Person asserted or could have asserted, against any of the NMC Defendants. (F) Indemnification. The Plan of Reorganization shall provide that the Estate Parties, jointly and severally, upon the making of the Settlement Payment, shall indemnify, defend and hold harmless the NMC Defendants for any loss, cost or expense (including attorneys' fees and other costs of defense) arising out of any and all Grace-Related Claims, commenced or continued in this or any other forum against any of the NMC Defendants. Such indemnification specifically shall not apply to the costs and expenses (including lawyers' fees and accountants' fees) incurred by the NMC Defendants in (i) defending the Asbestos Claimant's -3- Adversary Proceeding or any other proceedings or controversies arising out of or based upon Asbestos-Related Claims prior to the Settlement Execution Date, or (ii) defending any proceedings or controversies arising out of or based upon Grace-Related Claims, other than Asbestos-Related claims, prior to the Settlement Effective Date. (G) Dismissals. Upon the filing of timely motions to dismiss by the NMC Defendants, and the best efforts of the other Settling Parties in support of such motions, each court with jurisdiction over the following actions shall have dismissed by Final Order, effective upon the making of the Settlement Payment, each of the following actions with prejudice as against the NMC Defendants: (i) Mesquita v. W.R. Grace & Co., et al., amended as Abner v. W.R. Grace & Co. et al., No. 315465, Superior Court of California, County of San Francisco, (since transferred to the Court as Adversary Proceeding No. 01-08883); (ii) Woodward v. Sealed Air Corporation (US) et al., No. 01-10547 PBS, U.S. District Court, District of Massachusetts, (since transferred to the Court as Case No. 01-CV-412); (iii) Lewis v. W.R. Grace & Co. et al., U.S. Bankruptcy Court, District of Delaware, Bkr. Case No. D. Del. 01-001139/Adv. Case No. 01-08810; and (iv) The Asbestos Claimants Adversary Proceeding. (H) Successors. The Final Order confirming the Plan of Reorganization shall include a determination by the Court that, as of the Plan Effective Date, the Estate Parties have the ability to pay and satisfy in the ordinary course of business their respective obligations and liabilities, including without limitation, all Indemnified Taxes and all obligations under this Agreement. -4- (I) Court Approval. The Court by Final Order shall approve this Agreement, and each of the Estate Parties shall become obligated to, and entitled to the benefits of, the terms and conditions of this Agreement. (J) Implementation. Prior to the Settlement Approval Date, none of the Estate Parties shall take any action that would be a breach of such Person's duties under Article III of this Agreement if such action had been taken after the Settlement Approval Date. 2.03 Payment Obligations of the NMC Defendants. Within five (5) business days of the Settlement Effective Date the NMC Defendants shall wire transfer, subject to the provisions of Section 3.08, one hundred fifteen million dollars ($115,000,000) cash as designated by the Court in the Final Order approving the Plan of Reorganization. 2.04 Release of Sealed Air Defendants. Upon the Settlement Effective Date, the NMC Defendants will execute a release, acceptable in form and substance to the NMC Defendants, that fully, finally, and forever releases, relinquishes and discharges Sealed Air and Cryovac from any and all Tax claims or Asbestos-Related Claims (including but not limited to claims for lawyers' fees and the costs of litigation related thereto) that the NMC Defendants have asserted or could have asserted in this or any other forum against Sealed Air or Cryovac. 2.05 Publicity. Before making any public statements or announcements prior to the Settlement Approval Date, each of the Settling Parties shall obtain approval from the other Settling Parties of the text of any such public statement or announcement (including in any filing not under seal in the Court) to be made by such party or its parents, which approval shall not be unreasonably withheld. If the Settling Parties are not able to agree on or approve the text of such a public statement or announcement and the legal counsel for any party proposing to make a -5- public statement or announcement is of the opinion that such public statement or announcement is required by law or the rules of any stock exchange on which such party's securities, or the securities of a parent corporation of such party, are traded, then such party or the parent may make or issue the legally required statement or announcement. 2.06 The NMC Defendants Solely Responsible for Settlement Payment. Notwithstanding any other provision of this Agreement, or any prior Agreements, the NMC Defendants will not seek indemnification from the Estate Parties, Sealed Air, or Cryovac for the Settlement Payment. 2.07 Purpose of Payment and Consistency of Treatment. The Settling Parties agree, and the Plan of Reorganization shall provide that the Estate Parties acknowledge and agree, that FMCH and NMC have entered into this Agreement for the purpose of settling and terminating any and all controversies relating to the assertion of Asbestos-Related Claims, as well as other Grace-Related Claims against the NMC Defendants. The Settlement Payment is intended and shall be treated by the Settling Parties as a payment by the NMC Defendants of an ordinary and necessary expense incurred by the NMC Defendants and as income of the Estate Parties in the same amount. Any indemnification payments made by Grace-Conn. to the NMC Defendants, to the extent the indemnified obligation would have been an ordinary and necessary expense if incurred directly by Grace-Conn., shall be treated by the Settling Parties as a payment by Grace-Conn. of an ordinary and necessary expense incurred by Grace-Conn. and, to the extent the indemnified obligation was itself deducted as an ordinary and necessary expense of the NMC Defendants, as income of the NMC Defendants. None of the Settling Parties shall take a position inconsistent with the foregoing in any Tax Return or with any tax authority. -6- 2.08 No Limitation on Estate Parties' Ability to Propose Plan. Notwithstanding any other provision of this Agreement, it shall not be a breach of this Agreement for the Estate Parties to propose or support a plan of reorganization that does not provide for the establishment of an Asbestos Trust or the issuance of an injunction pursuant to Section 524(g) of the Bankruptcy Code, provided however, the Estate Parties shall use their best efforts to cause all of the preconditions set forth in Section 2.02, other than those set forth in paragraphs (C) and (E) of Section 2.02, to occur. For the avoidance of doubt, if the Plan of Reorganization, as well as the Final Order of confirmation respecting the Plan of Reorganization, do not satisfy the preconditions set forth in paragraphs (C) and (E) of Section 2.02, the NMC Defendants may in their sole discretion waive or decline to waive, as set forth in Section 2.02, the failure of those preconditions as conditions precedent to the Settlement Payment. 2.09 Best Efforts By Asbestos Committees Respecting Plan. The Asbestos Committees shall use their respective best efforts to cause the occurrence of all the preconditions to the obligation of the NMC Defendants to make the Settlement Payment set forth in Section 2.02, except to the extent the NMC Defendants may in their sole discretion waive, as set forth in Section 2.02, the failure of those preconditions as conditions precedent to the Settlement Payment. ARTICLE III SPECIFIED DUTIES REGARDING TAXES. 3.01 Termination of TSIA. From the Settlement Execution Date through the Settlement Effective Date, as among the Settling Parties, the terms of this Agreement shall supercede the terms of the TSIA, except that Section 4.04 of the TSIA shall remain in force and is incorporated by reference herein. Upon the Settlement Effective Date, the TSIA shall be -7- terminated and no party to such TSIA shall have any obligation to any other party to such TSIA in respect thereof, whether such obligation shall have accrued before or after the Settlement Approval Date, except that Section 4.04 of the TSIA shall remain in force and is incorporated by reference herein. 3.02 Estate Parties' Duty to Pay Indemnified Taxes. From and after the Settlement Approval Date, the Estate Parties promptly shall pay any Indemnified Taxes as such Taxes become due and payable to tax authorities pursuant to a Final Determination, provided that the Estate Parties have obtained authorization from the Court to pay currently any such Indemnified Taxes. To the extent Indemnified Taxes become due and payable, the Estate Parties shall use their best efforts to obtain authorization from the Court to pay currently such Indemnified Taxes. The other Settling Parties shall cooperate in the Estate Parties' efforts to obtain such authorization from the Court to pay currently such Indemnified Taxes, provided however, that the foregoing does not modify the obligations of members of the FMCH Group as set forth in Section 3.04(A). The Settling Parties agree that any such payments by the Estate Parties of Indemnified Taxes are, for purposes of this Agreement and the administration of the Debtors' estates, the payment of the Taxes of the Estate Parties. 3.03 Grace-Conn. Control of Indemnified Tax Matters. (A) Grace-Conn. Authority over Indemnified Taxes. Upon the Settlement Approval Date, subject to the limitations in Sections 3.03(B) and (C), Grace-Conn. solely shall be authorized to act for the Grace New York Group in its sole discretion with respect to Indemnified Taxes. Notwithstanding the authority granted in the previous sentence, Grace-Conn. and the other Estate Parties shall use their respective best efforts to defer any Final Determination of any Indemnified Taxes until such time as the Estate Parties have obtained -8- authorization from the Court to pay currently such Indemnified Taxes, and the other Settling Parties shall cooperate in the effort to defer any Final Determination of any Indemnified Taxes prior to authorization from the Court to pay such Indemnified Taxes, provided however, that the foregoing does not modify the obligations of members of the FMCH Group as set forth in Section 3.04(A). FMCH will provide to Grace-Conn. and its agents from time to time Powers of Attorney with respect to Indemnified Taxes so that Grace-Conn. can act as the agent of the Grace New York Group with respect to Indemnified Taxes. The NMC Defendants agree that, pursuant to the cooperation obligations set forth in Section 3.04(A), they will respect such authority of Grace-Conn. and do nothing to derogate from such authority with respect to Indemnified Taxes, and, so long as none of the Estate Parties are in breach of this Agreement, the NMC Defendants will not initiate communications with any tax authority concerning Indemnified Taxes without obtaining the written consent of Grace-Conn. or the permission of the Court. As requested by Grace-Conn., amendments to Consolidated Tax Returns for or attributable to all Tax Periods of the Grace New York Group ending on or before December 31, 1996 shall be prepared by Grace-Conn. and filed by FMCH on behalf of Grace-Conn. (B) Limitations on Agreement To Final Determinations. Neither Grace-Conn. nor any other Estate Party shall voluntarily agree to the payment, assessment, resolution or other Final Determination of any Indemnified Tax prior to the Settlement Effective Date, except to the extent the Estate Parties have obtained authorization from the Court to pay promptly in full any such Indemnified Taxes, or to the extent FMCH hereafter has consented in its sole discretion in writing to the Estate Parties' agreement to such payment, assessment, resolution or other Final Determination. -9- (C) Tax Refunds. Grace-Conn. shall control any Tax Refund of the Grace New York Group with respect to any Tax Period ending on or before December 31, 1996, credited or payable to any member of the Grace New York Group, except that: (i) any such Tax Refund credited or paid to any member of the Grace New York Group prior to the time the Estate Parties have received authority from the Court to make payments under Section 3.02 above of Indemnified Taxes as they become due and payable shall be repaid to the tax authority as a payment of Indemnified Taxes (whether or not then due and payable) if, in the reasonable determination of FMCH, Indemnified Taxes are expected to become due and payable to such tax authority, provided however, if there is a dispute as to whether additional Indemnified Taxes are expected to become due and payable to such tax authority Grace-Conn. shall first have the opportunity to seek a determination from the Court that additional Indemnified Taxes are not expected to become due and payable to such tax authority and Grace-Conn. therefore should be permitted by the Court to receive and retain such refund; and (ii) any Tax Refund attributable to the NMC Business with respect to any Tax Period ending on or before December 31, 1996, (I) shall first be applied to satisfaction of NMC Indemnified Taxes and (II) thereafter shall be applied to the satisfaction of Indemnified Taxes or if there are no such NMC Indemnified Taxes or Indemnified Taxes then due and payable, or in the reasonable determination of Grace-Conn. expected to become due and payable within eighteen (18) months, promptly shall be paid to FMCH. None of the Estate Parties shall seek the refund of any previously paid Taxes of the Grace New York Group with respect to any Tax Period ending on or before December 31, 1996, if in the reasonable determination of either FMCH or Grace-Conn. Indemnified Taxes are expected to become due and payable to such tax authority for Tax Periods ending on or before December 31, 1996. -10- 3.04 Cooperation. (A) Cooperation by FMCH. From and after the Settlement Approval Date, FMCH from time to time shall provide such cooperation as Grace-Conn. shall reasonably request, including (i) the implementation of its rights and responsibilities under this Agreement with respect to Indemnified Taxes, and (ii) provide such Powers of Attorney as provided in Section 3.03(A), and FMCH will not seek indemnification for the costs and expenses (including lawyers' fees and accountants' fees) of such cooperation, provided that FMCH will not be required to incur any unreasonable cost or expense in respect of such cooperation. Whenever FMCH or other member of the FMCH Group receives notice or demand from any tax authority with respect to any Tax Item which could increase or decrease the liability for, or give rise to a Tax Refund with respect to, any Indemnified Tax, FMCH shall in good faith promptly give notice to Grace-Conn. of such Indemnified Tax related issue, in accordance with Section 5.07. (B) Cooperation by Estate Parties. Upon the request of FMCH, each of the Estate Parties from time to time shall provide such cooperation as FMCH shall reasonably request, including (i) the implementation of its rights and responsibilities under this Agreement with respect to NMC Indemnified Taxes and (ii) provide such Powers of Attorney relating to NMC Indemnified Taxes as FMCH shall request with respect to Tax Periods ending on or before December 31, 1996, and the Estate Parties will not seek indemnification for the costs and expenses (including lawyers' fees and accountants' fees) of such cooperation, provided that the Estate Parties will not be required to incur any unreasonable cost or expense in respect of such cooperation. Whenever any of the Estate Parties receives notice or demand from any tax authority with respect to any Tax Item which could increase or decrease the liability for, or give rise to a Tax Refund with respect to, any NMC Indemnified Tax, Grace-Conn. shall in good faith -11- promptly give notice to FMCH of such NMC Indemnified Tax related issue, in accordance with Section 5.07. Grace-Conn. shall provide prompt notice from time to time to FMCH of (i) revenue agents' reports, adjustments to Tax Items that may increase Indemnified Taxes, demands for payment of Indemnified Taxes, notices of proposed assessments and Final Determinations respecting Indemnified Taxes and similar correspondence, notices and demands from tax authorities and (ii) confirmation that Indemnified Taxes have been paid by the Estate Parties. 3.05 FMCH Group Protection for Indemnified Taxes. The Estate Parties jointly and severally shall indemnify, defend and hold harmless FMCH and each member of the FMCH Group from and against any loss in respect of (i) Indemnified Taxes or (ii) any action by any Person, including any tax authority, seeking payment by or reimbursement from FMCH or any of the other NMC Defendants for any Indemnified Taxes, provided however, that there shall be no duty to indemnify for costs and expenses (including lawyers' fees and accountants' fees) except in the event of a breach of this Agreement and pursuant to the terms of Section 3.09 below. 3.06 Estate Parties' Protection for NMC Indemnified Taxes. FMCH and the other members of the FMCH Group jointly and severally shall indemnify, defend and hold harmless each of the Estate Parties from and against any loss in respect of (i) NMC Indemnified Taxes or (ii) any action by any Person, including any tax authority, seeking payment by or reimbursement from any of the Estate Parties for any NMC Indemnified Taxes, provided however, that there shall be no duty to indemnify for costs and expenses (including lawyers' fees and accountants' fees) except in the event of a breach of this Agreement and pursuant to the terms of Section 3.09 below. 3.07 Payment of Indemnified Taxes by FMCH. Notwithstanding the obligations of the Estate Parties in Section 3.02, in the event that any tax authority shall demand of FMCH or any -12- other members of the FMCH Group payment of any Indemnified Taxes, and FMCH or such other members of the FMCH Group pays such Indemnified Taxes, each of the Estate Parties promptly and unconditionally shall be obligated jointly and severally to and shall repay such amount of the Indemnified Taxes to FMCH or the other members of the FMCH Group, as applicable, with interest from the date of payment at the Hot Interest Rate. To the extent such Indemnified Taxes and interest are not set off against the payment required by Section 2.03 or any other payment required of FMCH or any member of the FMCH Group under this Agreement or otherwise pursuant to Section 3.08 below, FMCH or the other members of the FMCH Group, as applicable, shall have an allowed claim to the extent of such payment, including interest thereon at the Hot Interest Rate, against the estates of the Debtors. On and after the Settlement Effective Date, in addition to any other rights and remedies under this Agreement, each such claim for Indemnified Taxes and interest shall be an Allowed Administrative Claim against the Estate Parties. 3.08 Right of Setoff. Notwithstanding anything herein to the contrary, FMCH and each member of the FMCH Group shall have a right of setoff or recoupment, including a right of setoff under Section 553 of the Bankruptcy Code, against the payment required by Section 2.03 or any other payment required of FMCH or any member of the FMCH Group under this Agreement or otherwise, for the amount of any obligation of any of the Estate Parties under this Agreement, including without limitation indemnification obligations for Indemnified Taxes, that any of the Estate Parties has failed to pay to FMCH or the members of the FMCH Group. 3.09 Remedies for Breach. In the event of any breach of this Agreement, including any obligation for indemnification, (i) by the Estate Parties or any member of the New Grace Group, then the Estate Parties shall be jointly and severally liable for and shall indemnify, defend -13- and hold harmless the NMC Defendants from and against any Taxes, loss, cost or expense (including without limitation reasonable lawyers' fees and reasonable accountants' fees) attributable to such breach, and the NMC Defendants shall have, among other remedies, an allowed Administrative Claim against each of the Estate Parties for any Taxes, loss, cost or expense (including without limitation reasonable lawyers' fees and reasonable accountants' fees) attributable to such breach; or (ii) by the NMC Defendants or any member of the FMCH Group, then the NMC Defendants shall be jointly and severally liable for and shall indemnify, defend and hold harmless the Estate Parties from and against any Taxes, loss, cost or expense (including without limitation reasonable lawyers' fees and reasonable accountants' fees) attributable to such breach. 3.10 Preservation of Rights. In the event that a member of the New Grace Group, or their respective successors or assigns, shall fail to perform any obligation to indemnify, defend and hold harmless FMCH or any member of the FMCH Group, as provided in this Agreement, or prior to its termination, the TSIA, nothing herein shall preclude or estop such member of the FMCH Group from asserting any causes of action on the grounds that one or more of the members of the New Grace Group or of the Sealed Air/Grace Group is primarily liable for such obligation under general principles of law determined without reference to this Agreement or the TSIA. ARTICLE IV COVENANTS NOT TO SUE AND TOLLING. 4.01 Claims Against the NMC Defendants. The Asbestos Committees and the Estate Parties shall not commence or prosecute, or cooperate in the commencement or prosecution of, any suit, demand, claim, or cause of action, whether asserted directly or derivatively, against any -14- of the NMC Defendants for any Grace-Related Claims, including the Asbestos Claimants' Adversary Proceeding, except (i) as permitted in Section 4.03 below or (ii) to enforce this Agreement. 4.02 Sealed Air Indemnity Litigation. In connection with the Sealed Air Settlement Agreement, the Asbestos Committees shall use their best efforts to obtain from Sealed Air and Cryovac, an agreement acceptable in form and substance to the NMC Defendants, which provides for the stay, and if necessary the reinstatement, of the Sealed Air Indemnity Litigation pending the Settlement Effective Date. If Sealed Air and Cryovac do not agree to a stay of the Sealed Air Indemnity Litigation, then notwithstanding any other provision of this Agreement, prior to the Settlement Effective Date the NMC Defendants shall remain free to pursue all rights and remedies they may have against Sealed Air and Cryovac, in any court of competent jurisdiction. 4.03 Reinstatement of Litigation Upon Failure of Conditions Precedent. The Asbestos Committees or the Estate Parties may reinstate the Asbestos Claimants Adversary Proceeding on the active docket if the Court determines by Final Order (the "Litigation Reinstatement Date") that despite the best efforts of the Estate Parties and the Asbestos Committees one or more conditions in Section 2.02 above will not be able to be satisfied, and the failure of such precondition has not been waived by the NMC Defendants. For purposes of statutes of limitation, statutes of repose, and any procedural bars to the prosecutions of claims, all claims, counterclaims, cross-claims, and claims for contribution or indemnity the Settling Parties have asserted or could have asserted in the Court or any other forum will be deemed to have been tolled during the time period between the Settlement Execution Date and the Litigation Reinstatement Date. -15- ARTICLE V MISCELLANEOUS PROVISIONS. 5.01 Expenses. Unless otherwise expressly provided in this Agreement, each Person shall bear any and all expenses (including legal and accounting) that arise from its respective obligations under this Agreement. 5.02 Amendment; Agency. This Agreement may not be amended except by an agreement in writing, signed by the Settling Parties with the approval of the Court. The Settling Parties agree that FMCH shall be entitled to receive notices and to act on behalf of each member of the FMCH Group and each of the NMC Defendants and that Grace-Conn. shall be entitled to receive notices and to act on behalf of New Grace, the other Estate Parties and the New Grace Group, and each member of the New Grace Group, in respect of all matters under this Agreement. 5.03 Settlement Inadmissible for Other Purposes. The Settling Parties agree that the terms of this Agreement reflect a good faith settlement of the Grace-Related Claims and of the other terms and conditions contained herein, reached voluntarily after consultation with experienced legal counsel. Neither this Agreement nor the settlements contained herein, nor any act performed, document executed, or statement made pursuant to or in support of or in furtherance of this Agreement or the settlements contained herein: (i) is or may be deemed to be or may be used as an admission of, or evidence of, the validity or amount of any Grace-Related Claim or any other claim, or of any wrongdoing or liability; or (ii) is or may be deemed to be or may be used as an admission of, or evidence of, any fault or omission of any Settling Party in any proceeding in any court, administrative agency, or other tribunal. Any Settling Party or other Person released by the terms or -16- implementation of this Agreement may file this Agreement in any other action that may be brought against them in order to support a defense or counterclaim based on principles of res judicata, collateral estoppel, release, good faith settlement, accord and satisfaction, bar order, channelling injunction, judgment bar or reduction, or any theory of claim preclusion or issue preclusion or similar defense or counterclaim. The Settling Parties may file this Agreement in any proceeding brought to enforce any of its terms. 5.04 Signed Counterparts. This Agreement may be executed in one or more counterparts. All executed counterparts and each of them shall be deemed to be one and the same instrument. Counsel for the Settling Parties shall exchange among themselves signed counterparts of this Agreement. 5.05 Confidentiality of Information. All agreements made between and among the Settling Parties and orders entered during the course of the Asbestos Claimants Adversary Proceeding relating to the confidentiality of information shall survive this Agreement. 5.06 Agreement Drafted Equally. This Agreement shall not be construed more strictly against one party than another merely because it, or any part of it, may have been prepared by counsel for one of the parties. The Settling Parties acknowledge and agree that the Agreement is the result of arm's-length negotiations between the parties and all parties have contributed substantially and materially to the preparation of this Agreement. 5.07 Notices. All notices and other communications hereunder shall be in writing and shall be delivered by hand including overnight business courier or mailed by registered or certified mail (return receipt requested) to the parties at the following addresses (or at such other addresses for a party as shall be specified by like notice) and shall be deemed given on the date on which such notice is received: -17- To Grace-Conn. or any member of the New Grace Group: W.R. Grace & Co. 7500 Grace Drive Columbia, Maryland 21044 Attention: Secretary Phone: (410) 531-4212 Fax: (410) 531-4783 With a copy to: David M. Bernick Kirkland & Ellis 200 East Randolph Drive Chicago, Illinois 60601 Phone: (312) 861-2000 Fax (312) 861-2200 Email: david_bernick@chicago.kirkland.com To the Official Committee of Asbestos Personal Injury Claimants : Peter Van N. Lockwood Caplin & Drysdale, Chartered 1 Thomas Circle N.W. Washington, D.C. 20005 Phone: (202) 862-5000 Fax (202) 429-3301 Email: pvnl@capdale.com To the Official Committee of Asbestos Property Damage Claimants: Scott L. Baena Bilzin Sumberg Baena Price & Axelrod LLP 200 South Biscayne Blvd., Suite 2500 Miami, Florida 33131 Phone: (305) 374-7580 Fax: (305) 374-7593 Email: sbaena@bilzin.com -18- To FMCH or any member of the FMCH Group: c/o Fresenius Medical Care North America Corporate Headquarters General Counsel Corporate Law Department 95 Hayden Avenue Lexington, MA 02420-9192 Phone: (781) 402-9000 Fax: (781) 402-9713 With a copy to: David S. Rosenbloom McDermott, Will & Emery 227 W. Monroe, Suite 4400 Chicago, Illinois 60606 Phone: (312) 372-2000 Fax: (312) 984-7700 Email: drosenbloom@mwe.com 5.08 Resolution of Disputes. Any claim or dispute arising out of or relating in any way to this Agreement must be brought before the Court, which shall retain jurisdiction of this matter and the Settling Parties for the purposes of enforcing and implementing the terms and conditions of this Agreement and resolving disputes as to the rights and obligations of the Settling Parties hereunder, provided however that section 524(g)(2) shall govern jurisdiction over any proceeding that involves any injunction entered in accordance with section 524(g) of the Bankruptcy Code. The Settling Parties submit to the jurisdiction of the Court for these purposes. 5.09 Titles and Headings. Titles and headings to sections herein are inserted for the convenience of reference only and are not intended to be a part or to affect the meaning or interpretation of this Agreement. 5.10 Legal Enforceability. Without prejudice to any rights or remedies otherwise available to any party hereto, each party hereto acknowledges that damages would be an -19- inadequate remedy for any breach of the provisions of this Agreement and agrees that the obligations of the Settling Parties hereunder shall be specifically enforceable. 5.11 Governing Law. This Agreement shall be governed by the laws of the State of Delaware (without giving effect to its provisions on conflict of laws), and without affecting any determination as to the law applicable to the Asbestos Claimants' Adversary Proceeding. 5.12 Successors and Assigns. This Agreement shall be binding upon and shall inure to the benefit of the successors and assigns of the Settling Parties, including without limitation the other Estate Parties; provided that (i) neither this Agreement nor any substantial right or obligation hereunder may be assigned by FMCH, on the one hand, and New Grace or Grace-Conn., on the other, without the consent of the other Settling Parties, which consent shall not be unreasonably withheld, and (ii) none of the Estate Parties shall transfer or agree to transfer a substantial part of their respective assets (in one or a series of transactions, whether or not related) to any Person or Persons, without a prior determination of the Court by Final Order that at the time of each such transaction New Grace and Grace-Conn., or any such successors who agree to be jointly and severally liable for the obligations of New Grace and Grace-Conn., will have the ability to pay and satisfy in the ordinary course of business their respective obligations and liabilities, including without limitation, all Indemnified Taxes and all obligations under this Agreement. -20- IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written, on their own behalf and as authorized agents for each member of their respective affiliated groups. THE OFFICIAL COMMITTEE OF ASBESTOS PERSONAL INJURY CLAIMANTS By: /s/Peter Van N. Lockwood ----------------------------------- Name Counsel ----------------------------------- Title THE OFFICIAL COMMITTEE OF ASBESTOS PROPERTY DAMAGE CLAIMANTS By: /s/Scott L. Baena ----------------------------------- Name Counsel ----------------------------------- Title -21- FRESENIUS MEDICAL CARE HOLDINGS, INC. By: /s/ Ronald J. Kuerbitz --------------------------------- Name Senior Vice President --------------------------------- Title NATIONAL MEDICAL CARE, INC. By: /s/ Ronald J. Kuerbitz --------------------------------- Name Senior Vice President --------------------------------- Title -22- APPENDIX A TO SETTLEMENT AGREEMENT AND RELEASE OF CLAIMS DEFINITIONS As used in the Settlement Agreement and Release of Claims, the following terms shall have the following meanings (such meanings to be equally applicable to both the singular and the plural forms of the terms defined): 1.01 "Administrative Claim" shall mean a claim (as defined in Section 101(5) of the Bankruptcy Code) against the Debtors' chapter 11 bankruptcy estates for costs and expenses of administration under Sections 503(a) or 507(a)(1) of the Bankruptcy Code. 1.02 "Asbestos Claimants Adversary Proceeding" shall mean the adversary proceeding captioned, Official Committee of Asbestos Personal Injury Claimants and Official Committee of Asbestos Property Damage Claimants of W.R. Grace & Co., suing in behalf of the Chapter 11 Bankruptcy Estates of W.R. Grace & Co., et al., Plaintiffs v. Fresenius Medical Care Holdings, Inc. and National Medical Care, Inc., Adversary Proceeding No. 02-2211, which the Court consolidated with Adversary Proceeding No. 02-2210, by Order dated March 28, 2002. 1.03 "Asbestos-Related Claim" shall mean any claim, (including but not limited to personal injury, wrongful death, property damage or medical monitoring) whether sounding in tort, contract, warranty, statute, or any other theory of law or equity, based on or arising by reason of direct or indirect damages allegedly caused by consumption, use, storage, manufacturing, assembly, distribution, installation, exposure to, or the presence of asbestos or asbestos containing products or by-products, or products which contain asbestos in any form, consumed, used, stored, manufactured, assembled, distributed, disposed of, or installed by or on behalf of any Grace-Conn. Business. 1.04 "Asbestos Trust" shall have the meaning ascribed to such term in Section 2.02(C). A-1 1.05 "Bankruptcy Code" shall mean title 11 of the United States Code, as amended. 1.06 "Code" shall mean the Internal Revenue Code of 1986, as amended, and shall include corresponding provisions of any subsequently enacted federal income tax laws. 1.07 "Common Parent" shall mean the common parent, as defined in Treasury Regulation Section 1.1502-77, of those corporations that joined, or hereafter join, in filing a Consolidated Tax Return under Section 1501 of the Code, and the Treasury Regulations thereunder, or a Consolidated Tax Return under comparable provisions of Tax law of other jurisdictions (domestic or foreign). 1.08 "Consolidated Tax Return" shall mean (i) a federal consolidated income Tax Return, within the meaning of Section 1501 of the Code and the Treasury Regulations under Section 1502 of the Code, and (ii) any combined, joint, consolidated or other Tax Return respecting Taxes under the laws of any jurisdiction (domestic or foreign). 1.09 "Court" shall mean the court in which the Asbestos Claimants' Adversary Proceeding is pending, or if no longer pending, the United States Bankruptcy Court for the District of Delaware. 1.10 "Cryovac" shall mean Cryovac, Inc. (f/k/a Grace Communications, Inc.) (taxpayer identification number 13-2830262). 1.11 "Debtor" shall mean each of W. R. Grace & Co. (f/k/a Grace Specialty Chemicals, Inc.), W. R. Grace & Co. Conn., A-1 Bit & Tool Co., Inc., Alewife Boston Ltd., Alewife Land Corporation, Amicon, Inc., CB Biomedical, Inc. (f/k/a Circe Biomedical, Inc.), CCHP, Inc., Coalgrace, Inc., Coalgrace II, Inc., Creative Food 'N Fun Company, Darex Puerto Rico, Inc., Del Taco Restaurants, Inc., Dewey and Almy, LLC (f/k/a Dewey and Almy Company), Ecarg, Inc., Five Alewife Boston Ltd., GC Limited Partners I, Inc., (f/k/a Grace Cocoa Limited Partners I, A-2 Inc.), GC Management, Inc. (f/k/a Grace Cocoa Management, Inc.), GEC Management Corporation, GN Holdings, Inc. GPC Thomasville Corp., Gloucester New Communities Company, Inc., Grace A-B Inc., Grace A-B II Inc., Grace Chemical Company of Cuba, Grace Culinary Systems, Inc., Grace Drilling Company, Grace Energy Corporation, Grace Environmental, Inc., Grace Europe, Inc., Grace H-G Inc., Grace H-G II Inc., Grace Hotel Services Corporation, Grace International Holdings, Inc. (f/k/a Dearborn International Holdings, Inc.), Grace Offshore Company, Grace PAR Corporation, Grace Petroleum Libya Incorporated, Grace Tarpon Investors, Inc., Grace Ventures Corp., Grace Washington, Inc., W. R. Grace Capital Corporation., W. R. Grace Land Corporation, Gracoal, Inc., Gracoal II, Inc., Guanica-Caribe Land Development Corporation, Hanover Square Corporation, Homco International, Inc., Kootenai Development Company, L B Realty, Inc., Litigation Management, Inc. (f/k/a GHSC Holding, Inc., Grace JVH, Inc., Asbestos Management, Inc.), Monolith Enterprises, Incorporated, Monroe Street, Inc., MRA Holdings Corp. (f/k/a Nestor-BNA Holdings Corporation), MRA Intermedco, Inc. (f/k/a Nestor-BNA, Inc.), MRA Staffing Systems, Inc. (f/k/a British Nursing Association, Inc.), Remedium Group, Inc. (f/k/a Environmental Liability Management, Inc., E&C Liquidating Corp., Emerson & Cuming, Inc.), Southern Oil, Resin & Fiberglass, Inc., Water Street Corporation, Axial Basin Ranch Company, CC Partners (f/k/a Cross Country Staffing), Hayden-Gulch West Coal Company, H-G Coal Company. 1.12 "Estate Parties" shall mean each of the Debtors, the estate of each Debtor, the post-confirmation estate of each Debtor, each of the reorganized Debtors, and any trustee that may be appointed in any of the Debtors' cases under the Bankruptcy Code. 1.13 "Final Determination" shall mean any assessment or resolution of liability for any Tax for a Tax Period, (i) by Form 870 or 870-AD or by Form 5701 (or any successor forms A-3 thereto), on the date of acceptance or agreement by or on behalf of the taxpayer, or by comparable forms respecting Taxes under the laws of other jurisdictions (domestic or foreign); (ii) by a decision, judgment, decree, or other order by a court of competent jurisdiction, which has become final and unappealable; (iii) by a closing agreement or accepted offer in compromise under Section 7121 or 7122 of the Code, or comparable agreements respecting Taxes under the laws of other jurisdictions (domestic or foreign); (iv) by any allowance of a refund or credit in respect of an overpayment of Tax, but only after the expiration of all periods during which such refund may be recovered (including by way of offset) by the Tax imposing jurisdiction (domestic or foreign); or (v) by any other final disposition, including by reason of Section 6213(b)(3) of the Code on account of an excessive tentative carryback allowance under Section 6411 of the Code or comparable provisions of other jurisdictions (domestic or foreign), the expiration of the applicable statute of limitations, or by mutual agreement of the parties. 1.14 "Final Order" shall mean an order or judgment of the Court , or other court of competent jurisdiction with respect to the subject matter, which has not been reversed, stayed, modified or amended, and as to which the time to appeal or seek certiorari has expired and no appeal or petition for certiorari has been timely taken, or as to which any appeal that has been taken or any petition for certiorari that has been or may be filed has been resolved by the highest court to which the order or judgment was appealed or from which certiorari was sought. 1.15 "FMCH Group" shall mean that group of corporations, immediately after December 31, 1996, that were members of the affiliated group of corporations of which FMCH (taxpayer identification number 13-3461988) was and on the date hereof continues to be the Common Parent. A-4 1.16 "Form 1139" shall mean a Corporate Application for Tentative Refund on Internal Revenue Service Form 1139, or any successors to such form, or comparable forms for Taxes of any other jurisdiction (domestic or foreign). 1.17 "Grace-Conn." shall mean W.R. Grace & Co. -- Conn. (taxpayer identification number 13-5114230). 1.18 "Grace-Conn. Business" shall mean all of the businesses and operations of Grace-Conn. and its parents or subsidiaries at any time, other than the NMC Business. 1.19 "Grace New York" shall mean W.R. Grace & Co., a New York corporation, now known as FMCH, (taxpayer identification number 13-3461988). 1.20 "Grace New York Group" shall mean that group of corporations, including Grace-Conn., Cryovac, and Sealed Air, that were members through September 29, 1996 or December 31, 1996, as applicable, of the affiliated group of corporations within the meaning of Section 1504 of the Code, and the Treasury Regulations thereunder, of which Grace New York was the Common Parent, including, with respect to Taxes of other jurisdictions (domestic or foreign), that group of corporations which included Grace New York or one or more of the members of the Grace New York Group with respect to a Consolidated Tax Return. 1.21 "Grace-Related Claim" shall mean, collectively, all claims (including unknown claims), demands, rights, liabilities and causes of action of every nature and description whatsoever, known or unknown, direct or indirect, whether concealed or hidden, from the beginning of time up to and including the Settlement Effective Date, asserted or that might have been asserted (including without limitation claims for fraudulent conveyance, successor liability, piercing of corporate veil, negligence, gross negligence, professional negligence, breach of duty of care, breach of duty of loyalty, breach of duty of candor, fraud, breach of fiduciary duty, A-5 mismanagement, corporate waste, breach of contract, negligent misrepresentation, contribution, indemnification, any other common law or equitable claims, and violations of any state or federal statutes, rules or regulations), which are either Asbestos-Related Claims or that are based upon or arise out of the NMC Transaction, or the conduct or operations of any Grace-Conn. Business, including without limitation, any liability or obligation of a Grace-Conn. Business under environmental law, but not including any claims based on or arising out of the conduct or operations of the NMC Business or any act or omission of the NMC Defendants in connection with the operation of the NMC Business. 1.22 "Hot Interest Rate" shall mean the rate of interest charged from time to time on Taxes under Section 6621(c)(1) of the Code. 1.23 "Indemnified Taxes" shall mean all Taxes for or attributable to Tax Periods ending on or before December 31, 1996, other than NMC Indemnified Taxes. 1.24 "Litigation Reinstatement Date" shall have the meaning ascribed to such term in Section 4.03. 1.25 "Moving Parties" shall mean each of FMCH, NMC, the PI Committee, and the PD Committee. 1.26 "New Grace" shall mean W.R. Grace & Co., f/k/a Grace Specialty Chemicals, Inc. (taxpayer identification number 65-0773649). 1.27 "New Grace Group" shall mean that group of corporations, including Grace-Conn., that were, or hereafter become, members of that affiliated group of corporations under Section 1504 of the Code, and the Treasury Regulations thereunder, that joined, or hereafter join, in filing a Consolidated Tax Return of which New Grace, or any successor to New Grace, including any reorganized Debtor successor to New Grace, was or is the Common Parent. A-6 1.28 "NMC Business" shall mean all of the worldwide healthcare business and operations conducted by NMC and the NMC Subsidiaries at any time, whether prior to or after September 29, 1996. 1.29 "NMC Defendants" shall mean FMCH, NMC, and each of their respective present and former subsidiaries, parents, affiliates, officers, directors, employees, partners, trustees, shareholders, beneficiaries, agents, attorneys, predecessors, successors, and assigns, including but not limited to Fresenius Medical Care AG and Fresenius AG, but not including the Estate Parties, Sealed Air and Cryovac. 1.30 "NMC Group" shall mean NMC and the NMC Subsidiaries, whether members of the Grace New York Group or members of the FMCH Group. 1.31 "NMC Indemnified Taxes" shall mean all Taxes of or attributable to any Tax Period arising from Tax Items relating to the NMC Business conducted by a member of the FMCH Group (net of benefits from Tax Items relating to the NMC Business from one or more Tax Periods not previously paid to, or applied for the benefit of, any member of the FMCH Group) which have not previously been paid to (i) one of the Estate Parties, (ii) Grace New York prior to the NMC Transaction or (iii) the applicable tax authority, by any member of the FMCH Group. 1.32 "NMC Subsidiaries" shall mean all direct and indirect subsidiaries of NMC through which Grace New York or FMCH conducts or conducted the NMC Business. 1.33 "NMC Transaction" shall mean the series of transactions that became effective on September 27 - 30, 1996, whereby, inter alia, (i) NMC distributed approximately $2.3 billion in cash and assumed debt to Grace-Conn; (ii) Grace-Conn. distributed 100% of the common shares of NMC stock to Grace-New York; (iii) Grace New York contributed 100% of the common shares of Grace-Conn. stock to Sealed Air; (iv) Grace New York distributed 100% of the common A-7 shares of Sealed Air stock to its shareholders; and (v) Grace New York merged with a subsidiary of Fresenius Medical Care AG, all of which are more fully described in that certain Distribution Agreement dated as of February 4, 1996, among Grace New York, Grace-Conn. and Fresenius AG, and that certain Contribution Agreement dated as of February 4, 1996, among Fresenius AG, Sterilpharma GmbH, and Grace-Conn. 1.34 "Person" shall mean a natural person, individual, corporation, partnership, limited partnership, limited liability partnership, limited liability company, association, joint venture, joint stock company, estate, legal representative, trust, unincorporated association, government or any political subdivision or agency thereof, and any business or legal entity and their spouses, heirs, executors, administrators, predecessors, successors, representatives, or assigns. 1.35 "Plan Effective Date" shall mean the date specified as such in the Plan of Reorganization. 1.36 "Plan of Reorganization" shall mean the plan of reorganization of the Debtors under the Bankruptcy Code approved by a Final Order of confirmation of the Court. 1.37 "Power of Attorney" shall mean any agency under a power of attorney or other authorization which authorizes a Person to act on behalf of another Person with respect to Taxes, including Form 2848. 1.38 "Sealed Air" shall mean Sealed Air Corporation, f/k/a Grace Holding, Inc. (taxpayer identification number 65-0654331). 1.39 "Sealed Air/Grace Group" shall mean the group of corporations, including but not limited to Cryovac, Inc., that were from on or about September 29, 1996, or hereafter become, members of the affiliated group of corporations under Section 1504 of the Code, and the A-8 Treasury Regulations thereunder, that joined, or hereafter join, in filing a Consolidated Tax Return of which Sealed Air Corporation, or any successor to Sealed Air, was or is the Common Parent. 1.40 "Sealed Air Indemnity Litigation" shall mean the litigation captioned Sealed Air Corporation vs. Fresenius Medical Care AG, Fresenius Medical Care Holdings, Inc.; National Medical Care, Inc.; and Fresenius USA, Inc., (No. 600300/02 N.Y. Sup. Ct.). 1.41 "Sealed Air Settlement Agreement" shall mean the definitive agreement implementing the settlement of the adversary proceeding captioned, Official Committee of Asbestos Personal Injury Claimants and Official Committee of Asbestos Property Damage Claimants of W.R. Grace & Co., suing in behalf of the Chapter 11 Bankruptcy Estates of W.R. Grace & Co., et al., Plaintiffs v. Sealed Air Corporation. and Cryovac, Inc., Adversary Proceeding No. 02-2210, which settlement is reflected in the Acknowledgement of principal terms filed with the Court on November 27, 2002. 1.42 "Settlement Approval Date" shall mean the date the Court enters the orders described in Section 2.01. 1.43 "Settlement Effective Date" shall mean the later of: (i) the Plan Effective Date, or (ii) the satisfaction of all preconditions to payment described in Section 2.02, to the extent each such precondition has not been waived by the NMC Defendants. 1.44 "Settlement Execution Date" shall mean February 6, 2003. 1.45 "Settling Parties" shall mean (i) each of FMCH, NMC, the PI Committee, and the PD Committee, and (ii) either upon the satisfaction of the precondition in Section 2.02(I) or upon the execution of this Agreement by New Grace and Grace-Conn, New Grace and Grace-Conn., and (iii) the respective members of the affiliated groups of each of the other Settling Parties. A-9 1.46 "Settlement Payment" shall mean the payment by the NMC Defendants provided for in Section 2.03, as reduced by the items of setoff or recoupment, if any, referred to in Section 3.08. 1.47 "Taxes" shall mean all forms of taxation, whenever created or imposed, and whether of the United States or elsewhere, and whether imposed by a local, municipal, governmental, state, foreign, federation or other body, and without limiting the generality of the foregoing, shall include income (including alternative minimum), sales, use, ad valorem, gross receipts, license, value added, franchise, transfer, recording, withholding, payroll, employment, excise, occupation, unemployment insurance, social security, business license, business organization, stamp, environmental, premium and property taxes, together with any related interest, penalties and additions to any such tax, or additional amounts imposed by any taxing authority (domestic or foreign) upon the FMCH Group, the New Grace Group, the Grace New York Group, the Sealed Air Group or any of their respective members or divisions or branches. 1.48 "Tax Item" shall mean any item of income, gain, loss, deduction, credit, provisions for reserves, recapture of credit, net operating loss, net capital loss, tax credit, sales, revenues, property or asset values, capital or any other item which increases or decreases Taxes paid or payable, including an adjustment under Code Section 481 (or comparable provisions of the Tax law of any other jurisdiction (domestic or foreign)) resulting from a change in accounting method, the allowance or disallowance in whole or in part of, or assessment with respect to, a tentative allowance of refund claimed on Form 1139, the allowance or disallowance in whole or in part of a net operating loss, net capital loss or tax credit claimed on a Tax Return, an amended Tax Return or claim for refund, or an adjustment attributable to a quick refund of overpayment of estimated tax. A-10 1.49 "Tax Period" shall mean any period for, or with respect to, which a Tax Return is or has been filed, is required to be filed or may be filed. 1.50 "Tax Refund" shall mean an overpayment of, refund of, or credit against, Taxes, including a tentative allowance of refund claimed on Form 1139. 1.51 "Tax Return" shall mean any return, filing, questionnaire, information return or other document required or permitted to be filed, including requests for extensions of time, filings made with estimated tax payments, claims for refund, Forms 1139 and amended returns, that has been, or hereafter may, be filed for any Tax Period with any tax authority (whether domestic or foreign) in connection with any Tax (whether or not a payment is required to be made, or an overpayment, refund, or credit may be allowed, with respect to such filing). 1.52 "TSIA" shall mean that certain Tax Sharing and Indemnification Agreement made as of September 27, 1996, by and among Grace New York, Grace-Conn., and Fresenius AG, an Aktiengesellshaft organized under the laws of the Federal Republic of Germany and an indirect parent of FMCH. A-11 EX-11 8 b45677fmexv11.txt STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS 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)
TWELVE MONTHS ENDED DECEMBER 31, 2002 2001 2001 ---- ---- ---- The weighted average number of shares of Common Stock were as follows ........................ 90,000 90,000 90,000 ====== ====== ======
Income (loss) used in the computation of earnings per share were as follows:
TWELVE MONTHS ENDED DECEMBER 31, 2002 2001 2001 ---- ---- ---- Net income (loss) ..................................... $ 161,319 $(79,256) 105,250 Dividends paid on preferred stocks .................... (520) (520) (520) --------- -------- -------- --------- -------- -------- Income (loss) used in per share computation of earnings $ 160,799 $(79,776) 104,730 ========= ======== ======== Basic and fully dilutive net income (loss) per share .. $ 1.79 $ (0.89) 1.16 ========= ======== ========
EX-99.1 9 b45677fmexv99w1.txt CERTIFICATION OF CEO EXHIBIT 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Fresenius Medical Care Holdings, Inc. (the "Company") on Form 10-K for the period ending December 31, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Ben J. Lipps, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ Ben J. Lipps - ---------------------------- Ben J. Lipps President and Chief Executive Officer March 17, 2003 EX-99.2 10 b45677fmexv99w2.txt CERTIFICATION OF CFO EXHIBIT 99.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Fresenius Medical Care Holdings, Inc. (the "Company") on Form 10-K for the period ending December 31, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Jerry A. Schneider, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ Jerry A. Schneider - ---------------------------- Jerry A. Schneider Chief Financial Officer March 17, 2003 -----END PRIVACY-ENHANCED MESSAGE-----