Indicate
the number of outstanding shares of each of the issuers
classes of capital or common stock as of the close of the period
covered by the annual report:
Indicate
by check mark if the registrant is a well-known seasoned issuer,
as defined in Rule 405 of the Security Act.
If this
report is an annual or transition report, indicate by check mark
if the registrant is not required to file reports to
Section 13 or 15(d) of the Securities Exchange Act of 1934.
Note
Checking the box above will not relieve any registrant required
to file reports pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 from their obligations under
those Sections.
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.
Indicate
by check mark whether the registrant is a large accelerated
filer, an accelerated filer, or a non-accelerated filer. See
definition of accelerated filer and large accelerated
filer in Rule 12b-2 of the Exchange Act.
(Check one):
Indicate
by check mark which financial statement item the registrant has
elected to follow.
If this is
an annual report, indicate by check mark whether the registrant
is a shell company (as defined in
Rule
12b-2
of the
Exchange Act).
This report contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of
1934, as amended. We have based these forward-looking statements
on current estimates and assumptions made to the best of our
knowledge. By their nature, such forward-looking statements
involve risks, uncertainties, assumptions and other factors
which could cause actual results, including our financial
condition and profitability, to differ materially and be more
negative than the results expressly or implicitly described in
or suggested by these statements. Moreover, forward-looking
estimates or predictions derived from third parties
studies or information may prove to be inaccurate. Consequently,
we cannot give any assurance regarding the future accuracy of
the opinions set forth in this prospectus or the actual
occurrence of the predicted developments. In addition, even if
our future results meet the expectations expressed here, those
results may not be indicative of our performance in future
periods. These risks, uncertainties, assumptions, and other
factors include, among others, the following:
When used in this report, the words expects,
anticipates, intends, plans,
believes, seeks, estimates
and similar expressions are generally intended to identify
forward looking statements. Although we believe that the
expectations reflected in such forward-looking statements are
reasonable, forward-looking statements are inherently subject to
risks and uncertainties, many of which cannot be predicted with
accuracy and some of which might not even be anticipated. Future
events and actual results, financial and otherwise, could differ
materially from those set forth in or contemplated by the
forward-looking statements contained elsewhere in this report.
Important factors that could contribute to such differences are
noted in this report under the Risk Factors section,
Business Overview in Item 4. Information
on the Company, Item 5. Operating and Financial
Review and Prospects and Item 8.A.7. Legal
Proceedings. These risks and uncertainties include:
general economic, currency exchange and other market conditions,
litigation and regulatory compliance risks, changes in
government reimbursement for our dialysis care and
pharmaceuticals, the investigation by the Department of Justice,
Eastern District of New York, and changes to pharmaceutical
utilization patterns.
This report contains patient and other statistical data related
to end-stage renal disease and treatment modalities, including
estimates regarding the size of the patient population and
growth in that population. These data have been included in
reports published by organizations such as the Centers for
Medicare and Medicaid Services of the U.S. Department of
Health and Human Services, the Japanese Society for Dialysis
Therapy and the German non-profit entity Quasi-Niere gGmbH and
the journal
Nephrology News & Issues
. While we
believe these surveys and statistical publications to be
reliable, we have not independently verified the data or any
assumptions on which the estimates they contain are based. All
information not attributed to a source is derived from our
internal documents or publicly available information such as
annual reports of other companies in the healthcare industry and
is unaudited. Market data not attributed to a specific source
are our estimates.
Our business is also subject to other risks and uncertainties
that we describe from time to time in our public filings.
Developments in any of these areas could cause our results to
differ materially from the results that we or others have
projected or may project.
On February 10, 2006, we completed a transformation of our
legal form under German law from a stock corporation
(Aktiengesellschaft or AG) having the
name Fresenius Medical Care AG
(FMC-AG)
to
a partnership limited by shares (Kommanditgesellschaft auf
Aktien, or KGaA) having the name Fresenius
Medical Care AG & Co. KGaA
(FMC-AG
& Co.
KGaA). Under German law, the Company is the same legal
entity with a different form of organization, and continues to
exist in its new legal form. The Company holds the same assets
and is subject to the same liabilities as before the
transformation, and its contractual relationships with third
parties are unchanged. Upon effectiveness of the transformation
of legal form, the share capital of
FMC-AG
became the share
capital of
FMC-AG
&
Co. KGaA, and persons who were shareholders of
FMC-AG
became
shareholders of our company in its new legal form. For
additional information with respect to the transformation, see
Item 4.A., Information on the Company
History and Development of the Company. For information
regarding the management and governance of
FMC-AG
& Co. KGaA,
see Item 6.C., Directors, Senior Management and
Employees Board Practices. In this Annual
Report, (i) the Company and our
Company refer to
FMC-AG
before the
transformation of legal form and to
FMC-AG
& Co. KGaA
after the transformation, and (ii) we,
us and our refer either to the Company
or the Company and its subsidiaries on a consolidated basis both
before and after the transformation, as the context requires.
PART I
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Item 1.
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Identity of Directors, Senior Management and
Advisors
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Not applicable
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Item 2.
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Other Statistics and Expected Timetable
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Not applicable
Selected Financial Data
The following table summarizes the consolidated financial
information for our business for each of the years 2001 through
2005. We derived the selected financial information from our
consolidated financial statements. We prepared our financial
statements in accordance with accounting principles generally
accepted in the United States of America and KPMG Deutsche
Treuhand-Gesellschaft Aktiengesellschaft
Wirtschaftsprüfungsgesellschaft, an independent registered
public accounting firm, audited these financial statements. You
should read this information together with our consolidated
financial statements and the notes to those statements appearing
elsewhere in this document and the information under
Item 5. Operating and Financial Review and
Prospects.
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2005
(A)
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2004
(A)
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|
|
2003
(A)
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|
2002
(A)
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|
2001
(B)
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|
|
|
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(In millions)
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Statement of Operations Data:
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Net revenues
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$
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6,772
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$
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6,228
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$
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5,528
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$
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5,084
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$
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4,859
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Cost of revenues
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4,439
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4,142
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3,699
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3,428
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3,220
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Gross profit
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2,333
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2,086
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1,829
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1,656
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1,639
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Selling, general and administrative
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1,343
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1,183
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1,022
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914
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966
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Research and development
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51
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51
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50
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47
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36
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Special charge
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|
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258
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Operating income
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939
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852
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757
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695
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379
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Interest expense, net
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173
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183
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211
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226
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223
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Income before income taxes
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766
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669
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546
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469
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|
156
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Net income
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$
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455
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$
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402
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$
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331
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$
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290
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$
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63
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Weighted average of:
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Preference shares outstanding
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26,789,816
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26,243,059
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26,191,011
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26,185,178
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26,035,330
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Ordinary shares outstanding
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70,000,000
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70,000,000
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70,000,000
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70,000,000
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70,000,000
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Basic earnings per Ordinary share
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$
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4.68
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$
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4.16
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$
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3.42
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$
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3.00
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$
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0.65
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Fully diluted earnings per Ordinary share
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4.64
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4.14
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3.42
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3.00
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0.64
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Basic earnings per Preference share
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4.75
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4.23
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3.49
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|
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3.06
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0.70
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Fully diluted earnings per Preference share
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4.72
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4.21
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3.49
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3.06
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0.69
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Basic earnings per Ordinary ADS
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1.56
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1.39
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1.14
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1.00
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0.22
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Fully diluted earnings per Ordinary ADS
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1.55
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1.38
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1.14
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1.00
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0.21
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Basic earnings per Preference ADS
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1.58
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1.41
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1.16
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|
|
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1.02
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|
|
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0.23
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Fully diluted earnings per Preference ADS
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1.57
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1.40
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1.16
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1.02
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0.23
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Dividends declared per Ordinary
share (
)
(a)
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1.23
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(b)
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1.12
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1.02
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0.94
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|
|
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0.85
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Dividends declared per Preference
share (
)
(a)
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1.29
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(b)
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1.18
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1.08
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|
|
1.00
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0.91
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Dividends declared per Ordinary
share ($)
(a)
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|
|
|
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1.41
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1.25
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1.10
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0.78
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Dividends declared per Preference share ($)
(a)
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1.48
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1.32
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|
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1.17
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0.84
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3
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2005
(A)
|
|
|
2004
(A)
|
|
|
2003
(A)
|
|
|
2002
(A)
|
|
|
2001
(B)
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|
|
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(In millions)
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Balance Sheet Data
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Working capital
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$
|
883
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$
|
508
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$
|
794
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$
|
526
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$
|
402
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Total assets
|
|
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7,983
|
|
|
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7,962
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|
|
7,503
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|
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6,780
|
|
|
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6,516
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Total long-term
debt
(c)
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1,895
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1,824
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2,354
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|
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2,234
|
|
|
|
2,165
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Shareholders equity
|
|
|
3,974
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|
|
|
3,635
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|
|
|
3,244
|
|
|
|
2,807
|
|
|
|
2,617
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Capital Stock Preference shares Nominal
Value
|
|
|
74
|
|
|
|
70
|
|
|
|
70
|
|
|
|
70
|
|
|
|
70
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|
Capital Stock Ordinary shares Nominal
Value
|
|
|
229
|
|
|
|
229
|
|
|
|
229
|
|
|
|
229
|
|
|
|
229
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|
|
|
(A)
|
Includes the effect of an accounting change in 2002 relating to
the adoption of SFAS No. 142,
Goodwill and Other
Intangible Assets,
as of January 1, 2002
|
|
(B)
|
Includes the special charge to address 1996 merger related legal
matters, estimated liabilities and legal expenses arising in
connection with the W.R. Grace Chapter 11 proceedings and
the cost of resolving pending litigation and other disputes with
certain commercial insurers. You can find a more detailed
discussion of this special charge in Notes 8 and 18 of the
Notes to our Consolidated Financial Statements.
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(a)
|
Amounts shown for each year from 2001 to 2005 represent
dividends paid with respect to such year. The actual declaration
and payment of the dividend was made in the following year,
after approval of the dividend at our Annual General Meeting.
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(b)
|
Our general partners Management Board has proposed
dividends for 2005 of
1.23 per
Ordinary share and
1.29 per
Preference share. These dividends are subject to approval by our
shareholders at our Annual General Meeting to be held on
May 9, 2006.
|
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(c)
|
Total long-term debt represents long-term debt and capital lease
obligations, less current portions and (i) at
December 31, 2001, the mandatorily redeemable preferred
securities of Fresenius Medical Care Capital Trust, Fresenius
Medical Care Capital Trust II, Fresenius Medical Care
Capital Trust III, Fresenius Medical Care Capital
Trust IV, and Fresenius Medical Care Capital Trust V,
(ii) at December 31, 2002, 2003, 2004, and 2005, the
mandatorily redeemable preferred securities of Fresenius Medical
Care Capital Trust II, Fresenius Medical Care Capital
Trust III, Fresenius Medical Care Capital Trust IV,
and Fresenius Medical Care Capital Trust V. On
February 14, 2002, we redeemed the entire $360 million
aggregate liquidation amount of the trust preferred securities
of Fresenius Medical Care Capital Trust.
|
RISK FACTORS
Risks Relating to Litigation and Regulatory Matters in the
U.S.
If we do not comply with the many governmental regulations
applicable to our business or with the corporate integrity
agreement between us and the U.S. government, we could be
excluded from government health care reimbursement programs or
our authority to conduct business could be terminated, either of
which would result in a material decrease in our revenue.
Our operations in both our provider business and our products
business are subject to extensive governmental regulation in
virtually every country in which we operate. We are also subject
to other laws of general applicability, including antitrust
laws. The applicable regulations, which differ from country to
country, cover areas that include:
|
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|
|
the quality, safety and efficacy of medical and pharmaceutical
products and supplies;
|
|
|
|
the operation of manufacturing facilities, laboratories and
dialysis clinics;
|
|
|
|
the rate of, and accurate reporting and billing for, government
and third-party reimbursement; and
|
|
|
|
compensation of medical directors and other financial
arrangements with physicians and other referral sources.
|
If we fail to comply with one or more of these laws or
regulations, this may give rise to a number of legal
consequences. These include, in particular, monetary and
administrative penalties, increased costs for compliance with
government orders or a complete or partial exclusion from
government reimbursement programs or complete or partial
curtailment of our authority to conduct business. Any of these
consequences could have a material adverse impact on our
business, financial condition and results of operations.
4
Fresenius Medical Care Holdings, Inc. (FMCH), our
principal North American subsidiary, is party to a corporate
integrity agreement with the U.S. government. This
agreement, which was signed on January 18, 2000 in
conjunction with a settlement of claims previously asserted
against FMCH, requires that FMCH maintain a comprehensive
compliance program, including a staff of sufficient compliance
personnel, a written code of conduct, training programs,
regulatory compliance policies and procedures, annual audits and
periodic reporting to the government. The corporate integrity
agreement permits the U.S. government to exclude FMCH and
its subsidiaries from participation in U.S. federal health
care programs (in particular, Medicare and Medicaid) if
there is a material breach of the agreement that FMCH does not
cure within thirty days after FMCH receives written notice of
the breach. We derive approximately 36% of our consolidated
revenue from U.S. federal health care benefit programs.
Consequently, if FMCH commits a material breach of the corporate
integrity agreement that results in the exclusion of FMCH or its
subsidiaries from continued participation in those programs, it
would significantly decrease our revenue and have a material
adverse effect on our business, financial condition and results
of operations.
We rely upon our management structure, regulatory and legal
resources and the effective operation of our compliance programs
to direct, manage and monitor our operations to comply with
government regulations and the corporate integrity agreement. If
employees were to deliberately or inadvertently fail to adhere
to these regulations, then our authority to conduct business
could be terminated and our operations could be significantly
curtailed. Such actions could also lead to claims for repayment
or other sanctions. Any such terminations or reductions could
materially reduce our sales, with a resulting material adverse
effect on our business, financial condition and results of
operations.
In October 2004, FMCH and its Spectra Renal Management
subsidiary received subpoenas from the U.S. Department of
Justice, Eastern District of New York, in connection with a
civil and criminal investigation, which requires production of a
broad range of documents relating to our operations, with
specific attention to documents relating to laboratory testing
for parathyroid hormone (PTH) levels and vitamin D
therapies. We are cooperating with the governments
requests for information. While we believe that we have complied
with applicable laws relating to PTH testing and use of vitamin
D therapies, an adverse determination in this investigation
could have a material adverse effect on our business, financial
condition, and results of operations.
On April 1, 2005, FMCH was served with a subpoena from the
office of the United States Attorney for the Eastern District of
Missouri in connection with a joint civil and criminal
investigation of our company. The subpoena requires production
of a broad range of documents relating to our operations,
including documents related to, among other things, clinical
quality programs, business development activities, medical
director compensation and physician relations, joint ventures
and our anemia management program. The subpoena covers the
period from December 1, 1996 through the present. We are
unable to predict whether proceedings might be initiated against
us, when the investigation might be concluded or what the impact
of this joint investigation might be on our business, financial
condition and results of operations.
A change in U.S. government reimbursement for
dialysis care could materially decrease our revenues and
operating profit
For the twelve months ended December 31, 2005,
approximately 36% of our consolidated revenues resulted from
Medicare and Medicaid reimbursement. Legislative changes or
changes in government reimbursement practice may affect the
reimbursement rates for the services we provide, as well as the
scope of Medicare and Medicaid coverage. A decrease in Medicare
or Medicaid reimbursement rates or covered services could have a
material adverse effect on our business, financial condition and
results of operations. In December 2003, the Medicare
Prescription Drug Modernization and Improvement Act was enacted.
For information regarding the effects of this legislation on
reimbursement rates, see Item 4.B, Information on the
Company Business Overview Regulatory and Legal
Matters Reimbursement.
5
A reduction in reimbursement for or a change in the
utilization of EPO could materially reduce our revenue and
operating profit. An interruption of supply or our inability to
obtain satisfactory terms for EPO could reduce our
revenues
Reimbursement and revenue from the administration of
erythropoietin, or EPO, accounted for approximately 21% of total
revenue in our North America segment for the year ended
December 31, 2005. EPO is produced by a single source
manufacturer, Amgen Inc. Our new contract with Amgen USA, Inc.,
a subsidiary of Amgen, Inc. covers the period from
January 1, 2006 to December 31, 2007. Pricing is based
on Amgens list price and is subject to change. An increase
in Amgen price for EPO without a corresponding and timely
increase in CMSs reimbursement for EPO, a reduction of the
current overfill amount in EPO vials which we currently use
(liquid medications, such as EPO, typically include a small
overfill amount to ensure that the fill volume can be extracted
from the vial as administered to the patient), an interruption
of supply or our inability to obtain satisfactory purchase terms
for EPO after our current contract expires could reduce our
revenues from, or increase our costs in connection with, the
administration of EPO, which could materially adversely affect
our business, financial condition and results of operations.
On April 1, 2006, the Centers for Medicare and Medical
Services (CMS) will implement a new national policy
for claims for EPO and Aranesp administered to ESRD patients in
renal dialysis facilities. Specifically, CMS will expect a 25%
reduction in the dose administered to an ESRD patient whose
hematocrit level exceeds 39.0 (or hemoglobin of 13.0). If the
dose is not reduced by 25%, CMS will pay the claim as if the
dose reduction had occurred. See Item 4.B,
Information on the Company Business Overview
Regulatory and Legal Matters Reimbursement. A
decrease in EPO reimbursement or a change in EPO utilization,
caused, for example, by CMS new anemia monitoring policy,
could have a material adverse effect on our business, financial
condition, and results of operations.
Creditors of W.R. Grace & Co. Conn. have asserted
claims against us
We were formed in 1996 as a result of a series of transactions
with W.R. Grace & Co. that we refer to as the merger. 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 liabilities arising out of product-liability related
litigation (including asbestos), pre-merger tax claims and other
claims unrelated to its dialysis business. In connection with
the merger,
W.R. Grace &
Co.-Conn.
and other Grace entities agreed to indemnify the Company and its
subsidiaries 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 the
operations of National Medical Care, a subsidiary of W.R. Grace
& Co. which became our subsidiary in the merger. 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 our obligation. In particular, W.R. Grace &
Co. has disclosed in its filings with the SEC 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 Services examination report on
tax periods 1993 to 1996 and that during those years W.R. Grace
& Co. deducted approximately $122 million in interest
attributable to corporate owned life insurance
(COLI) policy loans.
W.R. Grace & Co. has already paid
$21 million in tax and interest related to COLI deductions
made in tax years prior to 1993.
In October 2004, W.R. Grace & Co. obtained bankruptcy court
approval to settle its COLI claims with the Service. In January
2005, W.R. Grace & Co., FMCH and Sealed Air Corporation
executed a settlement agreement with respect to the
Services COLI related claims and other tax claims. On
April 14, 2005, W.R. Grace & Co. paid the
Service approximately $90 million in connection with taxes
owed for the tax periods 1993 to 1996 pursuant to a bankruptcy
court order directing W.R. Grace & Co. to make such payment.
Subject to certain representations made by W.R. Grace & Co.,
Fresenius Medical Care AG and Fresenius AG, W.R. Grace & Co.
and certain of its affiliates agreed to indemnify us against
this and other pre-merger and merger-related tax liabilities.
6
Prior to and after the commencement of the Grace Chapter 11
Proceedings, class action complaints were filed against W.R.
Grace & Co. and FMCH 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.
In 2003, we reached an agreement with the asbestos
creditors committees and W.R. Grace & Co. in the Grace
Chapter 11 Proceedings to settle all fraudulent conveyance
and tax claims related to us that arise out of the Grace
Chapter 11 Proceedings. The settlement agreement has been
approved by the U.S. District Court. The proposed
settlement is subject to confirmation of a final plan of
reorganization of W.R. Grace & Co. that meets the
requirements of the settlement agreement or is otherwise
satisfactory to us. At December 31, 2005 our provision for
special charges for legal matters was $118 million,
including a provision for payment of $115 million pursuant
to the settlement agreement. If the proposed settlement with the
asbestos creditors committees and W.R. Grace & Co. is
not confirmed in such a final plan of reorganization, the claims
could be reinstated. If the claims are reinstated and the merger
is determined to be a fraudulent transfer and if material
damages are proved by the plaintiffs and we are not able to
collect, in whole or in part, on the indemnity from any of our
indemnitors, a judgment could have a material adverse effect on
our business, financial condition and results of operations. For
additional information concerning the Grace Chapter 11
Proceedings and the settlement agreement see Item 8.A.7,
Financial Information Legal Proceedings.
Managed care plans usually negotiate lower reimbursement
rates than other health plans. As such plans grow, amounts paid
for our services and products by non-governmental payors could
decrease
We obtain a significant portion of our revenues from
reimbursement provided by non-governmental third-party payors,
such as private medical insurers. Although non-governmental
payors generally pay at higher reimbursement rates than
governmental payors, managed care plans generally negotiate
lower reimbursement rates than indemnity insurance plans. Some
managed care plans and indemnity plans also utilize a capitated
fee structure or limit reimbursement for ancillary services.
The increasing consolidation in the commercial insurance sector
in the United States has put us under increasing pressure to
reduce the prices for our services and products. If managed care
plans in the United States reduce reimbursements, our sales
could decrease. This could have a material adverse effect on our
financial condition and results of operations.
Proposals for health care reform could decrease our
revenues and operating profit
The U.S. federal and certain U.S. state governments
have been considering proposals to modify their current health
care systems to improve access to health care and control costs.
See Item 4.B, Information on the Company
Business Overview Regulatory and Legal Matters
Reimbursement U.S. for a discussion of the
Medicare Prescription Drug Modernization and Improvement Act of
2003. Other countries, especially those in Western Europe, are
also considering health care reform proposals that could
materially alter their government-sponsored health care programs
by reducing reimbursement payments. Any reduction could affect
the pricing of our products and the profitability of our
services, especially as we intend to expand our international
business. We cannot predict whether and when these reform
proposals will be adopted in countries in which we operate or
what impact they might have on us. Any decrease in spending or
other significant changes in state funding in countries in which
we operate, particularly significant changes in the
U.S. Medicare and Medicaid programs, could reduce our sales
and profitability and have a material adverse effect on our
business, financial condition and results of operations.
Risks Relating to our Business
Our competitors recent combination could foreclose
certain sales to an important customer
We are engaged in both manufacturing dialysis products and
providing dialysis services. We compete in the dialysis services
business with many customers of our products business. As a
result, independent dialysis clinics,
7
those operated by other chains and dialysis centers acquired by
other products manufacturers may elect to limit or terminate
their purchases of our dialysis products so as to avoid
purchasing products manufactured by a competitor. In addition,
as consolidation in the dialysis services business continues and
other vertically integrated dialysis companies expand, the
external market for our dialysis products could be reduced.
Possible purchase reductions could decrease our product
revenues, with a material adverse effect on our business,
financial condition and results of operations.
On October 5, 2005, DaVita Inc. (DaVita), the
second largest provider of dialysis services in the
U.S. and one of the largest customers of our North America
Products Division, completed its acquisition of Gambro
Healthcare, Inc. (Gambro Healthcare), the third
largest provider of dialysis services in the U.S., and agreed to
purchase a substantial portion of its dialysis product supply
requirements from Gambro Renal Products, Inc. during the next
seven years. The long-term product supply contract between
Davita and Gambro could result in substantial future reductions
in DaVitas purchases of our dialysis products. Any such
reduction in DaVitas purchases will decrease our product
revenues and could result in a material adverse effect on our
business, financial condition and results of operations. Any
further consolidation involving dialysis service providers and
dialysis product manufacturers would likely have similar effects.
The risks associated with the Renal Care Group merger and
other acquisitions could have an adverse effect on our financial
condition and results of operation
On May 3, 2005, we entered into a definitive merger
agreement for the acquisition of Renal Care Group, Inc., or RCG,
for an all cash purchase price of approximately
$3.5 billion. The acquisition is subject to certain
conditions, including expiration or termination of the
applicable waiting period under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended, and other regulatory
approvals. Item 4.B., Information on the
Company Business Overview Proposed
Acquisition of Renal Care Group, Inc. and Item 5.B,
Operating and Financial Review and Prospects
Liquidity and Capital Resources Proposed
Acquisition. The RCG merger and other potential future
acquisitions present challenges for the financing and management
of our business. Following an acquisition, the infrastructure of
an acquired company (including its management information
systems) must be integrated into our own infrastructure; legal
issues (including regulatory issues and contractual matters)
arising from the acquisition must be resolved; marketing,
patient services and logistical procedures must be harmonized;
and, in some cases, divergent corporate and management cultures
need to be reconciled. There is also the risk that key managers
may leave the company during the integration process. These
departures could affect the companys day-to-day business
and relations with customers and employees. The integration
process could also turn out to be more difficult, time-consuming
and costly than expected. If there are delays in the receipt of
required governmental approvals for an acquisition, it may not
be possible to consummate the acquisition and to recover costs
that have been incurred in connection with the acquisition. In
addition, difficulties regarding the acquisition or the newly
acquired companys business activities that we may have
failed to identify could materialize or that we had regarded as
immaterial could turn out to be material in the end. In
addition, potential benefits of an acquisition may fail to
materialize or may not materialize as anticipated. If we are
unable to successfully meet the challenges associated with one
or more of our acquisitions, particularly, the acquisitions of
RCG, this could have an adverse effect on our business,
financial condition and results of operations.
On October 25, 2004, RCG received a subpoena from the
office of the United States Attorney for the Eastern District of
New York. The subpoena requires the production of documents
related to numerous aspects of their business and operations,
including those of RenaLab, Inc., their laboratory. The subpoena
includes specific requests for documents related to testing for
parathyroid hormone (PTH) levels and vitamin D therapies.
RCG has announced that it intends to cooperate with the
governments investigation.
On August 9, 2005, RCG received a subpoena from the office
of the United States Attorney for the Eastern District of
Missouri in connection with a joint civil and criminal
investigation. The subpoena requires the production of documents
related to numerous aspects of RCGs business and
operations. The areas covered by the subpoena include RCGs
supply company, pharmaceutical and other services that RCG
provides to patients, RCGs relationships to pharmaceutical
companies, RCGs relationships with physicians, medical
director
8
compensation and joint ventures with physicians and its purchase
of dialysis equipment from us. RCG has announced that it intends
to cooperate with the governments investigation.
Upon the closing of the proposed acquisition, the Company will
assume RCGs obligations to comply with these subpoenas.
Our growth depends, in part, on our ability to continue to
make acquisitions
The health care industry has experienced significant
consolidation in recent years, particularly in the dialysis
services sector. Our ability to make future acquisitions
depends, in part, on our available financial resources or could
be limited by restrictions imposed in North America by the
federal government or under our credit agreements. If we make
future acquisitions, we may issue ordinary shares for non-cash
consideration without first offering the shares to our existing
shareholders, which could dilute the holdings of these
shareholders. We may also need to borrow additional debt, assume
significant liabilities or create additional expenses relating
to intangible assets, any of which might reduce our reported
earnings or our earnings per share and cause our stock price to
decline. In addition, any financing that we might need for
future acquisitions might be available to us only on terms that
restrict our business. Acquisitions that we complete are also
subject to the risk that we might not successfully integrate the
acquired businesses or that we might not realize anticipated
synergies from the combination. If we are not able to effect
acquisitions on reasonable terms, there could be an adverse
effect on our business, financial condition and results of
operations.
We also compete with other dialysis products and services
companies in seeking suitable acquisition targets. If we are not
able to continue to effect acquisitions on reasonable terms,
especially in the international area, this could have an adverse
effect on our business, financial condition and results of
operations.
Our competitors could develop superior technology or
otherwise impact our product sales
We face numerous competitors in both our dialysis services
business and our dialysis products business, some of which may
possess substantial financial, marketing or research and
development resources. Competition could materially adversely
affect the future pricing and sale of our products and services.
In particular, technological innovation has historically been a
significant competitive factor in the dialysis products
business. The introduction of new products by competitors could
render one or more of our products less competitive or even
obsolete.
We are exposed to products liability and other claims
which could result in significant costs and liability which we
may not be able to insure on acceptable terms in the
future
Health care companies are subject to claims alleging negligence,
products liability, breach of warranty, malpractice and other
legal theories that may involve large claims and significant
defense costs whether or not liability is ultimately imposed.
Health care products may also be subject to recalls and patent
infringement claims. We cannot assure you that significant
claims will not be asserted against us, that significant adverse
verdicts will not be reached against us for patent infringements
or that large scale recalls of our products will not become
necessary. In addition, the laws of some of the countries in
which we operate provide legal rights to users of pharmaceutical
products that could increase the risk of product liability
claims. Product liability and patent infringement claims, other
actions for negligence or breach of contract and product recalls
or related sanctions could result in significant costs. These
costs could have a material adverse effect on our business,
financial condition and results of operations. See
Item 8.A.7, Financial Information Legal
Proceedings.
While we have been able to obtain liability insurance in the
past, to cover our business risks, we cannot assure you that
such insurance will be available in the future either on
acceptable terms or at all. A successful claim in excess of the
limits of our insurance coverage could have a material adverse
effect on our business, results of operations and financial
condition. Liability claims, regardless of their merit or
eventual outcome, also may have a material adverse effect on our
business and reputation, which could in turn reduce our sales
and profitability.
9
If physicians and other referral sources cease referring
patients to our dialysis clinics or cease purchasing our
dialysis products, our revenues would decrease
Our dialysis services business is dependent upon patients
choosing our clinics as the location for their treatments.
Patients may select a clinic based, in whole or in part, on the
recommendation of their physician. We believe that physicians
and other clinicians typically consider a number of factors when
recommending a particular dialysis facility to an end-stage
renal disease patient, including, but not limited to, the
quality of care at a clinic, the competency of a clinics
staff, convenient scheduling, and a clinics location and
physical condition. Physicians may change their facility
recommendations at any time, which may result in the movement of
our existing patients to competing clinics, including clinics
established by the physicians themselves. At most of our
clinics, a relatively small number of physicians account for the
referral of all or a significant portion of the patient base.
Our dialysis care business also depends on recommendations by
hospitals, managed care plans and other health care
institutions. If a significant number of physicians, hospitals
or other health care institutions cease referring their patients
to our clinics, this would reduce our dialysis care revenue and
could materially adversely affect our overall operations.
The decision to purchase our dialysis products and other
services or competing dialysis products and other services will
be made in some instances by medical directors and other
referring physicians at our dialysis clinics and by the managing
medical personnel and referring physicians at other dialysis
clinics, subject to applicable regulatory requirements. A
decline in physician recommendations or recommendations from
other sources or purchases of our products or ancillary services
would reduce our dialysis product and other services revenue,
and could materially adversely affect our business, financial
condition and results of operations.
If we are unable to attract and retain skilled medical,
technical and engineering personnel, we may be unable to manage
our growth or continue our technological development
Our continued growth in the provider business will depend upon
our ability to attract and retain skilled employees, such as
highly skilled nurses and other medical personnel. Competition
for those employees is intense and the current nursing shortage
in North America has increased our personnel and recruiting
costs. Moreover, we believe that future success in the provider
business will be significantly dependent on our ability to
attract and retain qualified physicians to serve as medical
directors of our dialysis clinics. If we are unable to achieve
that goal or if doing so requires us to bear increased costs
this could adversely impact our growth and results of operations.
Our dialysis products business depends on the development of new
products, technologies and treatment concepts to be competitive.
Competition is also intense for skilled engineers and other
technical research and development personnel. If we are unable
to obtain and retain the services of key personnel, the ability
of our officers and key employees to manage our growth would
suffer and our operations could suffer in other respects. These
factors could preclude us from integrating acquired companies
into our operations, which could increase our costs and prevent
us from realizing synergies from acquisitions. Lack of skilled
research and development personnel could impair our
technological development, which would increase our costs and
impair our reputation for production of technologically advanced
products.
We face additional risks from international
operations
We operate dialysis clinics in 27 countries and sell a
range of equipment, products and services to customers in over
100 countries. Our international operations are subject to
a number of risks, including the following:
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The economic situation in developing countries could deteriorate;
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Fluctuations in exchange rates could adversely affect
profitability;
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We could face difficulties in enforcing and collecting accounts
receivable under some countries legal systems;
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Local regulations could restrict our ability to obtain a direct
ownership interest in dialysis clinics or other operations;
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Political and economic instability, especially in developing and
newly industrializing countries, could disrupt our operations;
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Some customers and governments could have longer payment cycles,
with resulting adverse effects on our cash flow; and
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Some countries could impose additional taxes or restrict the
import of our products.
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Any one or more of these factors could increase our costs,
reduce our revenues, or disrupt our operations, with possible
material adverse effects on our business, financial condition
and results of operations.
Diverging views of the financial authorities could require
us to make additional tax payments
We are subject to ongoing tax audits in the U.S., Germany and
other jurisdictions. We have received notices of unfavorable
adjustments and disallowances in connection with certain of
these audits. We are contesting, and in some cases appealing
certain of these unfavorable determinations. We may be subject
to additional unfavorable adjustments and disallowances in
connection with ongoing audits. If our objections and any final
audit appeals are unsuccessful, we could be required to make
additional tax payments. We are not currently able to determine
the timing of these potential additional tax payments. If all
potential additional tax payments were to become due
contemporaneously, it could have a material adverse impact on
our operating cash flow in the relevant reporting period.
Risks Relating to our Securities
Capital markets may be unfamiliar with the KGaA form,
which may adversely affect our share price
Our preference shares and our ordinary shares are listed on the
Frankfurt Stock Exchange and ADSs representing such shares are
listed on the New York Stock Exchange. However, we are presently
aware of only a few companies organized in KGaA form in Germany
whose shares are publicly traded, and no such other
companys shares are listed on any national stock exchange
in the United States or quoted in the Nasdaq Stock Market. We
completed our transformation of legal form without any
interruption in stock market trading of our shares, but
additional time could be required until capital markets are
fully familiar with the KGaA form. We cannot give any assurances
as to the prices at which our shares or ADSs representing our
shares will trade.
The public market for our preference shares and our
preference share ADSs is limited and highly illiquid. The
delisting of or preference share ADSs would further reduce the
market for our preference shares
Our preference shares are listed on the Frankfurt Stock Exchange
and ADSs representing the preference shares are listed on the
New York Stock Exchange (NYSE). However, as a result
of the conversion and transformation, the number of our
preference shares outstanding has been reduced from 27,762,179
to 1,132,757. As a result, the public market for our preference
shares is limited and highly illiquid. At February 10,
2006, upon registration of the conversion and the transformation
in the commercial register in Germany, the number of preference
shares outstanding included 63,891 preference shares in the form
of 191,673 American Depositary Shares. We have been advised
by the NYSE that if the number of publicly-held
FMC-AG & Co. KGaA preference share ADSs falls below
100,000, the preference share ADSs are likely to be delisted
from the NYSE. Without a New York Stock Exchange or a Nasdaq
Stock Market listing, the market for our preference share ADSs
would be further reduced or eliminated.
Our substantial indebtedness may limit our ability to pay
dividends or implement certain elements of our business
strategy
We have a substantial amount of debt. At December 31, 2005,
we have consolidated debt of $2.19 billion, including
$1.19 billion of our trust preferred securities, and
consolidated total shareholders equity of
$3.97 billion, resulting in a ratio of total debt to equity
of .55. After the completion of the RCG acquisition (see
Item 5.B, Operating and Financial Review and
Prospects Liquidity and Capital
Resources Proposed Acquisition), our debt will
increase (on a pro forma basis as of December 31, 2005) to
approximately $6.40 billion and our pro forma total
shareholders equity will be approximately
$3.97 billion, resulting in a pro
11
forma ratio of total debt to equity of 1.61. Our substantial
level of debt and the higher level of debt to be incurred in
connection with the RCG acquisition present the risk that we
might not generate sufficient cash to service our indebtedness
or that our leveraged capital structure could limit our ability
to finance acquisitions and develop additional projects, to
compete effectively or to operate successfully under adverse
economic conditions.
Our 2003 Senior Credit Agreement and the indentures relating to
our trust preferred securities include, and the new senior
credit agreements that we will enter into in connection with the
acquisition of RCG will include, covenants that require us to
maintain certain financial ratios or meet other financial tests.
Under our senior credit agreement, we are obligated to maintain
a minimum consolidated net worth and a minimum consolidated
interest coverage ratio (ratio of consolidated earnings before
interest, taxes, depreciation and amortization (EBITDA) to
consolidated net interest expense) and a certain consolidated
leverage ratio (ratio of consolidated funded debt to EBITDA).
Our 2003 Senior Credit Agreement and our indentures include, and
the new senior credit agreements that we will enter into in
connection with the acquisition of RCG will include other
covenants which, among other things, restrict or have the effect
of restricting our ability to dispose of assets, incur debt, pay
dividends, create liens or make capital expenditures,
investments or acquisitions. These covenants may otherwise limit
our activities. The breach of any of the covenants could result
in a default and acceleration of the indebtedness under the
credit agreement or the indentures, which could, in turn, create
additional defaults and acceleration of the indebtedness under
the agreements relating to our other long-term indebtedness
which would have an adverse effect on our business, financial
condition and results of operations.
Fresenius AG owns 100% of the shares in the general
partner of our Company and is able to control our management and
strategy
Prior to the transformation of legal form and the conversion,
Fresenius AG held approximately 50.8% of our voting securities.
As a result, Fresenius AG had the ability to elect the members
of the supervisory board (
Aufsichtsrat
) of the Company
and, through its voting power, to approve many actions requiring
the vote of the shareholders of the Company. This controlling
ownership had the effect of, among other things, preventing a
change in control and precluding a declaration or payment of
dividends without the consent of Fresenius AG. While the
conversion and transformation have reduced Fresenius AGs
ownership of our voting ordinary shares to approximately 36.8%,
Fresenius AG owns 100% of the outstanding shares of the general
partner of the Company. As its sole shareholder, Fresenius AG
has the sole right to elect the supervisory board of the general
partner. Although our pooling agreement requires that one third
of the members of the general partners supervisory board
be persons with no significant business or professional
relationship with us, Fresenius AG, or any of our affiliates.
The general partners supervisory board elects the
management board of the general partner, which is responsible
for the management of the Company. Accordingly, through its
ownership of the general partner, Fresenius AG is able to
exercise substantially the same degree of control over the
management and strategy of FMC-AG & Co. KGaA that it
previously exercised as majority shareholder of FMC-AG,
notwithstanding that it no longer owns a majority of our
outstanding voting shares. Such control limits shareholder
influence on management of the Company and precludes a takeover
or change of control of the Company without Fresenius AGs
consent, either or both of which could adversely affect the
prices of our shares.
Because we are not organized under U.S. law, we are
subject to certain less detailed disclosure requirements under
U.S. federal securities laws
Under the pooling agreement that we have entered into for the
benefit of minority holders of our ordinary shares and holders
of our preference shares (including, in each case, holders of
American Depositary Receipts representing beneficial ownership
of such shares), we have agreed to file quarterly reports with
the SEC, to prepare annual and quarterly financial statements in
accordance with U.S. generally accepted accounting
principles, and to file information with the SEC with respect to
annual and general meetings of our shareholders. These pooling
agreements also require that the supervisory board of Fresenius
Medical Care Management AG, our general partner, include at
least two members who do not have any substantial business or
professional relationship with Fresenius AG, Fresenius Medical
Care Management AG or FMC-AG & Co. KGaA and its
12
affiliates and requires the consent of those independent
directors to certain transactions between us and Fresenius AG
and its affiliates.
We are a foreign private issuer, as defined in the
SECs regulations, and consequently we are not subject to
all of the same disclosure requirements applicable to domestic
companies. We are exempt from the SECs proxy rules, and
our annual reports contain less detailed disclosure than reports
of domestic issuers regarding such matters as management,
executive compensation and outstanding options, beneficial
ownership of our securities and certain related party
transactions. Also, our officers, directors and beneficial
owners of more than 10% of our equity securities are exempt from
the reporting requirements and short-swing profit recovery
provisions of Section 16 of the Securities Exchange Act of
1934. We are also generally exempt from most of the governance
rule revisions recently adopted by the New York Stock Exchange,
other than the obligation to maintain an audit committee in
accordance with Rule 10A-3 under the Securities Exchange
Act of 1934, as amended. These limits on available information
about our company and exemptions from many governance rules
applicable to domestic issuers may adversely affect the market
prices for our securities.
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Item 4.
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Information on the Company
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A. History
and Development of the Company
General
Fresenius Medical Care AG & Co.
KGaA
(FMC-AG & Co. KGaA or the
Company), is a German partnership limited by shares
(
Kommanditgesellschaft auf Aktien
), formerly known as
Fresenius Medical Care AG (FMC-AG), a German stock
corporation (
Aktiengesellschaft
) organized under the laws
of Germany.
The Company was incorporated on August 5, 1996 as a stock
corporation and transformed into the partnership limited by
shares upon registration on February 10, 2006. FMC-AG &
Co. KGaA is registered with the commercial register of the local
court (
Amtsgericht
) of Hof an der Saale, Germany under
the registration number HRB 4019. Our registered office
(
Sitz
) is Hof an der Saale, Germany. Our business address
is Else-Kröner-Strasse 1, 61352 Bad Homburg, Germany,
telephone ++49-6172-609-0.
History
The Company was originally created by the transformation of
Sterilpharma GmbH (
Gesellschaft mit beschränkter
Haftung
), a limited liability company under German law
incorporated in 1975, into a stock corporation under German law
(
Aktiengesellschaft
). A shareholders meeting on
April 15, 1996 adopted the resolutions for this
transformation and the commercial register registered the
transformation on August 5, 1996.
On September 30, 1996, we completed a series of
transactions to consummate an Agreement and Plan of
Reorganization entered into on February 4, 1996 by
Fresenius AG and W.R. Grace which we refer to as the
Merger elsewhere in this report. Pursuant to that
agreement, Fresenius AG contributed Fresenius Worldwide
Dialysis, its global dialysis business, including its
controlling interest in Fresenius USA, Inc., in exchange for
35,210,000 FMC-AG Ordinary shares. Thereafter, we acquired:
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all of the outstanding common stock of W.R. Grace &
Co., whose sole business at the time of the transaction
consisted of National Medical Care, Inc., its global dialysis
business, in exchange for 31,360,000 Ordinary shares; and
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the publicly-held minority interest in Fresenius USA, Inc., in
exchange for 3,430,000 Ordinary shares.
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Effective October 1, 1996, we contributed all our shares in
Fresenius USA, Inc., to Fresenius Medical Care Holdings, Inc.,
which conducts business under the trade name Fresenius Medical
Care North America, and which is the managing company for all of
our operations in the U.S., Canada and Mexico.
On February 10, 2006, the Company completed the
transformation of its legal form under German law as approved by
its shareholders during the Extraordinary General Meeting
(EGM) held on August 30, 2005. Upon
registration of the transformation of legal form in the
commercial register of the local court in Hof an der Saale, on
February 10, 2006, Fresenius Medical Care AGs legal
form was changed from a stock corporation
13
(
Aktiengesellschaft
) to a partnership limited by shares
(
Kommanditgesellschaft auf Aktien
) with the name
Fresenius Medical Care AG & Co. KGaA
(FMC-AG & Co. KGaA). The Company as a KGaA
is the same legal entity under German law, rather than a
successor to the stock corporation. Fresenius Medical Care
Management AG (Management AG), a subsidiary of
Fresenius AG, the majority voting shareholder of
FMC-AG
prior to the
transformation, is the general partner of
FMC-AG
& Co.
KGaA. Shareholders in
FMC-AG
& Co.
KGaA participate in all economic respects, including profits and
capital, to the same extent and (except as modified by the share
conversion described below) with the same number of ordinary and
preference shares in
FMC-AG
& Co.
KGaA as they held in FMC-AG prior to the transformation. Upon
effectiveness of the transformation of legal form, the share
capital of FMC-AG became the share capital of
FMC-AG
& Co.
KGaA, and persons who were shareholders of FMC-AG became
shareholders of the Company in its new legal form. In addition,
the EGM approved the adjustment of the existing employee
participation programs and agreed to the creation of a new level
of authorized capital (
Genehmigtes Kapital
). As used in
this report, (i) the Company refers to both
FMC-AG prior to the transformation of legal form and
FMC-AG & Co. KGaA after the transformation and
(ii) we, us, and our
refer to either the Company or the Company and its subsidiaries
on a consolidated basis, as the context requires.
Prior to the effectiveness of the transformation, and as
approved by the EGM and by a separate vote of the Companys
preference shareholders during a separate meeting of the
preference shareholders held immediately following the EGM, the
Company offered holders of its non-voting preference shares
(including preference shares represented by American Depositary
Shares (ADSs)) the opportunity to convert their shares into
ordinary shares at a conversion ratio of one preference share
plus a conversion premium of
9.75 per
ordinary share. Holders of a total of 26,629,422 preference
shares accepted the offer, resulting in an increase of
26,629,422 ordinary shares of FMC-AG & Co. KGaA
(including 2,099,847 ADSs representing 699,949 ordinary shares
of FMC-AG & Co. KGaA) outstanding. Immediately after
the conversion and transformation of legal form, there are
96,629,422 ordinary shares outstanding. Former holders of
preference shares who elected to convert their shares now hold a
number of ordinary shares of FMC-AG & Co. KGaA equal to
the number of preference shares they elected to convert. The
1,132,757 preference shares that were not converted remained
outstanding and became preference shares of FMC-AG &
Co. KGaA in the transformation. As a result, preference
shareholders who elected not to convert their shares into
ordinary shares hold the same number of non-voting preference
shares in FMC-AG & Co. KGaA as they held in FMC-AG
prior to the transformation. Persons who held ordinary shares in
FMC-AG prior to the transformation hold the same number of
voting ordinary shares in FMC-AG & Co. KGaA.
The market value of the Companys shares on the close of
business, May 3, 2005, the day before the conversion was
announced, was
62.45 for the
ordinary shares and
44.65 for the
preference shares, a difference of
17.80. All
preference shareholders were offered the opportunity, as
approved by the EGM, to convert their preference share holdings
by submitting their preference shares and paying a premium,
initially set at
12.25 and
subsequently reduced to
9.75 with each
preference share submitted, in exchange for a like number of
ordinary shares. Based on these market values the converting
preference shareholders received a benefit of
8.05. The
conversion is expected to have an impact on the earnings (or
loss) per share available to the holders of our ordinary shares,
under U.S. GAAP. As a result, the earnings per share
calculation in the first quarter of 2006 may need to reflect the
difference between (i) the market value of the ordinary
shares less the conversion premium of
9.75 per
preference share and (ii) the carrying amount of the
preference shares at the conversion date, February 3, 2006,
as a reduction of income available to ordinary shareholders and
as a corresponding benefit to preference shareholders. The
carrying amount of the preference shares consists of their
historic investment and undistributed retained earnings
allocated to the preference shares under the two-class method.
The Company is continuing to analyze the need to reflect this
reduction or benefit in our financial statements, but based on
the market value of the Companys ordinary shares on the
close of business, February 3, 2006, the impact is
approximately $0.9 billion or a reduction of $13.06 per
ordinary share and a benefit of $34.32 per preference share. As
this calculation compares the carrying amount of the preference
shares which consists of the original investment by the
preference shareholders plus any undistributed retained earnings
the preference shares are entitled to with the market value of
the ordinary shares at the date of closing, less the cash amount
of
9.75 that the
preference shareholders paid, it ignores the appreciation in
value of our preference shares that had already occurred beyond
the proportionate amount of undistributed retained earnings
allocated to the preference shares. In addition, the measurement
date of the exchange is February 3, 2006 and the charge
would include all increases
14
in the fair value of the ordinary shares received by the
preference shareholders as consideration subsequent to the
announcement date which significantly exceed the earnings
allocated to the preference shares during the period from the
announcement of the offer to the conversion date.
Capital Expenditures
We invested, by business segment and geographical areas, the
following amounts, excluding the RCG acquisition expected to
close in the first quarter 2006, during the three fiscal years
ended December 31, 2005, 2004, and 2003 (Mexico has been
reclassified from International segment to North America segment
in 2005 for management purposes. Prior years have been restated
to reflect this reclassification.) and have budgeted the
following amounts for the year 2006:
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|
Actual
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|
|
|
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|
|
Budget
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|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2006
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|
|
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|
|
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|
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|
|
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|
|
(in millions)
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|
Acquisitions
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
77
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|
|
$
|
65
|
|
|
$
|
43
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|
|
|
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|
|
International
|
|
|
57
|
|
|
|
55
|
|
|
|
58
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Total Acquisitions
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$
|
134
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|
|
$
|
120
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|
|
$
|
101
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|
|
$
|
100
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|
|
|
|
|
|
|
|
|
|
|
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|
Capital expenditures for property, plant and equipment
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|
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|
|
|
|
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North America
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$
|
176
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|
|
$
|
166
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|
|
$
|
182
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|
|
|
|
|
|
International
|
|
|
139
|
|
|
|
113
|
|
|
|
109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital Expenditures
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$
|
315
|
|
|
$
|
279
|
|
|
$
|
291
|
|
|
$
|
450
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During 2005, major areas of spending were for the maintenance of
existing clinics and equipment for new clinics. In addition,
expenditures were made for maintenance and expansion of
production facilities in North America, Germany, France and
Italy and for the capitalization of machines provided to
customers primarily in Europe. We finance our capital
expenditures through cash flow from operations or under existing
or new credit facilities.
In 2004, we acquired dialysis machines that were previously sold
in sale-lease back transactions. The machines were acquired for
approximately $29 million and were reflected as a capital
expenditure in the Companys cash flows.
In 2003, the Company exercised an option to terminate an
operating lease for certain manufacturing equipment in its
Ogden, Utah, North American facility. The equipment was
purchased for approximately $66,000 and is reflected as a
capital expenditure in the accompanying consolidated statement
of cash flows.
For information regarding recent acquisitions, see Item 4
B. Business Overview Dialysis Care
Acquisitions.
B. Business Overview
Our Business
We are the worlds largest kidney dialysis company,
operating in both the field of dialysis products and the field
of dialysis services. Based on publicly reported sales and
number of patients treated, we are the largest dialysis company
in the world. (Source:
Nephrology News & Issues,
July 2005; company data of significant competitors.) Our
dialysis business is vertically integrated, providing dialysis
treatment at our own dialysis clinics and supplying these
clinics with a broad range of products. In addition, we sell
dialysis products to other dialysis service providers. At
December 31, 2005, we provided dialysis treatment to
approximately 131,450 patients in 1,680 clinics
worldwide located in 27 countries. In the U.S. we also
perform clinical laboratory testing and provide inpatient
dialysis services, therapeutic aphaeresis, hemoperfusion and
other services under contract to hospitals. In 2005, we provided
19.7 million dialysis treatments, an increase of
approximately 5% compared to 2004. We also develop and
manufacture a full range of equipment, systems and disposable
products, which we
15
sell to customers in over 100 countries. For the year ended
December 31, 2005, we had net revenues of
$6.8 billion, a 9% increase (8% in constant currency) over
2004 revenues. We derived 68% of our revenues in 2005 from our
North America operations and 32% from our international
operations. (Mexico has been reclassified from International
segment to North America segment in 2005 for management
purposes. Prior years have been restated to reflect this
reclassification.)
We use the insight we gain when treating patients in developing
new and improved products. We believe that our size, our
activities in both dialysis care and dialysis products and our
concentration in specific geographic areas allow us to operate
more cost-effectively than many of our competitors.
The following table summarizes net revenues for our North
America segment and our International segment as well as our
major categories of activity for the three years ended
December 31, 2005, 2004 and 2003 (Mexico has been
reclassified from the International segment to the North America
segment in 2005 for management purposes. Prior years have been
restated to reflect this reclassification.)
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|
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|
|
|
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|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
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|
(in millions)
|
|
North America
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dialysis Care
|
|
$
|
4,054
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|
|
$
|
3,802
|
|
|
$
|
3,435
|
|
|
Dialysis Products
|
|
|
523
|
|
|
|
446
|
|
|
|
443
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,577
|
|
|
|
4,248
|
|
|
|
3,878
|
|
|
International
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dialysis Care
|
|
|
813
|
|
|
|
699
|
|
|
|
544
|
|
|
Dialysis Products
|
|
|
1,382
|
|
|
|
1,281
|
|
|
|
1,106
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,195
|
|
|
|
1,980
|
|
|
|
1,650
|
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Renal Industry Overview
We offer life-maintaining and life-saving dialysis services and
products in a market which is characterized by a favorable
demographic development.
End-Stage Renal Disease
End-stage renal disease (ESRD) is the stage of
advanced chronic kidney disease that is characterized by the
irreversible loss of kidney function and requires regular
dialysis treatment or kidney transplantation to sustain life. A
normally functioning human kidney removes waste products and
excess water from the blood, which prevents toxin buildup, water
overload and the eventual poisoning of the body. 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. A number of conditions diabetes,
hypertension, glomerulonephritis and inherited
diseases can cause chronic kidney disease. The
majority of all people with ESRD acquire the disease as a
complication of one or more of these primary conditions.
There are currently only two methods for treating ESRD: dialysis
and kidney transplantation. Scarcity of compatible kidneys
limits transplants. Therefore, most patients suffering from ESRD
rely on dialysis. According to data published by the Centers for
Medicare and Medicaid Services (CMS) (formerly the
Health Care Financing Administration) of the
U.S. Department of Health and Human Services,
15,589 patients of the ESRD patient population received
kidney transplants in the U.S. during 2003, an increase of
approximately 6% over 2002. Based on the total number of
patients treated with dialysis in the U.S., only about 5%
received a kidney transplant in 2003. In Germany, based on
information published by QuaSi-Niere gGmbH only 4%
of all patients treated with dialysis received a kidney
transplant in 2004. In both countries less than 30% of all ESRD
patients live with a functioning kidney transplant and more than
70% require dialysis (source: USRDS 2005 Annual Data Report;
QuaSi-Niere gGmbH, Bericht 2004/2005). There are two major
dialysis methods commonly used today, hemodialysis
(HD) and peritoneal dialysis (PD). These
are described below under Dialysis Treatment Options for
ESRD. We estimate the global ESRD patient population to
have reached almost
16
1.8 million at the end of 2004. Of these patients, we
estimate that almost 1.4 million were undergoing dialysis
treatment, and over 400,000 people were living with kidney
transplants. Of the estimated 1.4 million dialysis patients
treated in 2004 approximately 1.225 million received HD and
almost 150,000 received PD. Generally, an ESRD patients
physician, in consultation with the patient, chooses the patient
treatment method, which is based on the patients medical
conditions and needs. The number of dialysis patients grew by
approximately 6% in 2004.
Based on data published by the CMS in 2005, the number of
patients in the U.S. who received dialysis for chronic ESRD
grew from approximately 171,500 in 1993 to 310,100 in 2003, a
compound annual rate of approximately 6%. We believe that
worldwide growth will continue at 6% per year. According to our
own market surveys, Japan is the second largest dialysis market
in the world. According to data published by the Japanese
Society for Dialysis Therapy, approximately
237,710 dialysis patients were being treated in Japan at
the end of 2003. In the rest of the world, we estimate that at
the end of 2004 there were approximately 324,000 dialysis
patients in Europe, nearly 200,000 patients in Asia
(excluding Japan) and almost 170,000 patients in Latin
America (including Mexico).
Patient growth rates are significantly different on a regional
basis. A below average increase in the number of patients is
experienced in economically highly developed countries, such as
the U.S., Western and Central Europe where a substantial portion
of patients with terminal kidney failure have access to
treatment, usually dialysis. Contrary to this, growth rates in
the economically weaker regions continue to be around 10% and
were thus far higher than average levels. We estimate that
around 24% of all patients are treated in the U.S.,
approximately 18% in Japan and about 18% in the
25 countries of the European Union. The remaining 40% of
all dialysis patients are distributed throughout more than
90 countries in different geographical regions. The high
patient growth rate in economically weaker regions indicates
that access to treatment is gradually improving. If regional
growth patterns persist, a change in the regional distribution
of dialysis patients will eventually occur as dialysis treatment
becomes available to a higher proportion of patients in Asia,
Latin America, Eastern Europe, the Middle East and Africa which
comprise 80% of the worlds population.
We believe that the continuing growth in the number of dialysis
patients is principally attributable to:
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increased general life expectancy and the overall aging of the
general U.S. and European population;
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shortage of donor organs for kidney transplants;
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improved dialysis technology that makes life-prolonging dialysis
available to a larger patient population;
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greater access to treatment in developing countries; and
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better treatment and survival of patients with hypertension,
diabetes and other illnesses that lead to ESRD.
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Dialysis Treatment Options for ESRD
Hemodialysis.
Hemodialysis removes toxins and excess
fluids from the blood in a process in which the blood flows
outside the body through plastic tubes known as bloodlines into
a specially designed filter, called a dialyzer. The dialyzer
separates waste products and excess water from the blood.
Dialysis solution flowing through the dialyzer carries away the
waste products and excess water, and supplements the blood with
solutes which must be added due to renal failure. The treated
blood is returned to the patient. The hemodialysis machine 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 can also monitor and
record the patients vital signs.
Hemodialysis patients generally receive treatment three times
per week, typically for three to five hours 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.
According to the most recent data available from the CMS, there
were more than 4,500 Medicare-certified ESRD treatment
clinics in the U.S. in 2004. Ownership of these clinics is
characterized by a relatively small
17
number of chain providers owning 70-75% of the clinics, of which
we are one of the largest, and a large number of providers each
owning 10 or fewer clinics. We estimate that there were
approximately 4,000 dialysis clinics in the European Union
at the end of 2004, of which about 50% are government-owned,
approximately 40% are privately owned, and nearly 10% are
operated by health care organizations. In Latin America,
privately owned clinics predominate, comprising over 70% of all
clinics providing dialysis care.
According to CMS, as of December 31, 2003, hemodialysis
patients represented about 90% of all dialysis patients in the
U.S. Japanese Society for Dialysis Therapy data indicate
hemodialysis patients comprise approximately 95% of all dialysis
patients in Japan, and, according to our most recent studies,
hemodialysis patients comprise 90% in the European Union and 85%
in the rest of the world. Hence, hemodialysis is the dominant
therapy method worldwide.
Peritoneal Dialysis.
Peritoneal dialysis removes toxins
from the blood using the peritoneum, the membrane lining
covering the internal organs located in the abdominal area, as a
filter. Most peritoneal dialysis patients administer their own
treatments in their own homes and workplaces, either by a
treatment known as continuous ambulatory peritoneal dialysis or
CAPD, or by a treatment known as continuous cycling peritoneal
dialysis or CCPD. In both of these treatments, a surgically
implanted catheter provides access to the peritoneal cavity.
Using this catheter, the patient introduces a sterile dialysis
solution from a solution bag through a tube into the peritoneal
cavity. The peritoneum operates as the filtering membrane and,
after a specified dwell time, the solution is drained and
disposed. A typical CAPD peritoneal dialysis program involves
the introduction and disposal of dialysis solution four times a
day. With CCPD a machine pumps or cycles solution to
and from the patients peritoneal cavity while the patient
sleeps. During the day, one and a half to two liters of dialysis
solution remain in the abdominal cavity of the patient.
Our Strategy
Our objective is generating revenue growth that exceeds market
growth of the dialysis industry, measured by growth in the
patient population, while maintaining our leading position in
the market and increasing earnings at a faster pace than
revenues. Our dialysis care and product revenues have grown
faster than the market over the past five years, and we believe
that we are well positioned to meet our objectives by focusing
on the following strategies:
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Improve our Leading Market Position and Expand Presence in
Attractive Growth Markets Worldwide.
Based on publicly
reported sales and number of patients treated, we are the
worlds largest dialysis company. Through our planned
acquisition of RCG, we will further strengthen our position in
the United States. We also intend to expand our global product
business by acquiring and establishing new dialysis clinics
within attractive international markets. We believe that we will
obtain an increasing percentage of our dialysis care growth from
worldwide markets. We believe that increases in per capita
income in developing countries will make general health care
benefits, which may include payment for dialysis treatment, more
widely available and present significant opportunities.
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Increase Our Spectrum of Dialysis Services.
We plan to
continue to expand our role within the broad spectrum of
services for dialysis patients. We implement this strategy by
providing expanded and enhanced patient services, including
laboratory services, to both our own clinics and those of third
parties. We estimate that our Spectra Renal Management division
provides laboratory services for approximately 40% of the ESRD
patients in the U.S. We have developed disease state
management methodologies, which involve the coordination of
total patient care for ESRD patients and which we believe are
attractive to managed care payors. We formed Optimal Renal Care,
LLC, a joint venture with The Permanente Federation and
Renaissance Health Care as a joint venture with participating
nephrologists. We recently acquired the joint venture interest
in Optimal Renal Care and the minority interests in Renaissance
Health Care and merged the two companies. We provide ESRD and
Chronic Kidney Disease management programs to more than
3,000 patients. We also operate a surgical center for the
management and care of vascular access for ESRD patients, which
decreases hospitalization.
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Differentiated Patient Care Programs from those of Our
Competitors.
We believe that our
UltraCare
®
Patient Care program offered at our North America dialysis
facilities distinguishes and differentiates our
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18
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patient care programs from those of our competitors.
UltraCare
®
therapy employs single-use high flux polysulfone dialyzers,
on-line quality measurement, and Ultra Pure Dialysate all of
which we feel improve mortality and increase the quality of
patient care. The change to single-use dialyzers has increased
our per treatment dialyzer costs relative to use of multi-use
dialyzers. These cost increases have been offset, however, by
our ability to achieve economies of scale in the production of
these dialyzers, due to our large-scale single-use dialyzer
manufacturing capacity. Moreover, we have implemented a staffing
model based on single-use that reduces our personnel costs per
treatment. Finally, automated controls in our 2008 Series
dialysis machine reduces concentrate usage and associated costs.
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Continue to Provide High Standards of Patient Care.
We
believe that our reputation for providing the highest standards
of patient care is a competitive advantage.
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Extend Our Position as an Innovator in Product and Process
Technology.
We are committed to technological leadership in
both hemodialysis and peritoneal dialysis products. We have more
than 350 full time equivalents as members of our research
and development team that focuses 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. We believe that our extensive expertise in
patient treatment and clinical data will further enhance our
ability to develop more effective products and treatment
methodologies. Our 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, we have
reduced manufacturing costs per unit through development of
proprietary manufacturing technologies that have streamlined and
automated our production processes.
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Offer Complete Dialysis Product Lines with Recurring
Disposable Products Revenue Streams.
We offer broad and
competitive hemodialysis and peritoneal dialysis product lines.
These product lines enjoy broad market acceptance and enable us
to serve as our customers single source for all of their
dialysis machines, systems and disposable products.
|
Proposed Acquisition of Renal Care Group, Inc.
On May 3, 2005, we entered into a definitive merger
agreement for the acquisition (the Acquisition) of
Renal Care Group, Inc. (RCG), a Delaware corporation
with principle offices in Nashville, Tennessee, for an all cash
purchase price of approximately $3.5 billion. At
December 31, 2005, RCG provided dialysis and ancillary
services to over 32,360 patients through more than 450
owned outpatient dialysis centers in 34 states within the
United States, in addition to providing acute dialysis services
to more than 200 hospitals. Completion of the Acquisition,
approved by RCGs stockholders in a vote held on
August 24, 2005, is subject to governmental approvals
(including termination or expiration of the waiting period under
the Hart-Scott Rodino Antitrust Improvements Act of 1976, as
amended, the Act) and other third-party consents. On
February 15, 2006, we announced that we and RCG had entered
into a definitive agreement to sell approximately
100 dialysis centers serving on average approximately 60-65
patients per center to National Renal Institutes, Inc.
(NRI), a wholly owned subsidiary of DSI Holding
Company, Inc. The divestiture of these centers is an important
step toward concluding the review by the United States Federal
Trade Commission (FTC) of our acquisition of Renal
Care Group. The purchase price for the divested centers is
approximately $450 million to be paid in cash, subject to
post-closing adjustments for working capital and other routine
matters. The sale of the centers to NRI is expected to close
shortly after the completion of our acquisition of RCG.
The sale of the centers is subject to FTC and certain state
approvals. See Item 5 B. Operating and Financial
Review and Prospects Liquidity and Capital
Resources Outlook Proposed
Acquisition.
Dialysis Care
Dialysis Services
We provide dialysis treatment and related laboratory and
diagnostic services through our network of approximately 1,680
outpatient dialysis clinics, 1,155 of which are in the
U.S. and 525 of which are in
19
26 countries outside of the U.S. Our operations
outside the U.S. and Mexico generated 17% of our 2005
dialysis care revenue. Our International segment currently
operates or manages dialysis clinics in Argentina, Australia,
Brazil, China, Colombia, Chile, Czech Republic, Estonia, France,
Germany, Hungary, Hong Kong, Italy, Singapore, Portugal, Poland,
Romania, Slovakia, Slovenia, South Africa, Spain, Taiwan,
Turkey, United Kingdom and Venezuela. Our dialysis clinics are
generally concentrated in areas of high population density. In
2005, we acquired a total of 37 existing clinics, opened 65 new
clinics and consolidated 32 clinics. The number of patients
we treat at our clinics worldwide increased by about 6%, from
approximately 124,400 at December 31, 2004 to approximately
131,450 at December 31, 2005. For 2005, dialysis services
accounted for 72% of our total revenue.
With our large patient population, we have developed proprietary
patient statistical databases which enable us to improve
dialysis treatment outcomes, and further improve the quality and
effectiveness of dialysis products. We believe that local
physicians, hospitals and managed care plans refer their ESRD
patients to our clinics for treatment due to:
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our reputation for quality patient care and treatment;
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our extensive network of dialysis clinics, which enables
physicians to refer their patients to conveniently located
clinics; and
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our reputation for technologically advanced products for
dialysis treatment.
|
At our clinics, we provide hemodialysis treatments at individual
stations through the use of dialysis machines and disposable
products. A nurse attaches the necessary tubing to the patient
and the dialysis machine and monitors the dialysis equipment and
the patients vital signs. The capacity of a clinic is a
function of the number of stations and such factors as type of
treatment, patient requirements, length of time per treatment,
and local operating practices and ordinances regulating hours of
operation.
Each of our dialysis clinics is under the general supervision of
a Medical Director or, in exceptional circumstances dictating
the need for more than one medical director, all of whom are
physicians. See Patients, Physician and Other
Relationships. Each dialysis clinic also has an
administrator or clinical 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, we provide a variety of
services to ESRD patients in the U.S. at our dialysis
clinics. These services include administering EPO, a synthetic
engineered hormone that stimulates the production of red blood
cells. EPO is used to treat anemia, a medical complication that
ESRD patients frequently experience, and we administer EPO to
most of our patients in the U.S. Revenues from EPO
accounted for approximately 21% of total revenue in our North
America segment for the year ended December 31, 2005. We
receive a substantial majority of this revenue as reimbursements
through the Medicare and Medicaid programs. Amgen Inc. is the
sole manufacturer of EPO in North America and any interruption
of supply could materially adversely affect our business,
financial condition and results of operations. Our current
contract with Amgen covers the period from January 2006 to
December 2007. See Regulatory and Legal
Matters Reimbursement U.S.
Erythropoietan (EPO).
Our clinics also offer services for home dialysis patients, the
majority of whom receive peritoneal dialysis treatment. For
those patients, we provide materials, training and patient
support services, including clinical monitoring, follow-up
assistance and arranging for delivery of the supplies to the
patients residence. See Regulatory and
Legal Matters Reimbursement U.S.
for a discussion of billing for these products and services.
We also provide dialysis services under contract to hospitals in
the U.S. on an as needed basis for hospitalized
ESRD patients and for patients suffering from acute kidney
failure. Acute kidney failure can result from trauma or similar
causes, and requires dialysis until the patients kidneys
recover their normal function. We service these patients either
at their bedside, using portable dialysis equipment, or at the
hospitals dialysis site.
20
Contracts with hospitals provide for payment at negotiated rates
that are generally higher than the Medicare reimbursement rates
for chronic in-clinic outpatient treatments.
We employ a centralized approach with respect to certain
administrative functions common to our operations. For example,
each dialysis clinic uses our proprietary manuals containing our
standardized operating and billing procedures. We believe that
centralizing and standardizing these functions enhance our
ability to perform services on a cost-effective basis.
The manner in which each clinic conducts its business depends,
in large part, upon applicable laws, rules and regulations of
the jurisdiction in which the clinic is located, as well as our
clinical policies. However, a patients attending
physician, who may be the clinics Medical Director or an
unaffiliated physician with staff privileges at the clinic, has
medical discretion to prescribe the particular treatment
modality and medications for that patient. Similarly, the
attending physician has discretion in prescribing particular
medical products, although the clinic typically purchases
equipment, regardless of brand, in consultation with the Medical
Director.
Fresenius
UltraCare
®
Program
The
UltraCare
®
program of our North America dialysis services group combines
our latest product technology with our highly trained and
skilled staff to offer our patients a superior level of care.
The basis for this form of treatment is the
Optiflux
®
polysulfone single-use dialyzer.
Optiflux
®
dialyzers are combined with our
2008
tm
Hemodialysis Delivery System series, which has advanced online
patient monitoring and Ultra Pure Dialysate, all of which we
feel improve mortality rates and increase the quality of patient
care. (A study published in 2004 (Lowrie/Li/Ofsthun/ Lazarus,
Nephrology Dialysis Transplantation, August 17, 2004)
comparing single use and re-use dialyzers concluded that the
abandonment of dialyzer re-use practice could lead to lower
mortality rates and to an increase in the quality of patient
care).
UltraCare
®
program also utilizes several systems to allow the tailoring of
treatment to meet individual patient needs. Among the other
capabilities of this system, staff will be alerted if toxin
clearance is less than the target prescribed for the patient,
and treatment can be adjusted accordingly. All of our North
American dialysis clinics have been certified for the
UltraCare
®
program.
Laboratory Services
We provide laboratory testing and marketing services through
Spectra Renal Management. Spectra Renal Management provides
blood, urine and other bodily fluid testing services to
determine the appropriate individual dialysis therapy for a
patient and to assist physicians in determining whether a
dialysis patients therapy regimen, diet and medicines
remain optimal. Spectra Renal Management the leading clinical
laboratory provider in North America, provides testing for
dialysis related treatments in its two operating laboratories
located in New Jersey and Northern California. During the year
ended December 31, 2005, Spectra Renal Management performed
nearly 42 million tests for approximately
125,000 dialysis patients in over 1,800 clinics across
the U.S., including clinics that we own or operate.
Other Services
We also provide perfusion, autotransfusion and therapeutic
apheresis services in the U.S. Perfusion maintains human
heart and lung function during cardiovascular surgery.
Autotransfusion is used during surgery to collect, filter and
reinfuse a patients own blood as an alternative to using
donor blood. Therapeutic apheresis is the process of separating
or removing illness-causing substances from patients blood
or plasma.
Acquisitions
A significant factor in the growth in our revenue and operating
earnings in prior years has been our ability to acquire health
care businesses, particularly dialysis clinics, on reasonable
terms. Worldwide, physicians own many dialysis clinics that are
potential acquisition candidates for us. In the U.S., doctors
might determine to sell their clinics to obtain relief from
day-to-day administrative responsibilities and changing
governmental regulations, to focus on patient care and to
realize a return on their investment. Outside of the U.S.,
doctors might
21
determine to sell to us and/or enter into joint ventures or
other relationships with us to achieve the same goals and to
gain a partner with extensive expertise in dialysis products and
services.
We paid aggregate cash consideration primarily for dialysis
clinics of approximately $125 million in 2005 and
approximately $104 million in 2004.
In May 2005, we entered into a definitive merger agreement for
the acquisition of Renal Care Group Inc. for approximately
$3.5 billion in cash. See Item 5 B., Operating
and Financial Review and Prospects Liquidity and
Capital Resources Outlook Proposed
Acquisition.
We continued to enhance our presence outside the U.S. in
2005 by acquiring individual or small groups of dialysis clinics
in selected markets, expanding existing clinics, and opening new
clinics.
Quality Assurance in Dialysis Care
Our quality management activities are primarily focused on
comprehensive development and implementation of an Integrated
Quality Management System (IMS). Our goals in this
area include not only meeting quality requirements for our
dialysis clinics and environmental concerns, but also managing
the quality of our dialysis care. This approach results in an
IMS structure that closely reflects existing corporate
processes. We are also able to use the IMS to fulfill many legal
and normative regulations covering service lines. In addition,
the quality management system standard offers a highly flexible
structure that allows us to adapt to future regulations. The
most important of these include, among others, ISO 9001 and
ISO 14001, which defines environmental management system
requirements. The IMS fulfils the ISO-Norm 9001:2000
requirements for quality control systems and links it with the
ISO-Norm 14001:1996 for environmental control systems. At the
same time, it conforms to the medical devices requirements of
ISO-Norm 13485:2003.
Our dialysis clinics processes and documentation are
continuously inspected by internal auditors and external
parties. The underlying quality management system is certified
and found to be in compliance with relevant regulations,
requirements and company policies. Newly developed system
evaluation methods, allowing simpler performance comparisons,
are used to identify additional improvement possibilities.
Certification of our dialysis clinics was focused in 2005 on
Eastern European countries, particularly in Czech Republic,
Poland, Turkey and Hungary.
Our important quality assurance goals in 2006 are:
|
|
|
|
|
Improvement of risk management systems in dialysis clinics.
|
|
|
|
Implementation of an audit management system tool
first pilots are planned for the Czech Republic and Poland.
|
|
|
|
Extension of matrix certification of environmental management
system to Italy and Poland.
|
At each of our North America 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. We believe that we
enjoy a reputation of providing high quality care to dialysis
patients. In 2005, the Company continued to develop and
implement programs to assist in achieving our quality goals. Our
Access Intervention Management Program detects and corrects
arteriovenous access failure in hemodialysis treatment, which is
the major cause of hospitalization and morbidity.
Sources of U.S. Dialysis Care Net Revenue
The following table provides information for the years ended
December 31, 2005, 2004 and 2003 regarding the percentage
of our U.S. dialysis treatment services net revenues from
(a) the Medicare ESRD program,
22
(b) private/ alternative payors, such as commercial
insurance and private funds, (c) Medicaid and other
government sources and (d) hospitals.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
Medicare ESRD program
|
|
|
56.0%
|
|
|
|
58.3%
|
|
|
|
61.0%
|
|
Private/alternative payors
|
|
|
31.6%
|
|
|
|
30.0%
|
|
|
|
29.2%
|
|
Medicaid and other government sources
|
|
|
4.2%
|
|
|
|
4.1%
|
|
|
|
3.9%
|
|
Hospitals
|
|
|
8.2%
|
|
|
|
7.6%
|
|
|
|
5.9%
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100.0%
|
|
|
|
100.0%
|
|
|
|
100.0%
|
|
|
|
|
|
|
|
|
|
|
|
Under the Medicare ESRD program, Medicare reimburses dialysis
providers for the treatment of certain individuals who are
diagnosed as having ESRD, regardless of age or financial
circumstances. See Regulatory and Legal
Matters Reimbursement.
Patient, Physician and Other Relationships
We believe that our success in establishing and maintaining
dialysis clinics, both in the U.S. and in other countries,
depends significantly on our ability to obtain the acceptance of
and referrals from local physicians, hospitals and managed care
plans. A dialysis patient generally seeks treatment at a
conveniently located clinic at which the patients
nephrologist has staff privileges. In nearly all our dialysis
clinics, local doctors, who specialize in the treatment of renal
patients (nephrologists), act as practitioners. Our ability to
provide high-quality dialysis care and to fulfil the
requirements of patients and doctors depends significantly on
our ability to enlist nephrologists for our dialysis clinics and
receive referrals from general practitioners.
Medicare ESRD program reimbursement regulations require that a
Medical Director generally supervise treatment at a dialysis
clinic. Generally, the Medical Director must be board certified
or board eligible in internal medicine and have at least twelve
months of training or experience in the care of patients at ESRD
clinics. Our Medical Directors also maintain their own private
practices. We have entered into written agreements with
physicians who serve as medical directors in our clinics. In
North America these agreements generally have an initial term
between 5 to 10 years. The compensation of our medical
directors and other contracted physicians is negotiated
individually and depends in general on local factors such as
competition, the professional qualification of the physician,
their experience and their tasks as well as the size and the
offered services of the clinic. The total annual compensation of
the medical directors and the other contracted physicians is
stipulated at least one year in advance and normally contains
incentives in order to continue to improve efficiency and
quality. We believe that the compensation of our medical
directors is in line with the market.
Almost all contracts we enter into with our medical directors in
the United States as well as the typical contracts which we
obtain when acquiring existing clinics, contain non-competition
clauses concerning certain activities in defined areas for a
defined period to time. These clauses do not enjoin the
physicians from performing patient services directly at other
locations/ areas. As prescribed by law we do not require
physicians to send patients to us or to specific clinics or to
purchase or use specific medical products or ancillary services.
Competition
Dialysis Services.
Our major competitors in the
U.S. are DaVita, Inc., Dialysis Clinic Inc. and Renal
Advantage Inc. and in our International segment are Gambro AB
and B. Braun Melsungen AG. Ownership of dialysis clinics in the
U.S. consists of a large number of providers each owning 10 or
fewer clinics and a small number of larger multi-clinic
providers. Over the last decade the dialysis industry has been
characterized by ongoing consolidations. The Davita/Gambro and
Fresenius Medical Care/RCG transactions have carried this
consolidation process into 2005 and 2006. Davita, Inc. recently
acquired all of Gambro ABs dialysis service clinics in the
United States and entered into a long-term supply agreement with
Gambro. (See Risk Factors Our
competitors recent combination could foreclose certain
sales to an important customer.). In May 2005, we entered
into a definitive agreement to acquire RCG for approximately
$3.5 billion in cash. See Item 5 B.
23
Operating and Financial Review and Prospects
Liquidity and Capital Resources Outlook
Proposed Acquisition.
Many of our dialysis clinics are in urban areas, where there
frequently are many competing clinics in proximity to our
clinics. We experience direct competition from time to time from
former Medical Directors, former employees or referring
physicians who establish their own clinics. Furthermore, other
health care providers or product manufacturers, some of who have
significant operations, may decide to enter the dialysis
business in the future.
Because in the U.S. government programs are the primary
source of reimbursement for services to the majority of
patients, competition for patients in the U.S. is based
primarily on quality and accessibility of service and the
ability to obtain admissions from physicians with privileges at
the facilities. However, the extension of periods during which
commercial insurers are primarily responsible for reimbursement
and the growth of managed care have placed greater emphasis on
service costs for patients insured with private insurance.
In most countries other than the U.S., we compete primarily
against individual freestanding clinics and hospital-based
clinics. In many of these countries, especially the developed
countries, governments directly or indirectly regulate prices
and the opening of new clinics. Providers compete in all
countries primarily on the basis of quality and availability of
service and the development and maintenance of relationships
with referring physicians.
Laboratory Services.
Spectra Renal Management 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. We believe that our
services are competitive in these areas.
Dialysis Products
We are currently, based on internal estimates, publicly
available market data and our data of significant competitors,
the worlds largest manufacturer and distributor of
equipment and related products for hemodialysis and the second
largest manufacturer of peritoneal dialysis products, measured
by publicly reported revenues. We sell our dialysis products
directly and through distributors in over 100 countries.
Most of our customers are dialysis clinics. For the year 2005,
dialysis products accounted for 28% of our total revenue.
We produce a wide range of machines and disposables for
hemodialysis and for peritoneal dialysis:
|
|
|
|
|
HD machines and PD cyclers
|
|
|
|
Dialyzers, our largest product group
|
|
|
|
PD solutions in flexible bags
|
|
|
|
HD concentrates, solutions and granulates
|
|
|
|
Bloodlines
|
|
|
|
Systems for water treatment
|
Our product business also includes adsorbers, which are
specialized filters used in other extracorporeal therapies. In
addition we sell products from other producers, including others
dialyzers, specific instruments for vascular access, heparin (an
anticoagulant as well as other supplies, such as bandages,
clamps and injections.
24
Overview
The following table shows the breakdown of our dialysis product
revenues into sales of hemodialysis products, peritoneal
dialysis products and our adsorber business.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
Total
|
|
|
|
|
Total
|
|
|
|
|
|
Product
|
|
|
% of
|
|
|
Product
|
|
|
% of
|
|
|
Product
|
|
|
% of
|
|
|
|
Revenues
|
|
|
Total
|
|
|
Revenues
|
|
|
Total
|
|
|
Revenues
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(U.S. dollars in millions)
|
|
Hemodialysis Products
|
|
$
|
1,588.6
|
|
|
|
83
|
|
|
$
|
1,453.0
|
|
|
|
84
|
|
|
$
|
1,326.1
|
|
|
|
85
|
|
Peritoneal Dialysis Products
|
|
|
275.5
|
|
|
|
15
|
|
|
|
242.9
|
|
|
|
14
|
|
|
|
211.5
|
|
|
|
14
|
|
Adsorbers
|
|
|
40.9
|
|
|
|
2
|
|
|
|
30.9
|
|
|
|
2
|
|
|
|
11.6
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,905.0
|
|
|
|
100
|
|
|
$
|
1,726.8
|
|
|
|
100
|
|
|
$
|
1,549.2
|
|
|
|
100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hemodialysis Products
We offer a comprehensive hemodialysis product line. Products
include HD machines, modular components for dialysis machines,
polysulfon dialyzers, blood lines, solutions and concentrates,
needles, connectors, machines for water treatment, data
administration systems, dialysis chairs, equipment and
accessories for the reuse of dialyzers and similar products. We
continually strive to expand and improve the capabilities of our
hemodialysis systems to offer an advanced treatment mode at
reasonable cost.
Dialysis Machines.
We sell our
2008
tm
Series dialysis machines as 2008H and 2008K models in North
America and 4008 Series models and recently introduced
Series 5008 models in the rest of the world. The 2008/4008
series is the most widely sold machine for hemodialysis
treatment. Overall, we have produced nearly 200,000 units to
date. The 5008 series was launched in June 2005 and is
intended to gradually follow the 4008 series in the coming
years. The successor 5008 contains a number of newly developed
technical components for revised and improved dialysis processes
Significant advances in the field of electronics enables highly
complex treatment procedures to be controlled and monitored
safely and clearly through interfaces
Our dialysis machines offer the following features and
advantages:
|
|
|
|
|
Volumetric dialysate balancing and ultrafiltration control
system. This system, which we introduced in 1977, provides for
safe and more efficient use of highly permeable dialyzers,
permitting efficient 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 replacing the entire machine;
|
|
|
|
Specialized modules that provide monitoring and response
capability for selected bio-physical patient parameters, such as
body temperature and relative blood volume. 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.
|
|
|
|
Sophisticated microprocessor controls, and display and readout
panels that are adaptable to meet local language requirements;
|
|
|
|
Battery backup, which continues operation of the blood circuit
and all protective systems up to 20 minutes following a
power failure;
|
25
|
|
|
|
|
Online clearance, measurement of dialyzer clearance for quality
assurance with On-Line Clearance Monitoring, 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 FINESSE module and FDS08 system. Our systems enable us
to:
|
|
|
|
|
|
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.
|
Dialyzers.
We manufacture dialyzers using hollow fiber
Fresenius
Polysulfone
®
and Helixone membranes, a synthetic material. We estimate that
we are the leading worldwide producer of polysulfone dialyzers.
We believe 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 and
low flux, as well as ultra flux for acute dialysis, and allows
tailoring of dialysis therapy to individual patients.
|
Other Hemodialysis Products
We manufacture and distribute arterial, venous, single needle
and pediatric bloodlines. We produce both liquid and dry
dialysate concentrates. Liquid dialysate concentrate is mixed
with purified water by the hemodialysis machine to produce
dialysis solution, which removes the toxins and excess water
from the patients blood during dialysis. Dry concentrate,
developed more recently, is less labor-intensive to use,
requires less storage space and may be less prone to bacterial
growth than liquid solutions. We also produce dialysis solutions
in bags, including solutions for priming and rinsing
hemodialysis bloodlines, as well as connection systems for
central concentrate supplies and devices for mixing dialysis
solutions and supplying them to hemodialysis machines. Other
products include solutions for disinfecting and decalcifying
hemodialysis machines, fistula needles, hemodialysis catheters,
and products for acute renal treatment.
Peritoneal Dialysis Products
We offer a full line of peritoneal dialysis systems and
solutions which include both continuous ambulatory peritoneal
dialysis (CAPD) and continuous cycling peritoneal dialysis
(CCPD) also called automated peritoneal dialysis (APD).
CAPD Therapy: We manufacture both systems and solutions for CAPD
therapy. Our product range offers the following advantages for
patients including:
Fewer possibilities for touch contamination.
Our unique
PIN and DISC technology was designed to reduce the number of
steps in the fluid exchange process and by doing so has lessened
the risk of infection, particularly
26
in the disconnection step in which the patient connector is
closed automatically without the need for manual intervention.
|
|
|
|
|
Improved biocompatibility.
The new
balance
and
bica
Vera
solutions are pH neutral snf have very low
glucose degradation products (GDPs) providing greater protection
for the peritoneal membrane.
|
|
|
|
Environmentally friendly material:
Our
staysafe
®
system is made of Biofine, a material, developed by Fresenius,
which upon combustion is reduced to carbon dioxide and water and
does not contain any plasticizers.
|
APD Therapy:
We have been at the forefront of the
development of automated peritoneal dialysis machines since
1980. APD therapy differs from that of CAPD in that fluid is
infused into the peritoneal cavity of patients while they sleep.
The effectiveness of the therapy is dependant on the dwell
times, the composition of the solution used, the volume of
solution and the time of the treatment, usually 8-10 hours.
APD offers a number of benefits to the patients:
|
|
|
|
|
Improved quality of life.
The patient is treated at night
and can lead a more normal life during the day without fluid
exchange every few hours.
|
|
|
|
Improved adequacy of dialysis.
By adjusting the
parameters of treatment it is possible to provide more dialysis
to the patient compared to conventional CAPD therapy. This
therapy offers important options to physicians such as treating
patients with larger body sizes or those who have
ultrafiltration failure.
|
Our automated peritoneal dialysis equipment incorporates
microprocessor technology. This offers physicians the
opportunity to program specific prescriptions for individual
patients. Our APD equipment product line includes:
|
|
|
|
|
sleepsafe
: The
sleepsafe
machine has
been used since 1999. It has automated connection technology
thus further reducing the risk on touch contamination. Another
key safety feature is the barcode recognition system for the
types of solution bags used. This improves compliance and
ensures that the prescribed dosage is administered to the
patient. There is also a pediatric option for the treatment of
infants.
|
|
|
|
North American cycler portfolio:
This includes the
(a) Freedom
®
and
90/2
®
cyclers for pediatric and acute markets, (b) the
Freedom
®
Cycler PD+ with IQ card and (c) the Newton
IQ
®
Cycler. The credit card-sized IQcard can provide actual
treatment details and results for compliance monitoring to the
physician and, when used with the Newton IQ Cycler, can
upload the patients prescription into the machine. The
Newton IQ Cycler also pumps waste dialysate directly into
a receptacle.
|
Patient Management Software:
We have developed specific
patient management software tools to support both CAPD and APD
therapies in the different regions of the world. These include:
PatientOnLine,
Pack-PD
®
and FITTness. These tools can be used by physicians and
nurses to design and monitor treatment protocols thus ensuring
that therapy is optimized and that patient care is maximized.
Customers, Marketing, Distribution and Service
We sell most of our products to clinics, hospitals and
specialized treatment clinics. With our comprehensive product
line and years of experience in dialysis, we believe that we
have been able to establish and maintain very close
relationships with our clinic customer base on a global basis.
Close interaction between our sales force and research and
development personnel enables us to integrate concepts and ideas
that originate in the field into product development. We
maintain a direct sales force of trained salespersons engaged in
the sale of both hemodialysis and peritoneal dialysis products.
This sales force engages in direct promotional efforts,
including visits to physicians, clinical specialists, hospitals,
clinics and dialysis clinics, and represents us at industry
trade shows. We also sponsor medical conferences and scientific
symposia as a means for disseminating scientific or technical
information. Our clinical nurses provide clinical support,
training and assistance to customers and assist our sales force.
We also use outside distributors to provide sales coverage in
countries that our internal sales force does not service.
27
In our basic distribution system, we ship products from
factories to central warehouses which are frequently located
near the factories. From this central warehouse, we distribute
our dialysis products to regional warehouses. We then distribute
peritoneal dialysis products to the patient at home, and ship
hemodialysis products directly to dialysis clinics and other
customers. Local sales forces, independent distributors, dealers
and sales agents sell all our products.
We offer customer service, training and education in the
applicable local language, and technical support such as field
service, repair shops, maintenance, and warranty regulation for
each country in which we sell dialysis products. We provide
training sessions on our equipment at our facilities in
Schweinfurt, Germany, Chicago, Illinois and Walnut Creek,
California and we also maintain regional service centers that
are responsible for day-to-day international service support.
Manufacturing Operations
We operate state-of-the-art production facilities worldwide to
meet the demand for machines, cyclers, dialyzers, solutions,
concentrates, mixes, bloodlines, and disposable tubing
assemblies and equipment for water treatment in dialysis
clinics. We have invested significantly in developing
proprietary processes, technologies and manufacturing equipment
which we believe provide a competitive advantage in
manufacturing our products. The decentralized structure helps to
reduce transport costs. We are using our facilities in St.
Wendel, Germany and Ogden, Utah as centers of competence for
development and manufacturing.
We produce and assemble hemodialysis machines and CCPD cyclers
in our Schweinfurt, Germany and our Walnut Creek, California
facilities. We also maintain facilities at our service and local
distribution centers in Argentina, Egypt, France, Italy, The
Netherlands, China, Brazil and Russia for testing and
calibrating dialysis machines manufactured or assembled
elsewhere, to meet local end user market needs. We manufacture
and assemble dialyzers and polysulfone membranes in our St.
Wendel, Germany, LArbresle, France and Inukai, Japan
facilities and at production facilities of our joint ventures in
Belarus, Saudi Arabia and Japan. At our Ogden, Utah facilities
we manufacture and assemble dialyzers and polysulfone membranes
and manufacture PD solutions. We manufacture hemodialysis
concentrate at various facilities worldwide. We also produce
PD products in Mexico and Japan. Our facilities are
inspected on a regular basis by national and/or international
authorities.
During 2005, we primarily invested in the modernization and
expansion of production facilities in North America, Germany,
France and Italy. See History and Development of the
Company Capital Expenditures.
We operate a comprehensive quality management system in our
production facilities. Raw materials delivered for the
production of solutions are subjected to infra-red and
ultra-violet testing as well as physical and chemical analysis
to ensure their quality and consistency. During the production
cycle, sampling and testing take place in accordance with
applicable quality control measures to assure sterility, safety
and effectiveness of the finished products. The pressure,
temperature and time required for the various processes are
monitored to ensure consistency of unfinished products during
the production process. Through monitoring of environmental
conditions, particle and bacterial content are kept below
permittee limits. We provide regular ongoing training for our
employees in the areas of quality control and proper production
practice. See also Item 3. Regulatory and Legal
Matters Facilities and Operational Regulations.
Environmental Management
We have integrated environmental protection targets into our
operations. To reach these goals, our Integrated Quality
Management System (IMS) has been in use at our
production facilities as well as at a number of dialysis
clinics. IMS fulfils the requirements of quality management
systems as well as environmental management. Our IMS fulfils the
requirements of the ISO-Norm 14001:1996. Environmental targets
are set, adhered to and monitored during all stages of the lives
of our products, from their development to their disposal.
In our dialysis facilities, we establish, depending on the
facility and situation concerned, a priority environmental
protection target on which our dialysis clinics concentrate for
at least one year. Environmental performance in other dialysis
facilities is used as the basis for comparisons and targets.
Adjustments are
28
implemented on a site-by-site basis after evaluation of the
sites performance. In our North America dialysis clinics,
we have been able to reduce fresh water consumption by one third
by means of a new system of production of purified water and to
reduce energy costs at the same time. Targeted environmental
performance criterial in other locations include fresh water
consumption and improved separation of waste.
Sources of Supply
Our purchasing policy combines worldwide sourcing of
high-quality materials with the establishment of long-term
relationships with our suppliers. Additionally, we carefully
assess the reliability of all materials purchased to ensure that
they comply with the rigorous quality and safety standards
required for our dialysis products. Our International Purchasing
Consulting Center (PCC) ensures that we consistently maintain
high standards by entering into global agreements. An
interactive information system links all our global projects to
ensure that they are standardized and constantly monitored.
PCC focuses on further optimizing procurement logistics and
reducing purchasing costs. Supplemental raw material contracts
for all manufacturers of semi-finished goods will enable us to
improve purchasing terms for our complete network. We also plan
to intensify, where appropriate, our use of internet-based
procurement tools by purchasing raw materials through special
on-line auctions. Our sophisticated routing software enables us
to distribute our supplies to best accommodate customer requests
while maintaining operational efficiency.
New Product Introductions
Research and development focuses strongly on the development of
new products, technologies and treatment concepts to optimize
treatment quality for dialysis patients, and on process
technology for manufacturing our products. Research and
development expenditures were $51 million in 2005,
$51 million in 2004, and $50 million in 2003.
New or enhanced products introduced in 2005 included the
following:
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2008K@Home converting the 2008K dialysis machine for
the U.S. home hemodialysis market, including task oriented
prompts, integrated leakage and pulse sensors and devices for
remote monitoring.
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POL PatientOnLine improved software covering all
aspects of PD, including management of medical data,
prescription editor and adequacy tests.
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Improved PD Product Line including new connections
and color coding for ease of identification of glucose and
calcium concentrations.
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sleep.safe BicaVera sleep.safe with a more
biocompatible PD solution containing bicarbonate as a buffer.
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In 2005, we introduced a new series of dialysis
systems the 5008 series to the
market. The 5008 therapy system constitutes a significant new
development in kidney replacement therapy. It includes a
completely newly conceived dialysis machine. The system offers
the patient extremely high therapy quality and a very high
standard of safety, while providing clinical personnel maximum
operating comfort and significant time savings, all at reduced
operating costs for the operator of a dialysis unit. The 5008
therapy system thereby fulfils all the requirements placed by an
ever growing, multi-symptomatic patient population on dialysis
therapy while responding to increasing cost pressures in health
services.
Patents, Trademarks and Licenses
As the owner of or licensee under patents and trademarks
throughout the world, we hold rights under about
1,600 patents and patent applications relating to dialysis
technology in major markets. Patented technologies that relate
to dialyzers include our in-line sterilization method and
sterile closures for in-line sterilized medical devices. The
generation of
DIASAFE
®
filters and FX dialyzers are also the subject of patents and
pending patent applications.
29
The connector system for our biBag bicarbonate concentrate
powder container for the 4008 Series dialysis equipment
series has been patented in the United States, Norway and
Finland, Japan and Europe.
A number of pending patent applications relate to components of
the new 5008 dialysis equipment series, including, for example,
the pump technology, extracorporeal blood pressure measurement
and the connector system for a modified biBag bicarbonate
concentrate powder container.
Among our more significant patents is the one for our
polysulfone hollow fiber. This patent expired in 2005 in Germany
and most other countries but the patent in the United States
does not expire until the beginning of 2007. The in-line
sterilization method patent will expire in 2010 in Germany, the
United States, and other countries. The patent for the biBag
connector expires in 2013, in Germany, the United States, and
other countries. The dates given represent the maximum patent
life of the corresponding patents. We believe that even after
expiration of these patents, our proprietary know-how for the
manufacture of these products and our continuous efforts in
obtaining targeted patent protection for newly developed upgrade
products will continue to constitute a competitive advantage.
For peritoneal dialysis, we hold protective rights on our
polyolefine film Biofine, which is suitable for packaging
intravenous and peritoneal dialysis fluids. This film is
currently used only in non-US markets. Patents have been granted
in Australia, Brazil Germany, Europe, Japan, South Korea,
Belarus and the United States. However, in Japan and Europe,
proceedings opposing the registration of the patents are
pending. A further pending patent family describes a special
film for a peelable, non-PVC, multi chamber bag for peritoneal
dialysis solutions. Patents have been granted in Brazil Europe,
Japan, South Korea and the United States. However, proceedings
against the registration of the patent are currently pending in
Europe.
We believe that our success will continue to depend
significantly on our technology. As a standard practice, we
obtain legal protections we believe are appropriate for our
intellectual property. Nevertheless, we are in a position to
successfully market a material number of products for which
patent protection has lapsed or where only particular features
have been patented. We cannot, however, assure that our
intellectual property rights will not be infringed by third
parties or that we will always be successful in prosecuting
infringement claims. Registered patents may also be subject to
infringement or invalidation claims by others either in whole or
in part. In addition, technological developments could suddenly
reduce the value of our existing intellectual property.
Our principal trademarks are the name Fresenius and
the F logo, for which we hold a perpetual,
royalty-free license from Fresenius AG, formerly our majority
stockholder and now sole stockholder of our general partner. See
Item 7B Related Party
Transactions Trademarks.
Competition
The markets in which we sell our dialysis products are highly
competitive. Our competitors in the sale of hemodialysis and
peritoneal dialysis products include Gambro AB, Baxter
International Inc., Asahi Kasei Medical Co. Ltd., Bellco S.p.A.,
a subsidiary of the Sorin group, B. Braun Melsungen AG, Nipro
Corporation Ltd., Nikkiso Co., Ltd., Terumo Corporation and
Toray Medical Co., Ltd.
Risk Management
We have prepared guidelines for an extensive world-wide risk
management program, aimed at assessing, analyzing, evaluating
the spectrum of possible and actual developments and
if necessary converting these into corrective
measures.
Our risk management system for monitoring industry risks and
individual markets relies in part on supervisory systems in our
individual regions. Our management board receives status reports
from the responsible risk managers twice yearly and immediate
information regarding anticipated risks as the information is
developed. We monitor and evaluate economic conditions in
markets which are particularly important for us and overall
global political, legal and economic developments and specific
country risks. Our system covers industry risks and those of our
operative and non-operative business. Our risk management system
functions as part of our overall management information system,
based on group-wide controlling and an internal monitoring
system,
30
which provides early recognition of risks. Financial reports
provide monthly and quarterly information, including deviations
from budgets and projections in a relatively short period, which
also serve to identify potential risks.
As a company required to file reports under the Securities
Exchange Act of 1934, we are subject to the provisions of the
Sarbanes-Oxley Act of 2002. Section 404 of that act
requires that we maintain internal controls over financial
reporting, which is a process designed by, or under the
supervision of, our chief executive and chief financial
officers, to provide reasonable assurance regarding the
reliability of our financial reporting and the preparation of
financial statements for external purposes in accordance with US
GAAP. Since the beginning of 2003, a project team has been
documenting and evaluating our world-wide internal auditing and
controls to ensure that our internal controls and accounting
comply with applicable rules and regulations. Our
managements report on its review of the effectiveness of
our internal accounting controls as of December 31, 2005
has been filed as an exhibit to this report.
The functional capacity and effectiveness of our risk management
system was audited as part of the audit of our annual financial
statements for 2005, as required by German law. No special risks
were ascertained in relation to our business as a whole, our
internal organization or the external environment.
Regulatory and Legal Matters
Regulatory Overview
Our operations are subject to extensive governmental regulation
by virtually every country in which we operate including, most
notably, in the U.S., at the federal, state and local levels.
Although these regulations differ from country to country, in
general, non-U.S. regulations are designed to accomplish
the same objectives as U.S. regulations regarding the
operation of dialysis clinics, laboratories and manufacturing
facilities, the provision of quality health care for patients,
the maintenance of occupational, health, safety and
environmental standards and the provision of accurate reporting
and billing for governmental payments and/or reimbursement. In
the U.S., some states restrict ownership of health care
providers by certain multi-level for-profit corporate groups or
establish other regulatory barriers to the establishment of new
dialysis clinics. Outside the U.S., each country has its own
payment and reimbursement rules and procedures, and some
countries prohibit ownership of health care providers or
establish other regulatory barriers to direct ownership by
foreign companies. In all jurisdictions, we work within the
framework of applicable laws to establish alternative
contractual arrangements to provide services to those facilities.
Any of the following matters could have a material adverse
effect on our business, financial condition and results of
operations:
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failure to receive required licenses, certifications or other
approvals for new facilities or products or significant delays
in such receipt;
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complete or partial loss of various federal certifications,
licenses, or other permits required under the laws of any state
or other governmental authority by withdrawal, revocation,
suspension, or termination or restrictions of such certificates
and licenses by the imposition of additional requirements or
conditions, or the initiation of proceedings possibly leading to
such restrictions or the partial or complete loss of the
required certificates, licenses or permits; and
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changes resulting from health care reform or other government
actions that reduce reimbursement or reduce or eliminate
coverage for particular services we provide.
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We must comply with all U.S., German and other legal and
regulatory requirements under which we operate, including the
U.S. federal Medicare and Medicaid Fraud and Abuse
Amendments of 1977, as amended, generally referred to as the
anti-kickback statute, the federal False Claims Act,
the federal restrictions on certain physician referrals,
commonly known as the Stark Law, U.S. 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
31
agencies or the courts will not make interpretations
inconsistent with our own, any one of which could have a
material adverse effect on our business, reputation, financial
condition and results. 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., some of 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. Our company, and the health care
industry in general, will continue to be subject to extensive
federal, state and foreign regulation, the full scope of which
cannot be predicted. In addition, the U.S. Congress and
federal and state regulatory agencies continue to consider
modifications to federal health care laws that may create
further restrictions.
Fresenius Medical Care Holdings has entered into a corporate
integrity agreement with the U.S. government, which
requires that Fresenius Medical Care Holdings staff and maintain
a comprehensive compliance program, including a written code of
conduct, training programs 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 Fresenius Medical
Care Holdings and its subsidiaries from participation in
U.S. federal health care programs and impose fines if there
is a material breach of the agreement that is not cured by
Fresenius Medical Care Holdings within thirty days after
Fresenius Medical Care Holdings receives written notice of the
breach.
Product Regulation
U.S.
In the U.S. numerous regulatory bodies, including the Food
and Drug Administration (FDA) and comparable state
regulatory agencies impose requirements on certain of our
subsidiaries as a manufacturer and a seller of medical products
and supplies under their jurisdiction. We are required to
register with the FDA as a device manufacturer. As a result, we
are subject to periodic inspection by the FDA for compliance
with the FDAs Quality System Regulation requirements and
other regulations. These regulations require us to manufacture
products in accordance with Good Manufacturing Practices
(GMP) and that we comply with FDA requirements
regarding the design, safety, advertising, labeling, record
keeping and distribution of our products. Further, we are
required to comply with various FDA and other agency
requirements for labeling and promotion. The Medical Device
Reporting regulations require that we provide information to the
FDA whenever there is evidence to reasonably suggest that a
device may have caused or contributed to a death or serious
injury or, if a malfunction were to occur, could cause or
contribute to a death or serious injury. In addition, the FDA
prohibits us from promoting a medical device for unapproved
indications.
If the FDA believes that a company is not in compliance with
applicable regulations, it can issue a warning letter, issue a
recall order, institute proceedings to detain or seize products,
impose operating restrictions, enjoin future violations and
assess civil penalties against a company, its officers or its
employees and can recommend criminal prosecution to the
Department of Justice.
We cannot assure that all necessary regulatory approvals,
including approvals for new products or product improvements,
will be granted on a timely basis, if at all. Delays in or
failure to receive approval, product recalls or warnings and
other regulatory actions and penalties can materially affect
operating results.
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, we
must satisfy mandatory procedures and safety and efficacy
requirements established by the FDA or comparable state and
foreign governmental agencies. After approval or clearance to
market is given, the FDA, upon the occurrence of certain events,
has the power to withdraw the clearance or require changes to a
device, its manufacturing process, or its labeling or may
require additional proof that regulatory requirements have been
met. Such rules generally require that products be approved by
the FDA as safe and effective for their intended use prior to
being marketed. Our 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, as amended.
32
International (Including Germany and Other Non-U.S).
Most countries maintain different regulatory regimes for
pharmaceutical products and for medical devices. In almost every
country, there are rules regarding the quality, effectiveness,
and safety of products and regulating their testing, production,
and distribution. Treaties or other international law and
standards and guidelines under treaties or laws may supplement
or supersede individual country regulations.
Drugs.
Some of our products, such as peritoneal dialysis
solutions, are considered pharmaceuticals and are, therefore
subject to the specific drug law provisions in the various
countries. The European Union has issued a directive on
pharmaceuticals, No. 65/65/EWG (January 26, 1965), as
amended. Each member of the European Union is responsible for
conforming its law to comply with this directive. In Germany the
German Drug Law
(Arzneimittelgesetz)
(AMG),
which implements European Union requirements, is the primary
regulation applicable to pharmaceutical products.
The provisions of the German Drug Law are comparable with the
legal standards in other European countries. As in many other
countries, the AMG provides that in principle a medicinal
product may only be placed on the market if it has been granted
a corresponding marketing authorization. Such marketing
authorization is granted by the competent licensing authorities
only if the quality, efficacy and safety of the medicinal
product has been scientifically proven. The medicinal products
marketed on the basis of a corresponding marketing authorization
are subject to ongoing control by the competent authorities. The
marketing authorization may also be subsequently restricted or
made subject to specific requirements. It may be withdrawn or
revoked if there was a reason for the refusal of the marketing
authorization upon its grant or such a reason arises
subsequently, or if the medicinal product is not an effective
therapy or its therapeutic effect has been insufficiently proven
according to the relevant state of scientific knowledge. Such a
reason for refusal is, inter alia, found to exist if there is
the well-founded suspicion that the medicinal product has not
been sufficiently examined in accordance with the current state
of scientific knowledge, that the medicinal product does not
show the appropriate quality, or that there is the well-founded
suspicion that the medicinal product, when properly used as
intended, produces detrimental effects going beyond the extent
justifiable according to the current state of knowledge of
medicinal science. The marketing authorization can also be
withdrawn or revoked in the case of incorrect or incomplete
information supplied in the authorization documents, if the
quality checks prescribed for the medicinal product were
insufficient or have not been sufficiently carried out, or if
the withdrawal or revocation is required to comply with a
decision made by the European Commission or the Council of the
European Union. Instead of a withdrawal or revocation, it is
also possible to order the suspension of the marketing
authorization for a limited period.
The provisions of the AMG also contain special requirements for
the manufacture of medicinal products. The production of
medicinal products requires a corresponding manufacturing
license which is granted by the competent authorities of the
relevant Member State for a specific manufacturing facility and
for specific medicinal products and forms of medicinal products.
The manufacturing license is granted only if the manufacturing
facility, production techniques and production processes comply
with the principles and guidelines of good manufacturing
practice (GMP) as well as the terms of the
particular marketing authorization. A manufacturer of medicinal
products must, inter alia, employ pharmacists, chemists,
biologists, or physicians responsible for the quality, safety
and efficacy of the medicinal products. The manufacturer must
name several responsible persons: a Qualified Person possessing
the expert knowledge specified by the AMG, a head of production,
a head of quality control, and, if the manufacturer markets the
medicinal products itself, a commissioner for the so-called
graduated plan (
Stufenplanbeauftragter
) and an
information officer. It is the responsibility of the Qualified
Person to ensure that each batch of the medicinal products is
produced and examined in compliance with the statutory
provisions of the AMG. The commissioner for the graduated plan
must, among other things, collect and assess any reported risks
associated with the medicinal products and coordinate any
necessary measures. The information officer is in charge of the
scientific information relating to the medicinal products. All
these persons may be held personally liable under German
criminal law for any breach of the AMG.
International guidelines also govern the manufacture of
medicinal products and, in many cases, overlap with national
requirements. In particular, the Pharmaceutical Inspection
Convention (PIC) an international treaty,
33
contains rules binding most countries in which medicinal
products are manufactured. Among other things, the PIC
establishes requirements for GMP which are then adopted at the
national level. Another international standard, which is
non-binding for medicinal products, is the ISO 9000-9004
system for assuring quality management system requirements. This
system has a broader platform than GMPs, which are more
detailed. Compliance with the ISO Code entitles the manufacturer
to utilize the CE certification of quality control. This system
is primarily acknowledged outside the field of medicinal
products, for example with respect to medical devices.
Medical Devices.
In the past, medical devices were
subject to less stringent regulation than medicinal products in
some countries. In the last decade, however, statutory
requirements have been increased. In the European Union, the
requirements to be satisfied by medical devices are laid down in
three European directives to be observed by all EU Member
States, all Member States of the European Economic Area (EEA),
as well as all future accession states: (1) Directive
90/385/EEC of 20 June 1990 relating to active implantable
medical devices (AIMDs), as last amended (AIMD
Directive), (2) Directive 93/42/EEC of 14 June
1993 relating to medical devices, as last amended (MD
Directive), (3) Directive 98/79/EC of 27 October
1998 relating to in vitro diagnostic medical devices as last
amended (IVD Directive). In addition, Directive
2001/95/EC of 3 December 2001, as last amended, concerning
product safety should be noted. With regard to Directive
93/42/EEC, the Commission submitted a consultation draft on
5 April 2005. The Commissions opinion on the
consultations is supposed to be published in late 2005. The
amendments are intended to achieve improvements, for instance in
the following areas: clinical assessment by specification of the
requirements in more detail; monitoring of the devices after
their placing on the market; and decision making by enabling the
Commission to make binding decisions in case of contradictory
opinions of states regarding the classification of a product as
a medical device.
According to the directives relating to medical devices, the
so-called CE mark (the abbreviation of Conformité
Européenne signifying that the device complies with all
applicable requirements of the European Union) shall serve as a
general product passport for all Member States of the EU and the
EEA. Upon receipt of a European Union certificate for the
quality management system for a particular facility, we are able
to mark products produced or developed in that facility as being
in compliance with the EU requirements. A manufacturer having a
European Union-certified full quality management system has to
declare and document conformity of its products to the
harmonized European directive. If able to do so, the
manufacturer may put a CE mark on the products.
Products subject to these provisions that do not bear the
CE mark cannot be imported, sold or distributed
within the European Union.
The right to affix the CE mark is granted to any manufacturer
who has observed the conformity assessment procedure prescribed
for the relevant medical device and submitted the EU conformity
declaration before placing the medical device on the market. The
conformity assessment procedures were standardized by Council
Decision 93/465/EEC of 22 July 1993, which established
modules for the various phases of the conformity assessment
procedures intended to be used in the technical harmonization
directives and the rules for the affixing and use of the CE
conformity mark. The conformity assessment modules to be used
differ depending on the class or type of the medical device to
be placed on the market. The classification rules for medical
devices are, as a general rule, based upon the potential risk of
causing injury to the human body. Annex IX to the MD
Directive (making a distinction between four product
classes I, IIa, IIb, and III) and Annex II to the
IVD Directive (including a list of the products from lists A and
B) contain classification criteria for products and product
lists that are, in turn, assigned to specific conformity
assessment modules. AIMDs represent a product class of their own
and are subject to the separate AIMD Directive. Special rules
apply, for example, to custom-made medical devices, medical
devices manufactured in-house, medical devices intended for
clinical investigation or in vitro diagnostic medical devices
intended for performance evaluation, as well as for diagnostic
medical devices for in-house use, combination devices and
products related to medical devices.
The conformity assessment procedures for Class I devices
with a low degree of invasiveness in the human body (e.g.
devices without a measuring function that are not subject to any
sterilization requirements), can be made under the sole
responsibility of the manufacturer by submitting a EU conformity
declaration (a so-called self-certification, or
self-declaration). For Class IIa devices, the participation
of a so-called Notified Body is binding for the
production phase. Devices of classes IIb and III involving a
high risk potential are subject to inspection by the Notified
Body not only in relation to their manufacture (as for
class IIa devices), but also in
34
relation to their specifications. Class III is reserved for
the most critical devices the marketing of which is subject to
an explicit prior authorization with regard to their conformity.
In this risk category, the manufacturer can make use of several
different conformity assessment modules.
To maintain the high quality standards and performance of our
operations, we have subjected our entire European business to
the most comprehensive procedural module, which is also the
fastest way to launch a new product in the European Union. This
module requires the certification of a full quality management
system by a Notified Body charged with supervising the quality
management system.
Our Series 4008, 4008B, 4008E dialysis machines and their
therapy modifications, our PD-NIGHT cycler, and our other active
medical devices distributed in the European market, as well as
our dialysis filters and dialysis tubing systems and
accessories, all bear the CE mark. We expect to
continue to obtain additional certificates for newly developed
products or product groups.
Environmental Regulation
The Company uses substances regulated under
U.S. environmental laws, primarily in manufacturing and
sterilization processes. While it is difficult to quantify, we
believe the ongoing impact of compliance with environmental
protection laws and regulations will not have a material impact
on the Companys financial position or results of
operations.
Facilities and Operational Regulation
U.S.
The Clinical Laboratory Improvement Amendments of 1988
(CLIA) subjects virtually all clinical laboratory
testing facilities, including ours, to the jurisdiction of the
Department of Health and Human Services. CLIA establishes
national standards for assuring the quality of laboratories
based upon the complexity of testing performed by a laboratory.
Certain of our operations 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.
Our operations 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. Our operations are also subject to
various air emission and wastewater discharge regulations.
Federal, state and local regulations require us 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 our operations 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, our dialysis
centers, renal diagnostic support business and laboratories must
be certified by the Centers for Medicare and Medicaid Services
(CMS). All of our dialysis centers, and laboratories
that furnish Medicare services have the required certification.
Certain of our facilities 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.
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
35
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 we operate 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. We currently operate in 13 states,
as well as the District of Columbia and Puerto Rico that have
CON laws applicable to dialysis centers. These requirements
could, as a result of a states internal determination of
its dialysis services needs, prevent entry to new companies
seeking to provide services in these states, and could constrain
our ability to expand our operations in these states.
International (Including Germany and Other Non-U.S.)
Most countries outside of the U.S. regulate operating
conditions of dialysis clinics and hospitals and the
manufacturing of dialysis products, medicinal products and
medical devices.
We are subject to a broad spectrum of regulation in almost all
countries. Our operations must comply with various environmental
and transportation regulations in the various countries in which
we operate. Our manufacturing facilities and dialysis clinics
are also subject to various standards relating to, among other
things, facilities, management, personnel qualifications and
licensing, maintenance of proper records, equipment, quality
assurance programs, the operation of pharmacies, the protection
of workers from blood-borne diseases and the dispensing of
controlled substances. All of our operations are subject to
periodic inspection by various governmental authorities to
determine if the operations, premises, equipment, personnel and
patient care meet applicable standards. Our dialysis clinic
operations and our related activities generally require
licenses, which are subject to periodic renewal and may be
revoked for violation of applicable regulatory requirements.
In addition, many countries impose various investment
restrictions on foreign companies. For instance, government
approval may be required to enter into a joint venture with a
local partner. Some countries do not permit foreign investors to
own a majority interest in local companies or require that
companies organized under their laws have at least one local
shareholder. Investment restrictions therefore affect the
corporate structure, operating procedures and other
characteristics of our subsidiaries and joint ventures in these
and other countries.
We believe our facilities are currently in compliance in all
material respects with the applicable national and local
requirements in the jurisdictions in which they operate.
Reimbursement
As a global dialysis care provider and supplier of dialysis and
products, we are represented in more than 100 countries
throughout the world facing the challenge of meeting the needs
of patients in very different economic environments and health
care systems.
The health care systems and rules for the reimbursement of the
treatment of patients suffering from ESRD vary in the individual
countries. In general, the government, frequently in
coordination with private insurers, is responsible for the
health care system by financing payments by taxes and other
sources of income, social security contributions or a
combination of such sources.
However, in a large number of developing countries, the
government or charitable institutions grant only minor aid so
that dialysis patients must bear all or a large part of their
treatment expenses themselves. In some countries, dialysis
patients do not receive treatment on a regular basis, but only
if and to the extent available funds so allow.
36
U.S.
Dialysis Services.
Our dialysis centers provide
outpatient hemodialysis treatment and related services for ESRD
patients. In addition, some of the Companys 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 2004,
approximately 58% of Dialysis Services revenues resulted from
Medicares 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 our dialysis centers. As described hereinafter,
other payment methodologies apply to Medicare reimbursement for
other products and services provided at our dialysis centers and
for products (such as those sold by us) 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 us with predictable per treatment revenues.
Certain items and services that we furnish at our 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 are principally
drugs such as EPO vitamin D and iron.
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.
On December 8, 2003, the Medicare Prescription Drug,
Modernization and Improvement Act of 2003 was enacted (the
Medicare Modernization Act). This law makes several
significant changes to U.S. government payment for dialysis
services and pharmaceuticals. First, it increased the composite
rate for renal dialysis facilities by 1.6% on January 1,
2005. Second, effective January 1, 2005, payments for ten
separately billable dialysis-related medications were based on
average acquisition cost (as determined by the OIG and updated
by Centers for Medicare and Medicaid Services of the
U.S. Department of Health and Human Services
(CMS) and payments for the remaining separately
billable dialysis-related medications were based on average
sales price (ASP) plus 6% (ASP is defined in the law
as a manufacturers ASP to all purchasers in a calendar
quarter per unit of each drug and biological sold in that same
calendar quarter, excluding sales exempt from best price and
nominal price sales and including all discounts, chargebacks and
rebates). Third, the difference between the determined
acquisition cost-based reimbursement and what would have been
received under the current average wholesale price-based
(AWP-based) reimbursement methodology was added to
the composite rate. Fourth, effective April 1, 2005,
providers received higher composite rate payments for certain
patients based on their age, body mass index and body surface
area. Fifth, beginning in 2006, the Secretary of the Department
of Health and Human Services (the Secretary) was
authorized to set payment for all separately billed drugs and
biologicals at either acquisition cost or average sales price.
Lastly, the Secretary was required to establish a three-year
demonstration project to test the use of a fully case-mix
adjusted payment system for ESRD services, beginning
January 1, 2006. Under this project, separately billable
drugs and biologicals and related clinical laboratory tests
would be bundled into the facility composite rate. Participating
facilities would receive an additional 1.6% composite rate
increase.
On November 2, 2005 CMS released the final physician fee
schedule for calendar year (CY) 2006. The key
provisions affecting ESRD facilities include revisions to the
pricing methodology for separately billable drugs, revisions to
the drug add-on payment methodology and calculation of the drug
add-on for CY 2006, and revisions to the geographic adjustment
to the composite rate. In addition, CMS has decided to maintain
the case-mix adjustments finalized in last years rule, as
well as the base composite rate. For CY 2006, CMS has decided
37
to pay for separately billable drugs and biologicals provided by
both hospital-based and independent dialysis facilities using
the average sales price plus six percent methodology
(ASP+6%). According to CMS, the drug add-on
adjustment for 2006 will be 14.7%. CMS is also implementing
several changes to the ESRD wage index. First, over a four-year
transition period, CMS will apply the Office of Management and
Budgets revised core-based statistical area
(CBSA)-based
definitions as the basis for revising the urban/ rural locales
and corresponding wage index values reflected in the composite
rate. Since the Medicare Modernization Act requires that any
revisions to the ESRD composite rate payment system be budget
neutral, CMS will apply the budget neutrality adjustment factor
directly to the revised ESRD wage index values (rather than the
base composite payment rates). CMS estimates the overall impact
of the changes to be a 1.9% increase for independent facilities.
The Companys estimates of the impact of such changes on
its business are consistent with the CMS calculations.
The Deficit Reduction Act (DRA) of February 1,
2006, further increased the composite rate by an additional 1.6%
effective January 1, 2006. To account for this increase to
the composite rate and to preserve the originally intended
economic impact of the Medicare Modernization Act, the drug add
on percentage was reduced to 14.5%.
We are 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 our provider business and, because the demand
for products is affected by Medicare reimbursement, on our
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 our business and results of operations.
For Medicare-primary patients, Medicare is responsible for
payment of 80% of the Composite Rate set by CMS for dialysis
treatments and 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 the co-payment or deductible, the
patient is responsible for paying the co-payments or the
deductible, which we frequently do not fully collect despite
reasonable collection efforts. Under an advisory opinion from
the Office of the Inspector General, subject to specified
conditions, we and 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
some of our patients.
Laboratory Tests.
Spectra Renal Management obtains a
substantial portion of its net revenue 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 our dialysis 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, Spectra Renal Management
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
addition, in compliance with our Corporate Integrity Agreement,
we provide an annual report on the costs associated with the
composite rate tests, and have established that our Composite
Rate is above those costs.
Second, laboratory tests performed by Spectra Renal Management
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 2004-2008.
38
Erythropoetin (EPO).
EPO is used for anemia management of
patients with renal disease. The administration of EPO is
separately billable under the Medicare program, and accounts for
a significant portion of our dialysis revenues.
Anemia severity is commonly monitored by measuring a
patients hematocrit, a simple blood test that measures the
proportion of red blood cells in a patients whole blood.
Anemia may also be measured by evaluating a patients
hemoglobin level. The amount of EPO that a patient requires
varies by the several factors, including the severity of a
patients anemia.
On November 9, 2005, CMS announced a new national
monitoring policy for claims for Epogen and Aranesp for ESRD
patients treated in renal dialysis facilities. Previously,
claims for Epogen reimbursement were subject to focused CMS
review when the ESRD patients hematocrit level reached
37.5 or more. In the new monitoring policy, CMS recognized that
there is considerable natural variability in individual patient
hematocrit levels which makes it difficult to maintain a
hematocrit within an narrow range. Consequently, CMS will not
initiate monitoring of claims until the patients
hematocrit level reaches 39.0 (hemoglobin of 13.0). Under the
new monitoring policy, for services furnished on or after
April 1, 2006, CMS will expect a 25 percent reduction
in the dosage of Epogen or Aranesp administered to ESRD patients
whose hematocrit exceeds 39.0 (or hemoglobin exceeds 13.0). If
the dosage is not reduced by 25 percent, payment will be
made by CMS as if the dosage reduction had occurred. This
payment reduction may be appealed under the normal appeal
process. In addition, effective April 1, 2006, CMS will
limit Epogen and Aranesp reimbursement to a maximum per patient
per month aggregate dose of 500,000 IU for Epogen and 1500 mcg
for Aranesp. CMSs new Epogen and Aranesp monitoring policy
is expected to have a slightly negative impact on our operating
results.
In addition, any of the following changes could adversely affect
our business, and results of operations, possibly materially:
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future changes in the EPO reimbursement rate;
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inclusion of EPO in the Medicare composite rate without
offsetting increases to such rate;
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reduction in the typical dosage per administration;
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increases in the cost of EPO without offsetting increases in the
EPO reimbursement rate; or
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reduction by the manufacturer of EPO of the amount of overfill
in the EPO vials.
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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 patients 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 this
coordination period the EGHP pays a negotiated rate or in the
absence of such a rate, our standard rate or a rate defined by
its plan documents. The EGHP payments are generally higher than
the Medicare Composite Rate. EGHP insurance, when available,
will therefore generally cover as the primary payor a total of
33 months, the 3-month waiting period plus the 30-month
coordination period. The recent proposal included in the Bush
administration budget to extend the coordination period to five
years would generally be favorable to us and other dialysis
providers since it would extend the period during which
providers would receive the generally higher payments by EGHPs
prior to the commencement of primary Medicare coverage for
dialysis treatment. However, the proposal in the same budget to
eliminate Medicare bad-debt recoveries if adopted as proposed,
would have a material adverse impact on our operating results.
There can be no assurance, however, that either proposal will be
adopted as proposed, or at all.
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 us
and our 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
39
regulations could, depending upon the final form of such
regulation, have a positive or adverse affect our businesses and
results of operations, possibly materially.
International (Including Germany and Other
Non-U.S.)
As a global company delivering dialysis care and dialysis
products in more than 100 countries worldwide, we face the
challenge of addressing the needs of dialysis patients in widely
varying economic and health care environments.
Health care systems and reimbursement structures for ESRD
treatment vary by country. In general, the government pays for
health care and finances its payments through taxes and other
sources of government income, from social contributions, or a
combination of those sources. However, not all health care
systems provide for dialysis treatment. In many developing
countries, only limited subsidies from government or charitable
institutions are available, and dialysis patients must finance
all or substantially all of the cost of their treatment. In some
countries patients in need of dialysis do not receive treatment
on a regular basis but rather when the financial resources allow
it.
In the major European and British Commonwealth countries, health
care systems are generally based on one of two models. The
German model is based on mandatory employer and employee
contributions dedicated to health care financing. The British
model provides a national health care system funded by taxes.
Within these systems, provision for the treatment of dialysis
has been made either through allocation of a national budget or
a billing system reimbursing on a fee-for-service basis. The
health care systems of countries such as Japan, France, Belgium,
Austria and the Netherlands are based on the German model.
Countries like Canada, Denmark, Sweden and Italy established
their national health services using the British model.
Ownership of health care providers and, more specifically
dialysis care providers, varies within the different systems and
from country-to-country. In Europe almost 60% of the clinics
providing dialysis care and services are publicly owned, more
than 30% are privately owned and approximately 10% belong to a
health care organization. It should be noted that health care
organizations treating a significant patient population operate
only in Germany and France. Publicly operated clinics care for
almost 100% of the dialysis populations in Canada and more than
85% in Australia. Within Europe, nearly 100% of the dialysis
population is treated in public clinics in the Netherlands,
Finland and Belgium and to more than 80% in the United Kingdom
while the majority of dialysis clinics are privately owned in
Spain, Hungary and Portugal.
In Latin America privately owned clinics predominate,
constituting more than 70% of all clinics providing dialysis
care while in Asia, with the exception of Japan, publicly owned
clinics are predominant. In the U.S., less than 5% of all
dialysis clinics are publicly operated and in Japan only
approximately 15%. Unlike the U.S., however, Japan has a
premium-based, mandatory social insurance system, and the
structure of its health care system is more closely comparable
to the German system.
Financing policies for ESRD treatment also differ from
country-to-country. In countries with a health care system that
includes provisions for ESRD patient care, treatment is
generally financed through a government budget allocation or on
a fee-for-service basis. A few European countries have
introduced payment systems based on fixed fees charged according
to the disease related group, an arrangement similar to
capitation. This basis for payment was adopted from the United
States, where it was implemented as a method to curtail costs.
Germany has introduced a payment system that, depending on the
patients age, provides for a weekly fixed lump-sum payment
independent of treatment modality.
Treatment components included in the cost of dialysis may vary
from country-to-country or even within countries, depending on
the structure and cost allocation principles. Where treatment is
reimbursed on a fee-for-service basis, reimbursement rates are
sometimes allocated in accordance with the type of treatment
performed. We believe that it is not appropriate to calculate a
global reimbursement amount, because the services and costs for
which reimbursement is provided in any such global amount would
be likely to bear little relation to the actual reimbursement
system in any one country. Generally, in countries with
established dialysis programs, reimbursements range from $100 to
more than $300 per treatment. However, a comparison from country
to
40
country would not be meaningful if made in the absence of a
detailed analysis of the cost components reimbursed, services
rendered and the structure of the dialysis clinic in each
country being compared.
Health care expenditures are consuming an ever-increasing
portion of gross domestic product worldwide. In the developed
economies of Europe, Asia and Latin America, health care
spending is in the range of 5%-14% of gross domestic product. In
many countries, dialysis costs consume a disproportionately high
amount of health care spending and these costs may be considered
a target for implementation of cost containment measures. Today,
there is increasing awareness of the correlation between the
quality of care delivered in the dialysis unit and the total
health care expenses incurred by the dialysis patient.
Accordingly, developments in reimbursement policies might
include higher reimbursement rates for practices which are
believed to improve the overall state of health of the ESRD
patient and reduce the need for additional medical treatment.
Anti-kickback Statutes, False Claims Act, Health Care Fraud,
Stark Law and Fraud and Abuse Laws in North America
Some of our operations 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 our Medical Directors and other physicians with
whom we have financial relationships refer patients to, and
order diagnostic and therapeutic services from, our 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
patients nephrologist has staff privileges.
The U.S. Government, many individual States and private
third-party risk insurers have declared the struggle against
waste, misuse and fraud in the health care sector to be one of
their primary tasks by making more and more resources available
for this purpose. Therefore, the Office of the Inspector General
(OIG) of the U.S. Department of Health and Human Services
and other enforcement agencies increasingly review agreements
between physicians and service providers with regard to
potential breaches of the Federal fraud abuse laws.
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 billed but 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 interpreted the False Claims Act as
applying to claims for reimbursement that
41
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 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 Health and Human Services 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 a provider from offering
anything of value which the provider knows or should know would
be likely to induce the patient to select or continue with the
provider.
HIPAA included a health care fraud provision 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. Penalties
for violating this statute include freezing of assets and
forfeiture of property traceable to commission of a health care
fraud.
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
us must comply with the 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
(OBRA) of 1989, prohibits a physician from referring
Medicare patients for clinical laboratory services to
42
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 first phase regulations became
effective in 2002. The additional Designated Health Services
include: physical therapy, occupational therapy and speech
language pathology services; radiology and certain other imaging
services; radiation therapy services and supplies; 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. The first phase of the final regulations
implementing the Stark Law contains an exception for EPO and
certain other dialysis-related outpatient prescription drugs
furnished in or by an ESRD facility under many circumstances. In
addition, the regulations made clear that services reimbursed by
Medicare to a dialysis facility under the ESRD composite rate do
not implicate the Stark Law. Further, the final Phase I
regulations also adopted a definition of durable medical
equipment which effectively excludes ESRD equipment and supplies
from the category of Designated Health Services. Phase II of the
final regulations to the Stark Law was released on
March 26, 2004, and became effective on July 26, 2004.
This phase of the regulations finalized all of the compensation
exceptions to the Stark Law, including those for personal
services arrangements and indirect compensation
arrangements. In addition, Phase II revised the exception
for EPO and certain other dialysis-related outpatient
prescription drugs furnished in or by an ESRD facility to
include certain additional drugs.
Several states in which we operate 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
Our 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 countries to be a
national priority. In the U.S., members of Congress from both
parties and officials from the executive branch continue 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. We cannot
predict 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 our business and the results of our operations.
43
C. Organizational Structure
The following chart shows our organizational structure and our
significant subsidiaries. Fresenius Medical Care Holdings, Inc.
conducts its business as Fresenius Medical Care North
America.
44
D. Property, plant and equipment
Property
The table below describes our principal facilities. We do not
own the land and buildings comprising our principal facilities
in Germany. Rather, we lease those facilities on a long-term
basis from Fresenius AG or one of its affiliates. This lease is
described under Item 7.B. Related Party
Transactions Real Property Lease.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currently
|
|
|
|
|
|
|
|
|
|
Owned
|
|
|
|
|
|
|
|
Floor Area
|
|
|
or Leased
|
|
|
|
|
|
|
|
(Approximate
|
|
|
by Fresenius
|
|
|
Lease
|
|
|
Location
|
|
Square Meters)
|
|
|
Medical Care
|
|
|
Expiration
|
|
Use
|
|
|
|
|
|
|
|
|
|
|
|
Bad Homburg, Germany
|
|
|
11,524
|
|
|
|
leased
|
|
|
December 2006
|
|
Corporate headquarters and administration
|
St. Wendel, Germany
|
|
|
49,732
|
|
|
|
leased
|
|
|
December 2006
|
|
Manufacture of polysulfone membranes, dialyzers and peritoneal
dialysis solutions; research and development
|
Schweinfurt, Germany
|
|
|
19,605
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|
|
|
leased
|
|
|
December 2006
|
|
Manufacture of hemodialysis machines and peritoneal dialysis
cyclers; research and development
|
Bad Homburg (OE)
|
|
|
10,304
|
|
|
|
leased
|
|
|
December 2006
|
|
Manufacture of hemodialysis concentrate solutions / Technical
Services / Logistics services Amgen
|
Darmstadt
|
|
|
18,297
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|
|
|
leased
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|
|
December 2008
(2 x 6 months renewal option)
|
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Regional Distribution Center Central Europe
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Palazzo Pignano, Italy
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|
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70,212
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|
|
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owned
|
|
|
|
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Manufacture of bloodlines and tubing
|
LArbresle, France
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|
|
13,524
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|
|
|
owned
|
|
|
|
|
Manufacture of polysulfone dialyzers, special filters and dry
hemodialysis concentrates
|
Nottinghamshire, UK
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5,110
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|
|
|
owned
|
|
|
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|
Manufacture of hemodialysis concentrate solutions
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Barcelona, Spain
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2,000
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|
|
|
owned
|
|
|
|
|
Manufacture of hemodialysis concentrate solutions
|
Antalya, Turkey
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8,676
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|
|
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leased
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|
|
December 2022
|
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Manufacture of bloodlines
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Ankara, Turkey
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1,000
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|
|
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leased
|
|
|
February 2009
|
|
Manufacture of hemodialysis concentrate solutions
|
Casablanca, Morocco
|
|
|
2,823
|
|
|
|
owned
|
|
|
|
|
Manufacture of hemodialysis concentrate solutions
|
Guadalajara, México
|
|
|
26,984
|
|
|
|
owned
|
|
|
|
|
Manufacture of peritoneal dialysis bags
|
Buenos Aires, Argentina
|
|
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10,100
|
|
|
|
owned
|
|
|
|
|
Manufacture of hemodialysis concentrate solutions, dry
hemodialysis concentrates, bloodlines and desinfectants
|
São Paulo, Brazil
|
|
|
5,734
|
|
|
|
owned
|
|
|
|
|
Manufacture of hemodialysis concentrate solutions
|
Bogotá, Colombia
|
|
|
5,700
|
|
|
|
owned
|
|
|
|
|
Manufacture of hemodialysis concentrate solutions, peritoneal
dialysis bags, intravenous solutions
|
Hong Kong
|
|
|
1,260
|
|
|
|
leased
|
|
|
February 2006
|
|
Corporate headquarters and administration
Asia-Pacific
|
Hong Kong
|
|
|
3,515
|
|
|
|
leased
|
|
|
November 2005 November 2006
|
|
various leases of Warehouse facility
|
Shanghai, China
|
|
|
408
|
|
|
|
leased
|
|
|
July 2006
|
|
Warehouse
|
Shanghai, China
|
|
|
300
|
|
|
|
leased
|
|
|
July 2006
|
|
Administration
|
Taiwan
|
|
|
1,315
|
|
|
|
leased
|
|
|
November December 2006
|
|
Sales & Technical & Administration
office-FMC & Nephrocare
|
Smithfield, Australia
|
|
|
5,350
|
|
|
|
owned
|
|
|
|
|
Manufacture of hemodialysis concentrate
|
Altona VIC, Australia
|
|
|
2,400
|
|
|
|
leased
|
|
|
March 2009
|
|
Warehouse
|
Petaling Jaya, Malaysia
|
|
|
1,173
|
|
|
|
leased
|
|
|
November 2007
|
|
Administration & Warehouse
|
45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
Currently
|
|
|
|
|
|
|
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|
|
Owned
|
|
|
|
|
|
|
|
Floor Area
|
|
|
or Leased
|
|
|
|
|
|
|
|
(Approximate
|
|
|
by Fresenius
|
|
|
Lease
|
|
|
Location
|
|
Square Meters)
|
|
|
Medical Care
|
|
|
Expiration
|
|
Use
|
|
|
|
|
|
|
|
|
|
|
|
Yongin, South Korea
|
|
|
2,116
|
|
|
|
leased
|
|
|
January 2007
|
|
Warehouse
|
Yangsan, South Korea
|
|
|
661
|
|
|
|
leased
|
|
|
October 2006
|
|
Warehouse
|
Bangkok, Thailand
|
|
|
800
|
|
|
|
leased
|
|
|
December 2006
|
|
Warehouse
|
Tokyo, Japan
|
|
|
1,153
|
|
|
|
leased
|
|
|
December 2006 with 3-year renewal option
|
|
Headquarter and administration
|
Tokyo, Japan
|
|
|
592
|
|
|
|
leased
|
|
|
March 2010
|
|
Warehouse
|
Oita, Japan (Inukai Plant)
|
|
|
24,084
|
|
|
|
owned
|
|
|
|
|
Manufacture of polysulfone filters
|
Oita, Japan
|
|
|
3,598
|
|
|
|
owned
|
|
|
|
|
Building
|
Fukuoka, Japan (Buzen Plant)
|
|
|
37,092
|
|
|
|
owned
|
|
|
|
|
Manufacture of peritoneal dialysis bags
|
Fukuoka, Japan
|
|
|
8,369
|
|
|
|
owned
|
|
|
|
|
Building
|
Saga, Japan
|
|
|
4,972
|
|
|
|
leased
|
|
|
March 2010
|
|
Warehouse
|
Osaka, Japan
|
|
|
83
|
|
|
|
leased
|
|
|
September 2007 with 2-years renewal option
|
|
Kansai Sales Office
|
Lexington, Massachusetts
|
|
|
21,570
|
|
|
|
leased
|
|
|
October 2006
|
|
Corporate headquarters and administration North
America
|
Newport Beach
|
|
|
143
|
|
|
|
leased
|
|
|
February 2007 with 2-year renewal option
|
|
General offica use and administration North America
|
Walnut Creek, California
|
|
|
9,522
|
|
|
|
leased
|
|
|
June 2012 with 5-year renewal option
|
|
Manufacture of Hemodialysis machines and peritoneal dialysis
cyclers; research and development; warehouse space
|
Ogden, Utah
|
|
|
52,920
|
|
|
|
owned
|
|
|
|
|
Manufacture polysulfone membranes and dialyzers and peritoneal
dialysis solutions; research and development
|
Oregon, Ohio
|
|
|
13,934
|
|
|
|
leased
|
|
|
April 2019
|
|
Manufacture of liquid hemodialysis concentrate solutions
|
Perrysburg, Ohio
|
|
|
3,252
|
|
|
|
leased
|
|
|
August 2008
|
|
Manufacture of dry hemodialysis concentrates
|
Livingston, California
|
|
|
2,973
|
|
|
|
leased
|
|
|
October 2011 with a 5-year renewal option
|
|
Manufacture of liquid hemodialysis concentrates
|
Freemont, California
|
|
|
6,645
|
|
|
|
leased
|
|
|
August 2007 with 2-year renewal option
|
|
Clinical laboratory testing 3 Buildings
|
Rockleigh, New Jersey
|
|
|
9,727
|
|
|
|
leased
|
|
|
May 2012
|
|
Clinical laboratory testing
|
Irving, Texas
|
|
|
6,506
|
|
|
|
leased
|
|
|
December 2010
|
|
Manufacture of liquid hemodialysis solution
|
Reynosa, Mexico
|
|
|
13,936
|
|
|
|
leased
|
|
|
June 2013
|
|
Manufacture of bloodlines
|
Reynosa, Mexico
|
|
|
4,645
|
|
|
|
owned
|
|
|
|
|
Warehouse
|
Pharr, Texas
|
|
|
511
|
|
|
|
leased
|
|
|
Month to Month
|
|
Warehouse
|
Redmond, Washington
|
|
|
1,944
|
|
|
|
leased
|
|
|
December 2008
|
|
Manufacture of Prosorba Columns
|
Province of Quebec, Canada
|
|
|
1,516
|
|
|
|
leased
|
|
|
April 2012
|
|
Plant Building #1 Manufacture of dry and liquid
concentrates
|
Province of Quebec, Canada
|
|
|
1,516
|
|
|
|
leased
|
|
|
April 2008
|
|
Warehouse Building #2
|
We lease most of our dialysis clinics, manufacturing,
laboratory, warehousing and distribution and administrative and
sales facilities in the U.S. and foreign countries on terms
which we believe are customary in the industry. We own those
dialysis clinics and manufacturing facilities that we do not
lease.
For information regarding plans to expand our facilities and
related capital expenditures, see Item 4.A. History
and Development of the Company Capital
Expenditures.
46
Item 4. A.
Unresolved
Staff Comments
Not applicable.
Item 5.
Operating and
Financial Review and Prospects
You should read the following discussion and analysis of the
results of operations of Fresenius Medical Care AG & Co.
KGaA and its subsidiaries in conjunction with our historical
consolidated financial statements and related notes contained
elsewhere in this report. Some of the statements contained
below, including those concerning future revenue, costs and
capital expenditures and possible changes in our industry and
competitive and financial conditions include forward-looking
statements. We made these forward-looking statements based on
our managements expectations and beliefs concerning future
events which may affect us, but we cannot assure that such
events will occur or that the results will be as anticipated.
Because such statements involve risks and uncertainties, actual
results may differ materially from the results which the
forward-looking statements express or imply. Such statements
include the matters that we described in the discussion in this
report entitled Forward-Looking Statements.
Our business is also subject to other risks and uncertainties
that we describe from time to time in our public filings.
Developments in any of these areas could cause our results to
differ materially from the results that we or others have
projected or may project.
Critical Accounting Policies
The Companys reported financial condition and results of
operations are sensitive to accounting methods, assumptions and
estimates that are the basis for our financial statements. The
critical accounting policies, the judgments made in the creation
and application of these policies, and the sensitivities of
reported results to changes in accounting policies, assumptions
and estimates are factors to be considered along with the
Companys financial statements, and the discussion in
Results of Operations.
Recoverability of Goodwill and Intangible Assets
The growth of our business through acquisitions has created a
significant amount of intangible assets, including goodwill,
trade names and management contracts. At December 31, 2005,
the carrying amount of goodwill amounted to $3,457 million
and non-amortizable intangible assets amounted to
$439 million representing in total approximately 49% of our
total assets.
In accordance with Statement of Financial Accounting Standards
(SFAS) No. 142
Goodwill and Other Intangible
Assets,
we perform an impairment test of goodwill and
non-amortizable intangible assets at least once a year for each
reporting unit, or if we become aware of events that occur or if
circumstances change that would indicate the carrying value
might be impaired (See also Note 1g) in our consolidated
financial statements.
To comply with the provisions of SFAS No. 142, the
fair value of the reporting unit is compared to the reporting
units carrying amount. We estimate 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 units 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.
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 and for
procuring and selling products could adversely affect our
estimated future cashflows. Future adverse changes in a
reporting units economic environment could affect the
discount rate. A decrease in our estimated future cash flows
and/or a decline in the
47
reporting units economic 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
We are party to litigation and subject to investigations
relating to a number of matters as described in Note 18
Legal Proceedings in our Consolidated Financial
Statements. The outcome of these matters may have a material
effect on our financial position, results of operations or cash
flows.
We regularly analyze current information including, as
applicable, our defenses and we provide accruals for probable
contingent losses including the estimated legal expenses to
resolve the matters. We use the resources of our internal legal
department as well as external lawyers for the assessment. In
making the decision regarding the need for loss accrual, we
consider the degree of probability of an unfavorable outcome and
our ability to make a reasonable estimate of the amount of loss.
The filing of a suit or formal assertion of a claim or
assessment, or the disclosure of any such suit or assertion,
does not automatically indicate that accrual of a loss may be
appropriate.
Accounts Receivable and Allowance for Doubtful
Accounts
Trade accounts receivable are a significant asset of ours and
the allowance for doubtful accounts is a significant estimate
made by management. Trade accounts receivable were
$1,470 million and $1,463 million at December 31,
2005 and 2004, respectively, net of allowances. The allowance
for doubtful accounts was $177 million and
$180 million at December 31, 2005 and 2004,
respectively. The majority of our receivables relates to our
dialysis service business in North America.
Dialysis care revenues are recognized and billed at amounts
estimated to be receivable under reimbursement arrangements with
third party payors. Medicare and Medicaid programs are billed at
pre-determined net realizable rates per treatment that are
established by statute or regulation. Revenues for
non-governmental payors where we have contracts or letters of
agreement in place are recognized at the prevailing contract
rates. The remaining non-governmental payors are billed at our
standard rates for services and, in our North America segment, a
contractual adjustment is recorded to recognize revenues based
on historic reimbursement experience with those payors for which
contracted rates are not predetermined. The contractual
adjustment and the allowance for doubtful accounts are reviewed
quarterly for their adequacy. No material changes in estimates
were recorded for the contractual allowance in the periods
presented.
The allowance for doubtful accounts is based on local payment
and collection experience. We sell dialysis products directly or
through distributors in over 100 countries and dialysis services
in 27 countries through owned or managed clinics. Most payors
are government institutions or government-sponsored programs
with significant variations between the countries and even
between payors within one country in local payment and
collection practices. Specifically, public health institutions
in a number of countries outside the U.S. require a
significant amount of time until payment is made. Payment
differences are mainly due to the timing of the funding by the
local, state or federal government to the agency that is
sponsoring the program that purchases our services or products.
The collection of accounts receivable from product sales to
third party distributors or dialysis clinics is affected by the
same underlying causes, since these buyers of the products are
reimbursed as well by government institutions or government
sponsored programs.
In our U.S. operations, the collection process is usually
initiated 30 days after service is provided or upon the
expiration of the time provided by contract. For Medicare and
Medicaid, once the services are approved for payment, the
collection process begins upon the expiration of a period of
time based upon experience with Medicare and Medicaid. In all
cases where co-payment is required the collection process
usually begins within 30 days after service has been
provided. In those cases where claims are approved for amounts
less than anticipated or if claims are denied, the collection
process usually begins upon notice of approval of the lesser
amounts or upon denial of the claim. The collection process can
be confined to internal efforts, including the accounting and
sales staffs and, where appropriate, local management staff. If
appropriate, external collection agencies may be engaged.
48
For our international operations, a significant number of payors
are government entities whose payments are often determined by
local laws and regulations. Depending on local facts and
circumstances, the period of time to collect can be quite
lengthy. In those instances where there are non-public payors,
the same type of collection process is initiated as in the US.
Due to the number of subsidiaries and different countries that
we operate in, our policy of determining when a valuation
allowance is required considers the appropriate local facts and
circumstances that apply to an account.
While payment and collection practices vary significantly
between countries and even agencies within one country,
government payors usually represent low credit risks.
Accordingly, the length of time to collect does not, in and of
itself, indicate an increased credit risk and it is our policy
to determine when receivables should be classified as bad debt
on a local basis taking into account local practices. In all
instances, local review of accounts receivable is performed on a
regular basis, generally monthly. When all efforts to collect a
receivable, including the use of outside sources where required
and allowed, have been exhausted, and after appropriate
management review, a receivable deemed to be uncollectible is
considered a bad debt and written off.
Estimates for the allowances for doubtful accounts receivable
from the dialysis service business are mainly based on local
payment and past collection history. Specifically, the
allowances for the North American operations are based on an
analysis of collection experience, recognizing the differences
between payors and aging of accounts receivable. From time to
time, accounts receivable are reviewed for changes from the
historic collection experience to ensure the appropriateness of
the allowances. The allowances in the International segment and
the products business are also based on estimates and consider
various factors, including aging, creditor and past collection
history. Write offs are taken on a claim by claim basis when the
collection efforts are exhausted. A significant change in our
collection experience, a deterioration in the aging of
receivables and collection difficulties could require that we
increase our estimate of the allowance for doubtful accounts.
Any such additional bad debt charges could materially and
adversely affect our future operating results.
If, in addition to our existing allowances, 1% of the gross
amount of our trade accounts receivable as of December 31,
2005 were uncollectible through either a change in our estimated
contractual adjustment or as bad debt, our operating income for
2005 would have been reduced by approximately 2%.
The following table shows the portion of major debtors or debtor
groups of trade accounts receivable as at December 31,
2005. No single debtor other than U.S. Medicaid and
Medicare accounted for more than 5% of total trade accounts
receivable. Trade accounts receivable in the International
segment are for a large part due from government or
government-sponsored organizations that are established in the
various countries within which we operate.
|
|
|
|
|
|
|
|
|
Composition of Trade Accounts Receivables
|
|
|
|
|
in %, December 31
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
|
|
U.S. Medicare and Medicaid Programs
|
|
|
22%
|
|
|
|
22%
|
|
U.S. Commercial Payors
|
|
|
24%
|
|
|
|
21%
|
|
U.S. Hospitals
|
|
|
3%
|
|
|
|
7%
|
|
Self-Pay of U.S. patients
|
|
|
1%
|
|
|
|
1%
|
|
Other U.S.
|
|
|
4%
|
|
|
|
1%
|
|
International product customers and dialysis payors
|
|
|
46%
|
|
|
|
48%
|
|
|
|
|
|
|
|
|
Total
|
|
|
100%
|
|
|
|
100%
|
|
|
|
|
|
|
|
|
Self-Insurance Programs
FMCH, our largest subsidiary, is partially self-insured for
professional, product and general liability, auto liability and
workers compensation claims under which we assume
responsibility for incurred claims up to predetermined amounts
above which third party insurance applies. Reported balances for
the year include estimates of the anticipated expense for claims
incurred (both reported and incurred but not reported) based on
historical experience and existing claim activity. This
experience includes both the rate of claims incidence (number)
and claim severity (cost) and is combined with individual claim
expectations to estimate the reported amounts.
49
Financial Condition and Results of Operations
Overview
We are engaged primarily in providing dialysis services and
manufacturing and distributing products and equipment for the
treatment of end-stage renal disease. In the U.S., we also
perform clinical laboratory testing. We estimate that providing
dialysis services and distributing dialysis products and
equipment represents an over $40 billion worldwide market with
expected annual patient growth of 6%. Patient growth results
from factors such as the aging population; increasing incidence
of diabetes and hypertension, which frequently precedes the
onset of ESRD; improvements in treatment quality, which prolong
patient life; and improving standards of living in developing
countries, which make life saving dialysis treatment available.
Key to continued growth in revenue is our ability to attract new
patients in order to increase the number of treatments performed
each year. For that reason, we believe the number of treatments
performed each year is a strong indicator of continued revenue
growth and success. In addition, the reimbursement and ancillary
services utilization environment significantly influences our
business. In the past we experienced and also expect in the
future generally stable reimbursements for dialysis services.
This includes the balancing of unfavorable reimbursement changes
in certain countries with favorable changes in other countries.
The majority of treatments are paid for by governmental
institutions such as Medicare in the United States. As a
consequence of the pressure to decrease health care costs,
reimbursement rate increases have been limited. Our ability to
influence the pricing of our services is limited. Profitability
depends on our ability to manage rising labor, drug and supply
costs.
On December 8, 2003, the Medicare Prescription Drug,
Modernization and Improvement Act of 2003 was enacted (the
Medicare Modernization Act). This law makes several
significant changes to U.S. government payment for dialysis
services and pharmaceuticals. First, it increased the composite
rate for renal dialysis facilities by 1.6% on January 1,
2005. Second, effective January 1, 2005, payments for ten
separately billable dialysis-related medications are based on
average acquisition cost (as determined by the Office of the
Inspector General (OIG) and updated by Centers for
Medicare and Medicaid Services of the U.S. Department of
Health and Human Services (CMS)) and payments for
the remaining separately billable dialysis-related medications
are based on average sales price (ASP) plus 6% (ASP
is defined in the law as a manufacturers ASP to all
purchasers in a calendar quarter per unit of each drug and
biological sold in that same calendar quarter, excluding sales
exempt from best price and nominal price sales and including all
discounts, chargebacks and rebates). Third, the difference
between the determined acquisition cost-based reimbursement and
what would have been received under the prior average wholesale
price-based (AWP-based) reimbursement methodology
was added to the composite rate. Fourth, effective April 1,
2005, providers received higher composite rate payments for
certain patients based on their age, body mass index and body
surface area. Fifth, beginning in 2006, the Secretary of the
Department of Health and Human Services (the
Secretary) was authorized to set payment for all
separately billed drugs and biologicals at either acquisition
cost or average sales price. Lastly, the Secretary was required
to establish a three-year demonstration project to test the use
of a fully case-mix adjusted payment system for ESRD services,
beginning January 1, 2006. Under this project, separately
billable drugs and biologicals and related clinical laboratory
tests would be bundled into the facility composite rate.
Participating facilities would receive an additional 1.6%
composite rate increase.
On November 2, 2005, CMS released the final physician fee
schedule for calendar year (CY) 2006. The key
provisions affecting ESRD facilities include revisions to the
pricing methodology for separately billable drugs, revisions to
the drug add-on payment methodology and calculation of the drug
add-on for CY 2006, and revisions to the geographic adjustment
to the composite rate. In addition, CMS has decided to maintain
the case-mix adjustments finalized in last years rule, as
well as the base composite rate. For CY 2006, CMS has decided to
pay for separately billable drugs and biologicals provided by
both
hospital-based and independent dialysis facilities
using the average sales price plus six percent methodology
(ASP+6%). According to CMS, the drug add-on
adjustment for 2006 will be 14.7%. CMS is also implementing
several changes to the ESRD wage index. First, over a four-year
transition period, CMS will apply the Office of Management and
Budgets revised core-based statistical area
(CBSA)
-based
definitions as the basis for revising the urban/ rural locales
and corresponding wage index values reflected in the composite
rate. Since the Medicare Modernization Act requires that any
revisions to the ESRD composite rate payment system be budget
neutral, CMS will apply the budget neutrality adjustment factor
directly to the revised ESRD wage index values (rather than the
base composite payment rates).
50
CMS estimates the overall impact of the changes to be a 1.9%
increase for independent facilities. The Companys
estimates of the impact of such changes on its business are
consistent with the CMS calculations. For a discussion of the
composite rate for reimbursement of dialysis treatments, see
Item 4B, Business Overview Regulatory and
Legal Matters Reimbursement.
The Deficit Reduction Act (DRA) of February 1,
2006, further increased the composite rate by an additional 1.6%
effective January 1, 2006. To account for this increase to
the composite rate and to preserve the originally intended
economic impact of the Medicare Modernization Act, the drug add
on percentage was reduced to 14.5%.
On November 9, 2005, CMS announced a new national
monitoring policy for claims for Epogen and Aranesp for ESRD
patients treated in renal dialysis facilities. Previously,
claims for Epogen reimbursement were subject to focused CMS
review when the ESRD patients hematocrit level reached
37.5 or more. In the new monitoring policy, CMS recognized that
there is considerable natural variability in individual patient
hematocrit levels which makes it difficult to maintain a
hematocrit level within an narrow range. Consequently, CMS will
not initiate monitoring of claims until the patients
hematocrit level reaches 39.0 (hemoglobin of 13.0). Under the
new monitoring policy, for services furnished on or after
April 1, 2006, CMS will expect a 25 percent reduction
in the dosage of Epogen or Aranesp administered to ESRD patients
whose hematocrit exceeds 39.0 (or hemoglobin exceeds 13.0). If
the dosage is not reduced by 25 percent, payment will be
made by CMS as if the dosage reduction had occurred. This
payment reduction may be appealed under the normal appeal
process. In addition, effective April 1, 2006, CMS will
limit Epogen and Aranesp reimbursement to a maximum per patient
per month aggregate dose of 500,000 IU for Epogen and
1500 mcg for Aranesp. CMSs new Epogen and Aranesp
monitoring policy is expected to have a slightly negative impact
on our operating results.
The recent proposal included in the Bush administration budget
to extend the Medicare coordination of benefits period to five
years would generally be favorable to us and other dialysis
providers since it would extend the period during which
providers would receive the generally higher payments by
employer group health plans prior to the commencement of primary
Medicare coverage for dialysis treatment. However, the proposal
in the same budget to eliminate Medicare bad-debt recoveries, if
adopted as proposed, would have a material adverse impact on our
operating results. See Item 4B, Information on the
Company Business Overview Regulatory and
Legal Matters Reimbursement. There can be no
assurance, however, that either proposal will be adopted as
proposed, or at all.
Our operations are geographically organized and accordingly we
have identified three operating segments, North America,
International, and Asia Pacific. For management purposes, the
Company reclassified its Mexico operations from its
International segment to its North American segment beginning
January 1, 2005 and reclassified the operations and assets
for the comparative years 2003 and 2004. For reporting purposes,
we have aggregated the International and Asia Pacific segments
as International. We aggregated these segments due
to their similar economic characteristics. These characteristics
include same services provided and same products sold, same type
patient population, similar methods of distribution of products
and services and similar economic environments. Our Management
Board member responsible for the profitability and cash flow of
each segments various businesses supervises the management
of each operating segment. The accounting policies of the
operating segments are the same as those we apply in preparing
our consolidated financial statements under accounting
principles generally accepted in the United States
(U.S. GAAP). Our management evaluates each
segment using a measure that reflects all of the segments
controllable revenues and expenses.
With respect to the performance of our business operations, our
management believes the most appropriate measure in this regard
is operating income which measures our source of earnings.
Financing is a corporate function which segments do not control.
Therefore, we do not include interest expense relating to
financing as a segment measurement. We also regard income taxes
to be outside the segments control. Accordingly, these
items are not included in our analysis of segment results but
are discussed separately below under the heading
Corporate.
51
A. Results of Operations
The following tables summarize our financial performance and
certain operating results by principal business segment for the
periods indicated. Inter-segment sales primarily reflect sales
of medical equipment and supplies from the International segment
to the North America segment. We prepared the information using
a management approach, consistent with the basis and manner in
which our management internally disaggregates financial
information to assist in making internal operating decisions and
evaluating management performance.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
Total revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
4,578
|
|
|
$
|
4,250
|
|
|
$
|
3,880
|
|
|
International
|
|
|
2,250
|
|
|
|
2,019
|
|
|
|
1,686
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
|
6,828
|
|
|
|
6,269
|
|
|
|
5,566
|
|
|
|
|
|
|
|
|
|
|
|
Inter-segment revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
|
1
|
|
|
|
2
|
|
|
|
2
|
|
|
International
|
|
|
55
|
|
|
|
39
|
|
|
|
36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
|
56
|
|
|
|
41
|
|
|
|
38
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
|
4,577
|
|
|
|
4,248
|
|
|
|
3,878
|
|
|
International
|
|
|
2,195
|
|
|
|
1,980
|
|
|
|
1,650
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
|
6,772
|
|
|
|
6,228
|
|
|
|
5,528
|
|
|
|
|
|
|
|
|
|
|
|
Amortization and depreciation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
|
140
|
|
|
|
129
|
|
|
|
122
|
|
|
International
|
|
|
109
|
|
|
|
102
|
|
|
|
93
|
|
|
Corporate
|
|
|
2
|
|
|
|
2
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
|
251
|
|
|
|
233
|
|
|
|
217
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
|
644
|
|
|
|
587
|
|
|
|
528
|
|
|
International
|
|
|
362
|
|
|
|
300
|
|
|
|
258
|
|
|
Corporate
|
|
|
(67
|
)
|
|
|
(35
|
)
|
|
|
(29
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
|
939
|
|
|
|
852
|
|
|
|
757
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
18
|
|
|
|
14
|
|
|
|
19
|
|
Interest expense
|
|
|
(191
|
)
|
|
|
(197
|
)
|
|
|
(230
|
)
|
Income tax expense
|
|
|
(309
|
)
|
|
|
(266
|
)
|
|
|
(213
|
)
|
Minority interest
|
|
|
(2
|
)
|
|
|
(1
|
)
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
455
|
|
|
$
|
402
|
|
|
$
|
331
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2005 compared to year ended
December 31, 2004
Highlights
Earnings margins increased in both segments in 2005 resulting in
a 0.5% increase in operating income margin which was partially
offset by the one time effect of the $22 million of costs
associated with the transformation of our legal form and the
settlement and related legal fees of the shareholder suit.
Cash flow provided from operations in 2005 decreased by
approximately $158 million as compared to 2004 primarily as
a result of income tax payments for prior periods of
approximately $119 million made in Germany and the
U.S. in 2005 and the effects of the difference in the
reduction of days sales outstanding (DSO). There was
a reduction of 2 DSO in 2005 versus 2004 as compared to 5 DSO
reduction in 2004 versus 2003.
52
The tax payments were the result of a $78 million payment
in Germany on a disputed tax assessment relating to deductions
of write-downs taken in prior years and a $41 million
payment in the US resulting from a tax assessment relating to
the deductibility of payments made pursuant to the 2000 OIG
settlement.
Consolidated Financials
Key Indicators for Consolidated Financials
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in %
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
as
|
|
|
at constant
|
|
|
|
2005
|
|
|
2004
|
|
|
reported
|
|
|
exchange rates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of treatments
|
|
|
19,732,753
|
|
|
|
18,794,109
|
|
|
|
5
|
%
|
|
|
|
|
Same store treatment growth in %
|
|
|
4.6
|
%
|
|
|
3.6
|
%
|
|
|
|
|
|
|
|
|
Revenue in $ million
|
|
|
6,772
|
|
|
|
6,228
|
|
|
|
9
|
%
|
|
|
8
|
%
|
Gross profit in % of revenue
|
|
|
34.4
|
%
|
|
|
33.5
|
%
|
|
|
|
|
|
|
|
|
Selling, general and administrative costs in % of revenue
|
|
|
19.8
|
%
|
|
|
19.0
|
%
|
|
|
|
|
|
|
|
|
Net income in $ million
|
|
|
455
|
|
|
|
402
|
|
|
|
13
|
%
|
|
|
|
|
Net revenue increased by 9% for the year ended December 31,
2005 over the comparable period in 2004 due to growth in revenue
in both dialysis care and dialysis products. The 9% increase
represents 7% organic growth combined with 1% of growth from
acquisitions and 1% increase attributable to exchange rate
effects due to the continued strengthening of various local
currencies against the dollar.
Dialysis care revenue grew by 8% to $4,867 million (8% at
constant exchange rates) mainly due to organic revenue growth
resulting principally from 5% growth in same store treatments,
2% increase in revenue per treatment and 1% due to Acquisitions.
Dialysis products revenue increased by 10% to
$1,905 million (9% at constant exchange rates) driven by a
volume increase and higher priced products.
Gross profit margin improved to 34.4% in 2005 from 33.5% for
2004. The increase is primarily a result of higher revenue
rates, production efficiencies, and the effects in 2004 of a one
time discount provided to a distributor in Japan, partially
offset by higher personnel expenses, higher facility costs and
one less treatment day in North America. Depreciation and
amortization expense for 2005 was $251 million compared to
$233 million for 2004.
Approximately 36% of the Companys 2005 worldwide revenues,
as compared to 38% in 2004, were paid by and subject to
regulations under governmental health care programs, primarily
Medicare and Medicaid, administered by the United States
government.
Selling, general and administrative costs increased from
$1,182 million in 2004 to $1,343 million in 2005.
Selling, general and administrative costs as a percentage of
sales increased from 19.0% in 2004 to 19.8% in 2005. The
increase is mainly due to one time costs of $22 million for
the transformation of our legal form and the settlement and
related legal fees of the shareholder suit, increased delivery
costs due to higher fuel prices for Company-owned vehicles and
higher transport and other third party commercial delivery,
higher insurance costs, restructuring costs in Japan, and the
favorable effects in 2004 of an indemnification payment received
in 2004 related to a clinic in Asia Pacific. These effects were
partially offset by foreign currency gains and a patent
litigation settlement in the International segment as well as
the one time impact of compensation for cancellation of a
distribution contract in Japan.
In 2005, 19.73 million treatments were provided. This
represents an increase of 5.0% over 2004. Same store treatment
growth was 4.6% with additional growth of 1.5% from acquisitions
offset by the effects of sold and closed clinics (1.1%).
At December 31, 2005 we owned, operated or managed
approximately 1,680 clinics compared to 1,610 clinics at
the end of 2004. During 2005, we acquired 37 clinics, opened 65
clinics and consolidated 32 clinics. The number of patients
treated in clinics that we own, operate or manage increased to
approximately 131,450 at December 31, 2005 from
approximately 124,400 at December 31, 2004. Average revenue
per
53
treatment for worldwide dialysis services increased to $247 from
$240 mainly due to worldwide improved reimbursement.
The following discussions pertain to our business segments
and the measures we use to manage these segments.
North America Segment
Key Indicators for North America Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
Change in %
|
|
|
|
|
|
|
|
|
|
|
|
Number of treatments
|
|
|
13,471,158
|
|
|
|
12,998,661
|
|
|
|
4
|
%
|
Same store treatment growth in %
|
|
|
3.3
|
%
|
|
|
3.2
|
%
|
|
|
|
|
Revenue in $ million
|
|
|
4,577
|
|
|
|
4,248
|
|
|
|
8
|
%
|
Depreciation and amortization in $ million
|
|
|
140
|
|
|
|
129
|
|
|
|
9
|
%
|
Operating income in $ million
|
|
|
644
|
|
|
|
587
|
|
|
|
10
|
%
|
Operating income margin in %
|
|
|
14.1
|
%
|
|
|
13.8
|
%
|
|
|
|
|
Revenue
Net revenue for the North America segment for 2005 increased 8%
as dialysis care revenue increased by 7% from
$3,802 million to $4,054 million while dialysis
products sales increased by 17%.
The 7% increase in dialysis care revenue in 2005 was driven by
approximately 4% increase in treatments, a revenue rate per
treatment increase of approximately 2% and approximately 1%
resulting from Fin46(R). The 4% increase in treatments was the
result of same store treatment growth of 3% and 1% increase
resulting from acquisitions. For 2005, the administration of EPO
represented approximately 21% of North America total revenue as
compared to 23% in the prior year.
At the end of 2005, approximately 89,300 patients were being
treated in the 1,155 clinics that we own, operate or manage in
the North America segment, compared to approximately 86,350
patients treated in 1,135 clinics at the end of 2004. The
average revenue per treatment increased from $288 in 2004 to
$294 during 2005. In the U.S., average revenue per treatment
increased from $289 in 2004 to $297 in 2005.
Dialysis products revenues increased by 17% due to continued
strong demand for our dialysis machines and dialyzers.
DaVita
On October 5, 2005, DaVita Inc. (DaVita), the
second largest provider of dialysis services in the U. S. and an
important customer of ours, completed its acquisition of Gambro
Healthcare, Inc. (Gambro Healthcare), the third
largest provider of dialysis services in the U.S., and agreed to
purchase a substantial portion of its dialysis product supply
requirements from Gambro Renal Products, Inc. during the next
ten years. This product supply contract between our customer and
our competitor could result in the future in substantial
reductions of DaVitas purchases of our dialysis products.
Any such reduction in DaVitas purchases will decrease our
product revenues and could result in a material adverse effect
on our business, financial condition and results of operations.
The continuing consolidation of dialysis providers and
combinations of dialysis providers with dialysis product
manufacturers, could affect future growth of our product sales.
Operating income
Operating income margin increased from 13.8% in 2004 to 14.1% in
2005. The primary drivers of this margin improvement during 2005
are higher revenues per treatment partially offset by higher
personnel expenses, increased delivery costs due to higher fuel
prices, higher bad debt expense, higher insurance costs and
other increased costs. Accordingly, cost per treatment increased
from $250 in 2004 to $254 in 2005.
54
International Segment
Key Indicators for International Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in %
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
as
|
|
|
at constant
|
|
|
|
2005
|
|
|
2004
|
|
|
reported
|
|
|
exchange rates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of treatments
|
|
|
6,261,595
|
|
|
|
5,795,448
|
|
|
|
8
|
%
|
|
|
|
|
Same store treatment growth in %
|
|
|
7.6
|
%
|
|
|
4.1
|
%
|
|
|
|
|
|
|
|
|
Revenue in $ million
|
|
|
2,195
|
|
|
|
1,980
|
|
|
|
11
|
%
|
|
|
9
|
%
|
Depreciation and amortization in $ million
|
|
|
109
|
|
|
|
102
|
|
|
|
8
|
%
|
|
|
|
|
Operating income in $ million
|
|
|
362
|
|
|
|
300
|
|
|
|
21
|
%
|
|
|
|
|
Operating income margin in %
|
|
|
16.5
|
%
|
|
|
15.2
|
%
|
|
|
|
|
|
|
|
|
Revenue
The 11% increase in net revenues for the International segment
resulted from increases in both dialysis care and dialysis
products revenues. Organic growth during the period was 8% at
constant exchange rates and acquisitions contributed
approximately 1%. This increase was also attributable to a 2%
exchange rate effect due to the continued strengthening of
various local currencies against the dollar.
Total dialysis care revenue increased during 2005 by 16% (14% at
constant exchange rates) to $813 million in 2005 from
$699 million for 2004. This increase is a result of organic
growth of 13%, a 2% increase in contributions from acquisitions
and was partially offset by the 1% effects of sold or closed
clinics and increased by approximately 2% due to exchange rate
fluctuations. The 13% organic growth was driven by same store
treatment growth of 8% and pricing mix resulting from increased
average revenue per treatment and growth in countries that have
higher reimbursement rates.
As of December 31, 2005, approximately 42,150 patients were
being treated at 525 clinics that we own, operate or manage
in the International segment compared to 38,050 patients treated
at 475 clinics at December 31, 2004. In 2005, the
average revenue per treatment increased from $121 to $130 ($127
at constant exchange rates) due to the strengthening of local
currencies against the U.S. dollar and increased
reimbursement rates partially offset by higher growth in
countries with reimbursement rates below the average.
Total dialysis products revenue for 2005 increased by 8% (7% at
constant exchange rates) to $1,382 million mainly driven by
organic growth.
Including the effects of acquisitions, European region revenue
increased 9% (9% at constant exchange rates), Latin America
region revenue increased 27% (17% at constant exchange rates),
and Asia Pacific region revenue increased 8% (5% at constant
exchange rates).
Operating income
Our operating income increased from $300 million in 2004 to
$362 million in 2005. The operating margin increased from
15.2% in 2004 to 16.5% in 2005. The increase in margin resulted
mainly from production efficiencies in Europe, a reimbursement
increase in Turkey, foreign exchange gains, lower bad debt
expense, the one time effects of income associated with the
cancellation of a distribution agreement in Japan, and
settlement of a patent litigation, as well as the now favorable
impact of a discount provided to a distributor in Japan in 2004.
These effects were partially offset by restructuring costs in
Japan and by the then favorable effects of an indemnification
payment received in 2004 related to a clinic in Asia Pacific.
55
The following discussions pertain to our total Company costs.
Corporate
We do not allocate corporate costs to our segments
in calculating segment operating income as we believe that these
costs are not within the control of the individual segments.
These corporate costs primarily relate to certain headquarters
overhead charges including accounting and finance, professional
services, etc.
Total corporate operating loss was $67 million in 2005
compared to $35 million in the same period of 2004. The
increase in operating loss was mainly due to the one-time costs
of $22 million related to the transformation of our legal
form and the settlement and related legal fees of the
shareholder suit that sought to set aside the resolutions
approving the transformation. Legal fees related to the Baxter
patent litigation also contributed to this increase.
Interest
Interest expense for 2005 decreased 3% compared to the same
period in 2004 due to a lower debt level resulting from the use
of positive cash flows, and lower interest rates.
Income Taxes
The effective tax rate for 2005 was 40.3% compared to 39.7% in
2004.
Year ended December 31, 2004 compared to year ended
December 31, 2003
Like 2003, the earnings increase in 2004 is characterized by
improving margins in the North American segment partially offset
by a decline of margins in Asia Pacific. Cash flow provided from
operations reached $828 million and exceeded the prior
years cash flow from operations by $74 million. This
favorable development is a result of our increased net income
and focus on working capital management partially offset by a
lower impact of liquidity provided by hedging of intercompany
financings.
Consolidated Financials
Key Indicators for Consolidated Financials
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in %
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
as
|
|
|
at constant
|
|
|
|
2004
|
|
|
2003
|
|
|
reported
|
|
|
exchange rates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of treatments
|
|
|
18,794,109
|
|
|
|
17,821,185
|
|
|
|
5
|
%
|
|
|
|
|
Same store treatment growth in %
|
|
|
3.6
|
%
|
|
|
4.9
|
%
|
|
|
|
|
|
|
|
|
Revenue in $ million
|
|
|
6,228
|
|
|
|
5,528
|
|
|
|
13
|
%
|
|
|
10
|
%
|
Gross profit in % of revenue
|
|
|
33.5
|
%
|
|
|
33.1
|
%
|
|
|
|
|
|
|
|
|
Selling, general and administrative costs in % of revenue
|
|
|
19.0
|
%
|
|
|
18.5
|
%
|
|
|
|
|
|
|
|
|
Net income in $ million
|
|
|
402
|
|
|
|
331
|
|
|
|
21
|
%
|
|
|
|
|
Net revenue increased for the year ended December 31, 2004
over the comparable period in 2003 due to growth in revenue in
both dialysis care and dialysis products.
Dialysis care revenue grew by 13% to $4,501 million (12% at
constant exchange rates) mainly due to higher treatment rates,
acquisitions, as a result of an accounting change
(implementation of Financial Accounting Standards Board
Interpretation 46R (FIN 46R) issued
December 2003 and effective March 31, 2004), and the effect
of two additional treatment days in 2004. Same store treatment
growth in 2004 declined from 2003 as a result of the loss of
tenders in the International segment and the general market
growth slow down in the North American segment. Dialysis product
revenue increased by 11% to $1,727 million (5% at constant
exchange rates) in the same period.
56
Gross profit margin improved in 2004 to 33.5% from 33.1% for
2003. The increase is primarily a result of higher treatment
rates, higher margins for ancillary services in North America,
higher number of treatments as a result of two additional
treatment days in North America, operating improvements in Latin
America and growth in regions which have higher gross margins
offset by higher personnel and recruiting costs due to the
nursing shortage in North America, a one time discount provided
to a distributor in Japan, and reimbursement related price
pressure in Japan. Depreciation and amortization expense for the
period was $233 million compared to $217 million for
the same period in the prior year.
Approximately 38% of the Companys 2004 worldwide revenues,
as compared to 40% in 2003, are paid by and subject to
regulations under governmental health care programs, primarily
Medicare and Medicaid, administered by the United States
government.
Selling, general and administrative costs increased from
$1,022 million in 2003 to $1,182 million in 2004.
Selling, general and administrative costs as a percentage of
sales increased from 18.5% in 2003 to 19.0% in 2004. The
increase is mainly due to increased personnel expenses in North
America and growth in regions which have higher selling, general
and administrative costs partially offset by receipt of a one
time indemnification payment related to a clinic in the Asia
Pacific region and reduced expenses due to cost efficiency
control in Latin America. Net income for the period was
$402 million compared to $331 million in 2003.
In 2004, 18.79 million treatments were provided. This
represents an increase of 5.4% over 2003. Same store treatment
growth was 3.6% with additional growth of 1.8% from acquisitions.
At December 31, 2004 we owned, operated or managed 1,610
clinics compared to 1,560 clinics at the end of 2003. During
2004, we acquired 29 clinics, opened 52 clinics and consolidated
31 clinics. The number of patients treated in clinics that we
own, operate or manage increased to 124,400 at December 31,
2004 from approximately 119,250 at December 31, 2003.
Average revenue per treatment for worldwide dialysis services
increased to $240 from $223 mainly due to worldwide improved
reimbursement rates and favorable currency developments.
The following discussions pertain to our business segments
and the measures we use to manage these segments
.
North America Segment
Key Indicators for North America Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2003
|
|
|
Change in %
|
|
|
|
|
|
|
|
|
|
|
|
Number of treatments
|
|
|
12,998,661
|
|
|
|
12,440,258
|
|
|
|
4
|
%
|
Same store treatment growth in %
|
|
|
3.2
|
%
|
|
|
3.8
|
%
|
|
|
|
|
Revenue in $ million
|
|
|
4,248
|
|
|
|
3,878
|
|
|
|
10
|
%
|
Depreciation and amortization in $ million
|
|
|
129
|
|
|
|
122
|
|
|
|
6
|
%
|
Operating income in $ million
|
|
|
587
|
|
|
|
528
|
|
|
|
11
|
%
|
Operating income margin in %
|
|
|
13.8
|
%
|
|
|
13.6
|
%
|
|
|
|
|
Revenue
Net revenue for the North America segment for 2004 increased
because dialysis care revenue increased by 11% from
$3,435 million to $3,802 million. Dialysis product
revenue increased by 1% from $443 to $446.
The 11% increase in dialysis care revenue in 2004, was driven by
organic revenue growth of 7%, 1% increase attributable to
two extra dialysis days in 2004, 2% resulting from
implementation of FIN 46R and 1% resulting from
acquisitions. Organic revenue growth is a result of 3% same
store treatment growth and a 4% revenue per treatment
growth. Same store treatment growth in 2004 declined from 2003
as a result of the general market growth slow down in the North
America. For 2004, the administration of EPO represented
approximately 23% of total North America revenue.
At the end of 2004, approximately 86,350 patients were being
treated in the 1,135 clinics that we own, operate or manage in
the North America segment, compared to approximately 83,000
patients treated in
57
1,115 clinics at the end of 2003. The average revenue per
treatment, excluding laboratory-testing revenue, increased from
$266 in 2003 to $277 in 2004. Including laboratory testing, the
average revenue per treatment increased from $277 in 2003 to
$288 during 2004.
Dialysis product sales increased by 1% in 2005 compared to 2004
driven by the increased sales in Mexico. Dialysis Product sales
in both 2004 and 2003 also include the sales of machines to
third-party leasing companies which are leased back by our
dialysis services division and sales to other vertically
integrated dialysis companies. The volume of both these type
transactions has been reduced in 2004 compared to 2003. In
addition, the Company decided to focus sales efforts more on its
internally produced products while decreasing emphasis on
relatively low margin ancillary products manufactured by
third-parties. These three factors resulted in a
1% increase in dialysis product revenue from
$443 million in 2003 to $446 million in 2004. Our
dialysis products division measures its external sales
performance based on its sales to the net available
external market.
The Net available external market sales excludes machine sales
to third parties, i.e., leasing companies, for machines
utilized in our services division as well as sales to other
vertically integrated dialysis companies and sales related to
our adsorbers business. Net available external market sales were
flat in 2004 over the comparable period for 2003. The detail is
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Year ended
|
|
|
Year ended
|
|
|
|
December 31, 2004
|
|
|
December 31, 2003
|
|
|
|
|
|
|
|
|
|
|
in millions
|
|
Dialysis product sales
|
|
$
|
446
|
|
|
$
|
443
|
|
|
less sales to other vertically integrated dialysis companies and
to leasing company of dialysis machines leased back
|
|
|
(28
|
)
|
|
|
(34
|
)
|
|
less sales related to adsorber business
|
|
|
(5
|
)
|
|
|
(3
|
)
|
|
less Mexico business
|
|
|
(25
|
)
|
|
|
(17
|
)
|
|
|
|
|
|
|
|
Product sales to available external market
|
|
$
|
388
|
|
|
$
|
389
|
|
|
|
|
|
|
|
|
Operating income
Operating income margin increased from 13.6% in 2003 to 13.8% in
2004. The primary drivers of this margin improvement during 2004
are increases in commercial payor rates, improved ancillary
margins, and incremental profits provided by two additional
dialysis days in 2004 partially offset by the implementation of
FIN 46(R) (0.2%). Cost per treatment increased from $241 in
2003 to $250 in 2004, primarily due to increased personnel and
benefit costs, higher ancillary costs, and other miscellaneous
costs partially offset by improvements in medical supply costs
and reduced depreciation and amortization expense, as a
percentage of revenue, mainly as a result of completing the
depreciation and amortization of patient relationships acquired
in 1997.
International Segment
Key Indicators for International Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in %
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
as
|
|
|
at constant
|
|
|
|
2004
|
|
|
2003
|
|
|
reported
|
|
|
exchange rates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of treatments
|
|
|
5,795,448
|
|
|
|
5,380,927
|
|
|
|
8
|
%
|
|
|
|
|
Same store treatment growth in %
|
|
|
4.1
|
%
|
|
|
7.5
|
%
|
|
|
|
|
|
|
|
|
Revenue in $ million
|
|
|
1,980
|
|
|
|
1,650
|
|
|
|
20
|
%
|
|
|
11
|
%
|
Depreciation and amortization in $ million
|
|
|
102
|
|
|
|
93
|
|
|
|
10
|
%
|
|
|
|
|
Operating income in $ million
|
|
|
300
|
|
|
|
258
|
|
|
|
16
|
%
|
|
|
|
|
Operating income margin in %
|
|
|
15.2
|
%
|
|
|
15.7
|
%
|
|
|
|
|
|
|
|
|
58
Revenue
The increase in net revenues for the International segment
resulted from increases in both dialysis care and dialysis
product revenues. Acquisitions contributed approximately 3%
while consolidations resulting from initial consolidation of
entities as a result of an accounting change (implementation of
FIN 46R) contributed approximately 2%. Organic growth
during the period was 6% at constant exchange rates. Same store
treatment growth in 2004 declined from 2003 as a result of the
loss of tenders. The revenue increase was also attributable to a
9% exchange rate effect due to the continued strengthening of
various local currencies against the dollar in 2004 and 2003.
Total dialysis care revenue increased during 2004 by 29% (19% at
constant exchange rates) to $699 million in 2004 from
$544 million for 2003. This increase is a result of organic
growth of 5%, a 7% increase in contributions from acquisitions,
a 6% contribution from consolidations resulting from
implementation of FIN 46R and approximately 10% due to
exchange rate fluctuations.
As of December 31, 2004, approximately 38,050 patients were
being treated at 475 clinics that we own, operate or manage in
the International segment compared to 36,250 patients treated at
445 clinics at December 31, 2003. In 2004, the average
revenue per treatment increased from $101 to $121 ($111 at
constant exchange rates) due to the strengthening of the local
currencies against the U.S. dollar and increased
reimbursement rates partially offset by higher growth in
countries with reimbursement rates below the average.
Total dialysis product revenue for 2004 increased by 16% (7% at
constant exchange rates) to $1,281 million mainly driven by
organic growth.
Including the effects of the acquisitions, European region
revenue increased 22% (11% at constant exchange rates), Latin
America region revenue increased 28% (24% at constant exchange
rates), and Asia Pacific region revenue increased 6% (1% at
constant exchange rates).
Operating income
Our operating income margin decreased from 15.7% during 2003 to
15.2% in 2004. The main cause for the margin decrease was price
pressure in Japan as a result of biannual reimbursement rate
reductions, a one-time discount provided to a distributor in
Japan, unfavorable foreign currency transaction effects related
to the purchase of products from our European production sites
coupled with the appreciation of the euro against local
currencies and the effect of implementation of FIN 46(R)
(0.2%) partially offset by a one-time indemnification payment
received related to a clinic in the Asia Pacific region,
operating improvements in Latin America such as a reimbursement
rate increase in Venezuela and cost control improvements
throughout Latin America.
Latin America
Our subsidiaries in Latin America contributed approximately 3%
of our worldwide revenue and approximately 3% of our operating
income in 2004. Our operations in Latin America were affected by
the financial crisis and currency devaluations in some
currencies in Latin America. Because of these issues, we
continue to experience lower than anticipated reimbursement
rates, margin pressure and foreign currency exchange losses.
In 2004, sales in Latin America increased 28% (24% at constant
exchange rates) and operating income increased 88% compared to
2003. The consolidation of dialysis clinics in accordance with
FIN 46R contributed 14% of the revenue growth and had no
significant impact on operating income. A worsening of the
economic situation in Latin America, a further devaluation of
the Latin American currencies against the U.S. dollar or
other unfavorable economic developments in Latin America, could
result in an impairment of long-lived assets and goodwill.
59
Corporate
We do not allocate corporate costs to our segments
in calculating segment operating income as we believe that these
costs are not within the control of the individual segments.
These corporate costs primarily relate to certain headquarters
overhead charges including accounting and finance, professional
services, etc.
Total corporate operating loss was $36 million in 2004
compared to $29 million in the same period of 2003.
The following discussions pertain to our total Company costs.
Interest
Interest expense for 2004 decreased 15% compared to the same
period in 2003 due to a lower debt level resulting from the use
of positive cash flows, lower interest rates, and the conversion
of a portion of debt from fixed into variable interest rates.
Income Taxes
The effective tax rate for 2004 was 39.7% compared to 39.0% in
2003.
B. Liquidity and Capital Resources
Liquidity
Our primary sources of liquidity have historically been cash
from operations, cash from short-term borrowings as well as from
long-term debt from third parties and from related parties and
cash from issuance of equity securities and trust preferred
securities. Cash from operations is impacted by the
profitability of our business and the development of our working
capital, principally receivables. The profitability of our
business depends significantly on reimbursement rates.
Approximately 72% of our revenues are generated by providing
dialysis treatment; a major portion of which is reimbursed by
either public health care organizations or private insurers. For
the year ended December 31, 2005, approximately 36% of our
consolidated revenues resulted from U.S. federal health
care benefit programs, such as Medicare and Medicaid
reimbursement. Legislative changes could affect all Medicare
reimbursement rates for the services we provide, as well as the
scope of Medicare coverage. A decrease in reimbursement rates
could have a material adverse effect on our business, financial
condition and results of operations and thus on our capacity to
generate cash flow. See Overview, above, for a
discussion of recent Medicare reimbursement rate changes.
Furthermore cash from operations depends on the collection of
accounts receivable. We could face difficulties in enforcing and
collecting accounts receivable under some countries legal
systems. Some customers and governments may have longer payment
cycles. Should this payment cycle lengthen, then this could have
a material adverse effect on our capacity to generate cash flow.
See Critical Accounting Policies... Accounts Receivable
and Allowance for Doubtful Accounts, above.
The accounts receivable balance at December 31, 2005 and
2004, net of valuation allowances, represented approximately 82
and 84 days of net revenue, respectively. This favorable
development is mainly a result of our management effort to
improve collection of receivables. The development of days sales
outstanding by operating segment is shown in the table below.
Development of Days Sales Outstanding
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
|
|
North America
|
|
|
63
|
|
|
|
67
|
|
International
|
|
|
120
|
|
|
|
119
|
|
|
|
|
|
|
|
|
Total
|
|
|
82
|
|
|
|
84
|
|
|
|
|
|
|
|
|
On February 21, 2003, we entered into an amended and
restated bank agreement, (the 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
60
the Lenders made available to the Company and certain
subsidiaries and affiliates an aggregate amount of up to
$1.5 billion through three credit facilities.
Through a series of amendments in 2003 and 2004, we voluntarily
reduced the aggregate amount available to $1.2 billion
while increasing the available amounts under the revolving
credit portion and reducing the amounts available under the term
loan portion. In addition, the amendments reduced the term loan
interest rates by 25 basis points in 2003 and an additional
75 basis points in 2004 and the revolving credit interest
rates by 62.5 basis points in 2004. The termination date
was extended until February 28, 2010. Under the 2004
amendments, we can increase the amount of revolving credit by up
to $200 million during the life of the 2003 Senior Credit
Agreement.
Cash from short-term borrowings is generated by selling
interests in our accounts receivable (accounts receivable
facility) and by borrowing from our parent Fresenius AG.
Long-term financing is provided by the revolving portion and the
term loan under our 2003 Senior Credit Agreement, our borrowings
under the European Investment Bank (EIB) Agreement
and has been provided through the issuance of our euro notes and
trust preferred securities. We believe that our existing credit
facilities, our new $5 billion credit facility described
below, cash generated from operations and other current sources
of financing are sufficient to meet our foreseeable needs (See
Outlook Proposed Acquisition).
We entered into a credit agreement with the European Investment
Bank (EIB) on July 13, 2005 in the total amount
of $155 million consisting of a $106 million
(
90 million)
revolving credit line and a $49 million term loan. The
facility has an
8-year
term with the revolving line terminating on July 12, 2013
and the term loan maturing on September 13, 2013. Both
loans bear variable interest rates that change quarterly and
include options to convert into fixed rates. The EIB is a
not-for-profit long-term, lending institution of the European
Union that lends funds at favorable rates for the purpose of
capital investment projects, normally for up to half of the
funds required for such projects. The Company will use these
funds to refinance certain R&D projects and investments in
expansion and optimization of existing production facilities in
Germany. The loans are secured by bank guarantees and have
customary covenants. The term loan was drawn down on
September 15, 2005. Average interest for the period ending
December 31, 2005 was 3.89%. There were no drawdowns on the
revolving credit facility as of December 31, 2005.
On July 27, 2005, the Company issued new euro denominated
notes (Euro Notes) totalling $236 million
(
200 million)
with a
126 million
tranche at a fixed interest rate of 4.57% and a
74 million
tranche with a floating rate at EURIBOR plus applicable margin,
resulting in an average interest rate of 4.10% for the period
ending December 31, 2005. The proceeds were used to
liquidate $155 million
(
128.5 million)
of Euro Notes issued in 2001 that were due in July 2005 and for
working capital. The Euro Notes mature on July 27, 2009.
We had approximately $80 million in letters of credit
outstanding at both December 31, 2005 and 2004, and
approximately $624 million and $635 million,
respectively, of unused borrowing capacity available under the
revolving portion of our 2003 Senior Credit Agreement.
In connection with the Renal Care Group (RCG)
acquisition, we entered into a commitment letter pursuant to
which Bank of America, N.A. (BofA) and Deutsche Bank
AG (DB) have agreed, subject to certain conditions,
to underwrite an aggregate $5 billion in principal amount
of term and revolving loans to be syndicated to other financial
institutions. The loans will consist of a
5-year
$1 billion
revolving credit facility, a
5-year
$2 billion
term loan A facility and a 7-year $ billion term loan B
facility. The syndication of the revolving credit facility and
the term loan A facility have already been completed. Funding is
subject to customary closing conditions and BofAs and
DBs acquiescence to any material modification to the
merger agreement and any waiver of any material conditions
precedent under that agreement. Interest on the new senior
credit facilities will be at our option at a rate equal to
either (i) LIBOR plus an applicable margin, or
(ii) the higher of BofAs prime rate or the Federal
Funds rate plus 0.5% plus an applicable margin. The applicable
margin is variable and depends on our consolidated leverage
ratio (the Margin). The financing will be available
to us, among other uses, to pay the purchase price and related
expenses for the proposed acquisition of RCG, to refinance
outstanding indebtedness under our existing 2003 Senior Credit
Agreement and certain indebtedness of RCG, and for general
corporate purposes. In conjunction with the forecasted
utilization of the new senior credit facilities and the related
variable rate based interest payments, we entered into forward
starting interest rate swaps in the notional amount
61
of $2.5 billion. These instruments, designated as cash flow
hedges, effectively convert forecasted Libor based interest
payments into fixed rate based interest payments which fix the
interest rate on $2.5 billion of the forecasted financing
under the new senior credit facility at 4.32% plus the Margin.
These swaps are denominated in U.S. dollars and expire at
various dates between 2008 and 2012.
Our amended 2003 Senior Credit Agreement, EIB agreement, Euro
Notes and the indentures relating to our trust preferred
securities include covenants that require us to maintain certain
financial ratios or meet other financial tests. Under our 2003
Senior Credit Agreement, we are obligated to maintain a minimum
consolidated net worth, a minimum consolidated interest coverage
ratio (ratio of consolidated EBITDA to consolidated net interest
expense as defined in the 2003 Senior Credit Agreement) and a
maximum consolidated leverage ratio (ratio of consolidated
funded debt to consolidated EBITDA as defined in the 2003 Senior
Credit Agreement). Other covenants in one or more of each of
these agreements restrict or have the effect of restricting our
ability to dispose of assets, incur debt, pay dividends (limited
to $200 million in 2006, dividends paid in 2005 were
$137 million) and make other restricted payments, create
liens or make capital expenditures, investments or acquisitions.
The breach of any of the covenants could result in a default
under the 2003 Senior Credit Agreement, the European Investment
Bank Agreement, the Euro Notes or the notes underlying our trust
preferred securities, which could, in turn, create additional
defaults under the agreements relating to our other long-term
indebtedness. In default, the outstanding balance under the
amended 2003 Senior Credit Agreement becomes due at the option
of the Lenders. As of December 31, 2005, we are in
compliance with all financial covenants under the 2003 Senior
Credit Agreement and our other financing agreements.
We have an accounts receivable facility whereby certain
receivables are sold to NMC Funding, a special purpose entity
and a wholly-owned subsidiary. NMC Funding then assigns
undivided ownership interests in the accounts receivable to
certain bank investors. As we have the right to withdraw the
then outstanding interests at any time, the receivables remain
on our Consolidated Balance Sheet and the proceeds from the sale
of undivided interests are recorded as short-term borrowings.
The withdrawal of all transferred interests in the accounts
receivable would result in the termination of the accounts
receivable facility under the terms of the facility agreement.
On October 20, 2005 the Company amended the accounts
receivable facility to extend the maturity date to
October 19, 2006.
Our 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 could have a material impact on our
capacity to utilize the facility for our financial needs.
The settlement agreement with the asbestos creditors committees
on behalf of the W.R. Grace & Co. bankruptcy estate
(see Item 8.A.7, Financial Information
Legal Proceedings) provides for payment by the Company of
$115 million upon approval of the settlement agreement by
the U.S. District Court, which has occurred, and
confirmation of a W.R. Grace & Co. bankruptcy reorganization
plan that includes the settlement. The $115 million
obligation is included in the special charge we recorded in 2001
to address 1996 merger-related legal matters.
We are subject to ongoing tax audits in the U.S., Germany and
other jurisdictions. We have received notices of unfavorable
adjustments and disallowances in connection with certain of the
audits. We are contesting, including appealing certain of these
unfavorable determinations. In conjunction with a disputed tax
assessment in Germany, we made a $78 million payment to
discontinue the accrual of additional non-tax deductible
interest until the final resolution of the disputed assessment.
We may be subject to additional unfavorable adjustments and
disallowances in connection with ongoing audits. If our
objections and any final audit appeals are unsuccessful, we
could be required to make additional tax payments. With respect
to adjustments and disallowances currently on appeal, we do not
anticipate that an unfavorable ruling would have a material
impact on our results of operations. We are not currently able
to determine the timing of these potential additional tax
payments. If all potential additional tax payments and the Grace
Chapter 11 Proceedings settlement payment were to occur
contemporaneously, there could be a material adverse impact on
our operating cash flow in the relevant reporting
62
period. Nonetheless, we anticipate that cash from operations
and, if required, our available liquidity will be sufficient to
satisfy all such obligations if and when they come due.
Dividends
Consistent with prior years, we will continue to follow an
earnings-driven dividend policy. Our general partners
Management Board will propose to the shareholders at the Annual
General Meeting a dividend, with respect to 2005 and payable in
2006, of
1.23
per ordinary share (2004:
1.12) and
1.29 per
preference share (2004:
1.18) for
shareholder approval at the annual general meeting on
May 9, 2006. The total expected dividend payment is
approximately
120 million
and we paid approximately $137
(
109) million in
2005 for dividends with respect to 2004. Our 2003 Senior Credit
Agreement limits disbursements for dividends and certain other
transactions relating to our own equity type instruments during
2006 to $200 million in total.
Analysis of Cash Flow
Year ended December 31, 2005 compared to year ended
December 31, 2004
Operations
We generated cash from operating activities of $670 million
in the year ended December 31, 2005 and $828 million
in the comparable period in 2004, a decrease of about 19% over
the prior year. Cash flows were primarily generated by increase
in net income and working capital improvements. Cash flows were
impacted principally by a $78 million payment in Germany
made to halt the accrual of non-deductible interest on a
disputed tax assessment relating to deductions of write-downs
taken in prior years and a $41 million payment in the US
resulting from a tax assessment relating to the deductibility of
payments made pursuant to the 2000 OIG settlement. In addition,
less cash was generated in 2005 due to the effects of reducing
days sales outstanding by two days as compared to the cash
generated in 2004 by a five day reduction in days sales
outstanding. Cash flows were used mainly for investing (capital
expenditures and acquisitions), for payment of dividends and to
pay down debt.
Investing
Cash used in investing activities increased from
$365 million to $422 million mainly because of
increased capital expenditures. In 2005, we paid approximately
$125 million ($77 million for the North American
segment and $48 million for the International segment) cash
for acquisitions consisting primarily of dialysis clinics, the
remaining 55% of shares outstanding of CardioVascular Resources
(CVR) and direct costs relating to the Renal Care
Group acquisition. In the same period in 2004, we paid
approximately $104 million ($65 million for the North
American segment and $39 million for the International
segment) cash for acquisitions consisting primarily of dialysis
clinics.
In addition, capital expenditures for property, plant and
equipment net of disposals were $297 million in 2005 and
$261 million in 2004. In 2005, capital expenditures were
$168 million in the North America segment and
$129 million for the International segment. In 2004,
capital expenditures were $160 million in the North America
segment and $101 million for the International segment. The
majority of our capital expenditures was used for the
replacement of assets in our existing clinics, equipping new
clinics, the modernization and expansion of production
facilities in North America, Germany, France and Italy and for
the capitalization of machines provided to customers primarily
in Europe. Capital expenditures were approximately 4% of total
revenue.
Financing
Net cash used in financing was $220 million in 2005
compared to cash used in financing of $452 million in 2004.
Reductions to our total external financing were less than the
prior year due to lower cash from operating activities, higher
capital expenditures and higher dividend payments partially
offset by proceeds from exercises of stock options. Cash on hand
was $85 million at December 31, 2005 compared to
$59 million at December 31, 2004.
63
At December 31, 2005, aggregate loans outstanding from
Fresenius AG amounted to approximately $18.8 million and
bore interest at market rates at
year-end.
We had
approximately $6 million in financing outstanding at
December 31, 2004, from Fresenius AG including
$3 million in loans and approximately $3 million due
May 2005 representing the balance due on the Companys
purchase of the Fresenius AGs adsorber business in 2003.
These loans were paid in 2005.
Year ended December 31, 2004 compared to year ended
December 31, 2003
Operations
We generated cash from operating activities of $828 million
in the year ended December 31, 2004 and $754 million
in the comparable period in 2003, an increase of about 10% over
the prior year. Cash flows were primarily generated by increase
in net income and working capital improvements.
Investing
Cash used in investing activities decreased from
$369 million to $365 million mainly because of
decreased capital expenditures but this decrease was offset by
increased cash acquisition payments. In 2004, we paid
approximately $104 million ($65 million for the North
American segment and $39 million for the International
segment) cash for acquisitions consisting primarily of dialysis
clinics. In the same period in 2003, we paid approximately
$92 million ($40 million for the North American
segment and $52 million for the International segment) cash
for acquisitions consisting primarily of dialysis clinics and
the adsorber business acquired from Fresenius AG.
In addition, capital expenditures for property, plant and
equipment net of disposals were $261 million in 2004 and
$276 million in 2003. In 2004, capital expenditures were
$160 million in the North America segment and
$101 million for the International segment. In 2003,
capital expenditures were $175 million in the North America
segment and $101 million for the International segment. The
majority of our capital expenditures was used for the
replacement of assets in our existing clinics, equipping new
clinics, distribution activities in our products business and
the expansion of production facilities in Germany, France, Italy
and North America. Capital expenditures were approximately 4% of
total revenue.
Financing
Net cash used in financing was $452 million in 2004
compared to cash used in financing of $416 million in 2003.
Although we increased our Accounts Receivable Facility, our
total external financing needs decreased due to higher cash from
operating activities partially offset by higher dividend
payments. Cash on hand was $59 million at December 31,
2004 compared to $48 million at December 31, 2003.
We had approximately $6 million in financing outstanding at
December 31, 2004, from Fresenius AG including
$3 million in loans and approximately $3 million due
May 2005 representing the balance due on the Companys
purchase of the adsorber business from Fresenius AG in 2003. At
December 31, 2003, the balance outstanding was
$30 million from Fresenius AG.
64
Obligations
The following table summarizes, as of December 31, 2005,
our obligations and commitments to make future payments under
our long-term debt, trust preferred securities and other
long-term obligations, and our commitments and obligations under
lines of credit and letters of credit.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due by period of
|
|
|
|
|
|
|
|
Contractual Cash Obligations
|
|
Total
|
|
|
1 Year
|
|
|
2-5 Years
|
|
|
Over 5 Years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in millions
|
|
|
|
|
|
|
|
|
Trust Preferred Securities
|
|
$
|
1,188
|
|
|
$
|
|
|
|
$
|
613
|
|
|
$
|
575
|
|
Long Term Debt
|
|
|
829
|
|
|
|
125
|
|
|
|
646
|
|
|
|
58
|
|
Capital Lease Obligations
|
|
|
5
|
|
|
|
2
|
|
|
|
2
|
|
|
|
1
|
|
Operating Leases
|
|
|
1,195
|
|
|
|
252
|
|
|
|
602
|
|
|
|
341
|
|
Unconditional Purchase Obligations
|
|
|
274
|
|
|
|
149
|
|
|
|
86
|
|
|
|
39
|
|
Other Long-term Obligations
|
|
|
14
|
|
|
|
14
|
|
|
|
|
|
|
|
|
|
Letters of Credit
|
|
|
80
|
|
|
|
80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,585
|
|
|
$
|
622
|
|
|
$
|
1,949
|
|
|
$
|
1,014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expiration per period of
|
|
|
|
|
|
Available Sources of Liquidity
|
|
Total
|
|
|
1 Year
|
|
|
2-5 Years
|
|
|
Over 5 Years
|
|
|
|
|
|
|
|
|
|
|
|
|
in millions
|
|
|
|
|
|
|
|
|
Accounts receivable
facility
(a)
|
|
$
|
366
|
|
|
$
|
366
|
|
|
$
|
|
|
|
$
|
|
|
Unused Senior Credit Lines
|
|
|
624
|
|
|
|
|
|
|
|
624
|
|
|
|
|
|
Other Unused Lines of Credit
|
|
|
66
|
|
|
|
66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,056
|
|
|
$
|
432
|
|
|
$
|
624
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Subject to availability of sufficient accounts receivable
meeting funding criteria.
|
The amount of guarantees and other commercial commitments at
December 31, 2005 is not significant.
Borrowings
Short-term borrowings of $57 million and $83 million
at December 31, 2005, and 2004, respectively, represent
amounts borrowed by certain of our subsidiaries under lines of
credit with commercial banks. The average interest rates on
these borrowings at December 31, 2005, and 2004 was 3.91%
and 4.69%, respectively. For information regarding short-term
borrowings from affiliates see Note 4b) in our Consolidated
Financial Statements.
Excluding amounts available under the 2003 Senior Credit
Agreement (as described under Liquidity above), at
December 31, 2005, we had $66 million available under
such commercial bank agreements. In some instances lines of
credit are secured by assets of the Companys subsidiary
that is party to the agreement and may contain various covenants
including, but not limited to, requirements for maintaining
defined levels of working capital, net worth, capital
expenditures and certain financial ratios.
We have an asset securitization facility (the accounts
receivable facility), which provides borrowings up to a
maximum of $460 million. Under the facility, certain
receivables are sold to NMC Funding Corporation (NMC
Funding), a wholly-owned subsidiary. NMC Funding then
assigns undivided ownership interests in the accounts receivable
to certain bank investors. Under the terms of the accounts
receivable facility, NMC Funding retains the right to recall all
transferred interests in the accounts receivable assigned to the
banks under the facility. As the Company has the right at any
time to recall the then outstanding interests, the receivables
remain on the Consolidated Balance Sheet and the proceeds from
the transfer of undivided interests are recorded as short-term
borrowings. At December 31, 2005, we had outstanding
short-term borrowings under the facility of $94 million.
The effective interest rate during the twelve months ended
December 31, 2005 ranged from 2.49%-
65
4.63%. At December 31, 2004, $336 million had been
received and were reflected as reductions to accounts
receivables. On October 20, 2005, we amended the facility
to extend the maturity date to October 19, 2006.
We entered into a credit agreement with the European Investment
Bank (EIB) on July 13, 2005 in the total amount
of $155 million consisting of a $106 million
(
90 million)
revolving credit line and a $49 million term loan and on
July 27, 2005, we issued two tranches of senior notes
(Euro Notes) totaling $236 million
(
200 million).
See Liquidity and Capital Resources
Liquidity, above. The first tranche was for
126 million
with a fixed interest rate of 4.57% and the second tranche for
74 million
with variable interest rates at EURIBOR plus applicable margin
resulting in an average interest rate of 4.10% for the period
ending December 31, 2005. The proceeds were used to
liquidate $155 million
(
128.5 million)
of Euro Notes issued in 2001 that were due in July 2005 and for
working capital. The Euro Notes mature on July 27, 2009.
Debt covenant disclosure EBITDA
EBITDA (earnings before interest, taxes, depreciation and
amortization) was approximately $1,190 million, 17.6% of
sales, for 2005, $1,085 million, 17.4% of sales, for 2004
and $974 million, 17.6% of sales, for 2003. EBITDA is the
basis for determining compliance with certain covenants
contained in our 2003 Senior Credit Agreement, our Euro Notes
and the indentures relating to our outstanding trust preferred
securities. You should not consider EBITDA to be an alternative
to net earnings determined in accordance with U.S. GAAP or
to cash flow from operations, investing activities or financing
activities. In additions, not all funds depicted by EBITDA are
available for managements discretionary use. For example,
a substantial portion of such funds are subject to contractual
restrictions and functional requirements for debt service, to
fund necessary capital expenditures and to meet other
commitments from time to time as described in more detail
elsewhere in this annual report on Form 20-F. EBITDA, as
calculated, may not be comparable to similarly titled measures
reported by other companies. A reconciliation of cash flow
provided by operating activities to EBITDA is calculated as
follows:
Reconciliation of measures for consolidated totals.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31,
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
in thousands
|
|
|
|
|
|
|
|
|
|
Total EBITDA
|
|
$
|
1,190,370
|
|
|
$
|
1,084,931
|
|
|
$
|
973,813
|
|
Settlement of shareholder proceedings
|
|
|
7,335
|
|
|
|
|
|
|
|
|
|
Interest expense (net of interest income)
|
|
|
(173,192
|
)
|
|
|
(183,746
|
)
|
|
|
(211,759
|
)
|
Income tax expense
|
|
|
(308,748
|
)
|
|
|
(265,415
|
)
|
|
|
(212,714
|
)
|
Change in deferred taxes, net
|
|
|
(3,675
|
)
|
|
|
34,281
|
|
|
|
91,312
|
|
Changes in operating assets and liabilities
|
|
|
(45,088
|
)
|
|
|
141,979
|
|
|
|
(17,910
|
)
|
Cash inflow from Hedging
|
|
|
|
|
|
|
14,514
|
|
|
|
131,654
|
|
Other items, net
|
|
|
3,302
|
|
|
|
1,299
|
|
|
|
(377
|
)
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
$
|
670,304
|
|
|
$
|
827,843
|
|
|
$
|
754,019
|
|
|
|
|
|
|
|
|
|
|
|
Outlook
Proposed Acquisition
On May 3, 2005, we entered into a definitive merger
agreement for the acquisition (the Acquisition) of
Renal Care Group, Inc. (RCG), a Delaware corporation
with principle offices in Nashville, Tennessee, for an all cash
purchase price of approximately $3,500,000. At December 31,
2005, RCG provided dialysis and ancillary services to over
32,360 patients through more than 450 owned outpatient dialysis
centers in 34 states within the United States, in addition to
providing acute dialysis services to more than 200 hospitals.
Completion of the Acquisition, approved by RCGs
stockholders in a vote held on August 24, 2005, is subject
to governmental approvals (including termination or expiration
of the waiting period under the Hart-Scott Rodino Antitrust
Improvements Act of 1976, as amended, the Act) and
other third-party consents.
66
On February 15, 2006, we announced that we and RCG had
entered into a definitive agreement to sell approximately 100
dialysis centers serving on average approximately 60-65 patients
per center to National Renal Institutes, Inc., a wholly owned
subsidiary of DSI Holding Company, Inc. The divestiture of these
centers is an important step toward concluding the review by the
United States Federal Trade Commission (FTC) of our acquisition
of Renal Care Group. The purchase price for the divested centers
is approximately $450 million to be paid in cash, subject
to post-closing adjustments for working capital and other
routine matters. The sale of the centers is expected to close
shortly after the completion of our acquisition of RCG. Both the
divestiture and the acquisition of RCG remain subject to FTC
approval.
In connection with the Acquisition, we entered into a commitment
letter pursuant to which Bank of America, N.A.
(BofA) and Deutsche Bank AG (DB) have
agreed, subject to certain conditions, to underwrite an
aggregate $5 billion in principal amount of term and
revolving loans to be syndicated to other financial
institutions. The loans will consist of a
5-year
$1 billion
revolving credit facility, a 5-year $2 billion term loan A
facility and a
7-year
$2 billion term loan B facility. The syndication of the
revolving credit facility and the term loan A facility have
already been completed. Funding is subject to customary closing
conditions and BofAs and DBs acquiescence to any
material modification to the merger agreement and any waiver of
any material conditions precedent under that agreement. Interest
on the new senior credit facilities will be at our option at a
rate equal to either (i) LIBOR plus an applicable margin,
or (ii) the higher of BofAs prime rate or the Federal
Funds rate plus 0.5% plus an applicable margin. The applicable
margin is variable and depends on our consolidated leverage
ratio (the Margin). The financing will be available
to us, among other uses, to pay the purchase price and related
expenses for the proposed acquisition of RCG, to refinance
outstanding indebtedness under our existing 2003 Senior Credit
Agreement and certain indebtedness of RCG, and for general
corporate purposes. In conjunction with the forecasted
utilization of the new senior credit facilities and the related
variable rate based interest payments, we entered into forward
starting interest rate swaps in the notional amount of
$2.5 billion. These instruments, designated as cash flow
hedges, effectively convert forecasted Libor based interest
payments into fixed rate based interest payments which fix the
interest rate on $2.5 billion of the forecasted financing
under the new senior credit facility at 4.32% plus the Margin.
These swaps are denominated in U.S. dollars and expire at
various dates between 2008 and 2012.
On November 30, 2005, we announced we had commenced a cash
tender offer (the Tender Offer), contingent upon
satisfaction of the conditions to the closing of the
Acquisition, for all the $160 million of RCGs 9%
Senior Subordinated Notes (the Notes). Under the
terms of the Tender Offer, the total consideration to be paid
for validly tendered and accepted Notes will be the present
value of the future cash flows up to and including
November 1, 2007, based on an assumption that the Notes
will be redeemed at a price of $1.045 per $1 principal amount of
Notes on such date, discounted at a rate equal to 50 basis
points over the yield to maturity on the 4.25%
U.S. Treasury Note due October 31, 2007. The terms of
the offer also require certain consents, (the
Consents), to certain proposed amendments to the
Indenture governing the Notes that would eliminate substantially
all restrictive covenants and certain other provisions of
Indenture. Upon consummation of the Tender Offer, holders of
Notes tendered together with Consents before the end of business
on December 13, 2005 will receive a consent payment of
$0.030 per $1 principal amount of Notes tendered which will be
included in our costs of the Acquisition. Notes and Consents
tendered after this date cannot be withdrawn and are not
entitled to receive the consent payment. Holders of Notes
tendered and not withdrawn will receive accrued and unpaid
interest from the last interest date up to, but not including,
the date payment is made for the Notes. As most recently
extended, the offer expires February 27, 2006, unless
further extended by the Company. The Tender Offer is contingent
upon receipt of consents from the holders of a majority in
aggregate outstanding principal amount of the Notes and
satisfaction of the conditions to the Acquisition. As of
5:00 p.m., New York City time, on January 27, 2006,
99.87% of the outstanding aggregate principal amount of the
Notes had been tendered. Tendered notes may no longer be
withdrawn.
On October 25, 2004, RCG received a subpoena from the
office of the United States Attorney for the Eastern District of
New York. The subpoena requires the production of documents
related to numerous aspects of their business and operations,
including those of RenaLab, Inc., their laboratory. The subpoena
includes specific requests for documents related to testing for
parathyroid hormone (PTH) levels and vitamin D therapies. RCG
has announced that it intends to cooperate with the
governments investigation.
67
On August 9, 2005, RCG received a subpoena from the office
of the United States Attorney for the Eastern District of
Missouri in connection with a joint civil and criminal
investigation. The subpoena requires the production of documents
related to numerous aspects of RCGs business and
operations. The areas covered by the subpoena include RCGs
supply company, pharmaceutical and other services that RCG
provides to patients, RCGs relationships to pharmaceutical
companies, RCGs relationships with physicians, medical
director compensation and joint ventures with physicians and its
purchase of dialysis equipment from us. RCG has announced that
it intends to cooperate with the governments investigation.
We believe the proposed acquisition will be consummated late in
the first quarter of 2006 and it will be earnings neutral to
slightly accretive in 2006 after excluding the transaction
related expenses and accretive from 2007 onward.
Accounting Treatment for the Conversion of our Preference
Shares into Ordinary Shares
The market value of the Companys shares on the close of
business, May 3, 2005, the day before the conversion was
announced, was
62.45 for the
ordinary shares and
44.65 for the
preference shares, a difference of
17.80. All
preference shareholders were offered the opportunity, as
approved by the EGM, to convert their preference share holdings
by submitting their preference shares and paying a premium,
initially set at
12.25 and
subsequently reduced to
9.75 with each
preference share submitted, in exchange for a like number of
ordinary shares. Based on these market values the converting
preference shareholders received a benefit of
8.05. The
conversion is expected to have an impact on the earnings (or
loss) per share available to the holders of our ordinary shares
upon conversion of our preference shares into ordinary shares,
under U.S. GAAP. As a result, the earnings per share calculation
in the first quarter of 2006 may need to reflect the difference
between (i) the market value of the ordinary share less the
conversion premium of
9.75 per
preference share and (ii) the carrying amount of the
preference shares at the conversion date, February 3, 2006,
as a reduction of income available to ordinary shareholders and
as a corresponding benefit to preference shareholders. The
carrying amount of the preference shares consists of their
historic investment and undistributed retained earnings
allocated to the preference shares under the two-class method.
The Company is continuing to analyze the need to reflect this
reduction or benefit in our financial statements, but based on
the market value of our ordinary shares on the close of business
on February 3, 2006, the impact is approximately
$0.9 billion or a reduction of $13.06 per ordinary share
and a benefit of 34.32 per preference share. As this calculation
compares the carrying amount of the preference shares which
consists of the original investment by the preference
shareholders plus any undistributed retained earnings the
preference shares are entitled to with the market value of the
ordinary shares at the date of closing, less the cash amount of
9.75 that the
preference shareholders paid, it ignores the appreciation in
value of our preference shares that had already occurred beyond
the proportionate amount of undistributed retained earnings
allocated to the preference shares. In addition, the measurement
date of the exchange is February 3, 2006 and the charge
would include all increases in the fair value of the ordinary
shares received by the preference shareholders as consideration
subsequent to the announcement date which significantly exceed
the earnings allocated to the preference shares during the
period from the announcement of the offer to the conversion date.
Investing
During 2006, we plan to make acquisitions in the range of
$100 million excluding the Acquisition of RCG noted above,
and capital expenditures in the range of $450 million.
Net Income
We expect our net income for 2006 to be in the 10%-15% range on
a proforma basis excluding the one-time costs related to the RCG
acquisition, such as integration costs, the write-off of
non-amortized prepaid financing fees, the potential net impact
from divestitures of dialysis clinics and the additional costs
related to the change of accounting principle for stock options
(FAS 123(R)) as compared to net income in 2005 excluding
one-time cost related to the transformation.
68
Recently Issued Accounting Standards
In November, 2004, the Financial Accounting Standards Board
issued SFAS No. 151, Inventory Costs an
amendment of ARB No. 43, Chapter 4 (FAS 151), which is
the result of its efforts to converge U.S. accounting
standards for inventories with International Financial Reporting
Standards. This statement requires abnormal amounts of idle
facility expense, freight, handling costs, and wasted material
(spoilage) to be recognized as current-period charges. It also
requires that allocation of fixed production overheads to the
costs of conversion be based on the normal capacity of the
production facilities. FAS 151 will be effective for inventory
costs incurred during fiscal years beginning after June 15,
2005. The Company will adopt FAS 151, which is not expected to
have a material impact on the Companys consolidated
financial statements, as of January 1, 2006.
In December, 2004, the Financial Accounting Standards Board
issued its final standard on accounting for share-based payments
(SBP), SFAS No. 123R (revised 2004), Share-Based
Payment (FAS 123(R)), which requires companies to expense the
cost of employee stock options and similar awards.
SFAS 123R requires determining the cost that will be
measured at fair value on the date of the SBP awards based upon
an estimate of the number of awards expected to vest. There will
be no right of reversal of cost if the awards expire without
being exercised. Fair value of the SBP awards will be estimated
using an option-pricing model that appropriately reflects the
specific circumstances and economics of the awards. Compensation
cost for the SBP awards will be recognized as they vest. Under
U.S tax law, this cost generates a tax credit, however, such
cost is not deductible under German tax law. The Company will
have two alternative transition methods, each having a different
reporting implication. The effective date is for interim and
annual periods beginning after June 15, 2005. On
April 14, 2005, the SEC delayed the implementation of FAS
123(R) to the beginning of the next Fiscal Year that begins
after June 15, 2005. The Company has not yet adopted FAS
123(R) and is in the process of determining the transition
method it is going to adopt and the potential impact on the
Companys consolidated financial statements.
In June 2005 the FASB ratified EITF 05-5, Accounting for
Early Retirement or Postemployment Programs with Specific
Features (Such As Terms Specified in Altersteilzeit Early
Retirement Arrangements). EITF 05-5 provides guidance on
the accounting for the German early retirement program providing
an incentive for employees, within a certain age group, to
transition from full-time or part-time employment into
retirement before their legal retirement age. The program
provides the employee with a bonus which is reimbursed by
subsidies from the German government if certain conditions are
met. According to EITF 05-5, the bonuses provided by the
employer should be accounted for as postemployment benefits
under SFAS 112, Employers Accounting for
Postretirement Benefits, with compensation cost recognized
over the remaining service period beginning when the individual
agreement is signed by the employee and ending when the active
service period ends. The government subsidy should be recognized
when the employer meets the necessary criteria and is entitled
to the subsidy. The effect of applying EITF 05-5 should be
recognized prospectively as a change in accounting estimate in
fiscal years beginning after December 15, 2005. The Company
is in compliance with
EITF
05-5.
C. Research and development
Research and development focuses strongly on the development of
new products, technologies and treatment concepts to optimize
treatment quality for dialysis patients, and on process
technology for manufacturing our products. Our research and
development activities are geared towards offering patients new
products and therapies in the area of dialysis and other
extracorporeal therapies to improve their quality of life and
increase their life expectancy. The quality and safety of our
systems are a central focus of our research. Additionally, the
research and development efforts aim to improve the quality of
dialysis treatment by matching it more closely with the
individual needs of the patient, while reducing the overall cost
for treatment. With our vertical integration, our research and
development department can apply our experience as the
worlds largest provider of dialysis treatments to product
development, and our technical development department works in
close cooperation with our dialysis machines users to keep
track of and meet customer needs. To maintain and further
enhance a continuous stream of product innovations, we have over
350 full time equivalents working in research and development
worldwide at December 31, 2005.
69
Research and development expenditures were $51 million in
2005, $51 million in 2004, and $50 million in 2003.
For information regarding recent product introductions, see
Item 4.B., Information on the Company
Business Overview New Product Introductions.
Approximately two-thirds of our research and development
activities are based in Germany and one third in North America.
We intend to continue to maintain our central research and
development operations for disposable products at our
St. Wendel, Germany facility and for durable products at
our Schweinfurt and Bad Homburg, Germany facilities. Local
activities will continue to focus on cooperative efforts with
those facilities to develop new products and product
modifications for local markets.
In North America, we have concentrated our business development
activities on expanding our products business in three main
areas:
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pharmaceutical products utilized in treating our renal patient
base
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innovative products to improve vascular access outcomes for our
renal patients
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products and technologies which leverage our core competencies
to provide extracorporeal therapies to treat other diseases
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In 2005, we introduced our 5008 series, a new generation of
hemodialysis machines. We completed development work on the 5008
series in 2004. These machines contain a large number of newly
developed technical components and enhanced processes, with a
modern, ergonomic design and a large user-friendly touch screen.
With the aid of major advances in electronics and interfaces,
controlling the highly complex processes involved in performing
and monitoring treatment has become safer and easier.
The dialyzer is extremely important in hemodialysis treatments,
as it filters toxins and excess water from the blood. Our
research is focused on the development of a new series of
dialyzers that offer a highly diffusive and convective removal
of substances from the patients blood. Our new dialyzer
series is based on further advances in the production technology
for its Fresenius Polysulfone membrane. This technology allows
the production of all membrane components, which are ultimately
responsible for the performance of the dialyzer, at a level of
precision that was previously not possible. As a result, the
membranes can be adapted to individual treatment modes. A
refined production process and tight quality control guarantee
that each of the dialyzers will cleanse the patients blood
according to specifications. We see this development as an
advance in the direction of dialyzers that will be able to
control the treatment process to meet individual requirements.
At present, dialyzer membranes function rather unselectively. In
the future, these membranes could either have specific
adsorption properties or contain substances for targeted release.
Another focus of our development activities is alternative
anticoagulants, which temporarily restrict blood clotting.
Coagulation should be reduced during the extracorporeal cycle -
i.e., while the patients blood is being cleansed, but not
during recirculation in the patients body. Our research in
this area is focused on the use of citrate as an alternative to
heparin to interrupt clotting, followed by the controlled
addition of calcium at the end of extracorporeal circulation to
neutralize the effects of citrate and restore coagulability.
A number of factors determine whether or not peritoneal dialysis
is suitable for a patient. Many of these factors are directly
linked to the products used for the treatment. Special design
details as well as the simple and safe handling of the tubes and
connectors used in transferring the peritoneal dialysis
solutions into the abdominal cavity reduce the risk of bacterial
contamination, which could, for example, lead to peritonitis.
Peritonitis can restrict the effectiveness of the peritoneum,
the bodys own membrane used in peritoneal dialysis
treatment, or render it unsuitable for use in further
treatments. In addition, the composition of the solutions as
well as the buffer systems used can influence the long-term
success of peritoneal dialysis treatment. We actively conducting
research in these areas and are able to build on our broad
technological experience.
D. Trend
information
For information regarding significant trends in our business see
Item 5.A., Operating Financial Review and
Prospects.
70
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Item 6.
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Directors, Senior Management and Employees
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A. Directors and senior management
General
As a partnership limited by shares, under the German Stock
Corporation Act, our corporate bodies are our general partner,
our supervisory board and our general meeting of shareholders.
Our sole general partner is Fresenius Medical Care Management AG
(Management AG), a wholly-owned subsidiary of
Fresenius AG. Management AG is required to devote itself
exclusively to the management of Fresenius Medical Care AG &
Co. KGaA.
For a detailed discussion of the legal and management structure
of Fresenius Medical Care AG & Co. KGaA, including the more
limited powers and functions of the supervisory board compared
to those of the general partner, see Item 6C, below,
Directors, Senior Management and Employees
Board Practices The Legal Structure of Fresenius
Medical Care AG & Co. KGaA.
The general partner has a Supervisory Board and a Management
Board. These two boards are separate and no individual may
simultaneously be a member of both boards.
The General Partners Supervisory Board
The Supervisory Board of Management AG consists of six members
who are elected by Fresenius AG as the sole shareholder of
Management AG. Pursuant to a pooling agreements for the benefit
of the public holders of our ordinary shares and the holders of
our preference shares, at least one-third (but no fewer than
two) of the members of the general partners Supervisory
Board are required to be independent directors as defined in the
pooling agreements, i.e., persons with no substantial
business or professional relationship with us, Fresenius AG, the
general partner, or any affiliate of any of them.
Each of the members of the general partners Supervisory
Board was also a member of the supervisory board of FMC-AG at
the time of registration of the transformation of legal form.
The terms of the current members of the Supervisory Board of
Management AG will expire at that dates on which their terms as
members of the supervisory board of FMC-AG would have expired.
Thereafter, their terms of office as members of the Supervisory
Board of Management AG will expire at the end of the general
meeting of shareholders of Fresenius Medical Care AG & Co.
KGaA in which the shareholders discharge the Supervisory Board
for the fourth fiscal year following the year in which the
Management AG supervisory board member was elected by Fresenius
AG, but not counting the fiscal year in which such members
term begins. Members of the general partners Supervisory
Board may be removed only by a resolution of Fresenius AG, as
sole shareholder of the general partner. Neither our
shareholders nor the separate supervisory board of FMC-AG &
Co. KGaA has any influence on the appointment of the Supervisory
Board of the general partner.
The general partners Supervisory Board ordinarily acts by
simple majority vote and the Chairman has a tie-breaking vote in
case of any deadlock. The principal function of the general
partners Supervisory Board is to appoint and to supervise
the general partners Management Board in its management of
the Company, and to approve mid-term planning, dividend payments
and matters which are not in the ordinary course of business and
are of fundamental importance to us.
71
The table below provides the names of the members of the
Supervisory Board of Management AG and their ages as of
December 31, 2005.
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Age as of
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December 31,
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Name
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2005
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Dr. Gerd Krick
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67
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Dr. Dieter Schenk, Deputy Chairman
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53
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Dr. Ulf M. Schneider, Chairman
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40
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Prof. Dr. Bernd Fahrholz
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58
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Walter L.
Weisman
(1)(2)
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70
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John Gerhard
Kringel
(1)(2)
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66
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(1)
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Members of the Audit Committee
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(2)
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Independent director for purposes of our pooling agreement
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DR. GERD KRICK has been a member of the Supervisory Board
of Management AG since December 28, 2005 and was Chairman
of the Supervisory Board of
FMC-AG
from
January 1, 1998 until the transformation of legal form. He
is also Chairman of the Supervisory Board of
FMC-AG
& Co. KGaA.
He was Chairman of the Fresenius AG Management Board from 1992
to May 2003 at which time he became chairman of its Supervisory
Board. Prior to 1992, he was a Director of the Medical Systems
Division of Fresenius AG and Deputy Chairman of the Fresenius AG
Management Board. From September 1996 until December 1997,
Dr. Krick was Chairman of the Management Board of
FMC-AG.
Dr. Krick
is a member of the Board of Directors of Adelphi Capital Europe
Fund, of the Supervisory Board of Allianz Private
Krankenversicherung AG, of the Advisory Board of HDI
Haftpflichtverband der deutschen Industrie V.a.G. and of the
Board of Trustees of the Donau Universität Krems. He is
also the Chairman of the Supervisory Board of Vamed AG.
Dr. ULF M. SCHNEIDER has been a member of the Supervisory
Board of Management AG since April 8, 2005 and Chairman of
the Supervisory Board of Management AG since April 15, 2005
and was a member of the Supervisory Board of
FMC-AG
since May 2004.
He was Chief Financial Officer of
FMC-AG
from November
2001 until March 2003. On March 7, 2003, Dr. Schneider
announced his resignation from the
FMC-AG
Management Board
to become Chairman of the Management Board of Fresenius AG,
effective May 28, 2003. Previously he was Group Finance
Director for Gehe UK plc., a pharmaceutical wholesale and retail
distributor, in Coventry, United Kingdom. He has held several
senior executive and financial positions since 1989 with
Gehes majority shareholder, Franz Haniel & Cie. GmbH,
Duisburg, a diversified German multinational company.
PROF. DR. BERND FAHRHOLZ has been a member of the
Supervisory Board of Management AG since April 8, 2005 and
was a member of Supervisory Board of
FMC-AG
from 1998 until
the transformation of legal form. He is also a member of the
Supervisory Board of
FMC-AG
& Co. KGaA.
He is partner in the law firm of Dewey Ballantine, LLP., and
from 2004 until September 30, 2005 was a partner in the law
firm of Nörr Stiefenhofer Lutz. He was a member of the
Management Board of Dresdner Bank AG since 1998 and was Chairman
from April 2000 until he resigned in March of 2003. He also
served as the deputy chairman of the Management Board of Allianz
AG and chairman of the Supervisory Board of Advance Holding AG
until March 25, 2003. He served on the Supervisory Boards
of BMW AG until May 13, 2004 and Heidelberg Cement AG until
May 6, 2004.
JOHN GERHARD KRINGEL has been a member of the Supervisory Board
of Management AG since December 28, 2005 and was a member
of the Supervisory Board of
FMC-AG
from
October 20, 2004, when his appointment to fill a vacancy
was approved by the local court, until the transformation of
legal form. His election to the Supervisory Board was approved
by the shareholders of
FMC-AG
at the Annual
General Meeting held May 24, 2005. He is also a member of
the Supervisory Board of
FMC-AG
& Co.
KGaA. He has the following other mandates: Natures View, LLC,
Alpenglow Development, LLC, Justice, LLC and River Walk, LLC.
Mr. Kringel spent 18 years with Abbott Laboratories
prior to his retirement as Senior Vice President, Hospital
Products, in 1998. Prior to Abbot Laboratories, he spent three
years as Executive Vice President of American
72
Optical Corporation, a subsidiary of Warner Lambert Co. and ten
years in the U.S. Medical Division of Corning Glassworks.
DR. DIETER SCHENK has been a member of the Supervisory
Board of Management AG since April 8, 2005 and Vice
Chairman of the Supervisory Board of Management AG since
April 15, 2005 and was Vice-Chairman of the Supervisory
Board of
FMC-AG
from
1996 until the transformation of legal form. He is also a
member/ Vice Chairman of the Supervisory Board of
FMC-AG
& Co. KGaA.
He is an attorney and tax advisor and has been a partner in the
law firm of Nörr Stiefenhofer Lutz since 1986.
Dr. Schenk is also a member of the Supervisory Board of
Fresenius AG. He also serves as a member and chairman of the
Supervisory Board of Gabor Shoes AG, a member and vice-chairman
of the Supervisory Boards of Greiffenberger AG and TOPTICA
Photonics AG.
WALTER L. WEISMAN has been a member of the Supervisory Board of
Management AG since December 28, 2005 and was a member of
the Supervisory Board of
FMC-AG
from 1996 until
the transformation of legal form. He is also a member of the
Supervisory Board of
FMC-AG
& Co. KGaA.
He is a private investor and a former Chairman and Chief
Executive Officer of American Medical International, Inc.
Mr. Weisman is on the board of Maguire Properties, Inc.
(Vice-Chairman), and Occidental Petroleum Corporation. He is
Vice-Chairman of the Board of Trustees for the California
Institute of Technology, Chairman of the Board of Trustees of
the Los Angeles County Museum of Art, past Chairman and life
trustee of the Board of Trustees of the Sundance Institute, and
a trustee of the Samuel H. Kress Foundation and the Public
Broadcasting Service, Inc.
The General Partners Management Board
Each member of the Management Board of Management AG is
appointed by the Supervisory Board of Management AG for a
maximum term of five years and is eligible for reappointment
thereafter. Their terms expire at our Annual General Meeting in
the years listed below.
The table below provides names, positions and terms of office of
the members of the Management Board of Management AG and their
ages as of December 31, 2005. Each of the members of the
general partners Management Board listed below held the
same position on the Management Board of Fresenius Medical Care
AG until the transformation of legal form.
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Age as of
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Year
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Dec. 31,
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Term
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Name
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2005
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Position
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Expires
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Dr. Ben J. Lipps
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65
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Chairman of the Management Board, Chief Executive Officer of
FMC-AG & Co. KGaA
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2008
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Roberto Fusté
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53
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Chief Executive Officer for Asia Pacific
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2006
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Dr. Emanuele Gatti
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50
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Chief Executive Officer for Europe, Middle East, Africa and
Latin America
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2010
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Lawrence Rosen
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48
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Chief Financial Officer
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2006
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Dr. Rainer Runte
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46
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General Counsel and Chief Compliance Officer
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2010
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Rice Powell
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50
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Co-Chief Executive Officer, Fresenius Medical Care North America
and President Products & Hospital Group
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2006
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Mats Wahlstrom
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51
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Co-Chief Executive Officer, Fresenius Medical Care North America
and President Fresenius Medical Services North America
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2006
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DR. BEN J. LIPPS became Chairman of the Management Board of
Management AG and Chief Executive Officer of the Company on
December 21, 2005. He held such positions in
FMC-AG
from May 1,
1999 until the transformation of legal form and was Vice
Chairman of the Management Board from September until May 1999.
He was Chief Executive Officer of Fresenius Medical Care North
America until February 2004. He was President, Chief Executive
Officer, Chief Operating Officer and a director of Fresenius USA
from October 1989
73
through February 2004, and served in various capacities with
Fresenius USAs predecessor from 1985 through 1989. He has
been active in the field of dialysis for more than
35 years. After earning his masters and doctoral
degrees at the Massachusetts Institute of Technology in chemical
engineering, Dr. Lipps led the research team that developed
the first commercial Hollow Fiber Artificial Kidney at the end
of the 1960s. With that, the triumphal procession of the
artificial kidney the dialyzer
commenced. Before joining the Fresenius Group in 1985,
Dr. Lipps held several research management positions, among
them with DOW Chemical.
DR. EMANUELE GATTI became a member of the Management Board
of Management AG and Chief Executive Officer for Europe,
Latin America, Middle East and Africa on December 21, 2005.
He held such positions in
FMC-AG
from May 1997
until the transformation of legal form. After completing his
studies in bioengineering, Dr. Gatti lectured at several
biomedical institutions. He continues to be involved in
comprehensive research and development activities focusing on
dialysis and blood purification, biomedical signal analysis,
medical device safety and health care economics. Dr. Gatti
has been with the company since 1989. Before being appointed to
the Management Board in 1997, he was responsible for the
dialysis business in Southern Europe.
ROBERTO FUSTÉ became a member of the Management Board of
Management AG and Chief Executive Officer for Asia-Pacific on
December 21, 2005. He held such positions in
FMC-AG
from
January 1, 1999 until the transformation of legal form.
After finishing his studies in economic sciences at the
University of Valencia, he founded the company Nephrocontrol
S.A. in 1983. In 1991, Nephrocontrol was acquired by the
Fresenius Group, where Mr. Fusté has since worked.
Before being appointed to the Management Board of
FMC-AG
in 1999,
Mr. Fusté held several senior positions within the
company in Europe and the Asia-Pacific region.
DR. RAINER RUNTE became a member of the Management Board of
Management AG and General Counsel and Chief Compliance Office on
December 21, 2005. He was been a Member of the Management
Board for Law & Compliance of
FMC-AG
from
January 1, 2004 until the transformation of legal form, and
has worked for the Fresenius group for 14 years. Previously
he served as scientific assistant to the law department of the
Johann Wolfgang Goethe University in Frankfurt and as an
attorney in a law firm specialized in economic law.
Dr. Runte took the position as Senior Vice President for
Law of Fresenius Medical Care in 1997 and was appointed as
deputy member of the Management Board in 2002.
LAWRENCE A. ROSEN became a member of the Management Board of
Management AG and Chief Financial Officer on April 8,
2005. He held such positions in
FMC-AG
from
November 1, 2003 until the transformation of legal form.
Prior to that, he worked for Aventis S.A., Strasbourg, France,
and its predecessor companies, including Hoechst AG, beginning
in 1984. His last position was Group Senior Vice President for
Corporate Finance and Treasury. He holds a Masters of Business
Administration (MBA) from the University of Michigan and a
Bachelor of Science in Economics from the State University of
New York at Brockport.
RICE POWELL became a member of the Management Board of
Management AG on December 21, 2005. He was member of the
Management Board of
FMC-AG
from February
2004 until the transformation of legal form and is Co-Chief
Executive Officer of Fresenius Medical Care North America. He is
also is member of the Management Board for the Products &
Hospital Group of Fresenius Medical Care in North America. Since
1997 he has been the President of Renal Products division of
Fresenius Medical Care in North America including the
Extracorporal Therapy and Laboratory Services. He has more than
25 years of experience in the healthcare industry. From
1978 to 1996 he held various positions within Baxter
International Inc. (USA), Biogen Inc. (USA) and Ergo Sciences
Inc. (USA).
MATS WAHLSTROM became a member of the Management Board of
Management AG on December 21, 2005. He was member of the
Management Board of
FMC-AG
from February
2004 until the transformation of legal form and is Co-Chief
Executive Officer of Fresenius Medical Care North America. He
has nearly 20 years of experience in the renal field. From
1983 to 1999, Mats Wahlstrom held various positions at Gambro AB
(Sweden), including President and CEO of Gambro in North America
as well as CFO of the Gambro Group. In November 2002 he joined
Fresenius Medical Care as President of Fresenius Medical
Cares services division in North America.
74
The business address of all members of our Management Board and
Supervisory Board is Else-Kröner-Strasse 1, 61352 Bad
Homburg, Germany.
The Supervisory Board of FMC-AG & Co. KGaA
The Supervisory Board of FMC-AG & Co. KGaA consists of
six members who are elected by the shareholders of FMC-AG KGaA
in a general meeting. Fresenius AG, as the sole shareholder of
Management AG, the general partner, is barred from voting for
election of the Supervisory Board of FMC-AG & Co. KGaA
but will, nevertheless retain significant influence over the
membership of the FMC-AG & Co. KGaA Supervisory Board
in the foreseeable future. See Item 6C, below,
Directors, Senior Management and Employees
Board Practices The Legal Structure of
FMC-AG & Co. KGaA.
The current Supervisory Board of FMC-AG & Co. KGaA consists
of the persons who were the members of the Supervisory Board of
FMC-AG at the effective date of the transformation of legal
form, other than Dr. Ulf M. Schneider, who resigned from
the Supervisory Board of FMC-AG & Co. KGaA at that
time. In accordance with German law, Management AG intends to
apply for court appointment of a sixth member of
FMC-AG & Co. KGaA supervisory Board to replace
Dr. Schneider. That persons appointment will be
subject to shareholder approval at the next annual general
meeting following the appointment. For information regarding the
names, ages, terms of office and business experience of the
current members of the Supervisory Board of FMC-AG &
Co. KGaA, see The General Partners Supervisory
Board, above.
The terms of the current members of the Supervisory Board of
FMC-AG KGaA will expire at that dates on which their terms as
members of the supervisory board of FMC-AG would have expired.
Thereafter, their terms of office as members of the Supervisory
Board of FMC-AG KGaA will expire at the end of the general
meeting of shareholders of FMC-AG KGaA, in which the
shareholders discharge the Supervisory Board for the fourth
fiscal year following the year in which they were elected, but
not counting the fiscal year in which such members term
begins. Members of the FMC-AG KGaA Supervisory Board may be
removed only by a resolution of the shareholder of FMC-AG KGaA
with a majority of three quarters of the votes cast at such
general meeting. Fresenius AG is barred from voting on such
resolutions. The Supervisory Board of FMC-AG KGaA ordinarily
acts by simple majority vote and the Chairman has a tie-breaking
vote in case of any deadlock.
The principal functions of the Supervisory Board of FMC-AG KGaA
are to oversee the management of the Company but, in this
function, the supervisory board of a partnership limited by
shares has less power and scope for influence than the
supervisory board of a stock corporation. The Supervisory Board
of FMC-AG KGaA is not entitled to appoint the general partner or
its executive bodies, nor may the KGaA Supervisory Board subject
the general partners management measures to its consent or
issue rules of procedure for the general partner. Only the
Supervisory Board of Management AG, elected solely by Fresenius
AG, has the authority to appoint or remove members of the
general partners Management Board. See Item 6C,
below, Directors, Senior Management and
Employees Board Practices The Legal
Structure of FMC-AG KGaA.. Among other matters, the
Supervisory Board of FMC-AG KGaA will, together with the general
partner, fix the agenda for the annual general meeting and make
recommendations with respect to approval of the companys
annual financial statements and dividend proposals. The
Supervisory Board of FMC-AG KGaA will also propose nominees for
election as members of the KGaA Supervisory Board and propose
the companys auditors for approval by shareholders.
B. Compensation
Compensation of Our Management Board and our Supervisory
Board
For the year ended December 31, 2005, we paid aggregate
compensation to all members of the Management Board of
approximately $11.0 million, $4.4 million in fixed
compensation and $6.6 million in variable compensation. The
aggregate compensation fees to all members of the Supervisory
Board was $0.607 million including compensation to
Dr. Krick for his duties as Chairman of the Supervisory
Board. We pay an annual retainer fee to each member of the
Supervisory Board, with the Chairman paid twice that amount and
the Deputy Chairman paid 150% of that amount. We reimburse
Supervisory Board members for their reasonable travel and
accommodation expenses incurred with respect to their duties as
Supervisory Board members. The aggregate
75
compensation reported above does not include amounts paid as
fees for services rendered by certain business or professional
entities with which some of the Supervisory Board members are
associated.
During 2005 there were no options awarded to members of the
Management Board to purchase our preference shares under the
Fresenius Medical Care AG 2001 International Plan. As of
December 31, 2005 but after giving effect to the adjustment
of options so that they are exercisable to acquire ordinary
shares, Management Board members held no options to acquire
preference share and options to acquire 39,566 Ordinary
shares, all of which were exercisable at a weighted average
exercise price of
51.48 under
Fresenius Medical Care AG 98 Plan 2 and
(ii) 88,463 options, all of which are exercisable at a
weighted average exercise price of
51.21 under
Fresenius Medical Care AG 98 Plan 1 and options to
acquire 347,701 Ordinary shares, of which 273,773 were
exercisable at a weighted average exercise price of
61.19 under the
FMC 2001 stock incentive plan. During 2005, Board members
exercised 62,628 options.
In connection with the settlement of the shareholder proceedings
contesting the resolutions of the Extraordinary General Meeting
(EGM) held August 30, 2005 that approved the
transformation, the conversion of our preference shares into
ordinary shares and related matters (See Item 8.A.7,
Financial Information Legal
Proceedings), we agreed that commencing with remuneration
paid for fiscal year 2006, we would provide data on the
individual remuneration of our management board members. We will
include such information in our Annual Report on Form 20-F
to be filed in 2007 for our 2006 fiscal year.
C. Board Practices
For information relating to the terms of office of the
Management Board and the Supervisory Board of the general
partner, Fresenius Medical Care Management AG, (Management
AG) and of the Supervisory Board of FMC-AG KGaA, and the
periods in which the members of those bodies have served in
office, see Item 6.A. above. We do not have a remuneration
committee. Prior to the transformation, the Supervisory Board of
FMC-AG performed the functions usually performed by the
remuneration committee, and those functions, including review of
the compensation of the members of the general partners
Management Board, are now performed by the general
partners Supervisory Board. The current audit committee of
the Management AG Supervisory Board consists of Dr. Gerd
Krick, Walter Weisman and John Gerhard Kringel. The primary
function of the audit committee is to assist the general
partners Supervisory Board in fulfilling its oversight
responsibilities, primarily through:
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overseeing managements conduct or our financial reporting
process and the internal accounting and financial control
systems and auditing of our financial statements;
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monitoring our internal controls risk program;
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monitoring the independence and performance of our outside
auditors;
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providing an avenue of communication among the outside auditors,
management and the Supervisory Board;
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retaining the services of our independent auditors (subject to
the approval by our shareholders at our Annual General Meeting)
and approval of their fees; and
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pre-approval of all audit and non-audit services performed by
KPMG Deutsche Treuhand-Gesellschaft AG
Wirtschaftsprüfungsgesellschaft, the accounting firm which
audits our consolidated financial statements.
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In connection with the settlement of the shareholder proceedings
contesting the resolutions of the Extraordinary General Meeting
(EGM) held August 30, 2005 that approved the
transformation, the conversion of our preference shares into
ordinary shares and related matters (See Item 8.A.7,
Financial Information
76
Legal Proceedings), we agreed, together with Fresenius AG
and our general partner, Management AG, to establish two
additional committees. These committees are:
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A joint committee (the Joint Committee) (gemeinsamer
Ausschuss) of the supervisory boards of Management AG and
FMC-AG
& Co.
KGaA consisting of two members designated by each supervisory
board to advise and decide on certain extraordinary management
measures, including
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transactions between us and Fresenius AG with a value in excess
of 0.25% of our consolidated revenue, and
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acquisitions and sales of significant participations and parts
of our business, the spin-off of significant parts of our
business, initial public offerings of significant subsidiaries
and similar matters. A matter is significant for
purposes of this approval requirement if 40% of our consolidated
revenues, our consolidated balance sheet total assets or
consolidated profits, determined by reference to the arithmetic
average of the said amounts shown in our audited consolidated
accounts for the previous three fiscal years, are affected by
the matter.
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An Audit and Corporate Governance Committee within the
Supervisory Board of FMC-AG & Co. KGaA consisting of
three members, at least two of whom shall be persons with no
significant business, professional or personal connection with
FMC-AG & Co. KGaA or any of our affiliates, apart from
membership on our supervisory board or the supervisory board of
Management AG or Fresenius AG. The Audit and Corporate
Governance Committee will be responsible for reviewing the
report of our general partner on relations with related parties
and for reporting to the overall supervisory board thereon.
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Governance Matters
American Depositary Shares representing our Ordinary shares and
our Preference shares are listed on the New York Stock Exchange
(NYSE). However, because we are a foreign
private issuer, as defined in the rules of the Securities
and Exchange Commission, we are exempt from the governance rules
set forth in Section 303A of the NYSEs Listed
Companies Manual, except for the obligation to maintain an audit
committee in accordance with Rule 10A-3 under the
Securities Exchange Act of 1934, as amended, and the obligation
to notify the NYSE if any of our executive officers becomes
aware of any material non-compliance with any applicable
provisions of Section 303A. Instead, the NYSE requires that
we disclose the significant ways in which our corporate
practices differ from those applicable to U.S. domestic
companies under NYSE listing standards. You can review a summary
of the most significant differences by going to Corporate
Governance on the Investor Relations page of our web site,
www.fmc-ag.com.
The Legal Structure of FMC-AG & Co. KGaA
A partnership limited by shares, or KGaA is a mixed form of
entity under German corporate law, which has elements of both a
partnership and a corporation. Like a stock corporation, the
share capital of a KGaA is held by its shareholders. The KGaA
and the stock corporation are the only legal forms provided by
German law for entities whose shares trade on the stock
exchange. A KGaA is similar to a limited partnership because
there are two groups of owners, the general partner on the one
hand, and the KGaA shareholders on the other hand. The general
partner of FMC-AG & Co. KGaA is Management AG, a
wholly-owned subsidiary of Fresenius AG.
A KGaAs corporate bodies are its general partner, its
supervisory board and the general meeting of shareholders. A
KGaA may have one or more general partners who conduct the
business of the KGaA. However, unlike a stock corporation, in
which the supervisory board appoints the management board, the
supervisory board of a KGaA has no influence on appointment of
the managing body the general partner. Likewise, the
removal of the general partner from office is subject to very
strict conditions, including the necessity of a court decision.
The general partner(s) may, but are not required to, purchase
shares of the KGaA. The general partner(s) are personally liable
for the liabilities of the KGaA in relations with third parties
subject, in the case of corporate general partners, to
applicable limits on liability of corporations generally.
77
KGaA shareholders exercise influence in the general meeting
through their voting rights but, in contrast to a stock
corporation, the general partner of a KGaA has a veto right with
regard to material resolutions. The members of the supervisory
board of a KGaA are elected by the general meeting as in a stock
corporation. However, since the supervisory board of a KGaA has
less power than the supervisory board of a stock corporation,
the indirect influence exercised by the KGaA shareholders on the
KGaA via the supervisory board is also less significant than in
a stock corporation. For example, the supervisory board is not
usually entitled to issue rules of procedure for management or
to specify business management measures that require the
supervisory boards consent. The status of the general
partner or partners in a KGaA is stronger than that of the
shareholders based on: (i) the management powers of the
general partners, (ii) the existing veto rights regarding
material resolutions adopted by the general meeting and
(iii) the independence of the general partner from the
influence of the KGaA shareholders as a collective body.
After formation, the articles of association of a KGaA may be
amended only through a resolution of the general meeting adopted
by a qualified 75% majority and with the consent of the general
partner. Therefore, neither group of owners (i.e., the KGaA
shareholders and the general partners) can unilaterally amend
the articles of association without the consent of the other
group. Fresenius AG will, however, continue to be able to exert
significant influence over amendments to the articles of
association of FMC-AG & Co. KGaA through its ownership
of a significant percentage of the Companys ordinary
shares after the transformation, since such amendments require a
75% vote of the shares present at the meeting rather than three
quarters of the outstanding shares.
Fresenius AGs control of the Company through ownership of
the general partner is conditioned upon its ownership of a
substantial amount of the Companys share capital. See
The Articles of Association of
FMC-AG
& Co.
KGaA Organization of the Company, below.
Management and Oversight
The management structure of FMC-AG & Co. KGaA is
illustrated as follows (percentage ownership amounts refer to
ownership of the Companys total share capital of all
classes):
General Partner
Management AG, a stock corporation and a wholly owned subsidiary
of Fresenius AG, is the sole general partner of
FMC-AG & Co. KGaA and will conduct its business and
represent it in external relations. Use of a stock corporation
as the legal form of the general partner enables the Company to
maintain a management structure substantially similar to
FMC-AGs management structure prior to the transformation.
The internal
78
corporate governance structure of the general partner is
substantially similar to the prior structure at FMC-AG. In
particular, the general partner has substantially the same
provisions in its articles of association concerning the
relationship between the general partners management board
and the general partners supervisory board and, subject to
applicable statutory law, substantially the same rules of
procedure for its executive bodies. Management AG was
incorporated on April 8, 2005 and registered with the
commercial register in Hof an der Saale on May 10, 2005.
The registered share capital of Management AG is
1.5 million.
The general partner has not made a capital contribution to the
Company and, therefore, will not participate in its assets or
its profits and losses. However, the general partner will be
compensated for all outlays in connection with conducting the
business of the Company, including the remuneration of members
of the management board and the supervisory board. See
The Articles of Association of
FMC-AG & Co. KGaA Organization of the
Company below.
FMC-AG
& Co.
KGaA itself will bear all expenses of its administration.
Management AG will devote itself exclusively to the management
of FMC-AG & Co. KGaA. The general partner will receive
annual compensation amounting to 4% of its capital for assuming
the liability and the management of
FMC-AG
& Co.
AG & Co. KGaA. This payment of
60,000 per annum
constitutes a guaranteed return on Fresenius AGs
investment in the share capital of Management AG. This payment
is required for tax reasons, to avoid a constructive dividend by
the general partner to Fresenius AG in the amount of reasonable
compensation for undertaking liability for the obligations of
Fresenius Medical Care AG & Co. KGaA.
FMC-AG
& Co.
KGaA will also reimburse the general partner for the
remuneration paid to the members of its management board and its
supervisory board.
The statutory provisions governing a partnership, including a
KGaA, provide in principle that the consent of the KGaA
shareholders at a general meeting is required for transactions
that are not in the ordinary course of business. However, as
permitted by statute, the articles of association of
FMC-AG & Co. KGaA permit such decisions to be made by
Management AG as general partner without the consent of the
FMC-AG & Co. KGaA shareholders. This negation of the
statutory restrictions on the authority of Management AG as
general partner is intended to replicate governance arrangements
in FMC-AG by retaining for the management board of the general
partner the level of operating flexibility that existed prior to
the transformation. The shareholders of FMC-AG did not have any
such veto right regarding determinations of the management
board. This does not affect the general meetings right of
approval with regard to measures of unusual significance, such
as a sale of a substantial part of a companys assets, as
developed in German Federal Supreme Court decisions.
The relationship between the supervisory board and management
board of Management AG is substantially similar to the
governance provisions at FMC-AG prior to the transformation. In
particular, under the articles of association of Management AG,
the same transactions are subject to the consent of the
supervisory board of Management AG as previously required the
consent of the supervisory board of FMC-AG. These transactions
include, among others:
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The acquisition, disposal and encumbrance of real property if
the value or the amount to be secured exceeds a specified
threshold
(
5 million);
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The acquisition, formation, disposal or encumbrance of an equity
participation in other enterprises if the value of the
transaction exceeds a specified threshold
(
5 million);
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The adoption of new or the abandonment of existing lines of
business or establishments;
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Conclusion, amendment and termination of affiliation agreements;
and
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Certain inter-company legal transactions.
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The members of the management board of Management AG are the
same persons who constituted the Management Board of FMC-AG at
the effective time of the transformation. The Company expects
that Gary Brukardt, currently President and Chief Executive
Officer of Renal Care Group Inc. (RCG), will join
the management board of the general partner after the RCG
merger. The supervisory boards of FMC-AG & Co. KGaA and
of Management AG consist to a large extent of the same persons
as the supervisory board of FMC-AG prior to the transformation.
The Company and Fresenius AG have entered into a pooling
agreement requiring that at least one-third (and not less than
two) members of the general partners supervisory board be
independent
79
directors i.e., persons without a substantial
business or professional relationship with the Company,
Fresenius AG, or any affiliate of either, other than as a member
of the supervisory board of the Company or the general partner.
See Item 10B Additional Information
Articles of Association Description of the Pooling
Arrangements.
Supervisory Board
The supervisory board of a KGaA is similar in certain respects
to the supervisory board of a stock corporation. Like the
supervisory board of a stock corporation, the supervisory board
of a KGaA is under an obligation to oversee the management of
the business of the Company. The supervisory board is elected by
the KGaA shareholders at the general meeting. Shares in the KGaA
held by the general partner or its affiliated companies are not
entitled to vote for the election of the supervisory board
members of the KGaA. Accordingly, Fresenius AG will not be
entitled to vote its shares for the election of
FMC-AG & Co. KGaAs supervisory board.
Although Fresenius AG will not be able to vote in the election
of FMC-AG & Co. KGaAs supervisory board,
Fresenius AG will nevertheless retain influence on the
composition of the supervisory board of
FMC-AG
& Co.
KGaA. Because (i) the former members of the FMC-AG
supervisory board continued in office as the initial members of
the supervisory board of FMC-AG & Co. KGaA (except for
Dr. Ulf M. Schneider) and (ii) in the future, the
FMC-AG & Co. KGaA supervisory board will propose future
nominees for election to its supervisory board (subject to the
right of shareholders to make nominations), Fresenius AG is
likely to retain influence over the selection of the supervisory
board of FMC-AG & Co. KGaA. In addition, under our
articles of association, a resolution for the election of
members of the supervisory board requires the affirmative vote
of 75% of the votes cast at the general meeting. Such a high
vote requirement could be difficult to achieve, which could
result in the need to apply for court appointment of members to
the supervisory board after the end of the terms of the members
in office at the effective time of the transformation. Any such
application would be made by the general partner on behalf of
FMC-AG & Co. KGaA
The supervisory board of FMC-AG & Co. KGaA will have
less power and scope for influence than the supervisory board of
the Company as a stock corporation. The supervisory board of
FMC-AG & Co. KGaA is not entitled to appoint the
general partner or its executive bodies. Nor may the supervisory
board subject the management measures of the general partner to
its consent, or issue rules of procedure for the general
partner. Management of the Company will be conducted by the
management board of the general partner and only the supervisory
board of the general partner (all of whose members will be
elected solely by Fresenius AG) has the authority to appoint or
remove them. FMC-AG & Co. KGaA supervisory board will
represent FMC-AG & Co. KGaA in transactions with the
general partner.
FMC-AG & Co. KGaA shareholders will approve
FMC-AG & Co. KGaAs annual financial statements at
the general meeting. Except for making a recommendation to the
general meeting regarding such approval, this matter is not
within the competence of the supervisory board.
General Meeting
The general meeting is the resolution body of the KGaA
shareholders. Among other matters, the general meeting of a KGaA
approves its annual financial statements. The internal procedure
of the general meeting corresponds to that of the general
meeting of a stock corporation. The agenda for the general
meeting is fixed by the general partner and the KGaA supervisory
board except that the general partner cannot propose nominees
for election as members of the KGaA supervisory board or
proposals for the Company auditors.
The supervisory board of a KGaA is, in principle, elected by all
shareholders of the KGaA at the general meeting. Although
Fresenius AG, as sole shareholder of the general partner of the
Company is not entitled to vote its shares in the election of
the supervisory board of FMC-AG & Co. KGaA, Fresenius
AG will retain a degree of influence on the composition of the
supervisory board of FMC-AG & Co. KGaA. See The
Supervisory Board, above.
80
The transformation itself did not affect voting rights or
required votes at the general meeting. Fresenius AG, which owned
approximately 50.8% of the voting ordinary shares of the Company
prior to the transformation, will not have a voting majority at
the general meeting of FMC-AG & Co. KGaA due to the
conversion of preference shares into ordinary shares. However,
under German law, resolutions may be adopted by the vote of a
majority of the shares present at the meeting. Therefore, based
on Fresenius AGs ownership of approximately 36.8% of the
Companys voting ordinary shares after the transformation,
as long as less than approximately 73.5% of the Companys
ordinary shares are present at a meeting, Fresenius AG will
continue to possess a controlling vote on most matters presented
to the shareholders, other than election of the supervisory
board and the matters subject to a ban on voting as set forth
below, at least until the Company issues additional ordinary
shares in a capital increase in which Fresenius AG does not
participate.
Fresenius AG is subject to various bans on voting at general
meetings due to its ownership of the general partner. Fresenius
AG is banned from voting on resolutions concerning the election
and removal from office of the
FMC-AG
& Co.
KGaA supervisory board, ratification or discharge of the actions
of the general partner and members of the supervisory board, the
appointment of special auditors, the assertion of compensation
claims against members of the executive bodies, the waiver of
compensation claims, and the selection of auditors of the annual
financial statements.
Certain matters requiring a resolution at the general meeting
will also require the consent of the general partner, such as
amendments to the articles of association, consent to
inter-company agreements, dissolution of the Company, mergers, a
change in the legal form of the partnership limited by shares
and other fundamental changes. The general partner therefore has
a veto right on these matters. Annual financial statements are
subject to approval by both the KGaA shareholders and the
general partner.
The Articles of Association of FMC-AG & Co.
KGaA
The articles of association of FMC-AG & Co. KGaA are
based on the articles of association of Fresenius Medical Care
AG, particularly with respect to capital structure, the
supervisory board and the general meeting. Other provisions of
the articles of association, such as those dealing with
management of
FMC-AG
& Co.
KGaA, have been adjusted to the new KGaA legal form. Certain
material provisions of the articles of association are explained
below, especially variations from the articles of association of
FMC-AG.
The following
summary is qualified in its entirety by reference to the
complete form of articles of association of
FMC-AG
& Co.
KGaA, an English translation of which is on file with the SEC.
Organization of the Company
The provisions relating to the management board in FMC-AGs
articles of association have been replaced in the articles of
association of
FMC-AG
& Co.
KGaA by new provisions relating to the general partner of
FMC-AG
& Co.
KGaA. The general partner is Management AG with its registered
office in Hof an der Saale, Germany.
Under the articles of association, possession of the power to
control management of the Company through ownership of the
general partner is conditioned upon ownership of a specific
minimum portion of the Companys share capital. Under
German law, Fresenius AG could significantly reduce its holdings
in the Companys share capital while at the same time
retaining its control over the Company through ownership of the
general partner. Under the Companys prior legal structure
as a stock corporation, a shareholder had to hold more than 50%
of the Companys voting ordinary shares to exercise a
controlling influence. If half the Companys total share
capital had been issued as preference shares (the maximum
permissible by law), such controlling interest would represent
more than 25% of the Companys total share capital. This
minimum threshold for control of more than 25% of the total
share capital of a stock corporation is the basis for a
provision in the articles of association
FMC-AG
& Co.
KGaA requiring that a parent company within the group hold an
interest of more than 25% of the share capital of
FMC-AG
& Co.
KGaA. As a result, the general partner will be required to
withdraw from
FMC-AG
& Co.
KGaA if its shareholder no longer holds, directly or indirectly,
more than 25% of the Companys share capital. The effect of
this provision is that the parent company within the group may
not reduce its capital participation in FMC-AG & Co. KGaA
below such amount without causing the withdrawal of the general
81
partner. The articles of association also permit a transfer of
all shares in the general partner to the Company, which would
have the same effect as withdrawal of the general partner.
The articles of association also provide that the general
partner must withdraw if the shares of the general partner are
acquired by a person who does not make an offer under the German
Takeover Act to acquire the shares of the Companys other
shareholders within three months of the acquisition of the
general partner. The consideration to be offered to shareholders
must include any portion of the consideration paid for the
general partners shares in excess of the general
partners equity capital, even if the parties to the sale
allocate the premium solely to the general partners
shares. The Companys articles of association provide that
the general partner can be acquired only by a purchaser who at
the same time acquires more than 25% of FMC-AG & Co.
KGaAs share capital. These provision would therefore
trigger a takeover offer at a lower threshold than the German
Takeover Act, which requires that a person who acquires at least
30% of a companys shares make an offer to all
shareholders. The provisions will enable shareholders to
participate in any potential control premium payable for the
shares of the general partner, although the obligations to make
the purchase offer and extend the control premium to outside
shareholders could also discourage an acquisition of the general
partner, thereby discouraging a change of control.
In the event that the general partner withdraws from FMC-AG
& Co. KGaA as described above or for other reasons, the
articles of association provide for continuation of the Company
as a so-called unified KGaA
(
Einheits-KGaA
), i.e., a KGaA in which the general
partner is a wholly-owned subsidiary of the KGaA. Upon the
coming into existence of a unified KGaA, the
shareholders of
FMC-AG
& Co.
KGaA would ultimately be restored to the status as shareholders
in a stock corporation, since the shareholding rights in the
general partner would be exercised by FMC-AG & Co.
KGaAs supervisory board pursuant to the articles of
association. If the KGaA is continued as a unified
KGaA, an extraordinary or the next ordinary general
meeting would vote on a change in the legal form of the
partnership limited by shares into a stock corporation. In such
a case, the change of legal form back to the stock corporation
would be facilitated by provisions of the articles of
association requiring only a simple majority vote and that the
general partner consent to the transformation of legal form.
The provisions of the articles of association of
FMC-AG & Co. KGaA on the general meeting correspond for
the most part to the provisions of FMC-AGs articles of
association. Under the amendments to the German Stock
Corporation Act through the Act on Corporate Integrity and
Modernization of the Law on Shareholder Claims, the articles
provide that from the outset of the general meeting the
chairperson may place a reasonable time limit on the
shareholders right to speak and ask questions, insofar as
is permitted by law.
The articles of association provide that to the extent legally
required, the general partner must declare or refuse its consent
to resolutions adopted by the meeting directly at the general
meeting.
Annual Financial Statement and Allocation of
Profits
The articles of association of
FMC-AG
& Co.
KGaA on rendering of accounts require that the annual financial
statement and allocation of profits of FMC-AG & Co.
KGaA be submitted for approval to the general meeting of
FMC-AG & Co. KGaA.
Corresponding to the articles of FMC-AG, the articles of
association of FMC-AG & Co. KGaA provide that
Management AG is authorized to transfer up to a maximum of half
of the annual surplus of FMC-AG & Co. KGaA to other
retained earnings when setting up the annual financial
statements.
Articles of Association of Management AG
The articles of association of Management AG are based
essentially on FMC-AGs articles of association. In
particular, the provisions of its articles of association on
relations between the management board and the supervisory board
have been incorporated into the articles of association of
Management AG. The amount of Management AGs share capital
is
1,500,000,
issued as 1,500,000 registered shares without par value. By
law, notice of any transfer of Management AGs shares must
be provided to the management board of Management AG in order
for the transferee to be recognized as a new shareholder by
Management AG.
82
D. Employees
At December 31, 2005, we had 47,521 employees, as compared
to 44,526 at December 31, 2004 and 41,097 at
December 31, 2003. They are employed in our principal
segments as follows: North America 30,129 employees and
International 17,392. The following table shows the number of
employees by segment and our major category of activities for
the last three fiscal years.
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2005
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2004
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2003
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North America
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Dialysis Care
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24,737
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23,389
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22,096
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Dialysis Products
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5,392
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5,229
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5,209
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|
|
|
30,129
|
|
|
|
28,618
|
|
|
|
27,305
|
|
International
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dialysis Care
|
|
|
10,626
|
|
|
|
9,608
|
|
|
|
7,678
|
|
|
Dialysis Products
|
|
|
6,766
|
|
|
|
6,300
|
|
|
|
6,114
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,392
|
|
|
|
15,908
|
|
|
|
13,792
|
|
We are members of the Chemical Industry Employers Association
for most sites in Germany and we are bound by union agreements
negotiated with the respective union representatives in those
sites. We generally apply the principles of the Association and
the related union agreements for those sites where we are not
members. We are also party to additional shop agreements
negotiated with works councils at individual facilities that
relate to those facilities. In addition, approximately 3% of our
U.S. employees are covered by collective bargaining
agreements. During the last three fiscal years, we have not
suffered any labor-related work disruptions.
E. Share ownership
As of December 31, 2005, no member of the Supervisory Board
or the Management Board beneficially owned 1% or more of our
outstanding Ordinary shares or our outstanding Preference
shares. At December 31, 2005 Management Board members held
options to acquire 667,964 Preference shares of which
options to purchase 384,399 Preference shares were
exercisable at a weighted average exercise price of
40.19. Those
options expire at various dates between 2008 and 2014.
Options to Purchase Our Securities
Stock Option Plans
At December 31, 2005, we had awards outstanding under the
terms of various stock-based compensation plans, including the
2001 plan, which is the only plan with stock option awards
currently available for grant. Under the 2001 plan, convertible
bonds with a principal of up to
10,240 may
be issued to the members of the Management Board and other
employees of the Company representing grants for up to
4 million non-voting Preference shares. The convertible
bonds have a par value of
2.56 and bear
interest at a rate of 5.5%. Except for the members of the
Management Board, eligible employees may purchase the bonds by
issuing a non-recourse note with terms corresponding to the
terms of and secured by the bond. The Company has the right to
offset its obligation on a bond against the employees
obligation on the related note; therefore, the convertible bond
obligations and employee note receivables represent stock
options issued by the Company and are not reflected in the
consolidated financial statements. The options expire in ten
years and one third of each grant can be exercised beginning
after two, three or four years from the date of the grant. Bonds
issued to Board members who did not issue a note to the Company
are recognized as a liability on the Companys balance
sheet.
Upon issuance of the option, the employees have the right to
choose options with or without a stock price target. The
conversion price of options subject to a stock price target
becomes the stock exchange quoted price of the Preference shares
upon the first time the stock exchange quoted price exceeds the
Initial Value by at least 25%. The Initial Value is the average
price of the Preference shares during the last 30 trading
days prior to the date of grant. In the case of options not
subject to a stock price target, the number of convertible bonds
awarded to the eligible employee would be 15% less than if the
employee elected options subject to the stock price target.
83
The conversion price of the options without a stock price target
is the Initial Value. Each option entitles the holder thereof,
upon payment the respective conversion price, to acquire one
Preference share. Up to 20% of the total amount available for
the issuance of awards under the 2001 plan may be issued each
year through May 22, 2006. At December 31, 2005,
options for up to 172,224 Preference shares are available for
grant in future periods under the 2001 Plan.
During 1998, the Company adopted two stock incentive plans
(FMC98 Plan 1 and FMC98 Plan 2) for the
Companys key management and executive employees. These
stock incentive plans were replaced by the 2001 plan and no
options have been granted since 2001. Under these plans eligible
employees had the right to acquire Preference shares of the
Company. Options granted under these plans have a ten-year term,
and one third of them vest on each of the second, third and
fourth anniversaries of the award date. Each Option can be
exercised for one Preference share.
At December 31, 2005 under all plans, there were
4,102,539 options outstanding with a weighted average
remaining contractual life of 7.27 years with 1,536,917
exercisable at a weighted average exercise price of
46.33.
Item 7.
Major
Shareholders and Related Party Transactions
A. Major Shareholders
Security Ownership of Certain Beneficial Owners of
Fresenius Medical Care
Our outstanding share capital consists of Ordinary shares and
non-voting Preference shares that are issued only in bearer
form. Accordingly, unless we receive information regarding
acquisitions of our shares through a filing with the Securities
and Exchange Commission or through the German statutory
requirements referred to below, we have no way of determining
who our shareholders are or how many shares any particular
shareholder owns except as described below with respect to our
shares held in American Depository Receipt (ADR)
form. Because we are a foreign private issuer under the rules of
the Securities and Exchange Commission, our directors and
officers are not required to report their ownership of our
equity securities or their transactions in our equity securities
pursuant to Section 16 of the Exchange Act. Under the
German Securities Exchange Law
(Wertpapierhandelsgesetz)
,
however, persons who discharge managerial responsibilities
within an issuer of shares are obliged to notify the issuer and
the German Federal Financial Supervisory Authority of their own
transactions in shares of the issuer. This obligation also
applies to persons who are closely associated with the persons
discharging managerial responsibility. Additionally, holders of
voting securities of a German company listed on the official
market
(amtlicher Handel)
of a German stock exchange or a
corresponding trading segment of a stock exchange within the
European Union are obligated to notify the company of the level
of their holding whenever such holding reaches, exceeds or falls
below certain thresholds, which have been set at 5%, 10%, 25%,
50% and 75% of a companys outstanding voting rights.
We have been informed that as of December 31, 2005,
Fresenius AG owned the majority, 50.8%, of our Ordinary shares.
At December 31, 2005 Fresenius AGs Ordinary shares
represented approximately 36% of our total share capital. As a
result of the conversion of our preference shares into ordinary
shares, Fresenius AGs percentage ownership of our ordinary
shares was reduced to approximately 36.8%, but it percentage
ownership of our total share capital was unchanged. JPMorgan
Chase Bank, our ADR depositary, informed us, that as of
December 31, 2005, 1,627,015 Ordinary ADSs, each
representing one-third of an Ordinary share, were held of record
by 5,878 U.S. holders and 47,183 Preference ADSs, each
representing one-third of a Preference share, were held of
record by 3 U.S. holders. Ordinary shares and
Preference shares held directly by U.S. holders accounted
for less than 1% of our Ordinary shares outstanding and less
than 1% of our Preference shares outstanding as of
December 31, 2005. For more information regarding ADRs and
ADSs see Item 10.B. Memorandum and Articles of
Association Description of American Depositary
Receipts.
Security Ownership of Certain Beneficial Owners of
Fresenius AG
Fresenius AGs share capital consists of ordinary shares
and non-voting preference shares. Both classes of shares are
issued only in bearer form. Accordingly, Fresenius AG has no way
of determining who its shareholders
84
are or how many shares any particular shareholder owns. However,
under the German Securities Exchange Law, holders of voting
securities of a German company listed on the official market
(amtlicher Handel)
of a German stock exchange or a
corresponding trading segment of a stock exchange within the
European Union are obligated to notify the company of certain
levels of holdings, as described above.
Based on the most recent information available, Else
Kröner-Fresenius Foundation owns approximately 61% of the
Fresenius AG Ordinary shares. In addition, Allianz Deutschland
AG informed Fresenius AG that it owned between 5%-10% of the
Fresenius AG Ordinary shares.
B. Related party transactions
In connection with the formation of Fresenius Medical Care AG,
and the combination of the dialysis businesses of Fresenius AG
and W.R. Grace & Co. in the second half 1996, Fresenius
AG and its affiliates and Fresenius Medical Care and its
affiliates entered into several agreements for the purpose of
giving effect to the merger and defining our ongoing
relationship. Fresenius AG and W.R. Grace & Co.
negotiated these agreements. The information below summarizes
the material aspects of certain agreements, arrangements and
transactions between Fresenius Medical Care and Fresenius AG and
their affiliates. Some of these agreements have been previously
filed with the Securities and Exchange Commission. The following
descriptions are not complete and are qualified in their
entirety by reference to the agreements, copies of which have
been filed with the Securities and Exchange Commission and the
New York Stock Exchange. We believe that the leases, the supply
agreements and the service agreements are no less favorable to
us and no more favorable to Fresenius AG than would have been
obtained in arms-length bargaining between independent
parties. The trademark and other intellectual property
agreements summarized below were negotiated by Fresenius AG and
W.R. Grace & Co., and, taken independently, are not
necessarily indicative of market terms.
Dr. Gerd Krick and Dr. Dieter Schenk, the Chairman and
Vice Chairman, respectively, of the Supervisory Board of our
general partner and of the Supervisory Board of
FMC-AG & Co. KGaA, are also Chairman and a member,
respectively, of the Supervisory Board of Fresenius AG, and
Dr. Ulf M. Schneider, a member of the Supervisory Board of
our general partner and a former member of the Supervisory Board
of FMC-AG, is Chairman of the Management Board and CEO of
Fresenius AG.
In the discussion below regarding our contractual and other
relationships with Fresenius AG:
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the term we (or us) and our affiliates refers
only
to Fresenius Medical Care AG & Co. KGaA and its
subsidiaries; and
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the term Fresenius AG and its affiliates refers
only
to Fresenius AG and affiliates of Fresenius AG
other than
Fresenius Medical Care AG and its subsidiaries.
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Real Property Lease
We did not acquire the land and buildings in Germany that
Fresenius Worldwide Dialysis used when we were formed in the
second half 1996. Fresenius AG or its affiliates have leased
part of the real property to us, directly, and transferred the
remainder of that real property to two limited partnerships.
Fresenius AG is the sole limited partner of each partnership,
and the sole shareholder of the general partner of each
partnership. These limited partnerships, as landlords, have
leased the properties to us and to Fresenius AG, as applicable,
for use in our respective businesses. The aggregate annual rent
payable by us under these leases is approximately
12.6 million,
which was approximately $15.6 million as of
December 31, 2005, exclusive of maintenance and other
costs, and is subject to escalation, based upon the German cost
of living index for a four-person employee household. The leases
for manufacturing facilities have a ten-year term, followed by
two successive optional renewal terms of ten years each at our
election. The leases for the other facilities have a term of ten
years. Based upon an appraisal, we believe that the rents under
the leases represent fair market value for such properties. For
information with respect to our principal properties in Germany,
see Item 4.D. Property, plants and equipment.
85
Covenants Not to Compete
Each of Fresenius AG and W.R. Grace has agreed that, for a
period of ten years after our formation, it will not compete
with us in any aspect of the business of supplying renal
care-related goods and services, including laboratories.
However, Fresenius AG may continue its home care business.
Trademarks
Fresenius AG continues to own the name and mark
Fresenius and its F logo. Fresenius AG
and Fresenius Medical Care Deutschland GmbH, our principal
German subsidiary, have entered into agreements containing the
following provisions. Fresenius AG has granted to our German
subsidiary, for our benefit and that of our affiliates, an
exclusive, worldwide, royalty-free, perpetual license to use
Fresenius Medical Care in our company names, and to
use the Fresenius marks, including some combination marks
containing the Fresenius name that were used by Fresenius
AGs dialysis business, and the Fresenius Medical Care name
as a trade name, in all aspects of the renal business. Our
German subsidiary, for our benefit and that of our affiliates,
has also been granted a worldwide, royalty-free, perpetual
license:
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to use the Fresenius Medical Care mark in the then
current National Medical Care non-renal business if it is used
as part of Fresenius Medical Care together with one
or more descriptive words, such as Fresenius Medical Care
Home Care or Fresenius Medical Care
Diagnostics;
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to use the F logo mark in the National Medical Care
non-renal business, with the consent of Fresenius AG. That
consent will not be unreasonably withheld if the mark using the
logo includes one or more additional descriptive words or
symbols; and
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to use Fresenius Medical Care as a trade name in
both the renal business and the National Medical Care non-renal
business.
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We and our affiliates have the right to use Fresenius
Medical Care as a trade name in other medical businesses
only with the consent of Fresenius AG. Fresenius AG may not
unreasonably withhold its consent. In the U.S. and Canada,
Fresenius AG will not use Fresenius or the
F logo as a trademark or service mark, except that
it is permitted to use Fresenius in combination with
one or more additional words such as Pharma Home
Care as a service mark in connection with its home care
business and may use the F logo as a service mark
with the consent of our principal German subsidiary. Our
subsidiary will not unreasonably withhold its consent if the
service mark includes one or more additional descriptive words
or symbols. Similarly, in the U.S. and Canada, Fresenius AG
has the right to use Fresenius as a trade name, but
not as a mark, only in connection with its home care and other
medical businesses other than the renal business and only in
combination with one or more other descriptive words, provided
that the name used by Fresenius AG is not confusingly similar to
our marks and trade names. After the expiration of Fresenius
AGs ten-year covenant not to compete with us, Fresenius AG
may use Fresenius in its corporate names if it is
used in combination with one or more additional descriptive word
or words, provided that the name used by Fresenius AG is not
confusingly similar to the Fresenius Medical Care marks or
corporate or trade names.
Other Intellectual Property
Some of the patents, patent applications, inventions, know-how
and trade secrets that Fresenius Worldwide Dialysis used prior
to our formation were also used by other divisions of Fresenius
AG. For Biofine, the polyvinyl chloride-free packaging material,
Fresenius AG has granted to our principal German subsidiary, for
our benefit and for the benefit of our affiliates, an exclusive
license for the renal business and a non-exclusive license for
all other fields except other non-renal medical businesses. Our
German subsidiary and Fresenius AG will share equally any
royalties from licenses of the Biofine intellectual property by
either our German subsidiary or by Fresenius AG to third parties
outside the renal business and the other non-renal medical
businesses. In addition, Fresenius AG has transferred to our
German subsidiary the other patents, patent applications,
inventions, know-how and trade secrets that were used
predominantly in Fresenius AGs dialysis business. In
certain cases Fresenius Worldwide Dialysis and the other
Fresenius AG divisions as a whole each paid a significant part
of the development costs for patents, patent applications,
inventions, know-how and trade secrets that were used by both
86
prior to the merger. Where our German subsidiary acquired those
jointly funded patents, patent applications, inventions,
know-how and trade secrets, our subsidiary licensed them back to
Fresenius AG exclusively in the other non-renal medical
businesses and non-exclusively in all other fields. Where
Fresenius AG retained the jointly funded patents, patent
applications, inventions, know-how and trade secrets, Fresenius
AG licensed them to our German subsidiary exclusively in the
renal business and non-exclusively in all other fields.
Supply Agreements
We produce most of our products in our own facilities. However,
Fresenius AG manufactures some of our products for us,
principally dialysis concentrates, at facilities that Fresenius
AG retained. These facilities are located in Brazil and France.
Conversely, a facility in Italy that Fresenius AG transferred to
us produces products for Fresenius Kabi AG, a subsidiary of
Fresenius AG.
Our local subsidiaries and those of Fresenius AG have entered
into supply agreements for the purchase and sale of products
from the above facilities. Prices under the supply agreements
include a unit cost component for each product and an annual
fixed cost charge for each facility. The unit cost component,
which is subject to annual review by the parties, is intended to
compensate the supplier for variable costs such as costs of
materials, variable labor and utilities. The fixed cost
component generally will be based on an allocation of the 1995
fixed costs of each facility, such as rent, depreciation,
production scheduling and quality control. The fixed cost
component will be subject to adjustment by good-faith
negotiation every twenty-four months. If the parties cannot
agree upon an appropriate adjustment, the adjustment will be
made based on an appropriate consumer price index in the country
in which the facility is located. During 2005, we recognized
sales of $31.7 million to Fresenius AG and its affiliates
and we made purchases of $43.0 million from Fresenius AG
and its affiliates.
Each supply agreement has a term that is approximately equal to
the estimated average life of the relevant production assets,
typically having terms of four and one-half to five years. Each
supply agreement may be terminated by the purchasing party after
specified notice period, subject to a compensation payment
reflecting a portion of the relevant fixed costs.
The parties may modify existing or enter into additional supply
agreements, arrangements and transactions. Any future
modifications, agreements, arrangements and transactions will be
negotiated between the parties and will be subject to the
approval provisions of the pooling agreements and the regulatory
provisions of German law regarding dominating enterprises.
Services Agreement
We obtain administrative and other services from Fresenius AG
headquarters and from other divisions and subsidiaries of
Fresenius AG. These services relate to, among other things, data
processing, financial and management accounting and audit, human
resources, risk management, quality control, production
management, research and development, marketing and logistics.
For 2005, Fresenius AG charged us approximately
$36.2 million for these services. Conversely, we have
provided certain services to other divisions and subsidiaries of
Fresenius AG relating to research and development, plant
administration, patent administration and warehousing. For 2005,
we charged approximately $7.5 million to Fresenius
AGs other divisions and subsidiaries for services we
rendered to them.
We and Fresenius AG may modify existing or enter into additional
services agreements, arrangements and transactions. Any such
future modifications, agreements, arrangements and transactions
will be negotiated between the parties and will be subject to
the approval provisions of the pooling agreements and the
regulations of German law regarding dominating enterprises.
Financing
At December 31, 2005, aggregate loans outstanding from
Fresenius AG amounted to approximately $18.8 million which bore
interest at market rates at year-end. Interest paid during 2005
was $0.5 million. In addition, during 2005, we made the
final payment relating to the acquisition of Fresenius AGs
adsorber business for approximately $3 million.
87
Other Interests
Dr. Gerd Krick, chairman of the Supervisory Board of
FMC-AG & Co. KGaA and member of the supervisory board
of Management AG, was a member of the administration board of
Dresdner Bank, Luxembourg, S.A., a subsidiary of Dresdner Bank
AG. See Security Ownership of Certain
Beneficial Owners of Fresenius AG. Dresdner Bank AG,
through its New York and Cayman branches, was a documentation
agent and was one of the joint lead arrangers and book managers
under 2003 Senior Credit Agreement. It was also one of four
co-arrangers of our prior principal credit agreement and one of
the managing agents under that facility. Dr. Dieter Schenk,
Vice Chairman of the Supervisory Boards of Management AG
and of
FMC-AG
Co.
KGaA and a member of the Supervisory Board of Fresenius AG,
is a partner in the law firm of Nörr Stiefenhofer Lutz,
which has provided legal services to Fresenius AG and
Fresenius Medical Care. During 2005, Nörr Stiefenhofer Lutz
was paid approximately $1.7 million for these services. See
Security Ownership of Certain Beneficial
Owners of Fresenius AG. Dr. Schenk is one of the
executors of the estate of the late Mrs. Else Kröner.
Vermögensverwaltungsgesellschaft Nachlass Else
Kröner mbH, a 100 per cent subsidiary of
Else Kröner Fresenius Stiftung, a charitable foundation
established under the will of the late Mrs. Kröner,
owns the majority of the voting shares of Fresenius AG.
Prof. D. Bernd Fahrholz, a member of the Supervisory
Boards of FMC-AG & Co. KGaA and of
Management AG, was previously with the law firm of
Nörr Stiefenhofer Lutz until September 30, 2005.
Under the articles of association of FMC-AG &
Co. KGaA, we will pay Fresenius AG a guaranteed return
on its capital investment in our general partner. See The
Legal Structure of FMC-AG & Co. KGaA, above.
Products
During 2005, we recognized $31.7 million of sales to
Fresenius AG and its affiliates. We made purchases from
Fresenius AG and its affiliates in the amount of
$43.0 million during 2005.
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Item 8.
|
Financial information
|
The information called for by parts 8.A.1 through 8.A.6 of
this item is in the section beginning on Page F-1.
This section describes material legal actions and proceedings
relating to us and our business.
Commercial Litigation
We were 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 liabilities arising out
of product-liability related litigation (including
asbestos-related actions), pre-Merger tax claims and other
claims unrelated to NMC, which was W.R. Grace
& Co.s dialysis business prior to the Merger. In
connection with the Merger, W.R. Grace
&
Co.-Conn.
agreed to indemnify us, 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 NMCs 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 our obligation. 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 Services examination report on tax periods
1993 to 1996; that during those years W.R. Grace
& Co. deducted approximately $122 million in
interest attributable to corporate owned life insurance
(COLI) policy loans; that W.R. Grace
& Co. has paid $21 million 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.
88
In October 2004, W.R. Grace & Co. obtained
bankruptcy court approval to settle its COLI claims with the
Service. In January 2005, W.R. Grace & Co., FMCH
and Sealed Air Corporation executed a settlement agreement with
respect to the Services COLI-related claims and other tax
claims. On April 14, 2005, W.R. Grace & Co.
paid the Service approximately $90 million in connection
with taxes owed for the tax periods 1993 to 1996 pursuant to a
bankruptcy court order directing W.R. Grace & Co.
to make such payment. 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 us 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 FMCH 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.
In 2003, we reached agreement with the asbestos creditors
committees on behalf of the W.R. Grace & Co.
bankruptcy estate and W.R. Grace & Co. in the
matters pending in the Grace Chapter 11 Proceedings for the
settlement of all fraudulent conveyance and tax claims against
it and other claims related to us that arise out of the
bankruptcy of W.R. Grace & Co. Under the terms of
the settlement agreement as amended (the Settlement
Agreement), fraudulent conveyance and other claims raised
on behalf of asbestos claimants will be dismissed with prejudice
and we 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 provisions. Under the
Settlement Agreement, we will pay a total of $115 million
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 has been approved by the U.S. District Court.
Subsequent to the Merger, W.R. Grace & Co. was
involved in a multi-step transaction involving Sealed Air
Corporation (Sealed Air, formerly known as Grace
Holding, Inc.). We are engaged in litigation with Sealed Air to
confirm our 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 of our payment obligation, this litigation will
be dismissed with prejudice.
On April 4, 2003, FMCH filed a suit in the United States
District Court for the Northern District of California,
Fresenius USA, Inc., et al., v. Baxter International Inc.,
et al., Case
No. C
03-1431,
seeking a declaratory judgment that it does not infringe on
patents held by Baxter International Inc. and its subsidiaries
and affiliates (Baxter), that the patents are
invalid, and that Baxter is without right or authority to
threaten or maintain suit against it for alleged infringement of
Baxters patents. In general, the alleged patents concern
touch screens, conductivity alarms, power failure data storage,
and balance chambers for hemodialysis machines. Baxter has filed
counterclaims against FMCH seeking monetary damages and
injunctive relief, and alleging that it willfully infringed on
Baxters patents. Both parties have filed multiple
dispositive motions, some of which have been decided by the
court. Trial is currently scheduled for June 2006. FMCH believes
its claims are meritorious, although the ultimate outcome of any
such proceedings cannot be predicted at this time and an adverse
result could have a material adverse effect on our business,
financial condition, and results of operations.
Other Litigation and Potential Exposures
Several small ordinary shareholders challenged the resolutions
adopted at the EGM approving the conversion of the preference
shares into ordinary shares, the adjustment of the employee
participation programs, the creation of authorized capital and
the transformation of the legal form of the Company, with the
objective of having the resolutions declared null and void. On
December 19, 2005 the Company and the claimants agreed to a
settlement (Prozessvergleich) with the participation of
Fresenius AG and Management AG, the general partner,
and all proceedings were terminated.
89
Pursuant to the settlement, Management AG undertook to
(i) make an ex gratia payment to the ordinary shareholders
of the Company (other than Fresenius AG), of
0.12 for every
share issued as an ordinary share up to August 30, 2005 and
(ii) to pay to ordinary shareholders who, at the EGM of
August 30, 2005, voted against the conversion proposal, an
additional
0.69
per ordinary share. Ordinary shareholders who were shareholders
at the close of business on the day of registration of the
conversion and transformation with the commercial register were
entitled to a payment under (i) above. Ordinary
shareholders who voted against the conversion resolution in the
extraordinary general meeting on August 30, 2005, as
evidenced by the voting cards held by the Company, were entitled
to a payment under (ii) above, but only in respect of
shares voted against the conversion resolution. The right to
receive payment under (ii) has lapsed as to any shareholder
who did not make a written claim for payment with the Company by
February 28, 2006.
The Company also agreed to bear court fees and shareholder legal
expenses in connection with the settlement.
The total costs of the settlement are estimated to be
approximately $7.3 million. A further part of the
settlement agreement and German law require that these costs be
borne by Fresenius AG and the general partner,
Management AG. Under U.S. GAAP, however, these costs
must be reflected by the entity benefiting from the actions of
its controlling shareholder. As a result, the Company has
recorded the settlement amount as an expense in Selling, General
and Administrative expense and a contribution in Additional Paid
in Capital in Shareholders Equity.
As part of the settlement, the Company, with the participation
of Fresenius AG and the general partner, Management AG, also
agreed to establish, at the first ordinary general meeting after
registration of the transformation of legal form, a joint
committee (the Joint Committee) (
gemeinsamer
Ausschuss
) of the supervisory boards of Management AG and
FMC-AG & Co. KGaA with authority to advise and decide on
certain significant transactions between the Company and
Fresenius AG and to approve certain significant acquisitions,
dispositions, spin-offs and similar matters. The Company also
agreed to establish an Audit and Corporate Governance Committee
of the FMC-AG & Co. KGaA Supervisory Board to
review the report of the general partner on relations with
related parties and report to the overall supervisory board
thereon. See Item 6;C., Directors, Senior Management
and Employees Board Practices. The general
partner Management AG also undertook in this settlement to
provide data on the individual remuneration of its management
board members according to provisions of the German Commercial
Code, commencing with remuneration paid during 2006.
In April 2005, FMCH received a subpoena from the
U.S. Department of Justice, Eastern District of Missouri,
in connection with a joint civil and criminal investigation. The
subpoena requires production of a broad range of documents
relating to the FMCHs operations, with specific attention
to documents related to clinical quality programs, business
development activities, medical director compensation and
physician relations, joint ventures and anemia management
programs. We are cooperating with the governments requests
for information. An adverse determination in this investigation
could have a material adverse effect on our business, financial
condition and results of operations.
In October 2004, FMCH and its Spectra Renal Management
subsidiary received subpoenas from the U.S. Department of
Justice, Eastern District of New York in connection with a civil
and criminal investigation, which requires production of a broad
range of documents relating to our operations, with specific
attention to documents relating to laboratory testing for
parathyroid hormone (PTH) levels and vitamin D
therapies. We are cooperating with the governments
requests for information. While we believe that we have complied
with applicable laws relating to PTH testing and use of
vitamin D therapies, an adverse determination in this
investigation could have a material adverse effect on our
business, financial condition, and results of operations.
From time to time, we are a party to or may be threatened with
other litigation or arbitration, claims or assessments arising
in the ordinary course of our business. Management regularly
analyzes current information including, as applicable, our
defenses and insurance coverage and, as necessary, provides
accruals for probable liabilities for the eventual disposition
of these matters.
90
We, like other health care providers, conduct our operations
under intense government regulation and scrutiny. We 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. We 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 our
interpretations or the manner in which it conducts 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, our business activities
and practices are subject to extensive review by regulatory
authorities and private parties, and continuing audits,
investigative demands, subpoenas, other inquiries, claims and
litigation relating to our compliance with applicable laws and
regulations. We 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.
We operate many 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. We rely upon
our management structure, regulatory and legal resources, and
the effective operation of our compliance program to direct,
manage and monitor the activities of these employees. On
occasion, we may identify instances where employees,
deliberately or inadvertently, have submitted inadequate or
false billings. The actions of such persons may subject us and
our subsidiaries to liability under the Anti-Kickback Statute,
the Stark Statute and the 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,
workers compensation or related claims, many of which
involve large claims and significant defense costs. We have been
and are currently subject to these suits due to the nature of
our business and expect that those types of lawsuits may
continue. Although we maintain insurance at a level which we
believe to be prudent, we cannot assure that the coverage limits
will be adequate or that insurance will cover all asserted
claims. A successful claim against us or any of our subsidiaries
in excess of insurance coverage could have a material adverse
effect upon it and the results of our operations. Any claims,
regardless of their merit or eventual outcome, could have a
material adverse effect on our reputation and business.
We have also had claims asserted against us and have had
lawsuits filed against us relating to businesses that we have
acquired or divested. These claims and suits relate both to
operation of the businesses and to the acquisition and
divestiture transactions. When appropriate, we have asserted our
own claims, and claims for indemnification. A successful claim
against us or any of our subsidiaries could have a material
adverse effect upon us and the results of our operations. Any
claims, regardless of their merit or eventual outcome, could
have a material adverse effect on our reputation and business.
Accrued Special Charge for Legal Matters
At December 31, 2001, we recorded a pre-tax special charge
of $258 million to reflect anticipated expenses associated
with the defense and resolution of pre-Merger tax claims,
Merger-related claims, and commercial insurer claims (see
Note 8 and Note 18 to the consolidated financial
statements in this report). The costs associated with the
Settlement Agreement and settlements with insurers have been
charged against this accrual. While we believe that our
remaining accruals reasonably estimate our currently anticipated
costs related to the continued defense and resolution of the
remaining matters, no assurances can be given that our actual
costs incurred will not exceed the amount of this accrual.
We generally pay annual dividends on both our preference shares
and our ordinary shares in amounts that we determine on the
basis of the prior year unconsolidated earnings of Fresenius
Medical Care AG as shown in the statutory financial
statements that we prepare under German law on the basis of the
accounting principles of the
91
German Commercial Code (
Handelsgesetzbuch
or
HGB
),
subject to authorization by a resolution to be passed at our
general meeting of shareholders. Under our articles of
association, the minimum dividend payable on the preference
shares is
0.12
per share and, if we declare dividends, holders of our
preference shares must receive
0.06 per share
more than the dividend on an ordinary share. Under German law,
we must, in all cases, pay the annual dividend declared on our
preference shares before we pay dividends declared on our
ordinary shares.
The general partner and our Supervisory Board propose dividends
and the shareholders approve dividends for payment in respect of
a fiscal year at the Annual General Meeting in the following
year. Since all of our shares are in bearer form, we remit
dividends to the depositary bank (
Depotbank
) on behalf of
the shareholders.
Our senior credit agreement and outstanding euro notes, as well
as the senior subordinated indentures relating to our trust
preferred securities, restrict our ability to pay dividends.
Item 5.B. Operating and Financial Review and
Prospects Liquidity and Capital Resources and
the notes to our consolidated financial statements appearing
elsewhere in this report discuss this restriction.
The table below provides information regarding the annual
dividend per share that we paid on our Preference shares and
Ordinary shares. The dividends shown for each year were paid
with respect to our operations in the preceding year.
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|
|
|
|
|
|
|
|
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|
Per Share Amount
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preference share
|
|
|
1.18
|
|
|
|
1.08
|
|
|
|
1.00
|
|
|
|
0.91
|
|
Ordinary share
|
|
|
1.12
|
|
|
|
1.02
|
|
|
|
0.94
|
|
|
|
0.85
|
|
We have announced that the general partners Management
Board and our Supervisory Board have proposed dividends for 2005
payable in 2006 of
1.29 per
preference share and
1.23 per
ordinary share. These dividends are subject to approval by our
shareholders at our Annual General Meeting to be held on
May 9, 2006.
Except as described herein, holders of ADSs will be entitled to
receive dividends on the ordinary shares and the preference
shares represented by the respective ADSs. We will pay any cash
dividends payable to such holders to the depositary in euros
and, subject to certain exceptions, the depositary will convert
the dividends into U.S. dollars. Fluctuations in the
exchange rate between the U.S. dollar and the euro will
affect the amount of dividends that ADS holders receive.
Dividends paid on the preference shares and dividends paid to
holders and beneficial holders of the ADSs will be subject to
deduction of German withholding tax. You can find a discussion
of German withholding tax below in Item 10.E.
Taxation.
B. Significant Changes
On January 6, 2006, the Company commenced a conversion
offer to holders of its preference shares (including preference
shares represented by American Depositary Shares) pursuant to
which such shareholders were offered the opportunity to convert
their preference shares into ordinary shares at a conversion
ratio of one preference shares plus a conversion premium of
9.75 per share
for one ordinary share. The conversion offer expired on
February 3, 2006. On February 10, 2006, the conversion
of the preference shares was registered in the commercial
register and, immediately thereafter, the Company completed the
transformation of its legal form from under German law from a
stock corporation (
Aktiengesellschaft
or
AG
) having the name Fresenius Medical Care AG
(FMC-AG) to a partnership limited by shares
(
Kommanditgesellschaft auf Aktien
, or
KGaA
) having the name Fresenius Medical
Care AG & Co. KGaA (FMC-AG &
Co. KGaA). For additional information regarding these
matters, see Item 4.A., Information on the
Company History and Development of the Company.
Item 9.
The Offer and
Listing Details
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|
A.4. and C.
|
Information regarding the trading markets for price history
of our stock
|
Trading Markets
The principal trading market for the ordinary shares and the
preference shares is the Frankfurt Stock Exchange. All ordinary
shares and preference shares have been issued in bearer form.
Accordingly, we have no
92
way of determining who our holders of ordinary and preference
shares are or how many shares any particular shareholder owns,
with the exception of the number of shares held in ADR form in
the United States. For more information regarding ADRs see
Item 10.B. Memorandum and articles of
association Description of American Depositary
Receipts. However, under the German Securities trading
Act, holders of voting securities of a German company listed on
a stock exchange within the EU are obligated to notify the
company of certain levels of holdings as described in
Item 7.A. Major Shareholders. Additionally,
persons discharging managerial responsibilities and affiliated
persons are obliged to notify the supervising authority and the
Company of trades in their shares. The ordinary shares have been
listed on the Frankfurt Stock Exchange since October 2,
1996. The preference shares have been listed on the Frankfurt
Stock Exchange since November 25, 1996. Trading in the
ordinary shares and preference shares of FMC-AG &
Co. KGaA on the Frankfurt Stock Exchange commenced on
February 13, 2006.
Our shares are listed on the Official Market (
Amtlicher
Markt
) of the Frankfurt Stock Exchange and on the
sub-segment Prime Standard of the Official Market. The Prime
Standard is a sub-segment of the Official Market with additional
post-admission obligations. Admission to the Prime Standard
requires the fulfillment of the following transparency criteria:
publication of quarterly reports; preparation of financial
statements in accordance with international accounting standards
(IAS or US-GAAP); publication of a company calendar; convening
of at least one analyst conference per year; publication of
ad-hoc messages (i.e., certain announcements of material
developments and events) in English. Companies aiming to be
listed in this segment have to apply for admission. Listing in
the Prime Standard is a prerequisite for inclusion of shares in
the selection indices of the Frankfurt Stock Exchange, such as
the DAX, the index of 30 major German stocks.
Since October 1, 1996, ADSs each representing one-third of
an Ordinary share (the Ordinary ADSs), have been
listed and traded on the New York Stock Exchange
(NYSE) under the symbol FMS. Since November 25,
1996, ADSs, each representing one-third of a Preference share
(the Preference ADSs), have been listed and traded
on the NYSE under the
symbol
FMS-p.
Upon
completion of the transformation and the conversion, 191,673
preference ADSs remained outstanding. Accordingly, while the
preference ADSs remain listed on the New York Stock Exchange, we
expect that the trading market for the preference ADSs will by
highly illiquid. In addition, the New York Stock Exchange has
advised us that if the number of publicly held preference ADSs
falls below 100,000, that preference ADSs are likely to be
delisted. The Depositary for both the Ordinary ADSs and the
Preference ADSs is JPMorgan Chase Bank, N.A.
(the Depositary).
Trading on the Frankfurt Stock Exchange
Deutsche Börse AG operates the Frankfurt Stock Exchange,
which is the most significant of the eight German stock
exchanges. As of December 31, 2005, the most recent figures
available, the shares of 6,803 companies traded on the official
market, regulated market and the regulated unofficial market of
the Frankfurt Stock Exchange.
Trading on the floor of the Frankfurt Stock Exchange begins
every business day at 9:00 a.m. and ends at 8:00 p.m.,
Central European Time (CET). In floor trading,
specialists are responsible for price determination and
quotation for the shares supported by them. The order book in
which all buy and sell orders are compiled serves as their
basis. Thereby, only one Specialist is in charge of each
security. In Frankfurt, for Prime and General Standard
Instruments, ten investment firms serve as Specialist, also
spending liquidity. Since early 2005 a performance measurement
for price determination on the floor was launched. It includes
minimum requirements and therefore ensures
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|
permanent quotation during trading hours
|
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|
|
best price execution (in terms of spread and speed)
|
|
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|
full execution.
|
Our shares are traded on Xetra (Exchange Electronic Trading) in
addition to being traded on the Frankfurt floor. The trading
hours for Xetra are between 9:00 a.m. and 5:30 p.m.
CET. Only brokers and banks that have been admitted to Xetra by
the Frankfurt Stock Exchange may trade on the system. Private
investors can trade on Xetra through their banks and brokers.
93
Deutsche Börse AG publishes information for all traded
securities on the Internet, webpage
http://www.deutsch-boerse.com.
Transactions on the Frankfurt Stock Exchange (including
transactions through the Xetra system) settle on the second
business day following the trade. Transactions off the Frankfurt
Stock Exchange (such as, for example, large trades or
transactions in which one of the parties is foreign) generally
also settle on the second business day following the trade,
although a different period may be agreed to by the parties.
Under standard terms and conditions for securities transactions
employed by German banks, customers orders for listed
securities must be executed on a stock exchange unless the
customer gives specific instructions to the contrary.
The Frankfurt Stock Exchange can suspend a quotation if orderly
trading is temporarily endangered or if a suspension is deemed
to be necessary to protect the public.
The Hessian Stock Exchange Supervisory Authority and the Trading
Monitoring Unit of the Frankfurt Stock Exchange, which is under
the control of the Stock Exchange Supervisory Authority, both
monitor trading on the Frankfurt Stock Exchange.
The Federal Financial Supervisory Authority (
Bundesanstalt
für Finanzdienstleistungsaufsicht
), an independent
federal authority, is responsible for the general supervision of
securities trading pursuant to provisions of the German
Securities Trading Act (
Wertpapierhandelsgesetz
) and
other laws.
The table below sets forth for the periods indicated, the high
and low closing sales prices in euro for the Ordinary shares on
the Frankfurt Stock Exchange, as reported by the Frankfurt Stock
Exchange Xetra system. Since January 4, 1999, all shares on
German stock exchanges trade in euro.
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|
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|
|
|
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|
|
Price per
|
|
|
|
|
|
ordinary share (
)
|
|
|
|
|
|
|
|
|
|
|
|
High
|
|
|
Low
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
February
|
|
|
94.75
|
|
|
|
87.03
|
|
|
|
January
|
|
|
90.97
|
|
|
|
85.80
|
|
2005
|
|
December
|
|
|
89.45
|
|
|
|
80.81
|
|
|
|
November
|
|
|
80.61
|
|
|
|
74.80
|
|
|
|
October
|
|
|
80.13
|
|
|
|
74.25
|
|
|
|
September
|
|
|
76.41
|
|
|
|
73.75
|
|
2005
|
|
Fourth Quarter
|
|
|
89.45
|
|
|
|
74.25
|
|
|
|
Third Quarter
|
|
|
76.41
|
|
|
|
69.54
|
|
|
|
Second Quarter
|
|
|
70.67
|
|
|
|
60.53
|
|
|
|
First Quarter
|
|
|
68.23
|
|
|
|
57.37
|
|
2004
|
|
Fourth Quarter
|
|
|
63.63
|
|
|
|
55.72
|
|
|
|
Third Quarter
|
|
|
62.60
|
|
|
|
58.55
|
|
|
|
Second Quarter
|
|
|
63.33
|
|
|
|
53.55
|
|
|
|
First Quarter
|
|
|
57.42
|
|
|
|
49.46
|
|
2005
|
|
Annual
|
|
|
89.45
|
|
|
|
57.37
|
|
2004
|
|
Annual
|
|
|
63.63
|
|
|
|
49.46
|
|
2003
|
|
Annual
|
|
|
57.00
|
|
|
|
38.00
|
|
2002
|
|
Annual
|
|
|
73.00
|
|
|
|
19.98
|
|
2001
|
|
Annual
|
|
|
92.90
|
|
|
|
66.77
|
|
The average daily trading volume of the Ordinary shares traded
on the Frankfurt Stock Exchange during 2005 was
335,056 shares. The foregoing numbers are based on total
yearly turnover statistics supplied by the Frankfurt Stock
Exchange. On February 28, 2006, the closing sales price per
Ordinary share on the Frankfurt Stock Exchange was
90.20,
equivalent to $107.56. per Ordinary share.
94
The table below sets forth for the periods indicated, the high
and low closing sales prices in euro for the Preference shares
on the Frankfurt Stock Exchange, as reported by the Frankfurt
Stock Exchange. As all shares on German stock exchanges trade in
euro since January 4, 1999 (see the discussion under
Item 11. Quantitative and Qualitative Disclosures
about Market Risk with respect to the rates of exchange
between euro and deutsche mark).
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
Price per
|
|
|
|
|
|
preference share (
)
|
|
|
|
|
|
|
|
|
|
|
|
High
|
|
|
Low
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
February
|
|
|
90.76
|
|
|
|
76.18
|
|
|
|
January
|
|
|
81.09
|
|
|
|
75.86
|
|
2005
|
|
December
|
|
|
79.31
|
|
|
|
69.97
|
|
|
|
November
|
|
|
69.80
|
|
|
|
63.84
|
|
|
|
October
|
|
|
69.50
|
|
|
|
63.50
|
|
|
|
September
|
|
|
65.70
|
|
|
|
63.04
|
|
2005
|
|
Fourth Quarter
|
|
|
79.31
|
|
|
|
63.50
|
|
|
|
Third Quarter
|
|
|
65.70
|
|
|
|
56.39
|
|
|
|
Second Quarter
|
|
|
57.60
|
|
|
|
43.90
|
|
|
|
First Quarter
|
|
|
48.95
|
|
|
|
41.60
|
|
2004
|
|
Fourth Quarter
|
|
|
44.92
|
|
|
|
39.35
|
|
|
|
Third Quarter
|
|
|
44.81
|
|
|
|
41.98
|
|
|
|
Second Quarter
|
|
|
45.45
|
|
|
|
36.64
|
|
|
|
First Quarter
|
|
|
40.95
|
|
|
|
33.73
|
|
2003
|
|
Fourth Quarter
|
|
|
41.00
|
|
|
|
35.01
|
|
|
|
Third Quarter
|
|
|
40.50
|
|
|
|
30.09
|
|
|
|
Second Quarter
|
|
|
36.00
|
|
|
|
28.50
|
|
|
|
First Quarter
|
|
|
35.60
|
|
|
|
27.36
|
|
2005
|
|
Annual
|
|
|
48.95
|
|
|
|
41.60
|
|
2004
|
|
Annual
|
|
|
45.45
|
|
|
|
33.73
|
|
2003
|
|
Annual
|
|
|
41.00
|
|
|
|
28.50
|
|
2002
|
|
Annual
|
|
|
53.90
|
|
|
|
15.17
|
|
2001
|
|
Annual
|
|
|
65.25
|
|
|
|
46.01
|
|
The average daily trading volume of the Preference shares traded
on the Frankfurt Stock Exchange during 2005 was
96,038 shares. The foregoing numbers are based on total
yearly turnover statistics supplied by the Frankfurt Stock
Exchange. On February 28, 2006, the closing sales price per
Preference share on the Frankfurt Stock Exchange was
84.23,
equivalent to $100.44 per Preference share.
95
Trading on the New York Stock Exchange
The table below sets forth, for the periods indicated, the high
and low closing sales prices for the Ordinary ADSs on the NYSE:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Price per
|
|
|
|
|
|
ordinary ADS ($)
|
|
|
|
|
|
|
|
|
|
|
|
High
|
|
|
Low
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
February
|
|
|
37.26
|
|
|
|
35.11
|
|
|
|
January
|
|
|
36.79
|
|
|
|
34.89
|
|
2005
|
|
December
|
|
|
35.22
|
|
|
|
31.69
|
|
|
|
November
|
|
|
31.65
|
|
|
|
30.28
|
|
|
|
October
|
|
|
32.34
|
|
|
|
29.71
|
|
|
|
September
|
|
|
31.49
|
|
|
|
30.30
|
|
2005
|
|
Fourth Quarter
|
|
|
35.22
|
|
|
|
29.71
|
|
|
|
Third Quarter
|
|
|
31.49
|
|
|
|
27.90
|
|
|
|
Second Quarter
|
|
|
28.45
|
|
|
|
26.05
|
|
|
|
First Quarter
|
|
|
29.94
|
|
|
|
25.09
|
|
2004
|
|
Fourth Quarter
|
|
|
27.23
|
|
|
|
24.74
|
|
|
|
Third Quarter
|
|
|
25.75
|
|
|
|
24.13
|
|
|
|
Second Quarter
|
|
|
25.79
|
|
|
|
21.82
|
|
|
|
First Quarter
|
|
|
24.59
|
|
|
|
20.41
|
|
2005
|
|
Annual
|
|
|
35.22
|
|
|
|
25.09
|
|
2004
|
|
Annual
|
|
|
27.23
|
|
|
|
20.41
|
|
2003
|
|
Annual
|
|
|
23.54
|
|
|
|
13.20
|
|
2002
|
|
Annual
|
|
|
21.60
|
|
|
|
6.70
|
|
2001
|
|
Annual
|
|
|
28.30
|
|
|
|
19.80
|
|
On February 28, 2006, the closing sales price per Ordinary
ADS on the NYSE was $35.77.
96
The table below sets forth, for the periods indicated, the high
and low closing sales prices for the Preference ADSs on the NYSE:
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Price per
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preference ADS ($)
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High
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Low
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|
|
|
|
|
|
|
|
|
|
2005
|
|
February
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|
|
34.25
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|
|
|
31.00
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|
|
|
January
|
|
|
32.25
|
|
|
|
31.30
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|
2005
|
|
December
|
|
|
31.20
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|
|
|
28.50
|
|
|
|
November
|
|
|
27.50
|
|
|
|
25.88
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|
|
|
October
|
|
|
27.80
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|
|
|
25.30
|
|
|
|
September
|
|
|
26.75
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|
|
|
25.90
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2005
|
|
Fourth Quarter
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|
|
31.20
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|
|
|
25.30
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|
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Third Quarter
|
|
|
26.75
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|
|
|
22.90
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|
|
|
Second Quarter
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|
|
22.80
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|
|
|
19.50
|
|
|
|
First Quarter
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|
|
21.40
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|
|
|
18.16
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2004
|
|
Fourth Quarter
|
|
|
19.15
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|
|
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17.50
|
|
|
|
Third Quarter
|
|
|
18.24
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|
|
|
17.09
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|
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|
Second Quarter
|
|
|
18.40
|
|
|
|
14.91
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|
|
|
First Quarter
|
|
|
17.10
|
|
|
|
13.86
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|
2005
|
|
Annual
|
|
|
31.20
|
|
|
|
18.16
|
|
2004
|
|
Annual
|
|
|
19.15
|
|
|
|
13.86
|
|
2003
|
|
Annual
|
|
|
16.68
|
|
|
|
9.85
|
|
2002
|
|
Annual
|
|
|
15.70
|
|
|
|
4.90
|
|
2001
|
|
Annual
|
|
|
19.64
|
|
|
|
14.00
|
|
On February 22, 2006, the last day in February on which the
Preference ADS traded on the NYSE, the closing sales price per
Preference ADS was $34.25.
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Item 10.
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Additional information
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B.
|
Articles of Association
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FMC-AG & Co. KGaA is a partnership limited by shares
(
Kommanditgesellschaft auf Aktien
) organized under the
laws of Germany. FMC-AG & Co. KGaA is registered
with the commercial register of the local court
(Amtsgericht)
of Hof an der Saale, Germany under
HRB 4019. Our registered office
(Sitz)
is Hof an der
Saale, Germany. Our business address is
Else-Kröner-Strasse 1, 61352 Bad Homburg,
Germany, telephone
+49-6172-609-0.
Corporate Purposes
Under our articles of association, our business purposes are:
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the development, production and distribution of as well as the
trading in health care products, systems and procedures,
including dialysis;
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|
the projecting, planning, establishment, acquisition and
operation of health care businesses, including, dialysis
centers, also in separate enterprises or through third parties
as well as the participation in such dialysis centers;
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|
the development, production and distribution of other
pharmaceutical products and the provision of services in this
field;
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|
the provision of advice in the medical and pharmaceutical areas
as well as scientific information and documentation;
|
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|
|
the provision of laboratory services for dialysis and
non-dialysis patients and homecare medical services.
|
97
We conduct our business directly and through subsidiaries within
and outside Germany.
General Information Regarding Our Share Capital
As of February 10, 2006, our share capital consists of
250,271,178.24,
divided into 96,629,422 ordinary shares without par value
(
Stückaktien
) and 1,132,422 non-voting preference
shares without par value (
Stückaktien
). Our share
capital has been fully paid in. The relative rights and
privileges of our ordinary shares and our preference shares did
not change as a result of the conversion and transformation.
All shares of FMC-AG & Co. KGaA shares are in bearer form.
Our shares are deposited as share certificates in global form
(
Sammelurkunden
) with Clearstream Banking AG, Frankfurt
am Main. Shareholders are not entitled to have their
shareholdings issued in certificated form. All shares of FMC-AG
& Co. KGaA are freely transferable, subject to any
applicable restrictions imposed by the United States Securities
Act of 1933, as amended, or other applicable laws.
General provisions on Increasing the Capital of Stock
Corporations and Partnerships Limited by Shares
Under the German Stock Corporation Act, the capital of a stock
corporation or of a partnership limited by shares may be
increased by a resolution of the general meeting, passed with a
majority of three quarters of the capital represented at the
vote, unless the Articles of Association of the stock
corporation or the partnership limited by shares provide for a
different majority.
In addition, the general meeting of a stock corporation or a
partnership limited by shares may create authorized capital
(also called approved capital). The resolution creating
authorized capital requires the affirmative vote of a majority
of three quarters of the capital represented at the vote and may
authorize the management board to issue shares up to a stated
amount for a period of up to five years. The nominal value of
the authorized capital may not exceed half of the capital at the
time of the authorization.
In addition, the general meeting of a stock corporation or of a
partnership limited by shares may create conditional capital for
the purpose of issuing (i) shares to holders of convertible
bonds or other securities which grant a right to shares,
(ii) shares as consideration in the case of a merger with
another company, or (iii) shares offered to management or
employees. In each case, the authorizing resolution requires the
affirmative vote of a majority of three quarters of the capital
represented at the vote. The nominal value of the conditional
capital may not exceed half or, in the case of conditional
capital created for the purpose of issuing shares to management
and employees 10%, of the companys capital at the time of
the resolution.
In a partnership limited by shares all resolutions increasing
the capital of the partnership limited by shares also require
the consent of the general partner for their effectiveness.
Voting Rights
Each ordinary share entitles the holder thereof to one vote at
general meetings of shareholders of FMC-AG & Co. KGaA.
Resolutions are passed at an ordinary general or an
extraordinary general meeting of our shareholders by a majority
of the votes cast, unless a higher vote is required by law or
our articles of association (such as the provisions in the
FMC-AG & Co. KGaA articles of association relating to the
election of our supervisory board). By statute, Fresenius AG as
shareholder of the general partner is not entitled to vote its
ordinary shares in the election or removal of members of the
supervisory board, the ratification of the acts of the general
partners and members of the supervisory board, the appointment
of special auditors, the assertion of compensation claims
against members of the executive bodies arising out of the
management of the Company, the waiver of compensation claims and
the appointment of auditors. In the case of resolutions
regarding such matters Fresenius AGs voting rights may not
be exercised by any other person.
Our preference shares do not have any voting rights, except as
described in this paragraph. If we do not pay the minimum annual
dividend payable on the preference shares for any year in the
following year, and we do not pay both the dividend arrearage
and the dividend payable on the preference shares for such
following year in full in the next following year, then the
preference shares shall have the same voting rights as the
ordinary shares (one
98
vote for each share held or for each three ADSs held) until all
preference share dividend arrearages are fully paid up. In
addition, holders of preference shares are entitled to vote on
most matters affecting their preferential rights, such as
changes in the rate of the preferential dividend. Any such vote
requires the affirmative vote of 75% of the votes cast in a
meeting of holders of preference shares.
Dividend Rights
The general partner and our supervisory board will propose any
dividends for approval at the annual general meeting of
shareholders. Usually, shareholders vote on a recommendation
made by management (i.e., the general partner) and the
supervisory board as to the amount of dividends to be paid. Any
dividends are paid once a year, generally, immediately following
our annual general meeting.
Under German law, dividends may only be paid from our balance
sheet profits as determined by our unconsolidated annual
financial statements (
Bilanzgewinn
) as approved by our
annual general meeting of shareholders and the general partner.
Unlike our consolidated annual financial statements, which are
prepared on the basis of accounting principles generally
accepted in the United States of America (U.S. GAAP), the
unconsolidated annual financial statements referred to above are
prepared on the basis of the accounting principles of the German
Commercial Code (
Handelsgesetzbuch
or
HGB
). Since
our ordinary shares and our preference shares that are entitled
to dividend payments are held in a clearing system, the
dividends will be paid in accordance with the rules of the
individual clearing system. We will publish notice of the
dividends paid and the appointment of the paying agent or agents
for this purpose in the electronic version of the German Federal
Gazette (
elektronischer Bundesanzeiger
). If dividends are
declared, preference shareholders will receive
0.06 per share
more than the dividend payable on our ordinary shares, but not
less than
0.12
per share. Under German law, we must pay the annual dividend for
our preference shares prior to paying any dividends on the
ordinary shares. If the profit shown on the balance sheet in one
or more fiscal years is not adequate to permit distribution of a
dividend of
0.12
per preference share, the shortfall without interest must be
made good out of the profit on the balance sheet in the
following fiscal year or years after distribution of the minimum
dividend on the preference shares for that year or years and
prior to the distribution of a dividend on the ordinary shares.
The right to this payment is an integral part of the profit
share of the fiscal year from which the shortfall in the
preference share dividend is made good. The preferential
dividend rights of our preference shares will not change as a
result of the transformation of legal form.
In the case of holders of ADRs, the depositary will receive all
dividends and distributions on all deposited securities and
will, as promptly as practicable, distribute the dividends and
distributions to the holders of ADRs entitled to the dividend.
See Description of American Depositary
Receipts Share Dividends and Other
Distributions.
Liquidation Rights
Our company may be dissolved by a resolution of our general
shareholders meeting passed with a majority of three
quarters of our share capital represented at such general
meeting and the approval of the general partner. In accordance
with the German Stock Corporation Act (
Aktiengesetz
), in
such a case, any liquidation proceeds remaining after paying all
of our liabilities will be distributed among our shareholders in
proportion to the total number of shares held by each
shareholder. Our preference shares are not entitled to a
preference in liquidation. Liquidation rights did not change as
a result of the transformation of legal form.
Pre-emption Rights
Under the German Stock Corporation Act (
Aktiengesetz
),
each shareholder in a stock corporation or partnership limited
by shares has a preferential right to subscribe for any issue by
that company of shares, debt instruments convertible into
shares, e.g. convertible bonds or option bonds, and
participating debt instruments, e.g. profit participation rights
or participating certificates, in proportion to the number of
shares held by that shareholder in the existing share capital of
the company. Such pre-emption rights are freely assignable.
These rights may also be traded on German stock exchanges within
a specified period of time prior to the expiration of the
subscription period. Our general shareholders meeting may
exclude pre-emption rights by passing a
99
resolution with a majority of at least three quarters of our
share capital represented at the general meeting at which the
resolution to exclude the pre-emption rights is passed. In
addition, an exclusion of pre-emption rights requires a report
by the general partner justifying the exclusion by explaining
why the interest of FMC-AG & Co. KGaA in excluding the
pre-emption rights outweighs our shareholders interests in
receiving such rights. However, such justification is not
required for any issue of new shares if:
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we increase our share capital against contributions in cash;
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|
the amount of the capital increase does not exceed 10% of our
existing share capital; and
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|
the issue price of the new shares is not significantly lower
than the price for the shares quoted on a stock exchange.
|
Exclusion of Minority Shareholders
Under the provisions of Sections 327a et seq. of the German
Stock Corporation Act concerning squeeze-outs, a shareholder who
owns 95% of the issued share capital (a principal
shareholder) may request that the annual
shareholders meeting of a stock corporation or a
partnership limited by shares resolve to transfer the shares of
the other minority shareholders to the principal shareholder in
return for adequate cash compensation. In a partnership limited
by shares, the consent of the general partner(s) is not
necessary for the effectiveness of the resolution. The amount of
cash compensation to be paid to the minority shareholders must
take account of the issuers financial condition at the
time the resolution is passed. The full value of the issuer,
which is normally calculated using the capitalization of
earnings method (
Ertragswertmethode
), is decisive for
determining the compensation amount.
In addition to the provisions for squeeze-outs of minority
shareholders, Sections 319 et seq. of the German Stock
Corporation Act provides for the integration of stock
corporations. In contrast to the squeeze-out of minority
shareholders, integration is only possible when the future
principal company is a stock corporation with a stated domicile
in Germany. A partnership limited by shares can not be
integrated into another company.
General Meeting
Our annual general meeting must be held within the first eight
months of each fiscal year at the location of FMC-AG & Co.
KGaAs registered office, or in a German city where a stock
exchange is situated or at the location of a registered office
of a domestic affiliated company. To attend the general meeting
and exercise voting rights after the registration of the
transformation, shareholders must register for the general
meeting and prove ownership of shares. The relevant reporting
date is the beginning of the 21st day prior to the general
meeting.
Amendments to the Articles of Association
An amendment to our articles of association requires both a
voting majority of 75% of the shares entitled to vote
represented at the general meeting and the approval of the
general partner.
Description of American Depositary Receipts
General
JPMorgan Chase Bank, N.A., a national banking association
organized under the laws of the United States, is the depositary
for our ordinary shares and preference shares. Each American
Depositary Share (ADS) represents an ownership interest in
one-third of one ordinary share or one-third of one preference
share. We deposit the underlying shares with a custodian, as
agent of the depositary, under the deposit agreements among
ourselves, the depositary and all of the ADS holders of the
applicable class. Each ADS also represents any securities, cash
or other property deposited with the depositary but not
distributed by it directly to ADS holders. The ADSs are
evidenced by securities called American depositary receipts or
ADRs. An ADR may be issued in either book-entry or certificated
form by the depositary but, under our deposit agreements with
JPMorgan Chase Bank N.A., will be issued only in book-entry form
unless a holder specifically requests certificated ADRs. If an
100
ADR is issued in book-entry form, owners will receive periodic
statements from the depositary showing their ownership interest
in ADSs.
The depositarys office is located at 4 New York Plaza, New
York, NY 10004, U.S.A.
An investor may hold ADSs either directly or indirectly through
a broker or other financial institution. Investors who hold ADSs
directly, by having an ADS registered in their names on the
books of the depositary, are ADR holders. This description
assumes an investor holds ADSs directly. Investors who hold ADSs
through their brokers or financial institution nominees must
rely on the procedures of their brokers or financial
institutions to assert the rights of an ADR holder described in
this section. Investors should consult with their brokers or
financial institutions to find out what those procedures are.
Because the depositarys nominee will actually be the
registered owner of the shares, investors must rely on it to
exercise the rights of a shareholder on their behalf. The
obligations of the depositary and its agents are set out in the
deposit agreement. The deposit agreement and the ADSs are
governed by New York law.
The deposit agreements establishing the ADR facilities for the
ordinary shares and preference shares of Fresenius Medical Care
FMC-AG provide that, upon the transformation, the ordinary
shares and preference shares of FMC-AG & Co. KGaA into which
our ordinary shares and preference shares held by the depositary
were transformed continue to be treated as deposited
securities under the respective deposit agreements. As a
result, after the transformation of legal form, ADSs
representing the right to receive ordinary shares and preference
shares of FMC-AG now represent ADSs representing the right to
ordinary and preference shares of FMC-AG & Co.
KGaA, and ADRs evidencing ADSs of FMC-AG now evidence
FMC-AG & Co. KGaA ADSs.
Upon completion of the transformation and the conversion,
1,132,757 preference ADSs remained outstanding. Accordingly,
while the preference ADSs remain listed on the New York Stock
Exchange, we expect that the trading market for the preference
ADSs will by highly illiquid. In addition, the New York Stock
Exchange has advised us that if the number of publicly held
preference ADSs falls below 100,000, that preference ADSs are
likely to be delisted.
The following is a summary of the material terms of the deposit
agreements. Because it is a summary, it does not contain all the
information that may be important to investors. Except as
specifically noted, the description covers both ordinary ADSs
and preference ADSs. For more complete information, investors
should read the entire applicable deposit agreements and the
form of ADR of the relevant class which contains the terms of
the ADS. Investors may obtain a copy of the deposit agreements
at the SECs Public Reference Room, located at 100 F Street
N.E., Washington, D.C. 20549.
Share Dividends and Other Distributions
We may make different types of distributions with respect to our
ordinary shares and our preference shares. The depositary has
agreed to pay to investors the cash dividends or other
distributions it or the custodian receives on the shares or
other deposited securities, after deducting its expenses.
Investors will receive these distributions in proportion to the
number of underlying shares of the applicable class their ADSs
represent.
Except as stated below, to the extent the depositary is legally
permitted it will deliver distributions to ADR holders in
proportion to their interests in the following manner:
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Cash.
The depositary shall convert cash distributions
from foreign currency to U.S. dollars if this is
permissible and can be done on a reasonable basis. The
depositary will endeavor to distribute cash in a practicable
manner, and may deduct any taxes or other governmental charges
required to be withheld, any expenses of converting foreign
currency and transferring funds to the United States, and
certain other expenses and adjustments. In addition, before
making a distribution the depositary will deduct any taxes
withheld. If exchange rates fluctuate during a time when the
depositary cannot convert a foreign currency, investors may lose
some or all of the value of the distribution.
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Shares.
If we make a distribution in shares, the
depositary will issue additional ADRs to evidence the number of
ADSs representing the distributed shares. Only whole ADSs will
be issued. Any shares which
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101
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would result in fractional ADSs will be sold and the net
proceeds will be distributed to the ADR holders otherwise
entitled to receive fractional ADSs.
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Rights to receive additional shares.
In the case of a
distribution of pre-emption rights to subscribe for ordinary
shares or preference shares, or other subscription rights, if we
provide satisfactory evidence that the depositary may lawfully
distribute the rights, the depositary may arrange for ADR
holders to instruct the depositary as to the exercise of the
rights. However, if we do not furnish the required evidence or
if the depositary determines it is not practical to distribute
the rights, the depositary may:
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|
sell the rights if practicable and distribute the net proceeds
as cash, or
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|
allow the rights to lapse, in which case ADR holders will
receive nothing.
|
We have no obligation to file a registration statement under the
U.S. Securities Act of 1933, as amended (the
Securities Act) in order to make any rights
available to ADR holders.
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Other Distributions.
If we make a distribution of
securities or property other than those described above, the
depositary may either:
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|
distribute the securities or property in any manner it deems
fair and equitable;
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|
after consultation with us if practicable, sell the securities
or property and distribute any net proceeds in the same way it
distributes cash; or
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hold the distributed property in which case the ADSs will also
represent the distributed property.
|
Any U.S. dollars will be distributed by checks drawn on a
bank in the United States for whole dollars and cents
(fractional cents will be withheld without liability for
interest and handled in accordance with the depositarys
then current practices).
The depositary may choose any practical method of distribution
for any specific ADR holder, including the distribution of
foreign currency, securities or property, or it may retain the
items, without paying interest on or investing them, on behalf
of the ADR holder as deposited securities.
The depositary is not responsible if it decides that it is
unlawful or impractical to make a distribution available to any
ADR holders.
There can be no assurance that the depositary will be able to
convert any currency at a specified exchange rate or sell any
property, rights, shares or other securities at a specified
price, or that any of these transactions can be completed within
a specified time period.
Deposit, Withdrawal and Cancellation
The depositary will issue ADSs if an investor or his broker
deposits ordinary shares or preference shares or evidence of
rights to receive ordinary shares or preference shares with the
custodian. Shares deposited with the custodian must be
accompanied by certain documents, including instruments showing
that such shares have been properly transferred or endorsed to
the person on whose behalf the deposit is being made.
The custodian will hold all deposited shares for the account of
the depositary. ADR holders thus have no direct ownership
interest in the shares and only have the rights that are
contained in the deposit agreements. The custodian will also
hold any additional securities, property and cash received on or
in substitution for the deposited shares. The deposited shares
and any additional items are referred to as deposited
securities.
Upon each deposit of shares, receipt of related delivery
documentation and compliance with the other provisions of the
deposit agreement, including the payment of the fees and charges
of the depositary and any taxes or other fees or charges owing,
the depositary will issue an ADR or ADRs of the applicable class
in the name of the person entitled to them. The ADR or ADRs will
evidence the number of ADSs to which the person making the
deposit is entitled.
All ADSs issued will, unless specifically requested to the
contrary, be part of the depositarys book-entry direct
registration system, and a registered holder will receive
periodic statements from the depositary which will
102
show the number of ADSs registered in the holders name. An
ADR holder can request that the ADSs not be held through the
depositarys direct registration system and that a
certificated ADR be issued. Certificated ADRs will be delivered
at the depositarys principal New York office or any other
location that it may designate as its transfer office. If ADRs
are in book-entry form, a statement setting forth the
holders ownership interest will be mailed to holders by
the depositary.
When an investor surrenders ADSs at the depositarys
office, the depositary will, upon payment of certain applicable
fees, charges and taxes, and upon receipt of proper
instructions, deliver the whole number of ordinary shares or
preference shares represented by the ADSs turned in to the
account the investor directs within Clearstream Banking AG, the
central German clearing firm.
The depositary may restrict the withdrawal of deposited
securities only in connection with:
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temporary delays caused by closing our transfer books or those
of the depositary, or the deposit of shares in connection with
voting at a shareholders meeting, or the payment of
dividends,
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the payment of fees, taxes and similar charges, or
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compliance with any U.S. or foreign laws or governmental
regulations relating to the ADRs.
|
This right of withdrawal may not be limited by any other
provision of the applicable deposit agreement.
Voting Rights
Only the depositarys nominee is able to exercise voting
rights with respect to deposited shares. Upon receipt of a
request from the depositary for voting instructions, a holder of
ADSs may instruct the depositary how to exercise the voting
rights for the shares which underlie the holders ADSs.
After receiving voting materials from us, the depositary will
notify the ADR holders of any general shareholders meeting
or solicitation of consents or proxies. The notice from the
depositary will (a) contain such information as is
contained in such notice and any solicitation materials,
(b) state that each holder on the record date set by the
depositary for notice and voting will be entitled to instruct
the depositary as to the exercise of the voting rights, if any,
pertaining to the whole number of deposited shares underlying
such holders ADRs and (c) specify how and the date by
which such instructions may be given. For instructions to be
valid, the depositary must receive them on or before the date
specified in the depositarys request for instructions. The
depositarys notice will also include an express indication
that, if no specific voting instruction is received prior to the
date set by the depositary for receipt of such instructions,
then the holders shall in each case be deemed to have instructed
the depositary to give a proxy to Bayerische Hypo- und
Vereinsbank AG (the Proxy Bank), which will act as a
proxy bank in accordance with Sections 128 and 135 of the
German Stock Corporation Act (
Aktiengesetz
), to vote in
accordance with its recommendation with regard to voting of the
deposited shares pursuant to Section 128(2) of the German
Stock Corporation Act (the Recommendation) as to any
matter concerning which our notice to the depositary indicates
that a vote is to be taken by holders of shares. The notice will
also contain the Proxy Banks Recommendation. However, no
such deemed instruction shall be deemed given and no
discretionary proxy shall be given with respect to any matter as
to which we inform the depositary or (in the case of (y) or
(z) below) the depositary reasonably believes that
(x) we do not wish such proxy given, (y) substantial
opposition exists or (z) the matter materially affects the
rights of holders of shares. In addition, if the Proxy Bank
fails or declines to supply the Recommendation to the depositary
at least thirty (30) calendar days prior to any meeting of
holders of deposited shares with respect to which we have
notified the depositary, the depositarys notice shall not
contain the Recommendation or the indication concerning the
proxy to be given to the Proxy Bank and, if no specific voting
instructions are received by the depositary from a holder with
respect to the deposited shares, the depositary will not cast
any vote at such meeting with respect to such deposited shares.
The depositary will try, as far as is practical, subject to the
provisions of and governing the underlying shares or other
deposited securities, to vote or to have its agents vote the
shares or other deposited securities as instructed. The
depositary will only vote or attempt to vote as holders instruct
or are deemed to instruct, as described in the preceding
paragraph. The depositary will not itself exercise any voting
discretion. Neither the depositary nor its agents are
responsible for any failure to carry out any voting
instructions, for the manner in which any vote is cast or for
the effect of any vote.
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Our preference shares are non-voting, except in a limited number
of circumstances. In those circumstances in which preference
shares are entitled to vote, the procedures and limitations
described above will apply in connection with the
depositarys request for voting instructions from holders
of ADSs resenting preference shares.
There is no guarantee that holders will receive voting materials
in time to instruct the depositary to vote and it is possible
that holders, or persons who hold their ADSs through brokers,
dealers or other third parties, will not have the opportunity to
exercise a right to vote.
Fees and Expenses
ADR holders will be charged a fee for each issuance of ADSs,
including issuances resulting from distributions of shares,
rights and other property, and for each surrender of ADSs in
exchange for deposited securities. The fee in each case is $5.00
for each 100 ADSs (or any portion thereof) issued or surrendered.
The following additional charges shall be incurred by the ADR
holders, by any party depositing or withdrawing shares or by any
party surrendering ADRs or to whom ADRs are issued (including,
without limitation, issuance pursuant to a stock dividend or
stock split declared by the Company or an exchange of stock
regarding the ADRs or the deposited securities or a distribution
of ADRs), whichever is applicable:
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to the extent not prohibited by the rules of any stock exchange
or interdealer quotation system upon which the ADSs are traded,
a fee of $1.50 per ADR or ADRs for transfers of certificated or
direct registration ADRs;
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a fee of $0.02 or less per ADS (or portion thereof) for any cash
distribution made pursuant to the deposit agreement;
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a fee of $0.02 per ADS (or portion thereof) per year for
services performed, by the depositary in administering our ADR
program (which fee shall be assessed against holders of ADRs as
of the record date set by the depositary not more than once each
calendar year and shall be payable in the manner described in
the next succeeding provision);
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any other charge payable by any of the depositary, any of the
depositarys agents, including, without limitation, the
custodian, or the agents of the depositarys agents in
connection with the servicing of our shares or other deposited
securities (which charge shall be assessed against registered
holders of our ADRs as of the record date or dates set by the
depositary and shall be payable at the sole discretion of the
depositary by billing such registered holders or by deducting
such charge from one or more cash dividends or other cash
distributions);
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a fee for the distribution of securities (or the sale of
securities in connection with a distribution), such fee being in
an amount equal to the fee for the execution and delivery of
ADSs which would have been charged as a result of the deposit of
such securities (treating all such securities as if they were
shares) but which securities or the net cash proceeds from the
sale thereof are instead distributed by the depositary to those
holders entitled thereto;
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stock transfer or other taxes and other governmental charges;
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cable, telex and facsimile transmission and delivery charges
incurred at your request;
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transfer or registration fees for the registration of transfer
of deposited securities on any applicable register in connection
with the deposit or withdrawal of deposited securities;
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expenses of the depositary in connection with the conversion of
foreign currency into U.S. dollars; and
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such fees and expenses as are incurred by the depositary
(including without limitation expenses incurred in connection
with compliance with foreign exchange control regulations or any
law or regulation relating to foreign investment) in delivery of
deposited securities or otherwise in connection with the
depositarys or its custodians compliance with
applicable law, rule or regulation.
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We will pay all other charges and expenses of the depositary and
any agent of the depositary (except the custodian) pursuant to
agreements from time to time between us and the depositary. The
fees described above may be amended from time to time.
Payment of Taxes
ADR holders must pay any tax or other governmental charge
payable by the custodian or the depositary on any ADS or ADR,
deposited security or distribution. If an ADR holder owes any
tax or other governmental charge, the depositary may
(i) deduct the amount thereof from any cash distributions,
or (ii) sell deposited securities and deduct the amount
owing from the net proceeds of such sale. In either case the ADR
holder remains liable for any shortfall. Additionally, if any
tax or governmental charge is unpaid, the depositary may also
refuse to effect any registration, registration of transfer,
split-up or combination of deposited securities or withdrawal of
deposited securities (except under limited circumstances
mandated by securities regulations). If any tax or governmental
charge is required to be withheld on any non-cash distribution,
the depositary may sell the distributed property or securities
to pay such taxes and distribute any remaining net proceeds to
the ADR holders entitled thereto.
By holding an ADR or an interest therein, holders will be
agreeing to indemnify us, the depositary, its custodian and any
of our or their respective directors, employees, agents and
Affiliates against, and hold each of them harmless from, any
claims by any governmental authority with respect to taxes,
additions to tax, penalties or interest arising out of any
refund of taxes, reduced rate of withholding at source or other
tax benefit obtained.
Description of The Pooling Arrangements
Prior to the transformation of legal form, FMC-AG, Fresenius AG
and the independent directors (as defined in the pooling
agreements referred to below) of FMC-AG were parties to two
pooling agreements for the benefit of the holders of our
ordinary shares and the holders of our preference shares (other
than Fresenius AG and its affiliates). Upon consummation of the
conversion and the transformation, we entered into pooling
arrangements that we believe provide similar benefits for the
holders of the ordinary shares and preference shares of FMC-AG
& Co. KGaA. The following is a summary of the material
provisions of the pooling arrangements which we have entered
into with Fresenius AG and our independent directors.
General
The pooling arrangements have been entered into for the benefit
of all persons who, from time to time, beneficially own our
ordinary shares, including owners of ADSs evidencing our
ordinary shares, other than Fresenius AG and its affiliates or
their agents and representatives, and persons from time to time
beneficially owning our preference shares, including (if the
preference ADSs are eligible for listing on the New York Stock
Exchange), ADSs evidencing our preference shares, other than
Fresenius AG and its affiliates or their agents and
representatives. Beneficial ownership is determined in
accordance with the beneficial ownership rules of the SEC.
Independent Directors
Under the pooling arrangements, no less than one-third of the
supervisory board of Management AG, the general partner of
FMC-AG & Co. KGaA, must be independent directors, and there
must be at least two independent directors. Independent
directors are persons without a substantial business or
professional relationship with us, Fresenius AG, or any
affiliate of either, other than as a member of the supervisory
board of
FMC-AG
&
Co. KGaA or as a member of the supervisory board of Management
AG. If an independent director resigns, is removed, or is
otherwise unable or unwilling to serve in that capacity, a new
person will be appointed to serve as an independent director in
accordance with the provisions of our articles of association,
the articles of association of the general partner, and the
pooling arrangements, if as a result of the resignation or
removal the number of independent directors falls below the
required minimum.
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Extraordinary Transactions
Under the pooling arrangements, we and our affiliates on the one
hand, and Management AG and Fresenius AG and their affiliates on
the other hand, must comply with all provisions of German law
regarding: any merger, consolidation, sale of all or
substantially all assets, recapitalization, other business
combination, liquidation or other similar action not in the
ordinary course of our business, any issuance of shares of our
voting capital stock representing more than 10% of our total
voting capital stock outstanding on a fully diluted basis, and
any amendment to our articles of association which adversely
affects any holder of ordinary shares or preference shares, as
applicable.
Interested Transactions
We and Management AG and Fresenius AG have agreed that while the
pooling arrangements are in effect, a majority of the
independent directors must approve any transaction or contract,
or any series of related transactions or contracts, between
Fresenius AG or any of its affiliates, on the one hand, and us
or our controlled affiliates, on the other hand, which involves
aggregate payments in any year in excess of
5 million
for each individual transaction or contract, or a related series
of transactions or contracts. However, approval is not required
if the transaction or contract, or series of related
transactions or contracts, has been described in a business plan
or budget that a majority of independent directors has
previously approved. In any year in which the aggregate amount
of transactions that require approval, or that would have
required approval in that year but for the fact that such
payment or other consideration did not exceed
5 million,
has exceeded
25 million,
a majority of the independent directors must approve all further
interested transactions involving more than
2.5 million.
However, approval is not required if the transaction or
contract, or series of related transactions or contracts, has
been described in a business plan or budget that a majority of
independent directors has previously approved.
Listing of American Depositary Shares; SEC Filings
During the term of the pooling agreement, Fresenius AG has
agreed to use its best efforts to exercise its rights as the
direct or indirect holder of the general partner interest in
Fresenius Medical Care KGaA to cause us to, and we have agreed
to:
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maintain the effectiveness of (i) the deposit agreement for
the ordinary shares, or a similar agreement, and to assure that
the ADSs evidencing the ordinary shares are listed on either the
New York Stock Exchange or the Nasdaq Stock Market and (ii),
while the preference ADSs are eligible for listing on the New
York Exchange or the Nasdaq Stock Market, the deposit agreement
for the preference shares, or a similar agreement, and to assure
that, if eligible for such listing, the ADSs evidencing the
preference shares are listed on either the New York Stock
Exchange or the Nasdaq Stock Market;
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file all reports, required by the New York Stock Exchange or the
Nasdaq Stock Market, as applicable, the Securities Act, the
Securities Exchange Act of 1934, as amended, and all other
applicable laws;
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prepare all financial statements required for any filing in
accordance with generally accepted accounting principles of the
U.S. (U.S. GAAP);
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on an annual basis, prepare audited consolidated financial
statements including, without limitation, a balance sheet, a
statement of income and retained earnings, and a statement of
changes in financial position, and all appropriate notes, all in
accordance U.S. GAAP, and, on a quarterly basis, prepare
and furnish consolidated financial statements prepared in
accordance with U.S. GAAP;
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furnish materials with the SEC with respect to annual and
special shareholder meetings under cover of Form 6-K and
make the materials available to the depositary for distribution
to holders of ordinary share ADSs and, if we maintain a
preference share ADS facility, to holders of preference share
ADSs at any time that holders of preference shares are entitled
to voting rights; and
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make available to the depositary for distribution to holders of
ADSs representing our ordinary shares and, if we maintain a
preference share ADS facility, ADSs representing our preference
shares on an annual basis, a copy of any report prepared by the
supervisory board or the supervisory board of the
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general partner and provided to our shareholders generally
pursuant to Section 314(2) of the German Stock Corporation
Act, or any successor provision. These reports concern the
results of the supervisory boards examination of the
managing boards report on our relation with affiliated
enterprises.
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Term
The pooling arrangements will terminate if:
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Fresenius AG or its affiliates acquire all our voting capital
stock;
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Fresenius AGs beneficial ownership of our outstanding
share capital is reduced to less than 25%;
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Fresenius AG or an affiliate of Fresenius AG ceases to own the
general partner interest in FMC-AG & Co. KGaA; or
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we no longer meet the minimum threshold for obligatory
registration of the ordinary shares or ADSs representing our
ordinary shares and the preference shares or ADSs representing
our preference shares, as applicable, under
Section 12(g)(1) of the Securities Exchange Act of 1934, as
amended, and Rule 12g-1 thereunder.
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Amendment
Fresenius AG and a majority of the independent directors may
amend the pooling arrangements, provided, that beneficial owners
of 75% of the ordinary shares held by shareholders other than
Fresenius AG and its affiliates at a general meeting of
shareholders and 75% of the preference shares at a general
meeting of preference shareholders, as applicable, approve such
amendment.
Enforcement; Governing Law
The pooling arrangements are governed by New York law and may be
enforced in the state and federal courts of New York. The
Company and Fresenius AG have confirmed their intention to abide
by the terms of the pooling arrangements as described above.
Directors and Officers Insurance
Subject to any mandatory restrictions imposed by German law,
FMC-AG has obtained and FMC-AG & Co. KGaA will continue to
maintain directors and officers insurance in respect of all
liabilities arising from or relating to the service of the
members of the supervisory board and our officers. We believe
that our acquisition of that insurance is in accordance with
customary and usual policies followed by public corporations in
the U.S.
C. Material contracts
For information regarding certain of our material contracts, see
Item 7.B. Major Shareholders and Related Party
Transactions Related Party Transactions. For a
description of our stock option plans, see Item 6.E.
Directors, Senior Management and Employees Share
Ownership Options to Purchase our Securities.
For a description of our 2003 Senior Credit Agreement, see
Item 5B. Operating and Financial Review and
Prospects Liquidity and Capital Resources. Our
material agreements also include the agreements that FMCH and
certain of its subsidiaries entered into with the
U.S. government when we settled a U.S. government
investigation. Our Report on Form 6-K filed with the SEC on
January 27, 2000 contains a description of the agreements
comprising the settlement, including the plea agreements and a
corporate integrity agreement in Part II,
Item 5 Other Events OIG
Investigation, which is incorporated herein by reference.
Our material agreements include the settlement agreement that
we, FMCH and NMC entered into with the Official Committee of
Asbestos Injury Claimants, and the Official Committee of
Asbestos Property Damage Claimants of W.R. Grace & Co. A
description which appears in Item 8.A.7
Financial Information Legal Proceedings and the
merger agreement among us, FMCH and RCG. For a description of
the RCG acquisition, see Item 5.B., Operating and
Financial Review and Prospects Liquidity and
Financial Resource Outlook.
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D. Exchange controls
Exchange Controls and Other Limitations Affecting Security
Holders.
At the present time, Germany does not restrict the export or
import of capital, except for investments in areas like Iraq,
Serbia, Montenegro or Sierra Leone. However, for statistical
purposes only, every resident individual or corporation residing
in Germany must report to the German Federal Bank (
Deutsche
Bundesbank
), subject only to certain immaterial exceptions,
any payment received from or made to an individual or a
corporation resident outside of Germany if such payment exceeds
12,500. In
addition, residents must report any claims against, or any
liabilities payable to, non-residents individuals or
corporations, if such claims or liabilities, in the aggregate
5 million
at the end of any month.
There are no limitations imposed by German law or our articles
of association (
Satzung
) on the right of a non-resident
to hold the Preference shares or Ordinary shares or the ADSs
evidencing Preference shares or Ordinary shares.
E. Taxation
U.S. and German Tax Consequences of Holding ADSs
The discussion below is not a complete analysis of all of the
potential U.S. federal and German tax consequences of
holding ADSs of FMC-AG & Co. KGaA. In addition, the
U.S. federal and German tax consequences to particular
U.S. holders, such as insurance companies, tax-exempt
entities, investors holding ADSs through partnerships or other
fiscally transparent entities, investors liable for the
alternative minimum tax, investors that hold ADSs as part of a
straddle or a hedge, investors whose functional currency is not
the U.S. dollar, financial institutions and dealers in
securities, and to non-U.S. holders may be different from
that discussed herein.
Investors should consult their own tax
advisors with respect to the particular United States federal
and German tax consequences applicable to holding ADSs of FMC-AG
& Co.KGaA.
Tax Treatment of Dividends
Currently, German corporations are required to withhold tax on
dividends paid to resident and non-resident shareholders. The
required withholding rate applicable is 20% plus a solidarity
surcharge of 5.5% thereon, equal to 1.1% of the gross dividend
(i.e., 5.5% of the 20% tax). Accordingly, a total German
withholding tax of 21.1% of the gross dividend is required. A
partial refund of this withholding tax can be obtained by
U.S. holders under the U.S.-German Tax Treaty. For
U.S. federal income tax purposes, U.S. holders are
taxable on dividends paid by German corporations subject to a
foreign tax credit for certain German income taxes paid. The
amount of the refund of German withholding tax and the
determination of the foreign tax credit allowable against
U.S. federal income tax depend on whether the
U.S. holder is a corporation owning at least 10% of the
voting stock of the German corporation.
In the case of any U.S. holder, other than a
U.S. corporation owning our ADSs representing at least 10%
of our outstanding voting stock, the German withholding tax is
partially refunded under the U.S.-German Tax Treaty to reduce
the withholding tax to 15% of the gross amount of the dividend.
Thus, for each $100 of gross dividend that we pay to a
U.S. holder, other than a U.S. corporation owning our
ADSs representing at least 10% of our outstanding voting stock,
the dividend after partial refund of $6.10 of the $21.10
withholding tax under the U.S.-German Tax Treaty will be subject
to a German withholding tax of $15. For U.S. foreign tax
credit purposes, the U.S. holder would report dividend
income of $100 (to the extent paid out of current and
accumulated earnings and profits) and foreign taxes paid of $15,
for purposes of calculating the foreign tax credit or the
deduction for taxes paid.
Subject to certain exceptions, dividends received by a
non-corporate U.S. holder will be subject to a maximum
U.S. federal income tax rate of 15%. The lower rate applies
to dividends only if the ADSs in respect of which such dividend
is paid have been held by you for at least 61 days during
the 121 day period beginning 60 days before the
ex-dividend date. Periods during which you hedge a position in
our ADSs or related property may not count for purposes of the
holding period test. The dividends would also not be eligible
for the lower rate if you elect to take dividends into account
as investment income for purposes of limitations on deductions
for
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investment income. U.S. holders should consult their own
tax advisors regarding the availability of the reduced dividend
rate in light of their own particular circumstances.
In the case of a corporate U.S. holder owning our ADSs
representing at least 10% of our outstanding voting stock, the
21.1% German withholding tax is reduced under the U.S.-German
Tax Treaty to 5% of the gross amount of the dividend. Such a
corporate U.S. holder may, therefore, apply for a refund of
German withholding tax in the amount of 16.1% of the gross
amount of the dividends. A corporate U.S. holder will
generally not be eligible for the dividends-received deduction
generally allowed to U.S. corporations in respect of
dividends received from other U.S. corporations.
Subject to certain complex limitations, a U.S. holder is
generally entitled to a foreign tax credit equal to the portion
of the withholding tax that cannot be refunded under the
U.S.-German Tax Treaty.
Dividends paid in Euros to a U.S. holder of ADSs will be
included in income in a dollar amount calculated by reference to
the exchange rate in effect on the date the dividends, including
the deemed refund of German corporate tax, are included in
income by such a U.S. holder. If dividends paid in Euros
are converted into dollars on the date included in income,
U.S. holders generally should not be required to recognize
foreign currency gain or loss in respect of the dividend income.
Under the U.S.-German Tax Treaty the refund of German tax,
including the withholding tax, Treaty payment and solidarity
surcharge, will not be granted when the ADSs are part of the
business property of a U.S. holders permanent
establishment located in Germany or are part of the assets of an
individual U.S. holders fixed base located in Germany
and used for the performance of independent personal services.
But then withholding tax and solidarity surcharge may be
credited against German income tax liability.
Refund Procedures
To claim a refund under the U.S.-German Tax Treaty, the
U.S. holder must submit a claim for refund to the German
tax authorities, with the original bank voucher, or certified
copy thereof issued by the paying entity documenting the tax
withheld within four years from the end of the calendar year in
which the dividend is received. Claims for refund are made on a
special German claim for refund form, which must be filed with
the German tax authorities: Bundesamt für Finanzen, 53221
Bonn-Beuel, Germany. The claim refund forms may be obtained from
the German tax authorities at the same address where the
applications are filed, or from the Embassy of the Federal
Republic of Germany, 4645 Reservoir Road, N.W.,
Washington, D.C. 20007-1998, or from the Office of
International Operations, Internal Revenue Service, 1325 K
Street, N.W., Washington, D.C. 20225, Attention: Taxpayer
Service Division, Room 900 or can be downloaded from the
homepage of the Bundesamt für Finanzen (www.bff-online.de).
U.S. holders must also submit to the German tax authorities
certification of their last filed U.S. federal income tax
return. Certification is obtained from the office of the
Director of the Internal Revenue Service Center by filing a
request for certification with the Internal Revenue Service
Center, Foreign Certificate Request, P.O. Box 16347,
Philadelphia, PA 19114-0447. Requests for certification are to
be made in writing and must include the U.S. holders
name, address, phone number, social security number or employer
identification number, tax return form number and tax period for
which certification is requested. The Internal Revenue Service
will send the certification back to the U.S. holder for
filing with the German tax authorities.
U.S. holders of ADSs who receive a refund attributable to
reduced withholding taxes under the U.S.-German Tax Treaty may
be required to recognize foreign currency gain or loss, which
will be treated as ordinary income or loss, to the extent that
the dollar value of the refund received by the U.S. holders
differs from the dollar equivalent of the refund on the date the
dividend on which such withholding taxes were imposed was
received by the depositary or the U.S. holder, as the case
may be.
Taxation of Capital Gains
Under the U.S.-German Tax Treaty, a U.S. holder who is not
a resident of Germany for German tax purposes will not be liable
for German tax on capital gains realized or accrued on the sale
or other disposition of ADSs unless the ADSs are part of the
business property of a permanent establishment located in
Germany or are part of
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the assets of a fixed base of an individual located in Germany
and used for the performance of independent personal services.
Upon a sale or other disposition of the ADSs, a U.S. holder
will recognize gain or loss for U.S. federal income tax
purposes in an amount equal to the difference between the amount
realized and the U.S. holders tax basis in the ADSs.
Such gain or loss will generally be capital gain or loss if the
ADSs are held by the U.S. holder as a capital asset, and
will be long-term capital gain or loss if the
U.S. holders holding period for the ADSs exceeds one
year. Individual U.S. holders are generally taxed at a
maximum 15% rate on net long-term capital gains.
Gift and Inheritance Taxes
The U.S.-Germany estate, inheritance and gift tax treaty
provides that an individual whose domicile is determined to be
in the U.S. for purposes of such treaty will not be subject
to German inheritance and gift tax, the equivalent of the
U.S. federal estate and gift tax, on the individuals
death or making of a gift unless the ADSs are part of the
business property of a permanent establishment located in
Germany or are part of the assets of a fixed base of an
individual located in Germany and used for the performance of
independent personal services. An individuals domicile in
the U.S., however, does not prevent imposition of German
inheritance and gift tax with respect to an heir, donee, or
other beneficiary who is domiciled in Germany at the time the
individual died or the gift was made.
Such treaty also provides a credit against U.S. federal
estate and gift tax liability for the amount of inheritance and
gift tax paid in Germany, subject to certain limitations, in a
case where ADSs are subject to German inheritance or gift tax
and U.S. federal estate or gift tax.
Other German Taxes
There are no German transfer, stamp or other similar taxes that
would apply to U.S. holders who purchase or sell ADSs.
United States Information Reporting and Backup Withholding
Dividends and payments of the proceeds on a sale of ADSs, paid
within the United States or through U.S.-related financial
intermediaries are subject to information reporting and may be
subject to backup withholding unless you (1) are a
corporation or other exempt recipient or (2) provide a
taxpayer identification number and certify (on Internal
Revenue Service Form W-9) that no loss of exemption from
backup withholding has occurred.
Non-U.S. shareholders are not U.S. persons generally
subject to information reporting or backup withholding. However,
a non-U.S. holder may be required to provide a
certification (generally on Internal Revenue Service
Form W-8BEN) of its non-U.S. status in connection with
payments received in the United States or through a U.S.-related
financial intermediary.
H. Documents on display
We file periodic reports and information with the Securities and
Exchange Commission and the New York Stock Exchange. You may
inspect a copy of these reports without charge at the Public
Reference Room of the Securities and Exchange Commission at
100 F Street N.E., Washington, D.C. 20549 or at
the Securities and Exchange Commissions regional offices
233 Broadway, New York, New York 10279 and 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661. The public may
obtain information on the operation of the Public Reference Room
by calling the Securities and Exchange Commission at
1-800-SEC-0330. The Securities and Exchange Commission also
maintains an Internet site that contains reports, proxy and
information statements and other information regarding
registrants that file electronically with the Securities and
Exchange Commission. The Securities and Exchange
Commissions World Wide Web address is
http://www.sec.gov.
The New York Stock Exchange currently lists American Depositary
Shares representing our Preference shares and American
Depositary Shares representing our Ordinary shares. As a result,
we are subject to the periodic reporting requirements of the
Securities Exchange Act of 1934, as amended, and we file reports
and
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other information with the Securities and Exchange Commission.
These reports, proxy statements and other information and the
registration statement and exhibits and schedules thereto may be
inspected without charge at, and copies thereof may be obtained
at prescribed rates from, the public reference facilities of the
Securities and Exchange Commission and the electronic sources
listed in the preceding paragraph. In addition, these materials
are available for inspection and copying at the offices of the
New York Stock Exchange, 20 Broad Street, New York,
New York 1005, USA.
We prepare annual and quarterly reports, which are then
distributed to our shareholders. Our annual reports contain
financial statements examined and reported upon, with opinions
expressed by our independent auditors. Our consolidated
financial statements included in these annual reports are
prepared in conformity with U.S. generally accepted
accounting principles. Our annual and quarterly reports to our
shareholders are posted on our website at
http://www.fmc-ag.com
. In furnishing our web site address
in this report, however, we do not intend to incorporate any
information on our web site with this report, and any
information on our web site should not be considered to be part
of this report.
We will also furnish the depositary with all notices of
shareholder meetings and other reports and communications that
are made generally available to our shareholders. The
depositary, to the extent permitted by law, shall arrange for
the transmittal to the registered holders of American Depositary
Receipts of all notices, reports and communications, together
with the governing instruments affecting the Preference shares
and any amendments thereto, available for inspection by
registered holders of American Depositary Receipts at the
principal office of the depositary, JPMorgan Chase Bank, N.A.,
presently located at 4 New York Plaza, New York,
New York, 10004, USA.
Documents referred to in this report which relate to us as well
as future annual and interim reports prepared by us may also be
inspected at our offices, Else-Kröner-Strasse 1, 61352
Bad Homburg.
|
|
Item 11.
|
Quantitative and Qualitative Disclosures About Market
Risk
|
Market Risk
Our businesses operate in highly competitive markets and are
subject to changes in business, economic and competitive
conditions. Our business is subject to:
|
|
|
|
|
changes in reimbursement rates;
|
|
|
|
intense competition;
|
|
|
|
foreign exchange rate fluctuations;
|
|
|
|
varying degrees of acceptance of new product introductions;
|
|
|
|
technological developments in our industry;
|
|
|
|
uncertainties in litigation or investigative proceedings and
regulatory developments in the health care sector; and
|
|
|
|
the availability of financing.
|
Our business is also subject to other risks and uncertainties
that we describe from time to time in our public filings.
Developments in any of these areas could cause our results to
differ materially from the results that we or others have
projected or may project.
Reimbursement Rates
We obtained approximately 36% of our worldwide revenue for 2005
from sources subject to regulations under U.S. government
health care programs. In the past, U.S. budget deficit
reduction and health care reform measures have changed the
reimbursement rates under these programs, including the Medicare
composite rate, the reimbursement rate for EPO, and the
reimbursement rates for other dialysis and non-dialysis related
services and products, as well as other material aspects of
these programs, and they may change in the future.
111
We also obtain a significant portion of our net revenues from
reimbursement by non-government payors. Historically, these
payors reimbursement rates generally have been higher than
government program rates in their respective countries. However,
non-governmental payors are imposing cost containment measures
that are creating significant downward pressure on reimbursement
levels that we receive for our services and products.
Inflation
The effects of inflation during the periods covered by the
consolidated financial statements have not been significant to
our results of operations. However, most of our net revenues
from dialysis care are subject to reimbursement rates regulated
by governmental authorities, and a significant portion of other
revenues, especially revenues from the U.S., is received from
customers whose revenues are subject to these regulated
reimbursement rates. Non-governmental payors are also exerting
downward pressure on reimbursement rates. Increased operation
costs that are subject to inflation, such as labor and supply
costs, may not be recoverable through price increases in the
absence of a compensating increase in reimbursement rates
payable to us and our customers, and could materially adversely
affect our business, financial condition and results of
operations.
Management of Foreign Exchange and Interest Rate Risks
We are primarily exposed to market risk from changes in foreign
exchange rates and changes in interest rates. In order to manage
the risks from these foreign exchange rate and interest rate
fluctuations, we enter into various hedging transactions with
highly rated financial institutions as authorized by the
Management Board. We do not contract for financial instruments
for trading or other speculative purposes.
We conduct our financial instrument activity under the control
of a single centralized department. We have established
guidelines for risk assessment procedures and controls for the
use of financial instruments. They include a clear segregation
of duties with regard to execution on one side and
administration, accounting and controlling on the other.
Foreign Exchange Risk
We conduct our business on a global basis in several major
currencies, although our operations are located principally in
the United States and Germany. For financial reporting purposes,
we have chosen the U.S. dollar as our reporting currency.
Therefore, changes in the rate of exchange between the
U.S. dollar and the local currencies in which the financial
statements of our international operations are maintained,
affect our results of operations and financial position as
reported in our consolidated financial statements. We have
consolidated the balance sheets of our non-U.S. dollar
denominated operations into U.S. dollars at the exchange
rates prevailing at the balance sheet date. Revenues and
expenses are translated at the average exchange rates for the
period.
Our exposure to market risk for changes in foreign exchange
rates relates to transactions such as sales and purchases. We
have significant amounts of sales of products invoiced in euro
from our European manufacturing facilities to our other
international operations. This exposes our subsidiaries to
fluctuations in the rate of exchange between the euro and the
currency in which their local operations are conducted. We
employ, to a limited extent, financial derivatives to hedge our
currency exposures. Our policy, which has been consistently
followed, is that financial derivatives be used only for
purposes of hedging foreign currency exposures. We have not used
such instruments for purposes other than hedging.
In connection with intercompany loans in foreign currency, we
normally use foreign exchange swaps thus assuring that no
foreign exchange risks arise from those loans.
Our foreign exchange contracts contain credit risk, in that our
bank counterparties may be unable to meet the terms of the
agreements. We monitor the potential risk of loss with any one
party from this type of risk. Our management does not expect any
material losses as a result of default by the other parties. The
table below provides information about our foreign exchange
forward contracts at December 31, 2005. The information is
provided in U.S. dollar equivalent amounts. The table
presents the notional amounts by year of maturity, the fair
values of the contracts, which show the unrealized net gain
(loss) on existing contracts as of December 31, 2005,
112
and the credit risk inherent to those contracts with positive
market values as of December 31, 2005. All contracts expire
within 24 months after the reporting date.
Foreign Currency Risk Management
December 31, 2005
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nominal Amount
|
|
|
|
|
|
|
|
|
|
|
Fair
|
|
|
Credit
|
|
|
|
2006
|
|
|
2007
|
|
|
Total
|
|
|
Value
|
|
|
Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of EUR against USD
|
|
$
|
580,217
|
|
|
$
|
11,207
|
|
|
$
|
591,424
|
|
|
$
|
(3,056
|
)
|
|
$
|
1,978
|
|
Sale of EUR against USD
|
|
|
347,213
|
|
|
|
|
|
|
|
347,213
|
|
|
|
8,554
|
|
|
|
8,554
|
|
Purchase of EUR against others
|
|
|
232,790
|
|
|
|
22,098
|
|
|
|
254,888
|
|
|
|
(7,072
|
)
|
|
|
481
|
|
Sale of EUR against others
|
|
|
31,548
|
|
|
|
|
|
|
|
31,548
|
|
|
|
134
|
|
|
|
143
|
|
Others
|
|
|
55,170
|
|
|
|
16,982
|
|
|
|
72,152
|
|
|
|
(1,500
|
)
|
|
|
2,452
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,246,938
|
|
|
$
|
50,287
|
|
|
$
|
1,297,225
|
|
|
$
|
(2,940
|
)
|
|
$
|
13,608
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A summary of the high and low exchange rates for the euro to
U.S. dollars and the average exchange rates for the last
five years is set forth below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years
|
|
|
Years
|
|
|
Years
|
|
|
Years
|
|
Year ending December 31,
|
|
High
|
|
|
Low
|
|
|
Average
|
|
|
Close
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2001 $ per
|
|
|
0.9545
|
|
|
|
0.8384
|
|
|
|
0.8956
|
|
|
|
0.8813
|
|
2002 $ per
|
|
|
1.0487
|
|
|
|
0.8578
|
|
|
|
0.9454
|
|
|
|
1.0487
|
|
2003 $ per
|
|
|
1.2630
|
|
|
|
1.0377
|
|
|
|
1.1312
|
|
|
|
1.2630
|
|
2004 $ per
|
|
|
1.3633
|
|
|
|
1.1802
|
|
|
|
1.2439
|
|
|
|
1.3621
|
|
2005 $ per
|
|
|
1.3507
|
|
|
|
1.1667
|
|
|
|
1.2442
|
|
|
|
1.1797
|
|
Interest Rate Risk
We are exposed to changes in interest rates that affect our
variable-rate based borrowings and the fair value of parts of
our fixed rate borrowings. We enter into debt obligations and
into accounts receivable financings to support our general
corporate purposes including capital expenditures and working
capital needs. Consequently, we enter into derivatives,
particularly interest rate swaps, to (a) protect interest
rate exposures arising from borrowings and our accounts
receivable securitization programs at floating rates by
effectively swapping them into fixed rates and (b) hedge
the fair value of parts of our fixed interest rate borrowing.
Under interest rate swaps, we agree with other parties to
exchange, at specified intervals, the difference between
fixed-rate and floating-rate interest amounts calculated by
reference to an agreed notional amount.
Our subsidiary, National Medical Care, Inc., (NMC)
has entered into dollar interest rate swaps with various
commercial banks for notional amounts totaling $800 million
as of December 31, 2005. NMC entered into all of these
agreements for purposes other than trading.
The dollar interest rate swaps effectively fix NMCs
interest rate exposure on the majority of its variable interest
rate exposure of its mainly U.S. dollar-denominated
revolving loans and outstanding obligations under the accounts
receivable securitization program at an average interest rate of
5.26%.
These dollar interest rate swaps expire at various dates between
December 2008 and December 2009. At December 31, 2005, the
fair value of these agreements is $(9.4) million.
In conjunction with the Renal Care Group (RCG)
acquisition and forecasted utilization of the facilities under a
new credit agreement that would be consummated at the time of
the RCG acquisition closing and its related variable rate based
interest payments, we entered into forward starting
U.S. dollar denominated interest rate swaps with a notional
amount of $2.5 billion. These instruments, designated as
cash flow hedges, effectively convert forecasted LIBOR based
interest payments into fixed rate based interest payments which
fix the interest
113
rate on the $2.5 billion of the forecasted financing under
the new credit agreement at 4.32% plus an applicable margin.
These swaps are denominated in U.S. dollars and expire at
various dates between 2008 and 2012.
Our subsidiary, Fresenius Medical Care Trust Finance has
entered into interest rate swaps to hedge the risk of changes in
the fair value of fixed interest rate borrowings effectively
converting the fixed interest payments on Fresenius Medical Care
Capital Trust II preferred securities denominated in
U.S. dollars into variable interest rate payments. The
reported amount of the hedged portion of fixed rate trust
preferred securities includes an adjustment representing the
change in fair value attributable to the interest rate risk
being hedged. These interest rate swaps expire in February 2008
and their fair value at December 31, 2005, is
$(18.2) million.
The table below presents principal amounts and related weighted
average interest rates by year of maturity for the various
dollar interest rate swaps and for our significant fixed-rate
long-term debt obligations.
Dollar Interest Rate Exposure
December 31, 2005
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dec. 31,
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
Thereafter
|
|
|
Totals
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal payments on Senior Credit Agreement
|
|
$
|
100
|
|
|
|
100
|
|
|
|
100
|
|
|
|
100
|
|
|
|
71
|
|
|
|
|
|
|
$
|
471
|
|
|
$
|
471
|
|
|
Variable interest rate = 5.32%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable securitization programs
|
|
|
94
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
94
|
|
|
|
94
|
|
|
Variable interest rate = 4.30%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional amount
|
|
|
250
|
|
|
|
200
|
|
|
|
615
|
|
|
|
450
|
|
|
|
250
|
|
|
|
1,500
|
|
|
|
3,265
|
|
|
|
40
|
|
|
Average fixed pay rate = 4.55%
|
|
|
4.60
|
%
|
|
|
6.61
|
%
|
|
|
4.69
|
%
|
|
|
4.84
|
%
|
|
|
4.28
|
%
|
|
|
4.17
|
%
|
|
|
4.55
|
%
|
|
|
|
|
|
Receive rate = 3-month $LIBOR
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company obligated mandatorily redeemable preferred securities
of subsidiaries Fresenius Medical Care Capital Trusts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed interest rate = 7.875%/issued in 1998
|
|
|
|
|
|
|
|
|
|
|
432
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
432
|
|
|
|
479
|
|
|
Fixed interest rate = 7.375%/issued in 1998
(denominated in DM)
|
|
|
|
|
|
|
|
|
|
|
181
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
181
|
|
|
|
192
|
|
|
Fixed interest rate = 7.875%/issued in 2001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
223
|
|
|
|
223
|
|
|
|
239
|
|
|
Fixed interest rate = 7.375%/issued in 2001
(denominated in euro)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
352
|
|
|
|
352
|
|
|
|
393
|
|
Interest rate swaps
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional amount
|
|
|
|
|
|
|
|
|
|
|
450
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
450
|
|
|
|
(18
|
)
|
|
Average fixed pay rate = 3.50%
|
|
|
|
|
|
|
|
|
|
|
3.50
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.50
|
%
|
|
|
|
|
|
Pay rate = 6-month $LIBOR
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Item 12.
Description of
Securities other than Equity Securities
Not applicable
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data)
1. The Company and Summary of Significant
Accounting Policies
The Company
Fresenius Medical Care AG & Co. KGaA
(FMC-AG
& Co.
KGaA or the Company), a German partnership
limited by shares (
Kommanditgesellschaft auf Aktien
),
formerly Fresenius Medical Care AG
(FMC-AG),
a
German stock corporation (Aktiengesellschaft), is the
worlds largest kidney dialysis company, operating in both
the field of dialysis products and the field of dialysis
services. The Companys dialysis business is vertically
integrated, providing dialysis treatment at its own dialysis
clinics and supplying these clinics with a broad range of
products. In addition, the Company sells dialysis products to
other dialysis service providers. In the United States, the
Company also performs clinical laboratory testing and provides
perfusion, therapeutic apheresis and autotransfusion services.
For information regarding the transformation of the
Companys legal form from a stock corporation into a
partnership limited by shares and the related conversion of
preference shares into ordinary shares, see Note 2,
Transformation of Legal Form and Conversion of Preference Shares.
Basis of Presentation
The accompanying consolidated financial statements have been
prepared in accordance with accounting principles generally
accepted in the United States of America
(U.S. GAAP).
Summary of Significant Accounting Policies
a) Principles of Consolidation
The consolidated financial statements include all material
companies in which the Company has legal or effective control.
In addition, the Company consolidates variable interest entities
(VIEs) for which it is deemed the primary
beneficiary. The equity method of accounting is used for
investments in associated companies (20% to 50% owned). All
significant intercompany transactions and balances have been
eliminated.
The Company enters into various arrangements with certain
dialysis clinics to provide management services, financing and
product supply. Some of these clinics are variable interest
entities. Under FIN 46R these clinics are consolidated if
the Company is determined to be the primary beneficiary. These
variable interest entities in which the Company is the primary
beneficiary, generate approximately $59,361 in annual revenue.
In accordance with FIN 46R, the Company fully consolidates
the VIEs. The interest held by the other shareholders in these
consolidated VIEs is reported as minority interest in the
consolidated balance sheet at December 31, 2005.
b) Classifications
Certain items in prior years consolidated financial
statements may have been reclassified to conform with the
current years presentation. Net operating results have not
been affected by the reclassifications.
c) Cash and Cash Equivalents
Cash and cash equivalents comprise cash funds and all
short-term, highly liquid investments with original maturities
of up to three months.
d) Allowance for Doubtful Accounts
Estimates for the allowances for accounts receivable from the
dialysis service business are mainly based on past collection
history. Specifically, the allowances for the North American
services division are based on an
F-10
FRESENIUS MEDICAL CARE AG & CO. KGaA
(Formerly Fresenius Medical Care AG)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(in thousands, except share data)
analysis of collection experience, recognizing the differences
between payors and aging of accounts receivable. From time to
time, accounts receivable are reviewed for changes from the
historic collection experience to ensure the appropriateness of
the allowances. The allowances in the international segment and
the products business are based on estimates and consider
various factors, including aging, debtor and past collection
history.
e) Inventories
Inventories are stated at the lower of cost (determined by using
the average or first-in, first-out method) or market value.
f) Property, Plant and Equipment
Property, plant, and equipment are stated at cost less
accumulated depreciation. Significant improvements are
capitalized; repairs and maintenance costs that do not extend
the useful 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, less accumulated depreciation.
Depreciation on property, plant and equipment is calculated
using the straight-line method over the estimated useful lives
of the assets ranging from 5 to 50 years for buildings and
improvements with a weighted average life of 13 years and 3
to 15 years for machinery and equipment with a weighted
average life of 10 years. Equipment held under capital
leases and leasehold improvements are amortized using the
straight-line method over the shorter of the lease term or the
estimated useful life of the asset. The Company capitalizes
interest on borrowed funds during construction periods. Interest
capitalized during 2005, 2004, and 2003 was $1,828, $1,611, and
$920, respectively.
g) Other Intangible Assets and Goodwill
Intangible assets such as tradenames, management contracts,
patient relationships, patents, distribution rights, software,
and licenses acquired in a purchase method business combination
are recognized and reported apart from goodwill, pursuant to the
criteria specified by SFAS No. 141.
Goodwill and identifiable intangibles with indefinite lives are
not amortized but tested for impairment annually or when an
event becomes known that could trigger an impairment. The
Company identified trade names and certain qualified management
contracts as intangible assets with indefinite useful lives.
Intangible assets with finite useful lives are amortized over
their respective estimated useful lives to their estimated
residual values.
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. At least once a year the Company compares the
fair value of each reporting unit to the reporting units
carrying amount. Fair value is determined using a discounted
cash flow approach. In the case that the fair value of the
reporting unit is less than its book value, a second step is
performed which compares the fair value of the reporting
units 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.
To evaluate the recoverability of intangible assets with
indefinite useful lives, the Company compares the fair values of
intangible assets with their carrying values. An intangible
assets fair value is determined using a discounted cash
flow approach and other appropriate methods.
F-11
FRESENIUS MEDICAL CARE AG & CO. KGaA
(Formerly Fresenius Medical Care AG)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(in thousands, except share data)
h) Derivative Financial Instruments
In accordance with SFAS No. 133,
Accounting for
Derivative Instruments and Hedging Activities,
derivative
financial instruments which primarily include foreign currency
forward contracts and interest rate swaps are recognized as
assets or liabilities at fair value in the balance sheet.
Changes in fair value of derivative financial instruments are
recognized periodically either in earnings or, in the case of
cash flow hedges, the effective portion as other comprehensive
income (loss) in shareholders equity. The non-effective
portion of cash flow hedges is recognized in earnings
immediately.
i) Foreign Currency Translation
For purposes of these consolidated financial statements, the
U.S. dollar is the reporting currency. The Company follows
the provisions of SFAS No. 52, Foreign Currency
Translation. Substantially all assets and liabilities of the
parent company and all non-U.S. subsidiaries are translated
at year-end exchange rates, while revenues and expenses are
translated at exchange rates prevailing during the year.
Adjustments for foreign currency translation fluctuations are
excluded from net earnings and are reported in accumulated other
comprehensive income (loss). In addition, the translation
adjustments of certain intercompany borrowings, which are
considered foreign equity investments, are reported in
accumulated other comprehensive income (loss).
j) Revenue Recognition Policy
Dialysis care revenues are recognized on the date services and
related products are provided and the payor is obligated to pay
at amounts estimated to be received under reimbursement
arrangements with third party payors. Medicare and Medicaid in
North America and programs involving other government payors in
the international segment are billed at pre-determined rates per
treatment that are established by statute or regulation. Most
non-governmental payors are billed at our standard rates for
services net of contractual allowances to reflect the estimated
amounts to be received under reimbursement arrangements with
these payors.
Dialysis product revenues are recognized when title to the
product passes to the customers either at the time of shipment,
upon receipt by the customer or upon any other terms that
clearly define passage of title. As product returns are not
typical, no return allowances are established. In the event a
return is required, the appropriate reductions to sales,
accounts receivables and cost of sales are made.
A minor portion of International product revenues are generated
from arrangements which give the customer, typically a health
care provider, the right to use dialysis machines. In the same
contract the customer agrees to purchase the related treatment
disposables at a price marked up from the standard price list.
FMC-AG
& Co. KGaA
does not recognize revenue upon delivery of the dialysis machine
but recognizes revenue, including the mark-up, on the sale of
disposables.
k) Research and Development expenses
Research and development expenses are expensed as incurred.
l) Income Taxes
In accordance with SFAS No. 109,
Accounting for
Income Taxes,
deferred tax assets and liabilities are
recognized for the future consequences attributable to temporary
differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax basis.
Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in
which those temporary
F-12
FRESENIUS MEDICAL CARE AG & CO. KGaA
(Formerly Fresenius Medical Care AG)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(in thousands, except share data)
differences are expected to be recovered or settled. A valuation
allowance is recorded to reduce the carrying amount of the
deferred tax assets unless it is more likely than not that such
assets will be realized (see Note 16).
m) Impairment
The Company reviews the carrying value of its long-lived assets
or asset groups with definite useful lives 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 in accordance with SFAS No. 144,
Accounting for the
Impairment
or Disposal of
Long-Lived Assets
. 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 the 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.
n) Debt Issuance Costs
Costs related to the issuance of debt are amortized over the
term of the related obligation.
o) Self-Insurance Programs
The Companys largest subsidiary is partially self-insured
for professional, product and general liability, auto liability
and workers compensation claims under which the Company
assumes responsibility for incurred claims up to predetermined
amounts above which third party insurance applies. Reported
balances for the year include estimates of the anticipated
expense for claims incurred (both reported and incurred but not
reported) based on historical experience and existing claim
activity. This experience includes both the rate of claims
incidence (number) and claim severity (cost) and is combined
with individual claim expectations to estimate the reported
amounts.
p) Use of Estimates
The preparation of consolidated financial statements in
conformity with U.S. GAAP requires management to make
estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements
and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those
estimates.
q) Concentration of Risk
The Company is engaged in the manufacture and sale of products
for all forms of kidney dialysis, principally to health care
providers throughout the world, and in providing kidney dialysis
treatment, clinical laboratory testing, perfusion, therapeutic
apheresis and autotransfusion services and other medical
ancillary services. The Company performs ongoing evaluations of
its customers financial condition and, generally, requires
no collateral.
Approximately 36%, 38%, and 40% of the Companys worldwide
revenues were paid by and subject to regulations under
governmental health care programs, primarily Medicare and
Medicaid, administered by the United States government in 2005,
2004, and 2003, respectively.
See Note 5 for concentration of supplier risks.
F-13
FRESENIUS MEDICAL CARE AG & CO. KGaA
(Formerly Fresenius Medical Care AG)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(in thousands, except share data)
r) Earnings per Ordinary share and
Preference share
Basic earnings per ordinary share and basic earnings per
preference share for all years presented have been calculated
using the two-class method required under U.S. GAAP based
upon the weighted average number of ordinary and preference
shares outstanding. Basic earnings per share are computed by
dividing net income less preference amounts by the weighted
average number of ordinary shares and preference shares
outstanding during the year. Diluted earnings per share include
the effect of all potentially dilutive instruments on ordinary
shares and preference shares that would have been outstanding
during the year.
The awards granted under the Companys stock incentive
plans (see Note 15), are potentially dilutive equity
instruments.
For a discussion of the impact of the conversion of the
Companys preference shares on the earnings (or loss) per
share available to holders of ordinary shares and preference
shares, see Note 2.
s) Stock Option Plans
The Company accounts for its stock option plans using the
intrinsic value method in accordance with the provisions of
Accounting Principles Board (APB) Opinion
No. 25,
Accounting for Stock Issued to Employees
,
and related interpretations. As such, compensation expense is
recorded only if the current market price of the underlying
stock exceeds the exercise price on the measurement date.
Fair Value of Stock Options
In electing to continue to follow APB Opinion No. 25 for
expense recognition purposes, the Company is obliged to provide
the expanded disclosures required under SFAS No. 123
for stock-based compensation granted, including, if materially
different from reported results, disclosure of proforma net
earnings and earnings per share had compensation expense
relating to grants been measured under the fair value
recognition provisions of SFAS No. 123.
The per share weighted-average fair value of stock options
granted during 2005, 2004 and 2003 was $22.32, $15.76, and
$14.26, respectively, on the date of the grant using the
Black-Scholes option-pricing model with the weighted-average
assumptions presented below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected dividend yield
|
|
|
2.88%
|
|
|
|
2.87%
|
|
|
|
2.60%
|
|
|
Risk-free interest rate
|
|
|
2.76%
|
|
|
|
3.50%
|
|
|
|
3.80%
|
|
|
Expected volatility
|
|
|
40.00%
|
|
|
|
40.00%
|
|
|
|
40.00%
|
|
|
Expected life of options
|
|
|
5.3 years
|
|
|
|
5.3 years
|
|
|
|
5.3 years
|
|
F-14
FRESENIUS MEDICAL CARE AG & CO. KGaA
(Formerly Fresenius Medical Care AG)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(in thousands, except share data)
The following table illustrates the effect on net income and
earnings per share if the Company had applied the fair value
recognition provisions of SFAS No. 123 to stock based
employee compensation.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
Net income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported
|
|
$
|
454,952
|
|
|
$
|
401,998
|
|
|
$
|
331,180
|
|
|
Add: Stock-based employee compensation expense included in
reported net income, net of related tax effects
|
|
|
1,090
|
|
|
|
1,751
|
|
|
|
1,456
|
|
|
Deduct: Total stock-based employee compensation expense
determined under fair value method for all awards, net of
related tax effects
|
|
|
(8,302
|
)
|
|
|
(7,559
|
)
|
|
|
(7,420
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma
|
|
$
|
447,740
|
|
|
$
|
396,190
|
|
|
$
|
325,216
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ordinary share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported
|
|
$
|
4.68
|
|
|
$
|
4.16
|
|
|
$
|
3.42
|
|
|
|
Pro forma
|
|
$
|
4.61
|
|
|
$
|
4.10
|
|
|
$
|
3.36
|
|
|
Preference share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported
|
|
$
|
4.75
|
|
|
$
|
4.23
|
|
|
$
|
3.49
|
|
|
|
Pro forma
|
|
$
|
4.68
|
|
|
$
|
4.17
|
|
|
$
|
3.43
|
|
Fully diluted earnings per:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ordinary share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported
|
|
$
|
4.64
|
|
|
$
|
4.14
|
|
|
$
|
3.42
|
|
|
|
Pro forma
|
|
$
|
4.57
|
|
|
$
|
4.08
|
|
|
$
|
3.36
|
|
|
Preference share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported
|
|
$
|
4.72
|
|
|
$
|
4.21
|
|
|
$
|
3.49
|
|
|
|
Pro forma
|
|
$
|
4.64
|
|
|
$
|
4.15
|
|
|
$
|
3.43
|
|
t) Recent Pronouncements and Accounting
Changes
In November, 2004, the Financial Accounting Standards Board
issued SFAS No. 151, Inventory Costs an
amendment of ARB No. 43, Chapter 4 (FAS 151),
which is the result of its efforts to converge
U.S. accounting standards for inventories with
International Financial Reporting Standards. This statement
requires abnormal amounts of idle facility expense, freight,
handling costs, and wasted material (spoilage) to be recognized
as current-period charges. It also requires that allocation of
fixed production overheads to the costs of conversion be based
on the normal capacity of the production facilities. FAS 151
will be effective for inventory costs incurred during fiscal
years beginning after June 15, 2005. The Company will adopt
FAS 151 as of January 1, 2006, and it is not expected
to have a material impact on the Companys consolidated
financial statements.
In December, 2004, the Financial Accounting Standards Board
issued its final standard on accounting for share-based payments
(SBP), SFAS No. 123R (revised 2004), Share-Based
Payment (FAS 123R), which requires companies to expense the cost
of employee stock options and similar awards. SFAS 123R
requires determining the cost that will be measured at fair
value on the date of the SBP awards based upon an estimate of
the number of awards expected to vest. There will be no right of
reversal of cost if the awards expire without being exercised.
Fair value of the SBP awards will be estimated using an
option-pricing model that appropriately reflects the specific
circumstances and economics of the awards. Compensation cost for
the SBP awards will be recognized as they vest. Under U.S. tax
law, this cost generates a tax credit, however, such cost is not
deductible under German tax law. The Company will have two
alternative transition methods, each having a different
reporting implication. The effective date is for interim and
annual periods beginning after June 15, 2005. On
April 14,
F-15
FRESENIUS MEDICAL CARE AG & CO. KGaA
(Formerly Fresenius Medical Care AG)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(in thousands, except share data)
2005, the SEC delayed the implementation of FAS 123(R) to
the beginning of the next Fiscal Year that begins after
June 15, 2005. The Company has not yet adopted
FAS 123(R) and is in the process of determining the
transition method it is going to adopt and the potential impact
on the Companys consolidated financial statements.
In June 2005 the FASB ratified
EITF
05-5,
Accounting for Early Retirement or Postemployment Programs
with Specific Features (Such As Terms Specified in
Altersteilzeit Early Retirement Arrangements).
EITF
05-5
provides
guidance on the accounting for the German early retirement
program providing an incentive for employees, within a certain
age group, to transition from full-time or part-time employment
into retirement before their legal retirement age. The program
provides the employee with a bonus which is reimbursed by
subsidies from the German government if certain conditions are
met. According to
EITF
05-5,
the
bonuses provided by the employer should be accounted for as
postemployment benefits under SFAS 112,
Employers Accounting for Postretirement
Benefits, with compensation cost recognized over the
remaining service period beginning when the individual agreement
is signed by the employee and ending when the active service
period ends. The government subsidy should be recognized when
the employer meets the necessary criteria and is entitled to the
subsidy. The effect of applying
EITF
05-5
should
be recognized prospectively as a change in accounting estimate
in fiscal years beginning after December 15, 2005. The
Company is in compliance with
EITF
05-5.
|
|
2.
|
Transformation of Legal Form and Conversion of Preference
Shares
|
On February 10, 2006, the Company completed a
transformation of its legal form under German law as approved by
its shareholders during an Extraordinary General Meeting held on
August 30, 2005 (EGM). Upon registration of the
transformation of legal form in the commercial register of the
local court in Hof an der Saale, on February 10, 2006,
Fresenius Medical Care AGs legal form was changed from a
stock corporation (
Aktiengesellschaft
) to a partnership
limited by shares (
Kommanditgesellschaft auf Aktien
) with
the name Fresenius Medical Care AG & Co. KGaA
(FMC-AG
& Co.
KGaA). The Company as a KGaA is the same legal entity
under German law, rather than a successor to the AG. Fresenius
Medical Care Management AG (Management AG), a
subsidiary of Fresenius AG, the majority voting shareholder of
FMC-AG
prior to the
transformation, is the general partner of
FMC-AG
& Co. KGaA.
Upon effectiveness of the transformation of legal form, the
share capital of
FMC-AG
became the share capital of
FMC-AG
& Co. KGaA,
and persons who were shareholders of
FMC-AG
became
shareholders of the Company in its new legal form. As used in
the notes to these financial statements, the Company
refers to both
FMC-AG
prior to the transformation of legal form and
FMC-AG
& Co. KGaA
after the transformation.
In conjunction with the transformation of legal form, the
Company offered holders of its non-voting preference shares
(including preference shares represented by American Depositary
Shares (ADSs)) the opportunity to convert their shares into
ordinary shares at a conversion ratio of one preference share
plus a conversion premium of
9.75 per
ordinary share. Holders of a total of 26,629,422 preference
shares accepted the offer, resulting in an increase of
26,629,422 ordinary shares of
FMC-AG
& Co. KGaA
(including 2,099,847 ADSs representing 699,949 ordinary shares
of
FMC-AG
& Co.
KGaA) outstanding. Immediately after the conversion and
transformation of legal form, there were 96,629,422 ordinary
shares outstanding. Former holders of preference shares who
elected to convert their shares now hold a number of ordinary
shares of
FMC-AG
&
Co. KGaA equal to the number of preference shares they elected
to convert. The 1,132,757 preference shares that were not
converted remained outstanding and became preference shares of
FMC-AG
& Co. KGaA
in the transformation. As a result, preference shareholders who
elected not to convert their shares into ordinary shares hold
the same number of non-voting preference shares in
FMC-AG
& Co. KGaA
as they held in
FMC-AG
prior
F-16
FRESENIUS MEDICAL CARE AG & CO. KGaA
(Formerly Fresenius Medical Care AG)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(in thousands, except share data)
to the transformation. Shareholders who held ordinary shares in
FMC-AG
prior to the
transformation hold the same number of voting ordinary shares in
FMC-AG
& Co. KGaA.
The conversion of the Companys preference shares is
expected to have an impact on the earnings (or loss) per share
available to the holders of the Companys ordinary shares
upon conversion of the preference shares into ordinary shares,
under U.S. GAAP. As a result, the earnings per share
calculation in the first quarter of 2006 needs to reflect the
difference between (i) the market value of the ordinary
share less the conversion premium of
9.75 per
preference share and (ii) the carrying amount of the
preference shares at the conversion date, February 3, 2006,
as a reduction of income available to ordinary shareholders and
as a corresponding benefit to preference shareholders. The
carrying amount of the preference shares consists of their
historic investment and undistributed retained earnings
allocated to the preference shares under the two-class method.
The Company is continuing to analyze the need to reflect this
reduction or benefit in the Companys financial statements,
but based on the market value of the Companys ordinary
shares on the close of business, February 3, 2006, the
impact is approximately $914.000 or a reduction of
$13.06 per ordinary share and a benefit of $34.32 per
preference share.
Several ordinary shareholders challenged the resolutions adopted
at the EGM approving the conversion of the preference shares
into ordinary shares, the adjustment of the employee
participation programs, the creation of authorized capital and
the transformation of the legal form of the Company, with the
objective of having the resolutions declared null and void. On
December 19, 2005 the Company and the claimants agreed to a
settlement with the participation of Fresenius AG and Management
AG, and all proceedings were terminated.
Pursuant to the settlement, Management AG undertook to
(i) make an
ex gratia
payment to the ordinary
shareholders of the Company (other than Fresenius AG), of
0.12 for every
share issued as an ordinary share up to August 30, 2005 and
(ii) to pay to ordinary shareholders who, at the EGM of
August 30, 2005, voted against the conversion proposal, an
additional
0.69
per ordinary share. Ordinary shareholders who were shareholders
at the close of business on the day of registration of the
conversion and transformation with the commercial register were
entitled to a payment under (i) above. Ordinary
shareholders who voted against the conversion resolution in the
extraordinary general meeting on August 30, 2005, as
evidenced by the voting cards held by the Company, were entitled
to a payment under (ii) above, but only in respect of
shares voted against the conversion resolution. The right to
receive payment under (ii) has lapsed as to any shareholder
who did not make a written claim for payment with the Company by
February 28, 2006.
The Company also agreed to bear court fees and shareholder legal
expenses in connection with the settlement.
The total costs of the settlement are estimated to be
approximately $7,335. A further part of the settlement agreement
and German law require that these costs be borne by Fresenius AG
and the general partner, Management AG. Under U.S. GAAP,
however, these costs must be reflected by the entity benefiting
from the actions of its controlling shareholder. As a result,
the Company has recorded the settlement amount as an expense in
Selling, General and Administrative expense and a contribution
in Additional Paid in Capital in Shareholders Equity.
As part of the settlement, the Company, with the participation
of Fresenius AG and the general partner, Management AG, also
agreed to establish, at the first ordinary general meeting after
registration of the transformation of legal form, a joint
committee (the Joint Committee)
(gemeinsamer
Ausschuss)
of the supervisory boards of Management AG and
FMC-AG & Co. KGaA with authority to advise and decide on
certain significant transactions between the Company and
Fresenius AG and to approve certain significant acquisitions,
dispositions, spin-offs and similar matters. The Company also
agreed to establish an Audit and Corporate Governance Committee
of the FMC-AG & Co. KGaA Supervisory Board to review the
report of the general partner on relations with related parties
and report to the overall supervisory board thereon.
Additionally,
F-17
FRESENIUS MEDICAL CARE AG & CO. KGaA
(Formerly Fresenius Medical Care AG)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(in thousands, except share data)
Management AG undertook to provide in the settlement to provide
data on the individual remuneration of its management board
members in accordance with the German Commercial Code.
3. Proposed acquisition
On May 3, 2005, the Company entered into a definitive
merger agreement for the acquisition (the
Acquisition) of Renal Care Group, Inc.
(RCG), a Delaware corporation with principle offices
in Nashville, Tennessee, for an all cash purchase price of
approximately $3,500,000. At December 31, 2005, RCG
provided dialysis and ancillary services to over 32,360 patients
through more than 450 owned outpatient dialysis centers in 34
states within the United States, in addition to providing acute
dialysis services to more than 200 hospitals. Completion of the
Acquisition, approved by RCGs stockholders in a vote held
on August 24, 2005, is subject to governmental approvals
(including termination or expiration of the waiting period under
the Hart-Scott Rodino Antitrust Improvements Act of 1976, as
amended, the Act) and other regulatory approvals.
On February 15, 2006, the Company announced that the
Company and RCG had entered into a definitive agreement to sell
approximately 100 dialysis centers serving on average
approximately 60-65 patients per center to National Renal
Institutes, Inc., a wholly owned subsidiary of DSI Holding
Company, Inc. The divestiture of these centers is an important
step toward concluding the review by the United States Federal
Trade Commission (FTC) of our acquisition of Renal Care Group.
The purchase price for the divested centers is approximately
$450 million to be paid in cash, subject to post-closing
adjustments for working capital and other routine matters. The
sale of the centers is expected to close shortly after the
completion of the Companys acquisition of RCG. Both the
divestiture and the acquisition of RCG remain subject to FTC
approval.
In connection with the Acquisition, the Company has entered into
a commitment letter pursuant to which Bank of America, N.A.
(BofA) and Deutsche Bank AG (DB) have
agreed, subject to certain conditions, to underwrite an
aggregate $5,000,000 in principal amount of term and revolving
loans to be syndicated to other financial institutions. The
loans will consist of a 5-year $1,000,000 revolving credit
facility, a 5-year $2,000,000 term loan A facility and a 7-year
$2,000,000 term loan B facility. The syndication of the
revolving credit facility and the term loan A facility have
already been completed. Funding is subject to customary closing
conditions and BofAs and DBs acquiescence to any
material modification to the merger agreement and any waiver of
any material conditions precedent under that agreement. Interest
on the new senior credit facilities will be at the option of the
Company at a rate equal to either (i) LIBOR plus an
applicable margin, or (ii) the higher of BofAs prime
rate or the Federal Funds rate plus 0.5% plus an applicable
margin. The applicable margin is variable and depends on the
consolidated leverage ratio of the Company (the
Margin). The financing will be available to the
Company, among other uses, to pay the purchase price and related
expenses for the proposed acquisition of RCG, to refinance
outstanding indebtedness under the Companys existing 2003
Senior Credit Agreement (see Note 9) and certain
indebtedness of RCG, and for general corporate purposes. In
conjunction with the forecasted utilization of the new senior
credit facilities and the related variable rate based interest
payments, the Company entered into forward starting interest
rate swaps in the notional amount of $2,465,000. These
instruments, designated as cash flow hedges, effectively convert
forecasted LIBOR based interest payments into fixed rate based
interest payments which fix the interest rate on $2,465,000 of
the forecasted financing under the new senior credit facility at
4.32% plus Margin. These swaps are denominated in
U.S. dollars and expire at various dates between 2008 and
2012.
On November 30, 2005, the Company announced it had
commenced a cash tender offer (the Tender Offer),
contingent upon satisfaction of the conditions to the closing of
the Acquisition, for all the $159,685 of RCGs 9% Senior
Subordinated Notes (the Notes). Under the terms of
the Tender Offer, the total consideration to be paid for validly
tendered and accepted Notes will be the present value of the
future cash flows up to and including November 1, 2007,
based on an assumption that the Notes will be redeemed at a
price of $1.045 per $1
F-18
FRESENIUS MEDICAL CARE AG & CO. KGaA
(Formerly Fresenius Medical Care AG)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(in thousands, except share data)
principal amount of Notes on such date, discounted at a rate
equal to 50 basis points over the yield to maturity on the 4.25%
U.S. Treasury Note due October 31, 2007. The terms of
the offer also require certain consents, (the
Consents), to certain proposed amendments to the
Indenture governing the Notes that would eliminate substantially
all restrictive covenants and certain other provisions of
Indenture. Upon consummation of the Tender Offer, holders of
Notes tendered together with Consents before the end of business
on December 13, 2005 will receive a consent payment of
$0.030 per $1 principal amount of Notes tendered which will be
included in the Companys costs of the Acquisition. Notes
and Consents tendered after this date cannot be withdrawn and
are not entitled to receive the consent payment. Holders of
Notes tendered and not withdrawn will receive accrued and unpaid
interest from the last interest date up to, but not including,
the date payment is made for the Notes. As most recently
extended, the offer expires February 27, 2006, unless
further extended by the Company. The Tender Offer is contingent
upon receipt of consents from the holders of a majority in
aggregate outstanding principal amount of the Notes and
satisfaction of the conditions to the Acquisition. As of
5:00 p.m., New York City time, on January 27, 2006,
99.87% of the outstanding aggregate principal amount of the
Notes had been tendered. Tendered notes may no longer be
withdrawn.
On October 25, 2004, RCG received a subpoena from the
office of the United States Attorney for the Eastern District of
New York. The subpoena requires the production of documents
related to numerous aspects of their business and operations,
including those of RenaLab, Inc., their laboratory. The subpoena
includes specific requests for documents related to testing for
parathyroid hormone (PTH) levels and vitamin D therapies.
RCG has announced that it intends to cooperate with the
governments investigation.
On August 9, 2005, RCG received a subpoena from the office
of the United States Attorney for the Eastern District of
Missouri in connection with a joint civil and criminal
investigation. The subpoena requires the production of documents
related to numerous aspects of RCGs business and
operations. The areas covered by the subpoena include RCGs
supply company, pharmaceutical and other services that RCG
provides to patients, RCGs relationships to pharmaceutical
companies, RCGs relationships with physicians, medical
director compensation, joint ventures with physicians and
purchase of dialysis equipment from the Company. RCG has
announced that it intends to cooperate with the
governments investigation.
Upon the closing of the proposed acquisition, the Company will
assume RCGs obligations to comply with these subpoenas.
4. Related Party Transactions
a) Service Agreements
The Company is party to service agreements with
Fresenius AG, prior to the transformation its majority
shareholder and currently its largest shareholder and sole
shareholder of the general partner, and certain affiliates of
Fresenius AG to receive services, including, but not
limited to: administrative services, management information
services, employee benefit administration, insurance,
IT services, tax services and treasury services. For the
years 2005, 2004, and 2003, amounts charged by Fresenius AG
to the Company under the terms of the agreements are $36,190,
$30,779, and $26,172, respectively. The Company also provides
certain services to Fresenius AG and certain affiliates of
Fresenius AG, including research and development, central
purchasing, patent administration and warehousing. The Company
charged $7,460 $10,766, and $11,669, for services rendered to
Fresenius AG in 2005, 2004, and 2003, respectively.
Under operating lease agreements for real estate entered into
with Fresenius AG, the Company paid Fresenius AG
$15,655 $14,835, and $13,307 during 2005, 2004, and 2003,
respectively. The majority of the leases expire in 2006 with
options for renewal.
F-19
FRESENIUS MEDICAL CARE AG & CO. KGaA
(Formerly Fresenius Medical Care AG)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(in thousands, except share data)
b) Financing Provided by Fresenius AG
The Company has $18,757 in financing outstanding at
December 31, 2005, from Fresenius AG. In 2005, the
Company retired short-term loans with an outstanding balance of
$3,000 at December 31, 2004 and approximately $3,000
representing the balance due of the Companys purchase of
the adsorber business from Fresenius AG in 2003. Interest
expense on these borrowings was $501, $129, and $189 for the
years 2005, 2004, and 2003, respectively. The average interest
rates for these borrowings were 2.85%, 3.36% and 3.85% for 2005,
2004 and 2003, respectively.
c) Products
During the years ended December 31, 2005, 2004 and 2003,
the Company recognized sales of $31,708, $35,085, and $27,306,
respectively, to Fresenius AG and affiliates. During 2005,
2004 and 2003, the Company made purchases from Fresenius AG
and affiliates in the amount of $43,007, $36,122, and $27,228,
respectively.
d) Other
The Chairman of the Companys Supervisory Board is also the
Chairman of the Supervisory Board of Fresenius AG, the
largest holder of the Companys ordinary shares and sole
shareholder of the Companys general partner. He is also a
member of the Supervisory Board of the Companys general
partner.
The Vice Chairman of the Companys Supervisory Board is a
member of the Supervisory Board of Fresenius AG and Vice
Chairman of the Supervisory Board of the Companys general
partner. He is also a partner in a law firm which provided
services to the Company. The Company paid the law firm
approximately $1,710, $1,383, and $483, in 2005, 2004 and 2003,
respectively.
In May of 2003, Dr. Ulf M. Schneider, the Chief Financial
Officer of the Company, resigned to assume the position of
Chairman of the Management Board and CEO of Fresenius AG.
In May 2004, he was elected as a member of the Companys
Supervisory Board. Under German law, after a transformation of
legal form the members of a companys supervisory board
remain in office for the remainder of their terms as members of
its supervisory board if the supervisory board of the company in
its new legal form is formed in the same way and with the same
composition. Dr. Schneider, chairman of the management
board of Fresenius AG, resigned from the Companys
supervisory board effective upon entry of the transformation in
the commercial register, but continues to serve as Chairman of
the supervisory board of the Companys general partner.
Management AG will apply for a court appointment of a sixth
member of the supervisory board to replace Dr. Schneider in
accordance with German law.
5. Inventories
As of December 31, 2005 and 2004, inventories consisted of
the following:
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
|
|
Raw materials and purchased components
|
|
$
|
93,889
|
|
|
$
|
90,268
|
|
Work in process
|
|
|
33,073
|
|
|
|
36,586
|
|
Finished goods
|
|
|
223,356
|
|
|
|
240,296
|
|
Health care supplies
|
|
|
80,575
|
|
|
|
75,769
|
|
|
|
|
|
|
|
|
|
Inventories
|
|
$
|
430,893
|
|
|
$
|
442,919
|
|
|
|
|
|
|
|
|
F-20
FRESENIUS MEDICAL CARE AG & CO. KGaA
(Formerly Fresenius Medical Care AG)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(in thousands, except share data)
Under the terms of certain unconditional purchase agreements,
the Company is obligated to purchase approximately $273,757 of
materials, of which $148,904 is committed at December 31,
2005 for 2006. The terms of these agreements run 1 to
3 years. Inventories as of December 31, 2005 include
$26,754 of Erythropoietin (EPO), which is supplied
by a single source supplier in the United States. Delays,
stoppages, or interruptions in the supply of EPO could adversely
affect the operating results of the Company. Revenues from EPO
accounted for approximately 21% and 23% of total revenue in the
North America segment for 2005 and 2004, respectively.
6. Property, Plant and Equipment
As of December 31, 2005 and 2004, property, plant and
equipment consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
|
|
Land and improvements
|
|
$
|
26,564
|
|
|
$
|
29,258
|
|
Buildings and improvements
|
|
|
812,841
|
|
|
|
770,103
|
|
Machinery and equipment
|
|
|
1,338,831
|
|
|
|
1,349,373
|
|
Machinery, equipment and rental equipment under capitalized
leases
|
|
|
56,064
|
|
|
|
59,183
|
|
Construction in progress
|
|
|
117,331
|
|
|
|
91,227
|
|
|
|
|
|
|
|
|
|
|
|
2,351,631
|
|
|
|
2,299,144
|
|
Accumulated depreciation
|
|
|
(1,135,873
|
)
|
|
|
(1,117,217
|
)
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
$
|
1,215,758
|
|
|
$
|
1,181,927
|
|
|
|
|
|
|
|
|
Depreciation expense for property, plant and equipment amounted
to $211,103, $199,732, and $180,952, for the years ended
December 31, 2005, 2004 and 2003, respectively.
Included in property, plant and equipment as of
December 31, 2005 and 2004 were $131,195, and $126,021,
respectively, of peritoneal dialysis cycler machines which the
Company leases to customers with end-stage renal disease on a
month-to-month basis and hemodialysis machines which the Company
leases to physicians under operating leases. Accumulated
depreciation related to machinery, equipment and rental
equipment under capital leases was $32,078 and $34,806 at
December 31, 2005 and 2004, respectively.
7. Other Intangible Assets and Goodwill
As of December 31, 2005 and 2004, the carrying value and
accumulated amortization of intangible assets other than
goodwill consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005
|
|
|
December 31, 2004
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
|
|
Gross
|
|
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortizable Intangible Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patient relationships
|
|
$
|
164,188
|
|
|
$
|
(114,192
|
)
|
|
$
|
157,673
|
|
|
$
|
(106,545
|
)
|
Patents
|
|
|
28,535
|
|
|
|
(16,599
|
)
|
|
|
28,508
|
|
|
|
(16,239
|
)
|
Distribution rights
|
|
|
25,231
|
|
|
|
(14,391
|
)
|
|
|
25,306
|
|
|
|
(10,390
|
)
|
Other
|
|
|
151,640
|
|
|
|
(77,527
|
)
|
|
|
183,076
|
|
|
|
(100,129
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
369,594
|
|
|
$
|
(222,709
|
)
|
|
$
|
394,563
|
|
|
$
|
(233,303
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-21
FRESENIUS MEDICAL CARE AG & CO. KGaA
(Formerly Fresenius Medical Care AG)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying
|
|
|
|
|
Carrying
|
|
|
|
|
|
Amount
|
|
|
|
|
Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-amortizable Intangible Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tradename
|
|
$
|
220,935
|
|
|
|
|
|
|
$
|
222,289
|
|
|
|
|
|
Management contracts
|
|
|
217,869
|
|
|
|
|
|
|
|
218,499
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
438,804
|
|
|
|
|
|
|
$
|
440,788
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Intangible Assets
|
|
$
|
585,689
|
|
|
|
|
|
|
$
|
602,048
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The related amortization expenses are as follows:
Amortization Expense
|
|
|
|
|
For the year ended December 31, 2003
|
|
$
|
34,217
|
|
|
|
|
|
For the year ended December 31, 2004
|
|
$
|
32,853
|
|
|
|
|
|
For the year ended December 31, 2005
|
|
$
|
40,349
|
|
|
|
|
|
Estimated Amortization Expense
|
|
|
|
|
For the year ended December 31, 2006
|
|
$
|
33,405
|
|
|
|
|
|
For the year ended December 31, 2007
|
|
$
|
26,643
|
|
|
|
|
|
For the year ended December 31, 2008
|
|
$
|
18,912
|
|
|
|
|
|
For the year ended December 31, 2009
|
|
$
|
14,529
|
|
|
|
|
|
For the year ended December 31, 2010
|
|
$
|
12,246
|
|
|
|
|
|
Goodwill
Changes in the carrying amount of goodwill are mainly a result
of acquisitions and the impact of foreign currency translations.
During the year ended December 31, 2005, the Companys
acquisitions principally involved the acquisition of dialysis
clinics providing dialysis therapy. The segment detail is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North
|
|
|
|
|
|
|
|
America
|
|
|
International
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of January 1, 2004
|
|
|
2,966,024
|
|
|
$
|
322,324
|
|
|
$
|
3,288,348
|
|
|
Goodwill acquired
|
|
|
69,172
|
|
|
|
53,782
|
|
|
|
122,954
|
|
|
Reclassifications
|
|
|
501
|
|
|
|
2,879
|
|
|
|
3,380
|
|
|
Currency Translation
|
|
|
|
|
|
|
30,470
|
|
|
|
30,470
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2004
|
|
$
|
3,035,697
|
|
|
$
|
409,455
|
|
|
$
|
3,445,152
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill acquired
|
|
|
49,410
|
|
|
|
22,715
|
|
|
|
72,125
|
|
|
Reclassifications
|
|
|
(8,882
|
)
|
|
|
(390
|
)
|
|
|
(9,272
|
)
|
|
Currency Translation
|
|
|
108
|
|
|
|
(51,236
|
)
|
|
|
(51,128
|
)
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2005
|
|
$
|
3,076,333
|
|
|
$
|
380,544
|
|
|
$
|
3,456,877
|
|
|
|
|
|
|
|
|
|
|
|
The reduction in Goodwill in 2005 results mainly from resolution
of tax exposures established on acquisitions.
F-22
FRESENIUS MEDICAL CARE AG & CO. KGaA
(Formerly Fresenius Medical Care AG)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(in thousands, except share data)
8. Accrued Expenses and Other Current
Liabilities
As at December 31, 2005 and 2004 accrued expenses and other
current liabilities consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
|
|
Accrued salaries and wages
|
|
$
|
214,873
|
|
|
$
|
193,469
|
|
Special charge for legal matters
|
|
|
117,541
|
|
|
|
122,085
|
|
Accrued insurance
|
|
|
75,545
|
|
|
|
56,584
|
|
Unapplied cash and receivable credits
|
|
|
73,897
|
|
|
|
66,591
|
|
Other
|
|
|
356,912
|
|
|
|
302,346
|
|
|
|
|
|
|
|
|
Total accrued expenses and other current liabilities
|
|
$
|
838,768
|
|
|
$
|
741,075
|
|
|
|
|
|
|
|
|
At December 31, 2005, there is a balance of $117,541,
including $115,000 for a settlement payment relating to the
accrual for the special charge for legal matters as described
below. The Company believes that these provisions are adequate
for the settlement of those matters. During 2005, $4,544 were
applied against the accrual for the special charge for legal
matters.
In 2001, the Company recorded a $258,159 special charge to
address 1996 merger-related legal matters, estimated liabilities
and legal expenses arising in connection with the W.R. Grace
& Co. Chapter 11 proceedings (the Grace
Chapter 11 Proceedings) and the cost of resolving
pending litigation and other disputes with certain commercial
insurers (see Note 18).
The Company accrued $172,034 principally representing a
provision for income taxes payable for the years prior to the
1996 merger for which W.R. Grace & Co. had agreed to
indemnify the Company, but which the Company may ultimately be
obligated to pay as a result of Graces Chapter 11
Proceedings. In addition, that amount included the costs of
defending the Company in litigation arising out of the Grace
Chapter 11 Proceedings (see Note 18).
The Company included $55,489 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 of $30,636 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.
During the second quarter of 2003, the court supervising the
Grace Chapter 11 Proceedings approved the definitive
settlement agreement entered into among the Company, the
committee representing the asbestos creditors and
W.R. Grace & Co (See Note 18). Under the
settlement agreement, the Company will pay $115,000 upon plan
confirmation. Based on these developments, the Company reduced
its estimate in 2003 for the settlement and related costs of the
Grace Chapter 11 Proceedings by $39,000. This reduction of
the provision for the W.R. Grace & Co. matter has
been applied to the other components of the special charge
(i.e. reserves for settlement obligations and disputed
accounts receivable from commercial insurers and other
merger-related legal matters described in this note).
The other item includes accruals for other operating expenses
including interest, withholding tax, value added tax
(VAT), legal and compliance costs, physician
compensation, commissions, bonuses and rebates, and lease
liabilities.
F-23
FRESENIUS MEDICAL CARE AG & CO. KGaA
(Formerly Fresenius Medical Care AG)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(in thousands, except share data)
9. Short-term Borrowings, Long-term Debt and
Capital Lease Obligations
As of December 31, 2005 and 2004, short-term borrowings
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
|
|
Borrowings under lines of credit
|
|
$
|
57,113
|
|
|
$
|
83,383
|
|
Accounts receivable facility
|
|
|
94,000
|
|
|
|
335,765
|
|
|
|
|
|
|
|
|
|
|
$
|
151,113
|
|
|
$
|
419,148
|
|
|
|
|
|
|
|
|
As of December 31, 2005 and 2004, long-term debt and
capital lease obligations consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
|
|
Senior Credit Agreement
|
|
$
|
470,700
|
|
|
$
|
484,500
|
|
Capital lease obligations
|
|
|
4,596
|
|
|
|
6,987
|
|
EIB Agreement
|
|
|
48,806
|
|
|
|
|
|
EuroNotes
|
|
|
235,940
|
|
|
|
175,030
|
|
Other
|
|
|
73,327
|
|
|
|
109,232
|
|
|
|
|
|
|
|
|
|
|
|
833,369
|
|
|
|
775,749
|
|
Less current maturities
|
|
|
(126,269
|
)
|
|
|
(230,179
|
)
|
|
|
|
|
|
|
|
|
|
$
|
707,100
|
|
|
$
|
545,570
|
|
|
|
|
|
|
|
|
Short-term borrowings
For information regarding short-term borrowings from affiliates
see Note 4 b).
Lines of Credit
Short-term borrowings of $57,113 and $83,383 at
December 31, 2005, and 2004, respectively, represent
amounts borrowed by certain of the Companys subsidiaries
under lines of credit with commercial banks. The average
interest rates on these borrowings during 2005 and 2004 were
3.91% and 4.69%, respectively.
Excluding amounts available under the 2003 Senior Credit
Agreement (as described below), at December 31, 2005, the
Company had $66,179 available under such commercial bank
agreements. In some instances, lines of credit are secured by
assets of the Companys subsidiary that is party to the
agreement and may contain various covenants including, but not
limited to, requirements for maintaining defined levels of
working capital, net worth, capital expenditures and certain
financial ratios.
Accounts Receivable Facility
The Company has an asset securitization facility (the
accounts receivable facility), which provides
borrowings up to a maximum of $460,000. Under the facility,
certain receivables are sold to NMC Funding Corporation
(NMC Funding), a wholly-owned subsidiary. NMC
Funding then assigns undivided ownership interests in the
accounts receivable to certain bank investors. Under the terms
of the accounts receivable facility, NMC Funding retains the
right to recall all transferred interests in the accounts
receivable assigned to the banks under the facility. As the
Company has the right at any time to recall the then outstanding
interests, the receivables remain on the Consolidated Balance
Sheet and the proceeds from the transfer of undivided interests
are recorded as short-term borrowings.
F-24
FRESENIUS MEDICAL CARE AG & CO. KGaA
(Formerly Fresenius Medical Care AG)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(in thousands, except share data)
At December 31, 2005 there are outstanding short-term
borrowings under the facility of $94,000. NMC Funding pays
interest to the bank investors, calculated based on the
commercial paper rates for the particular tranches selected. The
effective interest rate during the twelve months ended
December 31, 2005 ranged from 2.49%-4.63%. The costs are
expensed as incurred and recorded as interest expense and
related financing costs. On October 20, 2005 the Company
amended the accounts receivable facility to extend the maturity
date to October 19, 2006.
Long-term debt
European Investment Bank Agreement
The Company entered into a credit agreement with the European
Investment Bank (EIB) on July 13, 2005 in the
total amount of $154,979 consisting of a $106,173
(
90,000)
revolving credit line and a $48,806 term loan. The facility has
an 8-year term with the revolving line terminating on
July 12, 2013 and the term loan terminating on
September 13, 2013. Both loans bear variable interest rates
that change quarterly with FMC-AG & Co. KGaA having options
to convert into fixed rates. The EIB is a not-for-profit
long-term, lending institution of the European Union that loans
funds at favorable rates for the purpose of capital investment
projects, normally for up to half of the funds required for such
projects. The Company will use these funds to refinance certain
R&D projects and investments in expansion and optimization
of existing production facilities in Germany. The loans are
secured by bank guarantees and have customary covenants. The
term loan was drawn down on September 15, 2005 with average
interest for the period ending December 31, 2005 at 3.89%.
There have been no drawdowns on the revolving credit facility as
of December 31, 2005.
Euro Notes
On July 27, 2005, the Company issued new euro denominated
notes (Euro Notes) (
Schuldscheindarlehen
)
totaling $235,940
(
200,000) with a
126,000 tranche
at a fixed interest rate of 4.57% and a
74,000 tranche
with a floating rate at EURIBOR plus applicable margin resulting
in an average interest rate of 4.10% for the period ending
December 31, 2005. The proceeds were used to liquidate
$155,000
(
128,500) of
Euro Notes issued in 2001 that were due in July 2005 and for
working capital. The Euro Notes mature on July 27, 2009.
2003 Senior Credit Agreement
On February 21, 2003, the Company entered into an amended
and restated bank agreement (hereafter, the 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), replacing the 1996 Senior Credit
Agreement that was scheduled to expire at September 30,
2003. Under the terms of the 2003 Senior Credit Agreement, the
Lenders made available to the Company and certain subsidiaries
and affiliates an aggregate amount of up to $1,500,000. Under
the 2003 Credit Agreement, all principal payments made on term
loans permanently reduce the total amounts available.
Through a series of amendments in 2003 and 2004, the Company
voluntarily reduced the aggregate amount available to $1,200,000
and achieved a reduction of the applicable interest rates. The
2003 amendment voluntarily reduced the aggregate amount
available to $1,400,000 while reducing interest rates for
certain tranches of the term loan portion by 25 basis points.
The 2004 amendments further reduced the aggregate amount
available to $1,200,000 while increasing the available amounts
under the revolving loan portion and reducing the amounts
available under the term loan portion. In the 2004 amendments,
the Company also reduced the interest rates on the Revolving
Credit by 62.5 basis points and the interest rates on certain of
the term loan tranches by 62.5 and 75 basis points while
extending the termination date of the facility until
February 28, 2010. In addition, under the
F-25
FRESENIUS MEDICAL CARE AG & CO. KGaA
(Formerly Fresenius Medical Care AG)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(in thousands, except share data)
2004 amendments, the Company can increase the amount of the
revolving credit facility by up to $200,000 during the extended
life of the 2003 Senior Credit Agreement.
The following table shows the available and outstanding credit
under the 2003 Senior Credit Agreement:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum Amount Available
|
|
|
Balance Outstanding
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revolving Credit
|
|
$
|
750,000
|
|
|
$
|
750,000
|
|
|
$
|
45,700
|
|
|
$
|
34,500
|
|
Term Loan A-1
|
|
|
425,000
|
|
|
|
450,000
|
|
|
|
425,000
|
|
|
|
450,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,175,000
|
|
|
$
|
1,200,000
|
|
|
$
|
470,700
|
|
|
$
|
484,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2005, $80,486 is committed to
outstanding letters of credit which are not included as part of
the Balance Outstanding as of December 31, 2005.
The terms of the credit facilities available at
December 31, 2005 are:
|
|
|
|
|
a revolving credit facility of up to $750,000 (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 line in U.S. dollars, up
to $250,000 is available as a competitive loan facility and up
to $50,000 is available as swing line in certain
non-U.S. currencies, the total of which cannot exceed
$750,000) which will be due and payable on February 28,
2010.
|
|
|
|
a term loan facility
(Loan
A-1)
of $450,000, also maturing on February 28, 2010. The terms
of the 2003 Senior Credit Agreement require payments that
permanently reduce the term loan facility. The repayment began
in the fourth quarter of 2005 and amounts to $25,000 per
quarter. The remaining amount outstanding is due on
February 28, 2010.
|
The revolving credit facility and Loan A-1 interest rates are
equal to LIBOR plus an applicable margin, or base rate, defined
as the higher of the Bank of America prime rate or the Federal
Funds rate plus 0.5% plus the applicable margin. The applicable
margin is variable and depends on the ratio of the
Companys funded debt to EBITDA as defined in the 2003
Senior Credit Agreement. In addition to scheduled principal
payments, indebtedness outstanding under the 2003 Senior Credit
Agreement will be reduced by portions of the net cash proceeds
from certain sales of assets, securitization transactions other
than the Companys existing accounts receivable financing
facility and the issuance of subordinated debt.
The 2003 Senior Credit Agreement contains affirmative and
negative covenants with respect to the Company and its
subsidiaries and other payment restrictions. Some of the
covenants limit indebtedness of the Company and investments by
the Company, and require the Company to maintain certain ratios
defined in the agreement. Additionally, the 2003 Senior Credit
Agreement provides for a dividend restriction, which is $200,000
for dividends paid in 2006, and increases in subsequent years.
The Company paid dividends of $137,487 in 2005. In default, the
outstanding balance under the 2003 Senior Credit Agreement
becomes immediately due and payable at the option of the
Lenders. As of December 31, 2005, the Company is in
compliance with all financial covenants under the 2003 Senior
Credit Agreement.
In connection with the acquisition of Renal Care Group, Inc, the
Company has entered into a commitment letter pursuant to which
Bank of America, N.A. (BofA) and Deutsche Bank AG
(DB) have agreed, subject to certain conditions, to
underwrite an aggregate $5,000,000 in principal amount of term
and revolving loans for syndication to other financial
institutions that would replace the 2003 Credit Agreement (See
Note 3, Proposed Acquisition).
F-26
FRESENIUS MEDICAL CARE AG & CO. KGaA
(Formerly Fresenius Medical Care AG)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(in thousands, except share data)
Annual Payments
Aggregate annual payments applicable to the 2003 Senior Credit
Agreement, Euro Notes, capital leases and other borrowings
(excluding the Companys trust preferred securities) for
the five years subsequent to December 31, 2005 are:
|
|
|
|
|
2006
|
|
$
|
126,269
|
|
2007
|
|
|
116,843
|
|
2008
|
|
|
112,720
|
|
2009
|
|
|
343,083
|
|
2010
|
|
|
74,977
|
|
Thereafter
|
|
|
59,477
|
|
|
|
|
|
|
|
$
|
833,369
|
|
|
|
|
|
10. Employee Benefit Plans
Defined Benefit Pension Plans
The Company currently has two principal pension plans, one for
German employees, and the other covering employees in the United
States. Plan benefits are generally based on years of service
and final salary. Consistent with predominant practice in
Germany, The Companys pension obligations in Germany are
unfunded. During the first quarter of 2002, the Companys
subsidiary, Fresenius Medical Care Holdings, Inc.
(FMCH) curtailed its 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 to
participate in 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. Each year
FMCH contributes at least the minimum required by the Employee
Retirement Income Security Act of 1974, as amended. There was no
minimum funding requirement for FMCH for the defined benefit
plan in 2005. FMCH voluntarily contributed $25,627 during 2005.
The following tables provide a reconciliation of benefit
obligations, plan assets, and funded status of the plans.
Benefits paid as shown in the reconciliation of plan assets
include only benefit payments from the Companys funded
benefit plans.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
Change in benefit obligation:
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at beginning of year
|
|
$
|
288,862
|
|
|
$
|
241,240
|
|
|
$
|
184,468
|
|
Translation (gain) loss
|
|
|
(11,233
|
)
|
|
|
4,939
|
|
|
|
8,870
|
|
Service cost
|
|
|
5,103
|
|
|
|
4,269
|
|
|
|
3,486
|
|
Interest cost
|
|
|
15,927
|
|
|
|
14,816
|
|
|
|
13,419
|
|
Transfer of plan participants
|
|
|
(36
|
)
|
|
|
(261
|
)
|
|
|
1,356
|
|
Actuarial loss
|
|
|
27,170
|
|
|
|
28,165
|
|
|
|
33,563
|
|
Benefits paid
|
|
|
(4,818
|
)
|
|
|
(4,306
|
)
|
|
|
(3,922
|
)
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at end of year
|
|
$
|
320,975
|
|
|
$
|
288,862
|
|
|
$
|
241,240
|
|
|
|
|
|
|
|
|
|
|
|
F-27
FRESENIUS MEDICAL CARE AG & CO. KGaA
(Formerly Fresenius Medical Care AG)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
Change on plan assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
|
$
|
166,952
|
|
|
$
|
135,247
|
|
|
$
|
83,191
|
|
Actual return on plan assets
|
|
|
7,481
|
|
|
|
9,642
|
|
|
|
13,898
|
|
Employer contributions
|
|
|
25,627
|
|
|
|
25,633
|
|
|
|
41,481
|
|
Benefits paid
|
|
|
(4,047
|
)
|
|
|
(3,570
|
)
|
|
|
(3,323
|
)
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at end of year
|
|
$
|
196,013
|
|
|
$
|
166,952
|
|
|
$
|
135,247
|
|
|
|
|
|
|
|
|
|
|
|
Funded status:
|
|
$
|
124,962
|
|
|
$
|
121,910
|
|
|
$
|
105,994
|
|
Unrecognized net loss
|
|
|
(108,440
|
)
|
|
|
(85,945
|
)
|
|
|
(61,595
|
)
|
Unrecognized prior service cost
|
|
|
(795
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized
|
|
$
|
15,727
|
|
|
$
|
35,965
|
|
|
$
|
44,399
|
|
|
|
|
|
|
|
|
|
|
|
Amounts recognized in statement of financial position consist of:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued benefit costs
|
|
$
|
108,702
|
|
|
$
|
108,125
|
|
|
$
|
100,052
|
|
Accumulated other comprehensive income
|
|
|
(92,180
|
)
|
|
|
(72,160
|
)
|
|
|
(55,653
|
)
|
Intangible assets
|
|
|
(795
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized
|
|
$
|
15,727
|
|
|
$
|
35,965
|
|
|
$
|
44,399
|
|
|
|
|
|
|
|
|
|
|
|
Calculation of Additional Minimum Liability*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value of plan assets
|
|
$
|
196,013
|
|
|
$
|
166,952
|
|
|
$
|
135,247
|
|
|
Accumulated benefit obligation (ABO)
|
|
|
304,715
|
|
|
|
213,995
|
|
|
|
184,489
|
|
|
|
|
|
|
|
|
|
|
|
Minimum Liability
|
|
$
|
108,702
|
|
|
$
|
47,043
|
|
|
$
|
49,242
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued/(prepaid) benefit costs
|
|
$
|
15,727
|
|
|
$
|
(25,117
|
)
|
|
$
|
(6,411
|
)
|
|
|
|
|
|
|
|
|
|
|
Additional Minimum Liability
|
|
$
|
92,975
|
|
|
$
|
72,160
|
|
|
$
|
55,653
|
|
|
|
|
|
|
|
|
|
|
|
|
Thereof intangible assets
|
|
|
795
|
|
|
|
|
|
|
|
|
|
|
Thereof accumulated other comprehensive income
|
|
$
|
92,180
|
|
|
$
|
72,160
|
|
|
$
|
55,653
|
|
|
|
|
|
|
|
|
|
|
|
Total pension liability (at December 31)
|
|
$
|
108,702
|
|
|
$
|
108,125
|
|
|
$
|
100,052
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average assumptions for benefit obligation
as of December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
5.22%
|
|
|
|
5.62%
|
|
|
|
6.14%
|
|
Rate of compensation increase
|
|
|
4.22%
|
|
|
|
4.25%
|
|
|
|
4.27%
|
|
Components of net period benefit cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
5,103
|
|
|
$
|
4,269
|
|
|
$
|
3,486
|
|
Interest cost
|
|
|
15,927
|
|
|
|
14,816
|
|
|
|
13,419
|
|
Expected return on plan assets
|
|
|
(13,163
|
)
|
|
|
(10,219
|
)
|
|
|
(7,688
|
)
|
Amortization of transition obligation
|
|
|
|
|
|
|
|
|
|
|
92
|
|
Amortization unrealized losses
|
|
|
6,753
|
|
|
|
4,712
|
|
|
|
3,971
|
|
Amortization of prior service cost
|
|
|
210
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit costs
|
|
$
|
14,830
|
|
|
$
|
13,578
|
|
|
$
|
13,280
|
|
|
|
|
|
|
|
|
|
|
|
F-28
FRESENIUS MEDICAL CARE AG & CO. KGaA
(Formerly Fresenius Medical Care AG)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average assumptions for net periodic
benefit cost for the year ended December 31
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
5.61%
|
|
|
|
6.00%
|
|
|
|
6.52%
|
|
Expected return of plan assets
|
|
|
7.50%
|
|
|
|
7.50%
|
|
|
|
8.50%
|
|
Rate of compensation increase
|
|
|
4.22%
|
|
|
|
4.25%
|
|
|
|
4.27%
|
|
|
|
*
|
this calculation refers only to companies with ABO in excess of
plan assets
|
Plan Investment Policy and Strategy
The investment strategy for the pension plan of FMCH, our
U.S. subsidiary, is to earn a long-term rate of return on
assets of at least 7.5% compounded annually while utilizing a
target investment allocation of 36% equity and 64% long-term
U.S. bonds.
The investment policy considers that there will be a time
horizon for invested funds of more than 5 years. The total
portfolio will be measured against a policy index that reflects
the asset class benchmarks and the target asset allocation. The
Plan policy does not allow investments in securities of the
Company or other related party stock. The performance benchmarks
for the separate asset classes include: S&P 500 Index,
Russell 2000 Growth Index, MSCI EAFE Index, Lehman
U.S. Long Government/ Credit bond Index and the HFRI Fund
of Funds Index. The following schedule describes FMCHs
allocation for its plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allocation 2005
|
|
|
Allocation 2004
|
|
|
Target allocation
|
|
|
|
in %
|
|
|
in %
|
|
|
in %
|
|
|
|
|
|
|
|
|
|
|
|
Categories of plan assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
|
44
|
%
|
|
|
52
|
%
|
|
|
36
|
%
|
|
Debt securities
|
|
|
56
|
%
|
|
|
48
|
%
|
|
|
64
|
%
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Overall expected long-term return rate
|
|
|
|
|
|
|
7.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected total contributions to plan assets for 2006
|
|
|
|
|
|
$
|
20,750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected benefit payments for the next five years and in the
aggregate for the five years thereafter are as follows:
|
|
|
|
|
2006
|
|
$
|
5,767
|
|
2007
|
|
|
6,371
|
|
2008
|
|
|
7,416
|
|
2009
|
|
|
8,757
|
|
2010
|
|
|
9,200
|
|
2011 through 2015
|
|
|
62,712
|
|
The measurement date used to determine pension benefit
measurements is December 31 for the plans in the United
States and September 30 for the non-U.S. plans.
F-29
FRESENIUS MEDICAL CARE AG & CO. KGaA
(Formerly Fresenius Medical Care AG)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(in thousands, except share data)
Defined Contribution Plans
FMCHs employees are eligible to join a 401(k) savings
plan. The Companys total expense under this defined
contribution plan for the years ended December 31, 2005,
2004 and 2003 was $15,242, $15,528, and $14,754, respectively.
11. Mandatorily Redeemable Trust Preferred
Securities
The Company issued Trust Preferred Securities through
Fresenius Medical Care Capital Trusts, statutory business trusts
organized under the laws of the State of Delaware.
FMC-AG
& Co. KGaA
owns all of the common securities of these trusts. The sole
asset of each trust is a senior subordinated note of
FMC-AG
& Co. KGaA
or a wholly-owned subsidiary of FMC-AG & Co. KGaA.
FMC-AG
& Co. KGaA,
Fresenius Medical Care Deutschland GmbH
(D-GmbH)
and FMCH
(D-GmbH
and
FMCH being the Guarantor Subsidiaries) have
guaranteed payment and performance of the senior subordinated
notes to the respective Fresenius Medical Care Capital Trusts.
The Trust Preferred Securities are guaranteed by FMC-AG
& Co. KGaA through a series of undertakings by the Company
and the Guarantor Subsidiaries.
The Trust Preferred Securities agreements give the Company
the right to substitute borrowers within each of the agreements.
On December 23, 2004, the Company exercised that right for
two of the Trusts, Fresenius Medical Care Capital Trust III
and Fresenius Medical Care Capital Trust V, assuming the
obligations of its wholly owned subsidiaries as issuer of senior
subordinated notes denominated in euro and Deutschmark held by
each Trust. D-GmbH and FMCH remained guarantors on these
borrowings.
The Trust Preferred Securities entitle the holders to
distributions at a fixed annual rate of the stated amount and
are mandatorily redeemable after 10 years. Earlier
redemption at the option of the holders may also occur upon a
change of control followed by a rating decline or defined events
of default including a failure to pay interest. Upon liquidation
of the trusts, the holders of Trust Preferred Securities
are entitled to a distribution equal to the stated amount. The
Trust Preferred Securities do not hold voting rights in the
trust except under limited circumstances.
The Trust Preferred Securities Agreements contain
affirmative and negative covenants with respect to the Company
and its subsidiaries and other payment restrictions. Some of the
covenants limit the Companys indebtedness and its
investments, and require the Company to maintain certain ratios
defined in the agreement. Some of these covenants are
subordinated to the 2003 Senior Credit Agreement covenants. As
of December 31, 2005, the Company is in compliance with all
financial covenants under all Trust Preferred Securities
Agreements.
The Trust Preferred Securities outstanding as of
December 31, 2005 and 2004 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mandatory
|
|
|
|
|
|
|
|
Year
|
|
|
Stated
|
|
|
Interest
|
|
|
Redemption
|
|
|
|
|
|
|
|
Issued
|
|
|
Amount
|
|
|
Rate
|
|
|
Date
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fresenius Medical Care Capital Trust II
|
|
|
1998
|
|
|
|
$450,000
|
|
|
|
7
7
/
8
%
|
|
|
|
February 1, 2008
|
|
|
|
431,762
|
|
|
|
440,965
|
|
Fresenius Medical Care Capital Trust III
|
|
|
1998
|
|
|
|
DM300,000
|
|
|
|
7
3
/
8
%
|
|
|
|
February 1, 2008
|
|
|
|
180,951
|
|
|
|
208,929
|
|
Fresenius Medical Care Capital Trust IV
|
|
|
2001
|
|
|
|
$225,000
|
|
|
|
7
7
/
8
%
|
|
|
|
June 15, 2011
|
|
|
|
222,917
|
|
|
|
222,533
|
|
Fresenius Medical Care Capital Trust V
|
|
|
2001
|
|
|
|
300,000
|
|
|
|
7
3
/
8
%
|
|
|
|
June 15, 2011
|
|
|
|
352,234
|
|
|
|
406,333
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,187,864
|
|
|
$
|
1,278,760
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-30
FRESENIUS MEDICAL CARE AG & CO. KGaA
(Formerly Fresenius Medical Care AG)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(in thousands, except share data)
12. Minority Interest
At December 31, 2005 and 2004, minority interest was as
follows:
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
|
|
FMCH Preferred Stock:
|
|
|
|
|
|
|
|
|
Preferred Stock, $100 par value
|
|
|
|
|
|
|
|
|
6% Cumulative; 40,000 shares authorized; 36,460 issued
and outstanding
|
|
$
|
3,646
|
|
|
$
|
3,646
|
|
8% Cumulative Class A; 50,000 shares authorized;
16,176 issued and outstanding
|
|
|
1,618
|
|
|
|
1,618
|
|
8% Noncumulative Class B; 40,000 shares authorized;
21,483 issued and outstanding
|
|
|
2,148
|
|
|
|
2,148
|
|
|
|
|
|
|
|
|
Sub-total FMCH minority interest
|
|
|
7,412
|
|
|
|
7,412
|
|
Other minority interest
|
|
|
6,993
|
|
|
|
10,622
|
|
|
|
|
|
|
|
|
Total minority interest
|
|
$
|
14,405
|
|
|
$
|
18,034
|
|
|
|
|
|
|
|
|
The decrease for 2005 was mostly a result of the acquisition in
2005 of the remaining 55% interest in a joint-venture which is
engaged in the perfusion industry.
13. Shareholders Equity
Capital Stock
As of December 31, 2005, the Companys capital stock
(
Grundkapital
) consisted of 27,762,179 preference shares
without par value and with a nominal amount of
2.56 per share
totaling $74,476 and of 70,000,000 ordinary shares without par
value with a nominal amount of
2.56 per share
totaling $229,494.
As of February 10, 2006, the Companys capital stock
consisted of 1,132,757 preference shares without par value and
with a nominal amount of
2.56 per share
totaling $3,471 and of 96,629,422 ordinary shares without par
value with a nominal amount of
2.56 per share
totaling $296,103 The conversion of the Companys
preference shares into ordinary shares is expected to result in
a charge to retained earnings in 2006 in the amount of
approximately $914,000, presenting an increase of income
available to preference shareholders and a reduction of income
available to ordinary shareholders. For a discussion of this
charge, see Note 2, Transformation of Legal Form and
Conversion of preference shares.
As of December 31, 2004 and 2003, the Companys
capital stock consisted of 26,296,086 and 26,213,979 preference
shares, respectively, totaling $69,878 and $69,616,
respectively, and of 70,000,000 ordinary shares without par
value with a nominal amount of
2.56 per share
totaling $229,494.
Under the German Stock Corporation Act (
Aktiengesetz
),
the capital of a stock corporation or of a partnership limited
by shares may be increased by a resolution of the general
meeting, passed with a majority of three quarters of the capital
represented at the vote, unless the Articles of Association of
the stock corporation or the partnership limited by shares
provide for a different majority.
In addition, the general meeting of a stock corporation or a
partnership limited by shares may approve Authorized Capital
(
genehmigtes Kapital
). The resolution creating authorized
capital requires the affirmative vote of a majority of three
quarters of the capital represented at the vote and may
authorize the management board to issue shares up to a stated
amount for a period of up to five years. The nominal value of
the authorized capital may not exceed half of the capital stock
at the time of the authorization.
In addition, the general meeting of a stock corporation or of a
partnership limited by shares may create conditional capital
(
bedingtes Kapital
) for the purpose of issuing
(i) shares to holders of convertible bonds or
F-31
FRESENIUS MEDICAL CARE AG & CO. KGaA
(Formerly Fresenius Medical Care AG)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(in thousands, except share data)
other securities which grant a right to shares, (ii) shares
in the preparation of a merger with another company, or
(iii) shares offered to management or employees. In each
case, the authorizing resolution requires the affirmative vote
of a majority of three quarters of the capital represented at
the vote. The nominal value of the conditional capital may not
exceed half or, in the case of conditional capital created for
the purpose of issuing shares to management and employees 10%,
of the companys capital at the time of the resolution.
In a partnership limited by shares all resolutions increasing
the capital of the partnership limited by shares also require
the consent of the general partner for their effectiveness.
Authorized Capital
By resolution of the Companys general meeting of
shareholders on May 23, 2001 and May 24, 2005, the
Companys management board was authorized, with the
approval of the supervisory board, to increase under certain
conditions the Companys share capital through the issue of
preference shares. Such authorizations are effective until
May 22, 2006 and May 23, 2010, respectively. Such
authorizations were revoked at an extraordinary general meeting
on August 30, 2005 as they were no longer appropriate due
to the proposed conversion of the Companys preference
shares into ordinary shares, such revocation becoming effective
upon registration of the Approved Capital referred to below.
Furthermore, by resolution of the extraordinary general meeting
of shareholders on August 30, 2005, the general partner was
authorized, with the approval of the supervisory board, to
increase, on one or more occasions, the share capital until
August 29, 2010 by a maximum amount of
35,000 through
issue of new ordinary shares against cash contributions,
Authorized Capital I. The general partner is entitled,
subject to the approval of the supervisory board, to decide on
the exclusion of statutory pre-emption rights of the
shareholders. However, such an exclusion of pre-emption rights
will be permissible for fractional amounts. Additionally, the
newly issued shares may be taken up by certain credit
institutions determined by the general partner if such credit
institutions are obliged to offer the shares to the shareholders
(indirect pre-emption rights).
In addition, by resolution of the extraordinary general meeting
of shareholders on August 30, 2005, the general partner,
was authorized, with the approval of the supervisory board, to
increase, on one or more occasions, the share capital of the
Company until August 29, 2010 by a maximum amount of
25,000 through
the issue of new ordinary shares against cash contributions or
contributions in kind, Authorized Capital II. The general
partner is entitled, subject to the approval of the supervisory
board, to decide on an exclusion of statutory pre-emption rights
of the shareholders. However, such exclusion of pre-emption
rights will be permissible only if, (i) in case of a
capital increase against cash contributions, the nominal value
of the issued shares does not exceed 10% of the nominal share
value of the Companys share capital and the issue price
for the new shares is at the time of the determination by the
general partner not significantly lower than the stock exchange
price of the existing listed shares of the same type and with
the same rights or, (ii) in case of a capital increase
against contributions in kind, the purpose of such increase is
to acquire an enterprise, parts of an enterprise or an interest
in an enterprise.
The Companys authorized capital became effective upon
registration with the commercial register of the local court in
Hof an der Saale on February 10, 2006.
Conditional Capital
Through the Companys employee participation programs,
consisting of employee stock option programs and an
international employee participation scheme, the Company has
issued convertible bonds and stock option/ subscription rights
(Bezugsrechte)
to employees and the members of the
management board of Fresenius Medical Care AG and employees and
members of management of affiliated companies that entitle these
persons to receive
F-32
FRESENIUS MEDICAL CARE AG & CO. KGaA
(Formerly Fresenius Medical Care AG)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(in thousands, except share data)
preference shares. Conditional capital available for such
purposes is
14,939 at
December 31, 2005. For the year ending December 31,
2005, 1,466,093 options had been exercised under these employee
participation plans and
65,516 ($80,146)
remitted to the Company. At December 31, 2005 options
representing 4,102,539 non-voting preference shares are
outstanding from all plans.
With the implementation of the conversion, these programs have
been adjusted to the effect that the conversion rights and
subscription rights of plan participants who elected to adjust
their rights refer to ordinary shares. The electing participants
in those programs have been put in the same economic position in
which they would have been without the implementation of the
conversion of preference shares into ordinary shares.
Participants who did not elect to adjust their rights are still
entitled to receive preference shares under the employee
participation programs.
As a result, conditional capital in the amount of
14,939 divided
into conditional capital for the issue of up to 2,849,318
ordinary shares and up to 2,986,203 preference shares, became
effective upon registration with the commercial register of the
local court in Hof an der Saale on February 10, 2006.
However, as a result of the adjustment of the employee
participation programs, preference shares can be issued for
234,311 convertible bonds or options and ordinary shares can be
issued for 2,849,318 convertible bonds and options with a
remaining average term of 7.16 years.
Dividends
Under German law, the amount of dividends available for
distribution to shareholders is based upon the unconsolidated
retained earnings of Fresenius Medical Care AG
& Co. KGaA as reported in its balance sheet determined
in accordance with the German Commercial Code
(
Handelsgesetzbuch
). The right to dividends on preference
shares converted into ordinary shares is the same as that for
ordinary shares, effective as of January 1, 2005.
If no dividends are declared for two consecutive years after the
year for which the preference shares are entitled to dividends,
then the holders of such preference shares would be entitled to
the same voting rights as holders of ordinary shares until all
arrearages are paid. In addition, the payment of dividends by
FMC-AG
& Co.
KGaA is subject to limitations under the 2003 Senior Credit
Agreement (see Note 9).
Cash dividends of $137,487 for 2004 in the amount of
1.18 per
preference share and
1.12 per
ordinary share were paid on May 25, 2005.
Cash dividends of $122,106 for 2003 in the amount of
1.08 per
preference share and
1.02 per
ordinary share were paid on May 28, 2004.
Cash dividends of $107,761 for 2002 in the amount of
1.00 per
preference share and
0.94 per
ordinary share were paid on May 23, 2003.
F-33
FRESENIUS MEDICAL CARE AG & CO. KGaA
(Formerly Fresenius Medical Care AG)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(in thousands, except share data)
The following table is a reconciliation of the numerators and
denominators of the basic and diluted earnings per share
computations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
Numerators:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
454,952
|
|
|
$
|
401,998
|
|
|
$
|
331,180
|
|
less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preference on Preference shares
|
|
|
2,000
|
|
|
|
1,959
|
|
|
|
1,778
|
|
|
|
|
|
|
|
|
|
|
|
Income available to all class of shares
|
|
$
|
452,952
|
|
|
$
|
400,039
|
|
|
$
|
329,402
|
|
|
|
|
|
|
|
|
|
|
|
Denominators:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ordinary shares outstanding
|
|
|
70,000,000
|
|
|
|
70,000,000
|
|
|
|
70,000,000
|
|
|
Preference shares outstanding
|
|
|
26,789,816
|
|
|
|
26,243,059
|
|
|
|
26,191,011
|
|
|
|
|
|
|
|
|
|
|
|
|
Total weighted average shares outstanding
|
|
|
96,789,816
|
|
|
|
96,243,059
|
|
|
|
96,191,011
|
|
|
Potentially dilutive Preference shares
|
|
|
779,330
|
|
|
|
421,908
|
|
|
|
145,861
|
|
|
|
|
|
|
|
|
|
|
|
|
Total weighted average shares outstanding assuming dilution
|
|
|
97,569,146
|
|
|
|
96,664,967
|
|
|
|
96,336,872
|
|
|
Total weighted average Preference shares outstanding assuming
dilution
|
|
|
27,569,146
|
|
|
|
26,664,967
|
|
|
|
26,336,872
|
|
Basic earnings per Ordinary share
|
|
$
|
4.68
|
|
|
$
|
4.16
|
|
|
$
|
3.42
|
|
Plus preference per Preference share
|
|
|
0.07
|
|
|
|
0.07
|
|
|
|
0.07
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per Preference Share
|
|
$
|
4.75
|
|
|
$
|
4.23
|
|
|
$
|
3.49
|
|
|
|
|
|
|
|
|
|
|
|
Fully diluted earnings per Ordinary share
|
|
$
|
4.64
|
|
|
$
|
4.14
|
|
|
$
|
3.42
|
|
Plus preference per Preference share assuming dilution
|
|
|
0.08
|
|
|
|
0.07
|
|
|
|
0.07
|
|
|
|
|
|
|
|
|
|
|
|
Fully diluted earnings per Preference share
|
|
$
|
4.72
|
|
|
$
|
4.21
|
|
|
$
|
3.49
|
|
|
|
|
|
|
|
|
|
|
|
15. Stock Options
At December 31, 2005, the Company has awards outstanding
under the terms of various stock-based compensation plans,
including the 2001 plan, which is the only plan with stock
option awards currently available for grant. Under the 2001
plan, convertible bonds with a principal of up to
10,240 may
be issued to the members of the Management Board and other
employees of the Company representing grants for up to
4 million non-voting preference shares. The convertible
bonds have a par value of
2.56 and bear
interest at a rate of 5.5%. Except for the members of the
Management Board, eligible employees may purchase the bonds by
issuing a non-recourse note with terms corresponding to the
terms of and secured by the bond. The Company has the right to
offset its obligation on a bond against the employees
obligation on the related note; therefore, the convertible bond
obligations and employee note receivables represent stock
options issued by the Company and are not reflected in the
consolidated financial statements. The options expire in ten
years and can be exercised beginning after two, three or four
years. Bonds issued to Management Board members who did not
issue a note to the Company are recognized as a liability on the
Companys balance sheet.
F-34
FRESENIUS MEDICAL CARE AG & CO. KGaA
(Formerly Fresenius Medical Care AG)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(in thousands, except share data)
Upon issuance of the option, the employees have the right to
choose options with or without a stock price target. The
conversion price of options subject to a stock price target
becomes the stock exchange quoted price of the preference shares
upon the first time the stock exchange quoted price exceeds the
Initial Value by at least 25%. The Initial Value is the average
price of the preference shares during the last 30 trading days
prior to the date of grant. In the case of options not subject
to a stock price target, the number of convertible bonds awarded
to the eligible employee would be 15% less than if the employee
elected options subject to the stock price target. The
conversion price of the options without a stock price target is
the Initial Value. Each option entitles the holder thereof, upon
payment the respective conversion price, to acquire one
preference share. Up to 20% of the total amount available for
the issuance of awards under the 2001 plan may be issued each
year through May 22, 2006. At December 31, 2005,
options for up to 172,224 preference shares are still available
for grant through May 22, 2006 under the 2001 Plan.
During 1998, the Company adopted two stock incentive plans
(FMC98 Plan 1 and FMC98
Plan 2) for the Companys key management and
executive employees. These stock incentive plans were replaced
by the 2001 plan and no options have been granted since 2001.
Under these plans eligible employees had the right to acquire
preference shares of the Company. Options granted under these
plans have a ten-year term, and one third of them vest on each
of the second, third and fourth anniversaries of the award date.
Each Option can be exercised for one preference share.
Stock option transactions are summarized as follows (average
exercise price in euro and USD):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
|
|
Exercise
|
|
|
Exercise
|
|
|
Options
|
|
|
|
Options
|
|
|
Price
|
|
|
Price
|
|
|
Exercisable
|
|
|
|
(In thousands)
|
|
|
(In Euro)
|
|
|
(In $)
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2002
|
|
|
3,615
|
|
|
|
45.51
|
|
|
$
|
47.72
|
|
|
|
1,769
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
622
|
|
|
|
33.16
|
|
|
|
41.88
|
|
|
|
|
|
|
Exercised
|
|
|
25
|
|
|
|
32.58
|
|
|
|
41.14
|
|
|
|
|
|
|
Forfeited
|
|
|
223
|
|
|
|
48.91
|
|
|
|
61.77
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2003
|
|
|
3,989
|
|
|
|
43.34
|
|
|
|
54.74
|
|
|
|
2,147
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
1,021
|
|
|
|
44.81
|
|
|
|
61.03
|
|
|
|
|
|
|
Exercised
|
|
|
83
|
|
|
|
33.92
|
|
|
|
46.20
|
|
|
|
|
|
|
Forfeited
|
|
|
266
|
|
|
|
46.74
|
|
|
|
63.66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2004
|
|
|
4,661
|
|
|
|
43.60
|
|
|
|
59.39
|
|
|
|
2,393
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
1,044
|
|
|
|
62.36
|
|
|
|
73.57
|
|
|
|
|
|
|
Exercised
|
|
|
1,466
|
|
|
|
44.51
|
|
|
|
52.50
|
|
|
|
|
|
|
Forfeited
|
|
|
136
|
|
|
|
44.94
|
|
|
|
53.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005
|
|
|
4,103
|
|
|
|
47.88
|
|
|
$
|
56.48
|
|
|
|
1,537
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-35
FRESENIUS MEDICAL CARE AG & CO. KGaA
(Formerly Fresenius Medical Care AG)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(in thousands, except share data)
The following table provides information with respect to stock
options outstanding and exercisable at December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
|
Exercisable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
Range of
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
Average
|
|
|
|
|
Average
|
|
|
Average
|
|
Exercise
|
|
Range of
|
|
|
|
|
Remaining
|
|
|
Exercise
|
|
|
Exercise
|
|
|
|
|
Exercise
|
|
|
Exercise
|
|
Prices
|
|
Exercise Prices
|
|
|
Number of
|
|
|
Contractual
|
|
|
Price
|
|
|
Price
|
|
|
Number of
|
|
|
Price
|
|
|
Price
|
|
in
|
|
in $
|
|
|
Options
|
|
|
Life
|
|
|
Euro
|
|
|
USD
|
|
|
Options
|
|
|
Euro
|
|
|
USD
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25.01-35.00
|
|
|
29.50-41.29
|
|
|
|
1,154,792
|
|
|
|
6.42
|
|
|
|
31.16
|
|
|
$
|
36.76
|
|
|
|
572,967
|
|
|
|
31.23
|
|
|
$
|
36.85
|
|
35.01-45.00
|
|
|
41.30-53.09
|
|
|
|
1,035,044
|
|
|
|
7.75
|
|
|
|
43.40
|
|
|
|
51.20
|
|
|
|
186,221
|
|
|
|
42.51
|
|
|
|
50.14
|
|
45.01-55.00
|
|
|
53.10-64.88
|
|
|
|
162,365
|
|
|
|
4.79
|
|
|
|
49.60
|
|
|
|
58.52
|
|
|
|
162,365
|
|
|
|
49.60
|
|
|
|
58.52
|
|
55.01-85.00
|
|
|
64.90-76.68
|
|
|
|
1,176,695
|
|
|
|
7.19
|
|
|
|
56.97
|
|
|
|
67.20
|
|
|
|
501,859
|
|
|
|
57.81
|
|
|
|
68.20
|
|
65.01-90.00
|
|
|
76.69-106.17
|
|
|
|
573,643
|
|
|
|
8.98
|
|
|
|
70.76
|
|
|
|
83.48
|
|
|
|
113,505
|
|
|
|
73.38
|
|
|
|
86.56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,102,539
|
|
|
|
7.27
|
|
|
|
47.92
|
|
|
$
|
56.53
|
|
|
|
1,536,917
|
|
|
|
46.33
|
|
|
$
|
54.66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company applies APB Opinion No. 25 in accounting for
stock compensation and, accordingly, recognized compensation
expense of $1,363 ($1,090 net of tax), $1,751, and $1,456, in
2005, 2004 and 2003. The tax effect of differences between
compensation expense for financial statement and income tax
purposes is recorded in income. Additional tax credits available
upon exercise of non-qualified stock options are recognized as a
credit to additional paid-in capital ($6,205 in 2005).
In connection with the conversion of the Companys
preference shares into ordinary shares, holders of options to
acquire preference shares had the opportunity to convert their
options so that they would be exercisable to acquire ordinary
shares. Holders of 234,311 options elected not to convert.
Holders of 3,863,470 options converted resulting in 2,849,318
options for ordinary shares. The table below reconciles the
options outstanding at December 31, 2005 to the options
outstanding after the conversion. See Note 2,
Transformation of Legal Form and Conversion of Preference Shares.
Stock Options Conversion Reconciliation
|
|
|
|
|
Balance at December 31, 2005
|
|
|
4,102,539
|
|
Forfeited prior to conversion
|
|
|
4,758
|
|
|
|
|
|
Eligible for conversion
|
|
|
4,097,781
|
|
Options not converted and still available to exercise for
preference shares
|
|
|
234,311
|
|
|
|
|
|
Options converted
|
|
|
3,863,470
|
|
Reduction due to impact of conversion ratios
|
|
|
1,014,152
|
|
|
|
|
|
Options outstanding for ordinary shares after conversion
|
|
|
2,849,318
|
|
|
|
|
|
F-36
FRESENIUS MEDICAL CARE AG & CO. KGaA
(Formerly Fresenius Medical Care AG)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(in thousands, except share data)
16. Income Taxes
Income before income taxes and minority interest is attributable
to the following geographic locations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
Germany
|
|
$
|
109,407
|
|
|
$
|
86,702
|
|
|
$
|
78,124
|
|
United States
|
|
|
512,697
|
|
|
|
447,197
|
|
|
|
368,382
|
|
Other
|
|
|
143,622
|
|
|
|
134,700
|
|
|
|
99,170
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
765,726
|
|
|
$
|
668,599
|
|
|
$
|
545,676
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit) for the years ended
December 31, 2005, 2004, and 2003, consisted of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Germany
|
|
$
|
40,386
|
|
|
$
|
55,034
|
|
|
$
|
51,849
|
|
|
United States
|
|
|
206,551
|
|
|
|
129,445
|
|
|
|
22,346
|
|
|
Other
|
|
|
48,133
|
|
|
|
40,316
|
|
|
|
35,505
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
295,070
|
|
|
|
224,796
|
|
|
|
109,700
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Germany
|
|
|
(12,990
|
)
|
|
|
5,147
|
|
|
|
(1,280
|
)
|
|
United States
|
|
|
27,391
|
|
|
|
34,958
|
|
|
|
102,142
|
|
|
Other
|
|
|
(723
|
)
|
|
|
513
|
|
|
|
2,152
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,678
|
|
|
|
40,619
|
|
|
|
103,014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
308,748
|
|
|
$
|
265,415
|
|
|
$
|
212,714
|
|
|
|
|
|
|
|
|
|
|
|
In 2005 and 2004, the Company is subject to German federal
corporation income tax at a base rate of 25% plus a solidarity
surcharge of 5.5% on federal corporation taxes payable.
The German government enacted the Flood Victim Solidarity Law in
September 2002 resulting in an increase of the base rate of
German federal corporation income tax from 25% to 26.5% for 2003
only. The tax rate returned to 25% on January 1, 2004.
F-37
FRESENIUS MEDICAL CARE AG & CO. KGaA
(Formerly Fresenius Medical Care AG)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(in thousands, except share data)
A reconciliation between the expected and actual income tax
expense is shown below. The expected corporate income tax
expense is computed by applying the German corporation tax rate
(including the solidarity surcharge) and the effective trade tax
rate on income before income taxes and minority interest. The
respective combined tax rates are 38.44%, 38.18% and 39.53% for
the fiscal years ended December 31, 2005, 2004 and 2003.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
Expected corporate income tax expense
|
|
$
|
294,345
|
|
|
$
|
255,271
|
|
|
$
|
215,706
|
|
Tax free income
|
|
|
(18,442
|
)
|
|
|
(15,570
|
)
|
|
|
(16,527
|
)
|
Foreign tax rate differential
|
|
|
(8,431
|
)
|
|
|
15,734
|
|
|
|
(2,045
|
)
|
Non-deductible expenses
|
|
|
27,757
|
|
|
|
9,426
|
|
|
|
7,149
|
|
Taxes for prior years
|
|
|
20,509
|
|
|
|
10,267
|
|
|
|
13,103
|
|
Other
|
|
|
(6,990
|
)
|
|
|
(9,713
|
)
|
|
|
(4,672
|
)
|
|
|
|
|
|
|
|
|
|
|
Actual income tax expense
|
|
$
|
308,748
|
|
|
$
|
265,415
|
|
|
$
|
212,714
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
|
40.3
|
%
|
|
|
39.7
|
%
|
|
|
39.0
|
%
|
|
|
|
|
|
|
|
|
|
|
The tax effects of the temporary differences that give rise to
deferred tax assets and liabilities at December 31 are
presented below:
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Accounts receivable, primarily due to allowance for doubtful
accounts
|
|
$
|
26,018
|
|
|
$
|
26,289
|
|
Inventory, primarily due to additional costs capitalized for tax
purposes, and inventory reserve accounts
|
|
|
29,628
|
|
|
|
30,547
|
|
Accrued expenses and other liabilities for financial accounting
purposes, not currently tax deductible
|
|
|
197,244
|
|
|
|
181,080
|
|
Net operating loss carryforwards
|
|
|
44,249
|
|
|
|
48,170
|
|
Derivatives
|
|
|
3,735
|
|
|
|
53,521
|
|
Other
|
|
|
5,266
|
|
|
|
1,378
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
$
|
306,140
|
|
|
$
|
340,985
|
|
Less: valuation allowance
|
|
|
(46,146
|
)
|
|
|
(44,564
|
)
|
|
|
|
|
|
|
|
Total deferred tax assets, net of valuation allowance
|
|
$
|
259,994
|
|
|
$
|
296,421
|
|
|
|
|
|
|
|
|
F-38
FRESENIUS MEDICAL CARE AG & CO. KGaA
(Formerly Fresenius Medical Care AG)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable, primarily due to allowance for doubtful
accounts
|
|
$
|
9,266
|
|
|
$
|
10,872
|
|
Inventory, primarily due to inventory reserve accounts for tax
purposes
|
|
|
6,040
|
|
|
|
8,148
|
|
Accrued expenses and other liabilities deductible for tax prior
to financial accounting recognition
|
|
|
15,945
|
|
|
|
38,009
|
|
Plant and equipment, principally due to differences in
depreciation
|
|
|
256,663
|
|
|
|
250,035
|
|
Derivatives
|
|
|
21,582
|
|
|
|
18,696
|
|
Other
|
|
|
49,893
|
|
|
|
14,574
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
359,389
|
|
|
|
340,334
|
|
|
|
|
|
|
|
|
Net deferred tax liabilities
|
|
$
|
99,395
|
|
|
$
|
43,913
|
|
|
|
|
|
|
|
|
The valuation allowance was $23,229 as of January 1, 2003.
The valuation allowance increased by $4,855, $16,480, and $1,582
during the years ending December 31, 2005, 2004 and 2003.
The expiration of net operating losses is as follows:
|
|
|
|
|
2006
|
|
$
|
6,334
|
|
2007
|
|
|
14,415
|
|
2008
|
|
|
10,276
|
|
2009
|
|
|
18,618
|
|
2010
|
|
|
12,355
|
|
2011
|
|
|
4,885
|
|
2012
|
|
|
4,296
|
|
2013
|
|
|
|
|
2014
|
|
|
2,323
|
|
2015 and thereafter
|
|
|
7,232
|
|
Without expiration date
|
|
|
47,551
|
|
|
|
|
|
Total
|
|
$
|
128,285
|
|
|
|
|
|
In assessing the realizability of deferred tax assets,
management considers whether it is more likely than not that
some portion or all of the deferred tax assets will not be
realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during
the periods in which those temporary differences become
deductible. Management considers the scheduled reversal of
deferred tax liabilities and projected future taxable income in
making this assessment. Based upon the level of historical
taxable income and projections for future taxable income over
the periods in which the deferred tax assets are deductible,
management believes it is more likely than not the Company will
realize the benefits of these deductible differences, net of the
existing valuation allowances at December 31, 2005.
The Company provides for income taxes on the cumulative earnings
of foreign subsidiaries that will not be reinvested. During the
year ended December 31, 2005, the Company provided for $800
of deferred tax liabilities associated with earnings that are
likely to be distributed in 2006. Provision has not been made
for additional taxes
F-39
FRESENIUS MEDICAL CARE AG & CO. KGaA
(Formerly Fresenius Medical Care AG)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(in thousands, except share data)
on $734,182 undistributed earnings of foreign subsidiaries as
these earnings are considered permanently reinvested.
Effective January 1, 2004, dividends from German
subsidiaries are 95% tax-exempt, i.e. 5% of dividend income
is taxable for corporate tax purposes and 5% of capital gains
from the disposal of foreign and domestic shareholdings is
subject to the combined corporate income and trade tax rate (tax
is therefore about 2% on the capital gain). This includes any
gains resulting from the reversal of previous write-downs.
Capital losses on the disposal of such shareholding and
write-down on the cost of investment are not tax deductible
whereas, by contrast, 5% of the income from reversing
write-downs is subject to taxation. Management does not
anticipate that these rules will result in significant
additional income tax expense in future fiscal years.
17. Operating Leases
The Company leases buildings and machinery and equipment under
various lease agreements expiring on dates through 2017. Rental
expense recorded for operating leases for the years ended
December 31, 2005, 2004 and 2003 was $334,947, $322,939,
and $303,060, respectively.
At December 31, 2004, the Company acquired dialysis
machines that were previously sold in sale-lease back
transactions. The machines were acquired for approximately
$29,000 and are included in capital expenditures in the
accompanying consolidated statement of cash flows.
In December 2003, the Company exercised an option to terminate
an operating lease for certain manufacturing equipment in its
Ogden, Utah, North American facility. The equipment was
purchased for approximately $66,000 and is reflected as a
capital expenditure in the accompanying consolidated statement
of cash flows.
Future minimum rental payments under noncancelable operating
leases for the five years succeeding December 31, 2005 and
thereafter are:
|
|
|
|
|
2006
|
|
$
|
251,627
|
|
2007
|
|
|
199,121
|
|
2008
|
|
|
164,067
|
|
2009
|
|
|
134,455
|
|
2010
|
|
|
103,972
|
|
Thereafter
|
|
|
341,520
|
|
|
|
|
|
|
|
$
|
1,194,762
|
|
|
|
|
|
18. Legal Proceedings
Commercial Litigation
The Company was originally 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 liabilities arising out
of product-liability related litigation (including
asbestos-related actions), pre-Merger tax claims and other
claims unrelated to NMC, which was W.R. Grace
& Co.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 NMCs operations.
W.R. Grace & Co. and certain of its subsidiaries
filed for reorganization under Chapter 11 of the
U.S. Bankruptcy
F-40
FRESENIUS MEDICAL CARE AG & CO. KGaA
(Formerly Fresenius Medical Care AG)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(in thousands, except share data)
Code (the Grace Chapter 11 Proceedings) on
April 2, 2001. 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 Companys obligation. 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 Services examination
report on tax periods 1993 to 1996; that during those years
W.R. Grace & Co. deducted approximately $122,100
in interest attributable to corporate owned life insurance
(COLI) policy loans; and that a U.S. District
Court ruling has denied interest deductions of a taxpayer in a
similar situation. W.R. Grace & Co. has paid
$21,200 of tax and interest related to COLI deductions taken in
tax years prior to 1993.
In October 2004, W.R. Grace & Co. obtained bankruptcy court
approval to settle its COLI claims with the Service. In January
2005, W.R. Grace & Co., FMCH and Sealed Air
Corporation executed a settlement agreement with respect to the
Services COLI-related claims and other tax claims. On
April 14, 2005, W.R. Grace & Co. paid the
Service approximately $90 million in connection with taxes
owed for the tax periods 1993 to 1996 pursuant to a bankruptcy
court order directing W.R. Grace & Co. to make
such payment. Subject to certain representations made by
W.R. Grace & Co., the Company and
Fresenius AG, W.R. Grace & Co. and certain of
its affiliates had 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 FMCH 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.
In 2003, the Company reached agreement with the asbestos
creditors committees on behalf of the W.R. Grace
& Co. bankruptcy estate and W.R. Grace & Co. in the
matters pending in the Grace Chapter 11 Proceedings for the
settlement of all fraudulent conveyance and tax 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 as amended (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. final bankruptcy
reorganization plan that contains such provisions. 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 has been approved by the U.S. District Court.
Subsequent to the Merger, W.R. Grace & Co. was involved
in a multi-step transaction involving Sealed Air Corporation
(Sealed Air, formerly known as Grace Holding, Inc.).
The Company is engaged in litigation with Sealed Air to confirm
its 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 of the Companys payment obligation, this
litigation will be dismissed with prejudice.
F-41
FRESENIUS MEDICAL CARE AG & CO. KGaA
(Formerly Fresenius Medical Care AG)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(in thousands, except share data)
On April 4, 2003, FMCH filed a suit in the U. S. District
Court for the Northern District of California,
Fresenius USA,
Inc., et al., v. Baxter International Inc., et al.
, Case
No. C 03-1431, seeking a declaratory judgment that FMCH
does not infringe on patents held by Baxter International Inc.
and its subsidiaries and affiliates (Baxter), that
the patents are invalid, and that Baxter is without right or
authority to threaten or maintain suit against FMCH for alleged
infringement of Baxters patents. In general, the alleged
patents concern touch screens, conductivity alarms, power
failure data storage, and balance chambers for hemodialysis
machines. Baxter has filed counterclaims against FMCH seeking
monetary damages and injunctive relief, and alleging that FMCH
willfully infringed on Baxters patents. Both parties have
filed multiple dispositive motions, some of which have been
decided by the court. Trial is currently scheduled for June
2006. FMCH believes its claims are meritorious, although the
ultimate outcome of any such proceedings cannot be predicted at
this time and an adverse result could have a material adverse
effect on the Companys business, financial condition, and
results of operations.
For information regarding the settlement of shareholder
litigation that challenged the resolutions approving the
Companys transformation of legal form and the conversion
of preference shares to ordinary shares, see Note 2,
Transformation of Legal Form and Conversion of preference Shares.
Other Litigation and Potential Exposures
In April 2005, FMCH received a subpoena from the
U.S. Department of Justice, Eastern District of Missouri,
in connection with a joint civil and criminal investigation. The
subpoena requires production of a broad range of documents
relating to the FMCHs operations, with specific attention
to documents related to clinical quality programs, business
development activities, medical director compensation and
physician relations, joint ventures and anemia management
programs. The Company is cooperating with the governments
requests for information. An adverse determination in this
investigation could have a material adverse effect on the
Companys business, financial condition and results of
operations.
In October 2004, FMCH and its Spectra Renal Management
subsidiary received subpoenas from the U.S. Department of
Justice, Eastern District of New York in connection with a
civil and criminal investigation, which requires production of a
broad range of documents relating to the FMCHs operations,
with specific attention to documents relating to laboratory
testing for parathyroid hormone (PTH) levels and
vitamin D therapies. The Company is cooperating with the
governments requests for information. While the Company
believes that it has complied with applicable laws relating to
PTH testing and use of vitamin D therapies, an adverse
determination in this investigation could have a material
adverse effect on the Companys business, financial
condition, and results of operations.
From time to time, the Company is a party to or may be
threatened with other litigation, claims or assessments arising
in the ordinary course of its business. Management regularly
analyzes current information including, as applicable, the
Companys 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. It
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 Companys or the
manner in which it conducts 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
F-42
FRESENIUS MEDICAL CARE AG & CO. KGaA
(Formerly Fresenius Medical Care AG)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(in thousands, except share data)
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
the Companys corporate integrity agreement with the
U.S. federal government, the Companys business
activities and practices are subject to extensive review by
regulatory authorities and private parties, and continuing
audits, investigative demands, subpoenas, other inquiries,
claims and litigation relating to the Companys 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 many facilities throughout the United
States. 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 the 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,
workers compensation or related claims, many of which
involve large claims and significant defense costs. The Company
has been and is currently subject to these suits due to the
nature of its business and expects that those types of lawsuits
may continue. Although the Company maintains insurance at a
level which it believes to be prudent, it 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 it and the results of its
operations. Any claims, regardless of their merit or eventual
outcome, could have a material adverse effect on the
Companys reputation and business.
The Company has also had claims asserted against it and has had
lawsuits filed against it relating to alleged patent
infringements or 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, when appropriate, asserted its own claims, and
claims for indemnification. A successful claim against the
Company or any of its subsidiaries could have a material adverse
effect upon it and the results of its operations. Any claims,
regardless of their merit or eventual outcome, could have a
material adverse effect on the Companys reputation and
business.
Accrued Special Charge for Legal Matters
At December 31, 2001, the Company recorded a pre-tax
special charge to reflect anticipated expenses associated with
the defense and resolution of pre-Merger tax claims,
Merger-related claims, and commercial insurer claims. The costs
associated with the Settlement Agreement and settlements with
insurers have been charged against this accrual. While the
Company believes that its remaining accruals reasonably estimate
its currently anticipated costs related to the continued defense
and resolution of the remaining matters, no assurances can be
given that its actual costs incurred will not exceed the amount
of this accrual (See Note 8).
19. Financial Instruments
Market Risk
The Company is exposed to market risk from changes in interest
rates and foreign exchange rates. In order to manage the risk of
interest rate and currency exchange rate fluctuations, the
Company enters into various
F-43
FRESENIUS MEDICAL CARE AG & CO. KGaA
(Formerly Fresenius Medical Care AG)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(in thousands, except share data)
hedging transactions with highly rated financial institutions as
authorized by the Companys Management Board. The Company
does not use financial instruments for trading purposes.
The Company established guidelines for risk assessment
procedures and controls for the use of financial instruments.
They include a clear segregation of duties with regard to
execution on one side and administration, accounting and
controlling on the other.
Foreign Exchange Risk Management
The Company conducts business on a global basis in various
currencies, though its operations are mainly in Germany and the
United States. For financial reporting purposes, the Company has
chosen the U.S. dollar as its reporting currency.
Therefore, changes in the rate of exchange between the
U.S. dollar, the euro and the local currencies in which the
financial statements of the Companys international
operations are maintained, affect its results of operations and
financial position as reported in its consolidated financial
statements.
The Companys exposure to market risk for changes in
foreign exchange rates relates to transactions such as sales and
purchases, and lending and borrowings, including intercompany
borrowings. The Company has significant amounts of sales of
products invoiced in euro from its European manufacturing
facilities to its other international operations. This exposes
the subsidiaries to fluctuations in the rate of exchange between
the euro and the currency in which their local operations are
conducted. The Company employs, to a limited extent, financial
deriviaives to hedge its currency exposure. The Companys
policy, which has been consistently followed, is that financial
derivatives be used only for the purpose of hedging foreign
currency exposure.
Changes in the fair value of foreign exchange forward contracts
designated and qualifying as cash flow hedges of forecasted
product purchases are reported in accumulated other
comprehensive income (loss). These amounts are subsequently
reclassified into earnings as a component of cost of revenues,
in the same period in which the hedged transaction affects
earnings. After tax losses of $4,307 ($6,164 pretax) for the
year ended December 31, 2005 are deferred in accumulated
other comprehensive income and will mainly be reclassified into
earnings during 2006. During 2005, the Company reclassified
after tax gains of $230 ($361 pretax) from accumulated other
comprehensive income (loss) into the statement of operations. As
of December 31, 2005, the Company had purchased foreign
exchange derivatives with a maximum maturity of 16 months
to hedge its exposure to the variability in future cash flows
associated with forecasted product purchases.
Changes in the fair value of foreign currency forward contracts
designated and qualifying as cash flow hedges associated with
foreign currency denominated intercompany financing transactions
are reported in accumulated other comprehensive income (loss).
These amounts are subsequently reclassified into earnings as a
component of selling, general and administrative expenses and
interest expense in the same period in which the hedged
transactions affect earnings.
The Company also entered into foreign exchange swaps with a fair
value of approximately $4,720 as of December 31, 2005 to
hedge its exposure from foreign currency denominated
intercompany loans. No hedge accounting is applied to these
foreign exchange swaps. Accordingly, the foreign exchange swaps
are recognized as assets and liabilities and changes in fair
values are charged to earnings.
The Company is exposed to potential losses in the event of
nonperformance by counterparties to financial instruments but
does not expect any counterparties to fail to meet their
obligations. The current credit exposure of foreign exchange
derivatives is represented by the fair value of those contracts
with a positive fair value at the reporting date.
F-44
FRESENIUS MEDICAL CARE AG & CO. KGaA
(Formerly Fresenius Medical Care AG)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(in thousands, except share data)
Interest Rate Risk Management
The Company enters into derivatives, particularly interest rate
swaps, to (a) protect interest rate exposures arising from
long-term debt and short-term borrowings and accounts receivable
securitization programs at floating rates by effectively
swapping them into fixed rates or (b) hedge the fair value
of parts of its fixed interest rate borrowings. Under interest
rate swaps, the Company agrees with other parties to exchange,
at specified intervals, the difference between fixed-rate and
floating-rate interest amounts calculated by reference to an
agreed notional amount.
Cash Flow Hedges of Variable Rate Debt
The Company enters into interest rate swap agreements that are
designated as cash flow hedges effectively converting certain
variable interest rate payments mainly denominated in
U.S. dollars into fixed interest rate payments. Those swap
agreements, which expire at various dates between 2006 and 2009,
effectively fix the Companys variable interest rate
exposure on the majority of its U.S. dollar-denominated
revolving loans and outstanding obligations under the accounts
receivable securitization program at an average interest rate of
5.26%. After taxes losses of $7,073 ($11,732 pretax) for the
year ended December 31, 2005, were deferred in accumulated
other comprehensive loss. Interest payable and interest
receivable under the swap agreements are accrued and recorded as
an adjustment to interest expense at each reporting date. There
are losses of $1,597 ($2,605 pretax) due to hedge
ineffectiveness. At December 31, 2005, the notional amount
of these swaps was $800,000.
In conjunction with the proposed acquisition of RCG and the
forecasted variable rate based interest payments for its
financing, the Company has entered into forward starting
interest rate swaps in the notional amount of $2,465,000. These
instruments, designated as cash flow hedges, effectively convert
forecasted variable rate based interest payments into fixed rate
based interest payments with an average fixed rate of 4.32% plus
an applicable margin. These swaps are denominated in
U.S. dollars and expire at various dates between 2008 and
2012. After tax gains of $30,465 ($49,488 pretax) for the year
ended December 31, 2005 are deferred in accumulated other
comprehensive income. There is no significant impact on earnings
due to hedge ineffectiveness.
Fair Value Hedges of Fixed Rate Debt
The Company enters into interest rate swap agreements that are
designated as fair value hedges to hedge the risk of changes in
the fair value of fixed interest rate borrowings effectively
converting the fixed interest payments on Fresenius Medical Care
Capital Trust II trust preferred securities (see
note 11) denominated in U.S. dollars into
variable interest rate payments. Since the critical terms of the
interest rate swap agreements are identical to the terms of
Fresenius Medical Capital Trust II trust preferred
securities, the hedging relationship is highly effective and no
ineffectiveness is recognized in earnings. The interest rate
swap agreements are reported at fair value in the balance sheet.
The reported amount of the hedged portion of fixed rate trust
preferred securities includes an adjustment representing the
change in fair value attributable to the interest rate risk
being hedged. Changes in the fair value of interest rate swap
contracts and trust preferred securities offset each other in
the income statement. At December 31, 2005, the notional
volume of these swaps was $450,000.
The Company is exposed to potential losses in the event of
nonperformance by counterparties to financial instruments but
does not expect any counterparties to fail to meet their
obligations. The current credit exposure of interest rate
derivatives is represented by the fair value of those contracts
with a positive fair value at the reporting date.
F-45
FRESENIUS MEDICAL CARE AG & CO. KGaA
(Formerly Fresenius Medical Care AG)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(in thousands, except share data)
Fair Value of Financial Instruments
The following table presents the carrying amounts and fair
values of the Companys financial instruments at
December 31, 2005 and 2004.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
Carrying
|
|
|
Fair
|
|
|
Carrying
|
|
|
Fair
|
|
|
|
Amount
|
|
|
Value
|
|
|
Amount
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Non-derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
85,077
|
|
|
$
|
85,077
|
|
|
$
|
58,966
|
|
|
$
|
58,966
|
|
|
Receivables
|
|
|
1,469,933
|
|
|
|
1,469,933
|
|
|
|
1,462,847
|
|
|
|
1,462,847
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
309,255
|
|
|
|
309,255
|
|
|
|
305,996
|
|
|
|
305,996
|
|
|
Long term debt, excluding Euro-notes
|
|
|
597,429
|
|
|
|
597,429
|
|
|
|
600,719
|
|
|
|
600,719
|
|
|
Trust Preferred Securities
|
|
|
1,187,864
|
|
|
|
1,285,319
|
|
|
|
1,278,760
|
|
|
|
1,436,306
|
|
|
Notes
|
|
|
235,940
|
|
|
|
236,326
|
|
|
|
175,030
|
|
|
|
176,090
|
|
|
Derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
|
(2,939
|
)
|
|
|
(2,939
|
)
|
|
|
16,980
|
|
|
|
16,980
|
|
|
Dollar interest rate hedges
|
|
|
21,830
|
|
|
|
21,830
|
|
|
|
(48,093
|
)
|
|
|
(48,093
|
)
|
|
Yen interest rate hedges
|
|
|
(201
|
)
|
|
|
(201
|
)
|
|
|
(381
|
)
|
|
|
(381
|
)
|
The carrying amounts in the table are included in the
consolidated balance sheet under the indicated captions, except
for derivatives, which are included in other assets or other
liabilities.
Estimation of Fair Values
The significant methods and assumptions used in estimating the
fair values of financial instruments are as follows:
Short-term financial instruments are valued at their carrying
amounts included in the consolidated balance sheet, which are
reasonable estimates of fair value due to the relatively short
period to maturity of the instruments. This approach applies to
cash and cash equivalents, receivables, accounts payable and
income taxes payable and short-term borrowings.
The long-term bank debt is valued at its carrying amount because
the actual drawings under the facility carry interest at a
variable rate 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.
The fair values of the Trust Preferred Securities and the
Euro Notes are based upon market quotes.
Trader quotes are available for all of the Companys
derivatives.
F-46
FRESENIUS MEDICAL CARE AG & CO. KGaA
(Formerly Fresenius Medical Care AG)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(in thousands, except share data)
20. Other Comprehensive Income (Loss)
The changes in the components of other comprehensive income
(loss) for the years ended December 31, 2005, 2004 and 2003
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
Year Ended December 31,
|
|
|
Year Ended December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax
|
|
|
|
|
|
|
Tax
|
|
|
|
|
|
|
Tax
|
|
|
|
|
|
Pretax
|
|
|
Effect
|
|
|
Net
|
|
|
Pretax
|
|
|
Effect
|
|
|
Net
|
|
|
Pretax
|
|
|
Effect
|
|
|
Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive (loss) income relating to cash flow hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in fair value of cash flow hedges during the period
|
|
$
|
72,440
|
|
|
$
|
(28,653
|
)
|
|
$
|
43,787
|
|
|
$
|
(36,192
|
)
|
|
$
|
13,638
|
|
|
$
|
(22,554
|
)
|
|
$
|
28,237
|
|
|
$
|
(11,114
|
)
|
|
$
|
17,123
|
|
|
Reclassification adjustments
|
|
|
(1,243
|
)
|
|
|
584
|
|
|
|
(659
|
)
|
|
|
(9,906
|
)
|
|
|
3,449
|
|
|
|
(6,457
|
)
|
|
|
8,091
|
|
|
|
(3,185
|
)
|
|
|
4,906
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive (loss) income relating to cash flow
hedges:
|
|
|
71,197
|
|
|
|
(28,069
|
)
|
|
|
43,128
|
|
|
|
(46,098
|
)
|
|
|
17,087
|
|
|
|
(29,011
|
)
|
|
|
36,328
|
|
|
|
(14,299
|
)
|
|
|
22,029
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign-currency translation adjustment
|
|
|
(104,723
|
)
|
|
|
|
|
|
|
(104,723
|
)
|
|
|
144,784
|
|
|
|
|
|
|
|
144,784
|
|
|
|
200,578
|
|
|
|
|
|
|
|
200,578
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum pension liability
|
|
|
(19,996
|
)
|
|
|
7,747
|
|
|
|
(12,249
|
)
|
|
|
(16,507
|
)
|
|
|
6,605
|
|
|
|
(9,902
|
)
|
|
|
(23,391
|
)
|
|
|
9,341
|
|
|
|
(14,050
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss)
|
|
$
|
(53,522
|
)
|
|
$
|
(20,322
|
)
|
|
$
|
(73,844
|
)
|
|
$
|
82,179
|
|
|
$
|
23,692
|
|
|
$
|
105,871
|
|
|
$
|
213,515
|
|
|
$
|
(4,958
|
)
|
|
$
|
208,557
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21. Business Segment Information
The Company has identified three business segments, North
America, International, and Asia Pacific, which were determined
based upon how the Company manages its businesses. All segments
are primarily engaged in providing dialysis services and
manufacturing and distributing products and equipment for the
treatment of end-stage renal disease. Additionally, the North
America segment engages in performing clinical laboratory
testing and providing perfusion, therapeutic apheresis and
autotransfusion services. The Company has aggregated the
International and Asia Pacific operating segments as
International. The segments are aggregated due to
their similar economic characteristics. These characteristics
include the same products sold, the same type patient
population, similar methods of distribution of products and
services and similar economic environments. For management
reporting purposes, the Company transferred its Mexico
operations from its International segment to its North American
segment beginning January 1, 2005 and reclassified the
Mexico operations and assets for the comparative periods of 2004
and 2003.
Management evaluates each segment using a measure that reflects
all of the segments controllable revenues and expenses.
Management believes that the most appropriate measure in this
regard is operating income which measures the Companys
source of earnings. Financing is a corporate function, which the
Companys segments do not control. Therefore, the Company
does not include interest expense relating to financing as a
segment measure. The Company also regards income taxes to be
outside the segments control.
F-47
FRESENIUS MEDICAL CARE AG & CO. KGaA
(Formerly Fresenius Medical Care AG)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(in thousands, except share data)
Information pertaining to the Companys business segments
is set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North
|
|
|
|
|
Segment
|
|
|
|
|
|
|
|
America
|
|
|
International
|
|
|
Total
|
|
|
Corporate
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue external customers
|
|
$
|
4,577,379
|
|
|
$
|
2,194,440
|
|
|
$
|
6,771,819
|
|
|
$
|
|
|
|
$
|
6,771,819
|
|
|
Inter segment revenue
|
|
|
1,327
|
|
|
|
54,449
|
|
|
|
55,776
|
|
|
|
(55,776
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
|
4,578,706
|
|
|
|
2,248,889
|
|
|
|
6,827,595
|
|
|
|
(55,776
|
)
|
|
|
6,771,819
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
(139,747
|
)
|
|
|
(109,812
|
)
|
|
|
(249,559
|
)
|
|
|
(1,893
|
)
|
|
|
(251,452
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income
|
|
|
643,917
|
|
|
|
362,134
|
|
|
|
1,006,051
|
|
|
|
(67,133
|
)
|
|
|
938,918
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment assets
|
|
|
5,634,985
|
|
|
|
2,216,630
|
|
|
|
7,851,615
|
|
|
|
131,485
|
|
|
|
7,983,100
|
|
|
Capital expenditures and
acquisitions
(1)
|
|
|
252,822
|
|
|
|
187,030
|
|
|
|
439,852
|
|
|
|
70
|
|
|
|
439,922
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue external customers
|
|
$
|
4,248,216
|
|
|
$
|
1,979,786
|
|
|
$
|
6,228,002
|
|
|
$
|
|
|
|
$
|
6,228,002
|
|
|
Inter segment revenue
|
|
|
1,602
|
|
|
|
39,004
|
|
|
|
40,606
|
|
|
|
(40,606
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
|
4,249,818
|
|
|
|
2,018,790
|
|
|
|
6,268,608
|
|
|
|
(40,606
|
)
|
|
|
6,228,002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
(128,532
|
)
|
|
|
(102,137
|
)
|
|
|
(230,669
|
)
|
|
|
(1,917
|
)
|
|
|
(232,586
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income
|
|
|
587,400
|
|
|
|
300,291
|
|
|
|
887,691
|
|
|
|
(35,346
|
)
|
|
|
852,345
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment assets
|
|
|
5,539,631
|
|
|
|
2,366,277
|
|
|
|
7,905,908
|
|
|
|
55,633
|
|
|
|
7,961,541
|
|
|
Capital expenditures and
acquisitions
(2)
|
|
|
230,150
|
|
|
|
152,820
|
|
|
|
382,970
|
|
|
|
255
|
|
|
|
383,225
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue external customers
|
|
$
|
3,877,807
|
|
|
$
|
1,649,702
|
|
|
$
|
5,527,509
|
|
|
$
|
|
|
|
$
|
5,527,509
|
|
|
Inter segment revenue
|
|
|
1,520
|
|
|
|
36,357
|
|
|
|
37,877
|
|
|
|
(37,877
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
|
3,879,327
|
|
|
|
1,686,059
|
|
|
|
5,565,386
|
|
|
|
(37,877
|
)
|
|
|
5,527,509
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
(122,201
|
)
|
|
|
(92,188
|
)
|
|
|
(214,389
|
)
|
|
|
(1,989
|
)
|
|
|
(216,378
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income
|
|
|
527,523
|
|
|
|
258,529
|
|
|
|
786,052
|
|
|
|
(28,617
|
)
|
|
|
757,435
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment assets
|
|
|
5,349,521
|
|
|
|
2,108,951
|
|
|
|
7,458,472
|
|
|
|
44,848
|
|
|
|
7,503,320
|
|
|
Capital expenditures and
acquisitions
(3)
|
|
|
222,024
|
|
|
|
161,410
|
|
|
|
383,434
|
|
|
|
16
|
|
|
|
383,450
|
|
|
|
(1)
|
North America and International acquisitions exclude $260 and
$9,031, respectively, of non-cash acquisitions for 2005.
|
|
(2)
|
International acquisitions exclude $15,479 of non-cash
acquisitions for 2004.
|
|
(3)
|
North America and International acquisitions exclude $3,995 and
$5,065, respectively, of non-cash acquisitions for 2003.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of measures to consolidated totals
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income of reporting segments
|
|
|
1,006,051
|
|
|
|
887,691
|
|
|
|
786,052
|
|
Corporate expenses
|
|
|
(67,133
|
)
|
|
|
(35,346
|
)
|
|
|
(28,617
|
)
|
Interest income
|
|
|
18,187
|
|
|
|
13,418
|
|
|
|
19,089
|
|
Interest expense
|
|
|
(191,379
|
)
|
|
|
(197,164
|
)
|
|
|
(230,848
|
)
|
|
|
|
|
|
|
|
|
|
|
Total income before income taxes and minority interest
|
|
$
|
765,726
|
|
|
$
|
668,599
|
|
|
$
|
545,676
|
|
|
|
|
|
|
|
|
|
|
|
F-48
FRESENIUS MEDICAL CARE AG & CO. KGaA
(Formerly Fresenius Medical Care AG)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(in thousands, except share data)
For the geographic presentation, revenues are attributed to
specific countries based on the end users location for
products and the country in which the service is provided.
Information with respect to the Companys geographic
operations is set forth in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
|
|
|
Rest of the
|
|
|
|
|
|
Germany
|
|
|
States
|
|
|
World
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue external customers
|
|
$
|
288,923
|
|
|
$
|
4,577,379
|
|
|
$
|
1,905,517
|
|
|
$
|
6,771,819
|
|
Long-lived assets
|
|
|
157,362
|
|
|
|
4,372,453
|
|
|
|
906,220
|
|
|
|
5,436,035
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue external customers
|
|
$
|
288,526
|
|
|
$
|
4,248,216
|
|
|
$
|
1,691,260
|
|
|
$
|
6,228,002
|
|
Long-lived assets
|
|
|
169,981
|
|
|
|
4,277,319
|
|
|
|
956,860
|
|
|
|
5,404,160
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue external customers
|
|
$
|
245,983
|
|
|
$
|
3,877,807
|
|
|
$
|
1,403,719
|
|
|
$
|
5,527,509
|
|
Long-lived assets
|
|
|
148,375
|
|
|
|
4,166,660
|
|
|
|
862,545
|
|
|
|
5,177,580
|
|
22. Supplementary Cash Flow Information
The following additional information is provided with respect to
the consolidated statements of cash flows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
Supplementary cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
180,853
|
|
|
$
|
201,380
|
|
|
$
|
208,429
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for income taxes
|
|
$
|
380,764
|
|
|
$
|
198,983
|
|
|
$
|
141,278
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Details for acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets acquired
|
|
$
|
149,189
|
|
|
$
|
148,324
|
|
|
$
|
152,570
|
|
|
Liabilities assumed
|
|
|
18,161
|
|
|
|
12,957
|
|
|
|
46,685
|
|
|
Minorities
|
|
|
(5,017
|
)
|
|
|
|
|
|
|
|
|
|
Transaction under common control with Fresenius AG
|
|
|
|
|
|
|
|
|
|
|
1,469
|
|
|
Notes assumed in connection with acquisition
|
|
|
9,291
|
|
|
|
15,479
|
|
|
|
9,060
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid
|
|
|
126,754
|
|
|
|
119,888
|
|
|
|
95,356
|
|
|
Less cash acquired
|
|
|
1,601
|
|
|
|
15,395
|
|
|
|
3,166
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash paid for acquisitions
|
|
$
|
125,153
|
|
|
$
|
104,493
|
|
|
$
|
92,190
|
|
|
|
|
|
|
|
|
|
|
|
23. Supplemental Condensed Combining Information
FMC Trust Finance S.à.r.l. Luxembourg and FMC
Trust Finance S.à.r.l.
Luxembourg-III,
each of
which is a wholly-owned subsidiary of
FMC-AG
& Co. KGaA,
are the obligors on senior subordinated debt securities which
are fully and unconditionally guaranteed, jointly and severally,
on a senior subordinated basis, by
FMC-AG
& Co. KGaA
and by Fresenius Medical Care Deutschland GmbH
(D-GmbH),
a
wholly-owned subsidiary of
FMC-AG
& Co. KGaA,
and by FMCH, a substantially wholly-owned subsidiary of
FMC-AG
& Co. KGaA
(D-GmbH
and FMCH being
Guarantor Subsidiaries). In December 2004, the
Company assumed the obligations of its wholly owned subsidiaries
as the issuer of senior subordinated notes denominated in euro
and Deutschmark held by Fresenius Medical Care Capital
Trust III and Fresenius Medical Care Capital Trust V,
respectively (see Note 9). The following combining
financial information for the Company is as of December 31,
F-49
FRESENIUS MEDICAL CARE AG & CO. KGaA
(Formerly Fresenius Medical Care AG)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(in thousands, except share data)
2005 and 2004 and for the year ended December 31, 2005,
2004 and 2003, segregated between the Company,
D-GmbH,
FMCH and each
of the Companys other businesses (the Non-Guarantor
Subsidiaries). For purposes of the condensed combining
information, FMC-AG & Co. KGaA and the Guarantor
Subsidiaries carry their investments under the equity method.
Other (income) expense includes income (loss) related to
investments in consolidated subsidiaries recorded under the
equity method for purposes of the condensed combining
information. In addition, other (income) expense includes income
and losses from profit and loss transfer agreements as well as
dividends received. Separate financial statements and other
disclosures concerning FMCH and D-GmbH are not presented herein
because management believes that they are not material to
investors.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2005
|
|
|
|
|
|
|
|
|
|
Guarantor Subsidiaries
|
|
|
|
|
|
FMC-AG &
|
|
|
|
|
|
Non-Guarantor
|
|
|
Combining
|
|
|
Combined
|
|
|
|
Co. KGaA
|
|
|
D-GmbH
|
|
|
FMCH
|
|
|
Subsidiaries
|
|
|
Adjustment
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
|
|
|
$
|
1,059,401
|
|
|
$
|
|
|
|
$
|
7,010,734
|
|
|
$
|
(1,298,316
|
)
|
|
$
|
6,771,819
|
|
Cost of revenue
|
|
|
|
|
|
|
664,871
|
|
|
|
|
|
|
|
5,058,548
|
|
|
|
(1,284,265
|
)
|
|
|
4,439,154
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
|
|
|
|
394,530
|
|
|
|
|
|
|
|
1,952,186
|
|
|
|
(14,051
|
)
|
|
|
2,332,665
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (income) expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
(14,805
|
)
|
|
|
135,899
|
|
|
|
|
|
|
|
1,075,777
|
|
|
|
145,921
|
|
|
|
1,342,792
|
|
|
Research and development
|
|
|
3,271
|
|
|
|
32,702
|
|
|
|
|
|
|
|
14,982
|
|
|
|
|
|
|
|
50,955
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
11,534
|
|
|
|
225,929
|
|
|
|
|
|
|
|
861,427
|
|
|
|
(159,972
|
)
|
|
|
938,918
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (income) expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest, net
|
|
|
35,391
|
|
|
|
11,750
|
|
|
|
51,981
|
|
|
|
112,199
|
|
|
|
(38,129
|
)
|
|
|
173,192
|
|
|
Other, net
|
|
|
(525,497
|
)
|
|
|
131,392
|
|
|
|
(294,649
|
)
|
|
|
|
|
|
|
688,754
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and minority interest
|
|
|
501,640
|
|
|
|
82,787
|
|
|
|
242,668
|
|
|
|
749,228
|
|
|
|
(810,597
|
)
|
|
|
765,726
|
|
|
Income tax expense (benefit)
|
|
|
46,688
|
|
|
|
79,606
|
|
|
|
(20,792
|
)
|
|
|
286,629
|
|
|
|
(83,383
|
)
|
|
|
308,748
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before minority interest
|
|
|
454,952
|
|
|
|
3,181
|
|
|
|
263,460
|
|
|
|
462,599
|
|
|
|
(727,214
|
)
|
|
|
456,978
|
|
Minority interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,026
|
|
|
|
2,026
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
454,952
|
|
|
$
|
3,181
|
|
|
$
|
263,460
|
|
|
$
|
462,599
|
|
|
$
|
(729,240
|
)
|
|
$
|
454,952
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-50
FRESENIUS MEDICAL CARE AG & CO. KGaA
(Formerly Fresenius Medical Care AG)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2004
|
|
|
|
|
|
|
|
|
|
Guarantor
|
|
|
|
|
|
|
|
Subsidiaries
|
|
|
|
|
|
FMC-AG &
|
|
|
|
|
|
Non-Guarantor
|
|
|
Combining
|
|
|
Combined
|
|
|
|
Co. KGaA
|
|
|
D-GmbH
|
|
|
FMCH
|
|
|
Subsidiaries
|
|
|
Adjustment
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
|
|
|
$
|
967,981
|
|
|
$
|
|
|
|
$
|
7,086,578
|
|
|
$
|
(1,826,557
|
)
|
|
$
|
6,228,002
|
|
Cost of revenue
|
|
|
|
|
|
|
618,147
|
|
|
|
|
|
|
|
5,344,614
|
|
|
|
(1,820,644
|
)
|
|
|
4,142,117
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
|
|
|
|
349,834
|
|
|
|
|
|
|
|
1,741,964
|
|
|
|
(5,913
|
)
|
|
|
2,085,885
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
98,025
|
|
|
|
144,952
|
|
|
|
|
|
|
|
1,068,900
|
|
|
|
(129,701
|
)
|
|
|
1,182,176
|
|
|
Research and development
|
|
|
2,455
|
|
|
|
33,610
|
|
|
|
|
|
|
|
15,299
|
|
|
|
|
|
|
|
51,364
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income
|
|
|
(100,479
|
)
|
|
|
171,272
|
|
|
|
|
|
|
|
657,764
|
|
|
|
123,788
|
|
|
|
852,345
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (income) expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest, net
|
|
|
36,777
|
|
|
|
13,367
|
|
|
|
62,189
|
|
|
|
104,768
|
|
|
|
(33,355
|
)
|
|
|
183,746
|
|
|
Other, net
|
|
|
(592,166
|
)
|
|
|
101,430
|
|
|
|
(286,567
|
)
|
|
|
|
|
|
|
777,303
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and minority interest
|
|
|
454,909
|
|
|
|
56,475
|
|
|
|
224,378
|
|
|
|
552,997
|
|
|
|
(620,160
|
)
|
|
|
668,599
|
|
|
Income tax expense (benefit)
|
|
|
52,912
|
|
|
|
58,815
|
|
|
|
(24,876
|
)
|
|
|
237,413
|
|
|
|
(58,849
|
)
|
|
|
265,415
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before minority interest
|
|
|
401,998
|
|
|
|
(2,340
|
)
|
|
|
249,254
|
|
|
|
315,584
|
|
|
|
(561,311
|
)
|
|
|
403,184
|
|
Minority interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,186
|
|
|
|
1,186
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
401,998
|
|
|
$
|
(2,340
|
)
|
|
$
|
249,254
|
|
|
$
|
315,584
|
|
|
$
|
(562,497
|
)
|
|
$
|
401,998
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2003
|
|
|
|
|
|
|
|
|
|
Guarantor
|
|
|
|
|
|
|
|
Subsidiaries
|
|
|
|
|
|
FMC-AG &
|
|
|
|
|
|
Non-Guarantor
|
|
|
Combining
|
|
|
Combined
|
|
|
|
Co. KGaA
|
|
|
D-GmbH
|
|
|
FMCH
|
|
|
Subsidiaries
|
|
|
Adjustment
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
|
|
|
$
|
823,632
|
|
|
$
|
|
|
|
$
|
5,630,923
|
|
|
$
|
(927,046
|
)
|
|
$
|
5,527,509
|
|
Cost of revenue
|
|
|
|
|
|
|
520,605
|
|
|
|
|
|
|
|
4,098,272
|
|
|
|
(920,271
|
)
|
|
|
3,698,606
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
|
|
|
|
303,027
|
|
|
|
|
|
|
|
1,532,651
|
|
|
|
(6,775
|
)
|
|
|
1,828,903
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
(645,049
|
)
|
|
|
114,074
|
|
|
|
|
|
|
|
883,745
|
|
|
|
669,011
|
|
|
|
1,021,781
|
|
|
Research and development
|
|
|
1,857
|
|
|
|
34,527
|
|
|
|
|
|
|
|
13,303
|
|
|
|
|
|
|
|
49,687
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
643,192
|
|
|
|
154,426
|
|
|
|
|
|
|
|
635,603
|
|
|
|
(675,786
|
)
|
|
|
757,435
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (income) expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest, net
|
|
|
35,157
|
|
|
|
11,918
|
|
|
|
63,512
|
|
|
|
138,110
|
|
|
|
(36,938
|
)
|
|
|
211,759
|
|
|
Other, net
|
|
|
229,988
|
|
|
|
83,283
|
|
|
|
(251,564
|
)
|
|
|
|
|
|
|
(61,707
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and minority interest
|
|
|
378,047
|
|
|
|
59,225
|
|
|
|
188,052
|
|
|
|
497,493
|
|
|
|
(577,141
|
)
|
|
|
545,676
|
|
|
Income tax expense (benefit)
|
|
|
46,867
|
|
|
|
58,320
|
|
|
|
(25,405
|
)
|
|
|
193,596
|
|
|
|
(60,664
|
)
|
|
|
212,714
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before minority interest
|
|
|
331,180
|
|
|
|
905
|
|
|
|
213,457
|
|
|
|
303,898
|
|
|
|
(516,477
|
)
|
|
|
332,962
|
|
Minority interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,782
|
|
|
|
1,782
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
331,180
|
|
|
$
|
905
|
|
|
$
|
213,457
|
|
|
$
|
303,898
|
|
|
$
|
(518,259
|
)
|
|
$
|
331,180
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-51
FRESENIUS MEDICAL CARE AG & CO. KGaA
(Formerly Fresenius Medical Care AG)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2005
|
|
|
|
|
|
|
|
|
|
Guarantor
|
|
|
|
|
|
|
|
Subsidiaries
|
|
|
|
|
|
FMC - AG &
|
|
|
|
|
|
Non-Guarantor
|
|
|
Combining
|
|
|
Combined
|
|
|
|
Co. KGaA
|
|
|
D-GmbH
|
|
|
FMCH
|
|
|
Subsidiaries
|
|
|
Adjustment
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1
|
|
|
$
|
26
|
|
|
$
|
|
|
|
$
|
82,558
|
|
|
$
|
2,492
|
|
|
$
|
85,077
|
|
|
Trade accounts receivable, less allowance for doubtful accounts
|
|
|
|
|
|
|
108,426
|
|
|
|
|
|
|
|
1,361,507
|
|
|
|
|
|
|
|
1,469,933
|
|
|
Accounts receivable from related parties
|
|
|
852,926
|
|
|
|
338,097
|
|
|
|
216,337
|
|
|
|
1,248,942
|
|
|
|
(2,622,418
|
)
|
|
|
33,884
|
|
|
Inventories
|
|
|
|
|
|
|
113,359
|
|
|
|
|
|
|
|
371,638
|
|
|
|
(54,104
|
)
|
|
|
430,893
|
|
|
Prepaid expenses and other current assets
|
|
|
17,399
|
|
|
|
12,329
|
|
|
|
13
|
|
|
|
231,734
|
|
|
|
115
|
|
|
|
261,590
|
|
|
Deferred taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
163,975
|
|
|
|
15,586
|
|
|
|
179,561
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
870,326
|
|
|
|
572,237
|
|
|
|
216,350
|
|
|
|
3,460,354
|
|
|
|
(2,658,329
|
)
|
|
|
2,460,938
|
|
Property, plant and equipment, net
|
|
|
157
|
|
|
|
86,386
|
|
|
|
|
|
|
|
1,174,252
|
|
|
|
(45,037
|
)
|
|
|
1,215,758
|
|
Intangible assets
|
|
|
970
|
|
|
|
12,220
|
|
|
|
|
|
|
|
572,499
|
|
|
|
|
|
|
|
585,689
|
|
Goodwill
|
|
|
|
|
|
|
3,227
|
|
|
|
|
|
|
|
3,453,650
|
|
|
|
|
|
|
|
3,456,877
|
|
Deferred taxes
|
|
|
|
|
|
|
4,562
|
|
|
|
|
|
|
|
27,994
|
|
|
|
3,093
|
|
|
|
35,649
|
|
Other assets
|
|
|
4,552,128
|
|
|
|
811,728
|
|
|
|
3,812,542
|
|
|
|
(829,742
|
)
|
|
|
(8,118,467
|
)
|
|
|
228,189
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
5,423,581
|
|
|
$
|
1,490,360
|
|
|
$
|
4,028,892
|
|
|
$
|
7,859,007
|
|
|
$
|
(10,818,740
|
)
|
|
$
|
7,983,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
19
|
|
|
$
|
13,401
|
|
|
$
|
|
|
|
$
|
187,897
|
|
|
$
|
|
|
|
$
|
201,317
|
|
|
Accounts payable to related parties
|
|
|
1,059,718
|
|
|
|
160,884
|
|
|
|
882,439
|
|
|
|
1,397,213
|
|
|
|
(3,392,316
|
)
|
|
|
107,938
|
|
|
Accrued expenses and other current liabilities
|
|
|
22,205
|
|
|
|
92,545
|
|
|
|
775
|
|
|
|
731,208
|
|
|
|
(7,965
|
)
|
|
|
838,768
|
|
|
Short-term borrowings
|
|
|
33
|
|
|
|
|
|
|
|
|
|
|
|
151,080
|
|
|
|
|
|
|
|
151,113
|
|
|
Short-term borrowings from related parties
|
|
|
18,757
|
|
|
|
1,752
|
|
|
|
|
|
|
|
|
|
|
|
(1,752
|
)
|
|
|
18,757
|
|
|
Current portion of long-term debt and capital lease obligations
|
|
|
968
|
|
|
|
826
|
|
|
|
100,000
|
|
|
|
24,475
|
|
|
|
|
|
|
|
126,269
|
|
|
Income tax payable
|
|
|
15,106
|
|
|
|
|
|
|
|
|
|
|
|
81,593
|
|
|
|
23,439
|
|
|
|
120,138
|
|
|
Deferred taxes
|
|
|
2,489
|
|
|
|
3,735
|
|
|
|
|
|
|
|
34,266
|
|
|
|
(26,550
|
)
|
|
|
13,940
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
1,119,295
|
|
|
|
273,143
|
|
|
|
983,214
|
|
|
|
2,607,732
|
|
|
|
(3,405,144
|
)
|
|
|
1,578,240
|
|
Long term debt and capital lease obligations, less current
portion
|
|
|
294,131
|
|
|
|
590
|
|
|
|
561,229
|
|
|
|
651,297
|
|
|
|
(800,147
|
)
|
|
|
707,100
|
|
Long term borrowings from related parties
|
|
|
3,720
|
|
|
|
180,951
|
|
|
|
|
|
|
|
|
|
|
|
(184,671
|
)
|
|
|
|
|
Other liabilities
|
|
|
419
|
|
|
|
5,013
|
|
|
|
|
|
|
|
89,112
|
|
|
|
17,874
|
|
|
|
112,418
|
|
Pension liabilities
|
|
|
2,578
|
|
|
|
75,880
|
|
|
|
|
|
|
|
42,680
|
|
|
|
(12,436
|
)
|
|
|
108,702
|
|
Deferred taxes
|
|
|
29,732
|
|
|
|
|
|
|
|
|
|
|
|
235,538
|
|
|
|
35,395
|
|
|
|
300,665
|
|
Company obligated mandatorily redeemable preferred securities of
subsidiary Fresenius Medical Care Capital Trusts holding solely
Company-guaranteed debentures of subsidiary
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,187,864
|
|
|
|
|
|
|
|
1,187,864
|
|
Minority interest
|
|
|
|
|
|
|
|
|
|
|
7,412
|
|
|
|
|
|
|
|
6,993
|
|
|
|
14,405
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,449,875
|
|
|
|
535,577
|
|
|
|
1,551,855
|
|
|
|
4,814,223
|
|
|
|
(4,342,136
|
)
|
|
|
4,009,394
|
|
Shareholders equity:
|
|
|
3,973,706
|
|
|
|
954,783
|
|
|
|
2,477,037
|
|
|
|
3,044,784
|
|
|
|
(6,476,604
|
)
|
|
|
3,973,706
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
5,423,581
|
|
|
$
|
1,490,360
|
|
|
$
|
4,028,892
|
|
|
$
|
7,859,007
|
|
|
$
|
(10,818,740
|
)
|
|
$
|
7,983,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-52
FRESENIUS MEDICAL CARE AG & CO. KGaA
(Formerly Fresenius Medical Care AG)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2004
|
|
|
|
|
|
|
|
|
|
Guarantor
|
|
|
|
|
|
|
|
Subsidiaries
|
|
|
|
|
|
|
|
|
|
|
Non-Guarantor
|
|
|
Combining
|
|
|
Combined
|
|
|
|
FMS AG
|
|
|
D-GmbH
|
|
|
FMCH
|
|
|
Subsidiaries
|
|
|
Adjustment
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
2,152
|
|
|
$
|
35
|
|
|
$
|
|
|
|
$
|
56,779
|
|
|
$
|
|
|
|
$
|
58,966
|
|
|
Trade accounts receivable, less allowance for doubtful accounts
|
|
|
|
|
|
|
110,204
|
|
|
|
|
|
|
|
1,353,422
|
|
|
|
(779
|
)
|
|
|
1,462,847
|
|
|
Accounts receivable from related parties
|
|
|
763,089
|
|
|
|
325,731
|
|
|
|
213,337
|
|
|
|
1,792,810
|
|
|
|
(3,043,207
|
)
|
|
|
51,760
|
|
|
Inventories
|
|
|
|
|
|
|
125,952
|
|
|
|
|
|
|
|
374,560
|
|
|
|
(57,593
|
)
|
|
|
442,919
|
|
|
Prepaid expenses and other current assets
|
|
|
7,347
|
|
|
|
12,254
|
|
|
|
22
|
|
|
|
224,071
|
|
|
|
399
|
|
|
|
244,093
|
|
|
Deferred taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
166,970
|
|
|
|
18,415
|
|
|
|
185,385
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
772,588
|
|
|
|
574,176
|
|
|
|
213,359
|
|
|
|
3,968,612
|
|
|
|
(3,082,765
|
)
|
|
|
2,445,970
|
|
Property, plant and equipment, net
|
|
|
227
|
|
|
|
100,496
|
|
|
|
|
|
|
|
1,121,290
|
|
|
|
(40,086
|
)
|
|
|
1,181,927
|
|
Intangible assets
|
|
|
333
|
|
|
|
16,384
|
|
|
|
|
|
|
|
585,331
|
|
|
|
|
|
|
|
602,048
|
|
Goodwill
|
|
|
|
|
|
|
3,726
|
|
|
|
|
|
|
|
3,441,426
|
|
|
|
|
|
|
|
3,445,152
|
|
Deferred taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32,613
|
|
|
|
25,510
|
|
|
|
58,123
|
|
Other assets
|
|
|
4,990,303
|
|
|
|
925,105
|
|
|
|
3,520,453
|
|
|
|
522,915
|
|
|
|
(9,730,455
|
)
|
|
|
228,321
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
5,763,451
|
|
|
$
|
1,619,887
|
|
|
$
|
3,733,812
|
|
|
$
|
9,672,187
|
|
|
$
|
(12,827,796
|
)
|
|
$
|
7,961,541
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
205
|
|
|
$
|
16,374
|
|
|
$
|
|
|
|
$
|
175,973
|
|
|
$
|
|
|
|
$
|
192,552
|
|
|
Accounts payable to related parties
|
|
|
1,682,729
|
|
|
|
359,869
|
|
|
|
842,204
|
|
|
|
1,290,323
|
|
|
|
(4,061,681
|
)
|
|
|
113,444
|
|
|
Accrued expenses and other current liabilities
|
|
|
15,800
|
|
|
|
79,530
|
|
|
|
541
|
|
|
|
652,379
|
|
|
|
(7,175
|
)
|
|
|
741,075
|
|
|
Short-term borrowings
|
|
|
38
|
|
|
|
|
|
|
|
|
|
|
|
419,110
|
|
|
|
|
|
|
|
419,148
|
|
|
Short-term borrowings from related parties
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,766
|
|
|
|
|
|
|
|
5,766
|
|
|
Current portion of long-term debt and capital lease obligations
|
|
|
770
|
|
|
|
1,145
|
|
|
|
25,000
|
|
|
|
203,264
|
|
|
|
|
|
|
|
230,179
|
|
|
Income tax payable
|
|
|
127,331
|
|
|
|
|
|
|
|
|
|
|
|
102,551
|
|
|
|
648
|
|
|
|
230,530
|
|
|
Deferred taxes
|
|
|
990
|
|
|
|
4,178
|
|
|
|
|
|
|
|
35,962
|
|
|
|
(35,971
|
)
|
|
|
5,159
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
1,827,863
|
|
|
|
461,096
|
|
|
|
867,745
|
|
|
|
2,885,328
|
|
|
|
(4,104,179
|
)
|
|
|
1,937,853
|
|
Long term debt and capital lease obligations, less current
portion
|
|
|
248,427
|
|
|
|
|
|
|
|
650,029
|
|
|
|
507,847
|
|
|
|
(860,733
|
)
|
|
|
545,570
|
|
Long term borrowings from related parties
|
|
|
4,295
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,295
|
)
|
|
|
|
|
Other liabilities
|
|
|
41,111
|
|
|
|
5,834
|
|
|
|
|
|
|
|
93,839
|
|
|
|
15,338
|
|
|
|
156,122
|
|
Pension liabilities
|
|
|
1,049
|
|
|
|
60,084
|
|
|
|
|
|
|
|
58,333
|
|
|
|
(11,341
|
)
|
|
|
108,125
|
|
Deferred taxes
|
|
|
5,890
|
|
|
|
2,376
|
|
|
|
|
|
|
|
239,162
|
|
|
|
34,833
|
|
|
|
282,261
|
|
Company obligated mandatorily redeemable preferred securities of
subsidiary Fresenius Medical Care Capital Trusts holding solely
Company-guaranteed debentures of subsidiary
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,278,760
|
|
|
|
|
|
|
|
1,278,760
|
|
Minority interest
|
|
|
|
|
|
|
|
|
|
|
7,412
|
|
|
|
|
|
|
|
10,622
|
|
|
|
18,034
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
2,128,635
|
|
|
|
529,390
|
|
|
|
1,525,186
|
|
|
|
5,063,269
|
|
|
|
(4,919,755
|
)
|
|
|
4,326,725
|
|
Shareholders equity:
|
|
|
3,634,816
|
|
|
|
1,090,497
|
|
|
|
2,208,626
|
|
|
|
4,608,918
|
|
|
|
(7,908,041
|
)
|
|
|
3,634,816
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
5,763,451
|
|
|
$
|
1,619,887
|
|
|
$
|
3,733,812
|
|
|
$
|
9,672,187
|
|
|
$
|
(12,827,796
|
)
|
|
$
|
7,961,541
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-53