Operations and Business Environment - Fresenius Medical Care

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02. 1 Our Fiscal Year 64 Share Conversion and Change of Legal Form The voluntary conversion of Fresenius Medical Care preference shares and the change in the legal form resulted in significant structural changes. During a four-week conversion period from January 6 to February 3, 2006, all preference shareholders had the opportunity to convert their shares into ordinary shares at a ratio of 1:1 including a conversion premium of € 9.75 per preference share. This also applied to holders of American Depositary Shares (ADS) that represent preference shares. A total of 26,629,422 preference shares were submitted for conversion, around 96 % of all outstanding preference shares. The conversion of the shares and the transformation of the legal form of the Company from a public limited company (Aktiengesellschaft) into a partnership limited by shares (Kommanditgesellschaft auf Aktien – KGaA) became effective upon registration with the commercial register of the local court Hof an der Saale on February 10, 2006. All shareholders of the former Fresenius Medical Care AG then became shareholders of Fresenius Medical Care AG & Co. KGaA. In connection with conversion, preference shareholders had to pay a conversion premium of € 9.75 per tendered preference share to the Company. After the successful conversion went into effect, Fresenius Medical Care received total gross proceeds of approximately € 260 million from this. With the registration of the new legal form as a partnership limited by shares and the new ordinary shares, we successfully completed two significant strategic steps that were launched in 2005. Economic and Business Environment Last year, there were no fundamental changes in the general economic and business environment of our industry. Dialysis is a medically indispensable and lifesaving treatment for acute or chronic kidney failure. At present, there is no direct treatment alternative to dialysis therapy with the exception of a kidney transplant. This means our company is active in a market which, unlike many other industries, is largely unaffected by market fluctuations, and this is reflected in the stable development of our revenue and earnings. This stability – even in economically difficult times – is the result of our vertical integration with a balanced offer of dialysis products and services coupled with relatively constant growth in patient numbers. As an essential component of patient care, dialysis services are not susceptible to economic fluctuations. The same applies to dialysis products, since the majority of the dialysis-related supplies are single-use disposables. They account for 25 % of our total revenue. However, even our company could not free itself completely from the effects of long-term global economic downturns. Summary Apart from the acquisition of RCG, the share conversion and the change of legal form, there were no major events which had a significant influence on the operating business or the legal structure of Fresenius Medical Care in 2006. Both our dialysis services and our dialysis products contributed to the positive business performance, in North America as well as in other regions in which our company is active. Fresenius Medical Care 2006
Comparison of the Actual Business Results with Forecasts In the fiscal year 2006, Fresenius Medical Care underwent a particularly positive development. We either reached or partially significantly exceeded our targets set at the beginning of 2006. We achieved record sales and earnings. Our forecasts for the fiscal year were based on the closing of the acquisition of Renal Care Group (RCG) in the first quarter of 2006. We kept this deadline – see “Events Significant for the Business Development” starting on page 63 . At the beginning of 2006, we had expected to achieve revenue of $ 8.1 billion for the full year. Due to our positive operating performance in the first nine months, with revenue increases in dialysis services and products, as well as the successful integration of RCG, we upgraded our guidance for the full year, raising our revenue forecast to approximately $ 8.4 billion. At the end of 2006, our revenue amounted to $ 8.5 billion, which was slightly above our target. Originally, we expected our net income for 2006 to be $ 515 to $ 535 million. We also raised this forecast after the first nine months of the year, expecting a growth in net income of at least 18 % to some $ 557 million. With a net income of $ 584 million at the end of 2006, we exceeded our target in this respect as well. In the outlook for 2006, one-time expenses in connection with the acquisition of RCG as well as the change of the accounting principle for stock options SFAS 123(R) were not taken into account in order to illustrate the company’s operative development. Fresenius Medical Care initially expected these two effects to reduce the Company’s after-tax earnings by around $ 50 million; after nine months, this figure was adjusted to some $ 44 million. At the end of 2006, the one-time costs amounted to $ 47 million and were thus within the range forecast. Including these expenses, we increased our net income for 2006 by 18 % to $ 537 million. Possible additional influences resulting from the sale of dialysis clinics in conjunction with the RCG acquisition could not be assessed when the Annual Report 2005 was printed. The actual net proceeds from the sale of clinics in 2006 amounted to $ 40 million and were included in the operating income. According to the tax balance sheet, the carrying value of the clinics was less than the fair value, and so the sale of the clinics result- 65 Objectives and Results for 2006 objectives 2006 Results 2006 Objective reached Revenue (constant currency) Net income 1 Capital expenditures and acquisitions (excl. RCG) Debt / EBITDA ratio Employees (full-time equivalents) Dividend $ 8.4 billion ≥ $ 557 million ~ $ 550 million Below 3.5 More than 56,000 Continuous increase $ 8.5 billion $ 584 million $ 609 million 3.23 56,803 Proposal of a dividend increase by 15 % per ordinary share ✓ ✓ ✓ ✓ ✓ ✓ Research and Development expenditures Product innovations ~ $ 60 million Further expansion of products and services range $ 51 million New PD solutions introduced and online-HDF further expanded ✓ 1 Excluding one-time effects and FAS 123(R) Fresenius Medical Care 2006
Page 1 and 2: 02. 1-6 With more than 56,000 emplo
Page 3 and 4: Our Fiscal year 02. 1 02. 1 Operati
Page 5 and 6: Path 2: Acquisitions. We intend to
Page 7 and 8: In addition, our development depart
Page 9 and 10: on the basis of growing clinical ex
Page 11 and 12: Asia While Japan’s gross domestic
Page 13 and 14: dialysis and about 165,000 receive
Page 15 and 16: As in previous years, many healthca
Page 17: Dialysis machines constitute anothe
Page 21 and 22: The Management’s General Assessme
Page 23 and 24: In terms of dialysis products, we w
Page 25 and 26: Europe, including the Middle East a
Page 27 and 28: egarding stock options and the incr
Page 29 and 30: Financing Detailed information on f
Page 31 and 32: of existing production facilities i
Page 33 and 34: The Group has no significant accrua
Page 35 and 36: is among our most important goals.
Page 37 and 38: departments enter into outline cont
Page 39 and 40: Quality and Environmental Managemen
Page 41 and 42: Clinical Databases Clinical databas
Page 43 and 44: In addition, we received regulatory
Page 45 and 46: combines RCG’s industry-leading s
Page 47 and 48: - In April 2006, new guidelines wer
Page 49 and 50: titative appraisals of the likeliho
Page 51 and 52: Risks in the Healthcare Industry Ri
Page 53 and 54: possibility of default. Please see
Page 55 and 56: to page 95 of the Consolidated Fina
Page 57 and 58: 02. 6 Outlook Business Policy Frese
Page 59 and 60: dialysis will remain the treatment
Page 61 and 62: Employees At this point, Fresenius

Operations and Business Environment - Fresenius Medical Care

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