The Group’s gross profit rose from DKK 2.2 billion in 2001 to DKK 2.5 billion in 2002, or an increase of 12%. In fixed exchange rates the increase was 16%, which matched the increase in revenue. In recent years the Group has earmarked substantial resources for the development of new manufacturing technologies and methods for the purpose of reducing unit costs particularly of hearing aids. This has resulted in new products involving substantially lower direct production costs (Swift and Ergo in autumn 1999 and Atlas in summer 2002) and a higher degree of automation. The Group was thus able to retain the gross profit ratio at a high level despite the acquisition of AHAA in 2001, which – being a distribution operation – has a considerably lower gross profit ratio than other corporate undertakings. The gross profit ratio is forecast at a level of 64% in 2003. 

Research & development costs 
Corporate R&D expenditure has risen over the years. Continued investment in research and development is seen as vital to our future success and ability to maintain the position as a world leader. 

In 2002 an amount of DKK 272 million was allocated for R&D, i.e. an increase of 8%. 

R&D activities are undertaken through collaboration between Group undertakings. In order to optimise and exploit know-how and knowledge across the organisation, Group undertakings transfer and share technology as well as know-how, particularly background technology, whereas the determination of product concepts and the development of actual products take place in the individual undertaking. The Group’s management of knowledge resources is described further under the heading Knowledge resources. 

The Group has R&D centres in Denmark, Switzerland, Germany and the USA. In addition Oticon has Eriksholm Research Centre located north of Copenhagen, which employs 14 researchers involved in basic research in audiology, psychoacoustics and new methods for fitting of hearing aids and the remedying of hearing losses. In addition to own activities in R&D, the Group works with many leading researchers, scientists and research institutes throughout the world. 

In 2003 R&D costs are estimated to grow by approx. 10%. 

Distribution costs 
Distribution costs accounted for DKK 1,160 million, or just under 30% of consolidated revenue in 2002 and thus constituted a relatively large share of total costs. Distribution costs have increased from 22-23% to now 29-30% in line with the acquisition of distribution activities: First Hidden Hearing (2000), later Avada (2000) and finally AHAA (2001). These undertakings sell and distribute hearing aids, but have no actual production or product development. In periods of slack market growth, undertakings with direct sales to end-users will see increased pressure on their earnings capabilities as a sizeable slice of distribution costs is paid prior to sale. This also applies to Group retail activities. 

The share of distribution costs of consolidated revenue in 2003 will continue at about 30%. 

Administrative expenses 
In 2002 administrative expenses totalled DKK 263 million, which is a 3% increase. In terms of fixed exchange rates the increase was 4%. The Group considers this modest increase very satisfactory, especially in the light of sales growth to the tune of 16%. 

The Group’s intranet is now fully developed and throughout the Group all subsidiary undertakings now use the same financial system and only recognised software products on standard PCs. This streamlining enables the Group’s central IT function to service and maintain all parts of the corporate computer network, and will thus contribute to improving efficiency. Only a moderate increase is forecast for administrative expenses in 2003. 

The year’s profit 
In relative terms the increase in total overheads in 2002 was less than the increase in gross profit, thereby improving the Group’s profit margin to 20.6%. 

Operating profit (EBIT) constituted DKK 809 million, or an increase of 18%, which has to a high degree been translated into a positive cash flow. Cash flow from operating activities thus amounted to DKK 892 million, and the net cash flow from operating activities constituted DKK 669 million. 

Depreciation on intangible assets amounted to a mere DKK 0.3 million in 2002. 

In 2002 financial expenditure fell from DKK 43 million to DKK 31 million due to a falling interest level and positive exchange adjustments. The Group’s free cash flow is mainly used for the buyback of shares rather than a reduction of the loans raised for investments in the expansion of the US distribution network. The Group foresees a slight increase in financial expenses in 2003. 

Pre-tax profit rose to DKK 779 million, which is an increase of 22%. Tax on the profit amounted to DKK 201 million, i.e. an effective tax rate of 25.8%. For 2003 the Group expects a slight increase in the corporation tax rate. 

The year’s profit was DKK 579 million. Earnings per share (EPS) rose by 22% to DKK 7.9, which matched previous forecasts. 

At the general meeting the Directors will propose that the entire profit for the year be transferred to reserves as the Directors wish that consolidated earnings be used to buy back further shares. At their meeting on 4 March 2003 the Directors authorised Management to continue the buyback of shares with due regard to the Group’s current cash inflow. 

William Demants og Hustru Ida Emilies Fond (the Oticon Foundation) has informed the Company that the Foundation wishes to make shares available to the share market in order to retain the Foundation’s relative ownership interest in the Group between 60% and 65%. 

In 2002 the Group increased its holding of own shares to 2,421,277 shares at a total cost of DKK 423 million. On 4 March 2003 the Company held 3,414,113 shares, or 4.6% of the share capital. At the general meeting the Directors will propose that the share capital be written down by a number of shares corresponding to the holding of own shares. 

Shareholders’ equity and capital 
At end-2002 shareholders’ equity amounted to DKK 428 million, or 21% of the consolidated balance sheet total. 

Development in consolidated shareholders’ equity
(DKK million)	2001	2002
Shareholders’ equity at 1 January	200	163
Value adjustment of hedging instruments	9	133
Exchange adjustments of subsidiary undertakings	-30	-40
Write-down of own shares	-27	-423
Write-down of goodwill on acquisitions	-468	-
Other adjustments	-2	16
Profit for the period	481	579
Shareholders’ equity at 31 December	163	428

Cash flows, financing and cash position 
Group net cash flow from operating activities doubled to DKK 669 million, the primary reason being that the Group was able to reduce inventories and trade debtors while boosting activities by 16%. The Group continues its effort to minimise Group undertakings’ working capital while maintaining growth in revenue and earnings. 

The Company has established credit facilities mainly with Danish credit institutes for funding of continued expansion and acquisitions, if and when opportunity arises. 

Development in cash flows by main items
(DKK million)	2000	2001	2002
Year’s profit	426	481	579
CFFO	316	317	669
CFFI, excl. acquisitions	-116	-184	-120
Free cash flow	200	133	549
Acquisitions	-773	-477	-7
Buyback of shares	-21	-27	-423
Other financing activities	257	524	-84
Year’s net effect	-337	153	35

In Management’s opinion the Group’s interest and loan terms are comparable with the best on the market. The composition of interest- bearing assets and liabilities is seen from the following table. 

Interest rate risk at 31 December 2001 (DKK million)
Maturity	Under 1 year	1-5 years	Over 5 years	Total	Weighted interest
Financial fixed assets	0.0	0.0	1.8	1.8
Liquid funds	116.5	0.0	0.0	116.5
Interest- bearing assets	116.5	0.0	1.8	118.3	1.5%
Mortgages	0.4	1.7	1.5	3.6
Long-term interest-bearing debt	12.5	548.5	57.7	618.7
Interest -bearing short-term debt	237.7	0.0	0.0	237.7
Interest-bearing debt	250.6	550.2	59.2	860.0	4.0%
Net position	-134.1	-550.2	-57.4	-741.7	4.4%

In 2002 the Group chose to fix interest rates for three to five years for part of the long-term debt through interest-rate swaps of USD 37 million and EUR 8 million, respectively. At 31 December 2002 a non-realised loss on these swaps was computed at DKK 10 million. 

The maximum credit risk at the balance sheet day is identical with the book value of the assets. There is no major accumulation of credit risks. 

In Management’s opinion there are at this point in time no material financial risks that have not been hedged. 

Investments 
Recent years have seen major single investments in new, sophisticated production technology, and the Group’s capacity for local production of in-the-ear aids has expanded in line with the growth in sales. In 2002 all major investments were of a maintenance nature, and the net investment in tangible fixed assets therefore amounted to DKK 114 million, matching the level of the year’s depreciation expenses. In 2003 the Group forecasts investments to the tune of DKK 110-140 million, corresponding to the estimated depreciation on tangible fixed assets. 

Balance sheet 
The balance sheet total is unchanged at DKK 2 billion, corresponding to half the consolidated revenue. 

Towards the end of 2001 inventories rose because the Group wished to ensure a high level of supply security on the introduction of Adapto. In 2002 the focus was on retaining the level of inventories despite growth in sales, and with a constant focus on collaboration with suppliers the effort was successful. 

Long-term creditors include a provision of USD 14 million concerning the purchase of an interest in AHAA in 2002. The other shareholders were given an option to receive an additional payment provided that AHAA reaches specified sales and profit targets within the next 30 months. 



New Danish Financial Statements Act     
In 2001 the Danish Parliament adopted a new financial statements act effective for annual reports drawn up after 1 January 2002. The 2001 Annual Report gave an outline of how the new financial statements act would affect the Company: 

	acquired goodwill, which has so far been written off direct via shareholders’ equity, will now be entered as an asset at the time of acquisition and depreciated over the expected economic life, however maximum 20 years,
	the Company has maintained its former practice of expensing R&D costs in line with the payment of such costs since the Company is of the opinion that R&D resources cannot in a meaningful way be allocated either to the development of new products or to the further development of existing products. The only change compared with earlier is that the act now requires the company to enter patents and rights acquired from third parties as intangible assets with subsequent depreciation,
	the present values of derivative financial instruments made for the purpose of hedging future cash flows must now be recognised in the balance sheet at the balance sheet day. Gains or losses on such hedging instruments are transferred from shareholders’ equity on realisation of the hedged cash flows and included under the same accounting item as the hedged cash flows. These derivative financial instruments were previously entered as contingent liabilities,
	long-term debts to credit institutes must now be entered at their amortised cost, previously such debts were entered at their nominal values.

Overall the above changes had a positive impact on the result for 2002 of less than DKK 3 million. Shareholders’ equity was also affected by the changes. The principle of including the present value of derivative financial instruments affected shareholders’ equity at 31 December 2002 by an amount of DKK 21 million (DKK -6 million at 31 December 2001). For a more detailed review, please refer to the accounting policies. 

Management and employees     
At the ordinary general meeting in March 2002, Mr Niels Boserup (chairman) and Mr Jørgen Mølvang (deputy chairman) were both re-elected. 

At year-end the Group employed 4,325 employees. The average number of employees throughout the year on a full-time basis was 4,208 against 3,997 in 2001. Denmark had 1,272 employees against 1,274 in 2001. 

Revenue per employee amounted to DKK 932,000, which is an increase of 6% compared with 2001. Growth was 10% in terms of fixed exchange rates. 

Staff commitment and diligence are vital contributors to the Group’s success, and the Directors would therefore take the opportunity to thank all employees for their dedicated and enthusiastic effort in 2002. 



Corporate governance
At the end of 2001 the Nørby Committee submitted a number of recommendations for good corporate governance in Denmark. The Directors are of the opinion that corporate governance in the William Demant Group matches the basic principles expressed in the Committee’s recommendations. The Directors currently discuss corporate governance and how to ensure good corporate management vis-à-vis the shareholders. The Company’s website www.demant.com provides a more detailed review of the Group’s approach to and handling of the principles reflected in the Nørby Committee’s report. 

In 2002 the Company published two so-called quarterly reviews regarding the first and third quarters, respectively. A quarterly review describes the market situation and provides a general description of the Group’s activities in the past quarter compared with previously announced expectations in respect of revenue and profit. The Company has chosen to publish annual and semi-annual reports as its only financial reports since in the Company’s opinion quarterly statements would not promote a better understanding of its activities and might give some very short-term targets for Company development which may result in a misleading picture of the development of the Group because activities in any given quarter will vary considerably from one year to the next. 



Incentive programmes
In November 2002 the Group successfully carried through the sale of employee shares giving the Group’s employees an opportunity to buy shares at a favourable price depending on the individual employee’s salary and seniority. 

About 1,800 employees chose to buy a total of 277,248 shares at an aggregate price of DKK 15 million. The favourable element for participating in the employee share programme constituted DKK 23 million at the date of purchase. 

In the Directors’ opinion the incentive programme provides a reasonable balance between employees’ opportunity for gain and their commitment to the Company. Apart from ordinary sales-related bonus schemes the Company has no other incentive programmes such as share option programmes or similar initiatives. 



Knowledge resources
The William Demant Group’s mission states that the Group will endeavour to expand growth in revenue and profit, and that it will seek innovation through a flexible, knowledge-based organisational structure. 

The prerequisite for the Group’s continued competitiveness is extensive know-how of audiology and a wide spectrum of competencies including the design of integrated circuits for sophisticated analogue and digital processing of sound signals, the development of software for optimum fitting of hearing aids, the design of micro-amplifiers and related acoustic systems as well as the development and production of micro-mechanic components. The Group’s R&D activities are described further under the heading Research & development costs. 

The Group’s products are made in collaboration with a wide range of specialists each with thorough knowledge of their own field and in-depth understanding of other professional areas as well as appreciation of the corporate approach as such. In order to utilise competencies and knowledge across the organisation, substantial resources are spent on communication and sharing of knowledge including a shared IT platform, a high degree of openness, exchange of employees across Group undertakings and a flat organisational structure. 

Prospects for the future
With the many product introductions from both Oticon and Bernafon in 2002 and the new products scheduled for launching this year, the Company also expects to capture market shares in 2003. For the Group’s core business (wholesale of hearing aids), the Group foresees growth at a rate of over 10%, which is considerably higher than the underlying market growth for 2003 forecast at 0-3%. For the Group as a whole, organic growth is estimated at 7-10%, as growth in corporate retail activities is estimated to be somewhat lower. 

With current exchange rates (average rates in January 2003), the Group’s revenue in Danish kroner will be negatively affected by 7% for all 2003, with the main impact in the first half-year. With unchanged exchange rates throughout 2003, revenue is estimated at DKK 3.9-4.1 billion and operating profit at DKK 850-900 million. The profit margin is thus estimated to go up by 1-2 percentage points. 

As in 2002 the Group foresees a substantial free cash flow for 2003. With due regard to the current cash inflow, the Company will use its free cash flow for the buyback of more shares. 

Net financial expenses and the Company’s tax rate are likely to show slight increases. Overall, earnings per share are thought to go up by more than 10% in 2003.

General meeting
William Demant Holding A/S will hold its annual general meeting on 25 March 2003 at 4 p.m. in the Experimentarium, Tuborg Havnevej 7, 2900 Hellerup, Denmark. 

The Directors will propose that the year’s profit be transferred to corporate reserves. 

At the annual general meeting the Directors will propose that the Company’s share capital be reduced by an amount corresponding to its holding of own shares. 

At the annual general meeting Mr Lars Nørby Johansen and Mr Michael Pram Rasmussen will both retire from the Board of Directors in accordance with the Company’s Articles of Association. The Directors will recommend that both be re-elected.