Overall, the rate of growth matched expectations at the start of the year. The product mix was slightly different though with higher-than-expected growth in the sale of less costly hearing aids, and the total increase of 14% in the number of instruments manufactured by Group undertakings was higher than estimated.




As in 2002, consolidated revenues were negatively affected by falling exchange rates in 2003. The falling exchange rates also affected consolidated earnings, even though the Group’s cost structure provides a partial hedge against fluctuations in exchange rates and despite the major trading currencies being hedged through forward-exchange contracts. With the expiry of existing forward-exchange contracts, new contracts will be concluded at lower exchange rates, and the negative impact will thus continue into 2004. Overall, it is estimated that the lower foreign-exchange rates will result in an annual negative effect on operating profits in 2004 and onwards of about DKK 120 million compared with 2002.

Consolidated revenues and operating profits matched our previously announced expectations.

Business conditions
Hearing Aids
The market for hearing aids was flat in the first half of 2003, but picked up nicely in the second half. Throughout the year, global sales of hearing aids grew moderately which is marginally better than expected at the start of the year. On the important US market, trends as a whole matched expectations, whereas the major European markets such as France, Germany and to some degree the Netherlands developed more favourably than expected.

Over time, growth rates in the hearing-aid business will fluctuate, and development on the short term is difficult to foresee. The Group still expects that on the medium to long term, the market will grow by 3-5% annually. Growth will be sustained by the demographic development, an increasing number of users requiring binaural fitting, development in new markets and modest price increases.

Trends in 2003 confirmed that having competitive products is all-important, and that the launching of new products is of far greater significance to the success of a manufacturer than are random price reductions. The positive shifts in demand, which are typical on product introductions, show that new products can differentiate themselves from existing ones enabling such new products to generate growth.

With no major product introductions, 2003 was an “intermediate” year for the Group’s hearing-aid undertakings – Oticon and Bernafon. The focus was instead on expanding the product portfolios, and today both Oticon and Bernafon have a complete digital product portfolio with digital products in all relevant price categories.

Atlas, which was introduced in August 2002, accounts for a large slice of the growth in 2003. In order to maintain the positive momentum in the medium to low-end segment, Oticon has decided to launch the Atlas Plus product family on selected markets. Atlas Plus offers more user features and is priced slightly higher than Atlas.

In April 2003, Oticon introduced the Gaia product family, which is positioned in the high-end segment just under Adapto. Gaia was a growth contributor in 2003, and we expect the Gaia product family to continue the favourable trends in 2004.

In order to benefit from the continued conversion of very inexpensive analogue instruments into inexpensive digital instruments, Oticon in January 2004 introduced a new inexpensive, digital product family, GO, with the most basic user features. The product family will help Oticon expand its position in the low-end segment of the hearing-aid market, a position which has been obtained in the past five years through the sale of Swift and Ergo.

Bernafon has already successfully convinced a number of the customers who used to buy inexpensive analogue instruments to buy the slightly more expensive digital Flair, which was launched in the second quarter of 2003. In December 2003, Bernafon also introduced a new upgraded version of its highend product, now called Symbio XT.

At the end of August, Oticon was chosen as one of two main suppliers of digital hearing aids to the British government through its National Health Service (NHS). The agreement is a continuation of Oticon’s long-standing cooperation with the NHS and an expansion of the existing cooperation relating to the NHS’ roll-out of digital instruments to the public hearing clinics in Great Britain. The collaboration will boost growth in the number of aids sold in 2004, but its effect on earnings will not be as significant because of the relatively low prices, at which the products are sold. Moreover, the increased sale of digital instruments will have a negative impact on the sale of analogue products to the NHS. The volume growth will also to some extent be offset by the fact that Bernafon lost its contract as main supplier to the Australian government through the Australian Hearing Services (AHS) in spring 2003.

Compared with 2002, the Group’s retail activities with sale of hearing aids direct to end-users saw reasonable growth as well as improved profitability in 2003. Retail activities depend more directly on the underlying market trends than wholesale activities with the individual hearing clinics being immediately affected by the general demand in the local market.

In recent years, Oticon has grown tremendously on the North American market partly through organic growth and partly through strategic acquisitions. The greater activity level has of course also put growing pressure on financing and manufacturing systems. In the second and third quarters of 2003, Oticon’s American sales company, Oticon, Inc., introduced a new IT system, which with the simultaneous implementation of a new telephone system meant that in certain periods, Oticon, Inc. was unable to meet the demand for Group products and provide a satisfactory service to customers. The problems created by the new IT system have now been solved, and Oticon, Inc. is again geared for growth.

In 2003, Bernafon chose to reposition its activities on the US market resulting in the replacement of its management team and the relocation of its head office to New Jersey. The related restructuring costs are included in the 2003 financial statements.

In line with the increasing sale of in-the-ear units, the Group has successfully extended its local manufacturing capacity, and the various undertakings are geared for volume growth as forecast for 2004.

The manufacture of in-the-ear instruments used to be very labour-intensive and the possibilities for improving efficiency fairly limited. In recent years, the hearing-aid industry has worked on a new technology for manufacture of shells for inthe- ear instruments. This technology is based on 3D scanning of the ear impression for subsequent modelling on a computer and automatic production of the shell by a machine that prints the shell. Oticon and Bernafon have waited for this technology to be ready for implementation, and it will be introduced at a number of the Group’s major production sites during 2004. The necessary laboratory tests and modification of the technology to match the Group’s products and production sites were carried through in 2003.

Diagnostic Instruments
The diagnostic Instruments business area is more sensitive to economic fluctuations than our core business, and sales in 2003 were affected by the adverse economic situation. The total market for audiometric equipment dropped slightly in 2003. The unfavourable market trends had a detrimental effect on the sale of almost all product lines in this business area. There were however signs in the fourth quarter of a rise in the order inflow suggesting that 2004 will be a better year than 2003.

In the autumn, Interacoustics introduced an OAE screener for screening of the hearing of children and infants. OAE stands for OtoAcoustic Emission and enables objective identification of a hearing loss. At UHA, the German hearing-aid conference, Interacoustics introduced a PC-based audiometer and fitting system, Affinity, designed for hearing-care professionals. This system will be ready for delivery in the second quarter of 2004 and will appeal to a market segment in which Interacoustics and Maico, historically, have had a weak track record.

Personal Communication
The market for Phonic Ear's products, wireless communication systems and technical aids for people with hearing impairment, continued its sluggish trends into 2003, and US sales were particularly disappointing.

Phonic Ear changed management in early 2003, and the year was influenced by production being moved to other production sites in the Group, to local sub-suppliers or suppliers in the Far East. This resulted in some supply problems, but these were solved during the autumn of 2003.

For Phonic Ear, the most significant event in 2003 was the introduction of Lexis, which is a hand-held, wireless, directional microphone with an FM receiver for mounting on a hearing aid. Lexis has been introduced in the USA and on most European markets and will be a growth driver in 2004. Lexis was developed in close collaboration with Oticon’s R&D team and is distributed by Phonic Ear, Oticon and Bernafon as well as the American hearing-aid manufacturer, Starkey, which was also a member of the development team. The introduction of Lexis is evidence that wireless communication is increasingly becoming an integral part of general hearing-aid development. Distribution will increasingly take place through the same channels as hearing aids. All sales of Lexis products are reported under the Personal Communication business area.

In 2003, the other business unit under Personal Communication, Sennheiser Communications, launched three new headset series: For PC’s, for SoHo (Small office/Home office) and for call centres. Each series consists of five products.

Sennheiser Communications was very successful with the first series of PC headsets. It perfectly matched the distribution system of our joint-venture partner, Sennheiser electronic. In 2004, the major challenge for Sennheiser Communications will be the establishment of a distribution network for headsets for the SoHo and call-centre segments where competition is tougher. The SoHo and call-centre series were introduced at the end of 2003, and the effect on sales will not be visible until 2004.

Financial statements for 2003
Revenues and the impact of foreign-exchange rates
As forecast, the Group realised revenues of DKK 3.87 billion in 2003, or 8% growth measured in local currency. In Danish kroner, this is a slight fall of 1%. The reason for the negative impact of minus 9% is generally the strength of the Danish krone vis-à-vis the Group’s major trading currencies. The conversion of Danacom A/S into the Sennheiser Communications A/S joint venture only had a limited adverse impact on revenues.

With 10% organic growth, our core business, wholesale of hearing aids, fully matched our expectations. This rate of growth was achieved in an 'intermediate year', in which the frequency of introductions of new hearing aids was lower than in previous years.

In terms of the number of hearing aids manufactured by Group undertakings, the rate of growth in terms of units is 14% (10% in 2002) in a market, where growth is estimated at 4-6%.

With 97% of revenues being generated outside Denmark, the Group depends not only on market trends, but most definitely also on trends in foreign-exchange markets on the medium to long term. Our forecasts for 2003 at the beginning of the year were based on the exchange rates at the time. The strengthening of the Danish krone during the year negatively affected revenues measured in Danish kroner compared with our original forecasts. The graph and table below reflect the drastic changes in our major trading currencies since 2001, with the USD for instance having been weakened by 30% vis-à-vis the Danish krone.



The realised consolidation rate of the USD in 2003 of 659 is 16% lower than the rate of 789 realised in 2002. With today’s rate of 591, which is the realised exchange rate for January 2004, the dollar has dropped another 10% compared with 2003.

The Group’s major trading currencies are USD, JPY and GBP:

The Group has chosen to fix interest rates for part of the long-term debt through interest swaps of USD 37 million and EUR 8 million. At 31 December 2003, there was a non-realised loss on these swaps of DKK 6 million.

Investments
Investments in tangible fixed assets in 2003 amounted to DKK 124 million net. Investments of less than DKK 50,000 totalling DKK 17 million were written off when acquired.

The Group currently tests new production technologies such as the new technology for printing of shells for in-the-ear hearing aids described previously. This particular technology will be implemented at our major production sites during 2004.

In 2001 and 2002, the Group invested heavily in the expansion of the Eriksholm research centre and the facilities in Oticon, USA. In 2003, investments focused on the expansion and maintenance of our productive capacity both in the central factories and locally in the sales companies. For 2004, the level of investments is expected to be DKK 120-140 million.

Balance sheet
The consolidated balance-sheet total is unchanged at a level of DKK 2 billion, of which total assets and investments account for about 27%.

The largest asset items are inventories and trade debtors. Investments in new automatic inventory handling equipment and increased integration with our suppliers resulted in inventories (based on fixed exchange rates) developing at a slower rate than the increase in consolidated revenues.

Board of Directors, Executive Board and employees
At the annual general meeting in March 2003, Mr Lars Nørby Johansen and Mr Michael Pram Rasmussen were both re-elected. Mr Nils Smedegaard Andersen was elected to sit on the Board. Employees elected new staff representatives to sit on the Board. Mr Stig Michelsen and Mr Ole Lundsgaard were elected and Ms Hanne Stephensen was re-elected.

At year-end, the Group employed 4,352 staff against 4,325 in 2002. The average number of employees throughout the year on a full-time basis was 4,272 against 4.208 in 2002. Denmark had 1,250 employees against 1,272 in 2002.

The Board of Directors would like to take the opportunity to thank all staff for their tremendous effort and commitment throughout 2003, which is vital to the Group's success.



Corporate governance
At the end of 2001, the Nørby Committee submitted a number of recommendations for good corporate governance in Denmark. The Directors currently discuss corporate governance, and how to ensure good corporate management vis-à-vis the shareholders. The Directors are of the opinion that corporate governance in the William Demant Group matches the basic principles expressed in the Committee's recommendations. Our 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.

We have chosen to publish quarterly reviews rather than quarterly financial statements. 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 revenues and performance. In our opinion, quarterly financial statements would not promote a better understanding of the Group's activities and might in fact give some very short-term targets for the development of the Group, which may result in a misleading picture of such development, because the Group's activities in any given quarter will vary considerably from one year to the next.



Incentive programmes
At two or three years' interval, the Group offers its employees the opportunity to acquire shares at a favourable price depending on salary and seniority conditions. The purchased shares are held in trust for five years. Since 1990, we have carried through six employee share programmes - most recently in 2002. Today, almost half the Group's employees are shareholders.

Apart from ordinary sales-related bonus schemes, we have no other incentive programmes such as share option programmes or similar initiatives.



The Oticon Foundation
The William Demant Holding Group has carried through no major acquisitions since the autumn of 2001, and in pursuit of the Group's dividend policy, consolidated free cash flows are applied for buyback of shares.

To achieve correct pricing of the William Demant share at the Copenhagen Stock Exchange, it is important that the liquidity of the share is good and that it has a large free flow. In order to ensure this, our main shareholder, William Demant og Hustru Ida Emilies Fond (the Oticon Foundation), has informed us that it seeks to retain an ownership interest of 60-65%.

The Oticon Foundation seeks to keep its relative interest under 65% by currently selling shares in the market, which takes place independently of the Company's buyback of shares. The Foundation's alternative to the sale of shares is an increased ownership interest, and subsequently future de-listing of the Company.

The Foundation and the Company consider the continued listing of the Company at the Stock Exchange absolutely vital to the positive development of the Company. Listing is important for others to take part in the ownership, including the Company's employees, while also maintaining the focus on improvement of shareholder value in the day-to-day operations of the business. Furthermore, listed shares can be used as a means of payment in connection with major acquisitions.

On this background, the Oticon Foundation is convinced that it can generate the best return in relation to risk by placing free funds in low-risk assets and by investing more actively in businesses whose business model and structure resemble that of the William Demant Holding Group, but which are of course outside the Company's strategic sphere of interest.

In the Directors' and the Management's opinion, collaboration between a business owned by the Foundation and the William Demant Holding Group may provide synergies in back-office functions and the development of technologies as well as creating more career and work opportunities for Group employees.

William Demant Holding A/S and the Oticon Foundation have therefore made an agreement that the Company seeks to identify active investment opportunities, and following any such investment the Company will be in charge of the control and development of the particular investments. In each case, a management agreement will be made between the Oticon Foundation and the Company on commercial terms.

The Oticon Foundation and the Company are of the clear opinion that this strategy ensures the continuation of positive development of the William Demant Holding Group for the benefit of all stakeholders, including shareholders and staff.



Knowledge resources
The William Demant Holding Group's mission states that the Group will endeavour to expand growth in revenues and profits, and that it will seek innovation through a flexible, knowledgebased 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 products are made in collaboration with a wide range of specialists each with thorough knowledge of their own fields and in-depth understanding of other professional areas as well as the 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, secondment of employees to other Group undertakings and a flat organisational structure.



Centenary
In 1904, William Demant's father began selling hearing aids, and on 8 June 2004, the Group will celebrate its centenary. The centenary celebrations will include activities involving customers and business partners as well as staff. The one-off expense for centenary celebrations and staff gifts is estimated at some DKK 30 million. This cost will be expensed under ordinary operations and is thus included in our 2004 forecasts.



Prospects for the future
2004 started with the introduction of two new product families in Oticon, GO and Atlas Plus. A third major product introduction from Oticon is planned for 2004 also. All other business areas will currently update existing products and introduce new ones during 2004.

Compared with the realised foreign-exchange rates for 2003, the level is 3% lower in January 2004. Provided that this level will exist throughout 2004, consolidated revenues for 2004 are expected to grow to about DKK 4.0 billion, or an organic growth rate of 7-10%. As in prior years, the Group's core business, wholesale of hearing aids, is expected to outgrow the other Group activities.

In line with the continued fall in trading currencies, forwardexchange contracts will be made at lower rates. This will have a significant impact on operating profits, and the Company expects that the lower foreign-exchange rates will have an annual negative effect in 2004 and onwards of about DKK 120 million compared with 2002.

The underlying growth of the business has more than compensated for this adverse development, and in 2004 after centenary celebration costs of about DKK 30 million, the Company expects to continue its growth trends. Operating profits (EBIT) are thus estimated at about DKK 875 million. The largest profit will be generated in the second half-year of 2004, when the largest effect of product introductions will be reflected in performance figures.

We intend to continue our policy of buying back shares in line with the generation of free cash flows, and provided that the level of interest rates is unchanged, net financials are expected to be at the same level as in 2003.

A slight increase in the corporation-tax rate is expected for 2004.

Earnings per share (excl. centenary celebrations) are expected to go up by approximately 10%.



General meeting
William Demant Holding A/S will hold its annual general meeting on 25 March 2004 at 4 p.m. at the Experimentarium, Tuborg Havnevej 7, DK-2900 Hellerup.

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 immediately prior to the general meeting.

At the annual general meeting, Mr Niels Boserup and Mr Nils Smedegaard Andersen 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. Moreover, Mr Jørgen Mølvang will retire due to age.