Success Through Professionalism Annual Report 2004 Content

Success through professionalism Annual Report 2004 Content

2 Company report 2 Highlights in 2004 4 Letter to the stockholders 6 The Executive Board—our key areas of focus 8 Our staff 10 Dräger stock 15 Corporate Governance

16 Report Dräger Medical 22 Report Dräger Safety

30 Report of the Supervisory Board

34 Management report 2004 34 Group structure of the Dräger Group 36 General economic conditions 38 Transition to IFRSs 40 Business performance of the Dräger Group 46 Research and development 47 Procurement, production and logistics 48 Environmental protection 50 Business performance of Dräger Medical 54 Business performance of Dräger Safety 58 Business performance of the holding company, other companies, consolidation 60 Risks to future development 62 Subsequent events 62 Outlook

63 Financial statements 2004 63 Income statement of the Dräger Group of the Dräger Group January 1 to December 31, 2004 64 Balance sheet of the Dräger Group as of December 2004 66 Statement of changes in equity 67 Cash flow statement of the Dräger Group

68 Notes 2004 of the Dräger Group

118 Separate financial statements 2004 of Drägerwerk AG (short version) 120 The Company’s Boards 122 Major shareholdings

126 Index 128 Imprint

See inside back cover for the glossary. The Dräger Group at a glance

Dräger Group 2002 2003 2003 2004 Change vs. 2003 Under HGB Under HGB Under IFRSs Under IFRSs in %

Order intake € million 1,345.0 1,421.9 1,421.9 1,523.3 +7.1 Revenues € million 1,333.0 1,413.5 1,422.1 1,520.5 +6.9

EBITDA before non-recurring expenses1 € million 116.4 141.8 148.2 162.8 +9.9 EBIT before non-recurring expenses 2 € million 71.9 96.4 94.8 117.2 +23.6 › in % of revenues (EBIT margin) in % 5.4 6.8 6.7 7.7 +14.9 Non-recurring expenses € million 5.6 32.4 37.1 22.3 –39.9 EBIT 2 € million 66.3 64.0 57.7 94.9 +64.5

Result from discontinued operations € million 0.0 20.2 19.0 9.4 –50.5 Net profit/loss € million 19.8 37.8 34.0 47.3 +39.1 Minority interests in net profit € million 2.3 10.9 11.9 22.0 +84.9 Earnings per share after minority interests › per common share € 1.35 2.09 1.71 1.96 +14.6 › per preferred share € 1.41 2.15 1.77 2.02 +14.1

Equity € million 170.1 499.2 443.3 477.3 +7.7 Equity ratio in % 20.1 41.7 33.4 33.5 +0.3 Capital employed 3 € million 531.5 857.3 694.1 792.9 +14.2 EBIT before non-recurring expenses/ capital employed (ROCE) in % 13.5 11.2 13.7 14.8 +8.0 Net financial debt 4 € million 189.3 36.7 138.7 218.3 +57.4

Headcount as of December 31 9,614 10,064 10,064 9,706 –3.6 Germany 5,551 5,099 5,099 4,378 –14.1 Abroad 4,063 4,965 4,965 5,328 +7.3

Cash dividend of Drägerwerk AG Common stock € 0.29 0.34 0.34 0.39 +14.7 Preferred stock € 0.35 0.40 0.40 0.45 +12.5

1 EBITDA = Earnings before net interest result, income taxes, depreciation, amortization and result from discontinued operations 2 EBIT = Earnings before net interest result, income taxes, and result from discontinued operations 3 Capital employed = Balance sheet total less deferred tax assets, cash and cash equivalents and non-interest bearing liabilities 4 Net financial debt = including receivables and liabilities from cash management systems Dräger Medical and Dräger Safety at a glance

Segment performance 2002 2003 2003 2004 Change vs. 2003 Under HGB Under HGB Under IFRSs Under IFRSs in %

Dräger Medical Order intake € million 851.3 920.7 922.8 1,018.5 +10.4 Revenues € million 848.3 917.7 920.2 1,023.4 +11.2 EBIT before non-recurring expenses € million 76.6 91.4 85.3 94.2 +10.4 Capital employed € million 328.8 694.2 479.4 563.3 +17.5

EBIT before non-recurring expenses/revenues (EBIT margin) in % 9.0 10.0 9.3 9.2 –1.1 EBIT before non-recurring expenses/capital employed (ROCE) in % 23.3 13.2 17.8 16.7 –6.2

Headcount as of December 31 4,811 5,596 5,596 5,859 +4.7 Germany 2,513 2,463 2,463 2,424 –1.6 Abroad 2,298 3,133 3,133 3,435 +9.6

Dräger Safety Order intake € million 469.8 487.1 487.1 510.0 +4.7 Revenues € million 471.1 477.4 477.3 503.0 +5.4 EBIT1 € million 41.3 39.7 36.5 40.9 +12.1 Capital employed € million 164.8 168.4 153.7 157.1 +2.2

EBIT/revenues (EBIT margin)1 in % 8.8 8.3 7.6 8.1 +6.6 EBIT/capital employed (ROCE)1 in % 25.1 23.6 23.7 26.0 +9.7

Headcount as of December 31 3,207 3,298 3,298 3,329 +0.9 Germany 1,464 1,474 1,474 1,442 –2.2 Abroad 1,743 1,824 1,824 1,887 +3.5

1 No non-recurring expenses at Dräger Safety

Financial diary

Annual accounts press conference, Lübeck April 28, 2005 Analysts’ meeting, Frankfurt/Main April 28, 2005 Conference call Q1/2005 report May 12, 2005 Conference call Annual stockholders’ meeting June 10, 2005 H1/2005 report August 11, 2005 Conference call Q3/2005 report November 10, 2005 Conference call Annual stockholders’ meeting June 2, 2006 Annual stockholders’ meeting May 11, 2007 Dräger. Still achieving success through professionalism in 2004.

Dräger owes its success to the professionalism of all its employees and managers, and this has been the case for 115 years now. Well-trained and highly committed employees, who observe the basic principles of fair play and respect in their dealings with one another—these are the values that are prized by our customers, and that shape Dräger’s corporate identity. We will continue to strengthen this identity in the future with a view to building upon our company’s standing in its global markets and ranking among the best of the best.

Technology for life is our guiding philosophy and vision, and also describes our fields of activity—medical and safety technology— and their markets. Our products, our methods, our organization, and our skills all change with time and need to be adapted to the ever-shifting conditions of our working environment. Yet one area where we demonstrate continuity is in our core strengths: customer orientation, staff, innovation, and quality. 2 Company report

Highlights in 2004

February August Dräger gas detection technology in New York’s Helmets for THW disaster underworld relief organization

January March Dräger Polytron monitors beverage production Anniversary in Shanghai

Dräger and Capgemini Germany sign New sales structure in the US IT outsourcing contract Draeger Medical, Inc., Dräger Medical’s US subsidiary, 230 employees of the Dräger IT companies transfer to IT restructures its sales division. The switch from product- specialist and partner Capgemini Germany. specific to portfolio selling in the critical care area, coupled with a larger workforce, is helping boost customer loyalty Dräger Polytron monitors beverage production in the US. One of the largest manufacturers of caffeine-based soft drinks installs Dräger detection technology to monitor Respiratory protective devices for Athens Olympics carbon dioxide in 52 of its production plants in the US and The Greek capital equips its fire departments with Dräger Canada. Safety respiratory protective equipment as part of its safety program for the Summer Olympics. With Dräger gas detectors in New York’s underworld NYC’s main energy supplier chooses Dräger MiniWarn New subsidiaries in Chile and Mexico gas detection instruments, allowing personnel to safely Previously represented only by dealer-agents, Dräger enter confined spaces, pipes and shafts in which harmful Medical founds its own subsidiaries in Santiago de Chile substances in gaseous form may be present. and Mexico City in 2004.

Anniversary in Shanghai: 10 years of Dräger Medical Pioneering Solutions: new “fuel gauge” for sensors Dräger Medical has enjoyed success in China since 1994. The way forward: the world’s first “Sensordiagnostics” Production for China and other markets has been going system keeps users of Dräger gas monitoring systems strong there since 1996. continuously informed about the current status of their gas warning system. High level of participation in staff survey More than 82 percent of employees worldwide take part Prize for best business communication in the Group-wide staff survey conducted in January. For the second time in succession, Dräger wins the German Prize for Business Communication. New soda lime plant commences production With its new automatic production plant for soda lime, Green light for Air-Shields acquisition Dräger Safety remains an important supplier of high-grade Dräger Medical takes over the neonatal care business unit soda lime for medical (anesthesia) devices, diving appa- of Hill-Rom, Inc., which operated under the name Air- ratus and respiratory protective equipment. Shields, thereby bolstering its presence in the neonatal care segment in the US. 3

September November December “Camena” offers hospital-standard ventilation Medica trade fair with new solution Aid for flood victims in quality in the home for network integration South-East Asia

October December Dräger Safety Solutions make tunnels safer Decision in favor of Lübeck

Concord GmbH takes over Dräger ProTech Medica trade fair: Dräger Medical sets milestone for The sale of Dräger ProTech marks the successful con- network integration in hospitals clusion of a strategy designed to achieve focus on the The Infinity® OneNet from Dräger Medical allows hard- company’s core business. wired and wireless patient monitoring in existing network structures for the first time. Heidelberg University Hospital Disaster relief organization uses Dräger head sees the world’s first installation of the new system for the protection systems simultaneous use of medical signal processing systems THW, Germany’s disaster relief organization, orders and the hospital’s in-house IT solutions. 27,000 HPS 4100 protective helmets from Dräger. The plan is to equip all THW personnel with this helmet. Dräger Safety Solutions make tunnels safer Dräger supplies rescue systems for European tunnel Strategist and entrepreneur of the year projects from a single source: escape chambers for tunnel Theo Dräger is named 2004 entrepreneur and strategist workers, and rescue containers for fire and rescue trains of the year: according to the jury, he has succeeded in during fire fighting and evacuation of train passengers achieving a symbiosis between publicly traded company following accidents in rail tunnels. and family-run business. Dräger Medical to remain in Lübeck Hospital-standard ventilation quality in the home Following a detailed analysis and intensive negotiations, Dräger Medical presents its new home ventilator a decision is taken in favor of a new knowledge-oriented “Camena” at the European Respiratory Society Congress. company headquarters and flexible production facility for Dräger Medical in Lübeck. The new building should be XV Malente Symposium on youth and employment ready in 2008. Around 400 international experts discuss the global rise in youth unemployment and develop visions for the future. Aid for flood victims The Dräger Group donates €50,000 in cash plus equip- Training center for Bangkok airport fire department ment worth a total of €85,000 to the disaster regions in Dräger Safety is commissioned to build a training center South-East Asia. for the fire department of the new Bangkok International Airport. Important service contract for hospital in Virginia, USA The Inova Fairfax Hospital, a 725-bed emergency clinic, chooses a comprehensive service package from Dräger Medical, with complete servicing of all anesthesia machines in the hospital’s 55 operating rooms. 4 Company report

Letter to the stockholders

Dear Stockholders:

A year ago, in our Annual Report 2003, I reported that our company was on course and making excellent headway. To remain with this maritime image, I am happy to say that we were able to maintain this course in 2004, as can be seen from our key business development figures for 2004: – Global sales of the Dräger Group climbed by 6.9 percent to over €1.5 billion, the Dräger Medical subgroup exceeding the one billion mark for the first time and the Dräger Safety subgroup reaching the half billion mark. – EBIT rose by around 24 percent to €117.2 million, with all areas of the company contributing. – The EBIT margin reached 7.7 percent. – The Group’s net profit increased to €47 million. – The return on capital employed (ROCE) was 14.8 percent. – Although during the year under review our preferred stock fell by 9 percent to €43, it rose six-fold over the five-year period from January 1, 2000 to December 31, 2004. – At the annual stockholders’ meeting, the Executive and Supervisory Boards will propose that a dividend of €0.45 per preferred share and €0.39 per common share be distributed.

We are pleased with the results we have achieved, but do not see this as any reason to rest on our laurels. On the contrary—our markets are changing, and the wind of global competition is whipping up. To maintain and build upon our position, we are concentrating on the following areas:

1. Focus on core areas of business: we have now concluded the program of restructuring we began in 2001. Dräger ProTech, a producer of individual parts and components, and the Dräger IT companies were sold, allowing the Dräger Group to focus on its Dräger Medical and Dräger Safety subgroups. Dräger Medical has taken over the US firm Air-Shields with a view to expanding its position in the field of perinatal care, while Dräger Safety has also strengthened its market and product position through company acquisitions. 2. Quality assurance: we have set ourselves the goal of remaining the undis- puted quality leader in our markets. Savings in our business processes will not be made at the cost of quality. 3. Innovations: utilizing the knowledge and skills of our staff, we are constantly hard at work fine-tuning our products and systems, placing particular emphasis on creating total solutions for the benefit of our customers. 5

4. Reduction of costs: ever since 2001, we have been striving to lower our base costs on a permanent basis, for example through the targeted use of IT at Dräger Safety, and the consistent implementation of a platform strategy for new product development at Dräger Medical. A further area of focus is the global standardization and optimization of our internal processes. 5. Internationalization: nowadays, we can only achieve above-average growth rates outside Germany. We are therefore expanding our business at the local level, either by investing in and setting up our own companies, or by collabo- rating with trading partners all over the world. 6. Our Lübeck site: at the end of 2004, we created the conditions for a new Dräger Medical building to be established at our Lübeck headquarters. This meant that concrete planning of a knowledge-oriented company headquarters was able to get underway in early 2005. This should be ready for use at the beginning of 2008.

As you can see, we are looking to the future. We are pursuing interesting projects, working on innovative products, expanding our quality assurance and targeting even higher levels of customer satisfaction. At the same time, we are planning and shaping the future of our company. This is also why we have chosen to entitle this year’s Annual Report “Success through professionalism”.

I would like to finish by thanking our highly motivated staff. At the same time, I would like to extend my thanks to you, our stockholders and business partners, for your confidence and trust in our work. We will do everything we can to ensure that Dräger remains a successful company in the future and that we deserve your support.

Theo Dräger Executive Board Chairman of Drägerwerk AG 6 Company report

The Executive Board—our key areas of focus

Theo Dräger Stefan Dräger Born 1938 Born 1963 Member of the Executive Board since 1970 Member of the Executive Board since 2003 Chairman Corporate Functions

“Creating value—that is the primary objective of the Dräger “Thoroughly professional employees, who observe the Group. Value for customers and stockholders, for employ- basic principles of fair play and respect in their dealings ees and the company. Their long-term success is our goal, with one another—these are the values that are perceived towards which our staff throughout the world work with and prized by our customers. Our goal is to enhance this dedication and competence.” reputation and, with the support of all our staff in the Safe- ty and Medical subgroups, to build upon our company’s Dr. Wolfgang Reim standing in its global markets and rank among the best of Born 1956 the best.” Member of the Executive Board since 2000 Dräger Medical Hans-Oskar Sulzer Born 1946 “Translating our knowledge of the challenges faced by our Member of the Executive Board since 1997 customers into the innovations of tomorrow—this is the Finance task we have defined for ourselves. With the patient firmly in our sights, our aim is to contribute to reducing clinical “The guiding principle behind our value-based style of process costs, while at the same time raising the standard management is our economic performance. Managers and of patient care. The key is products, services and inte- staff alike play their part in this, and share accordingly in grated CareAreaTM solutions which help optimize clinical the company’s success.” processes at the acute point of care. This will allow us to continue to grow globally and improve our market position.” Ingo Gensch Born 1940 Professor Albert Jugel Member of the Executive Board since 1984 Born 1948 Corporate Personnel Member of the Executive Board since 1999 Dräger Safety “The Dräger Group’s path to the top is paved by our staff. Their knowledge and dedication are the prerequisites for “Competent advice, impressive products and comprehen- our success. Dräger develops the potential of its employ- sive problem solutions from a single source—that is the ees, utilizes their skills in order to make continuous strategy followed at Dräger Safety. A company can only improvements in all areas, and rewards the contributions prepare itself for the future if it constantly adapts to market made by individuals and by the team as a whole to the conditions and customer requirements.” company’s increasing value.” 7

The Executive Board (from left to right): Stefan Dräger, Ingo Gensch, Dr.Wolfgang Reim, Hans-Oskar Sulzer, Theo Dräger, Prof. Dr.Albert Jugel 8 Company report

Our staff

9,700 employees—broad-based professionalism More training and continuing education The Dräger Group is becoming increasingly international, Within the framework of the “apprenticeship pact”, an ini- and as such relies on well-qualified managers and staff. tiative of the German government to encourage more com- Our success as a company is determined to a large extent panies to offer training opportunities, Dräger played its by our flexibility, our customer and service orientation, our part in tackling the shortage of apprenticeships in 2004 business-like approach in word and deed, and the interna- by making additional positions available in Lübeck. The tional outlook of every one of our employees. Facing up to company also intensified its cooperation with leading this challenge, even as we put in place restructuring universities and other institutes of higher education: in processes and cost reduction programs, demands hard addition to its longstanding cooperation with the Nord- work from us all. akademie Business School, Dräger also launched in 2004 an in-service university degree in information technology Attractive jobs with international prospects and in cooperation with the Hamburg-Harburg Technical Uni- multifaceted challenges versity. At an international level, cooperation continues The Dräger Group is able to offer its staff exciting jobs and with the Massachusetts Institute of Technology (MIT). To prospects in many of the world’s countries. In 2004, one ensure the continuous selection, qualification and further key question for our staff, especially those employed in development of upcoming young managers and top man- Lübeck, was whether Dräger Medical would be able to agement, Dräger introduced a target-group-oriented Man- remain at its traditional site. International competitive pres- agement Development Program in 2004. Together with sure is forcing us to change, and our answer is to build a first-class executive training partners, we select managers new knowledge-oriented company headquarters with and keep their management knowledge up-to-date. Fur- streamlined processes and a flexible production facility. By thermore, a cooperation agreement was signed in 2004 the end of the year, we were able to reach the necessary with a global provider in the area of vocational continuing agreement with the union and employee representatives to education. save the Lübeck site. The result included greater flexibility of labor costs and working hours, for example by increas- Staff satisfaction as a factor for success ing the number of employees with 40-hour contracts, Our employees are very important to us. Their opinions changing our company’s business hours and making it count. Our regular staff survey, which was last conducted easier to employ up to 25 percent of the workforce as loan Group-wide at the beginning of the year, has been devel- workers and staff on fixed-term contracts. oped still further to become an important strategic man- In return, Dräger Medical will make available around agement tool at Dräger. Over 82 percent of the global 50 percent more apprenticeship positions, and has prom- workforce took part in the survey—a figure that compares ised to remain in Lübeck in the long term, investing tens of very favorably to other companies and reveals a high level millions in structural improvements. The company’s goal of commitment on the part of our staff. As for information is to complete the new Dräger Medical building in Lübeck and communication, staff want to see even more trans- by January 1, 2008. parency. In cases where individual areas were pinpointed for action, our managers are being expected to introduce improvements within their respective areas of responsibility. 9

Dräger employee in the production department

From 2005, Dräger will regularly enter the “Great Place able to enter into partnership with an international high- to Work” competition and use standardized criteria to mea- flyer to handle our global IT infrastructure, as a result of sure its attractiveness for its staff against other excellent which some 600 staff found themselves with a new em- companies. The measurement will include evaluating the ployer. The final stage of this process was the transfer of benefits offered by the company, as well as a random sur- our Dräger ProTech GmbH business to the specialist vey of employees. The competition has shown that attrac- firm Concord GmbH and the integration of our internal tiveness as an employer goes hand in hand with business Dräger Interservices logistics firm into the subgroups. In success—though this is nothing new for Dräger. a parallel step, we consolidated our main fields of business by taking over a number of international companies, both Providing for our employees in old age—a new at Dräger Medical and Dräger Safety. This development is dimension in pension plans at Dräger clearly reflected in our staff structure—for the first time, In view of current economic, demographic and social more than half of the entire workforce of the Dräger Group trends, finding the right type of pension plan has become was employed outside Germany as of year’s end. extremely important. This prompted us to restructure the retirement plans Dräger offers its staff. The advantages of the new scheme for 2005 are as follows: stability of value, income-linking and the flexibility to allow for deferred compensation. In addition, Dräger adds its own contribution Workforce trend within the Dräger Group, 2000–2004 as of December 31 (discounting apprentices and interns) to the employee’s payment, taking full advantage of the new legal and social provisions. An annual account state- 5,673 3,399 ment increases the transparency of the pension plan, and 2000 9,072 employees can put together a package of benefits to suit 5,576 3,686 their particular life circumstances. As such, Dräger is also 2001 9,262 a pioneer in the area of company pension schemes. 5,551 4,063 2002 9,614

More than half the workforce outside of Germany 5,099 4,965 In 2004, we brought to conclusion our program of mea- 2003 10,064 sures designed to allow us concentrate on our core com- 4,378 5,328 petencies of medical and safety technology. As part of this 2004 9,706 program, we continued our spin-off activities last year, disposing of our IT companies. At the same time, we were Germany Abroad 10 Company report

Dräger stock

Our results of operations improved further in 2004, laying Dräger stock consistently outperforms the market the foundations for building corporate value further in the With equity investments, in particular, the mid-range and years to come. The year was yet another successful sequel long-term perspectives are what count. Dräger stock is an to Dräger’s growth story. However, the Dräger stock price attractive, high-yield investment, a fact underlined by its did not mirror this strong performance. Although the price performance over the past three years. The Dräger stock rose sharply during the year, Dräger preferred stock fell price climbed 286 percent, outstripping all other bench- some 9 percent year on year. mark indices, whose performance was either markedly weaker or even negative. Inconsistent stock markets Following a brilliant 2003, the stock markets tended side- Dräger stock unable ways in 2004. Alongside the US dollar, high oil prices, to keep up the previous year’s rally in 2004 fuelling concerns about global economic growth, were the In the fiscal year, Dräger stock was unable to continue its main brakes on stock performance. Some of the major excellent performance of prior years. At the end of 2004, international indices closed at higher levels than in the the price of the stock was down 8.9 percent. The year got prior year, but single-digit growth was the maximum. The off to a shaky start before culminating in a new record high picture on the German stock market was mixed: the DAX for the preferred stock. Dräger stock was recommended rose 7.3 percent in 2004 (2003: up 37.1 percent), while by a number of equity research analysts and received good the TecDAX fell by 3.9 percent (2003: up 50.9 percent). press, boosting its price by 35.5 percent from €46.51 at

Dräger stock performance at compared with Jan. 1, Jan. 1, Jan. 1, Jan. 1, Jan. 1, Jan. 1, Dec. 31, 2004 1999 2000 2001 2002 2003 2004 in %

Dräger-preferred stock 215.7 373.4 450.3 285.9 135.3 (8.9) DAX (14.9) (37.0) (33.8) (17.5) 47.1 7.3 TecDAX (84.0) (89.9) (81.9) (54.8) 44.9 (3.9) Prime Pharma & Healthcare 34.9 33.2 (5.4) 0.4 42.9 19.5 MSCI World Healthcare Equipment 42.0 82.9 18.1 26.1 47.2 18.5 HDAX (10.7) (32.2) (29.6) (13.9) 49.8 8.2 11

Dynamic price trend Dräger preferred stock price trend 2002–2004 (indexed)

600

500

400

300

Dräger 200 MSCI CDAX 100 HDAX DAX 0 TecDAX

123456789101112123456789101112123456789101112 2002 2003 2004

Source: Reuters

the beginning of the year to €63.00. The provisional fiscal Pharma and Healthcare index increased by 19.5 percent 2003 figures were published in March, and the forecast for (2003: up 19.6 percent), the Prime Medical Technology 2004 was adjusted at the same time to allow for currency index rose by 14.6 percent (2003: up 86.7 percent), and effects. The stock price declined for a while before re- the MCSI World Healthcare Equipment & Services index covering to €54.30 in April. In July and August, generally recorded growth of 18.5 percent (2003: up 24.3 percent). ailing markets saw the stock price fall to a calendar-year low of €38.03. The turnaround came in mid-August with Liquid trading the release of six-month figures and the generally brighter A daily average of 38,600 Dräger shares were traded at mood on the stock markets. Compared to its lowest price, German exchanges in the fiscal year (2003: approx. Dräger stock rose by up to 33 percent, climbing to 27,000), with a total of some 10 million shares changing €50.60. At year-end, the weak dollar and the reduced hands. This represents a 43 percent increase in the aver- sales and earnings forecast for Dräger Medical, revised at age daily trading volume (2003: up 35 percent). Accord- the end of October, put a damper on performance. At the ing to Deutsche Börse, Dräger stock was one of the 11 end of 2004, Dräger stock closed at €42.37. most traded TecDAX shares. Dräger preferred stock outperformed the industry benchmark indices for the year as a whole: the Prime 12 Company report Dräger stock

Investor relations efforts intensified and Fire Training Systems (FTS) Ltd., Ontario, Canada. We at Dräger believe that it is our duty to actively commu- This was also one of the main issues discussed in tele- nicate with investors and seek dialog with capital market phone conferences with investors and financial analysts participants. Investors receive information “hot off the in August and November to accompany the publication press” and far more frequently than just on the compulsory of the quarterly figures. reporting season dates. This is an important part of our The warm response from institutional investors shows transparent, regular and coherent communication with the that the Executive Board has succeeded in persuasively financial markets. We took a number of steps to intensify conveying the Dräger Group’s attractive investment profile. our links with the financial community. These included This is also reflected by the number of investment banks meeting institutional investors at roadshows in various that regularly publish studies on the company’s perform- financial centers in Germany, the UK, France, and Switzer- ance. Since the prior year, HypoVereinsbank, Bankhaus land to present the Dräger strategy and our growth oppor- Lampe and MainFirst Bank have joined their ranks. The tunities. We also participated in four investor conferences following banks regularly issue analyses of Dräger stock: with well-known brokers. The Executive Board held many one-on-one interviews with investors, and in 2004 many — Berenberg Bank institutional investors and analysts from Germany and — CA Cheuvreux abroad took the opportunity to visit Dräger and our cor- — Commerzbank porate exhibition in Lübeck or talk to company represen- — Deutsche Bank tatives at the international Medica fair. — DZ Bank Our investor relations efforts in the fiscal year focused —equinet on communicating the strategic development of Dräger- — Bankhaus Lampe werk AG to current and prospective shareholders and —LBBW updating the equity story. In the prior year, the company —Nord/LB had already begun streamlining its activities to focus on — Sal. Oppenheim Dräger Medical and Dräger Safety and, as a result, gradu- — SEB ally shed its service companies. This process was brought —WestLB to a close with the sale of Dräger ProTech as of July 1, — HVB 2004. Several acquisitions have also helped to strengthen — MainFirst Bank the Group’s product range and sales activities: Dräger Medical acquired Air-Shields to improve its neonatal business; Dräger Safety acquired the operations of the South African breathing mask manufacturer Zenith Safety Prod- ucts Trust and, in the field of fire and emergency training systems, Swede Survival Systems Inc., California, US, 13

High percentage of institutional investors High-potential share Dräger did not make any changes to capital in the fiscal Dräger stock is well known in German investment circles year. The capital stock remains unchanged at €32,512 as standing for both growth and solidity. The Group’s long- million, divided into 12,7 million bearer shares. Half of the term prospects are promising. Our global presence in all shares are preferred stock listed for trading. The owner- important future markets, a clear strategic alignment, high ship structure is by and large the same as in the prior year. levels of innovation and committed staff are the keys to The common stock is owned either directly or indirectly by our success. They will help us bolster our market position the Dräger family. All of the preferred stock is in free float. and enhance our corporate value in the long term. According to a current survey, around 42 percent was held by institutional investors in Switzerland (18 percent), the UK (15 percent), Germany (6 percent) and other countries (3 percent) in December 2004.

Earnings per share The net profit for the year after minority interests resulted in earnings per preferred share of €2.02 (2003: €1.77). Due to the lower dividend, the common stock was valued €0.06 lower. The minority interests in net profit increased by some €10 million to €22 million in fiscal year 2004, as the joint venture partner Siemens AG participated in the full annual net profit of the Dräger Medical subgroup for the first time in fiscal year 2004 (six months in the prior year).

Dividend proposal The Executive Board and the Supervisory Board will propose to the stockholders’ meeting on June 10, 2005 to pay a dividend of €0.39 on common stock and €0.45 per preferred share. In relation to the share price of €42.37 on December 31, 2004, the dividend yield comes to 1.06 percent. Hence 20 percent of the net income less minority interests is distributed to shareholders. 14 Company report Dräger stock

Dräger stock figures 2002 2003 2003 2004 HGB HGB IFRS IFRS

Shares Number of shares pc. 12,700,000 12,700,000 12,700,000 12,700,000 › thereof common pc. 6,350,000 6,350,000 6,350,000 6,350,000 › thereof preferred pc. 6,350,000 6,350,000 6,350,000 6,350,000 Free-floating preferred stock in % 100 100 100 100

Trading figures Average daily trading volume 1 pc. 19,899 40,094 40,094 38,649 Annual high in € 20.10 49.32 49.32 63.00 Annual low in € 10.50 18.01 18.01 38.03 Stock price at December 31 in € 18.01 46.51 46.51 42.37 Market capitalization 2 in € 228,727,000 590,677,000 590,677,000 538,099,000

Earnings figures as of December 31 Earnings per common share in € 1.35 2.09 1.71 1.96 Earnings per preferred share in € 1.41 2.15 1.77 2.02 Cash flow (from operating activities) per share in € 8.30 2.97 4.22 0.85 Equity per share in € 13.40 39.31 34.91 37.57 Price/equity ratio 1.3 1.2 1.3 1.1 Price/earnings ratio 13.1 21.9 26.7 21.3

Dividend figures Dividend per common share 3 in € 0.29 0.34 0.34 0.39 Dividend per preferred share 3 in € 0.35 0.40 0.40 0.45 Dividend yield (preferred stock) as of December 31 in % 1.94 0.86 0.86 1.06 Distribution ratio 4 in % 23.24 17.52 21.24 20.09

1 All German stock exchanges (source: Deutsche Börse) 2 Number of all shares/stock price at December 31 3 2004: Dividend proposed to the stockholders’ meeting 4 Total dividends paid divided by consolidated net profit after minority interests 15

Corporate Governance

Declaration of Conformity 5. The consolidated financial statements were made pub- “The Executive and Supervisory Boards declare that, sub- lic within the statutory time limit, but not within the peri- ject to the exceptions listed below, Drägerwerk AG has od recommended by 7.1.2 of the Code. Interim reports acted on the recommendations of the German Corporate were, and will be, made public in accordance with the Governance Code Government Commission, as amended recommendations of the Code (7.1.2 of the Code). on May 21, 2003, since the issuance of its previous decla- Compliance with the time limit for the publication of the ration of conformity on December 20, 2003: consolidated financial statements has been planned for a later date.” 1. The Company will not appoint any corporate voting proxy for exercising the voting right of stockholders on The reasons for the aforesaid exceptions from certain their instructions at the annual meeting (2.3.3 clause recommendations of the Code have largely been explained 3 of the Code). The voting common stock is solely in the declaration of conformity. For reasons of privacy, the owned directly or indirectly by the Dräger family and, Executive and Supervisory Board members jointly voted therefore, it would be redundant to appoint any such against the disclosure of the remuneration paid to each proxy for Drägerwerk AG’s stockholders. individual Executive Board member. 2. The salaries of Executive Board members and remuneration of Supervisory Board members have not been, and will not be, disclosed for individual members (4.2.4 and 5.4.5 of the Code). While the remuneration of the Executive Board consists of fixed and variable components, it does not include any long-term incentives or risk elements (4.2.3 of the Code). 3. An age limit for Executive Board members has not throughout been specified in the underlying contracts, as proposed in 5.1.2 clause 2 of the Code. A provision for the age limit of Executive Board members was added to the Supervisory Board rules of procedure on February 7, 2003. 4. No age limit has been specified for Supervisory Board members either, nor will it be (5.4.1 of the Code). In view of the knowledge, abilities and expert experience required in 5.4.1 clause 1 of the Code, the specification of an age limit does not appear recommendable.

REPORT Conquering distance

Remote diagnosis for anesthesia machines and ventilators generates greater efficiency in clinical processes, as demonstrated by the example of Remote Service at Daqin Oilfields General Hospital 18 Report Dräger Medical

Large distances between hospitals and service technicians can result in areas. And of course, this has to be achieved with the equipment remaining out of service for significant periods of time. Dräger same pressure on costs that exists in other parts of the Medical developed a new Remote Service diagnostic program with the world. specific goal of improving this situation—after all, the efficient use of medical For companies like Dräger Medical this offers huge devices is of key importance. Dräger Medical is the only company in the potential for growth, as its integrated products and system world to provide this type of remote technical service for its medical equip- solutions enable more efficient organization of clinical ment. The concept of remote servicing is already known in the field of processes. medical technology for imaging diagnostics and laboratory analysis, but to Spread out all over China, the world’s most populous date has not been available for anesthesia machines and ventilators. Con- country, are around 17,000 hospitals, most in the major quering distance contributes to greater efficiency and customer satisfaction, cities, with the number constantly rising as a result of particularly in a country as large as China. large-scale projects funded by both public and private investors. Surgery and in some cases intensive care treatment is available in these hospitals, though intensive Covering an area of 9,627,343 square kilometers care units are not yet to be found in all the healthcare faci- (3,717,137 miles), China is about the same size as the lities nationwide. whole of Europe, and in terms of span comes in third By way of comparison, Germany has some 2,200 hospi- behind only Canada and the Russian Federation. The tals providing medical care to 82 million people, while the maximum distance from north to south is around 4,100 km US boasts around 5,000 hospitals for its population of (2,563 miles). 292 million. Distance also plays an important role in day-to-day The Chinese medical equipment market is worth app- business at Dräger Medical Equipment (DME), Dräger’s rox. €3.6 billion and is growing at an annual rate of 15 to Chinese subsidiary headquartered in Shanghai. Dräger 18 percent (including diagnostic equipment, but no phar- Medical has had its own branch here for ten years now, maceutical products). In the area of acute point of care employing some 160 staff in sales and service and serving solutions, the segment in which Dräger Medical is active, China, Hong Kong and Taiwan. Shanghai Dräger Medical sales of around €250 million was achieved in 2003. Instrument (SDMI) is a production company likewise situated in Shanghai which employs a further 146 people DrägerService: a pioneering role once again who produce anesthesia machines for the Asian market as Over the past few years, Dräger Medical’s growth in China well as components and modules for other Dräger Medical has consistently outpaced that of the market. Having said devices. that, the sale of devices and system solutions for individual therapy applications is not the only area of focus—service The Middle Kingdom—a market with great potential is becoming increasingly important, too. One of the greatest challenges currently facing the The motto of DrägerService® is to play a pioneering Chinese public health system is to make medical care role. A company driven by innovation, Dräger Medical is available to the 1.3 billion Chinese throughout the land— the only manufacturer worldwide to offer remote technical not only in the major metropolitan centers, but also in rural service of its therapy devices. In the fall of 2002, the Remote Service program was first installed in the Nether- lands, Belgium, UK, Spain and China. 19

Dr. Jun Lee, Director of Anesthesiology in Daqin Oilfields General Hospital, downloads technical data from the Fabius CE anesthesia machine to the Remote Service Box and a short while later sends the data off through a phone line to Dräger Medical’s Remote Call Server for analysis. The hospital in Daqin, which has a population of 1.5 million (or 3 million including the outskirts), merged in fall 2004 with 26 other hospitals in the area to form the largest hospital in the north-east of China, with a total of over 2,000 beds. Situated right in the middle of what used to be Manchuria, to the west of the province of Heilongjiang, it provides medical care in all disciplines and serves at the same time as a teaching hospital that also pursues scientific research. It was founded in the early 1960s, just a few years after the founding of the oil extraction city of Daqin, and today employs a staff of around 1,700.

Andreas Frahm, General Manager of the Chinese Remote Service means that it is possible for the first time Dräger Medical subsidiaries DME and SDMI from 1999 to to diagnose therapy devices at a distance and detect any the start of 2005, was the driving force for Dräger behind technical problems instantly. It is hardly surprising that this the Remote Service program in China. “When we started is increasingly attracting the interest of Chinese hospitals explaining to hospitals five years ago how important it is in particular. Significant distances on the one hand and to have service contracts for our life-support systems, we rising pressure on costs on the other are forcing people met with skepticism. People were accustomed to setting to ensure more efficient use of medical equipment. up service contracts for computed tomography (CT) scan- For Dr. Jun Lee, Director of Anesthesiology at Daqin ners by way of protecting their investment, but not in order Oilfields General Hospital, it is not only shortening service to improve device availability and clinical processes, nor response times that is of fundamental importance: “What to increase patient safety. But this has now changed! impressed me above all was the accuracy with which error Although we are still in the early stages of this service in diagnosis is possible with Remote Service. In the past it China, the outlook is promising. Indeed, there is every sign simply took longer to correct problems. Nowadays, I get an that China will follow a similar development to Europe and accurate appraisal of the device situation from the Dräger the US, where service represents a very important ele- service technician within five minutes at the latest, and can ment.” then decide together with him what to do next.” Just a few months ago, the 900-bed hospital in Daqin Conquering distance decided to sign up to the Remote Service program for in minutes for greater efficiency equipment diagnosis in anesthesia and intensive care. Device errors can result in equipment downtime if problems cannot be identified and corrected without delay. Major distances between the customer and the nearest service technician only serve to exacerbate the situation. 20 …Distanzen überwinden

Bildunterschriften

On the display of the Remote Service Box, Dr. Lee can follow the status of the data transfer and receives further information about what to do next.

What is the job of Remote Service? Once the technical information arrives, the service tech- To decode data and convert it into information nician in Harbin, a university town situated around two Essentially, Remote Service visualizes device-related data hours east of Daqin, may in cases of doubt talk to his col- such as the device status and the status of components, leagues in the local service office in Beijing or in the calibration values, operating hours, charge status of Chinese headquarters in Shanghai. He clarifies the situa- batteries, and much more, making this information use- tion by phone or e-mail with the hospital and advises what able. To do this, the operator connects a special box should be done—all just five minutes after the hospital (known as a Remote Service Box) to the medical device, sent off the data in the first place. which then instantly copies its technical data to the Re- mote Service Box. From there, the data are transmitted Quicker at the destination— down a phone line to the central Remote Call Server. This high customer satisfaction translates the technical data into readily comprehensible The Remote Service program, which is available for just device information, which is sent on to the local service about all Dräger Medical products launched since 1993, organization—in this case to Shanghai, Beijing and Harbin. allows Dräger Medical to find the solution to a technical However, before the data are sent from the server to the fault quickly and precisely, before the service technician local service organization, they are checked against an has even had the chance to inspect the situation on site. international database which is updated daily and contains If spare parts are needed, they can be ordered immediately all the extensive experience of the global DrägerService® in the Chinese headquarters. Delivery of the spare parts, organization. and indeed of new medical devices, is handled by a logistics service provider in the Shanghai free trading zone of Wai Gao Qiao and takes place within 24 hours. 21

The Remote Service program is able to identify the device error quickly and accurately. Within five minutes at the most after data have been sent, Dr. Lee receives an e-mail telling him that the gas-conducting system has a small leakage—without him having to send his service staff into action.

When asked why Dr. Lee chose the Remote Service Dr. Lee and his staff at Daqin are particularly happy program for his hospital’s Dräger equipment, he is happy about the quality of the products and the service, which to explain: “Dräger devices have a life-supporting function. they describe as reliable and quick. As a teaching hospital We therefore have an obvious interest in ensuring that our for the university town of Harbin, efficiency is especially technology for life is conscientiously serviced so that the important, and can generally only be achieved with innova- equipment can do its job without any interruption. And this tive solutions, so the hospital continuously focuses on the benefits us doctors just as much as it does our patients!” latest developments in medical technology. It comes as no Daqin Oilfields General Hospital has worked with Dräger surprise, then, that Dr. Lee is planning in the year 2005 Medical for years, and in its 14 operating rooms, which to test out Dräger Medical’s innovative Primus anesthesia were fully modernized in the year 2000, personnel rely on system for himself. Dräger anesthesia machines and appreciate the advantages offered by the company’s ergonomic ceiling supply units. The hospital is also more than satisfied with the ventilators used in its intensive care units. Even though Dr. Lee, who is involved in and promotes the exchange of ideas and experience at an international level, only has a few months of experience in using the new service, one thing is already clear: “Remote Service has slashed our equipment downtime by 70 percent. Ultima- tely, this is time we now have at our disposal and which otherwise would have been wasted on diagnosing problems and finding solutions. This makes us much more efficient!”

REPORT Pioneering Solutions for private-public-partnership The Brunswick Fire Department Service Center as an example of innovative total solutions and partnership in fire prevention 24 Report Dräger Safety

Budgetary constraints are increasingly forcing towns and municipalities to adopt a more business-oriented mentality, opening up opportunities for innovative forms of cooperation with private enterprises. In the city of Brunswick, a partnership has been established which to date is unique in Germany, with Dräger Safety helping Brunswick Fire Department to perform its duties. The company planned, built and financed Brunswick's new Fire Department Service Center (FSC), underlining with this pioneering achievement its role as a provider of total problem solutions. In addition, Dräger Safety is enabling the city of Brunswick to refinance its investment through the cooperation agreement.

At the beginning, in the year 2000, it was clear that the Both started putting out feelers in the private economy, financial resources available would not stretch to a new fire holding informal talks with a number of potential partners— station in the south of the city with the necessary infra- among them Dräger Safety—to establish whether there structure. The new station would require a hose cleaning was any general interest and, if so, what solutions industry facility, a workshop for the servicing, care and maintenance could propose. They succeeded in persuading the city to of respiratory protective and gas detection equipment, and invite nationwide tenders for the construction and opera- a training center. “The city’s officials had decreed that no tion of a fire department service center. As Hans-Joachim new debts were allowed, and that no loans could be taken Gressmann says: “We were pleased that Dräger Safety out”, explains Carl-Heinz Beykuffer, Administrative Direc- submitted a bid, as we had noticed the company’s willing- tor of Brunswick Professional Fire Department. Chief Fire ness even during the early idea-gathering stages to try to Officer Hans-Joachim Gressmann adds: “However, since find an innovative solution to our problem.” Dräger Safety the infrastructure of our main fire station dates back to got through the qualifying rounds, and submitted a persua- the post-war years, something really needed to be done. sive concept which provided a good basis for further talks. So we asked ourselves what other ways there might be to The city began negotiations with the Lübeck firm, the finance the urgently needed fire department service outcome of which was a model that would prove profitable center.” to both parties: Dräger Safety was to contribute the financial resources needed to build the center, and would take 25

Whether it’s a question of hose cleaning or servicing of gas detection and respiratory protective equipment, the new Fire Department Service Center offers its technical services on a cross-regional level to other fire departments, rescue and aid organizations, and customers from industry.

overall responsibility for construction. In addition, Dräger Pioneering achievement Safety would be responsible for the servicing and mainte- When the Fire Department Service Center was officially nance of the center for the contractually agreed upon term handed over, Brunswick’s Mayor Friederike Harlfinger paid of 15 years, and for training personnel in the FSC. The tribute to the pioneering spirit of the Lübeck company: “In center itself was to be used by the City of Brunswick Fire Dräger Safety from Lübeck we found a partner who is not Department on the basis of a hire purchase scheme. only a world-renowned company in the field of safety tech- The FSC gives Brunswick Professional Fire Depart- nology, but also fulfilled all our expectations, even in the ment and the city’s 30 local fire departments a respiratory difficult initial phase of the project. While contracts were protection workshop and modern hose cleaning facility. being drawn up, it was already evident that Dräger Safety In addition, a respiratory protection training gallery, a flash- was prepared to work together with the city to develop new over container and training facilities for firefighters are approaches and concepts and to take a fresh look at famil- available. iar ground and come up with new ideas and solutions, both for the city and for the company itself.” Gerd Zeisler, Drä- PPP model ger Safety Regional Manager for Europe, underlines this The cooperation agreement between the fire department by saying: “What we are witnessing here is a pioneering and Dräger Safety is based on a PPP model (public-pri- achievement which for the first time combines the inter- vate partnership), and covers marketing by Dräger Safety ests and needs of the public sector in the fire department of the wide spectrum of technical services and training segment with those of a private-sector company, giving seminars offered by the FSC. The profits generated by the rise to a profitable situation for both partners. This configu- cooperation agreement are used to refinance the city’s ration was completely virgin territory for us, and there were leasing costs. PPP models are used above all in situations no examples of any similar problem solutions in Germany where the public sector finds that it can perform its duties upon which to base our work.” better or more cost-effectively by engaging private firms. 26 …

Infrastructure of the FSC and noise. They are monitored from a control panel The infrastructure of the FSC includes the following: throughout the exercise by means of contact sensors and — Respiratory protection workshop with equipment an infrared camera. storage area, for care and servicing of the respiratory Things get pretty hot in the flashover container from protective and gas detection equipment of the fire Dräger Safety: instead of a simulation, the different stages departments, industrial firms and rescue organizations of a real fire in a confined space can be experienced at first — Modern respiratory protection training gallery with hand. At temperatures of over 300 °C and in conditions of neighboring exercise and fitness area thick smoke, the firefighters in the container see for them- — Flashover container in which firefighters can train their selves how a flashover develops and learn under controlled response to fire under realistic conditions while wearing conditions how to respond correctly in such situations. In respirators the exercise and fitness area they can improve their physi- — Modern hose cleaning facility with hose storage area cal condition using exercise bikes, treadmills, moving lad- ders and hammers. Under full medical supervision by The new Dräger respiratory protection training gallery has Dräger Safety, the firefighters are helped get into shape a lot more to offer than the old one at the main fire station. ready for their next mission, when they have to save lives Firefighters are subjected to real stress and their physical and protect property. and psychological limits are tested in preparation for real- life situations. Wearing respirators, they have to find their way through a maze of tunnels, pipes and slopes, testing their ability to cope in conditions of darkness, heat, smoke 27

It’s hot inside the Dräger flashover container: Preparing for their next mission: medical supervision from Dräger Safety means that an individualized at temperatures of over 300°C, firefighters learn training and fitness program can be defined for every member of the crew. how to respond correctly to the different stages of a fire. The high point is the flashover itself.

The state-of-the-art hose cleaning facility replaces the What is more, to widen the range of training seminars on previous 30-meter high hose drying tower and 30-meter offer from the Dräger Academy, we will be making the long cleaning bath. Now, cleaning and drying a hose is just FSC’s many different courses available to other fire depart- a matter of minutes, instead of several days as in the past. ments and industrial companies, taking advantage of the Given that the Brunswick Fire Department has to wash expertise of Brunswick Professional Fire Department.” around 1,000 hoses every year, this saves a great deal of time and labor. The time gained can now be used to clean Win-win situation for both partners the hoses of other fire departments and disaster preven- Carl-Heinz Beykuffer describes cooperation during the tion organizations from the local region. four-year project with the Lübeck specialist in total hazard management as being founded on trust and partnership: The cooperation agreement with the FSC gives Dräger “The chemistry between the two partners was good, and Safety the chance to build upon its leading position as a by the end of the project it was clear that we had achieved provider of services to fire departments and industry, as a win-win situation for both.” As Hans-Joachim Gressmann well as to extend its portfolio of services. Morten Voss, adds: “And what is more, we now have the very latest Key Account Manager at Dräger Safety and project leader: infrastructure and equipment at our disposal!” “The efficiency of the FSC, combined with our flexible The Fire Department Service Center in Brunswick is a logistics concepts, allows us to make all our services avail- success story of cooperation between partners with a able at a cross-regional level on a large scale. For example, pioneering spirit! we could now be commissioned to clean all the fire hoses of a works fire department anywhere in Germany. The advantage for our customers is obvious—they get all the services they need from a single company, and do not have to maintain a capital-intensive infrastructure themselves.

Report of the Supervisory Board Manangement report 2004 of the Dräger Group Financial statements 2004 of the Dräger Group Notes 2004 of the Dräger Group Separate financial statements 2004 of Drägerwerk AG (short version) The Company’s Boards Major shareholdings 30 Report of the Supervisory Board

Report of the Supervisory Board

Dear Stockholders,

In fiscal 2003, the Supervisory Board continued to advise the Executive Board of Drägerwerk AG and monitor its conduct of business over the period. We were involved in all major Dräger decisions, and the Executive Board briefed us at regular intervals timely and comprehensively. At five regular meetings and one extraordinary meeting, we dealt in detail with, and discussed in depth with the Executive Board, the business and strategic developments at Drägerwerk AG, its subgroups, its German and foreign subsidiaries, as well as the service companies directly held by Drägerwerk AG. Between meetings, the Executive Board reported to us in writing on developments. The Chairman of the Supervisory Board obtained regular reports on all material transactions and pending decisions. Important results were brought to the plenary Supervisory Board’s attention. The two Supervisory Board committees, i.e., the Steering Committee, which is in charge of duties under the terms of Art. 27 (III) German Codetermination Act (“MitbestG”) and staff issues, and the Audit Committee, met in 2004 on three and four occasions, respectively.

Focal points of deliberations Written and oral reports to us focused on regularly taking cognizance of the Group’s, its subgroups’ and individual subsidiaries’ revenues, results, net assets and financial position, capacity utilization, as well as the workload and order situation, apart from specific events and their development. Ongoing variance analyses and rolled-forward estimates were submitted and discussed. The 2005 budget was also duly presented. In the fiscal year, the Executive Board prepared two reports on the Group’s risk position. Our deliberations were based on the reports submitted. In connection with our supervisory duties, we attached particular importance to information about the level of implementation of the 2004 budget approved by us, and also discussed the short, medium and long-term development of the Group, its subgroups and major subsidiaries and their product groups, including their cost and revenue situation, as well as the Group’s risk and financial position. We approved the duly submitted budget for fiscal year 2005. 31

The deliberations of the Supervisory Board centered on the Executive Board’s plans for a new headquarters for Dräger Medical with alternative locations in Germany and for production abroad, as well as the Dräger Group’s efforts toward focusing on the core business of the two subgroups, Dräger Medical and Dräger Safety, by selling Dräger ProTech GmbH and several IT companies. The impact of the location issue and the efforts to focus on the core business were discussed, sometimes inciting differing opinions as to the effects on employees and the Group. Other key issues included the acquisition of Air-Shields and the integration of the company in the Group’s operations, the change in sales structure at Dräger Medical in the US, and the growth of the solution business through the takeover of small, specialized units for Dräger Safety. At a series of four meetings, the Audit Committee of the Supervisory Board discussed the reporting system of Drägerwerk AG and the Dräger Group as well as the risk reports in great depth. It looked in particular at measures to enhance security and transparency. In this context, discussion was focused on the audit activities, programs and results of the internal audit department as well as on the statutory audit, including the key audit areas addressed by the auditing firm. High on the Audit Committee’s agenda was the attentive supervision of the first-time application of the International Financial Reporting Standards (IFRSs) to the consolidated financial statements as of December 31, 2004, and the preparatory measures including impacts of the accounting changeover on the Group’s net assets, financial position and results of operations. 32 Report of the Supervisory Board

Corporate governance At several meetings, the Supervisory Board discussed fundamental corporate governance issues affecting the Dräger Group, whose standard practice has for years satisfied many requirements of the German Corporate Governance Code. The outcome of our deliberations was that we formally resolved to issue a joint declaration with the Executive Board to the effect that Drägerwerk AG largely complies with the recommendations of the Code. Only a few changes to our previous practice were required to ensure conformity. The accordingly revised Supervisory Board rules of procedure were adopted in January 2003. The declaration of conformity has been reproduced on page 15 of this annual report. We evaluated our work using a method we developed in fiscal 2003.

Financial statements as of December 31, 2004 The statutory auditing firm elected by the annual stockholders’ meeting of June 11, 2004, Hamburg-based BDO Deutsche Warentreuhand Aktiengesell- schaft Wirtschaftsprüfungsgesellschaft, was engaged by the Supervisory Board to audit the annual financial statements for fiscal year 2004. Subject of the audit were the separate financial statements of Drägerwerk AG, prepared in accordance with the German Commercial Code (“HGB”), as well as the consolidated financial statements, prepared for the first time in accordance with the International Financial Reporting Standards (IFRSs), and the management reports of both. The auditing firm examined the separate financial statements of Drägerwerk AG, as well as the consolidated financial statements and management reports of both the Company and the Group in accordance with the provisions of the German Commercial Code, and issued an unqualified audit opinion. The auditing firm confirmed that the IFRS consolidated financial statements and the group management report satisfy the conditions required for the Company’s exemption from its obligation to prepare financial statements in accordance with German law and that the Executive Board has introduced an efficient risk management system in accordance with the relevant legal requirements. 33

The annual audit reports were submitted to the Supervisory Board members. Representatives of the statutory auditing firm attended the meetings of the Audit Committee and the Supervisory Board on April 20, 2005, during which Dräger’s separate and consolidated financial statements were deliberated. These representatives reported on the conduct of the audit, explained various key points and were available for additional information. At these meetings, the Executive Board eluci- dated the financial statements of Drägerwerk AG and the Dräger Group along with the risk management system. Based on the conclusions drawn by the Audit Committee following its own examination, the Supervisory Board agrees with the audit opinion of the statutory auditing firm on the separate and consolidated financial statements of Drägerwerk AG and the Dräger Group. Following our own final examination, we raise no objec- tions to the submitted sets of financial statements and management reports. We approve the separate and consolidated financial statements of Drägerwerk AG as prepared by the Executive Board and submitted to us; Drägerwerk AG’s separate financial statements are thus adopted. Moreover, we agree to the profit appropriation as proposed by the Executive Board.

Lübeck, April 20, 2005

Professor Dr. Dieter Feddersen Supervisory Board Chairman 34 Management report 2004 of the Dräger Group Group structure

Management report 2004 of the Dräger Group

Group structure

– Dräger Medical and Dräger Safety continue their Drägerwerk AG serves as the holding company for the success story Dräger Group. Besides its shares in the subgroup parents, – Group EBIT up 23.6 percent to €117.2 million the Company now only holds a few equity investments – Services and parts manufacturing fully outsourced which do not form part of the two subgroups’ operations. The sale of the IT companies and Dräger ProTech GmbH has concluded the Dräger Group’s efforts to focus on the core business of the two subgroups, Dräger Med- ical and Dräger Safety. The Dräger Group now boasts an efficient, market- oriented and transparent organizational structure. The subgroups focus on specific customer groups and their needs and, with their globally formatted business processes, are in a position to act and react swiftly and flexibly. These subgroups also benefit from all the advantages of group membership and, in many cases, the ability to share know- how in such aspects as taxes, legal issues, or basic research.

Dräger Medical Dräger Medical develops, produces, and markets medical equipment, system solutions and services along the entire patient process chain in the acute point of care (APOC) and home care sectors worldwide. Across all the Care- Areas, from Emergency Care, OR/Anesthesia and Critical Care to Perinatal Care and Home Care, Dräger Medical accompanies patients wherever their vital functions need to be supported or monitored. With its APOC IT solutions, the Company provides a horizontal flow of data throughout the CareAreas and prepares documented data for user decisions. Together with Siemens, Dräger Medical also 35

Drägerwerk AG

Subgroups

Dräger Medical AG & Co. KGaA Dräger Safety AG & Co. KGaA Other investments in Germany and abroad 65 % 100 %

Subsidiaries and associates in Germany Subsidiaries and associates in Germany and abroad and abroad

As of April, 2005

devises IT solutions allowing data to flow from the acute Dräger Safety point of care to the hospital’s own IT system. The objective The business units of Dräger Safety are Personal Protec- is to improve patient care as well as help abate healthcare tion Technology, Gas Detection Systems, and Dräger Safe- costs by improving hospital processes. ty Solutions. The Company’s business objective is to pro- Dräger Medical maintains sales and service locations in vide customers in industry, fire protection, mining or other over 190 countries. Development and production facilities sectors with comprehensive solutions to their problems. are based in Germany, the US, China, and the Nether- Its product range comprises devices, applications and lands. services that warn and protect people against contamin- ated or polluted air, allowing them to breathe even in extreme conditions. Whether industrial companies, fire departments, mines or companies from other sectors, Dräger Safety’s customers put their trust in its hazard management systems. Dräger Safety has development and production facilities in Germany, the UK, the US, Sweden, South Africa, and China. 36 Management report 2004 of the Dräger Group General economic conditions

General economic conditions The euro area only managed a 2 percent increase, with Germany bringing up the rear at 1 percent, despite posi- Global growth at varying speeds tive export figures. The internal market failed to pick up In 2004, global economic growth was the strongest it had speed, as both structural weaknesses, brought to bear by been for many years. However, after a broad-based up- globalization and a weak US dollar, and social reforms, swing at the beginning of the year, rising oil and raw mate- made consumers and investors reticent. rials prices, a weaker US dollar and an increase in the US The US and Asia are also set to enjoy higher growth current account and trade deficit took the pace off growth. rates than Europe in 2005. The high level of debt and The best GDP figures in 2004 came from the US and rising current account deficit in the US, however, pose a the People’s Republic of China, which recorded increases growing risk to the US economy and to the world at large. of 4.4 percent and 9 percent, respectively. Despite a diffi- The euro area should expect its currency to strengthen cult second half, the Japanese economy saw GDP rise by even more against the US dollar. 2.6 percent year on year. Growth in the Southeast Asian countries was less pronounced than in previous years. Recording a 3.1 percent rise in GDP, the UK was the top performing major European country, outstripped only by its eastern European neighbors, albeit at a lower aggregate level. 37

Industry trend: Dräger Medical Industry trend: Dräger Safety The health sector in general and medical equipment in The segment of the global safety technology market in particular, with a global volume of around €250 billion, which Dräger Safety operates and which represents a continue to be among the markets of tomorrow. Dräger market volume of €4 billion is showing signs of increased Medical’s relevant markets—acute point of care and home consolidation and tougher competition. Factors affecting respiration—represent a volume of some €17 billion. In market expectations include much greater safety con- euro terms, these markets are likely to have shrunk by sciousness and the launch of national safety programs, around 3 to 4 percent in 2004, whereas in dollar terms, as well as greater environmental awareness. A customer- slight growth of between 2 and 4 percent can be expected. oriented approach, as well as innovation, new technologies, The largest regional market remains the US, followed by and the combination of planning, design, construction, Europe and Asia/Pacific. and operator concepts are what is expected on the market. These markets are shaped by demographic trends, i.e. Dräger Safety is successfully responding to these demands a graying population, and hence rising demands on med- by offering what it heralds as “Pioneering Solutions”. ical care combined with the potential for new innovations in medical technology in the fields of preventive care, diagnosis, and therapy. The financial situation of nations and regions, municipalities and other bodies responsible for healthcare, however, is a constraining factor that exercises heavy cost pressure on health sector suppliers. There is also increasing consolidation on both the demand and supply side. 38 Management report 2004 of the Dräger Group Transition to IFRSs

Transition to IFRSs The effects of reconciliation from HGB to IFRSs on the opening balance sheet as of January 1, 2003 and the finan- The Dräger Group’s consolidated financial statements for cial statements as of December 31, 2003, and hence on fiscal year 2004 were prepared for the first time in accor- the equity and results for fiscal year 2003 are presented dance with International Financial Reporting Standards in the notes to the financial statements (see page 69 ff. (IFRSs) and relevant supplementary provisions. The appli- of the annual report). The 2003 consolidated financial cation of IFRSs affected the recognition of items as well as statements provide the comparative figures for the 2004 the measurement of balance sheet items and hence also consolidated financial statements. the equity and results of the Dräger Group. The Dräger Along with the actual transition to IFRSs, the definition Group also switched to classifying its balance sheet accor- of earnings before interest and taxes (EBIT) was also ding to the current/non-current distinction and its income adjusted. statement using the cost of sales method. All the changes are shown in the reconciliation of EBIT for fiscal year 2003 (before non-recurring expenses):

Fiscal year 2003 Group Medical Safety Holding company/ other

€ million € million € million € million

EBIT before non-recurring expenses (old definition) HGB 96.4 91.4 39.7 (34.7) less interest income (2.9) (2.7) (0.8) 0.6 less other taxes (2.0) (1.4) (0.3) (0.3)

EBIT before non-recurring expenses (new definition) HGB 91.5 87.3 38.6 (34.4) Interest expenses for pension provisions 7.6 1.5 1.0 5.1 Adjustments under IFRSs (4.3) (3.5) (3.1) 2.3

EBIT before non-recurring expenses IFRSs 94.8 85.3 36.5 (27.0) 39

Capital employed was also redefined in line with IFRSs and adjusted accordingly. The effects on capital employed as of December 31, 2003 are presented as follows:

Fiscal year 2003 Group Medical Safety Holding company/ other

€ million € million € million € million

Capital employed (old definition) HGB 857.3 694.2 168.4 (5.3) Deferred tax assets (12.1) (12.8) (5.4) 6.1 Cash and cash equivalents 1 (186.2) (211.1) (12.2) 37.1

Capital employed (new definition) HGB 659.0 470.3 150.8 37.9 Non-current assets 23.0 1.5 (2.4) 23.9 2 Inventories 25.4 18.8 5.6 1.0 Receivables and other assets 16.3 10.1 7.5 (1.3) Provisions (excl. pension provisions) 13.7 9.4 2.6 1.7 Other non-interest bearing liabilities (43.3) (30.7) (10.4) (2.2) Capital employed (new definition) IFRSs 694.1 479.4 153.7 61.0

1 At Medical and Safety, this item includes receivables from cash management 2 Of which €24.7 million relates to additions to non-current assets of real estate companies and €(0.8) million other 40 Management report 2004 of the Dräger Group Business performance of the Dräger Group

Business performance of the Dräger Group

2003 2003 2004 HGB IFRSs IFRSs

Order intake € million 1,421.9 1,421.9 1,523.3

Revenues by region Germany € million 405.3 409.7 373.5 Rest of Europe € million 524.6 527.8 593.1 Americas € million 247.0 248.0 295.6 Asia/Pacific € million 159.2 159.2 177.3 Other € million 77.4 77.4 81.0 Total revenues € million 1,413.5 1,422.1 1,520.5

EBITDA before non-recurring expenses 1 € million 141.8 148.2 162.8 Depreciation/amortization € million 45.4 53.4 45.6 EBIT before non-recurring expenses 2 € million 96.4 94.8 117.2 Non-recurring expenses € million 32.4 37.1 22.3 EBIT 2 € million 64.0 57.7 94.9

Capital employed 3 € million 857.3 694.1 792.9 Investments € million 201.5 199.4 57.2 Net financial debt € million 36.7 138.7 218.3

EBIT before non-recurring expenses/revenues % 6.8 6.7 7.7 EBIT before non-recurring expenses/capital employed % 11.2 13.7 14.8 Net financial debt/EBITDA before non-recurring expenses Factor 0.3 0.9 1.3

Headcount as of December 31 Germany 5,099 5,099 4,378 Abroad 4,965 4,965 5,328 Total headcount 10,064 10,064 9,706

Revenues 2003 2003 2004 Change Change HGB IFRSs IFRSs under IFRSs assuming constant exchange rate

€ million € million € million % %

Dräger Medical 917.7 920.2 1,023.4 11.2 13.7 Dräger Safety 477.4 477.3 503.0 5.4 7.1 Holding company, other companies, consolidation 18.4 24.6 (5.9) 1,413.5 1,422.1 1,520.5 6.9 9.1

Revenues by region 2003 2003 2004 Change Change HGB IFRSs IFRSs under IFRSs assuming constant exchange rate

€ million € million € million % %

Germany 401.1 409.7 373.5 (8.8) (8.8) Rest of Europe 527.8 527.8 593.1 12.4 12.8 Americas 248.0 248.0 295.6 19.2 27.3 Asia/Pacific 159.2 159.2 177.3 11.4 16.6 Other 77.4 77.4 81.0 4.7 4.3 1,413.5 1,422.1 1,520.5 6.9 9.1

Group revenues and order intake on the rise Both subgroups, Dräger Medical and Dräger Safety, In fiscal year 2004, Dräger Group revenues climbed continued to grow. The sale of the internal service compa- 6.9 percent to €1,520 million (2003: €1,422 million), thus nies in fiscal year 2004 and Dräger Aerospace in June continuing the trend of recent years despite the relative 2003 had very little effect on the year-on-year change in strength of the euro against the dollar and other curren- group revenues as these companies did not generate any cies. Assuming exchange rates had not changed, group significant revenues outside of the Dräger Group. On bal- revenues would have risen by as much as 9.1 percent. ance, the disposal of these companies led to a €27 million drop in revenues in 2004. 42 Management report 2004 of the Dräger Group Business performance of the Dräger Group

Part of the increase in revenues at Dräger Medical dur- Group result improves significantly ing the fiscal year is attributable to the six months’ recogni- EBIT before non-recurring expenses was increased by tion of the neonatology business acquired from Hill-Rom 23.6 percent in fiscal year 2004 to €117.2 million (2003: (Air-Shields) and full-year recognition (2003: six months) €94.8 million). of the monitoring business arising from the joint venture Due to an improved and rounded-off product range and with Siemens. increased production efficiency, the Group’s increased rev- From a regional perspective, it is clear that the Dräger enues widened its gross margin. The Dräger Group also Group was able to strengthen and extend its position in the kept other operating costs stable by continuing to optimize Americas, Asia/Pacific and Europe (excluding Germany). its business processes. Dräger Medical and Dräger Safety The two subgroups, Medical and Safety, also maintained contributed equally to these improvements. The absolute their strong market position in Germany, the drop in group rise in costs mainly reflects the full-year effect of the joint revenues resulting primarily from the aforementioned sale venture with Siemens, the additional costs of the units of companies. acquired in fiscal year 2004 and the costs of expanding The comments on the subgroups contain detailed the sales organization in the US. explanations of their sales trends. Non-recurring expenses dropped, the high level record- The Dräger Group increased its order intake by 7.1 per- ed in the prior year resulting from the integration of the cent to €1,523 million (2003: €1,422 million). Net of cur- joint venture with Siemens. Follow-up costs were also rency effects, orders increased by 9.3 percent in fiscal year incurred for this project in 2004. These came in addition 2004. to expenses for acquiring Air-Shields and €10 million in potential expenses in connection with the new building project for Dräger Medical as a result of the underutilization of land and buildings leased over the long term. Over- 43

all, non-recurring expenses fell to €22.3 million (2003: Fiscal year 2004 saw the Dräger Group’s net profit €37.1 million). At €9.4 million, income from the discontinu- advance 39 percent to €47.3 million (2003: €34.0 ation of operations was much less than in the prior year million), thereby equaling 3.1 percent of revenues (2003: (2003: €19.0 million). The sale of the IT companies and 2.4 percent). €22.0 million of this net profit is attributable production company Dräger ProTech GmbH concluded to minority interests (2003: €11.9 million), leaving the the restructuring of the Group in 2004. remaining €25.3 million (2003: €22.1 million) in result The financial result improved from €(26.2) million in the after minority interests attributable to Drägerwerk AG prior year to €(24.9) million primarily due to an improved stockholders and producing earnings per share of €1.96 net interest result. (2003: €1.71) for common stockholders and €2.02 (2003: Due to an improvement in earnings before taxes, in- €1.77) for preferred stockholders. come taxes increased to €33.3 million (2003: €18.0 million). By contrast, the tax load ratio—before inclusion of the result from discontinued operations—fell to 46.8 percent (2003: 54.6 percent), as the ratio between the Group’s taxable profit and non-tax effective expenses improved. 44 Management report 2004 of the Dräger Group Business performance of the Dräger Group

Net assets, equity and liabilities ables, predominantly at the subgroup Dräger Medical. The Significant changes to the composition and presentation of latter increase is primarily attributable to the provisions the Group’s net assets, equity and liabilities resulted from made for year-end business (inventories) and the substan- the transition to IFRSs. The inclusion of real estate compa- tial sales in the final quarter (receivables), yet also partly nies, lower inventory allowances, deferred taxes, and other to the acquisition of the Air-Shields business as of July 1, items noticeably increased the balance sheet total. By con- 2004. trast, equity decreased, particularly due to the reclassifica- This increase in net assets was largely financed by tion of participation capital to non-current liabilities. The increasing liabilities to banks and by way of equity, which application of IFRSs produces an equity ratio of around had grown as a result of the Group’s improved perform- 33 percent. ance. The additional liabilities to banks led to a rise in net For a detailed presentation of the changes under financial debt to 1.3 times EBITDA (2003 IFRSs: 0.9), IFRSs, please refer to Note 2 of the notes to the financial which still gives the Group plenty of financing leeway. statements on page 69 ff. of this annual report. The €477.3 million in equity covers non-current assets In fiscal year 2004, the Group’s net assets grew, mainly entirely. All inventories and around a quarter of trade as a result of the increase in inventories and trade receiv- receivables are financed by non-current liabilities. Capital

Dec. 31, 2003 Dec. 31, 2003 Dec. 31, 2004 Change HGB IFRSs IFRSs IFRSs

€ million € million € million %

Balance sheet total 1,196.5 1,326.6 1,423.1 +7.3 Equity 499.2 443.3 477.3 +7.7 Equity ratio 41.7 % 33.4 % 33.5 % Capital employed 857.3 694.1 792.9 +14.2 Net financial debt 36.7 1 138.7 218.3 +57.4

1 Excluding €74.8 million participation capital 45

employed (consolidated assets excluding cash and cash Cash flow statement equivalents and deferred taxes and minus non-interest The development of net assets and results of operations is bearing liabilities) also rose in line with the increase in the also reflected in the cash flow statement. The fiscal year Group’s net assets. saw a net cash outflow of €6.8 million (see page 67 of the Investments in intangible assets in fiscal year 2004 annual report), primarily from operating activities, where mainly relate to the addition of patents and goodwill from inventories and trade receivables were increased and pro- acquisitions and software solutions; investments in proper- visions decreased, as well as from investing activities. ty, plant and equipment concern broad-based measures Financing activities were a source of cash, particularly the serving replacements and often the improvement of increase in current liabilities to banks; at €178 million, cash processes in all areas of the Group. and cash equivalents—including short-term securities of €20 million—were slightly below the level recorded in the prior year (2003: €186 million). 46 Management report 2004 of the Dräger Group Research and development/procurement, production and logistics

Research and development Dräger Safety’s R & D projects encompass miniaturized electrochemical and optical gas sensors, ion sensor spec- Investing in its technological future, the Dräger Group trometric techniques for identifying molecular components spent a total of €103.8 million, or 6.8 percent of revenues in the air, and the analysis of trace elements. Sensor net- (2003: €95.4 million, or 6.7 percent), on research and works, secure wireless data communication and the inte- development (R & D). Development costs were not recog- gration of data in superordinate communication and nized in fiscal year 2004 as no further significant develop- information systems are development issues in the areas ment costs were incurred once products were approved in of both personal protection and patient care. The R& D the key sales markets. This is a prerequisite specified by projects of Dräger Medical comprise knowledge-based the Dräger Group for the recognition of development costs system solutions in the areas of anesthesia and critical as an asset. care for treating and monitoring patients. The R & D departments of the subgroups employ Dräger Medical spent €79.5 million, or 7.8 percent of 789 people worldwide. They work closely with the 43 staff revenues, on research and development (2003: €67.0 mil- members of the Lübeck-based research department at lion, or 7.3 percent), and Dräger Safety €23.7 million, or Drägerwerk AG, who are engaged in product basics and 4.7 percent of revenues (2003: €24.3 million, or 5.1 per- researching and developing promising new technologies cent). Expenses incurred by Drägerwerk AG and not for the subgroups. charged to the projects of the subgroups amounted to Product innovations at Dräger Medical and Dräger €0.6 million (2003: €2.6 million). Safety reflect the convergence of longstanding experience In 2004, Dräger filed a total of 65 patent applications in advance technology product development in the fields of and three utility models with the German Patent and microsystems, nanomaterials, biotechnology, and IT. The Trademark Office. Altogether, 49 new patent applications Group’s strong affiliation with technology providers, re- were submitted to international patent offices. Inventors search institutes and universities guarantees the high-tech from the basic research department in Lübeck were standard of its products. involved in almost 40 percent of the new applications filed in Germany. 47

Procurement, production and logistics procurement, the standardization of parts and components in the pursuance of a platform strategy for our products is We are pressing ahead with our efforts to improve the of key importance. The subgroups have production plants procurement process. By selling its last remaining group in Germany, the US, the UK, Sweden, the Netherlands, supplier, Dräger ProTech GmbH, the Dräger Group fur- China and South Africa. ther decreased its level of vertical manufacturing. The focus on storing products and parts in HUBs, Both subgroups are turning more and more toward which Dräger Medical and Dräger Safety already operate global procurement, which also offers a way to reduce cur- in Germany and the US, is another way of reducing capital rency risks through “natural hedges”. Pivotal issues, how- employment, increasing availability and further improving ever, include quality, reliability, price and the integration of our shipments to customers. suppliers and service providers in the Group’s business processes. In order to realize the full potential of global 48 Management report 2004 of the Dräger Group Environmental protection

Environmental protection Reduction in environmental load in relation to revenues Occupational health and safety issues are to be incorporated in our universally applicable quality and environment policies. This is because our endeavors in connection with 1995 the DIN EN ISO 14001 environment certification of all Dräger companies at the Lübeck site are not only aimed at 1996 continuously improving our environmental efforts. In an attempt to establish sustainable processes, we also attach 1997 particular importance to maintaining the health of our employees in the workplace. 1998 The founding of the Dräger waste management association in Lübeck, along with its approval by the authorities, 1999 is further testament to Dräger’s ability to deliver innovative solutions. The association is a role model for Germany, 2000 offering its members professional waste management with an added legal guarantee and high standards in terms of 2001 eco-friendly waste disposal. Five Lübeck-based companies from the Dräger Group and seven other companies were 2002 quick to join the association. 2003

2004

Solid waste Water consumption

CO2 emissions Energy consumption

A continuous decline in environmental load indices at the Lübeck site as measured against revenues (in %, reference year 1995: 100 %) 49

The successful modernization of the Group’s utilities is Solid waste output of Dräger’s Lübeck site remained sta- reflected in the environment figures recorded for each site. ble at around 4,000 tons. As a result of systematic waste Heating energy consumption was reduced by a further management, the proportion of solid waste in need of 15.5 percent in absolute terms; in some units, savings of disposal was reduced from 2.8 percent in the prior year to more than 25 percent were made. With electricity con- a mere 1.8 percent, i.e. Dräger puts more than 98 percent sumption remaining stable, this led not only to a consider- of its solid waste to good use, thereby making a key con- able reduction in fuel costs, but also to a further reduction tribution to saving resources through materials recycling. in CO2 emissions from the various sites, ultimately showing what an effective contribution the Group is making toward climate protection. Despite the large-scale success of its water-saving efforts in the prior year, the Group systematically monitored its key consumption areas and reduced water consumption in 2004 yet again by almost 7 percent. 50 Management report 2004 of the Dräger Group Business performance of Dräger Medical

Business performance of Dräger Medical

2003 2003 2004 HGB IFRSs IFRSs

Order intake € million 920.7 922.8 1,018.5

Revenues by region Deutschland € million 273.8 276.3 268.8 Rest of Europe € million 311.0 311.0 367.2 Americas € million 169.1 169.1 208.2 Asia/Pacific € million 106.8 106.8 118.4 Other € million 57.0 57.0 60.8 Total revenues € million 917.7 920.2 1,023.4

EBITDA before non-recurring expenses 1 € million 108.4 103.0 114.9 Depreciation/amortization € million 17.0 17.7 20.7 EBIT before non-recurring expenses 2 € million 91.4 85.3 94.2 Non-recurring expenses € million 27.5 32.1 12.3 EBIT 2 € million 63.9 53.2 81.9

Capital employed 3 € million 694.2 479.4 563.3 Investments € million 159.6 162.1 25.8 Net financial debt € million (163.3) (162.8) (127.6)

EBIT before non-recurring expenses/revenues % 10.0 9.3 9.2 EBIT before non-recurring expenses/capital employed % 13.2 17.8 16.7 Net financial debt/EBITDA before non-recurring expenses Factor (1.5) (1.6) (1.1)

Headcount as of December 31 Germany 2,463 2,463 2,424 Abroad 3,133 3,133 3,435 Total headcount 5,596 5,596 5,859

1 EBITDA = Earnings before net interest result, income taxes, depreciation and amortization 2 EBIT = Earnings before net interest result and income taxes 3 Capital employed = Balance sheet total less deferred tax assets, cash and cash equivalents including receivables from cash management and non-interest bearing liabilities 51

Revenues up, market position bolstered two months of acquiring the neonatology business unit of In fiscal year 2004, Dräger Medical saw worldwide rev- Hill-Rom Company Inc., known as Air-Shields (acquisition enues climb to €1,023.4 million, 11.2 percent higher than date: July 1, 2004), the business had been fully integrated the €920.2 million recorded in the prior year. Contributing in the subgroup’s operations and the product lines incor- to this rise were growing revenues in countries such as porated into the Group’s own product portfolio. On a global Italy (up 49.3 percent), France (up 24.8 percent), and the scale, this takeover, including the acquisition of 40,000 Benelux (up 20.4 percent), as well as a 26.6 percent rise Air-Shields incubators, enabled the subgroup to broaden in revenues (in dollar terms) in the US. its warming therapy product range and enter the neonatol- The subgroup continued its successful globalization ogy segment in the US, a key market for Dräger. strategy in 2004. 74 percent of total business and 85 per- An important step for the subgroup on its quest to glob- cent of equipment sales, for example, were sourced out- alize its operations and become a major world player was side of Germany. The increased significance of foreign the addition of another 250 employees to its sales and business was ultimately also evidenced by the fact that the service teams. Besides shifting from a product-specific to US remained the largest regional market for equipment an overall portfolio approach in its US sales activities, the sales—as in 2003. Germany came in second again, fol- subgroup also established subsidiaries in Chile, Mexico lowed by France (2003: fourth) and China (2003: third). and Canada. In addition to this positive development, the subgroup also successfully bucked the global downtrend in medical EBIT improves again technology sales (in euro terms) in the acute point of care Dräger Medical closed fiscal year 2004 having achieved (APOC) sector to bolster and build up its competitive posi- the best operating result since the two subgroups were tion. Although this market shrank overall by around 3 to 4 formed. EBIT (earnings before interest, taxes and non- percent in Germany, Dräger Medical increased its share. recurring expenses for M&A activities) came in at The same success was achieved in the rest of Europe, €94.2 million. Non-recurring expenses for M& A activities where the subgroup outstripped the 2 to 4 percent annual amounted to €12.3 million, clearly below the forecast growth recorded in medical technology sales in the APOC €20 million. This enabled the subgroup to improve its sector, enjoying an 18 percent rise in revenues. In euro result for the fourth consecutive year since its restructuring terms, markets in the dollar region (all countries with the program in 2000. Year on year, EBIT rose by 10.4 percent dollar as their reference currency) shrank by around 5 per- (2003: €85.3 million). cent, while Dräger Medical grew by around 15 percent. Due to extensive investments in its future—increased These results are attributable both to the development staffing and restructuring of the sales and services of customer-oriented products and also to the six-month teams—related sales time lags as well as tougher compe- and full-year consolidation of the Air-Shields and monitor- tition and resulting changes in price structures, the EBIT ing businesses, respectively, in fiscal year 2004. Within margin was 9.2 percent, slightly below the prior year (2003: 9.3 percent). 52 Management report 2004 of the Dräger Group Business performance of Dräger Medical

The sound operating result was achieved by the sub- This significantly shortened the flow of materials, almost group both by further boosting its global business activities completely removed the need for intermediate storage, fur- and by maintaining the pace of its restructuring measures ther improved the cost structure, and reduced the average to develop into a process-oriented global player. The result delivery time to 23 days. also further improved the subgroup’s cost structures. The ever greater availability of spare parts around the The absolute rise in costs mainly reflects the full-year globe led to increased customer satisfaction. By establish- effect of the joint venture with Siemens, the additional ing two new warehouses in Memphis, USA, and Dreieich costs of the units acquired during the fiscal year and the near Frankfurt/Main, Germany, the subgroup increased expansion of the sales organization in the US. the worldwide turnover of spare parts by more than 30 percent since the beginning of the project. In addition, Success factor: global processes relocations to within the vicinity of major airports led to In 2004, Dräger Medical continued its transformation into more efficient logistics, thereby offering customers a more a globally driven process organization with an improved comprehensive service. cost structure. The transparency of its operations was further en- Endeavoring to launch products more quickly, reach hanced by including global process figures in the internal larger production runs in a shorter space of time, increase control system alongside purely financial data. the profitability of its products and further improve quality control, the subgroup introduced two processes to accom- Success factor: innovation initiative pany the life cycle of its products: the innovation or devel- In 2004, Dräger Medical forged ahead with its innovation opment process and the newly created PLM or “Product initiative by developing new products. The interplay of ther- Lifecycle Management” process, which encompasses the apy, monitoring and information technology in the APOC market roll-out phase, the management of the product sector and directly at the patient’s bedside has been en- throughout its life cycle, and the efficient phase-out of the hanced by the launch of the new IT platform Innovian™. product. This platform allows the most varied of data and informa- Furthermore, in addition to the globally implemented tion to be integrated in operating rooms and intensive care sales and service structure, the global installation of the units, i.e. data from patient monitors, anesthetic machines “Order Fulfillment” business process, from customer and ventilators, as well as information and documentation orders right through to payments, was also virtually com- from other IT systems (including x-rays and laboratory pleted, and the direct shipment of spare parts and ac- reports). cessories to customers further enhanced. More specifically, in terms of order-related production and direct shipments to customers, the subgroup managed to increase the percentage of direct shipments from manufacturer to customer to 80 percent in 12 countries. 53

Additional solutions include the new Infinity® system Capital employed for monitoring patients throughout their hospital stay, and In fiscal year 2004, the subgroup continued to improve the Infinity Kappa XLT monitor, which was developed asset management in its sales and service companies as specially for areas with limited space, such as operating well as in its business units. Both inventory and receivables rooms. The monitor has a multi-display function, allowing turnover was boosted. However, due to the strong rev- caregivers to view current vital signs and patient data as enues generated in the final quarter, capital employed well other relevant documentation and information. increased in absolute terms as of the balance sheet date Dräger Medical has responded to the growing signifi- (December 31, 2004). Another reason for the increase cance of comprehensive clinical network solutions by was the integration of Air-Shields. At 16.7 percent, the developing Infinity® OneNet, a new solution, in line with ROCE (return on capital employed) was therefore slightly industry standards, that for the first time allows hospitals lower than the 17.8 percent of the prior year. and clinics to integrate cable-based and wireless patient monitoring systems into their existing network infra- Headcount up around the globe structure. The number of employees at Dräger Medical increased by Testament to Dräger Medical’s patient-oriented equip- 263 in fiscal year 2004. Total headcount worldwide— ment technology and focus on quality and service is the excluding trainees and apprentices—was therefore 5,859 new home ventilator Camena, which for the first time offers as of December 31 (2003: 5,596). clinical-quality ventilation at home and which is also suit- The increase is attributable to both the acquisition of able for long-term ventilator patients. the Air-Shields business and the additional staffing of the sales and service teams around the world. The number of people employed abroad also rose year on year. While around 56 percent of staff at Dräger Medical were employed outside of Germany in 2003, this rose to 58.6 percent in 2004. This confirmed the trend of the prior year, where the workforce within Germany declined (down by 39) while elsewhere numbers rose (up by 302). 54 Management report 2004 of the Dräger Group Business performance at Dräger Safety

Business performance at Dräger Safety

2003 2003 2004 HGB IFRSs IFRSs

Order intake € million 487.1 487.1 510.0

Revenues by region Germany € million 113.1 113.0 110.6 Rest of Europe € million 213.6 213.6 225.9 Americas € million 77.9 77.9 87.4 Asia/Pacific € million 52.4 52.4 58.9 Other € million 20.4 20.4 20.2 Total revenues € million 477.4 477.3 503.0

EBITDA1 € million 53.1 50.3 57.5 Depreciation/amortization € million 13.4 13.8 16.6 EBIT 2 € million 39.7 36.5 40.9

Capital employed 3 € million 168.4 153.7 157.1 Investments € million 24.4 24.7 21.6 Net financial debt € million 20.1 20.1 12.2

EBIT/revenues % 8.3 7.6 8.1 EBIT/capital employed % 23.6 23.7 26.0 Net financial debt/EBITDA before non-recurring expenses Factor 0.4 0.4 0.2

Headcount as of December 31 Germany 1,474 1,474 1,442 Abroad 1,824 1,824 1,887 Total headcount 3,298 3,298 3,329

1 EBITDA = Earnings before net interest result, income taxes, depreciation and amortization 2 EBIT = Earnings before net interest result, income taxes 3 Capital employed = Balance sheet total less deferred tax assets, cash and cash equivalents including receivables from cash management and non-interest bearing liabilities 55

Global market position extended again Steps taken throughout the year to improve processes The Dräger Safety subgroup’s 2004 revenues rose world- and reduce costs have borne fruit. Together with the mar- wide to €503.0 million, up 5.4 percent on the prior year’s ket segment and customer focus of the subgroup, these €477.3 million. Assuming constant exchange rates, rev- steps have led to growth and secured earnings. Product enues increased by 7.1 percent on the prior year. This innovations, acquisitions, services tailored to specific target increase is due to an overall positive performance—espe- groups, and direct customer proximity have strengthened cially in the subgroup’s core businesses. The result enab- the subgroup’s market position. led Dräger Safety to successfully defend its title as market With cost structures much improved and revenues ris- leader and even increase its lead. In the Americas, an ing, earnings at the subsidiaries increased. Major mile- increase of 12.2 percent was recorded (adjusted for cur- stones were achieved in the strategic goal of improving rency effects: 21.0 percent); in Asia/Pacific, the Company business process efficiency through strict, global process saw a 12.4 percent rise (adjusted for currency effects and standardization. excluding the effects of SARS: 20 percent). In Europe, an overall increase in market share of 5.7 percent was All regions contribute to growth achieved, allowing the Company to also enhance its posi- In terms of core business, all regions contributed to growth tion in this region compared with the prior year. in fiscal year 2004. Relative growth was particularly high in the Americas Earnings climb more quickly than revenues and the Asia/Pacific region. Despite the tough competitive Dräger Safety closed fiscal year 2004 with earnings before environment and the heavy burden of an unfavorable euro interest and taxes (EBIT) of €40.9 million, which is equiv- exchange rate, the subgroup enjoyed solid growth rates alent to an EBIT margin of 8.1 percent of revenues. This in these regions. puts EBIT 12.1 percent above that recorded in the prior The market position of the Company was strengthened year. As such, the subgroup proved that it was continuing in the Americas, where order intake was up by 5.6 percent its success story and also realizing its long-term aim of (adjusted for currency effects: 14.0 percent). The positive increasing EBIT ahead of revenues, thereby generating a performance was again particularly bolstered by the sub- faster rate of bottom-line growth. Dräger Safety achieved group’s core businesses. Along with projects to develop this despite the burden of several million euros due to and produce gas monitoring systems for major industrial the strength of the euro zone currency. companies, large orders for Dräger respiratory protective equipment by large fire departments and mining organizations also provided positive impetus. The biggest energy supplier in New York City decided to buy a whole new set of portable gas detection instruments from Dräger Safety. 56 Management report 2004 of the Dräger Group Business performance at Dräger Safety

In the Asia/Pacific region, order intake grew by 3.2 per- Alcotest 6510, a breathalyzer which combines 50 years of cent (adjusted for currency effects and excluding the experience in breathalyzer technology with modern tech- effects of SARS: 20 percent in the core businesses). Sta- nology and ergonomics to create a compact, user-friendly tionary gas monitoring equipment and systems as well as device, have outstripped expectations in almost all areas. respiratory protective equipment for miners and firefighters This device is fast, precise and reliable. The electrochemi- were also the main growth drivers in this region. The pro- cal measuring technique guarantees accuracy in line with duction plant in Beijing was extended further, and now, professional requirements. The police need breathalyzers along with oxygen sensors, also assembles portable gas not only to be accurate, but also easy and quick to use, detection instruments, as well as compressed-air and features which are made possible by the ergonomic design closed-circuit breathing apparatus. of the device. The subgroup also performed well in Europe in fiscal Dräger Safety also maintained its high level of invest- year 2004, enjoying both top and bottom-line growth ment in production facilities, remaining an important sup- against the prior year. Overall, European order intake was plier of high-grade soda lime by constructing a new auto- up by 5.3 percent. Order intake in Germany’s sluggish matic production plant for soda lime. Soda lime is needed market was good, although not all orders were settled in to create a closed circuit for medical (anesthesia) devices, the fiscal year, mainly due to the state of the public coffers. diving apparatus and respiratory protective equipment:

Revenues from industry increased. CO2 is removed from the expelled air so that it can then be re-oxygenated and inhaled again. High level of investments and innovation At €21.6 million, investments in intangible assets and property, plant and equipment in fiscal year 2004 remained at the high level of the prior year. R& D expenditure amounted to €23.7 million (4.7 percent of revenues) and mainly related to the development of new products and services. The subgroup’s efforts to increase its market share by launching innovative products were more successful than expected. Our new products, for example the 57

Portfolio enhancement and acquisitions Capital employed In fiscal year 2004, Dräger Safety continuously enhanced Capital employed rose proportionately less to €157.1 mil- its product, technology and service portfolio, thereby con- lion (2003: €153.7 million). With EBIT amounting to firming its role as a provider of system solutions for com- €40.9 million, ROCE was 26.0 percent (2003: 23.7 per- prehensive hazard management. This involved making a cent). number of acquisitions, including the US fire training sys- Improvements continued to be made to production and tem specialist Swede Survival Systems, and the Canadian organization processes as scheduled. Endeavors to use fire simulator manufacturer Fire Training Systems. In South a few locations (HUBs) to ship products directly to cus- Africa, the subgroup also took over the breathing mask tomers worldwide involved organizing delivery perform- manufacturer Zenith Safety Products, increasing Dräger ance more efficiently. A positive effect on capital employed Safety’s presence in the region, especially in the mining also came from the reduction in inventories, warehouses, industry. and associated costs.

Dräger Safety Solutions a success on the market Headcount After only one year in existence, the new business unit As of December 31, headcount at Dräger Safety (exclud- Dräger Safety Solutions has already exceeded expecta- ing trainees and apprentices) was up 31 to 3,329 (2003: tions. This underpins the Company’s strategy to focus on 3,298). In Germany, the workforce was cut by 32; abroad, its systems business. Due to the flourishing business in it increased by 63, mainly due to the first-time consolida- developing and constructing escape chambers and rescue tion of the acquired companies. trains for the European tunnel industry, Dräger Safety had to build a new production hall in order to guarantee opti- mum logistics and assembly. 58 Management report 2004 of the Dräger Group Business performance of the holding company, other companies, consolidation

Business performance of the holding company, other companies, consolidation

2003 2003 2004 HGB IFRSs IFRSs

Order intake € million 14.1 12.0 (5.2)

Revenues by region Germany € million 14.2 20.4 (5.9) Rest of Europe € million 3.2 3.2 0.0 Americas € million 1.0 1.0 0.0 Asia/Pacific € million 0.0 0.0 0.0 Other € million 0.0 0.0 0.0 Total revenues € million 18.4 24.6 (5.9)

EBITDA before non-recurring expenses1 € million (19.8) (5.1) (9.6) Depreciation/amortization € million 14.9 21.9 8.3 EBIT before non-recurring expenses 2 € million (34.7) (27.0) (17.9) Non-recurring expenses € million 4.9 5.0 10.0 EBIT 2 € million (39.6) (32.0) (27.9)

Capital employed 3 € million (7.1) 61.0 72.5 Investments € million 17.5 12.6 9.8 Net financial debt € million 179.9 281.4 333.7

EBIT before non-recurring expenses/revenues % – – – EBIT before non-recurring expenses/capital employed % – – – Net financial debt/EBITDA before non-recurring expenses Factor – – –

Headcount as of December 31 Germany 1,162 1,162 512 Abroad 886 Total headcount 1,170 1,170 518

1 EBITDA = Earnings before net interest result, income taxes, depreciation, amortization and result from discontinued operations 2 EBIT = Earnings before net interest result, income taxes and result from discontinued operations 3 Capital employed = Balance sheet total less deferred tax assets, cash and cash equivalents and non-interest bearing liabilities 59

Drägerwerk AG performs services connected with its func- After the IT companies and Dräger ProTech GmbH tion as a holding company. Alongside its strategic tasks, were sold, other companies still comprised Dräger Inter- the Company also assumes responsibility for all legal and services GmbH and Dräger InTek GmbH as well as real tax issues affecting the Group, as well as financing, public estate companies for leased properties. As of January 1, relations, financial market disclosure, basic human resour- 2005, 70 percent of Dräger Interservices GmbH was ces issues, the consolidated financial statements, corpo- transferred to Dräger Safety and 30 percent to Dräger rate controlling, group audit, the coordination of projects Medical Holding, as the company forms an integral part of involving both subgroups and the management of its own the subgroups’ operations. Dräger InTek, which provides and any leased land and buildings, including lease agree- facility services, maintenance and energy management for ments with Dräger Group companies and third parties. companies on the Dräger site in Lübeck, is to remain with The basic research department at Drägerwerk AG is a key Drägerwerk AG. partner of the subgroups’ own development departments and works closely with national and international research bodies. All services provided directly by Drägerwerk AG to group companies or third parties are charged at market rates. 60 Management report 2004 of the Dräger Group Risks to future development

Risks to future development The risk management procedures implemented at Drägerwerk AG fully meet the requirements of the In doing business, the Dräger Group is inevitably exposed German Act on Corporate Control& Transparency (“Kon- to business risks. Responsibly handling the uncertainties TraG”), ensuring particularly the early identification of of the global village is the purpose of the Dräger Group’s operational and strategic risks. risk management system. The risk management system comprises all tools for The risk aspects and developments receiving primary measuring, managing and monitoring exposures and attention are: potential risks. Based on the Group’s and subgroups’ annually revised strategic plans and the resultant short and Overall economic risks medium-term planning, systematic controlling covers divi- The economies of most industrialized nations are charac- sions, companies and regions, subgroups and the Group terized by a high degree of uncertainty about future devel- through monthly or quarterly reports. opments. In the US, the double deficit on government Risk management is rounded off by the activities of budget and current account constitutes a risk factor, al- Group Internal Auditing, the statutory annual audit, and though the economy shows a constantly good rate of GDP risk reports that routinely detail twice annually (and addi- growth. In many other industrialized nations, high levels of tionally as and when required) all economic, market and government debt hamper growth and implementation of currency risks, the competitive position and environment, necessary reforms. In addition to this, the continued weak- as well as risks specific to the divisions. ness of the US dollar constitutes a serious risk for export- As a matter of course, Dräger Medical and Dräger Safe- oriented euro zone companies. Continued growth can be ty submit their products and services to quality inspections expected in the Asia/Pacific region. and ongoing checks in accordance with stringent national Currency risks are first of all counteracted at the oper- and international standards and always with the special ational level by selling and buying products and materials quality and risk orientation of these sectors in mind. in matching currencies (mainly US dollars), as well as by currency options and other foreign exchange hedges.

Industry and sector risks Dräger Medical’s and Dräger Safety’s industries are con- sidered future-oriented but within each sector further consolidation processes are expected that are likely to affect the competitive structure. This in turn may mar Dräger’s market position. Customer focus, innovations and, where expedient to business, active involvement in consolidation processes will help us cement and further expand our market position. 61

Operational risks Financial risks and risks related Leadership not only in technology but also in costs is of to the use of financial instruments paramount importance to market position and business The Dräger Group has equity of €477.3 million and an success of the Dräger Group. This requires both a high- equity ratio of 33.5 percent. In addition to this, long-term quality product portfolio in line with market requirements participation capital, note loans (maturing between two and the ability to control operating processes, from devel- and five years), long-term bank loans (due within four opment and maintenance of products on the market, years) and short-term credit facilities all provide a secure through to sales and meeting orders. source of financing for the Group. In addition, cash and The extended integration of external suppliers through cash equivalents and securities of a total €178.2 million the sale and transfer of the internal production and service allow for sufficient financial scope. However, going on the companies requires a high level of coordination with the experience of the last few years, the risk of receivable loss- suppliers, who have to be reliably incorporated into the es is extremely low given the customer structure of the processes. To avoid the risks this entails, information pro- Dräger Group. cesses are structured, the necessary internal and external The interest rate risk inherent in outside financing is interfaces in the global processes are optimized and the contained by agreeing on fixed long and (partly hedged) performance of external partners is carefully reviewed. short-term rates. Operating processes are continuously improved; the The currency risk from the increasingly strong euro is action programs of recent years are proof that the Dräger counteracted by hedging the balance of planned purchas- Group has faced up to and mastered these challenges. es and sales and short-term items from the settlement of receivables and payables. Production in the US proved a particularly favorable factor by almost zeroing the net balance of US dollar sales and purchases of Dräger Medical. Marketable hedging instruments contracted with de- pendable banks as counterparties are the only financial derivatives we use.

Overall risk In view of currently available information, the Dräger Group’s continued existence as a going concern is not jeopardized. 62 Management report 2004 of the Dräger Group Subsequent events/Outlook

Subsequent events Outlook

As of January 1, 2005, 70 percent of Dräger Interservices In fiscal year 2005, Dräger expects the world economy to GmbH was transferred to Dräger Safety AG & Co. KGaA continue to develop uncertainly and difficult challenges and 30 percent to Dräger Medical Holding GmbH. As of in the markets of Dräger Medical and Dräger Safety. In the same date, Drägerwerk AG took over Dräger InTek particular, the positions of market participants will put GmbH from Dräger Interservices. This company serves as pressure on the price structure for products in individual facility manager for the premises in Lübeck. regions to varying extents. Dräger will therefore press After the executive board of the metalworkers’ union ahead with the profitability and productivity enhancement IG Metall consented to the supplementary collective wage programs in both subgroups in fiscal year 2005. In particu- agreement securing the location of Dräger Medical on lar, this includes fine-tuning global business processes and January 18, 2005, plans to build new headquarters/pro- increasing efficiency, expanding customer relations and duction facilities for the Company in Lübeck are underway. growth strategies with an innovative product range. For Dräger Medical, this includes the integration of therapy, monitoring and information technology and for Dräger Safety, the next steps toward becoming a comprehensive service provider for system solutions in hazard and risk management. Both subgroups intend to strengthen and develop their market position in all regions. The US and the Asia/Pacific region are expected to make the largest contribution to growth of 5 to 7 percent. Dräger Medical in particular laid important groundwork in fiscal year 2004 by boosting sales in the US. Both subgroups plan to increase EBIT ahead of revenues. Overall, the Dräger Group expects revenue growth of 5 to 7 percent, with an increase in the EBIT and net profit of between 5 and 10 percent. 63

Financial statements 2004 of the Dräger Group

Income statement of the Dräger Group Note 2004 2003 January 1 to December 31, 2004 € thousand € thousand € thousand

Revenues 8 1,520,472 1,422,098 Cost of sales 9 (772,223) (746,371) Gross profit 748,249 675,727

Research and development costs 10 (103,838) (95,376) Marketing and selling expenses 11 (413,305) (386,599) General administrative expenses 12 (134,935) (134,602) (652,078) (616,577)

96,171 59,150

Net interest expense (23,607) (24,749) Profit/loss from investments in associates 529 (517) Profit/loss from other investments 137 0 Other financial result (1,981) (891) Financial result 13 (24,922) (26,157)

Earnings before income taxes 71,249 32,993

Income taxes 14 (33,341) (18,021) Result from discontinued operations 15 9,391 19,044 Net profit 47,299 34,016

Minority interests in net profit (21,953) (11,899) Result after minority interests 25,346 22,117 Earnings per share 18 › per preferred share (in €) 2.02 1.77 › per common share (in €) 1.96 1.71 64 Financial statements 2004 of the Dräger Group

Balance sheet of the Dräger Group Note 2004 2003 as of December 31, 2004 € thousand € thousand € thousand

Assets

Intangible assets 19 176,471 161,633 Property, plant and equipment 20 189,168 191,512 Non-current financial assets 21 Investments in associates 429 760 Other financial assets 5,043 5,873 Other non-current financial assets 24,898 11,987 Deferred tax assets 22 76,964 77,413 Non-current assets 472,973 449,178

Inventories 23 260,424 228,395 Current financial assets 24 Trade receivables 455,638 424,324 Other current financial assets 64,236 35,492 Current tax assets 25 11,891 2,971 Cash and cash equivalents 26 157,954 186,278 Current assets 950,143 877,460

Total assets 1,423,116 1,326,638 65

Note 2004 2003

€ thousand € thousand € thousand

Equity and liabilities

Capital stock 32,512 32,512 Additional paid-in capital 38,867 38,867 Reserves retained from earnings 173,889 156,450 Other comprehensive income (16,917) (13,267) Group net earnings 5,334 4,699 Minority interests 28 243,598 224,064 Equity 27 477,283 443,325

Participation capital 29 74,797 74,797 Non-current provisions 30 Provisions for pensions and similar obligations 155,539 164,604 Other non-current provisions 19,821 15,007 Non-current interest-bearing loans 31 107,384 157,667 Other non-current financial liabilities 32 4,696 5,194 Deferred tax liabilities 33 16,667 16,966 Non-current liabilities 378,904 434,235

Short-term loans and liabilities to banks 34 214,071 92,028 Current provisions 35 129,455 144,153 Other current financial liabilities 36 Trade payables 98,840 84,770 Other current financial liabilities 91,078 103,090 Tax liabilities 37 33,485 25,037 Current liabilities 566,929 449,078

Total equity and liabilities 1,423,116 1,326,638 66 Financial statements 2004 of the Dräger Group

Statement of changes in equity Paid-in capital Earned equity Minority Equity interests

Capital Additional Reserves Group net Other comprehensive income stock paid-in capital retained from earnings earnings

Currency Market translation valuation differences of derivative hedging instruments

€ thousand € thousand € thousand € thousand € thousand € thousand € thousand € thousand

January 1, 2003 32,512 38,867 40,219 4,064 0 0 6,325 121,987 Change in fair values (44) 1 (43) Currency translation differences (19,230) (1,122) (20,352) Group net profit 34,016 34,016 Minority interests in net profit (11,899) 11,899 0 Distributions (4,064) (1,968) (6,032) Effects of joint venture with Siemens › Reclassification into minority interests (103,401) 6,007 97,394 0 › Inclusion of the new activities 208,700 112,376 321,076 Transfer to reserves 17,418 (17,418) 0 Change in consolidated group/other (6,486) (841) (7,327) December 31, 2003 32,512 38,867 156,450 4,699 (13,223) (44) 224,064 443,325 Change in fair values 13 0 13 Currency translation differences (3,663) (2,226) (5,889) Group net profit 47,299 47,299 Minority interests in net profit (21,953) 21,953 0 Distributions (4,699) (3,146) (7,845) Transfer to reserves 20,012 (20,012) 0 Change in consolidated group/other (2,573) 2,953 380 December 31, 2004 32,512 38,867 173,889 5,334 (16,886) (31) 243,598 477,283 67

Cash flow statement of the Dräger Group 2004 2003

€ thousand € thousand

Operating activities Group net profit 47,299 34,016 + Depreciation/amortization of non-current assets 45,426 54,667 – Decrease in provisions (2,677) (22,334) –/+ Gain(–)/loss(+) from the disposal of non-current assets (3,568) 1,691 –/+ Increase(–)/decrease(+) in inventories (37,393) 22,871 – Increase in trade receivables (61,822) (64,554) – Increase in other assets (20,739) (17,825) +/– Increase(+)/decrease(–) in trade payables 14,773 (10,049) + Increase in other liabilities 29,487 55,192 Net cash flow provided by operating activities 10,786 53,675

Investing activities – Cash outflow for investments in intangible assets (20,016) (16,028) + Cash inflow from the disposal of intangible assets 7,096 1,110 – Cash outflow for investments in property, plant and equipment (42,766) (51,380) –/+ Cash outflow(–)/cash inflow(+) from disposals of property, plant and equipment (3,065) 8,160 – Cash outflow for investments in financial assets (938) (4,159) + Cash inflow from the disposal of financial assets 3,034 6,637 – Cash outflow from the acquisition of subsidiaries (23,228) 0 + Cash inflow from the sale of subsidiaries 892 18,222 Net cash used in investing activities (78,991) (37,438)

Financing activities – Distribution of dividends (4,699) (4,064) + Net balance of bank loans raised/redeemed and other liabilities to banks 76,219 (5,777) – Net balance of bank loans raised/redeemed and other finance lease liabilities (7,284) (5,100) + Inflows from capital increases 1 315 158,000 less minority interests 0 (8,991) – Profit distributed to minority interests (3,146) (1,968) Net cash provided by financing activities 61,405 132,100

Change in cash and cash equivalents in the fiscal year (6,800) 148,337 +/– Effect of exchange rates on cash and cash equivalents (1,511) (3,958) + Cash and cash equivalents at the beginning of the fiscal year 2 186,312 41,933 Cash and cash equivalents as of December 31 of the fiscal year 2 178,001 186,312

1 Mainly the Siemens joint venture in 2003 2 Cash and cash equivalents include short-term securities 68 Notes 2004 of the Dräger Group

Notes 2004 of the Dräger Group

1 Basis of preparation of the consolidated financial statements Drägerwerk AG, Lübeck, has prepared its consolidated financial statements for fiscal year 2004 for the first time in accordance with the International Financial Reporting Standards (IFRSs) promul- gated by the International Accounting Standards Boards (IASB) and the interpretations of the International Financial Reporting Interpretations Committee (IFRIC). In its consolidated financial statements for 2004, Drägerwerk AG applied all the IFRSs adopted by the IASB as of December 31, 2004 on the basis of IFRS 1 (First-time Adoption of IFRSs). The effects of first-time adoption of IFRSs are presented in the reconciliation under “effects of transition from HGB to IFRSs” in Note 2. January 1, 2003 was chosen as the date of transition. The prior- year figures for 2003 were restated accordingly. The following standards and interpretations were applied before the date of compulsory application: – IFRS 3—Business Combinations – IFRS 5—Non-current Assets Held for Sale and Discontinued Operations – IAS 1 (2004)—Presentation of Financial Statements – IAS 2 (2004)—Inventories – IAS 8 (2004)—Accounting Policies, Changes in Accounting Estimates and Errors – IAS 10 (2004)—Events After the Balance Sheet Date – IAS 16 (2004)—Property, Plant and Equipment – IAS 17 (2004)—Leases – IAS 19 (2004)—Employee Benefits – IAS 21 (2004)—The Effects of Changes in Foreign Exchange Rates – IAS 24 (2004)—Related Party Disclosures – IAS 27 (2004)—Consolidated and Separate Financial Statements – IAS 28 (2004)— Investments in Associates – IAS 32 (2004)— Financial Instruments: Disclosure and Presentation – IAS 33 (2004)— Earnings Per Share – IAS 36 (2004)— Impairment of Assets – IAS 38 (2004)—Intangible Assets – IAS 39 (2004)—Financial Instruments: Recognition and Measurement – IFRIC 1—Changes in Existing Decommissioning, Restoration and Similar Liabilities

Of the new standards and interpretations that have been issued but not applied in these financial statements, IFRIC 4 (Determining whether an Arrangement contains a Lease) is relevant. 69

The requirements of Art. 292a German Commercial Code (“HGB”) required for the Company’s exemption from its obligation to prepare consolidated financial statements in accordance with German commercial law are met. Compliance with these requirements is assessed on the basis of German Accounting Standard 1 (GAS 1) issued by the German Accounting Standards Committee (GASC). To ensure that the consolidated financial statements are equivalent to consolidated accounts prepared in accordance with the German Commercial Code, all disclosures and explanations required by German commercial law above and beyond the provisions of the IFRSs are provided. The consolidated financial statements were prepared in euros. Unless stated otherwise, all figures are disclosed in thousands of euros (€ thousand). The balance sheet is classified according to the current/non-current distinction; the income statement was prepared according to the cost of sales method. Where certain items of the financial statements have been grouped with a view to enhancing the transparency of presentation, they are disclosed separately in these notes. The separate financial statements of the companies included in consolidation were prepared as of the balance sheet date of the consolidated financial statements on the basis of uniform accounting policies.

2 Effects of transition to IFRSs

a) Reconciliation of equity

January 1, 2003 December 31, 2003

Equity under HGB (including minority interests) 170,133 499,182

Asset-backed securities (2,677) (2,618) Recognition of internally developed software 2,983 2,607 Goodwill (3,214) 115 Valuation adjustment of components/ adjustment of depreciation (1,322) (1,653) Recognition of finance leases 158 123 Inventory measurement 21,711 9,957 Adjustment of bad debt allowances 7,550 8,310 Deferred tax assets 71,449 100,682 Deferred tax liabilities (21,935) (52,030) Revaluation/reversal of other provisions 1,828 2,033 Consolidation of real estate companies (11,484) (11,579) Remeasurement of pension provisions (38,658) (36,675) Other effects 262 (332) Reclassification of participation capital (74,797) (74,797) Equity under IFRSs (including minority interests) 121,987 443,325 70 Notes 2004 of the Dräger Group

Significant changes to items – Expenses for internally developed software were recognized as an asset in accordance with IAS 38. – The differences in goodwill are mainly due to the different amortization rules under HGB and IFRSs (impairment-only approach). – Effects on inventory measurement are attributable to a change in the methods used to calculate inventory allowances. – The general bad debt allowance was fully eliminated for the purposes of the IFRS consolidated financial statements. – Deferred tax assets and deferred tax liabilities changed due to deferred taxes recognized on the new adjustments between the tax balance sheet and the IFRS financial statements and the recognition of deferred taxes on loss carryforwards. – Another effect on equity came from the elimination of intercompany profits for the consolidation of various real estate companies (special purpose entities—SPEs) under IFRSs. – The remeasurement of pension provisions on the basis of IAS 19 by actuaries led to a significant increase in these provisions. – The participation capital was reclassified from equity to debt under the provisions of the IFRSs.

b) Reconciliation of balance sheets as of January 1 and December 31, 2003

January 1, 2003 HGB IFRSs Difference

Intangible assets 23,229 23,823 594 Property, plant and equipment 166,710 194,644 27,934 Financial assets 11,065 10,942 (123) Inventories 213,030 253,101 40,071 Receivables and other assets (including prepaid expenses and deferred charges) 376,002 388,816 12,814 Deferred tax assets 12,994 70,613 57,619 Cash in hand, bank balances 42,442 42,505 63 Assets 845,472 984,444 138,972

Equity 170,133 121,987 (48,146) › thereof minority interests [6,028] [6,325] [297] Participation capital 0 74,797 74,797 Pension provisions 129,026 160,653 31,627 Tax provisions 11,265 11,679 414 Other provisions 142,798 138,385 (4,413) Liabilities (including deferred income) 392,250 447,692 55,442 Prepayments received 0 21,146 21,146 Deferred tax liabilities 0 8,105 8,105 Equity and liabilities 845,472 984,444 138,972 71

December 31, 2003 HGB IFRSs Difference

Intangible assets 159,129 161,633 2,504 Property, plant and equipment 169,544 191,512 21,968 Financial assets 8,208 6,633 (1,575) Inventories 196,844 228,395 31,551 Receivables and other assets (including prepaid expenses and deferred charges) 464,432 474,774 10,342 Deferred tax assets 12,124 77,413 65,289 Cash in hand, bank balances 186,213 186,278 65 Assets 1,196,494 1,326,638 130,144

Equity 499,182 443,325 (55,857) › thereof minority interests [222,021] [224,064] [2,043] Participation capital 74,797 74,797 Pension provisions 134,415 164,604 30,189 Tax provisions 12,332 13,358 1,026 Other provisions 160,620 145,802 (14,818) Liabilities (including deferred income) 389,945 446,269 56,324 Prepayments received 21,517 21,517 Deferred tax liabilities 0 16,966 16,966 Equity and liabilities 1,196,494 1,326,638 130,144

Significant changes to items – The difference in intangible assets is largely due to the different treatment of goodwill under HGB and IFRSs. In addition, internally developed software was recognized as an asset under IFRSs. – The increase in property, plant and equipment is chiefly attributable to the consolidation of the real estate companies under IFRSs. In addition, the recognition of finance lease assets increased. – Inventories increased due to the reclassification of prepayments received on account of orders from inventories to a separate item on the liabilities side (gross disclosure). Equipment leased out under operating leases was reclassified from inventories to other assets. The different measurement provisions for inventories under IFRSs also contributed significantly to the higher inventories. – The higher receivables and other assets are mainly due to the reversal of general bad debt allowances. – Deferred tax assets increased due to the new adjustments between the tax balance sheet and the IFRS financial statements and the deferred taxes recognized on loss carryforwards. Also, both deferred tax assets and deferred tax liabilities increased due to separate disclosure in some instances. 72 Notes 2004 of the Dräger Group

– Please see the separate presentation under a) Reconciliation of equity for the differences in equity. – The participation capital was reclassified from equity to debt under the provisions of the IFRSs. – The increase in pension provisions is principally attributable to the different recognition and measurement criteria of IAS 19 compared to German commercial law. – Other provisions decreased mainly due to reclassification of various personnel obligations from other provisions to liabilities. – The rise in liabilities is due to the consolidation of real estate companies under IFRSs as well as the reclassification of personnel obligations from other provisions to liabilities. In addition, prepayments received were reclassified from inventories to a separate item on the liabilities side.

c) Reconciliation of net profit

2003

Net profit under HGB (including minority interests) 37,807

Recognition/valuation adjustment of internally developed software (376) Goodwill 666 Valuation adjustment of components/adjustment of depreciation (428) Recognition of finance leases (35) Inventory measurement (10,581) Adjustment of bad debt allowances 978 Deferred tax assets 30,347 Deferred tax liabilities (25,122) Revaluation/reversal of other provisions 599 Consolidation of SPEs 644 Remeasurement of pension provisions 1,365 Other effects (1,848) Adjustments affecting net profit (3,791)

Net profit under IFRSs (including minority interests) 34,016

Please see our information under a) Reconciliation of equity for an explanation of significant changes to items. 73

3 Consolidated group Besides Drägerwerk AG, the consolidated financial statements comprise 37 German (2003: 39) and 95 foreign companies (2003: 84) in which Drägerwerk AG directly or indirectly holds the majority of voting rights, giving it the power to govern their financial and operating policies so as to obtain benefits from their activities. Eight associates (2003: seven) over which Drägerwerk AG indirectly has a significant influence are consolidated according to the equity method. The consolidated group includes four real estate companies in the form of special purpose entities whose assets are attributable in substance to the Group (2003: four). The consolidated group was extended in the fiscal year by the formation of eight new companies and the acquisition of another four. In contrast, seven companies were sold and deconsolidated and two companies were merged. The consolidated income statement for 2003 included on a time proportion basis three sold or merged companies that were deconsolidated in 2003. The significant companies of the Dräger Group as of December 31, 2004 are listed after the notes. The list of Dräger shareholdings will be deposited with the Commercial Register of the Local Court of Lübeck under no. HRB 499.

4 Effects of the change in the consolidated group In fiscal year 2004, Dräger Group companies acquired the following entities: – Draeger Safety Systems Inc., Pittsburgh, USA – Draeger Safety Systems Ltd., Ontario, Canada – Draeger Safety Zenith (Pty.) Ltd., King William’s Town, South Africa

Fiscal year 2004 also saw the acquisition by Dräger Medical Infant Care Inc., Hatboro, USA, of the Air-Shields activities in an asset deal.

The following assets and liabilities were acquired in these transactions:

Non-current assets 4,467 Current assets 10,335

Less Provisions 562 Non-current and current liabilities 1,610 Net assets excluding goodwill 12,630 Goodwill 11,529 Costs of purchase 24,159 Less Acquired cash and cash equivalents 931 Net cash used for the acquisition 23,228

The new entities generated revenues of €20,787 thousand and a net loss of €88 thousand during their period of affiliation to the Group. 74 Notes 2004 of the Dräger Group

As part of its efforts to focus the Dräger Group on the core business of the Dräger Medical and Dräger Safety subgroups, Drägerwerk AG mainly sold the following companies in fiscal year 2004: – Dräger ProTech GmbH, Lübeck – Dräger Synematic GmbH, Lübeck – NORDAC Rechenzentrumsgesellschaft mbH, Lübeck – Dräger Information Technologies GmbH, Lübeck – Dräger Electronic Business Portals GmbH, Hamburg

In this context, the following assets and liabilities were transferred to various acquirers:

Non-current assets 17,526 Current assets excluding cash and cash equivalents 28,362

Less Provisions 15,413 Non-current and current liabilities 19,076 Net assets excluding goodwill 11,399

Sale price (less transferred cash and cash equivalents) 20,790 Less Present value of outstanding purchase price installments (19,898) Net cash provided by the sale 892

We also refer to our information on discontinued operations in Note 15.

5 Consolidation principles Capital consolidation is performed according to the purchase method. On first-time consolidation of subsidiaries, the identifiable assets and liabilities are measured at their fair values at the date of acquisition. The excess of the cost of the investment over the acquirer’s interest in the net fair value of the identifiable assets and liabilities is recognized as goodwill. Goodwill is subject to an annual impairment test pursuant to IAS 36 (impairment-only approach). Any excess of the Group’s share in equity over the cost of the investment is recognized in profit or loss at the date of acquisition after reassessment. Any minority interests in equity are shown in the consolidated balance sheet as such. When swapping or exchanging shares or in similar transactions, the fair value of the shares given is attributed to the shares received. Any resulting step-ups in fair value are transferred to the reserves retained from earnings. The cost of investments accounted for according to the equity method is adjusted to reflect the Group’s share in net profit or loss for the period and dividend distributions. The goodwill is included in the carrying amount of the investments. Impairments are accounted for separately. 75

Intercompany receivables and liabilities are netted. The carrying amount of assets from intercompany goods and services are adjusted for unrealized intercompany profits and losses; therefore, these assets are measured at group cost. For associates, elimination of intercompany profits and losses is waived due to immateriality. Internal revenues are eliminated. All other intercompany income and expenses are mutually offset. Deferred tax assets or liabilities from consolidation entries that affect profit or loss are recognized whenever differences in tax expenses are expected to reverse in subsequent years. Group net earnings agree with Drägerwerk AG’s distributable earnings. The portion of net profit not destined for distribution and attributable to minority interests is transferred to reserves retained from earnings. The additional paid-in capital of the Dräger Group and of Drägerwerk AG reflects the stock premiums earned from increases in capital. Paid-in capital and earned equity are disclosed separately in the consolidated balance sheet.

6 Currency translation In the separate financial statements of Drägerwerk AG and its subsidiaries, foreign currency transactions are translated at the mean exchange rate at the date of initial recognition. Exchange differences from the settlement of monetary items in foreign currencies during the year and the measurement of open foreign currency positions at the rate at the balance sheet date are recognized in profit or loss. The foreign consolidated subsidiaries prepare their financial statements in the local currency in which they mainly operate (functional currency). These financial statements are translated into the group reporting currency, the euro, at the mean exchange rate at the balance sheet date (closing rate) for assets and liabilities and at the annual average rate for the items of the income statement. All resulting translation differences are included in a translation reserve in equity. To account for the effects of inflation, the financial statements and comparative figures of foreign entities operating in a hyperinflationary environment and reporting in a currency of a hyperinflationary economy are restated in terms of the measuring unit current at the balance sheet date pursuant to IAS 29 using a general price index for the country in question. No significant subsidiary had its registered office in a hyperinflationary economy in the year under review and the prior year. The currency translation differences recognized in profit or loss, other than currency translation differences from measurement of instruments at fair value pursuant to IAS 39, lead to income of €2,848 thousand.

The major group currencies and their exchange rates developed as follows:

Closing rate Average rate

December December € 1 = 31, 2004 31, 2003 2004 2003

US USD 1.36 1.26 1.25 1.14 UK GBP 0.71 0.70 0.68 0.69 Japan JPY 139.65 135.05 134.05 131.74 People’s Republic of China CNY 11.26 10.35 10.31 9.45 76 Notes 2004 of the Dräger Group

7 Accounting policies The separate financial statements of Drägerwerk AG and its consolidated German and foreign subsidiaries as of December 31 of the fiscal year are prepared on the basis of uniform accounting policies and included in the consolidated financial statements. The following accounting policies are applied:

Intangible assets Group-controlled intangible assets from which future economic benefits are expected to flow to the Group and which can be reliably measured are recognized at cost less straight-line amortization over their expected useful lives. Acquired and internally developed software not disclosed under inventories is recognized as a separate asset unless it is an integral part of the related hardware. Costs incurred for the continuing use of an existing software system are recognized as an expense (e.g. a new release). Internal development costs are recognized as an asset if the asset’s future economic benefit is sufficiently probable. However, due to the strict safety requirements for Dräger Group products, this means that the product must have already been approved for sale in the major markets. Until all criteria for recognition as an asset are met, internal development costs and research costs are expensed as incurred. Intangible assets generally have a useful life of four years, patents and trademarks are amortized over their term (11 years on average). Amortization is charged straight-line. A useful life of five years is used for development costs recognized as an asset. Goodwill recognized as an intangible asset is disclosed at cost less accumulated impairment losses. Under IAS 36, amortization is no longer charged on a systematic basis.

Property, plant and equipment Items of property, plant and equipment are stated at cost less accumulated depreciation and accumulated impairment losses. The cost of purchase of an item of property, plant and equipment includes its purchase price and any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended. The cost of conversion comprises all direct and overhead costs, including depreciation, attributable to production. Borrowing costs are recognized as an expense. Subsequent expenditure incurred after the assets have been put into operation, such as repairs and maintenance and overhaul costs, are charged to income in the period in which the costs are incurred. Whenever it is probable that the expenditure will result in future economic benefits in excess of the originally assessed standard of performance of the existing asset flowing to the Company, the expenditure is recognized as an additional cost of property, plant and equipment.

Depreciation is computed on a straight-line basis over the following estimated useful lives:

– Buildings 20–40 years – Production plant and machinery 5–8 years – Other plant, factory and office equipment 2–15 years 77

Where significant parts of property, plant and equipment contain components with substantially different useful lives, such components are recorded separately and depreciated over their respective useful lives. The useful life and depreciation methods used for property, plant and equipment are reviewed annually to ensure that the method and period of depreciation are consistent with the expected pattern of economic benefits from items of property, plant and equipment. Assets under construction are stated at cost.

Impairment losses on intangible assets and property, plant and equipment If there are signs of impairment of intangible assets or property, plant and equipment at the balance sheet date, these items are subjected to an impairment test pursuant to IAS 36. If the carrying amount of the asset exceeds its recoverable amount (the higher of its value in use and net selling price), an impairment loss is charged. An impairment test is performed annually on goodwill and intangible assets with indefinite useful lives. If the reasons for an impairment loss cease to apply, write-ups are performed, except in the case of goodwill.

Financial assets Financial assets are investments in associates, other investments, securities, loans and other receivables and other assets. Financial assets held for or due in more than 12 months are disclosed as non-current financial assets. Loans and receivables are recognized at amortized cost less any impairment losses and discounting. Securities with fixed or determinable payments and fixed maturity that the Dräger Group has the positive intent and ability to hold to maturity are classified as held-to-maturity investments and recognized at amortized cost. Investments in associates that are not accounted for according to the equity method due to immateriality, other investments and securities and all other financial assets are classified as available for sale and recognized at fair value, or if not determinable, at amortized cost. Unrealized gains and losses from the change in fair value are recorded in equity, taking the tax effects into account. Changes in fair value are not recognized in profit or loss until the asset is permanently impaired or sold. Derivative financial instruments that are not designated hedging instruments (hedge accounting) are classified as held for trading and recognized at fair value, or if not determinable, at amortized cost. Gains and losses from the change in fair value are recognized in profit or loss. 78 Notes 2004 of the Dräger Group

Inventories Inventories comprise raw materials, consumables and supplies, work in process and finished goods and merchandise. They are measured at the lower of average cost and net realizable value. Cost comprises all direct and overhead costs for the conversion of inventories on the basis of normal capacity utilization. Borrowing costs are recognized as an expense. Net realizable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale. Unrealizable inventories are written off. In significant cases, revenues and profits from customer contracts in process are recognized according to the percentage of completion method. Finished goods and merchandise comprise equipment leased out and demo equipment. Two percent straight-line depreciation is charged monthly for the decrease in the net realizable value of these items.

Cash and cash equivalents Cash and cash equivalents comprise cash in hand and bank balances, including short-term deposits.

Participation capital The Dräger participation certificates are recognized as financial liabilities at amortized cost in accordance with IAS 39 in conjunction with IAS 32. As on termination by holders of series K and D participation certificates, the average amount received is equal to the amount repayable, the amortized cost is equal to the amounts originally received. Drägerwerk AG does not intend to terminate the participation certificates (also see Note 29). The dividends paid to holders of participation certificates represent interest expense of the period in question.

Provisions for pensions and similar obligations Provisions for pension obligations are calculated according to IAS 19 using the projected unit credit method allowing for future adjustments to salaries and pensions, and employee turnover. The provision was measured on the basis of pension reports. If the actuarial gains or losses, which mainly arise due to the changes in actuarial parameters, exceed 10 percent of pension obligations at the beginning of the fiscal year, the amount in excess of 10 percent is recognized in profit or loss over the remaining period of service of the eligible employees. The interest portions and expected returns on plan assets are disclosed on a net basis in interest expenses.

Other provisions A provision is recognized when, and only when, the entity has a present obligation as a result of a past event and it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation. Provisions are stated at the amount expected to be required to settle the obligation. Non-current provisions are discounted to the balance sheet date using appropriate market rates. 79

Other financial liabilities Other financial liabilities are disclosed at the amount repayable. Non-current liabilities that do not bear interest or bear interest at a rate substantially below market rates are disclosed at present value. Premiums and discounts are allocated over the term of the liability using the effective interest method.

Deferred taxes Deferred taxes are recognized for differences between the IFRS financial statements and the tax balance sheets of the consolidated companies as well as for consolidation entries and loss carryforwards. The deferred taxes are measured at the amount expected to be paid or recovered in subsequent fiscal years. Deferred tax assets are only recognized if it is sufficiently probable that they will be real- ized. Deferred tax assets and liabilities are only netted if they relate to the same taxation authority.

Leases a) Finance leases

Dräger Group as lessee At inception of the lease, finance leases are recognized as assets and liabilities in the balance sheet at amounts equal at the inception of the lease to the fair value of the leased property or, if lower, at the present value of the minimum lease payments. In calculating the present value of the minimum lease payments, the discount factor is the interest rate implicit in the lease if this is practicable to determine. If this is not the case, the lessee’s incremental borrowing rate is used. Initial direct costs are included as part of the asset. Lease payments are apportioned between the finance charge and the reduction of the outstanding liability. The finance charge is allocated to periods during the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period. A finance lease gives rise to a depreciation expense for the capitalized asset as well as a finance expense for each period. The depreciation policy for leased assets is consistent with that for corre- sponding depreciable assets which are owned by the entity.

Dräger Group as lessor Assets held under a finance lease are recognized in the balance sheets and presented as a receivable at an amount equal to the net investment (present value of the gross investment) in the lease. The recognition of finance income is based on a pattern reflecting a constant periodic rate of return on the lessor’s net investment outstanding in respect of the finance lease. Initial direct costs are capitalized and allocated as an expense over the term of the lease. 80 Notes 2004 of the Dräger Group

b) Operating leases

Dräger Group as lessee Leases of assets under which substantially all the risks and rewards of ownership are effectively retained by the lessor are classified as operating leases. Lease payments under an operating lease are recognized as an expense.

Dräger Group as lessor Assets subject to operating leases are presented in the balance sheets according to the nature of the asset. Lease income from operating leases is recognized in profit or loss on a straight-line basis over the lease term.

Derivative financial instruments The Dräger Group uses derivatives to hedge currency and interest rate risks. Derivatives are recognized at fair value. For derivatives that meet the hedge accounting criteria of IAS 39, the changes in their fair value are recognized depending on the type of hedge. In a hedge of the exposure to changes in fair value of a recognized asset or liability (fair value hedge), the changes in the fair value of both the hedged item and the derivative are recognized in profit or loss. Changes in the fair value of the exposure to variability in future cash flows (cash flow hedges) are recognized directly under equity, taking tax effects into account. These amounts are removed from equity when the hedged item is recognized in the balance sheet or in profit and loss.

Fair value of financial assets and liabilities Where the fair value of financial assets and liabilities is disclosed or stated, it is derived from the market or stock exchange value. In the absence of an active market, the fair value is determined according to recognized methods of financial mathematics.

Use of estimates and assumptions In preparing the consolidated financial statements in accordance with IFRSs, assumptions and estimates have to be made which have an effect on the recognition of assets and liabilities, the disclosure of contingent liabilities and the recognition of income and expenses. Actual amounts may differ from these assumptions and estimates.

Significant accounting policies and consolidation methods that differ from German law – Development costs and internally developed software are recognized as an asset if their future economic benefit is sufficiently probable. – Goodwill undergoes an annual impairment test according to the impairment-only approach. – The pension provisions are calculated according to IAS 19 based on the projected unit credit method taking future salary and pension increases into account. 81

– Participation capital is disclosed as debt. – Non-current provisions are carried at their present value. – Deferred tax assets are calculated according to the temporary concept, with deferred tax assets recognized for loss carryforwards that are expected to be used in the future. – Derivatives are recognized at fair value even if their cost is lower. The gains and losses on the measurement of derivatives used to hedge balance sheet items (fair value hedges) are recognized immediately in profit or loss. The gains and losses on the measurement of derivatives used to hedge future cash flows (cash flow hedges) are recognized directly under equity. – Receivables and liabilities in foreign currencies are measured at the mean exchange rate at the balance sheet date, contrary to the German imparity principle. – No provisions for accrued expenses. – General bad debt allowances are not recognized. – Inventories are measured at net realizable value. – SPEs are included in consolidation.

Notes to the income statement

8 Revenues Sales revenues are recognized when control, i.e. the risks and rewards incident to ownership, has been transferred to the buyer, if the amount of income can be determined reliably and it is probable that the economic benefit will flow to the entity. Revenues are net of sales deductions, if any. Revenues from services are recognized when the service has been rendered. For the breakdown of revenues by business segment and geographical segment, see the tables below. A detailed segment report is provided in Note 41 of these notes.

Breakdown by segment in € million 2004 2003 Change in %

Dräger Medical 1,023.4 920.2 +11.2 Dräger Safety 503.0 477.3 +5.4 Aerospace 0.0 10.6 –100.0 Segment revenues 1,526.4 1,408.1 +8.4 Internal revenues segments (12.0) (17.5) –31.4 Revenues other service companies 67.6 164.0 –58.8 Internal revenues other service companies (61.5) (132.5) –53.6 Revenues 1,520.5 1,422.1 +6.9 82 Notes 2004 of the Dräger Group

Breakdown by region in € million (sales areas) 2004 2003 Change in %

Germany 373.5 409.7 –8.8 Rest of Europe 593.1 527.8 +12.4 Americas 295.6 248.0 +19.2 Asia/Pacific 177.3 159.2 +11.4 Other 81.0 77.4 +4.7 Revenues 1,520.5 1,422.1 +6.9

On transition from HGB to IFRSs, the income from the sale of licenses was recognized as revenues in accordance with IFRSs. Under HGB, this amount was included under other operating income.

9 Cost of sales Cost of sales comprises direct material, direct labor, special direct production costs, inventory allowances, materials overheads, cost of warranties and other cost of sales. The cost of sales also includes price differences, consumption variances, cost of underutilization, inventory variances, measurement differences and scrapping. Income from the reversal of previously impaired inventories reduces the cost of sales. Borrowing costs are not included in the cost of sales.

10 Research and development costs Research and development costs comprise all costs incurred during the research and development process, including registration costs, costs of prototypes and the costs of the first series, if they are not capitalized as separate development costs.

11 Marketing and selling expenses Marketing expenses comprise all costs associated with corporate marketing, product marketing and business unit marketing, including expenses for advertising and trade fairs. Selling expenses include the costs of sales management, logistics costs, unless they relate to the sales depot or shipping, and the costs of the internal and external sales force, including order settlement. The costs of the sales companies are allocated to selling expenses, unless they belong to the cost of sales. Income arising in direct connection with the costs is netted. 83

1212 General administrative expenses General administrative expenses comprise the costs of administrative activities not related to other functions. This includes in particular the cost of management, corporate controlling, legal and consulting fees, audit fees, general infrastructure costs, etc. Income arising in direct connection with the costs is netted.

13 Financial result

2004 2003

Income from other long-term securities and loans 740 44 Interest income from bank balances 2,957 1,040 Income from interest hedges 29 169 Interest in lease payments 64 158 Other interest and similar income 708 1,668 Interest and similar income 4,498 3,079

Interest expenses from bank liabilities (11,726) (11,706) Other interest and similar expenses (2,244) (2,621) Expenses from interest hedges (189) (127) Interest in lease payments (116) (410) Interest portion of pension provisions (7,470) (7,310) Dividend for participation certificates (6,360) (5,654) Interest and similar expenses (28,105) (27,828)

Net interest expense (23,607) (24,749)

Income from investments in associates 529 292 Expense from investments in associates 0 0 Income from the disposal of associates 0 41 Write-ups and write-downs on investments in associates 0 (850) Net income/expense from investments recognized according to the equity method 529 (517)

Income from other investments 137 0 Expenses from other investments 0 0 Net income from other investments 137 0

Expenses from foreign exchange transactions (1,725) (552) Profit/loss on net monetary position (599) 410 Profit/loss on the disposal of other financial assets and securities 844 (389) Write-down of other financial assets (366) (372) Write-up of securities 146 0 Other financial income 96 30 Other financial expenses (377) (18) Other financial result (1,981) (891)

Financial result (24,922) (26,157) 84 Notes 2004 of the Dräger Group

14 Income taxes

Composition of tax expense 2004 2003

Current tax expense (32,558) (21,378) Deferred tax expense/income from temporary differences (1,544) (61) Deferred tax expense from loss carryforwards 761 3,418 Deferred tax expense/income (783) 3,357

Income taxes (33,341) (18,021)

No income tax was incurred in connection with the discontinuation of operations (2003: €718 thousand). Moreover, the income tax expense does not include any expenses or income due to a change in accounting policy or the introduction of new standards. Deferred tax expense includes taxes of €67 thousand (2003: €237 thousand) from the change in tax rates. Payment of dividends to the stockholders of the parent companies does not have any income tax consequences. A deferred tax liability of €1,994 thousand (2003: €2,118 thousand) was recognized for temporary differences in connection with retained profits of foreign subsidiaries.

Reconciliation of expected income tax expense to 2004 2003 recognized income tax expense

Result from ordinary operations before income taxes 71,249 32,993 Result from discontinued operations before income taxes 9,391 19,762 Earnings before income taxes 80,640 52,755

Expected income tax expense (tax rate: 39.6 %, 2003: 39.6 %) (31,933) (20,891)

Reconciliation:

Other period effects (12) 3,315 Effect from different foreign tax rates 7,884 6,314 Tax effect of non-deductible expenses and tax-free income (4,619) 5,200 Recognition and measurement of deferred tax assets (4,945) (11,451) Other tax effects 284 (1,226)

Recognized income tax expense (33,341) (18,739) Income tax expense from ordinary operations (33,341) (18,021) Income tax attributable to discontinued operations 0 (718)

Effective tax rate (%) overall 41.4 35.5 Effective tax rate (%) for continuing operations 46.8 54.6

The parent company’s tax rate was used as the expected tax rate. This has remained unchanged since the prior year. 85

The following deferred tax assets and deferred tax liabilities relate to recognition and measurement differences in the individual balance sheet items:

Deferred tax assets Deferred tax liabilities

2004 2003 2004 2003

Intangible assets 29,677 34,027 7,208 8,129 Property, plant and equipment 492 2,518 13,371 17,620 Other non-current financial assets 914 621 421 841 Inventories 3,313 3,721 8,785 9,393 Current financial assets 6,121 2,540 2,983 12,164 Pension provisions 11,219 13,377 57 710 Other non-current provisions 3,861 3,151 6 0 Other non-current financial liabilities 936 1,808 657 665 Current liabilities 16,509 25,791 7,387 5,125 Tax loss carryforwards after valuation adjustments 14,259 13,498 0 0 Valuation adjustments on deferred tax assets from temporary differences (7,873) (8,886) 0 0

Gross amount 79,428 92,166 40,875 54,647 Netting (31,142) (42,986) (31,142) (42,986) Deferred taxes from consolidation items 28,678 28,233 6,934 5,305 Carrying amount 76,964 77,413 16,667 16,966

Deferred taxes are determined on the basis of the tax rates which, under the legislation in force, apply in the individual countries at the time of realization or which are expected. The Dräger Group recognized deferred tax assets of €41,855 thousand (2003: €26,189 thousand) on corporate income tax loss carryforwards as of December 31, 2004. Of these, loss carryforwards of €40,071 thousand (2003: €25,891 thousand) can be used indefinitely, the others expire in a maximum of 10 years. The income from the reversal of a previous valuation adjustment on deferred tax assets came to €2,846 thousand in fiscal year 2004 (2003: €3,898 thousand). As of the balance sheet date, no deferred tax assets were recognized in the balance sheet for corporate income tax loss carryforwards of €166,114 thousand (2003: €139,742 thousand) and trade tax loss carryforwards of €113,001 thousand (2003: €68,373 thousand). The deferred taxes recognized directly in equity during the period came to €12 thousand (2003: €1 thousand). 86 Notes 2004 of the Dräger Group

15 Result from discontinued operations In fiscal year 2004, the Dräger Group discontinued the production of mechanical parts in connection with focusing on the core business of the Dräger Medical and Dräger Safety subgroups by selling Dräger ProTech GmbH. Likewise, IT development and IT operations were discontinued with the sale of Dräger Synematic GmbH, including its subsidiaries Dräger Electronic Business Portals GmbH, Nordac Rechenzentrumsgesellschaft mbH and Dräger Information Technologies GmbH. The services will be provided by third parties in the future. All sold entities were allocated to other companies for reporting purposes. As the services of all sold entities were mostly provided for group companies and were thus consolidated, these measures did not have a significant effect on the income statement.

The carrying amounts of assets and liabilities of the operations discontinued in 2004 were contained in the consolidated financial statements as follows:

At the date of As of December 31, 2004 deconsolidation

Non-current assets 17,526 20,101 Current assets 28,362 21,627 Total assets 45,888 41,728 Total liabilities (34,489) (40,225) Net assets 11,399 1,503

The sale generated proceeds of €20,790 thousand; the result from discontinued operations was €9,391 thousand.

The discontinued operations produced an operating result of €196 thousand.

Discontinued operations had the following effect on the cash flow statement in fiscal year 2004:

2004

Operating activities (16,634) Investing activities 17,526 Financing activities 0 Total cash flow 892 87

16 Personnel expenses/employees

Personnel expenses 2004 2003

Wages and salaries 465,827 472,273 Social security taxes and related employee benefits 87,244 82,848 Pension expenses 1 12,847 12,238 565,918 567,359

1 Excluding the interest portion, which is disclosed under interest expenses

Employees at the balance sheet date 2004 2003

Germany 4,378 5,099 Abroad 5,328 4,965 Total headcount 9,706 10,064

Production and customer service 5,105 5,706 Other 4,601 4,358 Total headcount 9,706 10,064

Headcount (average) 2004 2003

Germany 4,583 5,375 Abroad 5,198 4,654 Total headcount 9,781 10,029

Production and customer service 5,220 5,655 Other 4,561 4,374 Total headcount 9,781 10,029

17 Amortization of intangible assets and depreciation of property, plant and equipment

2004 2003

Intangible assets 10,974 8,768 Property, plant and equipment 34,712 44,668 45,686 53,436 88 Notes 2004 of the Dräger Group

18 Earnings/dividend per share

2004 2003

Net profit 47,299 34,016 Minority interests in net profit (21,953) (11,899) Result after minority interests 25,346 22,117

€0.45 (2003: €0.40) cash dividend for 6,350,000 preferred shares 2,857 2,540 €0.39 (2003: €0.34) cash dividend for 6,350,000 common shares 2,477 2,159 Total dividend 5,334 4,699

Result after minority interests and dividends 20,012 17,418 › thereof attributable to 6,350,000 preferred shares 10,006 8,709 › thereof attributable to 6,350,000 common shares 10,006 8,709

Distribution of result after minority interests for preferred shares 12,863 11,249 Dividends 2,857 2,540 50 % of net profit after dividends 10,006 8,709 for common shares 12,483 10,868 Dividends 2,477 2,159 50 % of net profit after dividends 10,006 8,709

Earnings per preferred share (in €) 2.02 1.77 Earnings per common share (in €) 1.96 1.71

Discontinued operations increased earnings per common and preferred share by €0.74 (2003: €1.50). Drägerwerk AG has issued 1,413,425 participation certificates for which the holder receives either 10 common or preferred shares per certificate or 10 times the current stock market price of preferred stock upon termination. The factor 10 is due to the share split, which did not apply to the participation certificates.

Diluted earnings per share do not have to be calculated, as Drägerwerk AG cannot offer shares without carrying out a capital increase or creating conditional or approved capital. Such a step, however, must be decided by the stockholders’ meeting rather than the Executive Board. Likewise, the possibility of acquiring treasury shares cannot lead to dilution due to the provisions governing the use of such shares. The participation certificate holders are not entitled to exchange their certificates for shares. Drägerwerk AG itself does not intend to make use of its right of termination. 89

Notes to the consolidated balance sheet

19 Intangible assets

December 31, 2003 Goodwill Patents, Software Lease Prepayments 2003 total trademarks and assets made licenses (finance lease)

Cost January 1, 2003 13,872 5,627 41,426 1,164 1,175 63,264 Additions 120,470 17,222 7,728 51 1,939 147,410 Disposals 0 (54) (4,413) (853) (50) (5,370) Reclassification 0 0 294 0 (106) 188 Change in consolidated group 0 0 (1,282) 0 0 (1,282) Currency translation effects (595) (140) (489) (5) (4) (1,233) December 31, 2003 133,747 22,655 43,264 357 2,954 202,977

Accumulated amortization and impairment losses January 1, 2003 8,555 1,668 28,347 871 0 39,441 Additions 0 3,279 5,342 147 0 8,768 Disposals 0 (54) (3,775) (853) 0 (4,682) Write-up 000000 Reclassification 0 0 169 0 0 169 Change in consolidated group 0 0 (1,268) 0 0 (1,268) Currency translation effects (596) (163) (323) (2) 0 (1,084) December 31, 2003 7,959 4,730 28,492 163 0 41,344

Net carrying amount 125,788 17,925 14,772 194 2,954 161,633 90 Notes 2004 of the Dräger Group

December 31, 2004 Goodwill Patents, Software Lease Prepayments 2004 total trademarks and assets made licenses (finance lease)

Cost January 1, 2004 133,747 22,655 43,264 357 2,954 202,977 Additions 1,178 594 9,615 84 764 12,235 Disposals (1,286) (40) (753) 0 (220) (2,299) Write-up 000000 Reclassification 0 7,250 (4,189) (382) (2,771) (92) Change in consolidated group 10,351 6,551 (5,837) 0 0 11,065 Currency translation effects 1,178 (1,173) (164) (2) (23) (184) December 31, 2004 145,168 35,837 41,936 57 704 223,702

Accumulated amortization and impairment losses January 1, 2004 7,959 4,730 28,492 163 0 41,344 Additions 0 7,396 3,515 63 0 10,974 Disposals 0 (40) (670) 0 0 (710) Write-up 000000 Reclassification 0 3,393 (3,220) (175) 0 (2) Change in consolidated group 0 0 (3,725) 0 0 (3,725) Currency translation effects (235) (230) (182) (3) 0 (650) December 31, 2004 7,724 15,249 24,210 48 0 47,231

Net carrying amount 137,444 20,588 17,726 9 704 176,471

The additions in 2003 mainly refer to the goodwill from, and the patents added under, the transfer of the “Electromedical Systems” division of Siemens Medical Solutions to Dräger Medical AG & Co. KGaA (hereinafter also referred to as the “joint venture”). The addition in fiscal year 2004 mainly relates to purchased software. Intangible assets with a cost of €10,912 thousand (2003: €5,491 thousand), fully amortized as of December 31, 2004, are still used in operations.

On transition to IFRSs, the Dräger Group made use of the option under IFRS 1 to disclose goodwill at the amount resulting after amortization and deduction directly from equity. At the same time, IAS 36 has been applied since fiscal year 2003. Accordingly, goodwill is no longer amortized on a straight-line basis over its useful life, but is written down whenever an impairment test indicates that the carrying amount of goodwill is higher than its recoverable amount (higher of value in use and net selling price). We used the discounted cash flow method based on the operational five-year plan without assuming further growth in the subsequent period to review the goodwill of the individual cash generating units. 91

The business segments form the basis for the cash generating units. No impairment loss was required on the basis of the above plan. Even if the assumed growth rate were to drop by one percent p.a. and the discount rate were to increase by another two percent, no impairment loss would have to be recognized. As of December 31, 2004, goodwill is made up of €135.1 million for Dräger Medical and €2.3 million for Dräger Safety and Drägerwerk AG.

20 Property, plant and equipment

December 31, 2003 Land, Production Other plant, Leased Prepayments 2003 total equivalent titles plant and factory and assets made and and buildings machinery office (finance lease) assets under equipment construction

Cost January 1, 2003 214,172 103,172 205,023 14,635 4,460 541,462 Additions 5,098 5,167 27,088 2,474 12,191 52,018 Disposals (7,746) (11,278) (23,539) (17) (267) (42,847) Reclassification 553 876 1,419 0 (3,036) (188) Change in consolidated group 2,197 (1,279) (3,481) 0 375 (2,188) Currency translation effects (4,657) (3,515) (5,106) 0 (134) (13,412) December 31, 2003 209,617 93,143 201,404 17,092 13,589 534,845

Accumulated depreciation and impairment losses January 1, 2003 100,240 87,494 154,231 4,853 0 346,818 Additions 7,368 6,300 26,303 4,568 129 44,668 Disposals (2,558) (10,141) (21,871) (34) 0 (34,604) Write-up 000000 Reclassification (38) (157) 26 0 0 (169) Change in consolidated group 137 (1,967) (2,435) 0 0 (4,265) Currency translation effects (2,220) (2,812) (4,081) (2) 0 (9,115) December 31, 2003 102,929 78,717 152,173 9,385 129 343,333

Net carrying amount 106,688 14,426 49,231 7,707 13,460 191,512 92 Notes 2004 of the Dräger Group

December 31, 2004 Land, Production Other plant, Leased Prepayments 2004 total equivalent plant and factory assets made and titles and machinery and office (finance lease) assets under buildings equipment construction

Cost January 1, 2004 209,617 93,143 201,404 17,092 13,589 534,845 Additions 3,853 4,227 24,765 1,586 10,579 45,010 Disposals (1,542) (5,824) (19,677) (101) (297) (27,441) Reclassification 7,783 5,016 2,111 392 (15,210) 92 Change in consolidated group 1,633 (17,547) (19,886) (15,002) 359 (50,443) Currency translation effects (1,484) (1,180) (1,377) (208) (116) (4,365) December 31, 2004 219,860 77,835 187,340 3,759 8,904 497,698

Accumulated depreciation and impairment losses January 1, 2004 102,929 78,717 152,173 9,385 129 343,333 Additions 7,383 4,353 22,253 708 15 34,712 Disposals (894) (5,399) (18,533) (133) (69) (25,028) Write-up 000000 Reclassification 788 57 (988) 220 (75) 2 Change in consolidated group (23) (16,739) (15,802) (8,652) 0 (41,216) Currency translation effects (862) (1,047) (1,359) (5) 0 (3,273) December 31, 2004 109,321 59,942 137,744 1,523 0 308,530

Net carrying amount 110,539 17,893 49,596 2,236 8,904 189,168

Buildings with a cost of €1,985 thousand (2003: €1,074 thousand) and factory and office equipment with a cost of €46,334 thousand (2003: €39,275 thousand), fully depreciated as of December 31, 2004, are still used in operations. The assets leased under finance leases mainly comprise IT hardware. For assets leased under operating leases, please see our information in Note 39.

21 Non-current financial assets

2004 2003

Investments in associates 429 760 Other financial assets 5,043 5,873 Financial assets 5,472 6,633

Other non-current financial assets 24,898 11,987

Non-current financial assets 30,370 18,620 93

Financial assets (including investments in associates)

December 31, 2003 Loans to Investments in Other Other Other 2003 total associates associates investments long-term long-term securities loans

Cost January 1, 2003 1,736 7,854 217 739 2,706 13,252 Additions 0 182 0 144 3,785 4,111 Disposals (1,104) (5,432) 0 (2) (1,145) (7,683) Change in consolidated group (76) (519) 0 3 79 (513) Currency translation effects 0000(36) (36) December 31, 2003 556 2,085 217 884 5,389 9,131

Accumulated impairment losses January 1, 2003 867 1,190 0 105 147 2,309 Additions 0 1,039 0 2 368 1,409 Disposals (311) (904) 0 0 0 (1,215) Write-up 0 0 0 (3) 0 (3) Change in consolidated group 000000 Currency translation effects 0000(2)(2) December 31, 2003 556 1,325 0 104 513 2,498

Net carrying amount 0 760 217 780 4,876 6,633

December 31, 2004 Loans to Investments in Other Other Other 2004 total associates associates investments long-term long-term securities loans

Cost January 1, 2004 556 2,085 217 884 5,389 9,131 Additions 0 164 2 71 424 661 Disposals (556) (3,055) (11) (120) (1,554) (5,296) Change in consolidated group 0 2,566 184 0 0 2,750 Currency translation effects 0 0 0 (10) (4) (14) December 31, 2004 0 1,760 392 825 4,255 7,232

Accumulated impairment losses January 1, 2004 556 1,325 0 104 513 2,498 Additions 06016471 Disposals (556) 0 0 0 (163) (719) Write-up 0 0 0 (11) (79) (90) Change in consolidated group 000000 Currency translation effects 000000 December 31, 2004 0 1,331 0 94 335 1,760

Net carrying amount 0 429 392 731 3,920 5,472 94 Notes 2004 of the Dräger Group

Drägerwerk AG holds shares in eight companies over which it has indirect significant influence. These entities are included as associates in the consolidated financial statements according to the equity method (over 20 percent).

Other non-current financial assets

2004 2003

Equipment leased out 5,356 4,375 Purchase price receivable from the sale of subsidiaries 14,000 3,500 Finance lease receivables (lessor) 1,107 1,536 Trade receivables 2,129 359 Positive fair values of derivatives 63 0 Other non-current assets 2,243 2,217 Other non-current assets, total 24,898 11,987

The fair values are not substantially different from the carrying amounts. For an explanation of finance lease receivables, please refer to our information on recognition of finance leases by the lessor (Note 39).

22 Deferred tax assets Deferred tax assets are explained in Note 14 (income taxes).

23 Inventories

2004 2003

Finished products and merchandise 125,163 114,279 Work in process 45,850 55,105 Raw materials, consumables and supplies 88,603 58,546 Prepayments made 808 465 Total 260,424 228,395

The carrying amount of inventories written down to their net realizable value as of December 31, 2004 is €39,138 thousand (2003: €40,632 thousand). Impairment losses of €11,391 thousand (2003: €14,199 thousand) were charged on inventories in the fiscal year and recognized in cost of sales. Finished goods comprise equipment leased out and demo equipment lent to customers in the short term worth €31,625 thousand (2003: €18,909 thousand). Their disclosure under inventories simplifies accounting when the customers take over the equipment outright, which is usually the case. Appropriate allowances are made for wear and tear over the period of use. 95

24 Current financial assets

2004 2003

Trade receivables › from third parties 455,638 424,324

Other current financial assets › Prepaid expenses and deferred charges 7,259 5,961 › Receivables from associates 2,754 2,969 › Notes receivable 1,973 1,920 › Receivables from employees 1,601 1,754 › Positive fair values of derivatives 3,825 1,273 › Finance lease receivables (lessor) 706 966 › Short-term securities 20,170 34 › Purchase price receivable from the sale of subsidiaries 10,500 0 › Other 15,448 20,615 64,236 35,492

Total 519,874 459,816

Trade receivables Trade receivables are disclosed at a high amount due to higher revenues in the final quarter. The risks associated with receivables are adequately accounted for by bad debt allowances of €16,876 thousand (2003: €16,090 thousand). All receivables are expected to be paid on time. Since certain Dräger companies participate in an ABS (asset-backed security) program, thus reducing the trade receivables from non-group customers, the total balance of receivables as of December 31, 2004 declined by €10,671 thousand (2003: €14,416 thousand). However, IAS 39 requires the receivables to be recognized at the amount at which the Dräger companies are still exposed to changes in fair value, in keeping with the principle of substance over form. This is the case for bonus accounts amounting to €4,887 thousand as of December 31, 2004 (2003: €6,192 thousand). Under IAS 39, a liability of the same amount is recognized, with part of the change in value recognized in profit or loss. In fiscal year 2004, this change resulted in an expense of €600 thousand (2003: income of €59 thousand).

Other current financial assets For the derivatives recognized as other financial assets, please refer to the table of derivatives in the Dräger Group presented in Note 38. For an explanation of finance lease receivables, please refer to our information on recognition of finance leases by the lessor (Note 39). 96 Notes 2004 of the Dräger Group

25 Current tax assets

2004 2003

Current tax assets 11,891 2,971

26 Cash and cash equivalents Cash and cash equivalents comprise cash in hand and balances at various banks in different currencies. Cash and cash equivalents amount to €1,657 thousand as of the balance sheet date (2003: €1,450 thousand) and are subject to restrictions, mainly as a result of restrictions on taking currency out of the People’s Republic of China.

27 Equity For the breakdown and movement details of equity in fiscal years 2003 and 2004, see the statement of changes in equity.

Capital stock The capital stock of Drägerwerk AG remains unchanged at €32,512 thousand. The capital stock is divided into 6,350,000 no-par bearer shares each of common and non-voting preferred stock. All shares have been fully paid in. As before, the preferred shares are traded on the capital market. Preferred shares have the same rights as those attached to common shares, other than voting rights. As compensation for the lack of voting rights, an advance dividend of €0.13 per preferred share is distributed from net earnings. Then a dividend of €0.13 per common share is paid if sufficient profits are available. Any profit in excess of this amount, if distributed, is allocated so preferred shares receive €0.06 more than common shares. If the profit is not sufficient to distribute the advance dividend for preferred shares in one or more years, the amounts are paid from the profit of subsequent fiscal years before a dividend is paid to common shares. If amounts in arrears are not paid in the next year along with the full preferred dividend for that year, the preferred stockholders have voting rights until the arrears have been paid. In the event of liquidation, the preferred stockholders receive 25 percent of net liquidation proceeds in advance. The remaining liquidation proceeds are distributed evenly to all shares.

Additional paid-in capital The additional paid-in capital originated from stock premiums from Drägerwerk AG’s (trans)formation in 1970 and from capital increases in 1979, 1981 and 1991.

Reserves retained from earnings Reserves retained from earnings comprise the earnings generated in the prior fiscal years and in fiscal year 2004 by the companies included in the consolidated financial statements, where they are not attributed to minority interests or paid as a dividend by Drägerwerk AG. The portion of group earnings to be distributed as a dividend by Drägerwerk AG is disclosed under group net earnings rather than under this item. Reserves retained from earnings were increased by a total of €105.3 million in fiscal year 2003 without affecting profit or loss when Siemens AG acquired a 35 percent stake in Dräger Medical AG & Co. KGaA and thus in the Dräger Medical subgroup in return for contribution of its “Electromedical Systems” division. 97

Other comprehensive income 2004 2003

Currency translation adjustment (16,886) (13,223) Change in fair value of financial instruments in the available-for-sale category (19) (43) Thereof tax effects (12) (1) (16,917) (13,267)

Group net earnings The amount proposed for distribution as a dividend by Drägerwerk AG is recognized as group net earnings in the consolidated financial statements (please see page 118 of the annual report).

28 Minority interests The minority interests mostly relate to the following subsidiaries.

Share in capital Share in profit/loss

2004 2003 2004 2003

Dräger Medical AG & Co. KGaA1 217,623 207,513 18,757 9,331 Draeger Kohden Japan Ltd. 1,267 1,110 318 590 Shanghai Dräger Medical Instrument Co. Ltd. 1,036 953 1,411 1,312 Carbamed AG 725 1,651 546 451 Dräger Medikal Ticaret ve Servis Limited Sirketi 547 442 320 200 MSI Elektronik GmbH 238 236 35 41 Other 209 260 566 (26) 221,645 212,165 21,953 11,899

1 The P & L transfer agreement between Drägerwerk AG and Dräger Medical AG & Co. KGaA was effective for the last time in 2003. Siemens AG received an appropriate compensatory payment, which Drägerwerk AG recognized as an expense.

29 Participation capital

Number Par value Premium Disclosed Fair value Value participation as of December capital 31, 2004 €€€€€

Series A until June 1991 315,600 8,066,736.00 12,353,585.70 20,420,321.70 73.00 23,038,800.00 Series K until June 27, 1997 105,205 2,689,039.80 1,758,718.44 4,447,758.24 72.25 7,601,061.25 Series D since June 28, 1997 992,620 25,371,367.20 24,557,921.23 49,929,288.43 72.00 71,468,640.00 1,413,425 36,127,143.00 38,670,225.37 74,797,368.37 102,108,501.25

No participation certificates were issued in 2004. 98 Notes 2004 of the Dräger Group

Termination Termination Loss share Minimum Dividend for right of right of partici- return participation Drägerwerk AG pation certifi- certificates cate holder

Series A Yes No No 1.30 Dividend on preferred stock x 10 Series K Yes Yes No 1.30 Dividend on preferred stock x 10 Series D Yes Yes Yes — Dividend on preferred stock x 10

Drägerwerk AG does not intend to terminate the participation certificates. On termination by the participation certificate holder, the maximum amount repaid is the average amount paid in for the series. Series K may be terminated for the first time as of December 31, 2021 with five years’ notice; the period of termination thereafter is again five years. Series D may be terminated for the first time as of December 31, 2026. Series D participation certificates share in losses. The proportionate loss attributable to the participation capital is offset by future profits. The cases in which the minimum return is not paid are the same as those in which the preferred dividend is not paid. As with the subsequent payment of preferred dividends, the dividend for participation certificates is paid in arrears. The dividend for participation certificates is 10 times the preferred stock dividend, as the par value of the securities was originally identical, but the arithmetic par value of the preferred stock has since been reduced to one tenth of the original par value. For details, please refer to the terms and conditions of series A, K and D participation certificates.

30 Non-current provisions

2004 2003

Provisions for pensions and similar obligations 155,539 164,604 Other non-current provisions 19,821 15,007 Non-current provisions 175,360 179,611

Provisions for pensions and similar obligations

Defined benefit plans The Dräger Group’s pension plans are mostly defined benefit plans as of December 31, 2004. Provisions for pension obligations and similar obligations have been accrued for benefits payable in the form of old-age, disability and surviving dependent pensions. The amount of the obligation is determined using the projected unit credit method. The obligations are partly funded by plan assets. 99

The changes in the projected benefit obligation and plan assets are as follows:

2004 2003

Changes in the projected benefit obligation Projected benefit obligation as of January 1 199,628 187,860 Service cost 2,741 2,701 Interest cost 8,568 8,668 Past service cost 269 0 Actuarial losses (+) 14,065 102 Benefits paid (19,979) (6,924) Employee contributions 27 0 Transfer of obligations (187) 1,646 Changes due to deconsolidation (12,294) (1,787) Currency changes 2,666 7,362 Projected benefit obligation as of December 31 195,504 199,628

Changes in plan assets Fair value of plan assets as of January 1 35,485 37,545 Expected rate of return on plan assets 1,098 1,358 Actuarial losses (4) (2) Employer contributions 15 663 Employee contributions 0 326 Benefits paid (12,702) (482) Transfer of obligations (76) 0 Currency changes 2,538 (3,923) Fair value of plan assets as of December 31 26,354 35,485

Funding status Unrecognized actuarial losses (2003: gains) (13,611) 461 Pension provisions as of December 31 155,539 164,604

Plan assets comprise land (97 percent) and other assets (three percent) (2003: land 64 percent, securities funds 34 percent and other assets two percent). Dräger Medical Systems Inc., USA, accounts for a significant share of benefits paid from plan assets, having decided to change from a defined benefit to a defined contribution pension plan. It therefore paid out most of its pension obligations tied up in plan assets to its employees and requested them to use this payment toward a defined contribution plan organized by an external pension fund. 100 Notes 2004 of the Dräger Group

Pension expense is made up as follows:

2004 2003

Current service cost 2,741 2,701 Interest expense on obligation 8,568 8,668 Expected return on plan assets (1,098) (1,358) Net recognized actuarial gains (2003: losses) (4) 99 Past service cost 269 0 Total pension expense 10,476 10,110

The following actuarial assumptions were made in measuring the projected benefit obligation:

2004 2003

Discount rate 4.75–5.25 % 3.50–5.25 % Future wage and salary increases 1.00–3.50 % 1.00–3.50 % Future pension increases 1.50–2.50 % 0.50–3.50 % Average employee turnover 3.30–5.00 % 5.00 %

Defined contribution plans In addition to the defined benefit plans described above, some companies in the Dräger Group sponsor defined contribution plans based on local practices and regulations. The cost of defined contribution plans came to €2,371 thousand in fiscal year 2004 (2003: €2,128 thousand).

Other non-current provisions

Balance Currency Change Com- Allocation Utilization Reversal Balance as of difference in consoli- pounding as of January dated December 1, 2004 group 31, 2004

Provisions for personnel and social obligations 15,007 (29) (1,484) 0 5,817 (2,046) (307) 16,958 Provisions for uncertain liabilities 00002,815 0 0 2,815 Tax provisions 0000480048 15,007 (29) (1,484) 0 8,680 (2,046) (307) 19,821

Provisions for personnel and social obligations mainly concern obligations from preretirement part-time work agreements and long-service awards. 101

31 Non-current interest-bearing loans

2004 2003

1 to 5 years Over 5 years Total 1 to 5 years Over 5 years Total

Non-current liabilities to banks 22,806 0 22,806 37,667 0 37,667 Note loans 84,578 0 84,578 95,000 25,000 120,000 107,384 0 107,384 132,667 25,000 157,667

The fair values are not substantially different from the carrying amounts. Note loans may be terminated when the equity ratio, net of deferred tax assets and liabilities, falls below 16 percent and net financial debt is five times the result from ordinary operations before depreciation and amortization. As of December 31, 2004, these ratios were 30.60 percent and 1.63, respectively.

Interest terms and conditions for the long-term interest-bearing loans are as follows:

Currency Fixed/variable Interest Amount interest rate repayable

Liabilities to banks € variable 3.04–3.629 13,000 € fixed 4.50–6.320 8,609 JPY fixed 0.940 1,217 22,826

Note loans € variable 3.950 35,000 € fixed 5.25–5.500 50,000 85,000

107,826

The variable interest rates are partly hedged. Please see our information on derivatives (Note 38). None of the liabilities shown in the consolidated balance sheet are collateralized by mortgages on land and buildings or assignment as security. 102 Notes 2004 of the Dräger Group

32 Other non-current financial liabilities

2004 2003

1 to 5 years Over 5 years Total 1 to 5 years Over 5 years Total

Finance lease liabilities (lessee) 1,406 19 1,425 3,527 0 3,527 Other non-current liabilities 2,376 895 3,271 1,097 570 1,667 3,782 914 4,696 4,624 570 5,194

The fair values are not substantially different from the carrying amounts. For an explanation of finance lease liabilities, please refer to our information on recognition of finance leases by the lessee (Note 39).

33 Deferred tax liabilities Deferred tax liabilities are explained in Note 14 (income taxes).

34 Short-term loans and liabilities to banks

2004 2003

Liabilities to banks 179,355 92,028 Note loans 34,716 0 214,071 92,028

Interest terms and conditions for the short-term interest-bearing loans and liabilities to banks are as follows:

Currency Fixed/variable Interest rate Amount interest repayable

Liabilities to banks € variable 2.69–3.350 132,719 € 1 variable 3.04–4.180 7,000 € fixed 4.50–6.350 5,911 USD variable 3.33–3.960 28,602 JPY variable 1.35–1.775 4,038 Other variable 1,094 179,364

Note loans € variable 3.947 35,000

214,364

1 Current portion of long-term loans 103

The variable interest rates are partly hedged. Please also see our information on derivatives (Note 38).

35 Current provisions

Balance Currency Change Allocation Utilization Reversal Balance as of difference in consoli- as of January dated December 1, 2004 group 31, 2004

Tax provisions 13,358 (144) (541) 5,202 (9,943) (168) 7,764 Provisions for personnel and social obligations 53,374 (423) (1,417) 39,071 (35,776) (2,977) 51,852 Warranty provision 19,107 (298) 283 7,933 (3,229) (1,757) 22,039 Provisions for other obligations in the normal course of business 58,314 (416) (1,386) 47,800 (42,248) (14,264) 47,800 144,153 (1,281) (3,061) 100,006 (91,196) (19,166) 129,455

Provisions for personnel and social obligations were mainly recognized to cover preretirement part-time work, long-service awards and bonuses. The warranty provision was measured by reference to the warranty claims made in the past. In addition to the warranty provision, obligations in the normal course of business were mainly covered by provisions for customer bonus accounting, sales commissions, audit of financial statements, litigation costs and risks, rent obligations and purchase guarantees. The decrease is largely due to the drop in tax provisions and in provisions for other obligations in the normal course of business.

36 Other current financial liabilities

2004 2003

Trade payables › to third parties 98,840 84,770

Other current financial liabilities › Deferred income 14,066 9,825 › Prepayments received 17,102 21,517 › Liabilities to associates 1,379 936 › Finance lease liabilities (lessee) 753 4,362 › Negative fair values of derivatives 464 93 › Other liabilities to employees and for social security 28,511 24,605 › Dividend for participation certificates 6,360 5,654 › Other liabilities 22,443 36,098 91,078 103,090

Total 189,918 187,860 104 Notes 2004 of the Dräger Group

For the derivatives recognized as other financial liabilities, please refer to the table of derivatives in the Dräger Group presented in Note 38.

For an explanation of finance lease liabilities, please refer to our information on recognition of finance leases by the lessee (Note 39).

37 Tax liabilities

2004 2003

Liabilities for taxes 33,485 25,037

38 Derivative financial instruments As an international business, the Dräger Group is exposed to various market risks. Derivatives are used to hedge the currency and interest exposure of current and forecast transactions. Derivatives may only be transacted with banks of prime standing. Please see our comments in the management report for more information on risk management. Like the hedged items, derivatives are recognized at fair value and resulting gains and losses are recognized in profit or loss as part of the financial result.

The following positions were held as of the balance sheet date:

Notional volume Fair value

Positive Negative

December 31, 2003 Currency hedges 79,131 1,250 93 Interest caps 71,581 2 0 Interest swaps 9,000 21 0 159,712 1,273 93

December 31, 2004 Currency hedges 112,776 3,796 339 Interest caps 55,790 63 0 Interest swaps 59,000 29 125 227,566 3,888 464

The positive fair values of the derivatives are disclosed as current and non-current assets, the negative fair values as current financial liabilities. The currency hedges cover selected foreign currency cash flows from operating activities over the next 12 months. The interest hedges have terms of up to five years. Currency hedging mainly relates to operations in US dollars, pounds sterling and Swiss francs. 105

Credit risk The maximum exposure to credit risk is represented by the carrying amount of each financial asset, including derivatives, in the balance sheet. Because counterparties to derivatives consist of a large number of prime financial institutions, the Group does not expect any counterparties to fail to meet their obligations. Consequently, the Group considers that its maximum exposure is reflected by the amount of trade receivables and other current assets, net of valuation adjustments recognized at the balance sheet date.

39 Leasing

Lessee—finance leases Property leased by the Dräger Group includes intangible assets, machinery and equipment. The most significant obligations assumed under the lease terms, other than the rental payments themselves, are the upkeep of the facilities and equipment, insurance and taxes on capital. Lease terms generally range from one to five years with options to renew at varying conditions. The Group had no finance leases with contingent payments in the fiscal year or the prior year. For a list of assets used under finance leases, please see our explanations in connection with the statement of non-current assets in Notes 19 and 20.

Future minimum lease payments for the above finance leases are as follows:

2004 2003

Not later than one year 846 4,485 Later than one year and not later than five years 1,497 4,059 Later than five years 20 0 Total minimum lease payments 2,363 8,544

Not later than one year 753 4,362 Later than one year and not later than five years 1,406 3,527 Later than five years 19 0 Present value of minimum lease payments 2,178 7,889

Interest portion contained in future minimum lease payments 185 655

No future income from non-cancelable subleases was expected as of the balance sheet date, as in the prior year. 106 Notes 2004 of the Dräger Group

Lessee—operating leases Drägerwerk AG and its subsidiaries have various operating lease agreements for buildings, machinery, offices and other facilities and equipment. Most leases contain renewal options. Some of the leases contain escalation clauses and provide for contingent rents based on percentages of revenues derived from assets held under operating leases. Lease conditions do not contain restrictions concerning dividends, additional debt or further leasing.

Lease expenses comprise the following:

2004 2003

Basic lease costs 24,446 23,770 Contingent costs 56 335 Income from subleases (362) (185) 24,140 23,920

Future minimum lease payments under non-cancelable operating leases are as follows:

2004 2003

Not later than one year 22,329 27,650 Later than one year and not later than five years 32,560 40,319 Later than five years 14,960 18,525 Total 69,849 86,494

Also see Note 40 for other financial obligations from rental and leasing arrangements.

Total expected future minimum income from subleases under non-cancelable operating leases amounts to €897 thousand as of December 31, 2004 (2003: €45 thousand). 107

Lessor—finance lease The Dräger Group’s main finance leases relate to medical equipment and marine technology products of the Dräger Safety subgroup.

Receivables from future lease payments outstanding are shown below:

2004 2003

Not later than one year 741 996 Later than one year and not later than five years 1,113 1,694 Later than five years 225 376 Total gross investment in finance leases 2,079 3,066

Not later than one year 706 966 Later than one year and not later than five years 948 1,291 Later than five years 159 245 Present value of minimum lease payments outstanding as of the balance sheet date 1,813 2,502 Unearned finance income 266 564

As in the prior year, bad debt allowances for uncollectible minimum lease payments were not required as of December 31, 2004.

Lessor—operating leases The Dräger Group’s main operating leases relate to medical equipment and products of the Dräger Safety subgroup. The lessor fully depreciates the cost of purchase of the leased assets over the term of the lease. Hence there is no residual value risk for the Dräger Group. A minor positive fair value, if any, can be expected to remain at the end of the leases.

The following table shows the assets leased out under operating leases:

2004 2003

Equipment 11,738 9,054 Accumulated depreciation (6,382) (4,679) Net carrying amount 5,356 4,375 108 Notes 2004 of the Dräger Group

Future minimum lease payments outstanding under non-cancelable operating leases are as follows:

2004 2003

Not later than one year 2,721 4,606 Later than one year and not later than five years 409 143 Later than five years 0 0 3,130 4,749

As in the prior year, no contingent rents were recognized in profit or loss in fiscal year 2004.

40 Contingent liabilities and other financial obligations

Contingent liabilities 2004 2003

Contingent liabilities from the issue and transfer of notes 0 187 Contingent liabilities from guaranties 0 3,188 Contingent liabilities under warranty/indemnity contracts 1,522 8,961 1,522 12,336

No loans were used under the guaranties in 2003.

Other financial obligations

a) Rental and leasing arrangements For other financial obligations from rental and leasing arrangements, please refer to our information in Note 39 (lessee—operating leases).

b) Purchase obligations As part of the sale of the IT companies, Drägerwerk AG, Dräger Medical AG & Co. KGaA and Dräger Safety AG & Co. KGaA agreed with an IT services company to purchase IT services to the value of €96.65 million for the entire Dräger Group until February 2009. This volume is within the usual requirements of the Dräger Group. As a result of outstanding orders, the Group has obligations to purchase intangible assets of €549 thousand (2003: €487 thousand) and items of property, plant and equipment of €7,072 thousand (2003: €6,500 thousand) as of December 31, 2004. 109

c) Put option of Siemens AG For the stake held by Siemens AG in Dräger Medical AG & Co. KGaA, Siemens AG holds a put option under which Drägerwerk AG or Dräger Medical Holding GmbH is obligated to repurchase the entire Siemens-held stake and which is exercisable for the first time in 2007 (or 2006 in the case of disagreement on the business plan and annual budget). 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. Depend- ing on the specific details of this development, the repurchase price due to Siemens corresponds proportionately to (i) 7.5 to 9 times the average EBITDA of the then current and two preceding fiscal years, after deducting the net financial debt or (ii), if the joint venture shows an equally specified business downtrend, the higher proportionate amount of six times the average EBITDA of the then preceding, current and three succeeding fiscal years, also after deducting the net financial debt, or the joint venture’s carrying amount. The price will be payable as follows: upfront payment at a defined amount, i.e., at up to—depending on any outside finance (where required) being available—2.5 times the average EBITDA of the then current and two preceding fiscal years after deducting the net financial debt, as well as in up to 10 annual installments of the residual principal plus interest. Each such annual installment shall equal 50 percent of the joint venture’s net earnings for that year. In the event that the repurchase price is based on six times the average EBITDA of future fiscal years, the upfront payment amounts to 25 percent of the purchase price, the remaining price neither carrying interest nor being due within a defined term. The put option may not be exercised (i) as long as a listing procedure initiated by either party is still pending or (ii) if notice to terminate the joint venture has been given. d) Litigation Companies of the Dräger Group are involved in litigation and claims in connection with their business activities as of December 31, 2004. The Executive Board believes that the outcome of such litigation and claims will not have a material adverse effect on the Company’s net assets, financial position or results of operations. 110 Notes 2004 of the Dräger Group

41 Segment report

Performance of the segments

Order intake € million Revenues € million › thereof intersegment revenues € million

EBITDA before non-recurring expenses 1 € million › Depreciation and amortization € million › Impairment losses € million EBIT before non-recurring expenses 2 € million Non-recurring expenses € million EBIT 2 € million

Net profit € million › thereof profit/loss from investments in associates € million Result after minority interests € million Earnings per share › per common share € › per preferred share €

Capital employed 3 € million Assets 4 € million › thereof investments in associates € million Liabilities 5 € million Net financial debt 6 € million Investments € million Non-cash expenses 7 € million

EBIT before non-recurring expenses/revenues % EBIT before non-recurring expenses/capital employed % Net financial debt/EBITDA before non-recurring expenses Factor

Headcount as of December 31 Germany Abroad 111

Dräger Medical Dräger Safety Holding company, Dräger Group other companies, consolidation

2004 2003 2004 2003 2004 2003 2004 2003

1,018.5 922.8 510.0 487.1 (5.2) 12.0 1,523.3 1,421.9 1,023.4 920.2 503.0 477.3 (5.9) 24.6 1,520.5 1,422.1 2.3 6.5 9.7 10.5 (12.0) (17.0) 0.0 0.0

114.9 103.0 57.5 50.3 (9.6) (5.1) 162.8 148.2 20.7 17.7 16.6 13.8 8.3 21.9 45.6 53.4 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 94.2 85.3 40.9 36.5 (17.9) (27.0) 117.2 94.8 12.3 32.1 0.0 0.0 10.0 5.0 22.3 37.1 81.9 53.2 40.9 36.5 (27.9) (32.0) 94.9 57.7

47.3 34.0 0.6 (0.5) 25.3 22.1

1.96 1.71 2.02 1.77

563.3 479.4 157.1 153.7 72.5 61.0 792.9 694.1 790.0 706.0 267.0 247.9 111.0 109.0 1,168.0 1,062.9 0.0 0.0 0.4 0.3 0.5 0.5 0.9 0.8 198.2 205.4 99.7 85.3 35.9 40.2 333.8 330.9 (127.6) (162.8) 12.2 20.1 333.7 281.4 218.3 138.7 25.8 162.1 21.6 24.7 9.8 12,6 57.2 199.4 69.7 99.2 34.3 35.1 39.6 26.8 143.6 161.1

9.2 9.3 8.1 7.6 7.7 6.7 16.7 17.8 26.0 23.7 14.8 13.7

(1.1) (1.6) 0.2 0.4 1.3 0.9

5,859 5,596 3,329 3,298 518 1,170 9,706 10,064 2,424 2,463 1,442 1,474 512 1,162 4,378 5,099 3,435 3,133 1,887 1,824 6 8 5,328 4,965

The business activities of Dräger Medical and Dräger Safety are discussed in detail in the management report. Services rendered between the two subgroups follow the arm’s length principle. 1 EBITDA = Earnings before net interest result, income taxes, depreciation, amortization and result from discontinued operations 2 EBIT = Earnings before net interest result, income taxes, and result from discontinued operations 3 Capital employed = Balance sheet total less deferred tax assets, cash and cash equivalents and non-interest bearing liabilities 4 Assets excluding tax assets and interest-bearing assets. Addition of the items deferred tax assets (€76.9 million), short-term securities and cash and cash equivalents (€178.2 million in total) gives total assets or the balance sheet total for the Group for 2004. 5 Liabilities excluding pension provisions, tax liabilities and interest-bearing liabilities 6 Net financial debt = including receivables and liabilities from cash management systems 7 Depreciation of inventories, losses from bad debt allowances, allocations to provisions 112 Notes 2004 of the Dräger Group

Segment performance by region

Revenues by region € million Germany € million Rest of Europe € million Americas € million Asia/Pacific € million Other € million

Revenues by region € million › Excluding tax assets and interest-bearing assets Germany € million Rest of Europe € million Americas € million Asia/Pacific € million Other € million

Revenues by region € million › Intangible assets and property, plant and equipment Germany € million Rest of Europe € million Americas € million Asia/Pacific € million Other € million 113

Dräger Medical Dräger Safety Holding company, Dräger Group other companies, consolidation

2004 2003 2004 2003 2004 2003 2004 2003

1,023.4 920.2 503.0 477.3 (5.9) 24.6 1,520.5 1,422.1 268.8 276.3 110.6 113.0 (5.9) 20.4 373.5 409.7 367.2 311.0 225.9 213.6 0.0 3.2 593.1 527.8 208.2 169.1 87.4 77.9 0.0 1.0 295.6 248.0 118.4 106.8 58.9 52.4 0.0 0.0 177.3 159.2 60.8 57.0 20.2 20.4 0.0 0.0 81.0 77.4

790.0 706.0 267.0 247.9 111.0 109.0 1,168.0 1,062.9

252.4 370.6 98.8 88.0 105.9 101.9 457.1 560.5 334.7 193.1 109.0 109.2 6.2 9.4 449.9 311.7 150.5 95.1 36.1 30.7 (0.2) (0.1) 186.4 125.7 44.7 39.5 19.6 18.4 0.3 (1.5) 64.6 56.4 7.7 7.7 3.5 1.6 (1.2) (0.7) 10.0 8.6

25.8 162.1 21.6 24.7 9.8 12,6 57.2 199.4

10.2 147.4 11.3 14.6 9.6 12,6 31.1 174,6 6.0 9.9 8.3 8.1 0.1 0.0 14.4 18.0 8.1 2.7 0.7 1.0 0.0 0.0 8.8 3.7 1.3 1.5 1.2 0.9 0.1 0.0 2.6 2.4 0.2 0.6 0.1 0.1 0.0 0.0 0.3 0.7 114 Notes 2004 of the Dräger Group

42 Notes to the cash flow statement Please see page 67 of this report for the cash flow statement. Cash flows from operating activities include interest of €9,626 thousand and income taxes of €25,434 thousand. For the effects of the acquisition and sale of subsidiaries, please refer to the information provided on the change in the consolidated group in Note 4. Note 15 comments on the cash flows from discontinued operations.

43 Total remuneration of, and Dräger stock owned by, the Executive and Supervisory Boards, as well as additional information relating to the German Corporate Governance Code The members of the Executive and Supervisory Boards of Drägerwerk AG and their memberships are presented on page 120 f. of the annual report.

Executive Board remuneration The remuneration of Executive Board members consists of fixed and variable portions linked to annual corporate performance. Drägerwerk AG’s Executive Board members receive a variable compensation that is pegged to the Group’s net profit, yet if they concurrently chair a subgroup management board, their compensation is mainly pegged to subgroup EBT and only to a minor degree to the Group’s net profit. For fiscal year 2004, the remuneration of Executive Board members totaled €6,457,594.67 (2003: €5,551,675.20), breaking down into €1,688,234.67 of fixed (2003: €1,885,675.20) and €4,769,360.00 of variable compensation (2003: €3,666,000). €1,067,803.08 was paid to former members of the Executive Board and their surviving dependants. A total €10,362,627.00 provides for the accrued pension obligations to former Executive Board members and their surviving dependants.

Supervisory Board remuneration At the Drägerwerk AG annual stockholders’ meeting on June 10, 2005, a total Supervisory Board fee of €378,500 will be submitted for voting. The basic remuneration of €21,400 for each member breaks down into a fixed fee of €10,000 and a dividend-related compensation of €11,400, the latter being the product of €600 for each €0.01 above a preferred dividend of €0.26, on the basis of a dividend of €0.45 per preferred share as proposed for the year under review. According to Art. 12(1) of Drägerwerk AG’s bylaws, the total remuneration is distributed among the members of, as resolved by, the Supervisory Board. To date, the Supervisory Board has adopted the following principles for fee distribution: Its chairman is entitled to four times, any vice-chairman two times, the other members of the Presidential Committee 1.5 times, the fee, the Audit Committee members receiving an additional €1,000.00 each. Moreover, a total per diem of €3,960 is paid. In the opinion of the German tax authorities, the premium for a consequential loss liability insurance policy and legal expense insurance for economic loss claims is not part of the Supervisory Board’s remuneration. 115

In addition, the following fees were paid to Supervisory Board members: for legal consultancy in the fiscal year, €0.00 to Prof. Feddersen (2003: law firm of White & Case, Feddersen, €467,520.70) and another €102,300.00 (2003: €102,000.00) to Dr. Christian Dräger for general advisory services. These amounts do not include VAT. Certain Supervisory Board members received an additional aggregate €76,800.00 (2003: €60,081) for their membership in supervisory boards of subsidiaries.

Preferred stock owned by the Executive and Supervisory Boards As of December 31, 2004, the board members of Drägerwerk AG directly or indirectly held a total of 57,184 preferred shares (Executive Board), equivalent to 0.45 percent of the total, and 139,792 preferred shares (Supervisory Board), equivalent to 1.10 percent of the total and including Dr. Christian Dräger’s preferred stock portfolio of 139,640 shares (1.0995 percent of the total). Altogether, 97.87 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”).

Directors’ dealings Members of the Executive and Supervisory Boards did not buy or sell any Dräger preferred stock in fiscal year 2004.

Related party transactions Business was transacted in 2004 with the following related enterprises that are part of the wide- spread shareholding portfolio of the Dräger family, including Executive Board members Stefan Dräger and Theo Dräger: Dräger GmbH, Dräger Objekt Finkenstrasse GmbH & Co. KG and Dräger Objekt Lachswehrallee GmbH & Co. KG have leased various real properties to Drägerwerk AG which are located close to the latter’s Moislinger Allee head office. Rentals totaled €1,596 thousand in 2004 (2003: €1,580 thousand). Now that a number of companies of the Dräger Medical subgroup will be moving into a new building in 2008, it is currently expected that it will not be possible to continue using all of the land and buildings leased over the long term. Drägerwerk AG has recognized a provision of €10 million for this eventuality. Furthermore, Dräger Objekt Möhringen GmbH & Co. KG has leased realty to Drägerwerk AG, earning €595 thousand in 2004 (2003: €593 thousand). Services were rendered for companies and foundations related to the Dräger family for €76 thousand (2003: €81 thousand). In addition, Herbert Rehn GmbH generated revenues of €2.0 million (2003: €2.2 million) from glass products and installation contracts. This resulted in receivables of €53 thousand (2003: €25 thousand) from Dräger Group companies. All transactions were conducted at arm’s length terms and conditions.

Corporate governance declaration 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 stockholders (see page 15 of this annual report). 116 Notes 2004 of the Dräger Group

44 Subsequent events In connection with a project looking into the future of the Lübeck location for the companies of the Dräger Medical subgroup currently based there, it was decided on December 16, 2004 that the companies would remain in Lübeck, provided that the competent bodies of the metalworkers’ union IG Metall consent to the agreements made and the City of Lübeck and State of Schleswig-Holstein meet their commitments. On January 18, 2005, the executive board of IG Metall consented to the agreements of December 16, 2004.

Lübeck, March 30, 2005

Drägerwerk AG The Executive Board

Theo Dräger Stefan Dräger Ingo Gensch Albert Jugel Wolfgang Reim Hans-Oskar Sulzer

Forward-looking statements This annual report contains statements concerning the future development of the Dräger Group and its companies, as well as economic and political trends. These statements are estimates based on all information available to date. If the underlying assumptions do not materialize, or if further risks surface, actual results may differ from current expectations. We therefore do not give any warranty for such statements. 117

Auditor’s opinion We have audited the consolidated financial statements, comprising the balance sheet, income statement, cash flow statement, statement of changes in equity and notes to the financial statements prepared by Drägerwerk Aktiengesellschaft for the fiscal year from January 1, 2004 to December 31, 2004. The preparation and content of the consolidated financial statements are the responsibility of the Company’s Executive Board. Our responsibility is to express an opinion whether the consolidated financial statements are in accordance with International Financial Reporting Standards (IFRSs) based on our audit. We conducted our audit of the consolidated financial statements in accordance with German auditing regulations and generally accepted standards for the audit of financial statements promul- gated by the Institut der Wirtschaftsprüfer (IDW). Those standards require that we plan and perform the audit such that it can be assessed with reasonable assurance whether the consolidated financial statements are free of material misstatements. The evidence supporting the amounts and disclosures in the consolidated financial statements are examined on a test basis within the framework of the audit. The audit includes assessing the accounting principles used and significant estimates made by the Executive Board, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements give a true and fair view of the net assets, financial position, results of operations and cash flows of the Group for the fiscal year in accordance with IFRSs. Our audit, which also extends to the group management report prepared by the Executive Board for the fiscal year from January 1, 2004 to December 31, 2004, has not led to any reservations. In our opinion, on the whole the group management report together with the other disclosures in the consolidated financial statements provides a suitable understanding of the Group’s position and suitably presents the risks to future development. In addition, we confirm that the consolidated financial statements and the group management report for the fiscal year from January 1, 2004 to December 31, 2004 satisfy the conditions required for the Company’s exemption from its obligation to prepare consolidated financial statements and a group management report in accordance with German law.

Hamburg, April 11, 2005 BDO Deutsche Warentreuhand Aktiengesellschaft Wirtschaftsprüfungsgesellschaft

Dyckerhoff Rohardt Wirtschaftsprüfer Wirtschaftsprüfer 118 Separate financial statements 2004 of Drägerwerk AG (short version)

Separate financial statements 2004 of Drägerwerk AG (Short version)

Drägerwerk AG discloses a net loss of €29.0 million for fiscal year 2004 (2003: net profit of €61.4 million). The negative result is due to the fact that no dividend income was received from Dräger Medical AG & Co. KGaA in fiscal year 2004 after the end of the P & L transfer agreement with this company as of December 31, 2003. After offsetting the profit brought forward with the net loss, Drägerwerk AG reports net earnings of €27.7 million. The Executive and Supervisory Boards of Drägerwerk AG will propose to distribute a cash dividend of €5.3 million (€0.39 per common share, €0.45 per preferred share) and carry forward the balance. A dividend of 10 times the preferred stock dividend will be paid for participation certificates since their arithmetic par value is 10 times that of a preferred share. Based on the proposed dividend, the dividend for participation certificates will be €4.50 per certificate. The complete financial statements of Drägerwerk AG, with an unqualified opinion from the auditor, will be published in the Federal Gazette and deposited with the Commercial Register in Lübeck. A printed copy may be requested from Drägerwerk AG or a copy downloaded on the internet at www.draeger.com.

Income statement of Drägerwerk AG 2004 2003 January 1 to December 31, 2004 € thousand € thousand

Other operating income 44,796 37,194 Personnel expenses (26,819) (21,506) Amortization of intangible assets and depreciation of property, plant and equipment (4,725) (3,359) Other operating expenses (44,581) (46,476) Income from investments 21,387 16,146 Write-down of financial assets and short-term securities (359) (3,693) Net interest expense (9,785) (8,946) Result from ordinary operations (20,086) (30,640) Extraordinary result (1,869) 97,919

Income taxes 1(6) Other taxes (648) (228) Profit before distribution for participation capital (22,602) 67,045 Distribution for participation capital (6,360) (5,654) Net loss/profit (28,962) 61,391

Profit brought forward from prior year 56,692 0 Net earnings 27,730 61,391 119

Balance sheet of Drägerwerk AG as of December 31, 2004 2004 2003

€ thousand € thousand

Assets

Intangible assets 1,919 440 Property, plant and equipment 42,318 39,796 Financial assets 614,182 608,636 Fixed assets 658,419 648,872

Trade receivables 395 782 All other receivables and other assets 58,148 44,284 Total receivables and other assets 58,543 45,066 Securities 20,035 30 Cash and cash equivalents 63,485 131,497 Current assets 142,063 176,593

Prepaid expenses and deferred charges 422 176

Total assets 800,904 825,641

2004 2003

€ thousand € thousand

Equity and liabilities

Capital stock 32,512 32,512 Additional paid-in capital 38,867 38,867 Reserves retained from earnings 160,477 160,477 Net earnings 27,730 61,391 Participation capital—par value: €36,127 thousand 74,797 74,797 Equity 334,383 368,044

Provisions for pensions and similar obligations 71,246 67,133 Other provisions 30,490 24,514 Total provisions 101,736 91,647

Liabilities to banks 232,895 168,159 Trade payables 4,986 2,536 All other liabilities 126,904 195,255 Total liabilities 364,785 365,950

Total equity and liabilities 800,904 825,641 36 The Company’s Boards

The Company’s Boards

Supervisory Board of Drägerwerk AG Uwe Bohm Works Council member of Chairman Dräger Medical AG & Co. KGaA, Lübeck Prof. Dr. Dieter Feddersen Lawyer, Frankfurt/Main Siegfrid Kasang Other supervisory board memberships: Works Council Chairman of Membership of statutory supervisory boards: Dräger Medical AG & Co. KGaA, Lübeck Deutsche Beteiligungs AG, Frankfurt/Main (Chairman), Group Works Council Chairman of until March 18, 2004 the Dräger Medical subgroup Dräger Medical AG & Co. KGaA, Lübeck Other supervisory board membership: SAI Automotive AG, Frankfurt/Main (Chairman), Dräger Medical AG & Co. KGaA, Lübeck until February 17, 2004 (Vice-Chairman) Tarkett Sommer AG, Frankenthal (Chairman) Sauerborn Trust AG, Bad Homburg, Dr. Thomas Lindner until December 7, 2004 Management Chairman of Groz-Beckert KG, Albstadt Membership of Other supervisory board memberships: comparable German or foreign boards: Talanx AG, Hanover Gesellschaft für Industriebeteiligungen HDI Haftpflichtverband der Deutschen Industrie VAG, Dr. Joachim Schmidt AG & Co. Holding-Kommandit- Hanover gesellschaft, Berlin (Chairman of the Board of Directors) Walter Neundorf Vice-Chairman Officer of Dräger Medical AG & Co. KGaA, Lübeck Werner Gustäbel Group Works Council Chairman of Dr. Martin Posth Drägerwerk AG, Lübeck President of Asien-Pazifik-Forum Berlin e.V., Berlin Other supervisory board membership: Other supervisory board membership: Dräger Medical AG & Co. KGaA, Lübeck Berlinwasser International AG, Berlin

Additional Vice-Chairman Waltraud Ricke Dr. Christian Dräger Union secretary of the metalworkers’ union Businessman, Lübeck IG Metall Lübeck/Wismar, Lübeck Other supervisory board memberships: Dräger Medical AG & Co. KGaA, Lübeck Thomas Rickers Dräger Safety AG & Co. KGaA, Lübeck 1st Delegate of the metalworkers’ union IG Metall’s Lübeck/Wismar office, Lübeck Other supervisory board membership: Dräger Medical AG & Co. KGaA, Lübeck 37

Gordon Riske Ingo Gensch CEO of Deutz AG, Cologne Corporate Personnel Other supervisory board membership: Supervisory board memberships: ISRA Vision Systems AG, Darmstadt Dräger ProTech GmbH, Lübeck (Chairman), until June 30, 2004 Dr. Dietrich Schulz Dräger Medical Verwaltungs AG, Lübeck Businessman, Lübeck Dräger Safety AG & Co. KGaA, Lübeck Other supervisory board memberships: Dräger Safety Verwaltungs AG, Lübeck Jungheinrich AG, Hamburg (Chairman), until June 2, 2004 L. Possehl & Co. mbH, Lübeck (Chairman), Prof. Dr.-Ing. Albert Jugel until September 28, 2004 Safety Süd-Chemie AG, Munich CEO of Dräger Safety Verwaltungs AG, Lübeck (Vice-Chairman), (General partner of Dräger Safety AG & Co. KGaA) Ad Capital AG, Stuttgart Supervisory board memberships: C-H-Reynolds Luchterhand AG, Frankfurt/Main (Chairman) until April 5, 2004 Executive Board of Drägerwerk AG Dr. Wolfgang Reim Theo Dräger Medical Chairman (CEO) CEO of Dräger Medical Verwaltungs AG, Lübeck Supervisory board memberships: (General partner of Dräger Medical AG & Co. KGaA) Dräger Medical AG & Co. KGaA, Lübeck (Chairman) Supervisory board membership: Dräger Medical Verwaltungs AG, Lübeck (Chairman) Dräger Medical Deutschland GmbH (Chairman) Dräger Safety AG & Co. KGaA, Lübeck (Chairman) Dräger Safety Verwaltungs AG, Lübeck (Chairman) Hans-Oskar Sulzer Dräger ProTech GmbH, Lübeck, until June 30, 2004 Finance (CFO) Dr. Jens Ehrhardt Kapital AG, Pullach Supervisory board memberships: L. Possehl & Co. mbH, Lübeck (advisory board) Dräger Medical Verwaltungs AG, Lübeck Sparkasse zu Lübeck, Lübeck Dräger Safety AG & Co. KGaA, Lübeck Dräger Safety Verwaltungs AG, Lübeck Stefan Dräger Dräger ProTech GmbH, Lübeck, until June 30, 2004 Central Functions Vice-Chairman since March 1, 2005 Supervisory board memberships: Dräger Medical AG & Co. KGaA, Lübeck Dräger ProTech GmbH, Lübeck, until June 30, 2004 122 Major shareholdings

Major shareholdings

Name and registered office Share capital Shareholding in LCU thousand in %

Germany Dräger Medical AG & Co. KGaA, Lübeck 78,968 € 65 Dräger Safety AG & Co. KGaA, Lübeck 25,739 € 100 Dräger Medical Holding GmbH, Lübeck 100 € 100 Dräger Medizin System Technik GmbH, Lübeck 1,023 € 100 I+D-Gesellschaft für Organisationsentwicklung und Beratung im Gesundheits- und Sozialwesen mbH, Lübeck 895 € 100 2 Dräger TGM GmbH, Lübeck 767 € 100 2 MSI Elektronik GmbH, Hagen 625 € 90 Dräger Safety ISS GmbH, Lübeck 307 € 100 Dräger Interservices GmbH, Lübeck 256 € 100 Dräger InTek GmbH, Lübeck 250 € 100 DrägerDive Vertriebs & Service GmbH, Lübeck 100 € 100 MAPRA Assekuranzkontor GmbH, Lübeck 51 € 49 1 Dräger Consulting & Management GmbH, Lübeck 51 € 100 2 DrägerForum GmbH, Lübeck 26 € 100 Dräger Medical Deutschland GmbH, Lübeck 2,000 € 100 2 Dräger KB GmbH, Lübeck 26 € 100 1 Dräger ANSY GmbH, Lübeck 5,000 € 100 2 Dräger Electronics GmbH, Lübeck 2,000 € 100 Fachklinik für Anästhesie und Intensivmedizin Vahrenwald GmbH, Lübeck 26 € 100 Dräger Medical Verwaltungs AG, Lübeck 1,000 € 100 Dräger Safety Verwaltungs AG, Lübeck 1,000 € 100 Dräger Medical ANSY GmbH, Lübeck 500 € 100 2 IMH International Medical Holding GmbH, Lübeck 25 € 100 Dräger 1.Verwaltungsgesellschaft mbH, Lübeck 25 € 100 2 FIMMUS Grundstücks-Vermietungs GmbH, Lübeck 25 € 100 Dräger Finance Services GmbH&Co. KG, Bad Homburg v. d. Höhe 511 € 95 ACF Grundstücksverwaltungsgesellschaft mbH & Co. Objekt Finkenberg KG, Eschborn 51 € 98 OPTIO Grundstücks-Verwaltungsgesellschaft mbH & Co.KG, Grünwald 26 €98 DEGESUDO Grundstücksverwaltungsgesellschaft mbH & Co. Immobilien-Vermietungs KG, Eschborn 3 € 100 HAMUS Grundstücks-Vermietungsgesellschaft mbH & Co. Objekt Lübeck KG, Düsseldorf 10 € 100 123

Name and registered office Share capital Shareholding in LCU thousand in %

Europe Austria Dräger Medical Austria GmbH, Vienna 2,000 € 100 2 Dräger Safety Austria GmbH, Vienna 500 € 100 Belgium Dräger Medical Belgium NV, Wemmel 1,503 € 100 2 Dräger Safety Belgium NV, Wemmel 789 € 100 Safety & Rental Services NV, Lanklaar-Dilsen 125 € 99.98 Bulgaria Draeger Bulgaria EOOD, Sofia 705 BGN 100 2 Dräger Safety Bulgaria EOOD, Sofia 500 BGN 100 Croatia Dräger Croatia d.o.o., Zagreb 4,182 HRK 100 2 Dräger Safety d.o.o., Zagreb 2,300 HRK 100 Czech Republic Dräger Medical s.r.o., Prague 18,314 CZK 100 2 Dräger Safety s.r.o., Prague 29,186 CZK 100 Denmark Dräger Safety Danmark A/S, Herlev 5,000 DKK 100 Dräger Medical Danmark A/S, Allerod 4,100 DKK 100 2 France Dräger Médical SAS, Antony Cedex 8,000 € 100 2 Draeger Safety France SAS, Strasbourg Cedex 1,470 € 100 AEC SAS, Antony Cedex 70 € 100 2 Hungary Dräger Safety Hungaria Kft., Budapest 66,300 HUF 100 Dräger Medical Hungary Kft., Budapest 94,800 HUF 100 2 Ireland Draeger Medical Ireland Ltd., Dublin 25 € 100 2 Italy Draeger Medical Italia S.p.A., Corsico-Milano 7,400 € 100 2 Draeger Safety Italia S.p.A., Corsico-Milano 1,033 € 100 Servizi Diversificati Draeger S.p.A., Corsico-Milano 1,020 € 100 2 Netherlands Dräger ST-Holding Nederland B.V., Zoetermeer 10,819 € 100 Dräger Medical B.V., Best 1,460 € 100 2 Dräger Beheer B.V., Zoetermeer 454 € 100 W.S.P. Safety Equipment B.V., Rotterdam 18 € 100 W.S. Poppeliers Brandblusmaterialen B.V., Rotterdam 18 € 100 Safety Service Center B.V., Rotterdam 18 € 100 Dräger Finance B.V., Zoetermeer 11 € 100 Dräger MT-Holding Nederland B.V., Zoetermeer 18 € 100 2 Dräger Safety Nederland B.V., Zoetermeer 18 € 100 Dräger Medical Netherlands B.V., Zoetermeer 18 € 100 2 Norway Dräger Safety Norge AS, Oslo 1,129 NOK 100 Dräger Medical Norge AS, Drammen 371 NOK 100 2

1 These companies are treated as associates as defined by IAS 28. 2 Siemens AG holds an indirect 35 percent stake in these companies through Dräger Medical AG & Co. KGaA. 124 Major shareholdings

Name and registered office Share capital Shareholding in LCU thousand in %

Europe (continued) Poland Dräger Polska Sp.zo.o., Bydgoszcz 4,655 PLN 100 2 Romania Dräger Medical Romania SRL, Bucharest 2,054,500 ROL 100 2 Dräger Safety Romania SRL, Bucharest 10,153,250 ROL 100 Russia Draeger Medizinskaja Technika ooo, Moscow 100 RUB 100 2 Serbia Draeger Tehnika d.o.o., Belgrade 21,385 CSD 100 2 Slovakia Dräger Slovensko s.r.o., Piestany 18,000 SKK 100 2 Slovenia Dräger Slovenija d.o.o., Ljubljana-Crnuce 82,372 SIT 100 Spain Dräger Medical Hispania SA, Madrid 3,606 € 100 2 Dräger Safety Hispania SA, Madrid 2,404 € 100 Sweden Dräger Safety Sverige AB, Svenljunga 6,000 SEK 100 Dräger Medical Sverige AB, Bromma 2,000 SEK 100 2 ACE Protection AB, Svenljunga 100 SEK 100 Electromedical Stockholm AB, Solna 100 SEK 100 2 Switzerland Dräger Beteiligungen AG, Zug 25,000 CHF 100 2 Carbamed AG, Liebefeld-Bern 3,000 CHF 70 2 Dräger Safety Schweiz AG, Dietlikon 1,000 CHF 100 Dräger Finanz AG, Zug 500 CHF 100 Turkey Draeger Medikal Ticaret ve Servis Limited Sirketi, Istanbul 1,270,000,000 TRL 67 2 UK Draeger Safety UK Ltd., Blyth 7,589 GBP 100 Draeger Medical Ltd., Hemel Hempstead 1,990 GBP 100 2 Draeger PLMS Ltd., Plymouth 805 GBP 100 Draeger Medical UK Ltd., Hemel Hempstead 4,296 GBP 100 2

Africa South Africa Dräger South Africa (Pty.) Ltd., Bryanston 4,000 ZAR 100 Dräger Medical South Africa (Pty.) Ltd., Johannesburg 1 ZAR 100 2 Dräger Safety Zenith (Pty.) Ltd., King Williams Town 1 ZAR 100

Americas Brazil Dräger do Brasil Ltda., São Paulo 27,021 BRL 100 Dräger Industria e Comércio Ltda., São Paulo 8,132 BRL 100 2 Canada Draeger Canada Ltd., Mississauga, Ontario 900 CAD 100 Draeger Medical Canada Inc., Richmond Hill, Ontario 2,000 CAD 100 2 Dräger Safety Systems Ltd., Napanee, Ontario 630 CAD 100 Chile Dräger Medical Chile Ltda., Santiago 1,284,165 CLP 100 2 125

Name and registered office Share capital Shareholding in LCU thousand in %

Americas (continued) Mexico Draeger Safety S.A. de C.V., Queretaro 50 MXN 100 Dräger Medical Mexico S.A. de C.V., Mexico D.F.D. 50 MXN 100 2 US Draeger Medical, Inc., Telford 480 USD 100 2 Draeger Safety, Inc., Pittsburgh 400 USD 100 Draeger Safety Diagnostics, Inc., Durango 1 USD 100 Draeger Medical Systems, Inc., Danvers 1 USD 100 2 Draeger Medical Infant Care, Inc., Hatboro 1 USD 100 2 Draeger Interservices, Inc., Pittsburgh 40 USD 100 Dräger Safety Systems, Inc., Pittsburgh 788 USD 100

Asia/Australia People’s Republic Shanghai Dräger Medical Instrument Co., Ltd., Shanghai 22,185 CNY 67.5 2 of China Beijing Fortune Draeger Safety Equipment Co., Ltd., Beijing 15,238 CNY 96.2 Dräger Medical Equipment (Shanghai) Co., Ltd., Shanghai 3,311 CNY 100 2 Draeger Medical Asia Pacific Ltd., Hong Kong 5,000 HKD 100 2 Draeger Medical Hong Kong Limited, Wanchai 500 HKD 100 2 India Joseph Leslie Drager Mfg., Pvt. Ltd., Mumbai 2,500 INR 36 1 Indonesia PT Draegerindo Jaya, Jakarta 3,384,000 IDR 100 Japan Draeger Medical Japan Ltd., Tokyo 549,000 JPY 100 2 Draeger Safety Japan Ltd., Tokyo 81,000 JPY 100 Draeger Kohden Japan Ltd., Tokyo 100,000 JPY 51 2 Saudi-Arabia Draeger Arabia Co. Ltd., Riyadh 2,000 SAR 51 2 Singapore Draeger Safety Asia Pte. Ltd., Singapore 3,800 SGD 100 Draeger Medical South East Asia Pte. Ltd., Singapore 1,200 SGD 100 2 South Korea Draeger Medical Korea Co. Ltd., Seoul 2,100,000 KRW 75.5 2 Taiwan Draeger Safety Taiwan Co. Ltd., Hsinchu City 5,000 TWD 100 Draeger Medical Taiwan Ltd., Taipei 10,000 TWD 100 2 Thailand Draeger Medical (Thailand) Ltd., Bangkok 3,000 THB 100 2 Draeger Safety (Thailand) Ltd., Bangkok 5,000 THB 100 Australia Draeger Safety Pacific Pty. Ltd., Notting Hill 5,875 AUD 100 Draeger Medical Australia Pty. Ltd., Notting Hill 3,800 AUD 100 2

As of December 31, 2004

1 These companies are treated as associates as defined by IAS 28. 2 Siemens AG holds an indirect 35 percent stake in these companies through Dräger Medical AG & Co. KGaA. 126 Index

Index

A E Acquisitions 45, 55, 57 Earnings Amortization 40, 50, 54, 58, 67, 76 f., 83, 87, 101, – Group 38, 40 ff., 62 f., 66, 72, 75, 83 ff., 110 ff., 118 107, 110 f., 118 – Medical 50 f., 110 ff. Annual stockholders’ meeting 4, 13 ff., 32, 88, 114, – Safety 54 f., 110 ff. inside front cover – Service companies 81 Associates 30, 35, 122ff. EBIT 4, 34, 38, 40, 42, 44, 50 f., 54 f., 57 f., 109 ff. Auditor’s opinion 117 f. EBIT margin 4, 51, 55 EBITDA 40, 44, 50, 54, 58, 109 ff. B Environmental protection 48 Balance sheet 38, 40, 44, 50, 54, 58, 64 ff., 69 ff., 74 ff., Equity 14, 38, 44 f., 61, 65 f., 69 ff., 74 f., 77, 80 f., 85, 85, 87, 89, 96 f., 104 f., 117 ff. 90, 96 f., 101, 117, 119 Equity ratio 44, 61, 101 C Executive Board 4, 6 f., 12 f., 15, 30 ff., 62, 88, 109, Capital employed 39 f., 44 f., 50, 53 f., 57 f., 110 f. 114 ff., 118, 121 Cash and cash equivalents 61, 73 f., 119 Expenses 25, 38, 40, 42 f., 46, 50, 54, 56, 58, 70, 75f., Cash flow 80 f., 91 78, 80, 82 ff., 87, 103, 106, 110, 118 Communication 8, 12, 46, 59 Consolidated balance sheet 65, 74 f., 89, 96 f., 101 G Consolidated financial statements 31ff., 38, 63, 68ff., Group net profit 66, 96 73, 76, 80, 86, 94 ff., 117 Consolidation 37, 41, 57 f., 61, 66, 69 ff., 79 ff., 85 f., H 89 ff., 99, 111, 113 f. Headcount 5, 8 f., 13, 31, 40, 46, 48, 50 f., 53 f., 57 f., 78, Corporate governance 15, 32, 114 f. 87, 95, 99 f., 103, 110 Corporate identity 1, 23ff. Currency translation 66, 75, 89ff. I Currency translation effects 89ff. IFRSs 31 f., 38 ff., 44, 68 ff., 79 f., 82, 90, 117 Income statement 38, 63, 69, 73, 75, 81, 86, 117 f. D Innovation 1, 5 f., 13, 19, 37, 46, 52, 55 f., 61, 64 f., 68 Depreciation 40, 50, 54, 58, 67, 76 f., 83, 87, 101, Interest cost/expense 78, 99 f. 107, 110 f., 118 Interest risk 61 Distributions 14, 66 f., 74 f., 96 f., 118 Internationalization 5, 8f. Dividend for participation certificates 78, 83, 98, Interservices 9, 59, 62, 122, 125 103, 118 Inventories 39, 44 f., 64, 67, 70 ff., 76, 78, 81 f., Dividends 4, 13 f., 67, 78, 83 f., 88, 96 ff., 103, 106, 85, 94, 111 114, 118 Investments 5, 36, 40, 45, 50 f., 54, 56, 58, 67, 77, 79, 86, 107, 110 ff. Investor relations 12 127

L R Liabilities 40, 44 f., 50, 54, 58, 61, 65, 67, 70 ff., Regions 75, 78 ff., 80 ff., 83, 95, 100 ff., 108, 110 f., 119 – Germany 5, 9, 13, 35 f., 40 ff., 47 f., 50 ff., 56 ff., Logistics 9, 21, 27, 47, 57, 82 82, 87, 110 ff., 122 – Europe 36 f., 40 ff., 50 f., 54 ff., 82, 112 f., 123 f. M – Americas 40 ff., 50, 54 f., 58, 82, 112 f., 124 f. Management report of the Dräger Group 34 ff. – Asia/Pacific 36 f., 40 ff., 50, 54 ff., 58, 62, 82, 112 f., 125 N Research and development 46, 56, 63, 76, 82 Net assets, equity and liabilities 44 Reserves retained from earnings 65, 74 f., 96, 119 Net earnings 33, 65 f., 75, 96 f., 109, 118 f. Return 4, 10, 13f. Net financial debt 44, 101, 109 Revenues Net profit 4, 13 f., 43, 62 f., 67, 72, 75, 88, 110, 114, 118 – Group 40 ff. Non-current assets 39, 45, 67, 70 f., 76 f., 118 f. – Medical 50 ff. Nordac 74, 86 –Safety54ff. Notes of the Dräger Group 68 ff. Risk management 32 f., 60, 62, 104 Notes to the consolidated financial statements 68 ROCE 4, 53

O S Objectives 4 ff., 74 Sales and marketing 63, 67, 82 Order intake 40 ff., 50, 54 ff., 58, 110 Securities 45, 61, 67, 77, 83, 93, 95, 98, 111, 118 f. Outsourcing 9, 34 Segment report 81, 110 Separate financial statements of Drägerwerk AG P 32 f., 118 Participation capital 44, 61, 65, 69 ff., 78, 81, 97 f., 118 f. Service companies 12, 41, 61, 81 Participation certificates 44, 61, 65, 69ff., 78, 81, 83, Stock 4, 10 ff., 43, 63, 88, 96, 98, 110, 114 f., 118 88, 97 f., 103, 118 f. Stock market value 80 Patents 45 f., 76, 89 f. Stockholder structure 13 Personnel expenses 87, 118 Strategy 5, 12, 47, 57, 62 Portfolio 51, 57, 61 Subsequent events 62 Procurement, production and logistics 47 Subsidiaries 30, 35, 122 ff. Production 9, 31, 42 f., 46 f., 52, 56 f., 61, 86 f. Supervisory Board 4, 13, 15, 30 ff., 114 f., 118, 120 f. Property, plant and equipment 45, 56, 64, 71, 76 f., 85, Suppliers 47, 61 87, 91, 108, 112, 118 f. Sustainability 48 Provisions 39, 45, 65, 67, 69 ff., 78, 80 f., 83, 85, 98 ff., 103, 111, 119 T Tax load ratio 43 TecDax 10 f. Training 8 128 Imprint

Imprint

Drägerwerk AG Corporate Communications Moislinger Allee 53/55 23542 Lübeck, Germany www.draeger.com

Concept and design Groothuis, Lohfert, Consorten|glcons.de

Reproductions Peter Maus GmbH, Ahrensburg

PR part translated by Chris Cave, Berlin

Printed by Dräger + Wullenwever pm GmbH & Co. KG, Lübeck

Photos Deutsche Presse-Agentur GmbH, Hamburg Michael Haydn, Eichede Axel Kirchhof, Hamburg Berhold Litjes, Düsseldorf André Reinke, Hamburg Ed Seeder, Heerhugowaard (NL) Glossary

Capital employed—Group Deferred taxes Balance sheet total less deferred tax assets, cash and cash Future tax benefits and burdens whose amount and timing equivalents and non-interest bearing liabilities. is uncertain. They arise when the carrying amounts in the commercial balance sheet and tax balance sheet differ, but Capital employed—subgroups the differences will reverse over time (temporary differen- Balance sheet total less deferred tax assets, cash and cash ces). After the recognition of deferred taxes, the effective equivalents including receivables from cash management, tax expense from the tax balance sheet is adjusted to the and non-interest bearing liabilities. divergent result in the commercial balance sheet. In addition, deferred taxes are recognized for the future utilization Cash flow from investing activities of tax loss carryforwards, if it is highly probable that they Net cash used in, or provided by, investments/divestments. can be used to offset profits.

Cash flow from operating activities Derivatives Net cash used in, or provided by, current operations unless Instruments whose value is mainly derived from a specified attributable to investments, divestments or financing. price and price fluctuations/expectations of an underlying asset (e.g. shares, foreign currency, interest securities). Cash flow statement Shows the flows of cash and cash equivalents provided by, Dräger Foundation or used in, a company’s operating, investing and financing Established in 1974 by Dr. Heinrich Dräger, the Dräger activities within a defined period. Foundation's activities continue its founder’s social commitment, especially the promotion of science and research. Corporate governance The responsible governance and control of a company with EBIT the sustained creation and addition of shareholder value in Earnings before net interest result, income taxes, and mind. result from discontinued operations.

Debt EBIT margin Outside capital as opposed to equity: the balance sheet Ratio of EBIT to revenues. total less equity. EBITDA Earnings before net interest result, income taxes, depreciation, amortization and result from discontinued operations.

Equity Funds paid in or contributed to the company by owners, plus retained earnings. Equity ratio Participation certificates The equity ratio is the ratio of equity to total capital. The Debenture that generally grants a share in net profits or more equity a company has, the better its creditworthi- liquidation proceeds, especially for stock corporations and ness, as a rule, and the greater its financial stability and limited liability companies, rather than conferring an equity independence from external lenders. interest, as does a share. Participation certificates are negotiable but are not shares. The holder does not have Equity story the right to vote at the annual stockholders’ meeting, but Comprehensive presentation of corporate performance. the profit participation usually exceeds the return on fixed- interest securities. Under HGB, participation certificates Free cash flow (before dividends) are recognized in equity, under IFRSs, they are disclosed Cash flow from operating activities less that from investing in debt. activities. ROE Goodwill Return on equity: profit (net profit) divided by recognized Excess of the price paid for an acquired company over the equity. The ratio indicates the return on the stockholders' acquirer's share in its net assets. capital.

Hedging Risk management Options, forwards or futures that hedge (a significant por- Systematic approach to identifying and evaluating potential tion of) interest, currency, price and other risks to which risks and selecting and implementing steps to address the underlying transaction is exposed. such risks.

IFRSs ROCE International Financial Reporting Standards. See page 38f. Return on capital employed: EBIT divided by capital for more information. employed.

Net financial debt Statutory audit Financial liabilities less financial assets and cash and cash A legally prescribed examination of a company (or part equivalents. thereof) by independent auditors for compliance with defined standards and regulations. Outsourcing Transfer of certain corporate functions to specialized TecDAX service companies. The German index for listed technology equities; covers the 30 biggest Prime Standard technology stocks below the DAX at the Frankfurt Stock Exchange. Dräger worldwide.

Dräger is represented in over 190 countries on all the world’s continents, with its own companies in more than 40 countries: sales/distribution and service companies, and development and production plants.

Pittsburgh Plymouth Hagen Beijing

Telford Blyth Lübeck Shanghai

Hatboro Best

Danvers Svenljunga King William’s Town

Dräger production plants Dräger sales/distribution and service organizations D Drägerwerk AG Moislinger Allee 53/55 23542 Lübeck, Germany www.draeger.com

Corporate Communications Phone (+49-451) 882-22 01 Fax (+49-451) 882-39 44

Investor Relations Phone (+49-451) 882-26 85 Fax (+49-451) 882-32 96 90 70 204