Separate financial statements and management report of Drägerwerk AG. as of December 31, 2005

Transcription

1 D Separate financial statements and management report of Drägerwerk AG as of December 31, 2005

2 Contents 1 Contents 2 Management report of Drägerwerk AG 9 Separate financial statements of Drägerwerk AG 9 Income statement of Drägerwerk AG for the year ended December 31, Balance sheet of Drägerwerk AG as of December 31, Analysis of non-current assets of Drägerwerk AG 14 Notes to Drägerwerk AG s separate financial statements The Company s Boards 30 Major shareholdings of Drägerwerk AG 31 Forward-looking statements The Company s Boards Notes Financial statements Management report Forward-looking statements Major shareholdings

3 2 Management report of Drägerwerk AG Management report of Drägerwerk AG Dividend proposal The Executive and Supervisory Boards of Lübeck-based Drägerwerk AG will propose to distribute out of the net earnings of EUR 36.3 million for fiscal year 2005 a cash dividend of EUR 0.50 per preferred share (2004: EUR 0.45) and EUR 0.44 per common share (2004: EUR 0.39), hence a total EUR 5.9 million, and carry forward the balance of EUR 30.4 million. The preferred stock dividend also governs the dividend for participation certificates, which will amount to EUR 5.00 each (2004: EUR 4.50). Participation certificates entitle to a dividend ten times the preferred stock dividend since their arithmetic par value is ten times that of a preferred share. Business activities Drägerwerk AG, Lübeck, as a holding company, directly or indirectly holds the shares in the parent companies of the subgroups Dräger Medical (65 percent) and Dräger Safety (100 percent). With the focus being placed on the core business of these two subgroups in prior years, the Company now only has a few other small shareholdings. Drägerwerk AG has functions which serve to fulfill the core tasks of the Company as well as provide services to the subgroups and their subsidiaries. These functions include the legal, tax and insurance departments, the treasury, public relations, investor relations, the financial control and accounting departments for the Company and the Group, HR, the internal audit and basic research departments and real estate management via a real estate company (Dräger Immobilien GmbH). The services to the subgroups are closely coordinated with them and provided in accordance with arm s length principles. The most important task of Drägerwerk AG is the management of the Group in its capacity as the ultimate parent company. This task has been facilitated by appointing a member of the Executive Board of Drägerwerk AG as Executive Board Chairman of each of the subgroups parent companies. The business activities of the subgroups Dräger Medical and Dräger Safety are discussed in detail in the group management report. Control systems The planning and control systems are based on the annual revision of the Dräger Group s strategic plan. This plan contains the Group s targets, which are developed in line with expected market developments, technological trends and their influence on products and services, as well as with the financial means of the Dräger Group. The head offices of the Group and subgroups are closely linked with the various business units, regions and group companies in the strategic plan. The results are summarized in a five-year plan, the first year of which is developed into a detailed budget for the coming year. Target figures for the monthly reports on the development of the net assets, financial position and results of operations of the group companies, subgroups and the Dräger Group as a whole are derived from this budget. These data are supplemented by detailed information required for the management of the Group s operating activities. In addition to the monthly reports, semi-annual risk

4 Management report > Dividend proposal/business activities/control systems/general economic conditions/business trend and results of operations 3 reports are compiled which mainly contain the strategic risks that cannot be directly derived from the Group s figures. The reports are discussed during Executive and Supervisory Board meetings and provide essential information for key decisions. General economic conditions In 2005, global economic activity was robust despite the higher prices for oil and raw materials but varied considerably between the key economic areas. Real GDP growth in 2005 was 3.5 percent in the US, for example, 2.8 percent in Japan, 9.9 percent in China and 1.4 percent in the euro area, with Germany recording growth of 0.9 percent. Consumer confidence in the US led to a renewed rise in consumption and further growth, despite prolonged structural problems due to the renewed current account deficit, the negative savings/income ratio and the increase in government debt. The stagnating Japanese economy was kick-started by the rise in exports and investments, coupled with an increase in consumption. With the wave of consolidation in the Japanese banking industry now considered complete, interest rates still low, and a weak yen, this favorable economic trend has solid foundations. The growth in China s GDP also reflects a rise in investments, exports, industrial output and consumption. A prolonged period of high growth is needed for the country to achieve its per-capita-income target of $1,600 (2000: $800). Driving growth in the euro area were exports and investments. The highest growth rates were recorded by Ireland, Spain, Finland and Luxembourg, and the lowest by Italy, the Netherlands, Portugal and Germany, where the discrepancy between successful exports and ailing consumption was particularly noticeable and put the brakes on any sustainable uptrend. The industries in which the two subgroups operate are highly concentrated and characterized by tough competition. However, both industries boast long-term stability and a slight growth trend. Business trend and results of operations Drägerwerk AG s business trend and net profit of EUR 13.9 million (2004: EUR 29.0 million) have essentially been influenced by (a) intragroup restructuring; (b) its result from operating activities; (c) the performance of its operating companies. As to (a) intragroup restructuring As of January 1, 2005, 70 percent of Dräger Interservices GmbH was transferred to Dräger Safety AG & Co. KGaA and 30 percent to Dräger Medical Holding GmbH as the business activities of Interservices GmbH are largely integrated in the business processes of the operating companies. As of the same date, Drägerwerk AG took over Dräger InTek GmbH from Dräger Interservices GmbH. This company, which is to begin trading under the name Dräger Immobilien GmbH as of February 1, 2006, serves as a facility and real estate management company for buildings belonging to or rented by Drägerwerk AG in Lübeck and other locations in Germany. Its duties also include letting unoccupied space to third parties as part of an industrial estate model. Forward-looking statements Major shareholdings The Company s Boards Notes Financial statements Management report

5 4 Management report of Drägerwerk AG Upon entry in the commercial register on October 31, 2005, Dräger Medical AG & Co. KGaA was transformed into Dräger Medical AG & Co. KG. This change in legal form has simplified the management structure and executive bodies of the subgroup and allowed it to use Drägerwerk AG s expenses and corresponding loss carryforwards for corporate income tax purposes. As to (b) its result from operating activities Drägerwerk AG s result from operating activities, including services to group companies and third parties, was stable in The decline in other operating income and other operating expenses is due to the absence of nonrecurring items. Expenses of EUR 1.0 million (2004: EUR 0.6 million) were incurred by Drägerwerk AG for internal research and development activities that are not provided and charged on as services to the subgroups. Expenses of EUR 5.8 million for research and development services were incurred and charged on to the subgroups. As to (c) the performance of its operating companies Income from profit and loss (P&L) transfer agreements (including the intragroup tax apportionment) increased to EUR 57.2 million (2004: EUR 21.8 million) in fiscal year 2005, as Dräger Medical was then able to pay a dividend after the final execution of the P&L transfer agreement on December 31, 2003 left the company with no distributable net earnings out of which it could pay a dividend in fiscal year No losses had to be absorbed in fiscal year 2005 (2004: EUR 0.9 million). Net assets and financial position Being a holding company, Drägerwerk AG presents a balance sheet where high financial assets, intercompany receivables and liabilities, and liabilities from group financing prevail. In fiscal year 2005, non-current assets decreased to EUR million (Dec. 31, 2004: EUR million). This was mainly due to the change in financial assets, in particular the sale of Dräger Interservices GmbH to Dräger Safety AG & Co. KGaA (around EUR 11.2 million) and the parallel buy-back of Dräger InTek GmbH (around EUR 2.3 million). As regards property, plant and equipment and intangible assets, additions of EUR 6.7 million outweighed disposals with net book values of EUR 0.3 million. Additions included software packages (EUR 1.6 million) as well as properties to round off its portfolio and relocate a pathway in preparation for the new construction project for Dräger Medical (EUR 2.0 million). Liabilities to banks rose to EUR million (Dec. 31, 2004: EUR million); of that amount, loans against borrower s note of EUR 215 million are due in one to seven years. This amount was netted with cash and cash equivalents, producing a slight increase in net financial liabilities to banks of EUR million (Dec. 31, 2004: EUR million). Net liabilities to group companies, however, decreased to EUR 57.5 million as a result of group financing (Dec. 31, 2004: EUR 91.1 million). Drägerwerk AG s net profit increased equity to EUR million (Dec. 31, 2004: EUR million), which now equals 42.6 percent of the balance sheet total (Dec. 31, 2004: 41.8 percent).

6 Management report > Business trend and results of operations/nets asset and financial position/personnel and welfare/research and development 5 Personnel and welfare As of December 31, 2005, Drägerwerk employed 143 people (Dec. 31, 2004: 146). As of January 1, 2005, the new company pension plans Rentenplan 2005 for employees of the Dräger Group and Führungskräfteversorgung 2005 for management came into effect, superseding the former Versorgungsordnung 90 and Ruhegeldordnung 90 schemes. Under the old pension plan, employees received pensions based on their salaries and period of employment. As part of the transition to the new plan, employees were guaranteed a pension based on the old plan for their years of service prior to the transition. The new plan, however, is now composed of three levels: Employer-funded basic level Employee-funded top-up level (deferred compensation) Employer-funded supplementary level The pension cost for the employer-funded basic level is based on the respective employee s income. The employee-funded top-up level allows employees to increase their pension entitlement through deferred compensation. The contribution made at the employerfunded supplementary level depends on the employee contribution through deferred compensation and on the company s business performance (EBIT). Research and development Investing in its technological future, the Dräger Group spent a total of EUR million, or 6.6 percent of revenues (2004: EUR million, or 6.8 percent), on research and development. The R&D departments of the subgroups employ 748 people worldwide. These work closely with staff members at the Lübeck-based research department of Drägerwerk AG. This department employs 43 people, who are engaged in product basics and researching and developing promising new technologies for the subgroups. Technical innovations at Dräger Medical and Dräger Safety reflect the convergence of longstanding experience in advanced technology product development in the fields of microsystems, nanomaterials, biomolecular technology, sensor functions, control equipment and IT. The Group s strong affiliation with national and international technology providers, research institutes and universities guarantees the high-tech standard of its products. Dräger Safety s R&D projects encompass miniaturized electrochemical and optical gas sensors, ion sensor spectrometric techniques for identifying molecular components in the air, and the analysis of trace elements in exhaled breath and saliva. The use of nanotechnology has led to the development of highly sensitive gas sensors with high selectivity and low cross-sensitivity. Forward-looking statements Major shareholdings The Company s Boards Notes Financial statements Management report The funds resulting from the new pension plan were held in separate bank accounts in The employees pension accounts have a minimum guaranteed interest rate of 2.75 percent. Dräger Medical s R&D projects consist of concepts designed to increase the efficiency and quality of hospital procedures. Dräger Medical is currently collaborating on two research projects sponsored by the State whose aim is to address technical integration in operating rooms and the intensive monitoring of in- and outpatients.

7 6 Management report of Drägerwerk AG Dräger Medical spent EUR 79.9 million, or 7.2 percent of revenues, on research and development (2004: EUR 79.5 million, or 7.8 percent), and Dräger Safety EUR 27.4 million, or 4.9 percent of revenues (2004: EUR 23.7 million, or 4.7 percent). Expenses incurred by Drägerwerk AG and not charged on to the projects of the subgroups amounted to EUR 1.0 million (2004: EUR 0.6 million). In 2005, Dräger filed a total of 70 patent applications and one utility model with the German Patent and Trademark Office. Altogether, 103 new patent applications were submitted to international patent offices. Inventors from the basic research department in Lübeck were involved in almost 50 percent of the new applications filed in Germany. Environmental protection Environmental protection and management are core elements of Dräger s location policy and a contributory factor towards enhancing the Lübeck headquarters. Since the founding of the Dräger waste disposal association, which ensures professional waste management, legal certainty and high environmental standards for waste disposal at all companies located on the Dräger industrial estate, the DIN EN ISO compliant environmental management system has offered many resident companies a number of additional advantages. The recertification of Drägerwerk AG in January 2005, with an association certificate being granted for the first time, has allowed participating companies including third-party firms to meet customers demands for environmental certificates in an efficient manner. In addition to environmental recertification, an inspection of the Revalstrasse premises by the regulatory authorities confirmed that the contingency standards make adequate provision for operational hazards. Environmental considerations were also included in the plans for the new Dräger Medical headquarters, e.g. the possibility of using innovative energy supply concepts and energy saving technology. The positive historical trend in environment figures for each production location has continued to improve. Electricity consumption has remained stable, waste volumes have been kept at prior-year levels, and water consumption has been reduced yet again by almost 10 percent to a total of 82,000m 3. In terms of energy consumption, the modernization of the energy supply centers and overhaul of the heat supply network led to a 19.5 percent reduction in the use of primary energy sources (adjusted for weather effects: 18.3 percent) compared with consumption prior to this work. This alone has resulted in a reduction in CO2 emissions, which for plants I/II are around 2,300 tons per year.

8 Management report > Research and development/environmental protection/risks to future development 7 Risks to future development As a holding company, Drägerwerk AG is fully exposed to the risks from the operating subgroups and other investees business activities and the value of its shareholdings, as well as to the risks from P&L transfer agreements. The risk management (RM) system of the Dräger Group, including Drägerwerk AG, comprises all tools for measuring, managing and monitoring exposures and potential risks. Based on the Group s and subgroups annually revised strategic plans and the resultant short and medium-term plans, systematic financial control covers divisions, companies and regions, subgroups and the Group through monthly or quarterly reports. Risk management is rounded off by the activities of the Group internal audit function, the statutory annual audit, and risk reports routinely detail twice annually (and additionally as and when required) all economic, market and currency risks, the competitive position and environment, as well as risks specific to the divisions. The RM system complies fully with the objectives of the German Act on Corporate Control and Transparency ( KonTraG ). The Group s internal audit department, the Audit Committee of the Supervisory Board and the Group s auditors hold regular discussions in order to optimize the efficacy and efficiency of the monitoring process. The systems that are in place ensure that information flows to the respective process owners, the Executive Board and the Supervisory Board and, if necessary, enables action to be taken at short notice. In restructuring the Group, important steps have been taken to safeguard the value of shareholdings and avoid losses. Of key concern to Drägerwerk AG is the avoidance of risks associated with group financing. The interest rate risk inherent in financing is contained by agreeing on fixed long and (partly hedged) short-term rates. The increase in short-term interest rates by one percentage point would affect the Group s results by increasing its interest expense by EUR 1 million. For all currency risks pertaining to the operating activities of the divisions within its responsibility, Drägerwerk AG concludes appropriate hedging transactions with external partners. Derivatives for hedging purposes are only concluded with banks of prime standing. The joint venture agreement between Drägerwerk AG, Dräger Medical AG & Co. KG, Dräger Medical Holding GmbH, Siemens Beteiligungen Inland GmbH, Siemens Medical Holding GmbH and Siemens AG and the partnership agreement of Dräger Medical AG & Co. KG grant Siemens Medical Holding GmbH a put option whereby Drägerwerk AG, Dräger Medical Holding GmbH or Dräger Medical Verwaltungs AG would be obligated to acquire the entire stake held by Siemens were the latter to exercise this option. Siemens AG confirmed that it would revise the joint venture agreement and the partnership agreement in line with the interests of both parties. Therefore, Siemens AG has agreed not to exercise its put option for the time being. The risks to future development from changes in the economic environment and various operational risks are detailed in the Group management report. In view of the information currently available, Drägerwerk AG s continued existence as a going concern is not jeopardized. Forward-looking statements Major shareholdings The Company s Boards Notes Financial statements Management report

9 8 Management report of Drägerwerk AG Subsequent events No significant events occurred between the beginning of the new fiscal year and the approval of the financial statements. Outlook In fiscal year 2006, Drägerwerk AG will continue to provide services to its group companies. As in the past, net profit or loss in 2006 will principally consist of P&L transfers and income from investments. For 2006, Drägerwerk AG expects its major shareholdings to continue their earnings uptrend.

10 Separate financial statements > Income statement 9 Separate financial statements of Drägerwerk AG Income statement of Drägerwerk AG for the year ended December 31, 2005 Note thousand thousand Other operating income (21) 37,477 44,796 Personnel expenses (22) (26,875) (26,819) Amortization of intangible assets and depreciation of property, plant and equipment (23) (5,181) (4,725) Other operating expenses (24) (30,194) (44,581) Income from investments (25) 57,721 21,387 Write-downs on financial assets and current securities (26) (59) (359) Interest result (27) (10,089) (9,785) Result from ordinary operations 22,800 (20,086) Extraordinary result 0 (1,869) Income taxes Other taxes (1,515) 1 (274) (648) Profit/loss before distribution for participation capital 21,011 (22,602) Distribution for participation capital (34) (7,067) (6,360) Net profit/loss 13,944 (28,962) Profit brought forward from prior year 22,396 56,692 Net earnings (35) 36,340 27,730 Management report Notes Financial statements Forward-looking statements The Company s Boards Major shareholdings

11 10 Separate financial statements of Drägerwerk AG Balance sheet of Drägerwerk AG as of December 31, 2005 Assets Note thousand thousand Intangible assets (6) 2,392 1,919 Property, plant and equipment (7) 43,502 42,318 Financial assets (8) 604, ,182 Non-current assets 650, ,419 Trade receivables All other receivables and other assets 63,249 58,148 Receivables and other assets (10) 63,623 58,543 Current securities (11) 0 20,035 Cash and cash equivalents (12) 91,523 63,485 Current assets 155, ,063 Prepaid expenses (13) Total assets 806, ,904

12 Separate financial statements > Balance sheet 11 Equity and liabilities Note thousand thousand Capital stock (14) 32,512 32,512 Additional paid-in capital (15) 38,867 38,867 Reserves retained from earnings (16) 160, ,477 Net earnings 36,340 27,730 Participation capital par value: 36,127 thousand (17) 74,797 74,797 Equity 342, ,383 Provisions for pensions and similar obligations 75,341 71,246 Other provisions 24,598 30,490 Provisions (18) 99, ,736 Liabilities to banks 255, ,895 Trade payables 1,432 4,986 All other liabilities 105, ,904 Liabilities (19) 363, ,785 Total equity and liabilities 806, ,904 The Company s Boards Notes Financial statements Management report Forward-looking statements Major shareholdings

13 12 Separate financial statements of Drägerwerk AG Analysis of non-current assets of Drägerwerk AG Cost As of Additions Disposals Reclassi- As of Jan. 1, 2005 fications Dec. 31, 2005 thousand thousand thousand thousand thousand Franchises, concessions, industrial property and similar rights and assets, as well as licenses thereto 10,879 1, (1) 12,467 Prepayments made Intangible assets 10,879 1, (1) 12,467 Land, equivalent titles, and buildings (incl. on leased land) 118,666 2, ,497 Production plant and machinery ,258 Other plant, factory and office equipment 14, ,933 17,892 Prepayments made and assets under construction 2,337 1, (2,239) 1,798 Property, plant and equipment 136,448 4,876 1,887 2, ,445 Intangible assets and property, plant and equipment 147,327 6,687 2,109 2, ,912 Shares in group companies 614,286 2,321 11, ,380 Loans to group companies Investments Other loans 2, ,842 Financial assets 617,577 2,321 11, , ,904 9,008 13,973 2, ,946 1 Additions from subsidiaries are disclosed at book value separately from the historical values.

14 Separate financial statements > Analysis of non-current assets of Drägerwerk AG 13 Amortization, depreciation and write-downs Carrying amounts As of Additions Disposals Write-ups Reclassi- As of Dec. 31, 2005 Dec. 31, 2004 Jan. 1, 2005 fications Dec. 31, 2005 thousand thousand thousand thousand thousand thousand thousand thousand 8,960 1, ,075 2,392 1, ,960 1, ,075 2,392 1,919 81,431 2, ,471 37,026 37, , ,118 1, ,421 4,471 2, ,798 2,337 94,130 3,845 1, ,599 97,943 43,502 42,318 Management report Financial statements 103,090 5,181 1, , ,018 45,894 44,237 Notes 2, , , , (39) ,675 2,181 3, (39) 0 3, , ,182 The Company s Boards 106,485 5,240 1,937 (39) 1, , , ,419 Forward-looking statements Major shareholdings

15 14 Notes to Drägerwerk AG s separate financial statements Notes to Drägerwerk AG s separate financial statements General The separate financial statements of Drägerwerk AG have been prepared in accordance with the provisions of the German Commercial Code ( HGB ). With a view to enhancing transparency of presentation, certain items of the balance sheet and income statement have been summarized but are detailed further down in these notes. For the income statement, the total-cost method of presentation has consistently been used. The amounts in the separate financial statements are all shown in thousands of EUR (EUR thousand). Corporate governance Drägerwerk AG s declaration of conformity under the terms of Art. 161 German Stock Corporation Act ( AktG ) has been issued and made available to the shareholders (cf. page 13 of the annual report). Currency translation Foreign-currency (i.e., non-euro) receivables and liabilities are stated at the historical exchange rate. Losses from different current exchange rates are duly recognized. Accounting policies Purchased intangible assets are carried at cost less straight-line amortization over an estimated useful life of no more than 4 years. Property, plant and equipment are carried at cost less straight-line depreciation over the assets estimated useful life. Acquisition cost is capitalized in accordance with the provisions of Art. 255 (1) HGB. Consequently, it includes incidental purchase costs and post-acquisition expenses, duly allowing for acquisition cost deductions, if any. Office and factory buildings are depreciated over a maximum period of 50 years, production plant and machinery over a maximum period of 8 years, and other plant, factory and office equipment over a maximum period of 15 years, but mainly between 2 and 5 years. Wherever permitted by tax regulations, movable items of property, plant and equipment are depreciated according to the declining-balance method, applying the maximum rates permissible. When straight-line depreciation results in higher charges, this method is used thenceforth for the remaining useful life. Low-value assets are fully written off in the year of their addition. In fiscal year 2005, no special depreciation solely for income tax purposes was charged. Within financial assets, the shares in group companies and investments are stated at cost. Non or low-interest loans are disclosed at their present value. Discount and accumulated interest are shown as a write-down or write-up, respectively. Non-current assets whose values, when determined according to the aforesaid principles, exceed the lower current values are written down accordingly. Receivables and other assets are stated at principal or par, less any necessary allowances for bad debts, etc.

16 Notes to Drägerwerk AG s separate financial statements 15 Adequate general allowances provide for the normal collection risk. Non or low-interest receivables with a remaining term of more than one year are discounted. Prepaid expenses do not include loan discounts as these are directly expensed. For accounting purposes, participation capital is regarded as equity due to the terms and conditions upon which the participation certificates are based. Therefore, it is shown in a separate line additional to the statutory classification format, under equity and after Drägerwerk AG s net earnings. The par value of this participation capital is disclosed in the text column. Although participation capital is treated as accounting equity, the underlying participation rights maintain their obligatory nature under law. Therefore, the premium yielded above par can be neither transferred to the additional paid-in capital nor allocated otherwise. Hence it follows that this premium continues to form an integral part of the item participation capital. Civil-law considerations require that any profit distributed in favor of participation capital may not be debited to a company s net earnings but offset against net profit. Consequently, the dividends for participation certificates reduce the net profit or increase the net loss for the period. The underlying dividend distribution is shown in a separate line immediately preceding net profit/loss. Pension provisions provide for the present value of pension obligations on the basis of actuarial calculations, using an imputed annual interest rate of 6 percent. As of January 1, 2005, the new company pension plans Rentenplan 2005 for employees of the German group companies and Führungskräfteversorgung 2005 for management came into effect, superseding the former Versorgungsordnung 90 and Ruhegeldordnung 90 schemes. Under the old pension plan, employees received pensions based on their salaries and period of employment. As part of the transition to the new plan, employees were guaranteed a pension based on the old plan for their years of service prior to the transition. The new plan, however, is now composed of three levels: Employer-funded basic level Employee-funded top-up level Employer-funded supplementary level The pension cost for the employer-funded basic level is based on the respective employee s income. The employee-funded top-up level allows employees to increase their pension entitlement through deferred compensation. The contribution made at the employer-funded supplementary level depends on the employee contribution through deferred compensation and on the company s business performance (EBIT). The funds resulting from the new pension plan were held in separate bank accounts in These bank accounts are subject to particular restraints on disposal. The employees pension accounts have a minimum guaranteed interest rate of 2.75 percent. The new Heubeck 2005G mortality tables will be used from Forward-looking statements Major shareholdings The Company s Boards Notes Financial statements Management report

17 16 Notes to Drägerwerk AG s separate financial statements Other provisions adequately allow for all identifiable risks in accordance with prudent business judgment. Liabilities are stated at the amount repayable. Contingent liabilities are valued at the amount or volume of any such liability as of balance sheet date. For contingent liabilities from guarantees, suretyships and warranty/indemnity contracts, the loan sums actually drawn as of the balance sheet date are disclosed in addition to the guaranteed ceilings. The other financial obligations under contracts are discounted and disclosed in these notes.

18 Notes > Notes to the balance sheet 17 Notes to the balance sheet (amounts in EUR thousand unless stated otherwise) 5 Non-current assets The breakdown and development of non-current assets, including gross book values and accumulated amortization, depreciation and write-downs in fiscal 2005, is shown in the analysis of non-current assets Intangible assets The additions to this item mainly relate to the purchase of additional licenses for SAP R/3 software. Property, plant and equipment Investments in property, plant and equipment (incl. reclassifications) amounted to EUR 5.3 million and focused on purchases and restructuring measures for the new construction for Dräger Medical (EUR 2.0 million) as well as prepayments made for these purposes (EUR 1.8 million). Financial assets To streamline the Group s structure, Dräger Forum GmbH and Dräger KB GmbH were merged into Drägerwerk AG in As of January 1, 2005, 70 percent of Dräger Interservices GmbH was transferred to Dräger Safety AG & Co. KGaA and 30 percent to Dräger Medical Holding GmbH. As of the same date, Drägerwerk AG took over Dräger InTek GmbH from Dräger Interservices GmbH. This company serves as facility manager for the premises in Lübeck. In September 2005, Molvina Vermietungsgesellschaft mbh & Co. Objekt Finkenstraße KG was formed with limited liability capital of EUR 5 thousand. This company will lease the planned new construction to Dräger Medical AG & Co. KG. Major shareholdings of Drägerwerk AG The list of Drägerwerk AG s shareholdings will be deposited with the Commercial Register of the Local Court of Lübeck under HRB No The major shareholdings of Drägerwerk AG are listed on page 30 of this report. Receivables and other assets The movements in receivables from group companies in 2005 reflect cash management and intercompany service fee clearing. Other assets include taxes receivable and miscellaneous non-trade receivables, as well as residual purchase price claims against the Cobham Group from the sale of Dräger Aerospace GmbH and against Capgemini Deutschland Holding GmbH from the sale of subsidiaries. In addition, the cap premiums from interest rate hedges are capitalized in this item. Forward-looking statements Major shareholdings The Company s Boards Notes Financial statements Management report

19 18 Notes to Drägerwerk AG s separate financial statements Receivables and other assets Trade receivables thereof due in more than 1 year 0 0 All other receivables and other assets Receivables from group companies 41,773 27,604 thereof due in more than 1 year 0 0 Other assets 21,476 30,544 thereof due in more than 1 year 3,536 14,390 63,249 58,148 Receivables and other assets 63,623 58, Non-current securities The fixed-interest securities are participation certificates of Drägerwerk AG repurchased originally for delivery under the employee profit-sharing program were sold in fiscal Cash and cash equivalents This item comprises cash on hand and in bank. The funds of EUR 281 thousand resulting from the new pension plan, which are subject to special restraints on disposal, are contained in this item. Prepaid expenses These exclusively comprise transitory items. Capital stock Drägerwerk AG s capital stock amounts to EUR 32,512,000 and is divided into 6,350,000 no-par bearer shares each of common and non-voting preferred stock. Additional paid-in capital Additional paid-in capital thousand Drägerwerk AG s additional paid-in capital originated from the stock premiums from the Company s (trans)formation, 2,556 the increases in capital stock of March ,726 June ,016 July ,569 Additional paid-in capital 38,867

20 Notes > Notes to the balance sheet Reserves from retained earnings These reserves were created on the basis of profit appropriation resolutions by the Company and its shareholders. 17 Participation capital The participation capital from the participation certificates issued and floated up to June 30, 1991, forms part of securities series A, while that created after June 30, 1991, covers securities series K. The terms and conditions underlying the series K participation certificates differ from those for the (series A) certificates outstanding up to June 30, 1991, in that their holders may give 5 years notice of termination, however, not to take effect prior to December 31, 2021; the period of termination thereafter is again 5 years. Therefore, these series K participation certificates represent a securities category of their own. Since the 1997 annual shareholders meeting, series D participation certificates have been floated; their terms and conditions have been amended in order to qualify as accounting equity, mainly to adapt to the terms defined by the Institute of Public Auditors ( Institut der Wirtschaftsprüfer ), as follows: waiver of minimum yield, losssharing concept for participation certificates and adequate cumulative, compensatory terms. Series D participation certificate holders may exercise their calling right every 5 years with 5 years notice as of calendar year-end, however, not to take effect prior to December 31, Since December 1, 1999, the par value of participation certificates has amounted to EUR If the participation certificate holder exercises the calling right, the amount repayable shall equal the average mean rate of the last 3 months at the Hamburg Stock Exchange or a maximum of the weighted average issue price of this tranche. The Company s Boards Notes Financial statements Management report Participation certificates Number Nominal amount Premium Participation capital As of December 31, ,413,425 36,127, ,670, ,797, (No new participation certificates were issued in 2005.) Series A 315,600 8,066, ,353, ,420, Series K 105,205 2,689, ,758, ,447, Series D 992,620 25,371, ,557, ,929, Major shareholdings Forward-looking statements Additionally, reference is made to the explanations in Note 4.

21 20 Notes to Drägerwerk AG s separate financial statements 18 Provisions Other provisions provide for personnel-related risks, mainly for profit shares/incentives, accrued vacation pay and pre-retirement part-time work, as well as for supplier invoices not yet received, litigation costs/risks and various other risks. Provisions Provisions for pensions and similar obligations 75,341 71,246 Tax provisions 2,956 2,166 Other provisions 21,642 28,324 Provisions 99, , Liabilities Liabilities 2005 Thereof Thereof 2004 Thereof Thereof due within due after due within due after 1 year 5 years 1 year 5 years Liabilities to banks 255,690 29,146 85, , ,506 0 Trade payables 1,432 1, ,986 4,986 0 Liabilities to group companies 93,350 93, , ,825 0 Liabilities to investees Other liabilities 12,609 12, ,071 10,071 0 thereof for taxes 1,277 1, thereof for social security Liabilities 363, ,308 85, , ,396 0 The liabilities to banks include liabilities of EUR 215 million from loans against borrower s note due in up to 7 years. EUR 130 million of these loans were issued in December 2005.

22 Notes > Notes to the balance sheet Contingent liabilities and other financial obligations Contingent liabilities Contingent liabilities from suretyships and guaranties 0 0 Contingent liabilities under warranty/indemnity contracts 181, ,862 thereof from group companies 0 0 thereof loan amounts actually drawn 48,014 47,959 Other financial obligations As of the balance sheet date, other financial obligations from long-term leases existed at around EUR 39.6 million (prior year: EUR 41.4 million), including some EUR 25.6 million in obligations to group companies (prior year: EUR 26.8 million). The annual burden comes to some EUR 4.8 million (prior year: EUR 5.2 million). As part of the sale of the IT companies in fiscal year 2004, Drägerwerk AG, Dräger Medical AG & Co. KGaA (now: Dräger Medical AG & Co. KG) and Dräger Safety AG & Co. KGaA agreed with an IT services company to purchase IT services for the entire Dräger Group until February The discounted value of this obligation amounted to EUR 82.0 million as of December 31, This volume is within the usual requirements of the Dräger Group. The purchasing commitments from initiated capital expenditure projects are within the scope of ordinary day-to-day business. As of December 31, 2005, Drägerwerk AG was not obligated to pay up any shares. Put option of Siemens AG The joint venture agreement between Drägerwerk AG, Dräger Medical AG & Co. KG, Dräger Medical Holding GmbH, Siemens Beteiligungen Inland GmbH, Siemens Medical Holding GmbH and Siemens AG and the partnership agreement of Dräger Medical AG & Co. KG grant Siemens Medical Holding GmbH a put option whereby Drägerwerk AG, Dräger Medical Holding GmbH or Dräger Medical Verwaltungs AG would be obligated to acquire the entire stake held by Siemens were the latter to exercise this option. If and when this put option is exercised, the repurchase price payable by Dräger Medical Holding GmbH is determined in a specific appraisal procedure laid down in detail to account for the economic development of the joint venture. Siemens AG confirmed that it would revise the joint venture agreement and the partnership agreement in line with the interests of both parties. Therefore, Siemens AG has agreed not to exercise its put option for the time being. Forward-looking statements Major shareholdings The Company s Boards Notes Financial statements Management report

23 22 Notes to Drägerwerk AG s separate financial statements Notes to the income statement (amounts in EUR thousand unless stated otherwise) Other operating income This item chiefly covers income from services rendered to group companies. Otherwise, this item basically includes rental income, income from the reversal of allowances, other valuation reserves and provisions, income from the disposal of non-current assets, and gains from foreign exchange and currency translation, as well as many individual amounts not allocable to other items. Personnel expenses/employees Personnel expenses/employees Salaries 15,754 15,679 Social security, pension expense and related employee benefits 11,121 11,140 thereof pension expense 9,707 9,605 Personnel expenses 26,875 26,819 Annual average headcount Production operations 0 0 Other operations Headcount as of the balance sheet date Production operations 0 0 Other operations Due to the large number of pensioners at Drägerwerk AG, the introduction of the new Heubeck 2005G mortality tables led to a one-time reduction in personnel expenses of EUR 384, Amortization of intangible assets and depreciation of property, plant and equipment Amortization/depreciation Amortization of intangible and depreciation of property, plant and equipment 5,181 4,725 Amortization/depreciation charged in previous years solely for tax purposes improved net profit for fiscal year 2005 by approx. EUR thousand (prior year: EUR thousand).

24 Notes > Notes to the income statement Other operating expenses These primarily include administrative expenses, such as rent and lease expenses, insurance premiums, contributions, fees and public levies, travel expenses, provisions for accrued liabilities, losses from foreign exchange and currency translation, as well as on the disposal of non-current assets. In addition, they cover a multitude of individual items not allocable elsewhere. 25 Income from investments Income from investments Income from investments thereof from group companies 9 52 Income from P&L transfer agreements group companies 55,809 19,228 Expenses from loss absorption group companies 0 (541) Intragroup tax apportionment 1,424 2,259 Income from investments 57,721 21,387 Management report Financial statements The profit transfer as of December 31, 2003 left Dräger Medical AG & Co. KGaA with no distributable net earnings out of which it could pay a dividend in fiscal year In fiscal year 2005, Dräger Medical paid a dividend. In 2005, Dräger Medical AG & Co. KGaA was transformed into Dräger Medical AG & Co. KG. Write-downs on financial assets and current securities This item simply contains write-downs on financial assets of EUR 59 thousand. Interest result Interest result Income from other non-current securities and loans thereof from group companies Other interest and similar income 3,310 3,250 thereof from group companies Interest and similar expenses (13,463) (13,079) thereof to group companies (2,640) (3,801) Interest result (10,089) (9,785) Forward-looking statements Major shareholdings The Company s Boards Notes

25 24 Notes to Drägerwerk AG s separate financial statements 28 Derivative financial instruments Derivatives are used to hedge against currency and interest rate risks, particularly currency forwards, futures and options, as well as interest rate hedges (caps). Such contracts are only transacted with banks of prime standing and confined to hedge finance transactions. The volume of currency futures and forwards substantially includes exchange rate hedges on behalf of group companies for operations-related underlying transactions. At Drägerwerk AG, these exclusively involve closed positions. Interest rate hedges comprise caps and swaps. The caps have maturities up to 2010 and a residual book value of approx. EUR 40 thousand (after write-downs) and are contained in other assets. Other provisions do not contain any obligations from swaps or currency forwards as neither type of transaction existed as of the balance sheet date. In fiscal year 2005, a gain of EUR 464 thousand and a loss of EUR 12 thousand were realized on swaps. Derivative financial instruments Nominal amount Term in Fair value Carrying amounts thousand years thousand thousand Interest rate hedges 44,000 up to Currency forwards and futures 0 up to 1 0 0

26 Notes > Notes to the income statement/other disclosures 25 Other disclosures and Total remuneration of the Executive and Supervisory Boards Within Drägerwerk AG, the remuneration of Executive Board members for fiscal year 2005 totaled EUR 6,950,842.79, breaking down into EUR 2,086, of fixed, and EUR 4,864, of variable performance-related compensation. EUR 1,835, was paid to former members of the Executive Board and their surviving dependants. A total EUR 27,929,778 provides for the accrued pension obligations to former Executive Board members and their surviving dependants. The remuneration of Drägerwerk AG s Supervisory Board amounts to EUR 437, for Drägerwerk AG. In the opinion of the German tax authorities, the premium for a directors and officers liability insurance policy and a legal expense insurance for economic loss claims is not part of the Supervisory Board s remuneration. Preferred stock owned by the Executive and Supervisory Boards As of December 31, 2005, the members of the Executive Board of Drägerwerk AG and their related parties directly or indirectly held a total of 96,192 preferred shares, equivalent to 0.76 percent of the total, and the members of the Supervisory Board and their related parties 36,760 preferred shares, equivalent to 0.29 percent of the total. Altogether, percent of Drägerwerk AG s common stock is held via Dr. Heinrich Dräger GmbH and the same percentage of voting rights is attributable to Executive Board member Stefan Dräger under the terms of Art. 22 (1)(1) German Securities Trading Act ( WpHG ). Supervisory and Executive Boards The Company s Supervisory and Executive Board members are listed under The Company s Boards on pages 28 and 29. Publications regarding significant voting rights in accordance with Art. 25 WpHG The publication in accordance with Art. 25(1) WpHG of December 19, 2005 appeared in the Börsen-Zeitung (in German) on December 21, 2005 as follows: Stefan Dräger GmbH, Lübeck, Germany, informed us in accordance with Art. 21 (1) WpHG that its share in the voting rights of our company exceeded the thresholds of 5, 10, 25, 50 and 75 percent as of December 16, 2005 and that its share now equals percent. This equates to 6,215,000 of the total 6,350,000 common voting shares of Drägerwerk Aktiengesellschaft. Of those shares, percent of voting rights are attributable to Stefan Dräger GmbH in accordance with Art. 22(1)(1)(1) WpHG. Forward-looking statements Major shareholdings The Company s Boards Notes Financial statements Management report 34 Auditor s fee The fee of EUR 467 thousand incurred in fiscal year 2005 for the separate financial statements of Drägerwerk AG and the consolidated financial statements related exclusively to the audit of financial statements.

27 26 Notes to Drägerwerk AG s separate financial statements Distribution for participation capital For the reasons explained in Note 4, dividends for participation certificates may not be distributed from net earnings. Consequently, within the income statement, we show after taxes and before net profit/loss the dividends for participation certificates in a separate line headed, Distribution for participation capital. Therefore, the participation capital dividend is determined above the line and thus reduces our net profit (or increases our net loss). The claim to annual dividends under the terms of Art. 2 (1) of the participation certificate covenants corresponds to 10 times the cash dividend for the Company s preferred stock, hence EUR Proposed appropriation of net earnings Net earnings for fiscal year 2005 amount to EUR 36,339, This item contains profit brought forward from the prior year of EUR 22,395, In accordance with Art. 16 (2) of the Company s bylaws, we will propose to the annual shareholders meeting to distribute these net earnings as follows: Proposed appropriation of net earnings 0.44 cash dividend for 6,350,000 common shares 2,794, cash dividend for 6,350,000 preferred shares 3,175, We further propose that the remaining net earnings for fiscal year 2005 of EUR 30,370, be carried forward. Lübeck, March 2, 2006 Drägerwerk Aktiengesellschaft The Executive Board Stefan Dräger Albert Jugel Wolfgang Reim Hans-Oskar Sulzer

28 Auditor s opinion 27 Auditor s opinion We have audited the annual financial statements, comprising the balance sheet, the income statement and the notes to the financial statements, together with the bookkeeping system, and the management report of Drägerwerk AG for the fiscal year from January 1 to December 31, The maintenance of the books and records and the preparation of the annual financial statements and management report in accordance with German commercial law and supplementary provisions of the bylaws are the responsibility of the Company s management. Our responsibility is to express an opinion on the annual financial statements, together with the bookkeeping system, and management report based on our audit. We conducted our audit of the annual financial statements in accordance with the provisions of Art. 317 German Commercial Code ( HGB ) and German generally accepted standards for the audit of financial statements promulgated by the Institut der Wirtschaftsprüfer [Institute of Public Auditors in Germany] (IDW). Those standards require that we plan and perform the audit such that misstatements materially affecting the presentation of the net assets, financial position and results of operations in the annual financial statements in accordance with [German] principles of proper accounting and in the management report are detected with reasonable assurance. Knowledge of the business activities and the economic and legal environment of the Company and expectations as to possible misstatements are taken into account in the determination of audit procedures. The effectiveness of the accounting-related internal control system and the evidence supporting the disclosures in the books and records, the annual financial statements and the management report are examined primarily on a test basis within the framework of the audit. The audit includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the annual financial statements and management report. We believe that our audit provides a reasonable basis for our opinion. Our audit has not led to any reservations. In our opinion, the annual financial statements give a true and fair view of the net assets, financial position and results of operations of the Company in accordance with [German] principles of proper accounting. The management report is consistent with the annual financial statements and as a whole provides a suitable view of the Company s position and suitably presents the opportunities and risks of future development. Hamburg, March 9, 2006 Forward-looking statements Major shareholdings The Company s Boards Notes Financial statements Management report BDO Deutsche Warentreuhand Aktiengesellschaft Wirtschaftsprüfungsgesellschaft Dyckerhoff Wirtschaftsprüfer Dr. Probst Wirtschaftsprüfer