20-F 1 f03029e20vf.htm FORM 20-F e20vf
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
 
FORM 20-F
 
     
(Mark One)
o
  REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR(g) OF THE SECURITIES EXCHANGE ACT OF 1934
    OR
þ
  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    For the fiscal year ended December 31, 2008
OR
o
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    For the transition period from          to
    OR
o
  SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    Date of event requiring this shell company report
Commission file number 001-32749
 
 
 
 
FRESENIUS MEDICAL CARE AG & Co. KGaA
(Exact name of Registrant as specified in its charter)
 
FRESENIUS MEDICAL CARE AG & Co. KGaA
(Translation of Registrant’s name into English)
 
Germany
(Jurisdiction of incorporation or organization)
 
 
 
 
Else-Kröner Strasse 1, 61352 Bad Homburg, Germany
(Address of principal executive offices)
 
Josef Dinger, +496172 609 2522, Josef.Dinger@FMC-AG.com,
Else-Kröner Strasse 1, 61352 Bad Homburg, Germany
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)
     Securities registered or to be registered pursuant to Section 12(b) of the Act:
 
     
Title of each class
 
Name of each exchange on which registered
 
American Depositary Shares representing Preference Shares
  New York Stock Exchange
Preference Shares, no par value
  New York Stock Exchange(1)
American Depositary Shares representing Ordinary Shares
  New York Stock Exchange
Ordinary Shares, no par value
  New York Stock Exchange(1)
(1)  Not for trading, but only in connection with the registration of American Depositary Shares representing such shares.
 
Securities registered or to be registered pursuant to Section 12(g) of the Act: None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
77/8% USD Trust Preferred Securities due 2011
73/8% Euro Trust Preferred Securities due 2011
67/8% Senior Notes due 2017
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report:
Preference Shares, no par value: 3,778,087
Ordinary Shares, no par value: 292,786,583
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Security Act.
Yes þ          No o
 
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
Yes o          No þ
 
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.
Yes þ          No o
 
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):
 
         
         
Large accelerated filer þ
  Accelerated filer o   Non-accelerated filer o
 
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
 
þ U.S. GAAP
 
o International Financial Reporting Standards as issued by the International Accounting Standards Board
 
o Other
 
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow:
 
o  Item 17
 
o  Item 18
 
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).
Yes o          No þ
 


 

 

TABLE OF CONTENTS
 
                         
           
Page
 
           
                       
        N/A     Identity of Directors, Senior Management and Advisors     3  
        N/A     Other Statistics and Expected Timetable     3  
              Key Information     3  
              Information on the Company     10  
        N/A     Unresolved Staff Comments     43  
              Operating and Financial Review and Prospects     43  
              Directors, Senior Management and Employees     62  
              Major Shareholders and Related Party Transactions     75  
              Financial Information     79  
              The Offer and Listing Details     80  
              Additional Information     82  
              Quantitative and Qualitative Disclosures About Market Risk     95  
        N/A     Description of Securities other than Equity Securities     99  
                       
        N/A     Defaults, Dividend Arrearages and Delinquencies     99  
              Material Modifications to the Rights of Security Holders and Use of Proceeds     99  
              Disclosure Controls and Procedures     99  
              Management’s annual report on internal control over financial reporting     99  
              Attestation report of the registered public accounting firm     100  
              Audit Committee Financial Expert     100  
              Code of Ethics     100  
              Principal Accountant Fees and Services     100  
        N/A     Exemptions from the Listing Standards for Audit Committees     101  
              Purchase of Equity Securities by the Issuer and Affiliated Purchaser     101  
              Corporate Governance     101  
                       
        N/A     Financial Statements     107  
              Financial Statements     107  
              Exhibits     108  
N/A means: Not applicable
 Exhibit 2.18
 Exhibit 2.19
 Exhibit 2.24
 Exhibit 2.25
 Exhibit 12.1
 Exhibit 12.2
 Exhibit 13.1
 Exhibit 14.1


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INTRODUCTION
 
Certain Defined Terms
 
In this report, (1) the “Company” refers to both Fresenius Medical Care AG prior to the transformation of legal form discussed in Item 4.A, “Information on the Company — History and Development of the Company — History” below and to Fresenius Medical Care AG & Co. KGaA after the transformation; (2) “we” and “our” refers either to the Company or the Company and its subsidiaries on a consolidated basis both before and after the transformation, as the context requires; (3) “Fresenius Medical Care AG” and “FMC-AG” refers to the Company as a German stock corporation before the transformation of legal form and “FMC-AG & Co. KGaA” refers to the Company as a German partnership limited by shares after the transformation; (4) “FMCH” and “D-GmbH” refer, respectively, to Fresenius Medical Care Holdings, Inc., the holding company for our North American operations and to Fresenius Medical Care Deutschland GmbH, one of our German subsidiaries; (5) “Fresenius SE” refers to Fresenius SE, a European Company (Societas Europaea) previously called Fresenius AG, a German stock corporation which, prior to the transformation of our legal form, held approximately 51.8% of our voting shares, and refers to that company both before and after the conversion of Fresenius AG from a stock corporation into a European Company on July 13, 2007; (6) “Fresenius AG” refers to Fresenius AG before its conversion from a stock corporation into a European Company on July 13, 2007; and (7) “Management AG” refers to Fresenius Medical Care Management AG, the Company’s general partner and a wholly owned subsidiary of Fresenius SE.
 
Forward Looking Statements
 
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. 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. 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 report or the actual occurrence of the developments described herein. 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 that could cause actual results to differ from our projected results include, among others, the following:
 
  •  changes in governmental and commercial insurer reimbursement for our products and services;
 
  •  reductions in erythropoietin, or EPO, utilization or EPO reimbursement;
 
  •  dependence on government reimbursements for dialysis services;
 
  •  the outcome of ongoing government investigations;
 
  •  the influence of private insurers and managed care organizations and health care reforms;
 
  •  product liability risks;
 
  •  the outcome of ongoing patent litigation;
 
  •  risks relating to the integration of acquisitions and our dependence on additional acquisitions;
 
  •  the impact of currency fluctuations;
 
  •  changes in the cost of pharmaceuticals and utilization patterns;
 
  •  introduction of generic or new pharmaceuticals that compete with our pharmaceutical products;
 
  •  changes in raw material and energy costs; and
 
  •  other statements of our expectations, beliefs, future plans and strategies, anticipated development and other matters that are not historical facts.


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Important factors that could contribute to such differences are noted in this report under “Risk Factors”, “Business Overview” in Item 4, “Information on the Company”, Item 5, “Operating and Financial Review and Prospects” and in “Notes to Consolidated Financial Statements — Note 18 — Legal Proceedings.”
 
Our reported financial condition and results of operations are sensitive to accounting methods, assumptions and estimates that are the basis of our financial statements. The actual accounting policies, the judgments made in the selection 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 our financial statements and the discussion below under “Results of Operations.” For a discussion of our critical accounting policies, see Item 5, “Operating and Financial Review and Prospects — Critical Accounting Policies”.
 
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 compiled using the Company’s Market & Competitor Survey (MCS), an internal information tool created by the Company designed to collect, analyze and communicate relevant market and competition data on the global dialysis market that utilizes annual country-by-country surveys and publicly available information from our competitors. See Item 4.B., “Information on the Company — Renal Industry Overview”. While we believe the information obtained in our surveys and competitor publications to be reliable, we have not independently verified the data or any assumptions our MCS is derived from on which the estimates they contain are based. All information not attributed to publicly available information such as national and multinational renal registries, publications of official organizations or annual reports of other companies in the healthcare industry is unaudited. Market data not attributed to a specific source are our estimates, compiled using our MCS survey.
 
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.


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PART I
 
Item 1.   Identity of Directors, Senior Management and Advisors
 
Not applicable
 
Item 2.   Other Statistics and Expected Timetable
 
Not applicable
 
Item 3.   Key Information
 
Selected Financial Data
 
The following table summarizes the consolidated financial information for our business for each of the years 2008 through 2004. 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 AG Wirtschaftsprüfungsgesellschaft (“KPMG”), an independent registered public accounting firm, audited these financial statements. Statements of operations data for 2008 and 2007 include the results of Renal Care Group, Inc. (“RCG”) and related financing costs for the entire year and statement of operations data for 2006 include the results of RCG and such financing costs from April 1, 2006, the effective date of the RCG acquisition. 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.”
 
                                         
    2008     2007     2006     2005     2004  
    (In millions except share and per share amounts)  
 
Statement of Operations Data:
                                       
Net revenues
  $ 10,612     $ 9,720     $ 8,499     $ 6,772     $ 6,228  
Cost of revenues
    6,983       6,364       5,621       4,564       4,266  
                                         
Gross profit
    3,629       3,356       2,878       2,208       1,962  
Selling, general and administrative
    1,877       1,709       1,549       1,218       1,059  
Gain on sale of dialysis clinics
                (40 )            
Research and development
    80       67       51       51       51  
                                         
Operating income
    1,672       1,580       1,318       939       852  
Interest expense, net
    336       371       351       173       183  
                                         
Income before income taxes
    1,336       1,209       967       766       669  
Net income
  $ 818     $ 717     $ 537     $ 455     $ 402  
                                         
                                         
Weighted average ordinary shares outstanding
    293,233,477       291,929,141       290,621,904       210,000,000       210,000,000  
Basic earnings per Ordinary share and Ordinary ADS
  $ 2.75     $ 2.43     $ 1.82     $ 1.56     $ 1.39  
Fully diluted earnings per Ordinary share and Ordinary ADS
    2.75       2.42       1.81       1.55       1.38  
Basic earnings per Preference share and Preference ADS
    2.78       2.45       1.85       1.58       1.41  
Fully diluted earnings per Preference share and Preference ADS
    2.78       2.44       1.84       1.57       1.40  
Dividends declared and paid per Ordinary share (€)(a)
    0.54       0.47       0.41       0.37       0.34  
Dividends declared and paid per Preference share (€)(a)
    0.56       0.49       0.43       0.39       0.36  
Dividends declared and paid per Ordinary share ($)(a)
    0.85       0.64       0.52       0.47       0.42  
Dividends declared and paid per Preference share ($)(a)
    0.88       0.67       0.55       0.49       0.44  
                                         
Balance Sheet Data at December 31:
                                       
Working capital
  $ 1,068     $ 833     $ 1,036     $ 883     $ 508  
Total assets
    14,920       14,170       13,045       7,983       7,962  
Total long-term debt (excluding current portion)
    4,598       4,668       5,083       1,895       1,824  
Shareholders’ equity
    5,962       5,575       4,870       3,974       3,635  
Capital Stock — Preference shares — Nominal Value
    4       4       4       91       85  
Capital Stock — Ordinary shares — Nominal Value
    363       361       360       271       271  
 
 
(a)  Amounts shown for each year from 2008 to 2004 represent dividends paid in each such year with respect to our operations in the year preceding payment. Our general partner’s Management Board has proposed dividends with respect to our operations in 2008 of €0.58 per Ordinary share and €0.60.per Preference share. These dividends are subject to approval by our shareholders at our Annual General Meeting to be held on May 7, 2009.
 
RISK FACTORS
 
Before you invest in our securities, you should be aware that the occurrence of any of the events described in the following risk factors, elsewhere in or incorporated by reference into this report and other events that we have not predicted or assessed could have a material adverse effect on our results of operations, financial condition and


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business. If the events described below or other unpredicted events occur, then the trading price of our securities could decline and you may lose all or part of your investment.
 
Risks Relating to Litigation and Regulatory Matters.
 
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, 2008, approximately 35% 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.
 
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 20% of total dialysis care revenue in our North America segment for the year ended December 31, 2008. Synthetic EPO is produced in the U.S. by a single source manufacturer, Amgen Inc., under the brand names Epogen® (epoeitin alfa) and Aranesp® (darbepoetin alfa). Our contract with Amgen USA, Inc., a subsidiary of Amgen, Inc. covers the period from October 1, 2006 to December 31, 2011. Pricing is based on Amgen’s list price and is subject to change within certain parameters. Any of the following developments could materially adversely affect our business, financial condition and results of operations: (i) an increase in Amgen’s price for EPO without a corresponding and timely increase in reimbursement for EPO by the Centers for Medicare and Medicaid Services (“CMS”), (ii) 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), (iii) an interruption of supply of EPO, or (iv) decreased utilization of EPO.
 
If we do not comply with the many governmental regulations applicable to our business, 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:
 
  •  the quality, safety and efficacy of medical and pharmaceutical products and supplies;
 
  •  the operation of manufacturing facilities, laboratories and dialysis clinics;
 
  •  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.
 
Failure to comply with one or more of these laws or regulations, may give rise to a number of legal consequences. These include, in particular, monetary and administrative penalties, increased costs for compliance with government orders, 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.
 
The Company’s pharmaceutical products are subject to detailed, rigorous and continually changing regulation by the U.S. Food and Drug Administration (“FDA”), and numerous other national, supranational, federal and state authorities. These include, among other things, regulations regarding manufacturing practices, product labeling, quality control, quality assurance, advertising and post- marketing reporting, including adverse event reports and field alerts due to manufacturing quality concerns. In addition, the Company’s facilities and procedures and those of its suppliers are subject to periodic inspection by the FDA and other regulatory authorities. The FDA may suspend, revoke, or adversely amend the authority necessary for manufacture, marketing, or sale of supplies. The Company and its suppliers must incur expense and spend time and effort to ensure compliance with these complex regulations, and if such compliance is not maintained, could be subject to significant adverse regulatory actions in the future. These possible regulatory actions could include warning letters, fines, damages, injunctions, civil penalties, recalls, seizures of the Company’s products and criminal prosecution. These actions could result in, among other things,


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substantial modifications to the Company’s business practices and operations; refunds, recalls or seizures of the Company’s products; a total or partial shutdown of production in its suppliers’ facilities while the alleged violation is remedied; and withdrawals or suspensions of current products from the market. Any of these events, in combination or alone, could disrupt the Company’s business and have a material adverse effect on the Company’s revenues, profitability and financial condition.
 
We rely upon FMC-AG & Co. KGaA’s 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. 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.
 
FMCH and its subsidiaries, including RCG (prior to the RCG Acquisition), received subpoenas from the U.S. Department of Justice for the Eastern District of Missouri, in connection with a joint civil and criminal investigation. FMCH received its subpoena in April 2005. RCG received its subpoena in August 2005. The subpoenas require production of a broad range of documents relating to FMCH’s and RCG’s operations, with specific attention to documents related to clinical quality programs, business development activities, medical director compensation and physician relationships, joint ventures, and anemia management programs, RCG’s supply company, pharmaceutical and other services that RCG provides to patients, RCG’s relationships to pharmaceutical companies, and RCG’s purchase of dialysis equipment from FMCH. The Office of the Inspector General of the U.S. Department of Health and Human Services and the U.S. Attorney’s office for the Eastern District of Texas have also confirmed that they are participating in the review of the anemia management program issues raised by the U.S. Attorney’s office for the Eastern District of Missouri. On July 16, 2007, the U.S. Attorney’s office filed a civil complaint against RCG and FMCH in its capacity as RCG’s current corporate parent in United States District Court, Eastern District of Missouri. The complaint seeks monetary damages and penalties with respect to issues arising out of the operation of RCG’s Method II supply company through 2005, prior to the date of FMCH’s acquisition of RCG. The complaint is styled United States of America ex rel. Julie Williams et al. vs. Renal Care Group, Renal Care Group Supply Company and FMCH. The Company believes that RCG’s operation of its Method II supply company complied with applicable law and will defend this litigation vigorously. We will continue to cooperate in the ongoing investigation. An adverse determination in this investigation or litigation or any settlement arising out of this investigation or litigation could result in significant financial penalties, and any adverse determination in any litigation arising out of the investigation could have a material adverse effect on the Company’s business, financial condition and results of operations.
 
If our joint ventures violate the law, our business could be adversely affected.
 
A number of the dialysis centers we operate are owned by joint ventures in which we hold a controlling interest and one or more hospitals, physicians or physician practice groups hold a minority interest. The physician owners may also provide medical director services to those centers or other centers we own and operate. The majority of these joint ventures were acquired in the RCG Acquisition. While we have structured our joint ventures to comply with many of the criteria for safe harbor protection under the Federal Anti-Kickback Statute, our investments in these joint venture arrangements do not satisfy all elements of such safe harbor. While we have established comprehensive compliance policies, procedures and programs to ensure ethical and compliant joint venture business operations, if one or more of our joint ventures were found to be in violation of the Anti-Kickback Statute or the Stark Law, we could be required to restructure or terminate them. We also could be required to repay to Medicare amounts received by the joint ventures pursuant to any prohibited referrals, and we could be subject to monetary penalties and exclusion from Medicare, Medicaid and other federal and state health care programs. Imposition of any of these penalties could have a material adverse effect on our business, financial condition and results of operations.
 
Proposals for health care reform could decrease our revenues and operating profit.
 
Many of the countries in which we operate have been considering proposals to modify their current health care systems to improve access to health care and control costs. 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.


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Risks Relating to our Business
 
A significant portion of our North American profits are dependent on the services we provide to a minority of our patients who are covered by private insurance.
 
In recent reviews of dialysis reimbursement, the Medicare Payment Advisory Commission, also known as MedPAC, has noted that Medicare payments for dialysis services are less than the average costs that providers incur to provide the services. Since Medicaid rates are comparable to those of Medicare and because Medicare only pays us 80% of the Medicare allowable amount (the patient, Medicaid or secondary insurance being responsible for the remaining 20%), the amount we receive from Medicare and Medicaid is less than our average cost per treatment. As a result, the payments we receive from private payors both subsidize the losses we incur on services for Medicare and Medicaid patients and generate a substantial portion of the profits we report. We estimate that Medicare and Medicaid are the primary payors for approximately 80% of the patients to whom we provide care in North America but that only 57% of our North America net revenues in 2008 were derived from Medicare and Medicaid. Therefore, if the private payors who pay for the care of the other 20% of our patients reduce their payments for our services, or if we experience a shift in our revenue mix toward Medicare or Medicaid reimbursement, then our revenue, cash flow and earnings would decrease, and our cash flow and profits would be disproportionately impacted.
 
Over the last few years, we have generally been able to implement modest annual price increases for private insurers and managed care organizations, but government reimbursement has remained flat or has been increased at rates below typical consumer price index (“CPI”) increases. There can be no assurance of similar future price increases to private insurers and managed care organizations. Any reductions in reimbursement from private insurers and managed care organizations could adversely impact our operating results. Any reduction in our ability to attract private pay patients to utilize our dialysis services relative to historical levels could adversely impact our operating results. Any of the following events could have a material adverse effect on our operating results:
 
  •  a portion of our business that is currently reimbursed by private insurers or hospitals may become reimbursed by managed care organizations, which generally have lower rates for our services; or
 
  •  a portion of our business that is currently reimbursed by private insurers at rates based on our billed charges may become reimbursed under a contract at lower rates.
 
We are exposed to product liability, patent infringement 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.
 
Healthcare companies are subject to claims alleging negligence, product 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. Healthcare 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 “Notes to Consolidated Financial Statements — Note 18 — Legal Proceedings.”
 
While we have been able to obtain liability insurance in the past to partially cover our business risks, we cannot assure that such insurance will be available in the future either on acceptable terms or at all. In addition, FMCH, our largest subsidiary, is partially self-insured for professional, product and general liability, auto liability and worker’s compensation claims, up to pre-determined levels above which our third-party insurance applies. 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.
 
The Company is vigorously defending certain patent infringement lawsuits described in Note 18 (see “Notes to Consolidated Financial Statements — Note 18 — Legal Proceedings — Commercial Litigation”. While we believe we have valid defenses to these claims, an adverse determination in any of these matters could have a material adverse effect on the Company’s business, results of operations and operating cash flows.
 
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 and


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could be limited by restrictions imposed in the United States of America or other countries competition laws or under our credit agreements. If we make future acquisitions, we may 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. We may also issue ordinary shares for non-cash consideration without first offering the shares to our existing shareholders, which could dilute the holdings of these shareholders. Acquisitions that we complete are also subject to risks relating to, among other matters, integration of the acquired businesses (including combining the acquired company’s infrastructure and management information systems with ours, harmonization of its marketing, patient service and logistical procedures with ours and, potentially, reconciling divergent corporate and management cultures), possible non-realization of anticipated synergies from the combination, potential loss of key personnel or customers of the acquired companies, and the risk of assuming unknown liabilities not disclosed by the seller or not uncovered during due diligence. 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 and the continuing consolidation of dialysis providers and combinations of dialysis providers with dialysis product manufacturers could affect future growth of our product sales. 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.
 
We face specific risks from international operations.
 
We operate dialysis clinics in more than 30 countries and sell a range of equipment, products and services to customers in over 115 countries. Our international operations are subject to a number of risks, including but not limited to the following:
 
  •  the economic situation in developing countries could deteriorate;
 
  •  fluctuations in exchange rates could adversely affect profitability;
 
  •  we could face difficulties in enforcing and collecting accounts receivable under some countries’ legal systems;
 
  •  local regulations could restrict our ability to obtain a direct ownership interest in dialysis clinics or other operations;
 
  •  political and economic instability, especially in developing and newly industrializing countries, could disrupt our operations;
 
  •  some customers and governments could have longer payment cycles, with resulting adverse effects on our cash flow;
 
  •  some countries could impose additional taxes or restrict the import of our products; and
 
  •  failure to receive or the loss of required licenses, certifications or other regulatory approvals for operation of dialysis clinics or sale of equipment, products, or services.
 
Any one or more of these or other 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.
 
If physicians and other referral sources cease referring patients to our dialysis clinics or cease purchasing or prescribing 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 ESRD patient, including, but not limited to, the quality of care at a clinic, the competency of a clinic’s staff, convenient scheduling, and a clinic’s location and physical condition. Physicians may change their facility recommendations at any time, which may result in the transfer 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 often 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.


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The decision to purchase our prescribe 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 for 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.
 
Our pharmaceutical product business could lose sales to generic drug manufacturers or new branded drugs.
 
Our branded pharmaceutical product business is subject to significant risk as a result of competition from manufacturers of generic drugs and other new competing medicines or therapies. We are obligated to make certain minimum annual royalty payments under certain of our pharmaceutical product license agreements, irrespective of our annual sales of the licensed products. Either the expiration or loss of patent protection for one of our products, or the “at-risk” launch by a generic manufacturer of a generic version of one of our branded pharmaceutical products or the launch of new branded drugs that compete with one or more of our products, could result in the loss of a major portion of sales of that branded pharmaceutical product in a very short period with no concomitant reduction in our license royalty payment obligations, which could materially and adversely affect 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 and especially new competitive developments 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.
 
Global Economic Conditions May Have an Adverse Effect on Our Businesses.
 
There was a material deterioration of the global economy and tightening of the financial markets in the second half of 2008, and the outlook for the economy in 2009 and beyond is uncertain. We depend on the financial markets for access to capital, as do our renal product customers and commercial healthcare insurers. Limited or expensive access to capital could make it more difficult for these customers to do business with us, or to do business generally, which could adversely affect our businesses. Current conditions in the credit and equity markets, if they continue, could also increase our financing costs and limit our financial flexibility. The continuation, or worsening, of domestic and global economic conditions could continue to adversely affect our businesses 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 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.
 
Diverging views of financial authorities could require us to make additional tax payments.
 
We are in dispute with the German tax authorities and the U.S. Internal Revenue Service (IRS) on certain tax deductions disallowed in past tax audits. We are also 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


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these audits and we may be subject to additional unfavorable adjustments and disallowances. We are contesting, and in some cases appealing or litigating certain of the unfavorable determinations. If our objections, audit appeals or court claims are unsuccessful, we could be required to make additional tax payments. If all potential additional tax payments were to become due contemporaneously, it could have a material adverse impact on our results of operations and operating cash flow in the relevant reporting period. (See Item 5, “Operating and Financial Review and Prospects — B. Liquidity and Capital Resources — Liquidity.”)
 
Risks Relating to our Securities
 
The public market for our preference shares and our preference share ADSs is limited and highly illiquid. The delisting of our preference share ADSs by the New York Stock Exchange would further reduce the U.S. 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, at December 31, 2008, there were only 3,810,540 preference shares outstanding, including 87,091 preference shares in the form of American Depositary Shares. As a result, the public market for our preference shares is limited and highly illiquid. Under NYSE rules, if the number of publicly — held FMC-AG & Co. KGaA preference share ADSs falls below 100,000, the preference share ADSs could be delisted from the NYSE. Without a New York Stock Exchange or a Nasdaq Stock Market listing, the U.S. 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, 2008, we have consolidated debt of $5,738 billion, including $641 million of our trust preferred securities, and consolidated total shareholders’ equity of $5,962 billion, resulting in a ratio of total debt to equity of 0.96. Our substantial level of debt presents 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 2006 Senior Credit Agreement, Senior Notes, European Investment Bank Agreements, 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 senior credit agreement, we are obligated to maintain a minimum consolidated fixed charge ratio (ratio of EBITDAR — consolidated earnings before interest, taxes, depreciation and amortization (EBITDA) plus rent — to consolidated fixed charges) and subject to a maximum consolidated leverage ratio (ratio of consolidated funded debt to EBITDA).
 
Our 2006 Senior Credit Agreement and our indentures include other covenants which, among other things, restrict or have the effect of restricting our ability to dispose of assets, incur debt, pay dividends and other restricted payments, create liens or make 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 SE owns 100% of the shares in the general partner of our Company and is able to exercise management control of FMC-AG & Co. KGaA.
 
Fresenius SE owns approximately 36.3% of our voting ordinary shares and 100% of the outstanding shares of the general partner of the Company. As the sole shareholder of Fresenius Medical Care Management AG, the general partner of the Company, Fresenius SE has the sole right to elect the supervisory board of the general partner which, in turn, elects the management board of the general partner. The management board of the general partner is responsible for the management of the Company. Through its ownership of the general partner, Fresenius SE is able to exercise de facto management control of FMC-AG & Co. KGaA even though it owns less than a majority of our outstanding voting shares. Such de facto control limits public shareholder influence on management of the Company and precludes a takeover or change of control of the Company without Fresenius SE’s consent, either or both of which could adversely affect the prices of our shares.


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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 United States generally accepted accounting principles (“U.S. GAAP”), 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 SE, Fresenius Medical Care Management AG or FMC-AG & Co. KGaA and its affiliates and requires the consent of those independent directors to certain transactions between us and Fresenius SE and its affiliates.
 
We are a “foreign private issuer,” as defined in the SEC’s regulations, and consequently we are not subject to all of the same disclosure requirements applicable to domestic companies. We are exempt from the SEC’s 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 rules applicable to companies listed on 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 U.S. domestic issuers may adversely affect the market prices for our securities.
 
Item 4.   Information on the Company
 
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 originally incorporated on August 5, 1996 as a stock corporation and transformed into a 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 shareholder’s 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 SE and W.R. Grace which we refer to as the “Merger” elsewhere in this report. Pursuant to that agreement, Fresenius SE contributed Fresenius Worldwide Dialysis, its global dialysis business, including its controlling interest in Fresenius USA, Inc., in exchange for 105,630,000 FMC-AG Ordinary shares. Thereafter, we acquired:
 
  •  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 94,080,000 Ordinary shares; and
 
  •  the publicly-held minority interest in Fresenius USA, Inc., in exchange for 10,290,000 Ordinary shares.
 
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.


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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 AG’s 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. 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.
 
Prior to the effectiveness of the transformation, and as approved by the EGM and by a separate vote of the Company’s preference shareholders, 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, which was accepted by the holders of approximately 96% of the outstanding preference shares. Preference shares that were not converted remained outstanding and became preference shares of FMC-AG & Co. KGaA in the transformation.
 
On March 31, 2006, the Company completed the acquisition of Renal Care Group, Inc. (“RCG” and the “RCG Acquisition”), a Delaware corporation with principal offices in Nashville, Tennessee, for an all cash purchase price, net of cash acquired, of approximately $4.2 billion including the concurrent repayment of approximately $657.8 million of indebtedness of RCG. For additional information regarding our recent acquisitions, see Note 2 of Notes to Consolidated Financial Statements, “Acquisitions.”
 
Effective June 15, 2007, we completed a three-for-one share split of our ordinary shares and our preference shares, as approved by our shareholders at the Annual General Meeting held on May 15, 2007. All share and per share amounts in the consolidated financial statements, the related notes and elsewhere in this report have been restated to reflect the share splits.
 
Capital Expenditures
 
We invested, by business segment and geographical areas, the amounts shown in the table below during the twelve month periods ended December 31, 2008, 2007, and 2006
 
                         
    Actual  
    2008     2007     2006  
    (in millions)  
 
Capital expenditures for property, plant and equipment
                       
North America
  $ 385     $ 334     $ 306  
International
    302       239       157  
                         
Total Capital Expenditures
  $ 687     $ 573     $ 463  
                         
Acquisitions
                       
North America
  $ 135     $ 63     $ 4,295  
International
    82       92       25  
Corporate
    107       204        
                         
Total Acquisitions
  $ 324     $ 359     $ 4,320  
                         
 
Major areas of capital 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, Japan, and France and for the capitalization of machines provided to customers primarily in the International segment. We finance our capital expenditures through cash flow from operations or under existing or new credit facilities.
 
For additional information regarding our capital expenditures, See Item 5. B, “Operational and Financial Review and Prospects — Liquidity — Investing.” For information regarding recent acquisitions, see Note 2 of Notes to the Consolidated Financial Statements, “Acquisitions and Investments.”


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B.  Business Overview
 
Our Business
 
We are the world’s 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. See “Renal Industry Overview” below, for a description of our internal information data gathering tool. 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, 2008, we provided dialysis treatment to 184,086 patients in 2,388 clinics worldwide located in more than 30 countries. In the U.S. we also perform clinical laboratory testing and provide inpatient dialysis services and other services under contract to hospitals. In 2008, we provided approximately 27.9 million dialysis treatments, an increase of approximately 5% compared to 2007. We also develop and manufacture a full range of equipment, systems and disposable products, which we sell to customers in over 115 countries. For the year ended December 31, 2008, we had net revenues of $10.6 billion, a 9% increase (8% in constant currency) over 2007 revenues. We derived 66% of our revenues in 2008 from our North America operations and 34% from our international operations.
 
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, 2008, 2007 and 2006.
 
                         
    2008     2007     2006  
    (in millions)  
 
North America
                       
Dialysis Care
  $ 6,247     $ 6,002     $ 5,464  
Dialysis Products
    758       661       561  
                         
      7,005       6,663       6,025  
International
                       
Dialysis Care
    1,490       1,211       913  
Dialysis Products
    2,117       1,846       1,561  
                         
      3,607       3,057       2,474  
 
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. As a global market leader in dialysis products and dialysis services, Fresenius Medical Care considers it important to possess accurate and current information on the status and development of the global, regional and national markets.
 
To obtain this information, Fresenius Medical Care created an internal information tool called Market & Competitor Survey (MCS). The MCS is used within the Company as a tool to retrieve current, accurate and essential information on the dialysis market, developing trends, the market position of Fresenius Medical Care and those of its competitors. The country — by — country surveys performed at the end of each calendar year focus on the total number of patients treated for ESRD, the treatment modality selected, products used, treatment location and ESRD patient care structure. The survey has been refined over the years to facilitate access to more detailed information and to reflect changes in the development of therapies and products. Its modular design allows the information from different countries to be consolidated. The questionnaires are distributed to professionals in the field of dialysis who are in a position to provide ESRD-relevant country specific information themselves or who can coordinate appropriate input from contacts with the relevant know-how in each country. The surveys are then centrally validated by cross-referencing them with the most recent sources of national ESRD information (e.g. registry data or publications if available) and with the results of earlier surveys performed in previous years. In addition, replies are subjected to a validation process whereby input fields with related information are linked and checked for consistency. All information received is consolidated at a global and regional level and analyzed and reported together with publicly available information published by our competitors.
 
Except as otherwise specified below, all patient and market data in this Report has been derived using our MCS.


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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.
 
Approximately 530,000 kidney patients lived with a transplanted kidney at the end of 2008. However, for many years the number of donated organs worldwide has continued to be significantly lower than the number of patients on transplant waiting lists. Consequently, less than one quarter of the global ESRD population lives with a donor organ. Despite ongoing efforts by many regional initiatives to increase awareness of and willingness for kidney donation, the distribution of patients between the various treatment modes has remained nearly unchanged over the past ten years. In both the U.S. and Germany, less than 30% of all ESRD patients live with a functioning kidney transplant and more than 70% require dialysis.
 
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 approximately 2.3 million at the end of 2008. Of these patients, we estimate that around 1.77 million were undergoing dialysis treatment, and approximately 530,000 people were living with kidney transplants. Of the estimated 1.77 million dialysis patients treated in 2008, approximately 1.58 million received HD and about 190,000 received PD. Generally, an ESRD patient’s physician, in consultation with the patient, chooses the patient treatment method, which is based on the patient’s medical conditions and needs. The number of dialysis patients grew by approximately 7% in 2008.
 
Our MCS indicates that the present annual patient growth rate in the U.S. is around 3-4% per year, while in many developing countries we see annual growth rates in the range of 10%. We believe that worldwide growth will continue at around 6% per year. Our MCS also indicates that Japan is the second largest dialysis market in the world with approximately 290,000 dialysis patients being treated at the end of 2008. In addition, our MCS shows that at the end of 2008, there were approximately 445,000 patients in North America (including Mexico), approximately 300,000 dialysis patients in Europe, approximately 220,000 patients in the Middle East and Africa, approximately 185,000 patients in Latin America (excluding Mexico), and nearly 620,000 patients in Asia (including Japan).
 
Dialysis patient growth rates vary significantly from region to region. A below average increase in the number of patients is experienced in the U.S., Western and Central Europe where patients with terminal kidney failure have had readily available access to treatment, usually dialysis, for many years. In contrast, growth rates in the economically weaker regions were above average, reaching double digit figures. We estimate that about 21% of world — wide patients are treated in the U.S., approximately 16% in Japan and around 17% in the 27 countries of the European Union. The remaining 46% of all dialysis patients are distributed throughout more than 120 countries in different geographical regions.
 
We believe that the continuing growth in the number of dialysis patients is principally attributable to:
 
  •  increased general life expectancy and the overall aging of the general U.S. and European population;
 
  •  shortage of donor organs for kidney transplants;
 
  •  improved dialysis technology that makes life-prolonging dialysis available to a larger patient population;
 
  •  greater access to treatment in developing countries; and
 
  •  better treatment and survival of patients with hypertension, diabetes and other illnesses that lead to ESRD.
 
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


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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 patient’s 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 our estimates, there are approximately 5,000 Medicare-certified ESRD treatment clinics in the U.S. Ownership of these clinics is characterized by a relatively small number of chain providers owning 70-75% of the clinics, of which we are the largest, and a large number of providers each owning 10 or fewer clinics. We estimate that there were approximately 5,000 dialysis clinics in the European Union, of which about 62% are government-owned, approximately 22% are privately owned, and nearly 16% are operated by health care organizations. In Latin America, privately owned clinics predominate, comprising over 84% of all clinics providing dialysis care.
 
According to our MCS, hemodialysis patients represented about 93% of all dialysis patients in the U.S., approximately 96% of all dialysis patients in Japan, and, 91% in the European Union and 84% in the rest of the world. Based on these data, it is clear that 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 patient’s 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
 
Growth Objectives
 
GOAL 10 is our long-term strategy for sustained growth through 2010. The strategy was implemented in the spring of 2005. Our GOAL 10 objectives, and our annual progress toward achieving those objectives, are as follows:
 
                                             
    Annual Progress           GOAL
    2004     2005     2006     2007     2008     2010
 
Revenue ($ in million)
  $ 6,228     $ 6,772     $ 8,499     $ 9,720     $ 10,612     $>11,500
Annual revenue growth at constant currency
    10%       8%       25%       12%       8%     ~6–9%
Share of dialysis market*
    12%       12.9%       15.5%       16.8%             ~18%
Market volume* ($ in billion)
  $ ~50     $ ~52,5     $ ~55     $ ~61,5     $       $ ~67
Annual net income growth percentage**
    21%       17%       24%       25%       14%     Low to mid teens
 
 
Company estimates
 
**  2005 excluding one-time effects, 2006 excluding one-time effects and FAS 123(R) and 2007 excluding one-time effects
 
We increased our long-term revenue goals in 2006. Our aim now is to generate revenue greater than $11.5 billion by 2010 — $1.5 billion more than originally planned. We expect to have an 18% share of the worldwide dialysis market in 2010; we had previously estimated it would be approximately 15%.
 
Growth Paths
 
GOAL 10 defines four paths that the Company intends to take in order to perform successfully in a broader spectrum of the global dialysis market and to achieve our growth and profitability objectives:
 
Path 1: Organic Growth
 
In the coming years, we intend to achieve an annual organic sales growth in dialysis care of 5% to 6%. To meet this goal, we are further expanding our offer of integrated, innovative treatment concepts such as UltraCare® and


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Cardioprotective Hemodialysis, which uses our BCM monitor to measure patient water levels, a major factor in the cardiovascular health of dialysis patients (see “Item 5.C., Research and Development”) and combining these treatments, for example, with our dialysis drugs. With these measures, we want our portfolio of services to stand out from those of our competitors. In addition, we plan to increase our growth in revenue by opening new dialysis clinics (including 70-80 new clinics annually in the U.S. alone over the next three years) and to further increase the number of patients whose treatments are covered by private health insurance.
 
We also intend to continue to innovate with dialysis products. New high-quality products such as the 5008 therapy system and cost-effective manufacturing are intended to contribute significantly to the further growth of our dialysis products sector.
 
Path 2: Acquisitions
 
We intend to make attractive, targeted acquisitions broadening our network of dialysis clinics. In North America we want to expand our clinic network in particularly attractive regions. The acquisition of Renal Care Group is an excellent example of this type of expansion although subsequent acquisitions have had and future acquisitions in North America will have a smaller financial scope.
 
Outside North America, we intend to participate in the privatization process of healthcare systems and seek to achieve above-average growth in Eastern Europe and Asia; acquisitions will support these activities. In our clinic network outside North America, we continue to focus on improving our strategic position in selected markets. We expect the number of our dialysis clinics in Europe, the Middle East and Africa to increase from 400 today to more than 500 by 2010. We plan to provide dialysis treatment for more than 40,000 patients in this region by 2010, compared to approximately 29,840 patients in 2008.
 
Path 3: Horizontal Expansion
 
We plan on opening up new growth opportunities in the dialysis market by expanding our product portfolio beyond patient care and dialysis products. To this end, beginning in 2006 we increased our activities in some areas of dialysis medication and will continue to do so in the future. Initially, we focused on drugs regulating patients’ mineral and blood levels, including phosphate binders, iron and Vitamin D supplements and calcimimetics. High phosphate levels in the blood can lead to medium-term damage of patients’ bones and blood vessels. In 2006, we acquired the PhosLo® phosphate binder business of Nabi Biopharmaceuticals, and in 2008 we entered into license and distribution agreements to market and distribute intravenous iron products such as Venofer® and Ferinject® for dialysis treatment. See the discussion of “Renal Pharmaceuticals” below.
 
Path 4: Home Therapies
 
Around 11% of all dialysis patients perform dialysis at home, principally PD, with the remaining 89% treated in clinics. Still, we aim to achieve a long-term leading global position in the relatively small field of home therapies, including peritoneal dialysis and home hemodialysis. To achieve this goal, we can combine our comprehensive and innovative product portfolio with our expertise in patient care. In 2007 we acquired Renal Solutions, Inc. which owns technology that can be utilized to significantly reduce water volumes used in hemodialysis, an important step in advancing home hemodialysis.
 
We expect these strategic steps, expansion of our product portfolio horizontally through an increase of our dialysis drug activities (Path 3), further development of our home therapies (Path 4) and organic growth in dialysis services (Path 1), to produce average annual revenue growth of about 6% to 9%, reaching more than $11.5 billion in 2010. Our annual net income growth, in percent, is expected to range in the low to mid teens by 2010, assuming constant currencies in 2009 and 2010.
 
Our Competitive Strengths
 
We believe that we are well positioned to meet our strategic objectives. Our competitive strengths include:
 
Our Leading Market Position
 
We are the world’s 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. 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.


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Our Full Spectrum of Dialysis and Laboratory Services
 
We provide expanded and enhanced patient services, including renal pharmaceutical products and laboratory services, to both our own clinics and those of third parties. We have developed disease state management methodologies, which involve the coordination of holistic patient care for ESRD patients and which we believe are attractive to managed care payors. We provide ESRD and chronic kidney disease management programs to about 4,000 patients. We also operate a surgical center for the management and care of vascular access for ESRD patients, which can decrease hospitalization.
 
Differentiated Patient Care Programs from those of our Competitors
 
We believe that our UltraCare® Patient Care program offered at our North American dialysis facilities distinguishes and differentiates our patient care from that of our competitors. UltraCare® represents our commitment to deliver excellent care to patients through innovative programs, the latest technology, continuous quality improvement and a focus on superior customer service. UltraCare® is delivered by highly trained staff, and demonstrated through dedication, leadership and compassion by every team member, every day.
 
Our Reputation for High Standards of Patient Care and Quality Products and our Extensive Clinic Network
 
We believe that our reputation for providing high standards of patient care is a competitive advantage. 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. Our extensive network of dialysis clinics enables physicians to refer their patients to conveniently located clinics.
 
Our Position as an Innovator in Product and Process Technology
 
We are committed to technological leadership in both hemodialysis and peritoneal dialysis products. Our research and development teams focus on 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. 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.
 
Our 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.
 
Our Worldwide Manufacturing Facilities
 
We operate state-of-the-art production facilities in all major regions — North America, Europe, Latin America and Asia-Pacific — to meet the demand for our dialysis products, including dialysis machines, dialyzers, and other equipment and disposables. We have invested significantly in developing proprietary processes, technologies and manufacturing equipment which we believe provides a competitive advantage in manufacturing our products. Our decentralized manufacturing structure adds to our economies of scale by reducing transportation costs.
 
Dialysis Care
 
Dialysis Services
 
We provide dialysis treatment and related laboratory and diagnostic services through our network of 2,388 outpatient dialysis clinics, 1,686 of which are in North America (including Mexico) and 702 of which are in more than 28 countries outside of North America. Our operations within North America generated 81% of our 2008 dialysis care revenue and outside North America generated 19%. Our dialysis clinics are generally concentrated in areas of high population density. In 2008, we acquired a total of 48 existing clinics, opened 127 new clinics and sold or consolidated 25 clinics. The number of patients we treat at our clinics worldwide increased by about 6%, from 173,863 at December 31, 2007 to 184,086 at December 31, 2008. For 2008, dialysis services accounted for 73% of our total revenue.


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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:
 
  •  our reputation for quality patient care and treatment;
 
  •  our extensive network of dialysis clinics, which enables physicians to refer their patients to conveniently located clinics; and
 
  •  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 patient’s 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 physician Medical Director. (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 at our dialysis clinics in the U.S. 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 20% of our total dialysis care revenue in our North America segment for the year ended December 31, 2008. 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 U.S. 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 October 2006 to December 2011. See “-Regulatory and Legal Matters — Reimbursement — U.S. — Erythropoetin (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 patient’s 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 patient’s kidneys recover their normal function. We service these patients either at their bedside, using portable dialysis equipment, or at the hospital’s dialysis site. 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 patient’s attending physician, who may be the clinic’s 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.
 
In the more than 28 countries outside North America in which we currently operate or manage dialysis clinics we face legal, regulatory and economic environments varying significantly from country to country. These individual environments can affect all aspects of providing dialysis services including our legal status, the extent to which we can provide dialysis services, the way we have to organize these services and the system under which


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we are reimbursed. (See “— Regulatory and Legal Matters — Reimbursement — International (Including Germany and Other Non-U.S.)” for further discussion of reimbursement.) Our approach to managing this complexity utilizes local management to ensure the strict adherence to the individual country rules and regulations and international functional departments supporting country management with processes and guidelines enabling the delivery of the highest possible quality level of dialysis treatment. We believe that with this bi-dimensional organization we will be able to provide superior care to dialysis patients under the varying local frameworks leading to improved patient well-being and to lower social cost.
 
Fresenius UltraCare® Program
 
The UltraCare® program of our North America dialysis services group represents our commitment to deliver excellent care to patients through innovative programs, state-of-the art technology, continuous quality improvement and a focus on superior patient service. It combines our latest product technology with our highly trained and skilled staff to offer our patients what we believe is a superior level of care. The basis for this form of treatment is the Optiflux® polysulfone single-use dialyzer. Optiflux® single use dialyzers are combined with our 2008tm 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. 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. The Ultracare® program also includes an annual training program for staff recertification. In 2008 we launched UltraCare at Home tm which emphasized patient-centered care: offering the full range of treatment modalities coupled with superior customer service for patients desiring care in the home setting.
 
Laboratory Services
 
We provide laboratory testing and marketing services in the U.S. through Spectra Laboratories (“Spectra”). Spectra 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 patient’s therapy regimen, diet and medicines remain optimal. Spectra, 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, 2008, Spectra performed nearly 52 million tests for approximately 154,000 dialysis patients in over 2,300 clinics across the U.S., including clinics that we own or operate.
 
Acquisitions and Investments
 
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 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.
 
During 2008 and 2007, we had total acquisitions and investments of $324 million and $359 million, respectively. Of the total 2008 acquisitions and investments, we paid aggregate cash consideration of approximately $277 million, approximately $227 million primarily for acquisitions of dialysis clinics and licenses and had an investment in a $50 million loan to Fresenius SE. In 2007, the cash consideration amounted to approximately $263 million, including $120 million as partial consideration for the Renal Solutions Inc. Acquisition. We continued to enhance our presence outside the U.S. in 2008 by acquiring individual or small groups of dialysis clinics in selected markets, expanding existing clinics, and opening new clinics. See Note 2 of Notes to Consolidated Financial Statements, “Acquisition and Investments.”
 
Quality Assurance in Dialysis Care
 
Our quality management activities are primarily focused on comprehensive development and implementation of an Integrated Management System (“IMS”) for quality management. 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 a 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 requirements for quality management systems in


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combination with the ISO 14001 standard for environmental management systems. Our IMS fulfils the ISO-Norm 9001:2000 requirements for quality management systems and links it with the ISO-Norm 14001:2004 for environmental management systems. At the same time, the IMS conforms to the medical devices requirements of ISO-Norm 13485:2003.
 
To evaluate the quality of our dialysis treatments, we make use of quality parameters that are recognized by the dialysis industry, such as hemoglobin values, phosphate levels, Kt/V values (the ratio of treatment length to toxic molecule filtration), albumin levels for assessment of nutritional condition and urea reduction ratio. The number of days a patient spends hospitalized is also an important indicator of treatment quality.
 
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. In 2008, we had 18 more employees qualified to carry out audits in accordance with IMS requirements, especially in the nursing care processes. We introduced our IMS system in 39 dialysis clinics in 2008 and increased the portion of our European clinics that meet the quality management standard of ISO 9001:2000 from 70% to 71%.
 
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 2008, 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.
 
Our principal focus of our research and development activities is the development of new products, technologies and treatment concepts to optimize treatment quality for dialysis patients. See Item 5.C., “Operating and Financial Review and Prospects — Research and Development.”
 
Sources of U.S. Dialysis Care Net Revenue
 
The following table provides information for the years ended December 31, 2008, 2007 and 2006 regarding the percentage of our U.S. dialysis treatment services net revenues from (a) the Medicare ESRD program, (b) private/alternative payors, such as commercial insurance and private funds, (c) Medicaid and other government sources and (d) hospitals.
 
                         
    Year Ended December 31,  
    2008     2007     2006  
 
Medicare ESRD program
    53.2%       53.2%       54.5%  
Private / alternative payors
    37.4%       36.5%       34.4%  
Medicaid and other government sources
    3.8%       4.2%       3.9%  
Hospitals
    5.6%       6.1%       7.2%  
                         
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 patient’s 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 fulfill the requirements of patients and doctors depends significantly on our ability to enlist nephrologists for our dialysis clinics and receive referrals from nephrologists, hospitals and 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


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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 largest competitors in the North America segment are DaVita, Inc., Dialysis Clinic Inc., Renal Advantage Inc. and Diversified Specialty Institutes, Inc. and, in our International segment, our largest competitors are Diaverum (formerly the non-U.S. dialysis services business of Gambro AB), Baxter International Inc., B. Braun Melsungen AG and Euromedic International. 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, of which we are the largest. Over the last decade the dialysis industry has been characterized by ongoing consolidations. In November 2008, DRA Group Holdings, Inc., the parent company of Renal Advantage Inc., the fourth largest provider of dialysis services in the United States, announced the signature of a definitive agreement to acquire National Renal Alliance, LLC the tenth largest provider of dialysis services in the United States.
 
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 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
 
Based on internal estimates prepared using our MCS, publicly available market data and our data of significant competitors, we are the world’s 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 115 countries. Most of our customers are dialysis clinics. For the year 2008, dialysis products accounted for 26% of our total revenue.
 
We produce a wide range of machines and disposables for hemodialysis (“HD”), peritoneal (“PD”) and acute dialysis:
 
  •  HD machines and PD cyclers
 
  •  Dialyzers, our largest product group
 
  •  PD solutions in flexible bags
 
  •  HD concentrates, solutions and granulates


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  •  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 specific instruments for vascular access, heparin (an anticoagulant) as well as other supplies, such as bandages, clamps and injections. We also include our PhosLo® and Venofer® iron products, and other renal pharmaceutical products business as part of our dialysis product revenues.
 
Overview
 
The following table shows the breakdown of our dialysis product revenues into sales of hemodialysis products, peritoneal dialysis products and other dialysis products.
 
                                                 
    Year Ended December 31,  
    2008     2007     2006  
    Total
          Total
          Total
       
    Product
    % of
    Product
    % of
    Product
    % of
 
    Revenues     Total     Revenues     Total     Revenues     Total  
    (in millions)  
 
Hemodialysis Products
  $ 2,291.9       80     $ 2,007.5       80     $ 1,720.7       81  
Peritoneal Dialysis Products
    345.5       12       326.7       13       307.8       14  
Other
    237.4       8       173.1       7       93.1       5  
                                                 
Total
  $ 2,874.8       100     $ 2,507.3       100     $ 2,121.6       100  
                                                 
 
Hemodialysis Products
 
We offer a comprehensive hemodialysis product line. Products include HD machines, modular components for dialysis machines, polysulfone dialyzers, bloodlines, HD solutions and concentrates, needles, connectors, machines for water treatment, data administration systems and dialysis chairs. We also include our PhosLo® and Venofer® iron products, and other renal drug products as part of our dialysis product revenues. 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 4008 Series and Series 5008 dialysis machines worldwide. In North America, we sell our 2008® Series machines, modeled on the 4008 Series sold elsewhere. The 2008/4008 series is the most widely sold machine for hemodialysis treatment. Following the successful launch of the 5008 series in 2005, we concentrated on the continued improvement of the reliable operation of our model 5008 dialysis machine in clinical use and under increasingly varied conditions in international applications during 2008. These efforts for improvement have taken into account considerable feedback from our own dialysis clinics as well as from other customers while focusing on therapeutic, technical, and economic aspects of the machine. The 5008 series is intended to gradually replace most of the 4008 series in the coming years. The successor 5008 contains a number of newly developed technical components for revised and improved dialysis processes and is offering the most efficient therapy modality, Online-Hemodiafilitration, as a standard. Significant advances in the field of electronics enables highly complex treatment procedures to be controlled and monitored safely and clearly through dedicated 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 variety of bloodlines 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 and specialized modules that provide monitoring and response capability for selected biophysical patient parameters, such as body temperature and relative blood volume. Modular design also allows upgrading through module substitution without replacing the entire machine;


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  •  Sophisticated microprocessor controls, displays and/or readout panels that are adaptable to local language requirements;
 
  •  Battery backup, which continues operation of the blood circuit and all protective systems up to 20 minutes following a power failure;
 
  •  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;
 
  •  In the series 5008 and 4008H, the most efficient therapy mode Online-Hemodiafilitration as standard;
 
  •  On-line data collection capabilities and computer interfacing with our TDMS and/or FDS08 systems. 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 computer network;
 
  —  enter nursing records automatically at bedside;
 
  —  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 our F-Series and FX premium series of dialyzers using hollow fiber Fresenius Polysulfone® and Helixone membranes from synthetic materials, including our Optiflux® polysulfone single-use dialyzer. 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 patient’s 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). We recently introduced our Body Composition Monitor for home dialysis, which determines a patient’s body composition (water, body mass and fat) which assesses a patient’s hydration state to assist in determining the patient’s therapy. See Item 5C, “Operating and Financial Review and Prospects — Research and Development.”


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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 in the disconnection step in which the patient connector is closed automatically without the need for manual intervention.
 
  •  Improved biocompatibility.  The new balance and bicaVera® solutions are pH neutral and have very low glucose degradation products providing greater protection for the peritoneal membrane.
 
  •  Environmentally friendly material:  Our stay•safe® 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 time, 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 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 improving the delivered dose of dialysis for certain patients.
 
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:
 
  •  sleep•safe:  The sleep•safe 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:(a) the new Liberty® cycler introduced in 2008 incorporating many new operational and safety features with an innovative piston driven pumping cassette design. (b) the Freedom® and 90/2® cyclers for pediatric and acute markets, (c) the Freedom® Cycler PD+ with IQ cardtm and (d) the Newton IQ® Cycler. The credit card-sized IQcardtm can provide actual treatment details and results for compliance monitoring to the physician and, when used with the Newton IQtm Cycler, can upload the patient’s prescription into the machine. The Newton IQtm 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 Finesse®. 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.
 
Renal Pharmaceuticals
 
We acquired the rights to PhosLo® from Nabi Pharmaceuticals in November 2006. During 2007, we submitted an application to the U.S. FDA to extend the PhosLo® label indication to pre-dialysis patients with chronic kidney disease. We also applied for approval of PhosLo® in selected European countries and of OsvaRen, another phosphate binder that supports bone health, in most EU member states. In October 2008, a generic phosphate binder that competes with PhosLo® was introduced in the U.S. market. See Item 5, “Operating and Financial Review and Prospects — Results of Operations — Year Ended December 31, 2008 Compared to Year Ended December 31, 2007.”
 
In July 2008, we entered into two separate and independent license and distribution agreements, one for the U.S. (with Galenica Ltd. and Luitpold Pharmaceuticals Inc.) and one for certain countries in Europe and the Middle East (with Galenica AG and Vifor (International) AG), to market and distribute intravenous iron products, such as Venofer® and Ferinject®. Both drugs are used to treat iron deficiency anemia experienced by dialysis patients. Venofer® is the leading intravenous iron product worldwide. The agreement concerns all commercialization activities for these intravenous iron products in the field of dialysis and became effective on January 1st, 2009. In North America, the license agreement provides our subsidiary FUSA Manufacturing Inc. (“FMI”) with exclusive


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rights to manufacture and distribute Venofer® to freestanding (non-hospital based) U.S. dialysis facilities and, in addition, grants FMI similar rights for Ferinject® (ferric carboxymaltose), a proposed new intravenous iron medication currently under clinical study in the U.S. The U.S. license agreement has a term of ten years and includes FMI extension options. The International Agreement has a term of 20-years. For additional information regarding the terms of the license, see Note 6, “Intangible Assests and Goodwill — Intangible Assets: License and Distribution Agreements” in the Notes to Consolidated Financial Statements.
 
Our dialysis services include administering EPO, a synthetic engineered hormone used to treat anemia in ESRD patients. We purchase EPO under a multi year contract with Amgen, Inc., the sole U.S. manufacturer (see “— Regulatory and Legal Matters — Reimbursement — U.S. — Erythropoietin (EPO)” below).
 
We estimate that the worldwide market for dialysis drugs (excluding erythropoietin stimulating agents, such as EPO) in 2008 was more than $2.5 billion. As part of our horizontal expansion growth path, we intend to continue to integrate the use of dialysis drugs with our existing product technology, dialysis treatment and laboratory services.
 
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 & Marketing and R&D 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. Sales & Marketing 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.
 
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 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. The St. Wendel training center will increase to about double its current size to help meet the growing demand for qualified employees.
 
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, L’Arbresle, France, Vrsac, Serbia Inukai and Buzen Japan and JiangSu, China 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, including Italy, Great Britain, Spain, Turkey, Serbia, Morocco, Argentina, Brazil, Columbia, Australia, Germany, and the U.S. Our PD products are manufactured in North America, Europe, Latin America, and Asia, with two of our largest plants for production of PD products in Mexico and Japan. Our plant in Reynoso, Mexico is the world’s largest bloodline manufacturing facility. We are also planning for the manufacture of hemodiaylsis


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concentrate and peritoneal dialysis solutions in China. Our facilities are inspected on a regular basis by national and/or international authorities.
 
We estimate that in 2008, we supplied more than 40% of global dialyzer production. Due to the ever-growing demand for dialyzers from Fresenius Medical Care, our production sites in all regions have reached their capacity limits. As a consequence, we are expanding our production capacity for FX-class premium dialyzers in Germany, a project in which we will have invested a total of €39 million in 2008 and by the end of the first quarter of 2009 and which has increased production by 40% from 32 million to 35 million dialyzers. We have also significantly expanded our dialyzer production capacities in the U.S. (Ogden, Utah), from 25 million to 35 million, and a new assembly line scheduled for completion in the fourth quarter of 2009 will further increase capacity by an additional 11 million dialyzers.
 
In 2008, we estimate that we manufactured more than 55% of all dialysis machines produced worldwide. We produce three times more dialysis machines than the second-largest manufacturer. Due to strong demand for our dialysis machines, we increased production of components for these machines for the U.S. market by more than 14% in 2008. We also increased our output outside of North America. In 2008, production of series 4008 and 5008 dialysis machine rose by approximately 19% in these regions as well.
 
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 permitted limits. We provide regular ongoing training for our employees in the areas of quality control and proper production practice. In North America, we are gearing our manufacturing processes to the “Lean Six Sigma” management system which is also utilized in our Schweinfurt facility. The focus of Lean Six Sigma is to achieve a very low error rate which should result in better production results while shortening manufacturing times. Our Integrated Management System (“IMS”) fulfills ISO 9001:2000 requirements for quality control systems in combination with the ISO norm 14001:2004 for environmental control systems. At the same time, IMS conforms to the requirements for medical devices of ISO norm 13485:2003. We have implemented our IMS in all our European production sites. (see also Item 4. Regulatory and Legal Matters — Facilities and Operational Regulations.)
 
Environmental Management
 
We have integrated environmental protection targets into our operations. To reach these goals, our IMS has been in use at our production facilities as well as at a number of dialysis clinics. IMS fulfills the requirements of quality management systems as well as environmental management. Environmental goals are set, adhered to and monitored during all stages of the lives of our products, from their development to their disposal.
 
We continually seek to improve our production processes for environmental compatibility, which frequently generates cost savings. In 2009, we plan to roll-out the efficiency initiative “Energy squeeze” in our main European production plants. The target is to save annually 5% of energy consumption, which would result in cost savings of around €1 million in 2009.
 
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 implemented on a site-by-site basis after evaluation of the site’s performance. More than 145 of our European dialysis clinics are now certified according to the environmental management standard ISO 14001-2004. 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 electricity consumption, and have implemented recycling programs for corrugated materials and hemodialysis machines. Use of heat exchangers enables us to obtain residual heat from water used for industrial purposes, which we use to heat fresh water used for dialysis treatment. Targeted environmental performance criteria 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 and we


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outsource only if we believe that a supplier can exceed our own quality standards. We produce 85% of our dialysis machine components in-house. An interactive information system links all our global projects to ensure that they are standardized and constantly monitored.
 
We focus 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
 
The field of dialysis products is mainly characterized by constant development and refinement of existing product groups and less by break-through innovations. In 2008, we raised the status of Online-hemodiafiltration (“HDF”) from an exclusive technology for just a few users to a standard feature. We also introduced the 5008S hemodialysis machine in the European market. The Company also introduced further software updates for hemodialysis machines. In addition, we continued research to further improve treatment quality both in the clinical and home environment. We have made refinements to the Body Composition Monitor (“BCM”) introduced in 2007 and are researching ways to reduce water consumption per treatment. The actual expenditures on research and development were $80 million (see Item 5.C. “Research and Development”).
 
Patents and Licenses
 
As the owner of patents or licensee under patents throughout the world, we currently hold rights in about 2,400 patents and patent applications 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 DiaSafeplus® filters and FX® dialyzers are also the subject of patents and pending patent applications.
 
The connector-container system for our biBag bicarbonate concentrate powder container for the 4008 dialysis equipment series has been patented in the United States, Norway, Finland, Japan and Europe. The German part of the European patent has been the subject of invalidity proceedings. A first instance court decision in January 2009 confirmed the validity of the patent. For additional information regarding patent infringement claims made against us, see Note 18 of Notes to Consolidated Financial Statements. “Legal Proceedings — Commercial Litigation.”
 
A number of patents and pending patent applications relate to components of the more recent 5008 dialysis equipment series, including, for example, the pump technology, extracorporeal blood pressure measurement and connector system for a modified biBag bicarbonate concentrate container. New applications are also pending relating to our new Liberty® peritoneal dialysis cycler which has a number of innovative attributes such as its multi-channel disposable cassette, dual piston pump and pneumatically locking door.
 
In 2007 Fresenius Medical Care acquired Renal Solutions Inc. and its substantial portfolio of patents and applications for renal sorbent technology. Many of the patents and applications represent new technology that the Company hopes to utilize in future products. We recently filed several new patent applications for improved sorbent designs/formulations developed since the acquisition as well as for future dialysis devices that utilize the acquired technology.
 
One of Fresenius Medical Care AG & Co. KGaA’s more significant patents, the in-line sterilization method patent, will expire in 2010 in Germany, the United States and other countries. The patent for the 4008 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. Our patent for polysulfone hollow fiber has expired in Germany and the United States, among other countries. We believe that even after expiration of patents, our proprietary know how for the manufacture of our 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, Fresenius Medical Care AG & Co. KGaA holds protective rights for our polyolefine film, Biofine®, which is suitable for packaging intravenous and peritoneal dialysis fluids. This film is currently used only in non-U.S. markets. These patents have been granted in Australia, Brazil, Canada, Germany, Europe, South Korea, Belarus and the United States. A Japanese patent was revoked as a result of opposition proceedings. A


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further 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, Germany, Japan, South Korea and the United States. However, proceedings against the registration of this patent are currently pending in Europe. A series of patents covering tubing sets for peritoneal dialysis expire in 2010 and 2012 in the United States.
 
We believe that our success will continue to depend significantly on our technology. As a standard practice, we obtain the 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. From time to time our patents may be infringed by third parties and in such case we will assert our rights. Initially registered patents may also be subject to invalidation claims made by competitors in formal proceedings (oppositions, trials, re-examinations, etc.) either in part or in whole. In addition, technological developments could suddenly and unexpectedly reduce the value of some of our existing intellectual property.
 
Trademarks
 
Our principal trademarks are the name “Fresenius” and the “F” logo, for which we hold a perpetual, royalty-free license from Fresenius SE the 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 Kuraray Medical Co. Ltd., Bellco S.r.l., B. Braun Melsungen AG, Nipro Corporation Ltd., Nikkiso Co., Ltd., Terumo Corporation, Kawasumi Laboratories Inc., Fuso Pharmaceuticals Industries Ltd., and Toray Industries, Inc.
 
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, 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.
 
In 2007, our internal audit department was reorganized and strengthened as a part of the global company risk management system. The department works independently from the regions and the head of the department reports directly to our Chief Financial Officer. The annual audit assignments are selected based on a risk assessment model. The audit plan is reviewed by the management board and finally approved by our Audit and Corporate Governance Committee. The plan consists of financial audits and fullscope audits performed throughout the total company. Audit reports are distributed to the management board. The Audit and Corporate Governance Committee receives the audit results. In 2008, a total of 27 audits was conducted.
 
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. This report includes our management’s report on its review of the effectiveness of our internal accounting controls as of December 31, 2008.


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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, compliance with labor laws, 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 establish regulatory processes that must be satisfied prior 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:
 
  •  failure to receive required licenses, certifications or other approvals for new facilities or products or significant delays in such receipt;
 
  •  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
 
  •  changes resulting from health care reform or other government actions that reduce reimbursement or reduce or eliminate coverage for particular services we provide.
 
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 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 operating 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 health care laws that may create further restrictions.
 
FMCH’s corporate integrity agreement with the U.S. government expired in 2008.
 
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 FDA’s Quality System Regulation (21 C.F.R. Part 820) requirements and other regulations. These regulations require us to manufacture products in accordance with current Good Manufacturing Practices (“GMP”) and that we comply with FDA requirements regarding the design, safety, labeling, record keeping and distribution of our products. In 2006, our production site for dialyzers in St. Wendel successfully passed an FDA GMC audit conducted by TÜV Süd Product Service Munich under the mutual recognition agreement between the European Union and the U.S. Further,


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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. In addition, the FDA prohibits us from promoting a product 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, dialyzers, bloodlines and other disposables) for human use, we must satisfy mandatory procedures and safety and efficacy requirements established by the FDA or comparable 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 approval or 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 or cleared by the FDA as safe and effective for their intended use prior to being marketed.
 
Some of our products — including our peritoneal dialysis solutions, PhosLo®, and Venofer® — are designated as drugs by the FDA and, as such, are subject to additional regulation under the Food, Drug, and Cosmetic Act of 1938, as amended. Many of these requirements are similar to those for devices. Thus, we are required to register with the FDA and are required to comply with regulatory requirements regarding drug manufacturing, labeling, distribution, and recordkeeping. Our drug products must be manufactured in accordance with cGMP (21 C.F.R. Part 211), and we are required to provide information to the FDA whenever we become aware of a report of an adverse drug experience associated with the use of one of our drug products that is both serious and unexpected, as defined in FDA regulations. In addition, as with our medical devices, our drug products must satisfy mandatory procedures and safety and efficacy requirements in order to market the products. Finally, if the FDA believes that a company is not in compliance with applicable drug regulations, it has similar enforcement authorities as those discussed above with respect to medical devices.
 
International (Including Germany and Other Non-U.S).
 
Most countries maintain different regulatory regimes for medicinal 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 and PhosLo®, are considered medicinal products and are, therefore subject to the specific drug law provisions in the various countries. The European Union has issued a directive on medicinal products, 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 medicinal 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


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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 and a statutory order, Arzneimittel- und Wirkstoffherstellungsverordnung (“AMWHV”), 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 national drug law requirements, with the principles and guidelines of EU-good manufacturing practice (“EU-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 (QP) for the release of the medicinal product into the market 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 for Germany, a Qualified Person for Pharmacovigilance (QPP) for the European Union) and an information officer. It is the responsibility of the QP to ensure that each batch of the medicinal products is produced and examined in compliance with the statutory provisions of the AMG. The QPP must, among other things, collect and assess any reported risks associated with the medicinal products and coordinate any necessary measures according to German Drug Law. The QPP, residing within the European Economic Area, is responsible for pharmacovigilance and the establishment of a system for handling of all suspected adverse reactions that need to be reported. 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. Material regulations concerning manufacture and registration related to medicinal products have been issued by the European Commission and the International Conference on Harmonization of Technical Requirements for Human Use (“ICH”). In particular, the Pharmaceutical Inspection Co-operation Scheme (“PIC/S”) an international treaty, contains rules binding many countries in which medicinal products are manufactured. Among other things, the European Commission, PIC/S, ICH, a.s.o. establish requirements for GMP which are then adopted at the national level. Another international standard, which is non-binding for medicinal products, is the ISO9001:2000 system for assuring quality management system requirements. This system has a broader platform than EU-GMP, which are more detailed and is primarily acknowledged outside the field of medicinal products, e.g., with respect to medical devices.
 
Medical Devices.  In the European Community (“EC”), the requirements to be satisfied by medical devices are laid down in three European directives to be observed by all EC Member States, all Member States of the European Economic Community (“EEC”), 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 June 14, 1993 relating to medical devices, as last amended (“MD Directive”), (3) Directive 98/79/EC of October 27, 1998 relating to in vitro diagnostic medical devices as last amended (“IVD Directive”). In addition, Directive 2001/95/EC of December 3, 2001, as last amended, concerning product safety should be noted. With regard to Directive 93/42/EEC, the Commission submitted an amendment, 2007/47/EC, 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. Member States had until December 21, 2008, to transpose the new Directive into national law, following which there is a transition period for manufacturers to come into compliance by March 21, 2010.
 
According to the directives relating to medical devices, the CE mark (the abbreviation of Conformité Européenne signifying that the device complies with all applicable requirements) shall serve as a general product passport for all Member States of the EC and the EEC. Upon receipt of a CE certificate for a product according to the applicable conformity assessment procedure, e.g. a certified full quality management system for medical devices according to ISO13485:2003 and AC2007, and the documented declaration and proof of conformity of our products to the harmonized European norms (Declaration of Conformity), we as the legal manufacturer are able to mark products as being in compliance with the EC requirements. If able to do so, the manufacturer has to put a “CE”


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mark on the products. Medical devices that do not bear the “CE” mark cannot be imported, sold or distributed within the European Community.
 
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 EC declaration of conformity before placing the medical device on the market. The conformity assessment procedures were standardized by Council Decision 93/465/EEC of July 22, 1993, which established modules for the various phases of the conformity assessment procedures intended to be used in the technical harmonization norms and the rules for the affixing and use of the CE conformity mark. The conformity assessment modules to be used differ depending on the risk class 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 harm 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 (“lay use”), combination devices and accessories 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 an EC declaration of conformity (a 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 relation to their specifications and design. 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 risk categories IIa, IIb and III, 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 from design, manufacture, and distribution, to after sales service.
 
Our Series 4008 dialysis machines and their therapy modifications, our 5008 dialysis machine and its accessories and devices, our PD-NIGHT cycler, our Sleep-safe cycler for automated PD treatment, the multiFiltrate system, 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 Company’s 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 (“HHS”). 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, Environmental Protection Agency, and Occupational Safety and Health Administration (“OSHA”) 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


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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 CMS, an agency within HHS. All of our dialysis centers, and laboratories that furnish Medicare or Medicaid 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.
 
OSHA regulations require employers to provide employees who work with blood or other potentially infectious materials with prescribed protections against blood-borne and air-borne pathogens. The regulatory requirements apply to all health care facilities, including dialysis centers and laboratories, and require employers to make a determination as to which employees may be exposed to blood or other potentially infectious materials and to have in effect a written exposure control plan. In addition, employers are required to provide hepatitis B vaccinations, personal protective equipment, blood-borne pathogens training, post-exposure evaluation and follow-up, waste disposal techniques and procedures, engineering and work practice controls and other OSHA-mandated programs for blood-borne and air-borne pathogens.
 
Some states in which 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 several 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 state’s 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 services and products, we are represented in more than 115 countries throughout the world facing the challenge of meeting the needs of patients in very different economic environments and health care systems.


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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 financing the health care system through tax payments 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.
 
U.S.
 
Dialysis Services.  Our dialysis centers provide outpatient hemodialysis treatment and related services for ESRD patients. In addition, some of the Company’s centers offer services for the provision of peritoneal dialysis and hemodialysis treatment at home, and dialysis for hospitalized patients.
 
The Medicare program is the largest single source of dialysis services revenues from dialysis treatment. For example, in 2008, approximately 53% of North America dialysis services revenues resulted from Medicare’s ESRD program. As a preliminary matter, in order to be eligible for reimbursement by Medicare, ESRD facilities must meet conditions for coverage established by CMS. New conditions for coverage became effective in October of 2008, with the exception of two provisions relating to physical environment and infection control which are effective in February of 2009. We have made the necessary modifications to meet these new requirements.
 
Certain products and services delivered by our dialysis centers are reimbursed by the Medicare program in accordance with a “basic case-mix adjusted prospective system,” which provides a fixed payment for each dialysis treatment, comprised of a composite rate component and a drug add-on adjustment component. The payment rates under this system are now subject to adjustment from time to time through changes in the Medicare statute (in the case of basic services included in the “composite rate”) or through annual adjustments (in the case of a portion of the payment referred to as the “drug add-on adjustment”).
 
For calendar year 2009, CMS has maintained the drug add-on adjustment at the 2008 rate, which resulted in a reduction in the drug add-on adjustment percentage from 15.5 percent to 15.2 percent of the total per-treatment prospective payment. The composite rate, unlike many other payment rates in Medicare, is not automatically updated each year. As a result, this portion of the payment rate has not received an annual update in the absence of a statutory change. In the Medicare Improvements for Patients and Providers Act of 2008 (“MIPPA”), Congress provided for a 1.0 percent increase in the composite rate in each of 2009 and 2010. Further, Congress eliminated a provision that previously paid hospital-based facilities slightly more than independent (or “free-standing”) facilities. Thus, in 2009, all facilities are paid at the 2008 independent facility rate increased by 1.0 percent.
 
CMS updated the wage index adjustment applicable to ESRD facilities from the 25/75 blend between adjustments based on old metropolitan statistical areas (“MSA”) and those based on new core-based statistical areas (“CBSA”) used in 2008. For 2009, CMS completed the transition from the MSA definition to the CBSA definition, and facilities will be paid henceforth according to the CBSA rate.
 
Certain other items and services that we furnish at our dialysis centers are not now included in the composite rate and are eligible for separate Medicare reimbursement. The most significant of these items are drugs or biologicals, such as erythropoietin-stimulating agents (“ESAs”), vitamin D analogs, and iron, which are reimbursed at 106% of the average sales price as reported to CMS by the manufacturer. Products and support services furnished to ESRD patients receiving dialysis treatment at home are also reimbursed separately under a reimbursement structure comparable to the in-center composite rate.
 
Although these reimbursement methodologies limit the allowable charge per treatment, they provide us with predictable per treatment revenues.
 
Any significant decreases in Medicare reimbursement rates could have material adverse effects on our provider business and, because the demand for products is affected by Medicare reimbursement, on our products business. To the extent that increases in operating costs that are affected by inflation, such as labor and supply costs, are not fully reflected in a compensating increase in reimbursement rates, our business and results of operations may be adversely affected.
 
For Medicare-primary patients, Medicare is responsible for payment of 80% of the prospective payment amount and separately reimbursable drugs or biologicals amounts set by Congress 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


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coverage policies of such payors. Each third-party payor, including Medicaid, makes payment under contractual or regulatory reimbursement provisions that 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 of the Department of Health and Human Services, 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.
 
Medicaid Rebate Program and Other Government Drug Pricing Program Requirements.  Manufacturers of drugs that are covered by the Medicaid program or that are reimbursed by Part B of the Medicare program are subject to various price determination and reporting requirements under federal statutes, including the Medicaid and Medicare statutes as well as the Public Health Service Act (PHSA) and the Veterans Health Care Act (VHCA). Compliance with the Medicaid rebate statute, the VHCA, the Medicare statute, and Section 340B of the PHSA requires us to calculate and/or report a number of different pricing metrics (e.g., Average Manufacturer Price (AMP), Best Price (BP), Average Sales Price (ASP), Federal Ceiling Price (FCP), non-federal average manufacturer price (Non-FAMP), and 340B ceiling price) to federal authorities responsible for monitoring and enforcing drug manufacturer compliance with federal law and policy.
 
We participate in the Federal Medicaid rebate program established by the Omnibus Budget Reconciliation Act of 1990, as well as several state supplemental rebate programs, and we make our pharmaceutical products available to authorized users of the Federal Supply Schedule (“FSS”) of the General Services Administration under an FSS contract negotiated by the Department of Veterans Affairs (“DVA”). With the recent acquisition of a license to market and distribute the IV Iron product Venofer® to freestanding dialysis clinics, we also are considered, for statutory price reporting purposes, to be the “manufacturer” of Venofer® which is reimbursed under Part B of the Medicare program. Our products also are subject to a federal requirement that any company participating in the Medicaid rebate or Medicare Part B program extend discounts comparable to the rebates paid to State Medicaid agencies to qualified purchasers under the Public Health Services (“PHS”) pharmaceutical pricing program managed by the Health Resources and Services Administration of HHS (also known as the “340B program” by virtue of the section of the PHSA that created the program). The PHS pricing program extends these deep discounts on drugs to a variety of community health clinics and other entities that receive health services grants from the PHS, as well as hospitals that serve a disproportionate share of poor Medicare and Medicaid beneficiaries.
 
Under the Medicaid rebate program, we pay a rebate to each state Medicaid program based upon sales of our pharmaceutical products that are reimbursed by those programs. Rebate calculations are complex and, in certain respects, subject to interpretations of law, regulation, or policy guidance by us, government or regulatory agencies and the courts. The Medicaid rebate amount is computed each quarter based on our submission to CMS of our current average manufacturer price and best price for our pharmaceutical products. The Veterans Health Care Act of 1992 imposes a requirement that the prices we charge to certain federal entities under the FSS must be no greater than a Federal Ceiling Price determined by applying a statutory discount to the average manufacturer price charged to non-federal customers (a pricing metric referred to as “Non-FAMP”). Because the amount the government pays to reimburse the cost of a drug under Part B of the Medicare program is ordinarily based on the average sales price (“ASP”) charged by the manufacturer to purchasers of the drug, additional price calculation and reporting obligations are imposed on the manufacturers of Part B drugs under that program. Since Venofer® is a Part B drug (i.e., one ordinarily administered incident to a physician service), we are responsible for compiling and utilizing a wide range of sales data elements to determine the ASP of Venofer® marketed under our labeler code, and reporting it to the CMS. We are subject to specific ASP reporting obligations with respect to our Venofer® sales under a consent order issued by the Federal Trade Commission in October 2008 (FTC File No. 081-0146).
 
Government agencies may make changes in program interpretations, requirements or conditions of participation, and retain the right to audit the accuracy of our computations of rebates and pricing, some of which may have or result in implications (such as recoupment) for amounts previously estimated or paid and may have a material adverse effect on the Company’s revenues, profitability and financial condition.
 
Laboratory Tests.  Spectra 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. The centers obtain the laboratory services from laboratories and pay the laboratories for the services. In accordance with industry practice, Spectra usually provides such testing services under capitation agreements with its customers


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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.
 
Second, laboratory tests performed by Spectra for Medicare beneficiaries that are not included in the Composite Rate are billed separately directly to Medicare. Such tests are paid at 100% of the Medicare fee schedule amounts, which vary to some extent across different geographic areas but which cannot exceed national ceilings on payment rates, called national limitation amounts (“NLAs”). The Medicare statute calls for updating the payment rates to reflect inflation by the change in consumer price index. Congress has frequently reduced or eliminated this update, most recently by imposing a five-year freeze for calendar years 2004 through 2008. In MIPPA, Congress specified updates for 2009 to 2013 as the CPI change minus one-half percentage point. For 2009, the increase is 4.5 percent.
 
Erythropoetin stimulating agents.  ESAs, including Epogen® and Aranesp® are used for anemia management of patients with renal disease. The administration of ESAs is separately billable under the Medicare program, and accounted for 20% of our 2007 U.S. dialysis care revenues.
 
Anemia severity is commonly monitored by measuring a patient’s hematocrit, an indicator of the proportion of red blood cells in a patient’s whole blood, or by evaluating a patient’s hemoglobin level. The amount of ESA that is appropriate for a patient varies by several factors, including the severity of the patient’s anemia.
 
We believe our policies on billing for ESAs comply with CMS policies. We have recommended to our treating physicians that they review and understand the package label insert and the K/DOQI guidelines as they make their anemia management decisions.
 
Any of the following changes relating to ESAs could adversely affect our business, and results of operations, possibly materially:
 
  •  future changes in the ESA reimbursement methodology and/or rate;
 
  •  inclusion of ESAs in the Medicare composite rate without sufficient offsetting increases to such rate;
 
  •  reduction in the typical dosage per administration, including by imposition of a requirement to administer ESAs to Medicare beneficiaries subcutaneously rather than intravenously;
 
  •  increases in the cost of ESAs without offsetting increases in the ESA reimbursement rate; or
 
  •  reduction by the manufacturer of ESAs of the amount of overfill in the ESA vials.
 
In 2008, Congress mandated the development of an expanded ESRD bundled payment system for services furnished on or after January 1, 2011. The new law requires CMS to implement by January 1, 2011 a bundled ESRD payment system under which CMS will reimburse dialysis facilities with a single payment for (i) all items and services currently included in the composite rate, (ii) all ESAs and other pharmaceuticals (other drugs and biologicals other than vaccines) furnished to the patients that were previously reimbursed separately, (iii) diagnostic laboratory tests and (iv) other services furnished to individuals for the treatment of ESRD. The initial bundled reimbursement rate will be set based on 98 percent of estimated 2011 Medicare program costs of dialysis care as calculated under the current reimbursement system using the lowest per patient utilization data from 2007, 2008 or 2009. The bundled payment will be subject to case mix adjustments that may take into account individual patient characteristics (e.g., age, weight, body mass) and co-morbidities. Payments will also be adjusted for (i) certain high cost patient outliers due to unusual variations in medically necessary care, (ii) disparately high costs incurred by low volume facilities relative to other facilities and (iii) such other adjustments as the Secretary of HHS deems appropriate. Beginning in 2012, the bundled payment amount will be subject to annual increases based on increases in the costs of a mix of dialysis items and services to be determined by HHS minus 1%. The Act will establish pay-for-performance quality standards that will take effect in 2012. Dialysis facilities that fail to achieve the established quality standards will have payments reduced by 2%. Facility quality standards are expected to be developed in the areas of anemia management, patient satisfaction, iron management, bone mineral metabolism and vascular access. Facility performance scores will be made available to the public. The bundled system will be phased in over four years with full implementation for all dialysis facilities on January 1, 2014. However, providers may elect at any time prior to 2011 to become fully subject to the new system. The Act extends the authority of specialized Medicare Advantage (“MA”) plans to target enrollment to certain populations through December 31, 2010 and revises definitions, care management requirements and quality reporting standards for all specialized plans. CMS is developing and drafting the regulations necessary to implement this new system; details of the system will not be known until CMS issues final regulations sometime in 2010. The Act maintains a moratorium on new specialized MA plans through December 31, 2010. This change will materially affect how the Company is paid for Epogen®


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and other items and services. The Company cannot estimate the overall effect of the new system on its business until adoption of the final CMS regulations.
 
Coordination of Benefits.  Medicare entitlement begins for most patients in the fourth month after the initiation of chronic dialysis treatment at a dialysis center. During the first three months, considered to be a waiting period, the patient or patient’s insurance, Medicaid or a state renal program are responsible for payment.
 
Patients who are covered by Medicare and are also covered by an employer group health plan (“EGHP”) are subject to a 30-month coordination period during which the EGHP is the primary payor and Medicare the secondary payor. During 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 payment. 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
 
Possible Changes in Statutes or Regulations.  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 regulations could, depending upon the detail of the provisions, have positive or adverse effects, possibly material, on our businesses and results of operations.
 
International (Including Germany and Other Non-U.S.)
 
As a global company delivering dialysis care and dialysis products in more than 115 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, the “Bismarck system”, is based on mandatory employer and employee contributions dedicated to health care financing. The British model, the “Beveridge system”, 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, Czech Republic, Poland, Hungary, Turkey and the Netherlands are based on the Bismarck-type system. Countries like Canada, Denmark, Finland, Portugal, Sweden, Taiwan and Italy established their national health services using the Beveridge-type system.
 
Ownership of health care providers and, more specifically dialysis care providers, varies within the different systems and from country-to-country. In Europe about 50% of the clinics providing dialysis care and services are publicly owned, about 35% are privately owned and approximately 15% 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 80% in Australia. Within Europe, nearly 100% of the dialysis population is treated in public clinics in the Netherlands, Finland and Belgium and 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 75% of all clinics providing dialysis care while in Asia, with the exceptions of Japan, Republic of Korea, Taiwan, and Thailand, publicly owned clinics are predominant. In the U.S., less than 2% 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. There are three main types of reimbursement modalities: budget transfer, fee for service and flat rate. In some cases, the reimbursement modality varies within the same country depending on the type of provider (public or private). Budget transfer is a reimbursement modality used mainly for public providers in most of the European countries where the funding is


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based on taxation and in some of the countries where it is based on social security (e.g. Czech Republic). Fee for service is the most common reimbursement modality for private providers in all European countries (with exceptions, such as Hungary, where reimbursement to private providers is based on budget) and for public providers in countries where the funding system is based on social security payments. Germany is the only country in Europe in which the reimbursement modality is a flat weekly rate independent of both the type of provider and the type of dialysis therapy provided.
 
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 likely 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 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%-15% 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 Insurance Portability and Accountability Act of 1996, Civil Monetary Penalties Law, Stark Law and Other Fraud and Abuse Laws in the United States
 
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, the False Claims Act, the Stark Law, and other federal health care 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 often account for all or a significant portion of the patient referral base. An ESRD patient generally seeks treatment at a center that is convenient to the patient and at which the patient’s nephrologist has staff privileges.
 
The U.S. Government, many individual states and private third-party risk insurers have devoted increasing resources to combat fraud, waste, and abuse in the health care sector. The Office of the Inspector General (OIG) of HHS, state Medicaid fraud control units, and other enforcement agencies have dedicated substantial resources to their efforts to detect agreements between physicians and service providers that may violate fraud and abuse laws. In its most recent Work Plan, the OIG identified several types of arrangements and practices worthy of its close scrutiny in the coming year. Several of these are related directly to the delivery of dialysis care, including whether Medicare Part B claims for Epogen administration submitted by dialysis facilities are supported and billed in accordance with Medicare requirements; whether a dialysis facility’s dosing guidelines for erythropoiesis-stimulating agents adhere to FDA labeling recommendations; and laboratory compliance with the current Medicare payment policies for automated multichannel chemistry tests furnished to ESRD beneficiaries.
 
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 and/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.
 
The OIG has the authority to promulgate regulations referred to as “safe harbors” that define certain business relationships and arrangements that would not be subject to civil sanction or criminal enforcement under the Anti-


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Kickback Statute. Failure to comply with a safe harbor provision does not make the activity illegal. Rather, the safe harbors set forth specific criteria that, if fully met, will assure the entities involved of not being prosecuted criminally or civilly for the arrangement under the Anti-Kickback Statute.
 
Many 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 15-30% 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. The False Claims Act generally provides for the imposition of civil penalties of $5,000 to $10,000 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. Some states also have enacted statutes similar to the False Claims Act which may include criminal penalties, substantial fines, and treble damages. Effective, January 1, 2007, section 1909 of the Social Security Act (enacted by section 6031 of the Deficit Reduction Act of 2005) provides a financial incentive for states to enact false claims acts that establish liability to the state for the submission of false or fraudulent claims to the state’s Medicaid program. If a state false claims act is determined to meet certain enumerated requirements, the state is entitled to an increase in the amounts recovered under a state action brought under such law. The OIG, in consultation with the Attorney General of the United States and the Department of Justice, determines whether a state false claims act meets these enumerated requirements to qualify for the added financial incentive. As of January 2009, the OIG reviewed and approved state false claims acts promulgated by California, Georgia, Hawaii, Illinois, Indiana, Massachusetts, Nevada, New York, Rhode Island, Tennessee, Texas, Virginia, and Wisconsin.
 
The Health Insurance Portability and Accountability Act of 1996 (“HIPAA”)
 
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 statutory exception to the Anti-Kickback Statute 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 a federal health care program beneficiary 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 criminal penalties, exclusion from the Medicare and Medicaid programs, 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 Privacy and Security Rules. Health insurance payers and healthcare providers like us must comply with the HIPAA regulations. Violations of these HIPAA regulations may include civil money penalties and potential criminal sanctions.
 
Many states also have enacted state health care privacy laws governing patient information and medical records. The HIPAA Privacy Rule establishes a minimum federal standard for protecting privacy and preempts all contrary state privacy laws. The Privacy Rule does not, however, preempt state privacy laws that are more stringent or more protective. In such instances, we would need to comply with the state privacy law.


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Civil Monetary Penalties Law
 
Individuals or entities who have either (1) directly submitted, or caused to be submitted, claims which are improper or false; (2) arranged or contracted with an individual or entity that the person knows or should know is excluded from participation in federal health care programs; or (3) offered or received kickbacks may also be subject to monetary penalties or exclusion under the Civil Monetary Penalties Law (“CMPL”) at the discretion of the OIG. Penalties are generally not more than $10,000 for each item or service. However, under the CMPL, violators of the federal Anti-Kickback Statute provisions may also be subject to additional civil money penalties of $50,000 per violation. Violators are also subject to an assessment of up to three times the amount claimed for each item or service in lieu of damages sustained by the United States or a state agency because of such claim, or damages of up to three times the total amount of renumeration offered, paid, solicited, or received. In addition, any person or entity who violates this section may be excluded from participation in the federal or state health care programs.
 
Stark Law
 
The original Ethics in Patient Referrals Act of 1989 (commonly referred to as the “Stark Law”) was enacted as part of the Omnibus Budget Reconciliation Act (“OBRA”) of 1989, and prohibits a physician from referring Medicare patients for clinical laboratory services to entities with which the physician (or an immediate family member) has a financial relationship, unless an exception applies. Sanctions for violations of the Stark Law may include denial of payment, refund obligations, civil monetary penalties and exclusion of the provider from the Medicare and Medicaid programs. In addition, 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 1993, known as “Stark II,” amended the Stark Law to revise and expand upon various statutory exceptions, expanded 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. 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, prosthetic devices and supplies; home health services; outpatient prescription drugs; and inpatient and outpatient hospital services. The first phase of Stark regulations was finalized on January 4, 2001. Most portions of the first phase regulations became effective in 2002. The first phase of the final regulations implementing the Stark Law (the “Phase I regulations”) contains an exception for Epogen® 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 Stark regulations was published 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 Epogen® and certain other dialysis-related outpatient prescription drugs furnished in or by an ESRD facility to include certain additional drugs.
 
On September 5, 2007, CMS published Phase III of the Stark regulations. While this rulemaking was intended to be the final phase of the Stark rulemaking process, CMS has continued to address the Stark Law as part of its annual rulemaking process for reimbursement under the Medicare Part B Physician Fee Schedule.
 
Finally, it should be noted that 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.
 
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


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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. Any significant 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.
 
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.”
 


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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 SE or one of its affiliates. These leases are 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
    15,646     leased   December 2016   Corporate headquarters and administration
Bad Homburg, Germany
    4,556     leased   December 2011   Administration Building FMC D-GmbH Central Europe
St. Wendel, Germany
    58,767     leased   December 2016   Manufacture of polysulfone membranes, dialyzers and peritoneal dialysis solutions; research and development
Biebesheim, Germany
    51,300     leased   February 2024   Central Distribution Center
Schweinfurt, Germany
    24,900     leased   December 2016   Manufacture of hemodialysis machines and peritoneal dialysis cyclers; research and development
Bad Homburg (OE), Germany
   
10,304
   
leased
 
December 2016
 
Manufacture of hemodialysis concentrate solutions / Technical Services / Logistics services Amgen
Darmstadt, Germany
    21,597     leased   November 2010   Regional Distribution Center Central Europe
Palazzo Pignano, Italy
    19,990     owned       Manufacture of bloodlines and tubing
L΄Arbresle, France
    13,524     owned       Manufacture of polysulfone dialyzers, special filters and dry hemodialysis concentrates
Nottinghamshire, UK
    5,110     owned       Manufacture of hemodialysis concentrate solutions
Vrsac, Serbia
    2,642     owned       Production area, Laboratory, lobby, maintenance, administration, logistics
Barcelona, Spain
    2,000     owned       Manufacture of hemodialysis concentrate solutions
Antalya, Turkey
    8,676     leased   December 2022   Manufacture of bloodlines
Casablanca, Morocco
    2,823     owned       Manufacture of hemodialysis concentrate solutions
Guadalajara, México
    26,984     owned       Manufacture of peritoneal dialysis bags
Buenos Aires, Argentina
    10,500     owned       Manufacture of hemodialysis concentrate solutions, dry hemodialysis concentrates, bloodlines and desinfectants
São Paulo, Brazil
    8,566     owned       Manufacture of hemodialysis concentrate solutions, dry hemodialysis concentrates, peritoneal dialysis bags, intravenous solutions bags, peritoneal dialysis and blood lines sets
São Paulo, Brazil
    5,000     leased   October 2009   Warehouse
Rio de Janeiro, Brazil
    1,635     leased   Jun 2011   Head Office


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          Currently
       
          Owned
       
    Floor Area
    or Leased
       
    (Approximate
    by Fresenius
  Lease
   
Location
  Square Meters)     Medical Care  
Expiration
 
Use
 
Bogotá, Colombia
    18,947     owned       Manufacture of hemodialysis concentrate solutions, peritoneal dialysis bags, intravenous solutions, administration
Valencia, Venezuela
    3,562     leased   May 2009   Head Office and Warehouse
Buenos Aires, Argentina
    1,800     leased   September 2010   Head Office
Hong Kong
    3,588     leased   November 2009   Various leases of Warehouse facility
Hong Kong
    1,260     leased   February 2012   Corporate headquarters and administration
Suzhou, China (Changshu Plant)
    25,168     owned       Manufacture of hemodialysis bloodline sets / AV Fistula set
Brighton, Australia
    1,200     owned       Dialysis Unit
Altona VIC, Australia
    1,500     leased       Warehouse
Auckland, New Sealand
    1,680     leased   open contract   Warehouse
Selangor, Malaysia
    1,669     leased   November 2011   Administration / Warehouse
Yongin, South Korea
    2,645     leased   December 2009   Warehouse
Seoul, South Korea
    1,905     leased   January 2012   Administration
Oita, Japan (Inukai Plant)
    3,065     owned       Manufacture of polysulfone filters
Fukuoka, Japan (Buzen Plant)
    37,092     owned       Manufacture of peritoneal dialysis bags
Saga, Japan
    6,668     leased   January 2010 with 1 year renewal option   Warehouse
Waltham, Massachusetts
    25,588     leased   April 2017 - July 2017 with a 10 year renewal and a second 5 year renewal option   Corporate headquarters and administration - North America
Lexington, Massachusetts
    6,425     leased   October 2012 with 5 year renewal option   IT headquarters and administration - North America
Nashville, Tennessee
    3,053     leased   April 2009   IT administration / payroll administration
Walnut Creek, California
    9,522     leased   June 2012 with 5-year renewal optioin   Manufacture of Hemodialysis machines and peritoneal dialysis cyclers; research and development; warehouse space
Concord, California
    1,579     leased   February 2009   Warehouse
Pittsburg, California
    5,574     leased   July 2012 with 5 year renewal option   Warehouse
Ogden, Utah
    74,322     owned       Manufacture polysulfone membranes and dialyzers and peritoneal dialysis solutions; research and development
Ogden, Utah
    9,755     leased   July 2033   Plant expansion. Manufacturing operations
Ogden, Utah
    24,452     leased   December 2011   Warehouse
Ogden, Utah
    8,933     leased   December 2011   Warehouse
Ogden, Utah
    2,072     leased   December 2009 year-to-year lease   Warehouse
Oregon, Ohio
    13,934     leased   April 2019   Manufacture of liquid hemodialysis concentrate solutions
Livingston, California
    7,885     leased   December 2011 with a 5-year renewal option   Manufacture of liquid hemodialysis concentrates and resupply
Milpitas, California
    8,670     leased   December 2015 with 5-year renewal option   Clinical laboratory testing - 1 Building
Rockleigh, New Jersey
    9,812     leased   May 2012   Clinical laboratory testing

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          Currently
       
          Owned
       
    Floor Area
    or Leased
       
    (Approximate
    by Fresenius
  Lease
   
Location
  Square Meters)     Medical Care  
Expiration
 
Use
 
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
Province of Quebec, Canada
    1,914     leased   April 2012   Plant Building #1 - Manufacture of dry and liquid concentrates
Province of Quebec, Canada
    3,601     leased   March 2011 with option to cancel in March 2010 with 6 month notification   Warehouse
Broomfield, Colorado
    1,448     leased   February 2010   Call center and clinical operations for Renaissance Health Care (RHC)
Warrendale, Pennsylvania
    1,672     leased   April 2013   RSI administration and research facility
Oklahoma City, OK
    3,427     leased   October 2010   Manufacturer of sorbent cartridges
 
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.”
 
Item 4A.   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 the expectations and beliefs of the management of the Company’s General Partner 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 and are subject to the uncertainties that we described in the discussion in this report entitled “Introduction — Forward-Looking Statements.” (See also “Risk Factors.”)
 
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 Company’s 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 Company’s 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, 2008, the carrying amount of goodwill amounted to $7,310 million and non-amortizable intangible assets amounted to $430 million representing in total approximately 52% of our total assets.

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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 unit’s 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 (“WACC”) specific to that unit. Estimating the discounted future cash flows involves significant assumptions, especially regarding future reimbursement rates and sales prices, treatments and sales volumes and costs. In determining discounted cash flows, the Company utilizes its three-year budget, projections for years 4 to 10 and a range of growth rates of 0% to 4% for all remaining years. The Company’s weighted average cost of capital consists of a basic rate of 6.47% for 2008. This basic rate is then adjusted by a percentage ranging from 0% to 7% for specific country risks within each reporting unit for determining the reporting unit’s fair value.
 
If the fair value of the reporting unit is less than its carrying value, a second step is performed which compares the fair value of the reporting unit’s goodwill to the carrying value of its goodwill. If the fair value of the goodwill is less than its carrying value, the difference is recorded as an impairment.
 
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 unit’s economic environment could affect the discount rate. A decrease in our estimated future cash flows and/or a decline in a reporting unit’s 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 the “Notes to Consolidated Financial Statements — Note 17 — Legal Proceedings” in this report. 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 $2,176 million and $2,027 million at December 31, 2008 and 2007, respectively, net of allowances for doubtful accounts of $263 million and $248 million at December 31, 2008 and 2007, 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 115 countries and dialysis services in more than 30 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


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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 our 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.
 
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 commercial payors, the same type of collection process is initiated as in the US.
 
Due to the number of our 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, 2008 were uncollectible through either a change in our estimated contractual adjustment or as bad debt, our operating income for 2008 would have been reduced by approximately 1%.
 
The following tables show the portion and aging of trade accounts receivable of major debtors or debtor groups at December 31, 2008 and December 31, 2007. No single debtor other than U.S. Medicaid and Medicare accounted for more than 5% of total trade accounts receivable in either year. Trade accounts receivable in the International segment are for a large part due from government or government-sponsored organizations that are established in the


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various countries within which we operate. Amounts pending approval from third party payors represent less than 1% at December 31, 2008.
 
Aging of Net Trade Accounts Receivable by Major Payor Groups:
 
                                                         
    At December 31, 2008  
                overdue
    overdue
                   
          overdue
    more than
    more than
    overdue
          % of
 
          by
    3 months
    6 months
    by
          net
 
          up to
    up to
    up to
    more than
          trade
 
    current     3 months     6 months     1 year     1 year     Total     A/R  
    (in millions)  
 
U.S. Medicare and Medicaid Programs
  $ 311     $ 56     $ 47     $ 34     $ 34     $ 482       22  
U.S. Commercial Payors
    215       176       62       47       41       541       25  
U.S. Hospitals
    83       25       3       1       1       113       5  
Self-Pay of U.S. patients
    1       5       3       2       0       11       1  
Other North America
    7       1       0       0       0       8       0  
International product customers and dialysis payors
    620       185       84       66       66       1,021       47  
                                                         
Total
  $ 1,237     $ 448     $ 199     $ 150     $ 142     $ 2,176       100  
                                                         
 
                                                         
    At December 31, 2007  
                overdue
    overdue
                   
          overdue
    more than
    more than
    overdue
          % of
 
          by
    3 months
    6 months
    by
          net
 
          up to
    up to
    up to
    more than
          trade
 
    current     3 months     6 months     1 year     1 year     Total     A/R  
    (in millions)  
 
U.S. Medicare and Medicaid Programs
  $ 261     $ 63     $ 30     $ 28     $ 19     $ 401       20  
U.S. Commercial Payors
    209       139       57       56       62       523       26  
U.S. Hospitals
    69       39       2       1       1       112       6  
Self-Pay of U.S. patients
    1       2       4       3       1       11       1  
Other North America
    5       1       0       0       0       6       0  
International product customers and dialysis payors
    614       178       75       56       51       974       47  
                                                         
Total
  $ 1,159     $ 422     $ 168     $ 144     $ 134     $ 2,027       100  
                                                         
 
Self-Insurance Programs
 
Under the insurance programs for professional, product and general liability, auto liability and worker’s compensation claims, FMCH, our largest subsidiary, is partially self-insured for professional liability claims. For all other coverages we assume responsibility for incurred claims up to predetermined amounts above which third party insurance applies. Reported liabilities for the year represent estimated future payments 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.
 
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 $65 billion worldwide market with expected annual world-wide patient growth of around 6%. Patient growth results from factors such as the aging population; increasing incidence of diabetes and hypertension, which frequently precede 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.


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For calendar year 2009, CMS has maintained the drug add-on adjustment at the 2008 rate of $0.69 which resulted in a reduction in the drug add-on adjustment from 15.5 percent to 15.2 percent of the total per-treatment prospective payment. The composite rate, unlike many other payment rates in Medicare is not automatically updated each year. As a result, this portion of the payment rate has not received an annual update in the absence of a statutory change. In the Medicare Improvements for Patients and Providers Act of 2008 (“MIPPA”), Congress provided for a 1.0 percent increase in the composite rate in each of 2009 and 2010. Further, Congress eliminated a provision that previously paid hospital-based facilities slightly more than independent (or “free-standing”) facilities. Thus, in 2009, all facilities are paid at the 2008 independent facility rate increased by 1.0 percent. CMS updated the wage index adjustment applicable to ESRD facilities from the 25/75 blend between adjustments based on old metropolitan statistical areas (“MSAs”) and those based on new core-based statistical areas (“CBSAs”) used in 2008. For 2009, CMS completed the transition from the MSA definition to the CBSA definition, and facilities will henceforth be paid according to the CBSA rate. For a discussion of the composite rate for reimbursement of dialysis treatments, see Item 4B, “Business Overview — Regulatory and Legal Matters — Reimbursement”.
 
Certain other items and services that we furnish at our dialysis centers are not now included in the composite rate and are eligible for separate Medicare reimbursement. The most significant of these items are drugs or biologicals, such as erythropoiesis-stimulating agents (“ESAs”), vitamin D analogs, and iron, which are reimbursed at 106% of the average sales price as reported to CMS by the manufacturer. Products and support services furnished to ESRD patients receiving dialysis treatment at home are also reimbursed separately under a reimbursement structure comparable to the in-center composite rate. Although these reimbursement methodologies limit the allowable charge per treatment, they provide us with predictable per treatment revenues.
 
In 2008, Congress mandated the development of an expanded ESRD bundled payment system for services furnished on or after January 1, 2011. The new law requires CMS to implement by January 1, 2011 a bundled ESRD payment system under which CMS will reimburse dialysis facilities with a single payment for (i) all items and services included in the composite rate, (ii) all ESAs and other pharmaceuticals (other drugs and biologicals, other than vaccines) furnished to the patients that were previously reimbursed separately, (iii) diagnostic laboratory tests and (iv) other services furnished to individuals for the treatment of ESRD. The initial bundled reimbursement rate will be set based on 98 percent of estimated 2011 Medicare program costs of dialysis care as calculated under the current reimbursement system using the lowest per patient utilization data from 2007, 2008 or 2009. The bundled payment will be subject to case mix adjustments that may take into account individual patient characteristics (e.g., age, weight, body mass) and co-morbidities. Payments will also be adjusted for (i) certain high cost patient outliers due to unusual variations in medically necessary care, (ii) disparately high costs incurred by low volume facilities relative to other facilities and (iii) such other adjustments as the Secretary of HHS deems appropriate. Beginning in 2012, the bundled payment amount will be subject to annual increases based on increases in the costs of a mix of dialysis items and services to be determined by HHS minus 1%. The Act will establish pay-for-performance quality standards that will take effect in 2012. Dialysis facilities that fail to achieve the established quality standards will have payments reduced by 2%. Facility quality standards are expected to be developed in the areas of anemia management, patient satisfaction, iron management, bone mineral metabolism and vascular access. Facility performance scores will be made available to the public. The bundled system will be phased in over four years with full implementation for all dialysis facilities on January 1, 2014. However, providers may elect at any time prior to 2011 to become fully subject to the new system. The Act extends the authority of specialized Medicare Advantage (“MA”) plans to target enrollment to certain populations through December 31, 2010 and revises definitions, care management requirements and quality reporting standards for all specialized plans. CMS is developing and drafting the regulations necessary to implement this new system; details of the system will not be known until CMS issues final regulations sometime in 2010. The Act maintains a moratorium on the new specialized MA plans through December 31, 2010. This change will materially affect how the Company is paid for Epogen® and other items and services. The Company cannot estimate the overall effect of the new system on its business until adoption of the final CMS regulations.
 
We believe our policies on billing for ESAs comply with CMS policies. We have recommended to our treating physicians that they review and understand the package label insert and the K/DOQI guidelines as they make their anemia management decisions.
 
We have identified three operating segments, North America, International, and Asia Pacific. 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. The general partner’s Management Board member responsible for the profitability and cash flow of each segment’s 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 segment’s controllable revenues and expenses.


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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. Similarly, we do not allocate “corporate costs,” which relate primarily to certain headquarters overhead charges, including accounting and finance, professional services, etc. because we believe that these costs are also not within the control of the individual segments. In addition, certain acquisitions and intangible assets are not allocated to a segment but are accounted for as “corporate”. Accordingly, all of these items are excluded from our analysis of segment results and are discussed below in the discussion of our consolidated results of operations.
 
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.
 
                         
    For the years ended
 
    December 31,  
    2008     2007     2006  
    (in millions)  
 
Total revenue
                       
North America
  $ 7,007     $ 6,664     $ 6,026  
International
    3,688       3,134       2,534  
Corporate
    1       0       0  
                         
Totals
    10,696       9,798       8,560  
                         
Inter-segment revenue
                       
North America
    2       1       1  
International
    82       77       60  
                         
Totals
    84       78       61  
                         
Total net revenue
                       
North America
    7,005       6,663       6,025  
International
    3,606       3,057       2,474  
Corporate
    1       0       0  
                         
Totals
    10,612       9,720       8,499  
                         
Amortization and depreciation
                       
North America
    238       220       187  
International
    171       141       120  
Corporate
    7       2       2  
                         
Totals
    416       363       309  
                         
Operating income
                       
North America
    1,168       1,130       965  
International
    616       544       440  
Corporate
    (112 )     (94 )     (87 )
                         
Totals
    1,672       1,580       1,318  
                         
Interest income
    25       29       21  
Interest expense
    (361 )     (400 )     (372 )
Income tax expense
    (489 )     (466 )     (413 )
Minority interest
    (29 )     (26 )     (17 )
                         
Net Income
  $ 818     $ 717     $ 537  
                         
 
Year ended December 31, 2008 compared to year ended December 31, 2007
 
Highlights
 
Revenues increased by 9% to $10,612 million (8% at constant rates) mainly due to organic growth at 7% and acquisitions at 1%.
 
Operating income (EBIT) increased 6%.


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Net Income increased by 14%.
 
Trust Preferred Securities in the amount of $678 million were redeemed at maturity.
 
In July 2008, we entered into two separate and independent license and distribution agreements to market and distribute intravenous iron products, such as Venofer® and Ferinject®.
 
Consolidated Financials
 
Key Indicators for Consolidated Financials
 
                                 
                Change in %  
                      at constant
 
    2008     2007     as reported     exchange rates  
 
Number of treatments
    27,866,573       26,442,421       5 %        
Same market treatment growth in %
    4.5 %     3.9 %                
Revenue in $ million
    10,612       9,720       9 %     8 %
Gross profit in% of revenue
    34.2 %     34.5 %                
Selling, general and administrative costs in % of revenue
    17.7 %     17.6 %                
Net income in $ million
    818       717       14 %        
 
We provided 27,866,573 treatments during the year ended December 31, 2008, an increase of 5% over the same period in 2007. Same market treatment growth contributed 4% and growth from acquisitions contributed 1%.
 
At December 31, 2008, we owned, operated or managed (excluding those managed but not consolidated in the U.S.) 2,388 clinics compared to 2,238 clinics at December 31, 2007. During 2008, we acquired 48 clinics, opened 127 clinics and combined or closed 25 clinics. The number of patients treated in clinics that we own, operate or manage (excluding patients of clinics managed but not consolidated in the U.S.) increased by 6% to 184,086 at December 31, 2008 from 173,863 at December 31, 2007. Including 32 clinics managed but not consolidated in the U.S., the total number of patients was 185,768.
 
Net revenue increased by 9% (8% at constant exchange rates) for the year ended December 31, 2008 over 2007 due to growth in revenue in both dialysis care and dialysis products.
 
Dialysis care revenue grew by 7% to $7,737 million (6% at constant exchange rates) in 2008 mainly due to growth in same market treatments (4%), revenue per treatment (2%), acquisitions (1%), and exchange rate fluctuations (1%), partially offset by sold or closed clinics (1%).
 
Dialysis product revenue increased by 15% to $2,875 million (11% at constant exchange rates) mainly as a result of increased sales of hemodialysis machines, dialyzers, bloodlines, concentrates, and peritoneal dialysis products and higher revenues attributable to the phosphate binding drug, PhosLo® and to the sales of the newly licensed intravenous iron products.
 
The decrease in gross margin reflects reductions in gross margin in the International segment. North America was impacted by higher personnel and other operating costs, decreased utilization of and reduced reimbursement rates for EPO, higher material costs, and increased costs for the anticoagulant drug heparin, fully offset by increased commercial payor revenue. International was affected by strong growth in dialysis care business which has lower than average margins and unfavorable foreign currency transaction effects related to purchases from Europe due to the appreciation of the Euro against local currencies. Both segments experienced higher depreciation expense in 2008 as compared to 2007 as a result of expansion of production capacities. The availability of these new capacities allowed a more normalized summer maintenance program in our International facilities, in contrast to the prior year’s shortened program.
 
Selling, general and administrative (“SG&A”) costs increased to $1,876 million in 2008 from $1,709 million in 2007. SG&A costs as a percentage of sales increased to 17.7% in 2008 from 17.6% in 2007. The percentage increased in the North America segment and decreased in the International segment. North America was impacted by higher personnel costs and higher bad debt expense, partially offset by economies of scale and gains on the sale of minority interests in subsidiaries. International benefited from lower foreign currency losses in Europe, lower bad debt expense and with respect to SG&A as a percentage of sales, from revenue growth in excess of the increase of SG&A. These were partially offset by higher corporate expenses relating to the operating expenses of Renal Solutions Inc., reported under corporate, and compensation expense for stock options. Bad debt expense for the year


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ended December 31, 2008 was $214 million as compared to $202 million in 2007, representing 2.0% of sales for the year ended December 31, 2008 and 2.1% for 2007.
 
Research and development (“R&D”) expenses increased to $80 million in 2008 from $67 million for the same period in 2007 mainly as a result of the additional R&D programs related to continued development of hemodialysis machines, field testing of new products and extracorporeal and home therapy programs.
 
Operating income increased to $1,672 million in 2008 from $1,580 million for 2007. Operating income margin decreased to 15.8% for the year ended December 31, 2008 from 16.3% for 2007 due to the decreased gross margins, increased SG&A as a percentage of sales, and increased R&D costs as discussed above.
 
Interest expense decreased 10% to $361 million in 2008 from $400 million for 2007 mainly as a result of decreased interest rates and the more favorable financing structure following the repayment of a portion of our trust preferred securities. This was partially offset by the slightly increased debt level resulting from the acquisition of Renal Solutions, Inc. in the fourth quarter of 2007 as well as higher capital expenditures in 2008.
 
Income tax expense increased to $489 million for the year ended December 31, 2008 from $466 million in 2007 due to increased earnings. The effective tax rate for 2008 decreased to 36.6% from 38.5% for 2007 mainly due to a German corporate tax rate reduction which became effective January 1, 2008.
 
Net income for 2008 increased to $818 million from $717 million for 2007 mainly as a result of the combined effects of the items discussed above.
 
We employed 64,666 people (full-time equivalents) as of December 31, 2008 compared to 61,406 as of December 31, 2007, an increase of 5% primarily due to our overall growth in business.
 
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
 
                         
    2008     2007     Change in %  
Number of treatments
    19,146,084       18,451,381       4 %
Same market treatment growth in %
    2.9 %     2.9 %        
Revenue in $ million
    7,005       6,663       5 %
Depreciation and amortization in $ million
    238       220       8 %
Operating income in $ million
    1,168       1,130       3 %
Operating income margin in %
    16.7 %     17.0 %        
 
Revenue
 
Treatments increased by 4% for the year ended December 31, 2008 as compared to 2007 due to same market growth (3%) and acquisitions (1%). At December 31, 2008, 125,857 patients (a 4% increase over the same period in the prior year) were being treated in the 1,686 clinics that we own or operate in the North America segment, compared to 121,431 patients treated in 1,602 clinics at December 31, 2007. Average North America revenue per treatment was $326 for the year ended December 31, 2008 and $323 for 2007. In the U.S., the average revenue per treatment was $330 for the year ended December 31, 2008 and $327 in 2007, mainly due to increased commercial payor revenue.
 
Net revenue for the North America segment for 2008 increased as a result of increases in dialysis care revenue by 4% to $6,247 million from $6,002 million in 2007 and in dialysis product revenue by 15% to $758 million from $661 million in 2007.
 
The dialysis care revenue increase was driven by same market treatment growth of 3%, increased revenue per treatment (1%), and 1% resulting from acquisitions partially offset by the effects of sold or closed clinics (1%). The administration of EPO represented approximately 20% and 21% of total North America dialysis care revenue for 2008 and 2007, respectively.
 
The product revenue increase was driven mostly by a higher sales volume of dialysis machines, concentrate, bloodlines, dialyzers, and peritoneal products, as well as increased pricing and sales of the newly licensed intravenous iron products and higher sales attributable to the phosphate binding drug, PhosLo® which we acquired in late 2006. However, we experienced substantial reductions in our PhosLo® sales following a competitor’s launch of a generic version of PhosLo® in the U.S. in October 2008.


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Operating Income
 
Operating income increased by 3% to $1,168 million for 2008 from $1,130 million for 2007. Operating income margin decreased to 16.7% for 2008 as compared to 17.0% for 2007 primarily due to increased personnel and other operating costs, higher raw material costs, decreased utilization of and reduced reimbursement rates for EPO, heparin cost increases, and higher depreciation expense due to expansion of production capacities, partially offset by increased commercial payor revenue. Cost per treatment increased to $273 in 2008 from $267 in 2007.
 
International Segment
 
Key Indicators for International Segment
 
                                 
                Change in %  
                      at constant
 
    2008     2007     as reported     exchange rates  
 
Number of treatments
    8,720,489       7,991,040       9 %        
Same market treatment growth in %
    8.6 %     6.2 %                
Revenue in $ million
    3,606       3,057       18 %     13 %
Depreciation and amortization in $ million
    171       141       21 %        
Operating income in $ million
    616       544       13 %        
Operating income margin in %
    17.1 %     17.8 %                
 
Revenue
 
Treatments increased by 9% in 2008 over 2007 mainly due to same market growth (9%), and acquisitions (1%), partially offset by sold or closed clinics (1%). As of December 31, 2008, 58,229 patients (a 11% increase over the prior year) were being treated at 702 clinics that we own, operate or manage in the International segment compared to 52,432 patients treated at 636 clinics at December 31, 2007. Average revenue per treatment increased to $171 from $152 due to increased reimbursement rates and changes in country mix ($11) and the strengthening of local currencies against the U.S. dollar ($8).
 
The increase in net revenues for the International segment for 2008 over 2007 resulted from increases in both dialysis care and dialysis product revenues. Organic growth during the period was 12% and acquisitions contributed approximately 1%. Exchange rate fluctuations contributed 5%.
 
Including the effects of acquisitions, European region revenue increased 19% (12% at constant exchange rates), Latin America region revenue increased 23% (19% at constant exchange rates), and Asia Pacific region revenue increased 12% (11% at constant exchange rates).
 
Total dialysis care revenue for the International segment increased during 2008 by 23% (18% at constant exchange rates) to $1,490 million from $1,211 million for 2007. This increase is a result of same market treatment growth of 9% and a 1% increase in contributions from acquisitions and one additional dialysis day (1%), partially offset by sold or closed clinics (1%). Increases in revenue per treatment contributed 8% and exchange rate fluctuations contributed approximately 5%.
 
Total dialysis product revenue for 2008 increased by 15% (10% at constant exchange rates) to $2,117 million mostly due to higher dialyzer and machine sales.
 
Operating Income
 
Operating income increased by 13% to $616 million primarily as a result of increases in the number of treatments, revenue per treatment and increases in units of products sold. Operating income margin decreased to 17.1% for the year ended December 31, 2008 from 17.8% in 2007. The margin decrease resulted from the effects of stronger growth in dialysis care business which has lower than average margins and higher depreciation expense due to expansion of production capacities. The availability of these new capacities allowed a more normalized summer maintenance program in our facilities in 2008, in contrast to the prior year’s shortened program. In addition, the International margin was impacted by unfavorable foreign currency transaction effects in Asia Pacific related to purchase of products from Europe due to the appreciation of the Euro against local currencies.


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Year ended December 31, 2007 compared to year ended December 31, 2006
 
Highlights
 
Revenues increased by 14% to $9,720 million (12% at constant rates) mainly due to organic growth at 6%, the RCG Acquisition, net of acquisition-related divestitures, which occurred by the end of the first quarter of 2006, contributing 4% and other acquisitions contributing 2%. Operating income (EBIT) increased 20%.
 
Net Income increased by 34%.
 
We successfully issued $500 million 67/8% Senior Notes due 2017 to refinance debt.
 
On November 26, 2007, the Company completed the acquisition of 100% of the common shares of Renal Solutions, Inc. (RSI) an Indiana corporation with principal offices in Warrendale, PA. for total consideration of up to $204 million. RSI holds key patents and other intellectual property worldwide related to sorbent-based technology (SORB) which allows dialysate to be regenerated, an important step in advancing home hemodialysis and helping to create a potential platform for eventual development of a wearable kidney.
 
Consolidated Financials
 
Key Indicators for Consolidated Financials
 
                                 
                Change in %  
                      at constant
 
    2007     2006     as reported     exchange rates  
 
Number of treatments
    26,442,421       23,739,733       11 %        
Same market treatment growth in %
    3.9 %     4.2 %                
Revenue in $ million
    9,720       8,499       14 %     12 %
Gross profit in % of revenue
    34.5 %     33.9 %                
Selling, general and administrative costs in % of revenue
    17.6 %     18.2 %                
Net income in $ million
    717       537       34 %        
 
We provided 26,442,421 treatments during the year ended December 31, 2007, an increase of 11% over 2006. Same market treatment growth contributed 4%, the RCG Acquisition, net of the acquisition-related divestitures, contributed 4%, and additional growth from other acquisitions contributed 4%, partially offset by the combined effects of sold or closed clinics (1%).
 
At December 31, 2007, we owned, operated or managed (excluding those managed in the U.S.) 2,238 clinics compared to 2,108 clinics at December 31, 2006. During 2007, we acquired 84 clinics, opened 76 clinics and combined or closed 30 clinics. The number of patients treated in clinics that we own, operate or manage (excluding those managed in the U.S.) increased by 6% to 173,863 at December 31, 2007 from 163,517 at December 31, 2006. Including 33 clinics managed in the U.S., the total number of patients was 175,705.
 
Net revenue increased by 14% (12% at constant rates) for the year ended December 31, 2007 over 2006 due to growth in revenue in both dialysis care and dialysis products and the net effects of the RCG Acquisition.
 
Dialysis care revenue grew by 13% to $7,213 million (12% at constant exchange rates) in 2007 mainly due to the RCG Acquisition net of acquisition-related divestitures (5%), growth in same market treatments (4%), increased revenue per treatment (2%), other acquisitions (2%) and exchange rate fluctuations (1%), partially offset by sold or closed clinics (1%).
 
Dialysis product revenue increased by 18% to $2,507 million (12% at constant exchange rates mainly as a result of increased sales of hemodialysis machines, dialyzers, concentrates, and the PhosLo® business which we acquired in late 2006.
 
The increase in gross profit margin is primarily a result of higher revenue per treatment rates, partially offset by higher personnel expenses and by decreased utilization of and reduced reimbursement rates for EPO in North America, higher growth in lower gross margin dialysis care business in the International segment and growth in lower margin renal pharma sales.
 
Selling, general and administrative (“SG&A”) costs increased to $1,709 million in 2007 from $1,548 million in 2006. SG&A costs as a percentage of sales decreased to 17.6% in 2007 from 18.2% in 2006. The positive effect of the economies of scale in the International segment was partially offset by higher personnel expenses. In addition,


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2006 was negatively impacted by the effects of charges of $32 million related to the integration of the RCG Acquisition, $3 million for in-process R&D and the transformation of the Company’s legal form ($2). Bad debt expense for 2007 was $202 million as compared to $177 million in 2006, representing 2.1% of sales for both 2007 and 2006.
 
Operating income increased to $1,580 million in 2007 from $1,318 million in 2006. Operating income margin increased to 16.3% for 2007 from 15.5% 2006 due to increased gross margins as noted above and the decrease in SG&A as a percentage of sales as noted above, partially offset by effects of a $40 million gain in 2006 from the acquisition-related divestitures. The gain from the acquisition-related divestitures and the costs in connection with the RCG integration and transformation of our legal form, had no net effect on the operating income margin for 2006.
 
Interest income increased to $29 million in 2007 as compared to $21 million in 2006 to a large extent as a result of interest income related to the collection of overdue accounts receivable.
 
Interest expense increased 8% to $400 million during 2007 from $372 million for 2006 mainly as a result of increased debt due to the RCG Acquisition which was consummated at the end of March 2006. The write-off of fees related to the early retirement of debt incurred under Senior Credit Agreements had an impact of $5 million and $15 million for 2007 and 2006, respectively.
 
Income tax expense increased to $466 million for 2007 from $413 million for 2006. In August 2007, the German corporate tax rate was reduced from 25% to 15% which resulted in a deferred tax benefit in the second half of 2007 of $4.3 million. This benefit was offset by the effect of additional tax expense recognized as a result of ongoing tax audits. The effective tax rate for 2007 was 38.5% compared to 42.8% for 2006, a decrease mainly due to the impact of tax charges in 2006 related to the gain from the RCG acquisition-related divestitures and a tax audit in Germany.
 
Minority interest increased by $9 million as a result of a number of joint ventures acquired in connection with the RCG Acquisition in 2006 and additional Asia Pacific acquisitions in 2007 that are not wholly-owned.
 
Net income for 2007 increased to $717 million from $537 million for 2006 mainly as a result of the effects of the items mentioned above. The twelve-month period ended December 31, 2006 was affected by the after-tax effect of $9 million of charges from the write-off of deferred financing fees related to the previous senior credit agreement, $4 million net loss on the sale of acquisition-related divestitures, $22 million costs for the integration of RCG, $1 million for in-process R&D and $1 million costs for the transformation of legal form. Excluding these costs for the prior year, net income in 2007 increased by 25% to $717 million from $574 million in 2006.
 
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
 
                         
    2007     2006     Change in %  
 
Number of treatments
    18,451,381       16,877,911       9 %
Same market treatment growth in %
    2.9 %     2.1 %        
Revenue in $ million
    6,663       6,025       11 %
Depreciation and amortization in $ million
    220       187       18 %
Operating income in $ million
    1,130       965       17 %
Operating income margin in %
    17.0 %     16.0 %        
 
Revenue
 
Treatments increased by 9% for 2007 as compared to 2006 mainly due to the RCG Acquisition (6%), same market growth (3%), and other acquisitions (1%) partially offset by the combined effect of sold or closed clinics (1%). At December 31, 2007, 121,431 patients (a 3% increase over the same period in the prior year) were being treated in the 1,602 clinics that we own or operate in the North America segment, compared to 117,855 patients treated in 1,560 clinics at December 31, 2006. The average revenue per treatment for 2007 increased to $323 from $317 in 2006. In the U.S., the average revenue per treatment increased to $327 for 2007 from $321 for 2006. The improvement in the revenue rate per treatment is primarily due to improved commercial payor rates, a 1.6%


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increase in the Medicare composite rate, an increase in the drug add-on adjustment and the effects of the RCG Acquisition, partially offset by decreased utilization of and reduced reimbursement rates for EPO.
 
Net revenue for the North America segment for 2007 increased as a result of increases in dialysis care revenue by 10% to $6,002 million from $5,464 million in 2006 and dialysis product revenue by 18% to $661 million from $561 million in 2006.
 
The 10% increase in dialysis care revenue was driven by an 6% increase as a result of the effects of the RCG Acquisition, net of acquisition-related divestitures, by same market treatment growth of 3% and 1% resulting from other acquisitions partially offset by sold or closed clinics and the divestiture of the perfusion business (2%). In addition, revenue per treatment improved 2%. The administration of EPO represented approximately 21% and 23% of total North America dialysis care revenue for 2007 and 2006, respectively.
 
The product revenue increase was driven mostly by a higher sales volume of hemodialysis machines, concentrates, and sales of the phosphate binding drug PhosLo® which was acquired in late 2006.
 
Operating Income
 
Operating income increased by 17% to $1,130 million for 2007 from $965 million for 2006. Operating income margin increased to 17.0% for 2007 as compared to 16.0% for 2006 primarily due to increased revenue per treatment and a higher volume of products sold, partially offset by higher personnel costs, by decreased utilization of and reduced reimbursement rates for EPO, and the effects in 2006 of a $40 million gain from the acquisition-related divestitures as well as $31 million costs for the integration of the RCG Acquisition and $3 million for in-process R&D. Excluding the gain from the acquisition-related divestitures and the costs in connection with the integration of RCG, operating income margin would have been 15.9% for 2006. Cost per treatment increased to $267 in 2007 from $266 in 2006.
 
International Segment
 
Key Indicators for International Segment
 
                                 
                Change in %  
                      at constant
 
    2007     2006     as reported     exchange rates  
 
Number of treatments
    7,991,040       6,861,822       16 %        
Same market treatment growth in %
    6.2 %     8.6 %                
Revenue in $ million
    3,057       2,474       24 %     15 %
Depreciation and amortization in $ million
    141       120       18 %        
Operating income in $ million
    544       440       24 %        
Operating income margin in %
    17.8 %     17.8 %                
 
Revenue
 
Treatments increased by 16% in 2007 over 2006 mainly due to same market growth (6%), and acquisitions (11%), partially offset by sold or closed clinics (1%). As of December 31, 2007, 52,432 patients (a 15% increase over the prior year) were being treated at 636 clinics that we own, operate or manage in the International segment compared to 45,662 patients treated at 548 clinics at December 31, 2006. The average revenue per treatment increased to $152 from $133 due to increased reimbursement rates and changes in country mix ($8) and the strengthening of local currencies against the U.S. dollar ($11).
 
The increase in net revenues for the International segment for 2007 over 2006 resulted from increases in both dialysis care and dialysis product revenues. Acquisitions contributed approximately 6% and organic growth during the period was 9% at constant exchange rates. Exchange rate fluctuations contributed 9%.
 
Including the effects of acquisitions, European region revenue increased 20% (9% at constant exchange rates), Latin America region revenue increased 22% (14% at constant exchange rates), and Asia Pacific region revenue increased 44% (40% at constant exchange rates).
 
Total dialysis care revenue for the International segment increased during 2007 by 33% (23% at constant exchange rates) to $1,211 million from $913 million for 2006. This increase is a result of same market treatment


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growth of 6% and an 11% increase in contributions from acquisitions. An increase in revenue per treatment contributed 6% and exchange rate fluctuations contributed approximately 10%.
 
Total dialysis product revenue for 2007 increased by 18% (10% at constant exchange rates) to $1,846 million mostly due to increased dialyzer, peritoneal-dialysis product and hemodialysis machine sales.
 
Operating Income
 
Operating income increased by 24% to $544 million primarily as a result of an increase in treatment volume, acquisitions and in volume of products sold. Operating income margin remained at approximately 17.8% mainly due to disproportionately higher growth in the dialysis care business which has lower than average margins offset by operational improvements.
 
B. Liquidity and Capital Resources
 
Our primary sources of liquidity have historically been cash from operations, cash from borrowings from third parties and related parties, as well as cash from issuance of equity and debt securities. We require this capital primarily to finance working capital needs, to fund acquisitions and develop free-standing renal dialysis centers, to purchase equipment for existing or new renal dialysis centers and production sites, to repay debt and to pay dividends.
 
At December 31, 2008, we had cash and cash equivalents of $222 million and unused credit lines of $820 million available to us which are discussed in more detail below.
 
Operations
 
In the past three years, 2008, 2007 and 2006, we have generated cash flows from operations of $1,016 million, $1,200 million, and $908 million, respectively. Cash from operations is impacted by the profitability of our business, the development of our working capital, principally receivables, and cash outflows that occur due to a number of singular specific items (especially payments in relation to disallowed tax deductions and legal proceedings).
 
The profitability of our business depends significantly on reimbursement rates. Approximately 73% 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, 2008, approximately 35% of our consolidated revenues resulted from U.S. federal health care benefit programs, such as Medicare and Medicaid reimbursement. Legislative changes could affect Medicare reimbursement rates for all the services we provide, as well as the scope of Medicare coverage. A decrease in reimbursement rates or the scope of coverage could have a material adverse effect on our business, financial condition and results of operations and thus on our capacity to generate cash flow. In the past we experienced and also expect in the future generally stable reimbursements for our dialysis services. This includes the balancing of unfavorable reimbursement changes in certain countries with favorable changes in other countries. See “Overview” above for a discussion of recent Medicare reimbursement rate changes including provisions for implementation of a “bundled rate” by January 1, 2011.
 
Furthermore, cash from operations depends on the collection of accounts receivable. Our working capital was $1,068 million at December 31, 2008 which increased from $833 million at December 31, 2007, mainly as a result of increases in our accounts receivables; our ratio of current assets to current liabilities was 1.34. We could face difficulties in enforcing and collecting accounts receivable under some countries’ legal systems. Some customers and governments may have longer payment cycles. A lengthening of this payment cycle could have a material adverse effect on our capacity to generate cash flow. During 2008, we have experienced some delay in payments from our customers world-wide. Accounts receivable balances at December 31, 2008 and December 31, 2007, net of valuation allowances, represented approximately 77 and 73 days of net revenue, respectively, with increased balances in both of our segments. The increase in the North America segment is mainly driven by the launch of Venofer® in late 2008 in the Products business, as well as reimbursement delays in the dialysis services business related to National Provider Identification issues and other delays associated with provider numbers for new clinics and acquisitions. The increase for the International segment mainly reflects payment delays by government entities most recently impacted by the world-wide financial crises. Due to the fact that a large portion of our reimbursement is provided by public health care organizations and private insurers, we expect that most of our accounts receivables will be collectable, albeit somewhat more slowly in the immediate future.


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The development of days sales outstanding (“DSO”) by operating segment is shown in the table below:
 
Development of Days Sales Outstanding
 
                 
    December 31,
    December 31,
 
    2008     2007  
 
North America days sales outstanding
    60       58  
                 
International days sales outstanding
    107       104  
                 
FMC AG & Co. KGaA average days sales outstanding
    77       73  
                 
 
Interest and income tax payments also have a significant impact on our cash from operations.
 
There are a number of tax and other items we have identified that will or could impact our cash flows from operations in the immediate future as follows:
 
During the third quarter 2006, the German tax authorities substantially finalized their tax audit for tax years 1998-2001 and issued an audit report in the second quarter 2008. We recognized and recorded the results of the audit in 2006, and thereafter paid all amounts due to the tax authorities. We have filed claims for refunds contesting the IRS’s disallowance of FMCH’s civil settlement payment deductions in prior year tax returns. As a result of a settlement agreement with the IRS to resolve our appeal of the IRS’s disallowance of deductions for the civil settlement payments made to qui tam relators in connection with the resolution of the 2000 investigation, we received a refund in September 2008 of $37 million, inclusive of interest. The settlement agreement preserves our right to continue to pursue claims in the U.S. Federal courts for refund of all other disallowed deductions.
 
Payments of $64 million for taxes and $35 million for other costs, both related to the RCG Acquisition, and a tax payment $99 million related to the Company’s 2000 and 2001 US tax filings, had a negative impact on cash generated from operations in 2006.
 
For the tax year 1997, we recognized an impairment of one of our subsidiaries which the German tax authorities have disallowed in the audit for the years 1996 and 1997. We disagree with such conclusion, believe we have valid arguments and have filed a complaint with the appropriate German court to challenge the tax authority’s decision. An adverse determination in this litigation could have a material adverse effect on our results of operations in the relevant reporting period. We have a liability payable to Fresenius SE related to this matter (See Item 7. Major Shareholders and Related Party Transactions — Related party transactions — Supply Agreements and Arrangements).
 
The IRS tax audit of FMCH for the years 2002 through 2004 has been completed. Except for the disallowance of all deductions taken during the audit period for remuneration related to intercompany mandatorily redeemable preferred shares, the proposed adjustments are routine in nature and have been recognized in the financial statements. The Company has protested the disallowed deductions and some routine adjustments and will avail itself of all remedies. An adverse determination in this litigation could have a material adverse effect on results of operations and liquidity.
 
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. If our objections and any final audit appeals are unsuccessful, we could be required to make additional tax payments, including payments to state tax authorities reflecting the adjustments made in our federal tax returns in the U.S. With respect to other potential adjustments and disallowances of tax matters currently under review or where tentative agreement has been reached, 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.
 
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. The settlement agreement with the asbestos creditors committees on behalf of the W.R. Grace & Co. bankruptcy estate (see “Notes to Consolidated Financial Statements — Note 17 — Legal Proceedings” in this report) 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 was included in the special charge we recorded in 2001 to address 1996 merger-related legal matters. The payment obligation is not interest-bearing.
 
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


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reporting 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.
 
Investing
 
We used net cash of $891 million, $777 million and $4,241 million in investing activities in 2008, 2007 and 2006, respectively.
 
Capital expenditures for property, plant and equipment, net of disposals were $673 million in 2008, $543 million in 2007 and $446 million in 2006. In 2008, capital expenditures were $384 million in the North America segment, and $289 million for the International segment. Capital expenditures in 2007 were $314 million in the North America segment, and $229 million for the International segment. In 2006, capital expenditures were $302 million in the North America segment and $144 million for the International segment. The majority of our capital expenditures was used for equipping new clinics, maintaining existing clinics, maintenance and expansion of production facilities primarily in North America and Germany and; in 2008 — Japan and France, in 2007 — Japan, in 2006 — France. In addition, we incurred higher investment for machines that we provide to our customers mostly under operating leases, primarily in the International segment (2008 and 2007). Capital expenditures were approximately 6%, 6% and 5% of total revenue for 2008, 2007 and 2006, respectively.
 
Primarily for acquisitions of dialysis clinics and licenses, we invested approximately $227 million cash in 2008 ($113 million in the North America segment, $57 million in the International segment and $57 million in Corporate), $143 million in 2007 ($63 million in the North America segment and $80 million in the International segment) and $90 million cash in 2006 ($72 in the North American segment and $18 million for the International segment). In addition, in 2007 we paid approximately $120 million in conjunction with the Renal Solutions, Inc. acquisition while in 2006 we paid $4,148 million for the RCG acquisition, partially offset by the cash receipts of $516 million from acquisition related divestitures, and we paid $73 million for the PhosLo® product business. We also received $59 million and $29 million in conjunction with divestitures in 2008 and 2007, respectively.
 
In 2008, we granted a loan of $50 million to Fresenius SE, our parent. See Item 7, “Major Shareholders and Related Party Transactions — Related party transactions — Financing.”
 
We anticipate capital expenditures of approximately $550 to $650 million and expect to make acquisitions of approximately $200 to $300 million in 2009.
 
Financing
 
Net cash used in financing was $156 million in 2008 compared to $341 million in 2007 and to cash provided of $3,383 million in 2006.
 
In 2008, cash was mainly used for redemption of trust preferred securities ($678 million), the payment of dividends ($252 million) and the payment in November 2008 of the remaining financial liability relating to the 2007 RSI Acquisition ($56 million); we raised cash from our accounts receivable securitization facility (“A/R Facility”) and other existing long-term credit facilities. In 2007, cash was mainly used to pay down our A/R Facility and other debt and for payment of dividends; we raised net proceeds of $484 million from the issuance of our Senior Notes due 2017 (“Senior Notes”). In 2006, $4,148 million required for the RCG Acquisition, less the $516 million proceeds from the divestiture of 105 clinics and the laboratory business, was provided by debt from our 2006 Senior Credit Agreement and $307 million generated by equity injections from the conversion of preference to ordinary shares.
 
For a description of our short-term credit facilities, including our A/R Facility, see Note 8 of Notes to Consolidated Financial Statements, “Short-Term Borrowings, Other Financial Liabilities and Short-Term Borrowings from Related Parties”. For a description of our long-term sources of liquidity, including our 2006 Senior Credit Agreement, our Senior Notes, our credit facilities with the European Investment Bank (“EIB”), and our trust preferred securities, see Note 9 of Notes to Consolidated Financial Statements, “Long-Term Debt and Capital Lease Obligations” and Note 12 of Notes to Consolidated Financial Statements, “Mandatorily Redeemable Trust Preferred Securities.”


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The following table summarizes the Company’s available sources of liquidity at December 31, 2008:
 
                                 
Available Sources of Liquidity
        Expiration per period of  
in millions
  Total     1 Year     2-5 Years     Over 5 Years  
 
Accounts receivable facility(a)
  $ 11     $ 11     $     $  
Unused Senior Credit Lines
    583             583        
Other Unused Lines of Credit
    226       226              
                                 
    $ 820     $ 237     $ 583     $  
                                 
 
 
(a)  Subject to availability of sufficient accounts receivable meeting funding criteria.
 
The amount of guarantees and other commercial commitments at December 31, 2008 is not significant.
 
At December 31, 2008, we have short-term borrowings, excluding the current portion of long-term debt, of $660 million.
 
The following table summarizes, as of December 31, 2008, 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.
 
                                 
Contractual Obligations and Commitments
        Payments due by period of  
in millions
  Total     1 Year     2-5 Years     Over 5 Years  
 
Trust Preferred Securities(a)
  $ 765     $ 50     $ 715     $  
Long Term Debt(b)
    4,990       588       3,649       753  
Capital Lease Obligations
    13       3       9       1  
Operating Leases
    2,121       388       1,094       639  
Unconditional Purchase Obligations
    2,557       358       1,002       1,197  
Other Long-term Obligations
    63       57       6        
Letters of Credit
    112       112              
                                 
    $ 10,621     $ 1,556     $ 6,475     $ 2,590  
                                 
 
 
(a)  Interest payments are determined on these debt instruments until their respective maturity dates and based on their applicable balances and fixed interest rates for each period presented. We redeemed $670 million of Trust Preferred Securities on February 1, 2008, primarily by utilizing funds available under our existing credit facilities.
 
(b)  Interest payments are based upon the principal repayment schedules and fixed interest rates or estimated variable interest rates considering the applicable interest rates (e.g. Libor, Prime), the applicable margins, and the effects of related interest rate swaps.
 
Our obligations under the 2006 Credit Agreement are secured by pledges of capital stock of certain material subsidiaries, including FMCH and D-GmbH, in favor of the lenders. Our 2006 Senior Credit Agreement, EIB agreements, Euro Notes, Senior 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 2006 Senior Credit Agreement, we are obligated to maintain a minimum consolidated fixed charge ratio (ratio of consolidated EBITDAR (sum of EBITDA plus Rent expense under operation leases) to Consolidated Fixed Charges as these terms are defined in the 2006 Senior Credit Agreement) and a maximum consolidated leverage ratio (ratio of consolidated funded debt to consolidated EBITDA as these terms are defined in the 2006 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 and make other restricted payments, create liens or engage in sale-lease backs.
 
The breach of any of the covenants in any of the instruments or agreements governing our long-term debt — the 2006 Senior Credit Agreement, the EIB agreements, the Euro Notes, the Senior Notes or the notes underlying our trust preferred securities — could, in turn, create additional defaults under one or more of the other instruments or agreements. In default, the outstanding balance under the Senior Credit Agreement becomes due at the option of the lenders under that agreement, and the “cross default” provisions in our other long-term debt permit the lenders to accelerate the maturity of the debt upon such a default as well. As of December 31, 2008, we are in compliance with all covenants under the 2006 Senior Credit Agreement and our other financing agreements.
 
Although we are not immune from the world-wide financial crises of 2008, we believe that we are in a solid financial position to continue to grow our business while meeting our financial obligations as they come due. Our


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business is generally not cyclical. A substantial portion of our accounts receivable are generated by governmental payers. While payment and collection practices vary significantly between countries and even between agencies within one country, government payors usually represent low risks. See “Critical Accounting Policies — Accounts Receivable and Allowance for Doubtful Accounts,” above. Our syndicated credit facility is comprised of 60 lenders for our revolving credit facility none of which contribute more than 4% of our revolving borrowings under the 2006 Credit Agreement. Even though one of the 60 participating banks in this syndicated facility defaulted on its obligation to provide funds under the terms of the revolving facility during the fourth quarter 2008, we do not anticipate any major issues in having funds available for us when we utilize this credit facility. As we deemed the amount in default immaterial, we took no action to amend our 2006 Credit Agreement to replace the defaulting bank. (See Note 9 of Notes to Consolidated Financial Statements, “Long-Term Debt and Capital Lease Obligations — 2006 Senior Credit Agreement.”) However, limited or expensive access to capital could make it more difficult for our customers to do business with us, or to do business generally, which could adversely affect our business. Current conditions in the credit and equity markets, if they continue, could also increase our financing costs and limit our financial flexibility.
 
Following our earnings-driven dividend policy, our General Partner’s Management Board will propose to the shareholders at the Annual General meeting on May 7, 2009, a dividend with respect to 2008 and payable in 2009, of €0.58 per ordinary share (for 2007 paid in 2008: €0.54) and €0.60 per preference share (for 2007 paid in 2008: €0.56). The total expected dividend payment is approximately €173 million (approximately $240 million based upon the December 31, 2008 spot rate) compared to €160 million ($252 million) in 2008 with respect to 2007. Our 2006 Senior Credit Agreement limits disbursements for dividends and other payments for the acquisition of our equity securities (and rights to acquire them, such as options or warrants) during 2009 to $280 million in total.
 
Our treasury management services, which Fresenius SE provides under contractual arrangements with us, assists in the management of our liquidity by means of effective cash management as well as an anticipatory evaluation of financing alternatives. We have sufficient financial resources — consisting of only partly drawn credit facilities and our accounts receivable facility — which we intend to preserve in the next years. We aim to keep committed and unutilized credit facilities to a minimum of $500 million.
 
We will focus our financing activities in the coming years on reducing subordinated debt. In this respect we did not refinance the subordinated trust-preferred securities issued by Fresenius Medical Care Capital Trust II and III which matured in February 2008 by issuing new subordinated debt, but used our existing senior credit facilities instead. Our target for maturing long-term debt is to refinance with senior and unsecured debt instruments only.
 
Our refinancing needs for the years 2009 and 2010 are limited to refinancing of our Euro notes totaling $278 million (€200 million) in July 2009 and the annual renewal of our $550 million accounts receivable facility. These refinancing requirements, as well as our dividend payment of approximately $240 million in May 2009 and the anticipated dividend payment in 2010, are expected to be covered by our cash flows and by using existing credit facilities. Our debt covenants provide sufficient flexibility to cover our financing needs. Generally, we believe that we will have sufficient financing to achieve our goals in the future and to continue to promote our growth.
 
Our financing strategy and our financial performance are reflected in the credit ratings assigned to us by the rating agencies, Standard & Poor’s and Moody’s. The table below shows the ratings as of December 31, 2008:
 
                 
    Standard &
       
    Poor’s     Moody’s  
 
Corporate Credit Rating
    BB       Ba1  
Outlook
    negative       stable  
 
Outlook
 
Below is a table showing our growth outlook for 2009:
 
     
    2009
    ($ in millions)
 
Net Revenues
  > $11,100
Net Income
  $850-$890
Debt/EBITDA
  < 2.7
Capital Expenditures
  ~$550-$650
Acquisitions
  ~$200-$300


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Debt covenant disclosure — EBITDA
 
EBITDA (earnings before interest, taxes, depreciation and amortization) was approximately $2,088 million, 19.7% of revenues for 2008, $1,944 million, 20.0% of revenues for 2007, and $1,627 million, 19.1% of revenues for 2006. EBITDA is the basis for determining compliance with certain covenants contained in our 2006 Credit Agreement, Senior Notes, Euro Notes, EIB, 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 addition, not all funds depicted by EBITDA are available for management’s discretionary use. For example, a substantial portion of such funds are subject to contractual restrictions and functional requirements for debt service, or are needed for capital expenditures and to meet other commitments, as described in more detail elsewhere in this report. 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:
 
                         
    For the years ended December 31,  
    2008     2007     2006  
    (in thousands)  
 
Total EBITDA
  $ 2,088,103     $ 1,943,451     $ 1,626,825  
Settlement of shareholder proceedings
                (888 )
Interest expense (net of interest income)
    (336,742 )     (371,047 )     (351,246 )
Income tax expense, net
    (489,142 )     (465,652 )     (413,489 )
Change in deferred taxes, net
    133,047       1,177       10,904  
Changes in operating assets and liabilities
    (420,297 )     46,876       58,294  
Tax payments related to divestitures and acquisitions
                (63,517 )
Compensation Expense
    31,879       24,208       16,610  
Cash inflow from Hedging
                10,908  
Other items, net
    9,550       20,561       13,429  
                         
Net cash provided by operating activities
  $ 1,016,398     $ 1,199,574     $ 907,830  
                         
 
Recently Issued Accounting Standards
 
For a discussion of recently issued accounting standards, see Note 1 of Notes to Consolidated Financial Statements “The Company, Basis of Presentation and Summary of Significant Accounting Policies — Summary of Significant Accounting Policies — u) Recent Pronouncements”.
 
C. Research and Development
 
Our 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 world’s largest provider of dialysis treatments to product development, and our technical department benefits from our daily practical experience as a provider of dialysis treatment and close contact with doctors, nurses and patients to keep track of and meet customer and patient needs. We conduct annual innovation meetings and developer conferences, at which employees from our worldwide research and development sites meet and exchange experience with each other and with representatives of our various market segments. We also maintain close contacts with universities and research institutions. We are cooperating particularly intensively with the University of Michigan (on a longitudinal study of chronic kidney patients), Danube University Krems in Austria (on extracorporeal methods), and the Renal Research Institute (RRI) in the United States. RRI was founded in 1997 as a joint venture between Fresenius Medical Care North America and the Beth Israel Medical Center, a hospital in New York, and its network currently comprises 15 institutes in six U.S. states. It was organized to create a network of clinics in which new technologies could be researched, with the aim of improving patients’ quality of life and better understanding the course of chronic kidney failure.


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The task of our research and development departments, which employ approximately 415 full time equivalents, is to continually develop and improve our products and treatments. Our biggest research and development department is R&D International with 347 employees, most of whom work at our Schweinfurt and Bad Homburg locations. Smaller teams also work in St. Wendel and in Romania. Apart from R&D International, we have research and development departments in North America and in the Asia Pacific regions, as well as at a few production sites. All of these units are closely connected and cooperate on many projects.
 
In 2008, research and development expenditures amounted to $80 million, (equivalent to 2.8% of our total dialysis product sales), compared to $67 million in 2007, our most significant year over year increase in R&D expenditures. Our R&D activities focus on continual improvements for users and patients rather than revolutionary discoveries, resulting in expenditures that are lower than other companies in the healthcare sector but that are well within the range typically observed in the dialysis industry. The main reason for the increase in expenditures in 2008 is the acquisition of Renal Solutions, Inc. (RSI), which is continuing to do intensive research in the field of sorbent-based technology, helping to create a potential platform for eventual development of a wearable artificial kidney (see also “Sorbent Systems” below). In addition we continued development of hemodialysis machines, field testing of new products and extracorporeal and home therapy programs. A discussion of each of these activities follows below.
 
Online-HDF and 5008S Hemodialysis Machine
 
With the development of the 5008 hemodialysis machine, we have raised the status of Online-hemodiafiltration (HDF) from an exclusive technology for just a few users to a standard feature. In Online-HDF, the machine produces the required amounts of sterile and pyrogene-free infusion solution from standard bicarbonate dialysate. Clinical studies show that hemodiafiltration led to a 30% to 35% decrease in the mortality rate of kidney patients. Hardly any other single measure in the field of renal replacement therapy has had such a positive impact on the length of patients’ lives. Fresenius Medical Care was one of the first providers of commercially available Online-HDF machines — and we see this as a confirmation of the Company’s long-term innovation and product development policy. As Online-HDF becomes increasingly widespread as a standard treatment, our R&D work will center on improving technical aspects of this treatment method.
 
An important milestone for our research and development activities last year was the European market launch of the 5008S hemodialysis machine at the most important event in the industry, the Congress of the European Renal Association/European Dialysis and Transplant Association in Stockholm in May. The 5008S complements our 5008 therapy system; with an improved interface between the machine and user and increased automation of some processes — for example, data collection — so that nurses have more time to tend to individual patients. We will continue to use the 5008 as the main platform for further significant improvements and extensions of our products.
 
Home Dialysis
 
Against a background of increasing ESRD patient growth, we are pursuing two lines of attack to reduce the burdens on clinic capacities in the future and to improve the treatment quality for the individual patient in a targeted manner. First, we intend to create general conditions enabling more treatments to be transferred to the patient’s home. And second, with optimized products we seek to establish the groundwork for more successful dialysis treatment in the patient’s home.
 
At present, an important strategy in home dialysis is continued improvement of peritoneal dialysis (PD), in which the patient’s peritoneum is used as the dialyzing membrane. The patient administers the treatments several times a day or during the night supported by a machine, the cycler. Fresenius Medical Care manufactures several types of high-quality, machines for automated peritoneal dialysis (APD). Our development department is currently working on a new cycler for international use and thus pursuing the goal of being able to offer high-quality APD at optimized costs. The joint technological platform of this cycler is an important step in this direction. A cycler developed specifically for the U.S. market was approved by the Food and Drug Administration (FDA) in 2008. With the planned further developments the cycler will become one of our core products in the U.S.
 
In hemodialysis, a dialyzer outside the body filters the blood. Currently 120 liters of water are needed for each treatment. For this reason, among others, PD is the home therapy of choice. However, we are researching ways of reducing water consumption per treatment to only five or six liters (see “Sorbent Systems” below), which would enable widespread use of HD as a therapy outside dialysis clinics.
 
Using our PatientOnLine software, clinic personnel monitor the patient’s individual PD treatment and thus make a significant contribution to treatment quality assurance. In 2008, a new version of this software was brought


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to market. With it, the doctor can determine the current state of health of the patient even more reliably. The software is compatible with Windows Vista and has been certified as a medical device.
 
In 2008, we also stepped up work on therapy options for children with kidney disease.
 
Body Composition Monitor (BCM)
 
Home dialysis has also been improved thanks to the refinement of our Body Composition Monitor (BCM). The BCM can determine a patient’s body composition (body water, fat-free body mass and fat). On the basis of these data, especially the percentage of body water, it is possible to assess the exact condition of dialysis patients and select the right treatment. The hydration state (the water level) of kidney patients has an immediate influence on the state of their heart and vascular system and thus on their life expectancy — cardiovascular diseases increase the mortality rate of dialysis patients considerably. With the BCM, Fresenius Medical Care developed a state-of-the-art, easy-to-operate, inexpensive measuring device which provides users with a comprehensive clinically validated program for evaluating the data collected.
 
In 2008, we successfully launched the BCM in different markets. Since it is not a standard medical device, for successful utilization it is important that the user be provided exact instructions. At present, an important clinical study is being carried out in which the BCM is being employed with other state-of-the-art medical processes known to improve patients’ hydration level. The findings will supply important clues for our customer service’s usage consulting work. Given the importance of the hydration level of the BCM method, whose potential is only beginning to be understood, this project will continue to be a focus of our development work in the future.
 
Sorbent Systems
 
In dialysis, as in other areas of medical technology, new technological methods and materials are making it possible to reduce the size, weight and energy consumption of individual components and thus entire devices, as well as to integrate fundamentally new functionalities in medical technology. Renal Solutions, Inc. (RSI), which we acquired in 2007, is an internationally recognized and exclusive specialist in the field of dialysis regeneration using enzyme-based sorbent systems. The main aim of these systems is to reduce the amount of water needed for hemodialysis treatment from about 120 liters (37 gallons) of reverse osmosis water at present to around five or six liters — an important contribution towards cutting costs and reducing environmental burdens with our ecologically sustainable therapies. Apart from the ecological and financial implications of these improvements, they may lead to a substantial reduction in the size of hemodialysis machines. The ultimate aim is for patients to be able to wear these devices directly on their bodies. The space- and water-saving technology is therefore especially suitable for home dialysis. The long-term use of such sorbent systems is also of particular interest to the R&D department because such systems hold the prospect of removing specific toxins from patients’ blood. Further developments for innovative home dialysis solutions will be a focus in the future.
 
D. Trend information
 
For information regarding significant trends in our business see Item 5.A., “Operating Financial Review and Prospects.”
 
Item 6.   Directors, Senior Management and Employees
 
A.  Directors and senior management
 
General
 
As a partnership limited by shares, under the German Stock Corporation Act (Aktiengesetz), 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 SE. 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 16G, below, “Governance — 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. A person may, however, serve on both the supervisory board of our general partner and on our supervisory board.


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The General Partner’s Supervisory Board
 
The Supervisory Board of Management AG consists of six members who are elected by Fresenius SE as the sole shareholder of Management AG. Pursuant to 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 partner’s 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 SE, the general partner, or any affiliate of any of them.
 
Each of the members of the general partner’s Supervisory Board (other than Dr.  William P. Johnston) was also a member of the supervisory board of FMC-AG at the time of registration of the transformation of legal form into FMC AG & Co. KGaA. Unless resolved otherwise by the general meeting of shareholders, their terms of office as members of the Supervisory Board of Management AG will expire at the end of the general meeting of shareholders 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 SE, but not counting the fiscal year in which such member’s term begins. Members of the general partner’s Supervisory Board may be removed only by a resolution of Fresenius SE in its capacity 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 partner’s 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 partner’s Supervisory Board is to appoint and to supervise the general partner’s 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.
 
The table below provides the names of the members of the Supervisory Board of Management AG and their ages as of December 31, 2008.
 
         
    Age as of
 
    December 31,
 
Name
  2008  
 
Dr. Ulf M. Schneider, Chairman(1)
    43  
Dr. Dieter Schenk, Vice-Chairman
    56  
Dr. Gerd Krick(1)(2)
    70  
Dr. Walter L. Weisman(1)(2)(3)
    73  
John Gerhard Kringel(2)(3)
    69  
Dr. William P. Johnston(1)(2)(3)
    64  
       
 
 
(1)  Members of the Human Resources Committee
 
(2)  Members of the Audit and Corporate Governance Committee of FMC-AG & Co. KGaA
 
(3)  Independent director for purposes of our pooling agreement
 
DR. ULF M. SCHNEIDER has been Chairman of the Supervisory Board of Management AG from April 15, 2005. He was a member of the Fresenius Medical Care AG Supervisory Board from May 2004 and Chairman of its Supervisory Board until the effective date of the transformation when he resigned upon the Company’s transformation to a KGaA. He was Chief Financial Officer of FMC-AG from November 2001 until May 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 (now Fresenius SE), 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 Gehe’s majority shareholder, Franz Haniel & Cie. GmbH, Duisburg, a diversified German multinational company. Dr. Schneider is Chairman of the Supervisory Board of Fresenius Kabi AG, HELIOS Kliniken GmbH, Eufets AG and Fresenius Medical Care Groupe France S.A.S., France. He is member of the Supervisory Board of Fresenius Kabi Austria GmbH, Austria, Fresenius Kabi Espana S.A., Spain and Fresenius HemoCare Nederlands B.V., Netherlands. Dr. Schneider is member of the Board of Directors of FHC (Holdings), Ltd., Great Britain and of APP Pharmaceuticals, Inc., USA. Furthermore, Dr. Schneider is Chairman of the Board of Directors of Fresenius Kabi Pharmaceuticals Holding, Inc., USA.


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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 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 Vice Chairman of the Supervisory Board of Fresenius SE and Chairman of the Advisory Board of Else-Kröner-Fresenius-Stiftung, which owns approximately 58% of the ordinary shares of Fresenius SE. He also serves as the Chairman of the Supervisory Board of Gabor Shoes AG and TOPTICA Photonics AG and as a Vice-Chairman of the Supervisory Board of Greiffenberger AG. In September 2008, Dr. Schenk resigned from his position as Chairman of the Supervisory Board of NSL Consulting AG.
 
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 Boards of FMC-AG & Co. KGaA and Fresenius SE. 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 Vice-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 was a member of the Advisory Board of HDI Haftpflichtverband der deutschen Industrie V.a.G until December 31, 2008. He is also the Chairman of the Supervisory Board of VAMED AG, Austria and was a member of the Supervisory Board of Allianz Private Krankenversicherungs-AG until April 16, 2008.
 
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 subsequently 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, River Walk, LLC. Formerly he was also an Advisory Board member of Visionary Medical Device Fund. Mr. Kringel spent 18 years with Abbott Laboratories prior to his retirement as Senior Vice President, Hospital Products, in 1998. Prior to Abbott Laboratories, he spent three years as Executive Vice President of American Optical Corporation, a subsidiary of Warner Lambert Co. and ten years in the U.S. Medical Division of Corning Glassworks.
 
DR. 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 President and Chief Executive Officer of American Medical International, Inc and is a member of the Management Board of Occidental Petroleum Corporation. He is Senior Trustee of the Board of Trustees for the California Institute of Technology, life trustee of the Board of Trustees of the Los Angeles County Museum of Art, and Chairman of the Board of Trustees of the Sundance Institute. Dr. Weisman was Vice-Chairman and Lead Director of Maguire Properties, Inc. until September 1, 2008 and was Vice-Chairman of the Board of Trustees of the Samuel H. Kress Foundation until November 1, 2008.
 
DR. WILLIAM P. JOHNSTON was elected to the Supervisory Board of Management AG on August 30, 2006. He has been a member of the Supervisory Board of FMC-AG & Co. KGaA since May 2006. In February 2008, Dr. Johnston was appointed as a member of the Board of Directors of HCA-Manor Care, Inc. He was the former Chairman of the Board of Directors of Renal Care Group, Inc. Dr. Johnston is a Senior Advisor of The Carlyle Group since June 2006. He is also a member of the Board of Directors of The Hartford Mutual Funds, Inc., LifeCare Holdings, Inc. and Multiplan, Inc. Dr. Johnston is a member of the Board of Directors of Georgia O’Keeffe Museum.


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The General Partner’s 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 of office expire 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, 2008.
 
                     
    Age as of
       
    Dec 31,
      Year term
Name
  2008   Position  
expires
 
Dr. Ben J. Lipps
    68     Chairman of the Management Board, Chief Executive Officer of Management AG     2011  
Roberto Fusté
    56     Chief Executive Officer for Asia Pacific     2011  
Dr. Emanuele Gatti
    53     Chief Executive Officer for Europe, Middle East, Africa and Latin America     2010  
Lawrence Rosen
    51     Chief Financial Officer     2011  
Dr. Rainer Runte
    49     General Counsel and Chief Compliance Officer     2010  
Rice Powell
    53     Co-Chief Executive Officer, Fresenius Medical Care North America and CEO of Renal Therapy Group (“RTG”) of Fresenius Medical Care in North America     2011  
Mats Wahlstrom
    54     Co-Chief Executive Officer, Fresenius Medical Care North America and CEO of Fresenius Medical Services of Fresenius Medical Care in North America     2011  
 
DR. BEN J. LIPPS became Chairman and Chief Executive Officer of the Management Board of Management AG 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 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 through February 2004, and served in various capacities with Fresenius USA’s predecessor from 1985 through 1989. He is a member of the management board of Fresenius SE. He has been active in the field of dialysis for more than 40 years. After earning his master’s 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. 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 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 18 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.


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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 a 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 and CEO of Renal Therapy Group (RTG) of Fresenius Medical Care in North America. He has more than 30 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 and CEO of Fresenius Medical Services of Fresenius Medical Care in North America. He has more than 25 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.
 
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 & Co. KGaA in a general meeting. Fresenius SE, 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, nevertheless has and will retain significant influence over the membership of the FMC-AG & Co. KGaA Supervisory Board in the foreseeable future. See Item 16G, below, “Governance — The Legal Structure of FMC-AG & Co. KGaA.”
 
The current Supervisory Board of FMC-AG & Co. KGaA consists of six persons, five of whom — Messrs. Schenk, Krick, Kringel, Weisman and Johnston — are also members of the Supervisory Board of our General Partner. For information regarding the names, ages, terms of office and business experience of those members of the Supervisory Board of FMC-AG & Co. KGaA, see “The General Partner’s Supervisory Board,” above. The name, age, term of office and business experience of the sixth member of the Supervisory Board of FMC-AG & Co. KGaA is as follows:
 
PROF. DR. BERND FAHRHOLZ, age 61, was a member of the Supervisory Board of Management AG from April 8, 2005 until August 30, 2006 and was a member of the Supervisory Board of FMC-AG from 1998 until the transformation of legal form and a member of the Supervisory Board of FMC-AG & Co. KGaA following the transformation. He is a member of our Audit and Corporate Governance Committee. He is partner in the law firm of Dewey & LeBoeuf, 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 vice-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. Prof. Dr. Fahrholz is Chairman of the Supervisory Board of SMARTRAC N.V.
 
The terms of office of the aforesaid members of the Supervisory Board of FMC-AG & Co. KGaA will expire at the end of the general meeting of shareholders of FMC-AG & Co. 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 member’s term begins. Members of the FMC-AG & Co. KGaA Supervisory Board may be removed only by a resolution of the shareholders of FMC-AG & Co. KGaA with a majority of three quarters of the votes cast at such general meeting. Fresenius SE is barred from voting on such resolutions. The Supervisory Board of FMC-AG & Co. KGaA ordinarily acts by simple majority vote and the Chairman has a tie-breaking vote in case of any deadlock.
 
The principal function of the Supervisory Board of FMC-AG & Co. KGaA is 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 & Co. KGaA is not


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entitled to appoint the general partner or its executive bodies, nor may it subject the general partner’s 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 SE, has the authority to appoint or remove members of the general partner’s Management Board. See Item 16G, below, “Governance — The Legal Structure of FMC-AG & Co. KGaA.” Among other matters, the Supervisory Board of FMC-AG & Co. KGaA will, together with the general partner, fix the agenda for the annual general meeting and make recommendations with respect to approval of the company’s annual financial statements and dividend proposals. The Supervisory Board of FMC-AG & Co. KGaA will also propose nominees for election as members of its Supervisory Board and propose the Company’s auditors for approval by shareholders.
 
B. Compensation
 
Report of the Management Board of Management AG, our General Partner
 
The compensation report of Fresenius Medical Care AG & Co. KGaA summarizes the principles applied for the determination of the compensation of the management board members of Fresenius Medical Care Management AG as general partner of Fresenius Medical AG & Co. KGaA and explains the amounts and structure of the management board compensation.
 
The compensation report is based on the recommendations of the German Corporate Governance Code and also includes the disclosures in accordance with the Commercial Code extended by the Act on the Disclosure of Management Board Compensation.
 
Compensation of the Management Board
 
Determination of the compensation of the management board is made by the full supervisory board of Fresenius Medical Care Management AG. In the fiscal year 2008, the supervisory board was, for the first time, supported in this manner by a personnel committee, the “Human Resources Committee”. In the year under report, the Human Resources Committee consisted of Dr. Ulf M. Schneider, Dr. Gerd Krick, Dr. William P. Johnston and Dr. Walter Weisman. The objective of the compensation system is to enable the members of the management board to participate in the development of the business relative to their duties and performance and the successes in managing the economic and financial position of the Company taking into account its comparable environment.
 
The compensation of the management board is, as a whole, performance oriented and consists of three elements in fiscal year 2008:
 
  •  non-performance related compensation (basic salary)
 
  •  performance related compensation (variable bonus)
 
  •  components with long-term incentive effect (share options, share-based compensation with cash settlement)
 
Furthermore, three members of the management board had pension commitments in the reporting period.
 
The design of the individual components is based on the following criteria:
 
The non-performance-related compensation was paid in twelve monthly installments as basic salary in fiscal year 2008. In addition, the members of the management board received additional benefits consisting mainly of insurance premiums, the private use of company cars, special payments such as foreign supplements, rent supplements and reimbursement of certain other charges and additional contributions to pension and health insurance.
 
The performance-related compensation will also be granted for fiscal year 2008 as a variable bonus. The amount of the bonus in each case depends on the achievement of individual and common targets. For the total performance-related compensation, the maximum achievable bonus is fixed. The targets are measured on revenue growth, consolidated net income and operating income (EBIT) as well as the development of cash flow, are in part subject to a comparison with the previous year’s figures and can for another part be derived from the comparison of budgeted and actually achieved figures. Furthermore, targets are divided into group level targets and those to be achieved in individual regions. The regional targets also include in some cases special components which are for a three-year period, and therefore only for the fiscal years 2006, 2007 and 2008, linked to a special bonus component to the achievement of extraordinary financial targets connected to special integration measures, e. g. in connection with the acquisition of Renal Care Group in the U.S. The special components require an extraordinary increase in earnings. These special bonus components thereby consist in equal parts of cash payments and a share-based compensation based on the development of the stock exchange price of the Company’s ordinary shares. Once the


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annual targets are achieved, the cash was or will be paid after the end of the respective fiscal year. The share-based compensation also to be granted yearly in these cases is subject to a three-year vesting period. The amount of cash payment of this share-based compensation corresponds to the share price of Fresenius Medical Care AG & Co. KGaA ordinary shares on exercise, and is, for that reason, attributed to the long-term incentive compensation components.
 
For fiscal years 2008 and 2007 the amount of the cash payment of the management board of Fresenius Medical Care Management AG consisted of the following:
 
                                                                 
                            Performance
    Cash Compensation
 
    Non-Performance Related
          Related
    (without long-term
 
    Compensation           Compensation     Incentive Components)  
    Salary     Other(1)     Bonus              
    2008     2007     2008     2007     2008     2007     2008     2007  
    in thousands     in thousands     in thousands     in thousands  
 
Dr. Ben Lipps
  $ 1,200     $ 1,050     $ 297     $ 315     $ 1,417     $ 2,257     $ 2,914     $ 3,622  
Roberto Fusté
    515       480       270       251       290       624       1,075       1,355  
Dr. Emanuele Gatti
    809       637       95       63       968       1,530       1,872       2,230  
Rice Powell
    750       700       44       46       1,053       1,541       1,847       2,287  
Lawrence A. Rosen
    589       548       126       115       750       1,197       1,465       1,860  
Dr. Rainer Runte
    486       452       42       41       644       979       1,172       1,472  
Mats Wahlstrom
    850       800       46       47       1,244       1,761       2,140       2,608  
                                                                 
Total:
  $ 5,199     $ 4,667     $ 920     $ 878     $ 6,366     $ 9,889     $ 12,485     $ 15,434  
                                                                 
 
 
(1)  Includes insurance premiums, private use of company cars, contributions to pension and health insureance and other benefits.
 
In fiscal year 2008 stock options based on the Stock Option Plan 2006 were granted as components with long-term incentive effect. The principles of the Stock Option Plan 2006 are described in more detail in Item 6, E. Share Ownership under the heading “Fresenius Medical Care AG & Co. KGaA Stock Option Plan 2006” (see below). As of January 1, 2008, the Company had three additional Employee Participation Programs secured by conditional capital which entitled their participants to convertible bonds or stock options and under which however, no further options could be issued.
 
In connection with these successful employee participation programs of the past fiscal years, Fresenius Medical Care AG & Co. KGaA implemented Stock Option Plan 2006 approved by resolution of the general meeting on May 9, 2006 and amended by resolution of the general meeting of May 15, 2007 (share split 1:3). A total of 2,499,021 stock options were granted under the Stock Option Plan 2006 on July 28, 2008, of which 398,400 were granted to the members of the management board. (See Item 6.E. “Share Ownership — Options to Purchase our Securities — “Fresenius Medical Care AG & Co. KGaA Stock Option Plan 2006” below).
 
For fiscal years 2008 and 2007 the number and value of stock options issued and also the value of the share-based compensation is shown in the following table.
 
                                                                 
    Components with Long-term Incentive Effect  
                            Share-based
             
                            Compensation with Cash
             
    Stock Options     Settlement     Total  
    2008     2007     2008     2007     2008     2007     2008     2007  
    Number     in thousands     in thousands     in thousands  
 
Dr. Ben Lipps
    99,600       99,600     $ 1,537     $ 1,318     $ 626     $ 1,243     $ 2,163     $ 2,561  
Roberto Fusté
    49,800       49,800       768       659       0       0       768       659  
Dr. Emanuele Gatti
    49,800       49,800       768       659       260       366       1,028       1,025  
Rice Powell
    49,800       49,800       768       659       348       841       1,116       1,500  
Lawrence A. Rosen
    49,800       49,800       768       659       307       649       1,075       1,308  
Dr. Rainer Runte
    49,800       49,800       768       659       253       535       1,021       1,194  
Mats Wahlstrom
    49,800       49,800       768       659       395       961       1,163       1,620  
                                                                 
Total:
    398,400       398,400     $ 6,145     $ 5,272     $ 2,189     $ 4,595     $ 8,334     $ 9,867  
                                                                 


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The stated values of the stock options granted to members of the management board in fiscal year 2008 correspond to their fair value at the time of grant, namely a value of $15.43 (€9.80) (2007 — $13.23/ €9.71) per stock option. The exercise price for the stock options granted is $55.88 (€35.49) (2007 — $46.22/€33.91).
 
At the end of fiscal year 2008, the members of the management board held a total of 2,159,720 stock options (December 31, 2007 — 1,922,628 stock options).
 
The development and the status of the stock options of the members of the management board during 2008 are shown in more detail in the following table:
 
                                                                 
    Dr. Ben
    Roberto
    Dr. Emanuele
    Rice
    Lawrence
    Dr. Rainer
    Mats
       
    Lipps     Fusté     Gatti     Powell     A. Rosen     Runte     Wahlstrom     Total  
 
                                                                 
Options outstanding at January 1, 2008
Number
    824,280       241,476       226,476       162,846       177,804       157,953       131,793       1,922,628  
                                                                 
Weighted average exercise price in $
    31.05       31.15       31.76       36.84       36.47       38.50       40.23       33.38  
                                                                 
Options granted during the fiscal year
Number
    99,600       49,800       49,800       49,800       49,800       49,800       49,800       398,400  
                                                                 
Weighted average exercise price in $
    55.88       55.88       55.88       55.88       55.88       55.88       55.88       55.88  
                                                                 
Options exercised during the fiscal year
Number
    105,469       0       0       35,469       0       0       20,370       161,308  
                                                                 
Weighted average exercise price in $
    24.01       0.00       0.00       28.20       0.00       0.00       24.81       25.03  
                                                                 
Weighted average share price in $
    49.55       0.00       0.00       49.09       0.00       0.00       49.20       49.40  
                                                                 
Options outstanding at December 31, 2008
Number
    818,411       291,276       276,276       177,177       227,604       207,753       161,223       2,159,720  
                                                                 
Weighted average exercise price in $
    34.19       34.27       34.93       42.10       39.30       41.11       45.01       36.96  
                                                                 
Weighted average remaining contractual life in years
    3.7       5.0       5.1       5.4       5.5       5.3       5.6       4.7  
                                                                 
Range of exercise price in $
    20.14 - 55.88       15.89 - 55.88       15.89 - 55.88       15.89 -55.88       23.91 - 55.88       19.98 - 55.88       28.20 - 55.88       15.89 - 55.88  
                                                                 
Options exercisable at December 31, 2008
Number
    519,611       141,876       126,876       27,777       78,204       58,353       11,823       964,520  
                                                                 
Weighted average exercise price in $
    27.21       21.56       21.50       19.29       25.85       27.73       28.20       25.33  
 
On the basis of the financial targets achieved in fiscal year 2008, additional rights for share-based compensation with cash settlement amounting to $2,189,419 (2007 — $4,595,000) were earned. Since the actual distribution will only take place in March 2009, the number of shares will, on the basis of the then current share price, be determined only then by the supervisory board and serve as the basis for the calculation of the payment after the three year waiting period.
 
The amount of the total compensation of the management board of Fresenius Medical Care Management AG for fiscal years 2008 and 2007 consisted of:
 
                                                 
    Cash Compensation
    Components with
    Total Compensation
 
    (without long-term
    long-term
    (including long-term
 
    Incentive components)     Incentive Effect     Incentive Components)  
    2008     2007     2008     2007     2008     2007  
    in thousands     in thousands     in thousands  
 
Dr. Ben Lipps
  $ 2,914     $ 3,622     $ 2,163     $ 2,561     $ 5,077     $ 6,183  
Roberto Fusté
    1,075       1,355       768       659       1,843       2,014  
Dr. Emanuele Gatti
    1,872       2,230       1,028       1,025       2,900       3,255  
Rice Powell
    1,847       2,287       1,116       1,500       2,963       3,787  
Lawrence A. Rosen
    1,465       1,860       1,075       1,308       2,540       3,168  
Dr. Rainer Runte
    1,172       1,472       1,021       1,194       2,193       2,666  
Mats Wahlstrom
    2,140       2,608       1,163       1,620       3,303       4,228  
                                                 
Total:
  $ 12,485     $ 15,434     $ 8,334     $ 9,867     $ 20,819     $ 25,301  
                                                 


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The components with long-term incentive effect can be exercised only after the expiry of the specified vesting period. Their value is recognized over the vesting period as expense in the respective fiscal year. The expenses attributable to fiscal years 2008 and 2007 are stated in the following table.
 
                                                 
          Expense
       
    Expense
    for Long-term
       
    for Long-term
    Incentive
       
    Incentive
    Components
    Total Expense
 
    Components
    by Share-based
    for
 
    with Equity
    Compensation with
    Share-based
 
    Instruments     Cash Settlement     Compensation  
    2008     2007     2008     2007     2008     2007  
    in thousands     in thousands     in thousands  
 
Dr. Ben Lipps
  $ 1,188     $ 769     $ 796     $ 379     $ 1,984     $ 1,148  
Roberto Fusté
    594       384       0       0       594       384  
Dr. Emanuele Gatti
    594       384       265       133       859       517  
Rice Powell
    594       378       488       224       1,082       602  
Lawrence A. Rosen
    594       398       385       147       979       545  
Dr. Rainer Runte
    594       384       340       144       934       528  
Mats Wahlstrom
    594       378       558       256       1,152       634  
                                                 
Total:
  $ 4,752     $ 3,075     $ 2,832     $ 1,283     $ 7,584     $ 4,358  
                                                 
 
The non-performance related compensation components and the basic structures of the performance-related compensation components are agreed in the service agreements with the individual management board members. The stock options are granted on an annual basis by the supervisory board to members of the management board.
 
Commitments to Members of the Management Board for the Event of the Termination of their Appointment
 
There are individual contractual pension commitments for the management board members Roberto Fusté, Dr. Emanuele Gatti and Lawrence A. Rosen. With regard to these pension commitments, Fresenius Medical Care as of December 31, 2008 has pension obligations of $3,354,178 (at December 31, 2007 — $3,192,997). The additions to pension obligations in fiscal ,year 2008 amounted to $422,394 (2007 -$1,530,166). Each of the pension commitments provides a pension and survivor benefit, depending on the amount of the most recent basic salary, from the 65th year of life, or, in the case of termination because of professional or occupational incapacity, from the time of ending active work. The starting percentage of 30% increases with every year of service by 1.5 percentage points, 45% being the attainable maximum. 30% of the gross amount of any later income from an occupation of the management board member is set-off against the pension.
 
With the chairman of the management board, Dr. Ben Lipps, there is an individual agreement, instead of a pension provision, to the effect that, taking account of a competitive restriction after the ending of the employment contract/service agreement between him and Fresenius Medical Care Management AG, he can, for a period of ten years, act in a consultative capacity for the company. The consideration to be granted annually by Fresenius Medical Care Management AG in return would amount to approximately 33% of the non-performance related compensation components paid to him in the fiscal year 2008.
 
The management board members Dr. Emanuele Gatti, Rice Powell and Mats Wahlstrom have been granted benefits (severance, calculated on the basis of guaranteed simple annual income, based on the relevant basic salary) by individual agreements for the event that their employment with Fresenius Medical Care Management AG should end. One half of any additional compensation payments which the said management board members would be entitled to in connection with existing post-contractual prohibitions of competitive activity would be set-off against these severance payments. The employment contracts of management board members contain no express provisions for the case of a change of control.
 
Miscellaneous
 
In fiscal year 2008, no loans or advance payments of future compensation components were made to members of the management board of Fresenius Medical Care Management AG.
 
As far as legally permitted, Fresenius Medical Care Management AG undertook to indemnify the members of the management board against claims against them arising out of their work for the company and its affiliates, if such claims exceed their responsibilities under German law. To secure such obligations, the company concluded a Directors’ & Officers’ insurance with an appropriate excess. The indemnity applies for the time in which each


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member of the management board is in office and for claims in this connection after the ending of the membership of the management board in each case.
 
Former members of the management board did not receive any compensation in fiscal year 2008.
 
Compensation of the Supervisory Board of Fresenius Medical Care & Co KGaA and Supervisory Board of Management AG
 
Our supervisory board consists of six members, five of whom are also members of the supervisory board of Management AG, our general partner. Management AG has one additional supervisory board member who is not a member of our supervisory board. Each member of our supervisory board is paid an annual retainer fee of $80,000. The Chairman is paid twice that amount and the Vice-Chairman 150% of that amount. Supervisory Board members are reimbursed for their reasonable travel and accommodation expenses, including value added tax, incurred with respect to their duties as Supervisory Board members. Supervisory board members who serve on committees receive an additional retainer of $30,000 per year ($50,000 per year in the case of committee chairs). In accordance with our by-laws, we pay 50% of the fees directly to the board member for the five supervisory board members who are also members of the Management AG board and 100% of the sixth (unaffiliated) member’s compensation directly to him. In addition, under the management agreement with our general partner, the general partner pays the remaining 50% of the retainer fees of five members of our supervisory board and 100% of the fees payable to the general partner’s sixth board member (who has no position with FMC-AG & Co. KGaA or its Supervisory Board). By agreement, we reimburse Management AG for 100% of all fees it incurs (including compensation paid to the general partner’s supervisory board). The aggregate compensation reported 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.
 
For the years 2008 and 2007 the compensation for the members of the supervisory boards were as follows:
 
                                                                 
          Compensation for
    Compensation for
       
                committee services at
    committee services at
             
    Fixed compensation     Management AG(4)     KGaA     Total compensation  
    2008     2007     2008     2007     2008     2007     2008     2007  
    in thousands     in thousands     in thousands     in thousands  
 
Dr. Gerd Krick
  $ 160     $ 160     $ 20     $ 0     $ 30     $ 30     $ 210     $ 190  
Dr. Dieter Schenk
    120       120       15       0       0       0       135       120  
Dr. Ulf M. Scheider(2)
    160       160       25       0       0       0       185       160  
Dr. Walter L. Weisman
    80       80       15       0       50       50       145       130  
John Gerhard Kringel
    80       80       20       0       30       30       130       110  
Dr. William P. Johnstion
    80       80       40       0       30       30       150       110  
Prof. Dr. Bernd Fahrholz(3)
    80       80       0       0       30       30       110       110  
                                                                 
Total
  $ 760     $ 760     $ 135     $ 0     $ 170     $ 170     $