The Fresenius Group had an excellent year 2007. We again achieved record levels in sales and earnings, and improved profitability in all business segments. Capital expenditure on property, plant, and equipment was at a high level and assures further growth.

OPERATIONS AND BUSINESS ENVIRONMENT

GROUP STRUCTURE AND BUSINESS

Fresenius is an international health care group with products and services for dialysis, hospitals, and outpatient medical care. In addition, Fresenius focuses on hospital operations and offers engineering and services for hospitals and other health care facilities.

Fresenius AG was converted into a European Company (Societas Europaea) following the shareholder resolution of December 4, 2006. The change of legal form came into effect as from July 13, 2007, with its entry in the Commercial Register. Since then, Fresenius AG has been operating under the name Fresenius SE. After the successful expansion of the Group’s international business and the strong growth in recent years, the conversion into a European Company was a consistent step in the Company’s development. The SE is a modern legal form based on European law which will underline the Group’s international focus and facilitate an open and international corporate culture at Fresenius. The conversion did not lead to a liquidation of the Company or to the formation of a new legal entity. Since there was no change in its legal identity, the Company’s corporate structure and governance, and all shareholders’ stakes in the Company remained unchanged.

As of December 31, 2007, the operating business comprised the business segments Fresenius Medical Care, Fresenius Kabi, and Fresenius ProServe, all legally independent entities managed by the operating parent company, Fresenius SE. The corporate structure remained unchanged in 2007. As from January 1, 2008, the former Fresenius ProServe business segment has been replaced by two new business segments — Fresenius Helios and Fresenius Vamed which so far have formed Fresenius ProServe. This step underlines the growing importance of the hospital operations business (HELIOS) and the engineering and service business for hospitals (VAMED). The two business segments will now be run independently and be directly represented in Fresenius SE’s Management Board. The Fresenius Group is therefore now organized into four business segments: Fresenius Medical Care, Fresenius Kabi, Fresenius Helios and Fresenius Vamed.

Fresenius operates internationally and all business segments have a regional and decentralized structure. Responsibilities are clearly defined in line with the Company’s “entrepreneur in the enterprise” management principle. Additionally, management accountability is reinforced by an earnings orientated and target-linked compensation system.

Fresenius has an international marketing and production network of about 70 production sites worldwide. Key production sites are located in the United States, China, Japan, Germany and Sweden. Production plants are also located in other European countries, Latin America, Asia and South Africa. This international production network allows us to implement our business model while meeting the most exacting logistics and regulatory requirements. The decentralized structure of the production sites also substantially reduces transportation costs and currency exposure.

Management and control

Fresenius AG’s conversion into an SE has had no effect on the governance structure, apart from the change in the composition of the Supervisory Board.

The corporate organs of the Group are the Management Board, the Supervisory Board and the Annual General Meeting. Fresenius SE has a two-tier management and control system consisting of the Management Board and the Supervisory Board. This is in accordance with Regulation No. 2157/2001 on the Statute for a European Company (SE). The two boards work independently of each other. No one is allowed to be a member of both organs simultaneously.

The Management Board of Fresenius SE conducts the business and represents the Company in dealings with third parties. As from January 1, 2008, the Management Board has seven members. According to the Management Board’s rules of procedure, each member is accountable for their own area of responsibility. However, the members have joint responsibility for the management of the Group. The Management Board is required to report to the Supervisory Board regularly, in particular on its corporate policy and strategies, business profitability, current operations, and any other matters that could be of significance for the Company’s profitability and liquidity.

The Supervisory Board appoints the members of the Management Board and advises and supervises the Management Board in its management of the Company. It is prohibited from managing the Company directly. However, the Management Board’s rules of procedure require it to obtain the Supervisory Board’s approval for specific activities.

The Supervisory Board of Fresenius SE is comprised of six shareholders’ representatives and six employees’ representatives. All twelve members of the Supervisory Board are appointed by the Annual General Meeting. Six of the twelve members must be appointed on the basis of a proposal put forward by the employees; the Annual General Meeting is bound to the employees’ proposal. In accordance with the legal form of an SE, the employee representatives may come from various European countries.

The Supervisory Board must meet at least twice per calendar half-year.

The appointment and dismissal of the members of the Management Board is in accordance with Article 39 of the SE Regulation. The articles of association of Fresenius SE also provide that deputy members of the Management Board may be appointed.

For information on compensation, please see the Notes.

Key products, services and business processes

Fresenius Medical Care offers a comprehensive range of products for hemodialysis and peritoneal dialysis and provides dialysis care in its own dialysis clinics in over 25 countries. Dialysis products are sold to Group clinics as well as to external dialysis care providers in more than 100 countries. Fresenius Kabi is one of the few companies to offer a comprehensive portfolio of enteral and parenteral nutrition therapies.

The company also offers a broad spectrum of products for fluid and blood volume substitution as well as a range of intravenously administered (IV) generic drugs. Fresenius Kabi sells its products mainly to hospitals in approximately 100 countries. Fresenius Helios operates hospitals mainly in Germany. Fresenius Vamed provides engineering and services for hospitals and other health care facilities internationally.

Important markets and competitive position

Fresenius operates in more than 60 countries through its subsidiaries. The main markets are North America and Europe, where Fresenius generates 43 % of its sales in each region.

Fresenius Medical Care is the largest dialysis company in the world. Fresenius Kabi holds leading positions in Europe and in the growth markets of Asia-Pacific, Latin America, and South Africa. Fresenius Helios is a leading private hospital operator in Germany. Fresenius Vamed is one of the internationally leading companies in the field of health care engineering.

Legal and economic factors

The markets of the Fresenius Group are fundamentally stable and relatively independent of economic cycles due to the intrinsic importance of the life-saving and life-sustaining products and treatments that the Group offers. Furthermore, these markets are expanding, mainly for three reasons: demographics, the demand for innovative therapies in the industrialized countries, and the increasing availability of high-quality health care in the developing and newly industrializing countries.

The statement of income and the balance sheet can be influenced by currency translation effects as a result of exchange rate fluctuations, especially in the rate of the US dollar to the euro. This factor had a pronounced effect, both on the statement of income due to the changed average annual exchange rate between these currencies of 1.3705 in 2007 compared to 1.2558 in 2006 and on the balance sheet due to the changed closing rate of exchange of 1.4721 as of December 31, 2007 compared to 1.3170 as of December 31, 2006.

There were no legal aspects that significantly impacted the business performance in 2007.

Capital, shareholders, articles of association

The summary below shows the subscribed capital of Fresenius SE. On December 4, 2006, the Extraordinary General Meeting approved a share split with capital increase from the Company’s funds. These resolutions were entered in the Commercial Register on January 24, 2007. As a result, the Company’s subscribed capital increased by approximately € 22.6 million and the number of shares outstanding tripled. The share split did not affect the preference dividend or the minimum dividend payable on the preference shares. Three preference shares now represent the preference that one preference share previously denoted. The change became effective as of February 2, 2007.

      December 31, 2007  December 31, 2006
  Number of
shares 		Subscribed
capital in €
 % of
subscribed
capital		 Number of
shares		 Subscribed
capital in €
 
Ordinary shares / capital 77,582,385 77,582,385.00 50% 25,725,646 65,857,653.76
Preference shares / capital 77,582,385 77,582,385.00 50% 25,725,646 65,857,653.76
Total 
 155,164,770 155,164,770.00 100% 51,451,292 131,715,307.52
 

The shares of Fresenius SE are non-par-value bearer shares. The subscribed capital is divided into an equal number of ordinary and preference shares. Shareholders’ rights are regulated by the German Stock Corporation Act (AktG). Additionally, the articles of association of Fresenius SE contain the following three provisions for the holders of non-voting preference shares:

  1. From retained earnings for the year they will receive a dividend of least € 0.02 per preference share and higher by € 0.01 per preference share than that for an ordinary share.
  2. The minimum dividend payable on preference shares takes precedence over payment of a dividend on ordinary shares.
  3. If the retained earnings of one or more fiscal years is not sufficient to pay a dividend of € 0.02 per preference share, the amounts not distributed will be paid in arrears without interest from the retained earnings in subsequent fiscal years, after distributing the minimum preference dividend for those fiscal years and before payment of a dividend on the ordinary shares. The deferred payment right is a constituent of the share of profits from retained earnings of that fiscal year for which the deferred payment is made.

The Management Board is authorized, with the consent of the Supervisory Board, to increase the subscribed capital of Fresenius SE in accordance with the Annual General Meeting’s resolutions on approved capital. This involves two authorizations:

In addition, there is the following conditional capital: 

Fresenius SE does not have a share buyback program.

Direct and indirect ownership interests in Fresenius SE are listed in the Notes. The Else Kröner-Fresenius-Stiftung notified the Company on December 28, 2007 that they have an ownership interest in Fresenius SE of 46,582,692 ordinary shares representing 60.04 % of the voting rights.

Changes to the articles of association are made in accordance with Article 59 of the SE Regulation in accordance with Section 18 (3) of the articles of association. Unless mandatory legal provisions require otherwise, amendments of the statutes require a majority of two-thirds of the votes cast or, if at least half of the subscribed capital is represented, the simple majority of votes cast. If, for the effectiveness of the passing of resolutions, mandatory legal provisions require that, in addition, a majority of the subscribed capital be represented when the resolution is passed, the simple majority of the subscribed capital represented shall be sufficient, to the extent that this is permitted by law. If the voting results in a tie a motion shall be deemed rejected. The articles of association of Fresenius SE authorize the Supervisory Board to make changes to these that relate to their wording in its respective relevant version without a resolution by the General Meeting.

Material agreements embodying contingent conditions in the event of a change of control as the result of a takeover bid exist in respect of some of our long-term financing agreements. These agreements contain customary change of control clauses that grant creditors the right of premature call in the event of a change of control, whereby, generally, the change of control has to be followed by a downgrading of the Company’s rating.