34. Stock options

Compensation cost in connection with the stock option plans of the Fresenius Group

In 2009, the Fresenius Group recognized compensation cost in an amount of
€ 36 million for convertible bonds and stock options granted since 2005. For stock incentive plans which are performance based, the Fresenius Group recognizes compensation cost over the vesting periods, based on the then current market values of the underlying stock.

Fair Value of Stock Options

The Fresenius Group elected to adopt FAS 123(R), Share-Based Payment, prospectively.

The Fresenius Group uses a binomial option pricing model in determining the fair value of stock options granted under the stock option plans of Fresenius SE and Fresenius Medical Care. Option valuation models require the input of highly subjective assumptions including expected stock price volatility. Fresenius Group’s assumptions are based upon its past experiences, market trends and the experiences of other entities of the same size and in similar industries. To incorporate the effects of expected early exercise in the model, an early exercise of vested options was assumed as soon as the share price exceeds 150 % of the exercise price. Fresenius Group’s stock options have characteristics that vary significantly from traded options and changes in subjective assumptions can materially affect the fair value of the option.

The weighted-average assumptions for the calculation of the fair value of grants of the Fresenius SE Stock Option Plan 2008 made during the years 2009 and 2008 are as follows:

  2009 2008
in million € December Grant July Grant December Grant August Grant
Expected dividend yield 2.33 % 2.90 % 2.39 % 1.63 %
Risk-free interest rate 2.73 % 3.04 % 2.88 % 4.20 %
Expected volatility 28.83 % 29.01 % 28.91 % 27.82 %
Life of options 7 years 7 years 7 years 7 years
Exercise price per option
in €
39.61 36.89 43.52 53.56

  2009 2008
in million € December Grant July Grant December Grant August Grant
Expected dividend yield 2.33 % 2.90 % 2.39 % 1.63 %
Risk-free interest rate 2.73 % 3.04 % 2.88 % 4.20 %
Expected volatility 28.83 % 29.01 % 28.91 % 27.82 %
Life of options 7 years 7 years 7 years 7 years
Exercise price per option
in €
39.61 36.89 43.52 53.56

The expected volatility results from the historical volatility calculated over the expected life of options. The volatility was determined when the fair value of stock options was calculated for the first time and since then has been controlled every year upon issuance of a new tranche.

Fresenius SE stock option plans

Description of the Fresenius SE stock option plans in place

On December 31, 2009, Fresenius SE had three stock option plans in place; the Fresenius AG stock option based plan of 1998 (1998 Plan), the Fresenius AG Stock Option Plan 2003 (2003 Plan) which is based on convertible bonds and the stock option based Fresenius SE Stock Option Plan 2008 (2008 Plan). The latter is the only plan under which stock options were granted during 2009.

Stock Option Plan 2008

On May 21, 2008, Fresenius SE’s Annual General Meeting has resolved upon the 2008 Plan by authorizing the granting of subscription rights to members of the Management Board and managerial employees of the Company and affiliated companies. To fulfill the subscription rights under the 2008 Plan, the subscribed capital of Fresenius SE was increased conditionally by up to € 6.2 million through the issue of up to 3.1 million no par value bearer ordinary shares and 3.1 million no par value bearer preference shares.

Under the 2008 Plan, up to 6.2 million options can be issued, which carry entitlement to obtain 3.1 million ordinary shares and 3.1 million preference shares. Up to 1.2 million options are designated for members of the Management Board of Fresenius SE, up to 3.2 million options are designated for members of the management of directly or indirectly affiliated companies (except for Fresenius Medical Care) and up to 1.8 million options are designated for managerial staff members of Fresenius SE and its affiliated companies (except for Fresenius Medical Care). With respect to the members of Fresenius SE’s Management Board, the Supervisory Board has sole authority to grant stock options and administer the 2008 Plan. The Management Board of Fresenius SE has such authority with respect to all other participants in the 2008 Plan. The options can be granted in five tranches with effect as of the first bank working day in July and / or the first bank working day in December. The exercise price of options shall be the average closing price of Fresenius SE’s ordinary shares and preference shares, respectively, on the Frankfurt Stock Exchange during the 30 trading days immediately prior to each grant date. For participants in the United States, the exercise price may be the average closing price of both classes of shares during the 30 calendar days immediately prior to the grant date, if these are higher. Options granted have a seven-year term but can be exercised only after a three-year vesting period. The vesting of options granted is mandatorily subject to the condition, in each case, that the annual success target within the three-year vesting period is achieved. For each such year, the success target is achieved if the consolidated net income attributable to Fresenius SE, adjusted for extraordinary effects, has increased by at least
8 % compared to the respective adjusted net income attributable to Fresenius SE of the previous fiscal year. For each year in which the success target has not been met, one-third of the options granted shall forfeit. The adjusted net income attributable to Fresenius SE shall be calculated on the basis of the calculation method of the accounting principles according to US GAAP. For the purposes of the 2008 Plan, the adjusted net income attributable to Fresenius SE is determined and will be verified bindingly by Fresenius SE’s auditor during the audit of the consolidated financial statements. The performance targets for 2009 and 2008 were met. Upon exercise of vested options, Fresenius SE has the right to grant treasury shares or a cash payment in lieu of increasing capital by the issuance of new shares. If all conditions are fulfilled, stock options may be exercised throughout the year with the exception of certain pre-determined black-out periods.

Stock Option Plan 2003

During 2003, Fresenius AG adopted the 2003 Plan for members of the Management Board and executive employees. This incentive plan which is based on convertible bonds was replaced by the 2008 Plan and no options have been granted since 2008. Under the 2003 Plan, eligible employees have the right to acquire ordinary and preference shares of Fresenius SE. The bonds expire in ten years and one third of them can be exercised beginning after two, three and four years after the grant date, respectively. Upon issuance of the option, the employees have the right to choose options with or without a stock price target. The conversion price of options subject to a stock price target corresponds to the stock exchange quoted price of the ordinary or preference shares upon the first time the stock exchange quoted price exceeds the initial value (after the share split in 2007: 1/3 of the initial value) by at least 25 %. If converted after the share split, the conversion price which entitles to three ordinary shares or preference shares, respectively, is equal to the triple of one third of the initial value. The initial value is the joint average stock exchange price of bearer ordinary shares and non-voting bearer preference shares during the last 30 trading days prior to the date of grant. The conversion price of options without a stock price target is the initial value. In the case of options not subject to a stock price target, the number of convertible bonds awarded to the eligible employee would be 15 % less than if the employee elected options subject to the stock price target. Each convertible bond granted after the share split entitles to subscribe one ordinary or preference share, subject to payment of the conversion price. Bonds granted and converted prior to the share split were entitled to subscribe one ordinary or preference share, conversion after the share split entitles to three ordinary or preference shares.

Stock Option Plan 1998

During 1998, Fresenius AG adopted the 1998 Plan for members of the Management Board and executive employees. This stock incentive plan was replaced by the 2003 Plan and no options have been granted since 2003. Under the 1998 Plan, eligible employees have the right to acquire ordinary and preference shares of Fresenius SE. Options granted under this plan have a ten-year term. At December 31, 2009, all options were exercisable. Prior to the share split, one ordinary or one preference share could be acquired for each option. After the share split in 2007, each option entitles to acquire three ordinary or preference shares. The maximum number of ordinary or preference shares to be issued to the members of the Management Board or executive employees has been adjusted accordingly.

Transactions during 2009

In 2009, Fresenius SE awarded 1,067,248 stock options, including 180,600 options to members of the Management Board of Fresenius SE, at a weighted-average exercise price of € 36.90, a weighted-average fair value of € 8.25 each and a total fair value of € 9 million, which will be amortized over the three-year vesting period.

During the fiscal year 2009, Fresenius SE received cash of € 4 million from the exercise of 171,642 stock options. The average stock price at the exercise date was € 35.92 for ordinary shares and € 41.82 for preference shares. The intrinsic value of options exercised in 2009 was € 2 million.

At December 31, 2009, out of 457,062 outstanding and exercisable options issued under the 1998 Plan, 25,800 were held by the members of the Fresenius SE Management Board. The number of outstanding stock options issued under the 2003 Plan was 2,799,514, of which 1,953,308 were exercisable. The members of the Fresenius SE Management Board held 514,500 options. Out of 2,136,876 outstanding stock options issued under the 2008 Plan, 361,200 were held by the members of the Fresenius SE Management Board.

Stock option transactions are summarized as follows:

Ordinary shares
December 31
Number of
options
Weighted-
average
exercise price
in €
Number of
options
exercisable
Balance 2007 2,121,996 34.93 822,094
Granted 549,551 53.48  
Exercised 241,425 26.31  
Forfeited 59,823 37.62  
Balance 2008 2,370,299 40.05 951,484
Granted 533,624 33.82  
Exercised 85,821 24.55  
Forfeited 121,376 36.14  
Balance 2009 2,696,726 39.49 1,205,185

Ordinary shares
December 31
Number of
options
Weighted-
average
exercise price
in €
Number of
options
exercisable
Balance 2007 2,121,996 34.93 822,094
Granted 549,551 53.48  
Exercised 241,425 26.31  
Forfeited 59,823 37.62  
Balance 2008 2,370,299 40.05 951,484
Granted 533,624 33.82  
Exercised 85,821 24.55  
Forfeited 121,376 36.14  
Balance 2009 2,696,726 39.49 1,205,185

Preference shares
December 31
Number of
options
Weighted-
average
exercise price
in €
Number of
options
exercisable
Balance 2007 2,121,996 35.74 822,094
Granted 549,551 51.78  
Exercised 241,425 27.75  
Forfeited 59,823 38.88  
Balance 2008 2,370,299 40.21 951,484
Granted 533,624 39.97  
Exercised 85,821 25.24  
Forfeited 121,376 38.10  
Balance 2009 2,696,726 40.73 1,205,185

Preference shares
December 31
Number of
options
Weighted-
average
exercise price
in €
Number of
options
exercisable
Balance 2007 2,121,996 35.74 822,094
Granted 549,551 51.78  
Exercised 241,425 27.75  
Forfeited 59,823 38.88  
Balance 2008 2,370,299 40.21 951,484
Granted 533,624 39.97  
Exercised 85,821 25.24  
Forfeited 121,376 38.10  
Balance 2009 2,696,726 40.73 1,205,185

The following tables provide a summary of fully vested options outstanding and exercisable for both preference and ordinary shares at December 31, 2009:

Options for ordinary shares

  Options outstanding Options exercisable
Range of
exercise price
in €
Number of options Weighted-average
remaining
contractual life
in years
Weighted-average
exercise price
in €
Number of options Weighted-average
remaining
contractual life
in years
Weighted-average
exercise price
in €
10.01 – 15.00 118,977 3.50 13.65 118,977 3.50 13.65
15.01 – 20.00 102,702 2.61 19.61 102,702 2.61 19.61
20.01 – 25.00 144,376 4.50 21.96 144,376 4.50 21.96
25.01 – 30.00 280,598 5.45 28.56 280,598 5.45 28.56
30.01 – 35.00 668,046 5.39 33.17 137,109 1.08 30.71
35.01 – 40.00 409,786 6.41 39.29 274,626 6.36 39.11
40.01 – 45.00 49,640 5.92 41.62 0    
45.01 – 50.00 8,484 6.50 48.81 4,812 6.50 48.81
50.01 – 55.00 486,111 5.58 54.69 0    
55.01 – 60.00 415,337 7.50 56.43 137,764 7.50 56.43
70.01 – 75.00 12,669 7.50 70.54 4,221 7.50 70.54
  2,696,726 5.70 39.49 1,205,185 4.86 31.60

  Options outstanding Options exercisable
Range of
exercise price
in €
Number of options Weighted-average
remaining
contractual life
in years
Weighted-average
exercise price
in €
Number of options Weighted-average
remaining
contractual life
in years
Weighted-average
exercise price
in €
10.01 – 15.00 118,977 3.50 13.65 118,977 3.50 13.65
15.01 – 20.00 102,702 2.61 19.61 102,702 2.61 19.61
20.01 – 25.00 144,376 4.50 21.96 144,376 4.50 21.96
25.01 – 30.00 280,598 5.45 28.56 280,598 5.45 28.56
30.01 – 35.00 668,046 5.39 33.17 137,109 1.08 30.71
35.01 – 40.00 409,786 6.41 39.29 274,626 6.36 39.11
40.01 – 45.00 49,640 5.92 41.62 0    
45.01 – 50.00 8,484 6.50 48.81 4,812 6.50 48.81
50.01 – 55.00 486,111 5.58 54.69 0    
55.01 – 60.00 415,337 7.50 56.43 137,764 7.50 56.43
70.01 – 75.00 12,669 7.50 70.54 4,221 7.50 70.54
  2,696,726 5.70 39.49 1,205,185 4.86 31.60

Options for preference Shares

  Options outstanding Options exercisable
Range of
exercise price
in €
Number of options Weighted-average
remaining
contractual life
in years
Weighted-average
exercise price
in €
Number of options Weighted-average
remaining
contractual life
in years
Weighted-average
exercise price
in €
10.01 – 15.00 130,257 3.50 12.05 130,257 3.50 12.05
15.01 – 20.00 144,376 4.50 19.00 144,376 4.50 19.00
20.01 – 25.00 91,422 2.50 21.13 91,422 2.50 21.13
25.01 – 30.00 280,598 5.45 29.30 280,598 5.45 29.30
30.01 – 35.00 73,607 1.58 34.73 73,607 1.58 34.73
35.01 – 40.00 569,856 6.43 39.86 38,919 5.50 38.52
40.01 – 45.00 434,369 5.62 40.79 299,209 5.23 40.88
45.01 – 50.00 49,640 5.92 45.40 0    
50.01 – 55.00 494,595 5.60 52.44 4,812 6.50 53.01
55.01 – 60.00 415,337 7.50 56.11 137,764 7.50 56.11
70.01 – 75.00 12,669 7.50 70.14 4,221 7.50 70.14
  2,696,726 5.70 40.73 1,205,185 4.86 32.39

  Options outstanding Options exercisable
Range of
exercise price
in €
Number of options Weighted-average
remaining
contractual life
in years
Weighted-average
exercise price
in €
Number of options Weighted-average
remaining
contractual life
in years
Weighted-average
exercise price
in €
10.01 – 15.00 130,257 3.50 12.05 130,257 3.50 12.05
15.01 – 20.00 144,376 4.50 19.00 144,376 4.50 19.00
20.01 – 25.00 91,422 2.50 21.13 91,422 2.50 21.13
25.01 – 30.00 280,598 5.45 29.30 280,598 5.45 29.30
30.01 – 35.00 73,607 1.58 34.73 73,607 1.58 34.73
35.01 – 40.00 569,856 6.43 39.86 38,919 5.50 38.52
40.01 – 45.00 434,369 5.62 40.79 299,209 5.23 40.88
45.01 – 50.00 49,640 5.92 45.40 0    
50.01 – 55.00 494,595 5.60 52.44 4,812 6.50 53.01
55.01 – 60.00 415,337 7.50 56.11 137,764 7.50 56.11
70.01 – 75.00 12,669 7.50 70.14 4,221 7.50 70.14
  2,696,726 5.70 40.73 1,205,185 4.86 32.39

At December 31, 2009, the aggregate intrinsic value of exercisable options for ordinary shares and preference shares was € 14 million and € 21 million, respectively.

At December 31, 2009, total unrecognized compensation costs related to non-vested options granted under the 2003 Plan and the 2008 Plan were € 18 million. These costs are expected to be recognized over a weighted-average period of 1.9 years.

Fresenius Medical Care AG & Co. KGaa stock option plans

Stock Option Plan 2006

On May 9, 2006, as amended on May 15, 2007, the Fresenius Medical Care AG & Co. KGaA Stock Option Plan 2006 (Amended 2006 Plan) was established by resolution of FMC-AG & Co. KGaA’s Annual General Meeting with a conditional capital increase up to € 15 million subject to the issue of up to 15 million no par value bearer ordinary shares with a nominal value of € 1.00 each. Under the Amended 2006 Plan, up to 15 million options can be issued, each of which can be exercised to obtain one ordinary share, with up to 3 million options designated for members of the Management Board of Fresenius Medical Care Management AG (FMC Management AG), the General Partner, up to 3 million options designated for members of management boards of direct or indirect subsidiaries of FMC-AG & Co. KGaA and up to 9 million options designated for managerial staff members of FMC-AG & Co. KGaA and such subsidiaries. With respect to participants who are members of the Management Board of FMC Management AG, its Supervisory Board has sole authority to grant stock options and exercise other decision making powers under the Amended 2006 Plan (including decisions regarding certain adjustments and forfeitures). The Management Board of FMC Management AG has such authority with respect to all other participants in the Amended 2006 Plan.

Options under the Amended 2006 Plan can be granted the last Monday in July and / or the first Monday in December. The exercise price of options granted under the Amended 2006 Plan shall be the average closing price on the Frankfurt Stock Exchange of FMC-AG & Co. KGaA’s ordinary shares during the 30 calendar days immediately prior to each grant date. Options granted under the Amended 2006 Plan have a seven-year term but can be exercised only after a three-year vesting period. The vesting of options granted is subject to achievement of performance targets, measured over a three-year period from the grant date. For each such year, the performance target is achieved if FMC-AG & Co. KGaA’s adjusted basic income per ordinary share (EPS), as calculated in accordance with the Amended 2006 Plan, increases by at least 8 % year over year during the vesting period, beginning with EPS for the year of grant as compared to EPS for the year preceding such grant. Calculation of EPS under the Amended 2006 Plan excluded, among other items, the costs of the transformation of Fresenius Medical Care’s legal form and the conversion of preference shares into ordinary shares. For each grant, one-third of the options granted are forfeited for each year in which EPS does not meet or exceed the 8 % target. The performance targets for 2009 and 2008 were met. Vesting of the portion or portions of a grant for a year or years in which the performance target is met does not occur until completion of the entire three-year vesting period. Upon exercise of vested options, FMC-AG & Co. KGaA has the right to reissue treasury shares or issue new shares.

Options granted under the Amended 2006 Plan to US participants are non-qualified stock options under the United States Internal Revenue Code of 1986, as amended. Options under the Amended 2006 Plan are not transferable by a participant or a participant’s heirs, and may not be pledged, assigned, or otherwise disposed of.

2001 International Stock Option Plan

Under the Fresenius Medical Care 2001 International Stock Incentive Plan (2001 Plan), options in the form of convertible bonds with a principal of up to
€ 12 million were issued to the members of the Management Board and other employees of FMC-AG & Co. KGaA representing grants for up to 12 million non-voting preference shares. The convertible bonds have a par value of
€ 1.00 and bear interest at a rate of 5.5 %. Except for the members of the Management Board, eligible employees may purchase the bonds by issuing a non-recourse note with terms corresponding to the terms of and secured by the bond. FMC-AG & Co. KGaA has the right to offset its obligation on a bond against the employee’s obligation on the related note; therefore, the convertible bond obligations and employee note receivables represent stock options issued by FMC-AG & Co. KGaA and are not reflected in the consolidated financial statements. The options expire ten years from issuance and can be exercised beginning two, three or four years after issuance. Compensation costs related to awards granted under this plan are amortized on a straight-line basis over the vesting period for each separately vesting portion of the awards. Bonds issued to Management Board members who did not issue a note to FMC-AG & Co. KGaA are recognized as a liability on the Group’s statement of financial position.

Upon issuance of the option, the employees had the right to choose options with or without a stock price target. The conversion price of options subject to a stock price target corresponds to the stock exchange quoted price of the preference shares upon the first time the stock exchange quoted price exceeds the initial value by at least 25 %. The initial value is the average price of the preference shares during the last 30 trading days prior to the date of grant. In the case of options not subject to a stock price target, the number of convertible bonds awarded to the eligible employee would be 15 % less than if the employee elected options subject to the stock price target. The conversion price of the options without a stock price target is the initial value. Each option entitles the holder thereof, upon payment of the respective conversion price, to acquire one preference share. Effective May 2006, no further grants can be issued under the 2001 Plan and no options were granted under the 2001 Plan after 2005.

Transactions during 2009

During 2009, Fresenius Medical Care awarded 2,585,196 options, including 348,600 to members of the Management Board of FMC Management AG, at a weighted-average exercise price of € 32.08, a weighted-average fair value of
€ 7.67 each and a total fair value of € 20 million, which will be amortized over the three-year vesting period.

During 2009, FMC-AG & Co. KGaA received cash of € 46 million from the exercise of stock options and € 6 million from a related tax benefit. The intrinsic value of options exercised in 2009 was € 20 million.

At December 31, 2009, the Management Board members of FMC Management AG, held 2,041,121 stock options for ordinary shares and employees of FMC-AG & Co. KGaA held 9,852,942 stock options for ordinary shares and 146,601 stock options for preference shares under the various stock-based compensation plans of Fresenius Medical Care.

The table below provides reconciliations for options outstanding at December 31, 2009 as compared to December 31, 2008.

  Number of options
in thousand
Weighted-average
exercise price
in €
Balance at December 31, 2008 (options for ordinary shares) 11,280 29.15
Granted 2,585 32.08
Exercised 1,815 24.08
Forfeited 156 33.18
Balance at December 31, 2009 (options for ordinary shares) 11,894 30.50
     
Balance at December 31, 2008 (options for preference shares) 242 16.18
Exercised 74 13.38
Forfeited 21 11.04
Balance at December 31, 2009 (options for preference shares) 147 18.35

  Number of options
in thousand
Weighted-average
exercise price
in €
Balance at December 31, 2008 (options for ordinary shares) 11,280 29.15
Granted 2,585 32.08
Exercised 1,815 24.08
Forfeited 156 33.18
Balance at December 31, 2009 (options for ordinary shares) 11,894 30.50
     
Balance at December 31, 2008 (options for preference shares) 242 16.18
Exercised 74 13.38
Forfeited 21 11.04
Balance at December 31, 2009 (options for preference shares) 147 18.35

The following table provides a summary of fully vested options outstanding and exercisable for both preference and ordinary shares at December 31, 2009:

  Number
of options
in thousand
Weighted-average
remaining
contractual life
in years
Weighted-average
exercise price
in €
Aggregate
intrinsic value
in million €
Options for ordinary shares 4,589 4.02 25.27 54
Options for preference shares 147 3.91 18.35 2

  Number
of options
in thousand
Weighted-average
remaining
contractual life
in years
Weighted-average
exercise price
in €
Aggregate
intrinsic value
in million €
Options for ordinary shares 4,589 4.02 25.27 54
Options for preference shares 147 3.91 18.35 2

At December 31, 2009, total unrecognized compensation costs related to non-vested options granted under all plans were € 33 million. These costs are expected to be recognized over a weighted-average period of 1.6 years.

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35. Related party transactions

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