Annual report 2 OO42OO5

Transcription

1 Annual report 2 OO42OO5

2 CTT in brief CTT Systems AB is a Swedish technology company operating in the aviation industry. The company develops and markets humidity control systems for commercial aircraft. Customers include both aircraft manufacturers and airlines. The company has its headquarters in Nyköping, Sweden, and has been listed on the O-list of the Stockholm Stock Exchange since BUSINESS CONCEPT The company s business concept is to solve the two moisture problems currently encountered in commercial aircraft, i.e. preventing condensation between the cabin and the outer skin, and raising the cabin humidity level to enhance comfort and well-being for both crew and passengers. STRATEGY CTT s strategy is to consolidate its position as the leading player on the market through on-going development of products in the Dehumidification and Humidification product sector. Marketing communications will aim to emphasize the humidity-related problems that currently prevail in aircraft. CTT will take an active part in discussions surrounding health and comfort in the cabin. By entering into alliances with other subcontractors in the aviation industry, interesting and competitive system solutions shall be created for both manufacturers and airlines. The long-term goals in volume will be achieved by supplying aircraft manufacturers directly. VISION CTT s vision is that all airlines shall be able to offer the same level of comfort in the cabin as in a normal indoor climate, in terms of air humidity. FINANCIAL CALENDAR The printed annual report for 2004/2005 is distributed to all registered shareholders. Information is published regularly on Annual General Meeting: November 17, 2005 Interim report, July Sept: November 17, 2005 Interim report, July Dec: February 2006 Interim report, July March: May 2006 ANNUAL GENERAL MEETING The Annual General Meeting will be held at 5 pm on Thursday, November 17, 2005 at the company s premises, Brukslagarevägen 5, Nyköping, Sweden. Shareholders wishing to attend the Annual General Meeting must be registered in the VPC share register no later than November 7, 2005, and notify the company of their intended participation no later than Monday, November 14, In order to vote, shareholders whose shares are administered through a bank s trustee department or private fund administrator must temporarily re-register their shares in their own name. Registration must be completed no later than November 7,

3 The year in brief Table of Contents Boeing appoints CTT as a supplier for the Boeing 787 Dreamliner that will have the Zonal Drying System installed as standard equipment and humidifiers available as an option for flight deck and crew rest compartments (Agreement was signed after the financial period). CTT and Air Mauritius sign a Letter of Intent (LOI) for the installation of the Cair system in five Airbus A aircraft. Air Mauritius thereby qualifies itself as the first airline to offer humidification in first and business class. Jet Aviation ordered Cair systems for two Boeing 737 BBJ VIP aircraft. (In total five systems have been supplied to Jet Aviation). CTT receives the first order for humidifiers from Airbus for the Airbus A380 superjumbo. The rights issue is oversubscribed and provides the company with SEK 17 million, prior to issue expenses. Net sales totalled SEK 12.8 million (SEK 21.1 million). Operating loss SEK million (SEK million) and cash flow SEK million (SEK million). Order intake rose to SEK 22 million (SEK 13 million). CTT in brief The year in brief Review by the President OEM Market The need for CTT s products Air Mauritius Humidity control Moisture management Market overview Sales and marketing strategy Customer and product overview Competition Background, organisation, environment and quality..21 Risk and exposure analysis The CTT share Administrative report Five-year summary Income statement Balance sheet Shareholders equity Cash flow statement Accounting principles and notes Auditors report Board of directors and auditors Senior executives MSEK Order intake Net sales Loss Production: Byrån i Tranås Photo: Erik Hellquist, Jonas Sällberg Printing: NRS Tryckeri

4 Review by the President In general, the aviation industry has had an eventful year with a positive undertone.the greatest interest within the industry was generated by the first test flights of the world s largest passenger aircraft, the Airbus A380.When exhibited at the Paris Air Show in June, this generated great enthusiasm and wonder for a number of attributes, not least for its exceptionally low-noise level engines. But Boeing also succeeded in drawing considerable attention to its B787 project that has obviously found a much sought after niche market as vindicated by 263 orders from 22 airlines.this makes it the most successful aircraft launch in the company s history. In many respects the aircraft is based upon groundbreaking techniques, yet notably distinguishes itself as a result of the decision to make extensive use of composite materials that significantly reduce fuel consumption. Deliveries of the B787 to customers will commence in These two major future projects combined with a steady increase in the number of passengers flying with airlines has once again given the aviation industry reason to believe in the future. ZONAL DRYING SYSTEM STANDARD EQUIPMENT FOR B787 By far the most important single event in CTT s history occurred after the financial period when Boeing selected the Zonal Drying System as a standard installation for the new B787 aircraft. With a single stroke of the pen the conditions had changed: as a result of the order a steady, longterm source of income has been secured that from early 2008 will grow in line with the increase in deliveries up to an expected production output of around ten aircraft per month. Turnover is expected to increase further thereafter thanks to a growing after market demand. Not only does the agreement (to be appointed as a direct supplier to Boeing) give CTT increased legitimacy as a company, but it also represents an increased acknowledgement of the technology. Everything considered, Boeing s decision prepares the ground for a further improvement of our opportunities of selling to other aircraft manufacturers and airlines, alike. Otherwise, the financial year 2004/2005 was an average year for the Zonal Drying System. A total of 14 systems were delivered and orders for a further 12 were received. It has proven to be more difficult than expected to win orders for the B737 system, despite the fact that it has now been included on Boeing s options listing since mid It will be extraordinarily interesting to see if Boeing s initiative to take measures for remedying the condensation problem on the B787 has any positive effects on the consensus of opinion held by B737 customers. The view held by many is that an airline should not have to pay to eliminate condensation, but that the aircraft manufacturer should bear the cost. If this reasoning continues to prevail, it will remain difficult to sell the Zonal Drying System into the retrofit market. Awareness of problems related to condensation is growing constantly and with the B787 agreement signed and sealed one would hope that the chances of the Zonal Drying System becoming base equipment on other future aircraft models have significantly improved. I personally think that it would be logical for the Zonal Drying System to become a standard as aircraft manufacturers discover how increasingly difficult it is when requesting airlines to purchase an optional system to solve one of the fundamental problems inherent in the structural designs of aircraft. In the longer term, therefore, I foresee a situation whereby aircraft manufacturers are faced with only two alternatives: to either introduce the Zonal Drying System as a standard for new aircraft types or to develop an equally effective 4

5 With a single stroke of the pen the conditions had changed system or innovation capable of solving the condensation problem that also meets with the approval of the airlines. CTT S WORLD LEADING HUMIDIFICATION TECHNOLOGY The agreement with Boeing also means that humidifiers will be offered as an option in the B787 for flight deck and crew rest compartments. Herewith, CTT further strengthens its world leader status in the aviation industry on the humidification market (in addition to the B787, Airbus has also selected CTT s humidification technology for the A380). CTT is thus firmly on course to emerge as the de facto standard for aircraft humidification. For many years, the company s technology has dominated the market for VIP aircraft and by way of OEM agreements is now creating a strong platform from which it can address the needs of airlines existing aircraft fleets and new aircraft types. For CTT as a company, the significance of humidification grows with every year that passes, as the after market is considerably larger than that for the Zonal Drying System. The pad in the humidifier should be replaced at least once every year by which time it becomes contaminated by the water s minerals. It is my hope that the number of aircraft equipped with humidification in flight deck and crew rest compartments also increases in line with the growing insight of how important air quality and humidity are for the health and well-being of crews. THE FIRST AIRLINE INSTALLS CAIR IN ITS LONG-HAUL FLEET The year has also been a success for Cair. We have received further orders from Jet Aviation, delivered the first Cair system for an Airbus aircraft, and above all, won our first airline customer, Air Mauritius. Moreover, the debate surrounding the cabin air during long-haul flights continues and has become a major point of discussion in association with the new aircraft types A380, A350 and B787. The systems for Air Mauritius five A aircraft will be installed during the course of As part of the agreement, Air Mauritius will also jointly market the system together with CTT.This presents us with an excellent opportunity to increase the interest in Cair and thereby precipitate a breakthrough with other larger airlines or an aircraft manufacturer. The Cair system is being discussed within a number of larger airlines and it has come to our attention that certain airlines are negotiating with manufacturers to have humidification systems installed during the production of new long-haul aircraft. 5

6 FUTURE PROSPECTS Thanks to our B787 agreement, we now have for the first time the opportunity to promote a system that will be built for a long time and in large numbers. At best, we had earlier received orders for around twenty aircraft and the systems were delivered within a maximum of one year. Besides, short-term contracts with considerable development work in relation to the value of the system delivered have, even if we succeeded in maintaining high gross margins, been economically disadvantageous. Now we can focus on a more rationalised production and create the opportunity to reduce costs for the system. In a nutshell, CTT will evolve into an effective OEM contractor. In the short-term, the agreement will require CTT to strengthen its technical organisation. We need to recruit a number of engineers to meet our commitments to Boeing.We must also recruit still more assembly personnel. Deliveries of the humidifier for the A380 have commenced and we expect volumes to increase in To deal with this expansion economically, it is important that, during the course of the next two years, we succeed in selling the Zonal Drying System on the retrofit market and the option system for the Boeing 737NG, in addition to selling the Cair system for VIP aircraft as well as to the airlines. As regards sales to OEM customers, we will now concentrate on winning a number of contracts with Airbus. We anticipate that Airbus will commence with development of the humidifier system for cockpits and first-class compartments in the A380 and, above all, we hope that Airbus will offer cabin humidification in the new A350 aircraft. Now the wind has changed and we can look forward to some very interesting years for CTT. Nyköping September 2005 Torbjörn Johansson President 6

7 The OEM market With forecasts predicting annual growth rates averaging 5% for passenger traffic and 6% for freight traffic, the aircraft industry s long-term potential significance is vindicated by an expected requirement for 25,000 new aircraft (for 100 and more passengers) over the next twenty years! Because an aircraft type s lifetime is typically long, it isn t every year that the development of a completely new aircraft model is planned or set in motion. However, the coming years look set to be particularly eventful with the introduction of many new types in prospect.this creates opportunities for CTT, as it has long been our stated ambition that aircraft manufacturers should install systems already at their production facilities, either as a standard or option for the customer. At present, the company maintains the following OEM relations: - Boeing, that has decided to have the Zonal Drying System as a standard installation on all B787s and humidification as an option for flight deck and crew rest compartments. Starting around a year ago, it has also offered the Zonal Drying System as an option for new production B737NGs. - Airbus, that has selected CTT s humidification technology for the A380 as an option for crew rest compartments. Boeing 787 Dreamliner. The launch of the B787 has been the most successful in Boeing s history with firm orders for 263 aircraft from 22 different airlines already confirmed.the first 35 aircraft for commercial service are expected to come off the production line in 2008.Thereafter, production output will increase successively to reach approximately ten aircraft per month by around A customer ordering a B787 today will, at the current rate of production, have to wait until 2013 before Boeing can deliver. The successful launch has however resulted in the company considering an earlier acceleration of production output than originally planned. In which case, output would rise to fourteen aircraft per month from In total, Boeing hopes to build around 2,000 aircraft over a 20-year period.the B787 is based upon ground breaking technologies whereby the fuselage, to a large extent, is made of composite materials that result in lower maintenance costs and lower weight (reducing fuel consumption by 20%). Chinese and Japanese carriers dominate the order book. Airbus A380 superjumbo. The world s largest ever passenger aircraft, Airbus new aircraft type A380 made its first flight in March and participated at the Paris Air Show in June.With the possibility of carrying up to 555 passengers and with a longer range than that of other large aircraft, the A380 creates new conditions for both airlines and passengers, alike.the lower operating costs per passenger mile will change the aviation market. Another noteworthy feature is the exceptionally quiet operational noise levels of the aircraft. Airbus has orders for 149 aircraft confirmed with more awaiting finalisation. In addition, there are options for around 80 further aircraft. The order book is dominated by Asian carriers (Qantas, Singapore, Malaysian, Korean, and Thai) and airlines from the Middle East (Emirates and Qatar). In Europe, Lufthansa, Air France and Virgin have ordered the A380. It was expected that Emirates, Singapore and Qantas would take delivery of their first A380s during 2006 followed by, amongst others, Lufthansa in The A380 project is however somewhat delayed and a degree of uncertainty prevails as to whether Airbus will succeed in keeping to the original schedule.this has prompted branch analysts to revise the delivery programme covering the first two years (which explains the wide spread for error in the table below). B737NG The market for short-haul aircraft (for 100 or more passengers) is dominated by two players: Airbus with its A320 family and Boeing with the B737NG. Both aircraft types are delivered at a rate of units annually. The Zonal Drying System has been available as an option for the B737NG for around a year. FUTURE AIRCRAFT TYPES A350. Airbus is expected to officially launch a new aircraft project, the A350, with the first deliveries of aircraft to their customers planned for Even if the project has not yet been approved, orders for 125 aircraft from seven customers (Qatar accounting for no less than sixty thereof) have been received. It has always been our stated ambition that Airbus should select our technology by virtue of our leading position in the humidification market.the A350 will be an important indicator as to whether Airbus, like Boeing, has decided to solve the condensation problem once and for all by selecting the Zonal Drying System or resolve it with another solution. New B737. With the Zonal Drying System as base equipment on the B787, the chances of Boeing selecting the system for future aircraft models have increased. A great deal speaks in favour of the company starting a project the aim of which would be to find a replacement for the company s faithful servant, the B737NG. Forecasts suggest the new aircraft could enter commercial service around Aircraft type P 2006P 2007P 2008P 2009P B737NG B A

8 The need for CTT s products HISTORY OF AVIATION The aviation industry, which recently celebrated the 100 year anniversary of the Wright brothers first flight, has undergone extremely expansive development. In the early days, aviators flew in open, singleseat, propeller-driven aircraft used primarily for postal and military purposes. Once it became possible to construct larger aircraft, passenger-carrying, open, propellerdriven aircraft entered the scene. The introduction of pressurized cabins represented a leap in development, enabling flights at higher altitudes where weather conditions are more favourable.this placed greater demands on the reliability of the systems in the aircraft as conditions are different at higher altitudes. For instance, the surrounding temperature is lower causing new phenomena. During the 1930s, the need for our dehumidification system first became apparent. With a warm cabin and very cold exterior, condensation began to form on the inside of the aircraft fuselage. At that time, aircraft were equipped with few electronic systems and the structure was significantly oversized which meant the negative effects of condensation were surmountable.with the introduction of the jet engine into passenger service in the 1950s, capacity could be increased and aircraft could thus fly further, and carry more passengers. This created a need for our other product, Cair which humidifies the cabin, counteracting the arid cabin environment of long-distance flights. In recent years, progress has mainly been made in the field of computers, communications, engines, and design optimization to maximize efficiency of the aircraft. This has resulted in an increasing number of computer-controlled systems in aircraft, which are more sensitive to condensation, as is all electronic equipment. Today s passengers have a greater awareness of health issues and are beginning to demand greater comfort during flights. If aircraft have been optimized to attain technical perfection over the last 100 years, the future will, in all probability, focus on people. Air travel will be developed into a method of travel that combines maximum comfort with extremely high safety standards. On this basis, we envisage a continuing future need for our products. CONDENSATION IN AIRCRAFT Moisture enters the fuselage of an aircraft during ground stops. It is also emitted by every person on board. In flight, the aircraft is exposed to extremely low temperatures. Modern jet aircraft have a cruising altitude of over 10,000 metres where temperatures lie between -50 and -60 C.This cools the fuselage to between -30 and -40 C, resulting in large amounts of water condensing on the inner skin of the fuselage. Water collects in the insulation and runs down into the belly of the aircraft. 8

9 OPERATIONAL EFFECTS OF CONDENSATION Increased aircraft weight. Depending on the number of passengers, flight distance, aircraft type and climate zone, larger or smaller amounts of condensation are created. Condensation can increase the weight of the aircraft by over half a ton. This unwanted increase means higher fuel consumption with negative effects for both transport economy and the environment. Disturbances in electrical systems. Many of the electrical cables in an aircraft are located in the space between the inner and outer skins, where condensation accumulates. This can trigger warning signals and short circuits in sensitive equipment, resulting in delays and component replacement. Inspections and repairs are expensive and time-consuming.this type of problem has come to the fore following a number of incidents during recent years. MAINTENANCE RELATED EFFECTS OF CONDENSATION Corrosion mainly affects the areas around aircraft windows and doors, antenna or wing mountings, and belly structures. Floor beams and electrical contacts are also exposed areas. Corrosion entails extra expense for the airlines who often have to replace structural parts at D-checks. Older aircraft in particular are affected by increased maintenance costs due to corrosion. Damaged insulation. Water gets trapped in the insulation, making the material heavier in addition to reducing its functional capacity. During maintenance, parts of the insulation may have to be dried or replaced. This entails extra costs for the airlines, yet only provides a temporary solution to the problem once the aircraft reenters service the insulation will get wet again. Mould flourishes in wet insulation which can be a problem for passengers and maintenance staff. EFFECTS OF CONDENSATION ON COMFORT Rain in the plane. Air passengers are exposed to dripping water during take-off and landing.this is caused by condensation gathering on ceiling panels. Most noticeably during take-off, water runs along fissures in ceiling panels and drips on passengers: Rain in the plane. Reduced insulation effect. Water trapped in the insulation reduces its insulation effect. Passengers feel cold draughts at windows and doors. Acoustic insulation is also adversely affected, resulting in higher noise levels in the cabin from engines and wind against the aircraft. Increased aircraft weight Who would check-in half a ton of water? Zonal Drying System Provided by F E - Increased weight / fuel consumption - Water and ice in insulation - Malfunction in electrical systems - Rain in the plane - Corrosion / contamination - Ruined insulation blankets - Fungus and bacteria - Deteriorated insulation effect - Aircraft cabin low humidity / dry air - Increased maintenance costs 9

10 ZONAL DRYING AND ITS BENEFITS The areas listed are those most open to improvement with our Zonal Drying System. Our calculations, based on experience from actual installations and reports from operators of our systems, indicate that the payback period for a Zonal Drying System in an aircraft is two to four years, depending on the type of air travel.the payback period is shortest for operators with a high degree of use and high passenger figures. This should be compared to an aircraft s economic and technical lifetime of 20 to 25 years. It is also important to note that some of the benefits of the Zonal Drying System cannot be calculated in monetary terms, but are linked to passenger comfort and operational reliability. These advantages include increased operational reliability, no damp seats or carpets, no brown windows with condensation, no cold draughts due to retained insulation effect, etc. However, we believe that the most important advantage is the fact that it is simply not consistent with today s flight safety requirements to have several hundred kilos of uncontrolled water flowing around in a plane, close to electrical cables, components and computers. WHY INCREASED CABIN HUMIDITY? Average Cabin Humidity without CAIR Relative Humidity % 30,0 25,0 20,0 15,0 10,0 5,0 0,0 First / Business Economy Without CAIR - Condensation in Crown Area Crown Area Low humidity in business area ~5% Crown Area Low humidity in economy area ~10% Most passengers on long-haul flights experience THE DRY FACTS Cold symptoms Soar throat, dry skin Dryness in mouth, nose and eyes Jet-lag / Increased fatigue General uncomfortable feeling Medical experts and specifications for in-house air quality (ASHRAE), recommends 20% relative humidity as the lowest acceptable level. Average Cabin Humidity without CAIR Average Cabin Humidity with CAIR Relative Humidity % 30,0 25,0 20,0 15,0 10,0 5,0 0,0 First / Business Economy With CAIR - Dry Crown Area Crown Area Increased humidity in business area ~25% Crown Area Increased humidity in economy area ~15% 10 FIVE GOOD REASONS Increased cabin humidity will reduce many of the discomforts and lower the risk of getting airborne infections Passengers and crew will feel better Passengers will experience a more relaxed and comfortable flight The sleep will be better The food and wine will taste better The risk for airborne infections are lowered A very important factor for well-being and comfort. Limited modification work necessary. Cost comparable to 1-2 business class seats.

11 WHY IS AIR SO DRY IN THE CABIN? Air conditioning systems in modern aircraft are designed to take in approximately 50 percent of their air quota via the engines in other words, atmospheric air from around 10,000 metres altitude. The remaining 50 percent consists of recirculated cabin air. Atmospheric air is extremely dry which means cabin air is also dry. Normally, the relative humidity (RH) in homes and offices is between 50 and 60 percent. In an aircraft, the level lies between 5 and 15 percent. In extreme cases, humidity levels as low as two percent have been recorded. HOW DOES DRY AIR EFFECT PEOPLE? Passenger comfort is mainly affected on long-haul flights of 5 to 18 hours. The human body is not designed to function in a dry environment (lower than 20% RH) and is adversely affected when subjected to it. In the dry conditions on board, many passengers experience irritated mucous membranes in the nose and throat, contact lenses have to be removed, there is an increased likelihood of colds, and a greater risk of bacteria spreading. Problems also occur with dry skin, allergies, etc.this especially applies to cabin crews, who are continuously exposed to low humidity levels.the problem is most apparent in business class and first class where there are fewer passengers and less moisture is generated. Conditions in tourist class are somewhat better as passenger density is higher and more moisture is generated. However, even in tourist class, moisture needs to be added to attain an acceptable humidity level. DEMANDS ON ENHANCED COMFORT Passengers today are more knowledgeable and aware of their health, and the effects of flying.what s more, people are much more conscious of how they spend their work and leisure time, making demands on the possibilities to work and rest during flights.the airlines response is demonstrated in the fact that a majority of airlines have redesigned, or are in the proceeds of redesigning, their cabins for improved comfort. Airlines spend millions of dollars installing better seating, video on demand, live TV, internet connections, etc, to meet passenger demands. Some airlines have even installed fake starry skies to simulate night skies and thus promote sleep. Air quality onboard is a matter of much discussion; many passengers consider it to be poor, with fatigue, faintness, etc, as the result.the fact that people today fly longer, up to 18 hours, means that the effects of poor air quality are more pronounced. In all likelihood, we will see requirements for improved air quality onboard, with the emphasis on the level of humidity. CAIR AND ITS BENEFITS Cair is developed to meet passenger requirements on health and increased well-being during flights. In-flight studies have shown that humidifying the cabin reduces tiredness and alleviates dehydration of the eyes, skin and mucous membranes. As the condition of the mucous membranes is essential for the body s immune system, there is thus a reduced risk of viral infection during flights. Our goal with Cair is to improve the passenger s sense of well-being during flights. Cair raises the humidity level in the cabin, which has a positive effect on all the passenger s senses. Passengers will feel better, sleep better, food and drink will taste better. Cair means airlines around the world get a unique opportunity to gain competitive advantages through improved comfort on long-haul flights a strategic marketing tool in parity with in-flight entertainment. 11

12 Air Mauritius leads the way to a better climate. Think about it. Comfortable, reclined in a seat with a view of the Indian Ocean. Suddenly, a small dot appears on the horizon. A paradise island appears out of the turquoise waves. As you get closer, you see the coral reef winding its way like a pearl necklace around the white beaches. In the shadows of the palm trees, you catch a glimpse of a few visitors. Mauritius has an enchanting way of welcoming its guests. Each and every trip to Mauritius begins by boarding a plane.with this in mind, Air Mauritius has decided to give its passengers a taste of the island s pleasurable climate the moment they step on board, and is now on the way to installing CTT s climate system Cair in its Airbus A340s.The first aircraft with humidification systems will be in service during Air Mauritius will thereby qualify itself as the world s first airline to offer its passengers improved comfort by raising the humidity level in the cabin.the installation of Cair goes hand in hand with the airline s philosophy of providing the highest imaginable levels of comfort. L Esprit d lle de Maurice, or the Mauritian Feel, is a renowned motto. We want our passengers to savour the Mauritian atmosphere and hospitality in the same moment they enter the cabin.the climate onboard has a significant bearing on their sense of well-being.together with dishes from the Mauritian kitchen and wines originating from France s best Sommeliers, the humidified fresh air represents a real lift, says Managing Director, Megh Pillay. Air Mauritius, the island s national carrier, operates to 28 destinations on three continents. A flight with a stopover from Paris to the island s capital, Port Louis, takes hours. Needless to say, good air in the cabin on such long flights is extremely important. Cair raises the relative humidity from 5% to 25%. In addition to improving levels of comfort, the system also prevents condensation on the aircraft s structure. CTT is the only company in the world offering a total solution for solving humidity problems. This represents a breakthrough for CTT s Cair system.we are convinced that humidification of aircraft cabins will be more or less standard in the future. The first customer always starts the ball rolling, says CTT s VP Sales & Marketing Ulf Liljenberg. Today, airlines are competing to make long-haul travel more comfortable and relaxing for passengers. When we humidify extremely dry cabin air, both crew and passengers experience an improvement in air quality. Problems such as dry skin, dry eyes, irritated respiratory tracts and general dehydration, together with jetlag and risk of spreading viral infections, are reduced with higher humidity levels onboard. Moreover, the air feels cleaner and fresher and the flight is less tiring than before, he reasons. If one company offers this product, the others will follow, just as they did earlier with video, and flatbeds.with this breakthrough, we have opened the market for our system, reasons Ulf Liljenberg. 12

13 The location off the African coast attracts holidaying business people from all corners of the world to the tropical island paradise Mauritius. Soon, they will be able to get a taste of the pleasurable climate the moment they step onboard the plane. Air Mauritius has the distinction of being the first airline in the world to install CTT s climate system Cair on its A340s. 13

14 Humidity control the technology ZONAL DRYING SYSTEM The air in an aircraft cabin normally has a temperature of 23 C and a relative humidity, RH, of about 10 percent (in a house, the RH is usually 50 percent). Moisture is transported from the cabin towards the outer skin of the aircraft, partly due to pressure variations during the flight. The outer skin of the aircraft is extremely cold and when the cabin air meets this surface, condensation occurs in the form of frost that turns to ice.when the outer skin heats up during landing, the ice melts. Most of the water runs out through drainage vents when the aircraft is on the ground, but some accumulates in the insulation blankets and as pools in the fuselage. The Zonal Drying System takes air from the cabin, removes the moisture, and blows the air between the cabin and the aircraft s outer skin.there, a weak over-pressure is created by a barrier of dry air, which dries the insulation blankets. At the same time, the relative humidity of the air coming into contact with cold surfaces is reduced, eliminating condensation. The technology is based on Munters well-known moisture removal technology, which is already used in the military aviation industry with land-based equipment. CTT has refined this technology by building small, lightweight drying units, which can be installed for permanent operation in an aircraft. A Zonal Dryer consists of a fan, a heater and a rotor. The rotor is made from glass fibre and is impregnated with silica gel, a substance with excellent properties for absorbing and dissipating moisture. Two separate airstreams are led through the slowly moving rotor. One, comprising about 80 percent of the air, passes through the rotor for drying.the dry air is then led to the area to be dried. The other 20 percent of the airstream is warmed before passing through and drying the rotor.this moist air is re-circulated in the cabin, either directly or via the aircraft s air conditioning system. Depending on the aircraft type, the Zonal Drying System is either fitted in the crown area or beneath the cabin floor.the system remains in operation as long as the aircraft has electric power, in other words during flight and most of the time on the ground.the Zonal Drying System is a complete system that has been adapted and installed in various aircraft types. ZONAL DRYING SYSTEM PRINCIPAL OF THE ZONAL DRYER REDUCED CONDENSATION Using the Zonal Drying System Air intake The aircraft s electrical interface Rotor absorbs moisture Dry air (80%) Moist air (20%) Thermal fuse CTT s Zonal Drying System reduces the build-up of frost and dries damp insulation in the aircraft. This is achieved by distributing an even flow of dry air in the area between the cabin and the plane s outer skin, the crown area. Heater Thermostat Thermistor Rotor motor 14

15 Moisture management the technology CAIR Cair consists of the CTT Zonal Drying System, and a system for humidifying portions of the aircraft s passenger and crew areas.the humidifying part of Cair consists of one or more humidifiers with water supply systems. The humidifier uses the technique of evaporative humidification and has been developed in cooperation with Munters.The main component in the humidifier is a pad of glass fibre with specially designed air channels moistened via a spreader system.when dry air passes the moist surface of the pad, the water evaporates and the air is humidified while it is cooled. By dimensioning the pad according to the airflow to be humidified, as well as controlling the supply of water and air temperature before the pad, the humidifier can operate without further regulation. Minerals and other contamination in the water are precipitated in the pad. The pad is replaced at regular intervals depending on the mineral content of the water.the risk of bacteria spreading via the humidifier is minimal since the water evaporates during transfer to the air and thus cannot carry any bacteria. The humidifier is installed in supply ducts to the zones to be humidified.water is taken from the aircraft s regular water system. CTT and the German company AOA (Apparatebau gauting) are jointly developing the humidifier system for crew rest areas in A380 aircraft. Besides the actual humidifier, the system contains a software-based control unit, moisture sensors and advanced water valves. CTT and AOA are continuing development of this system in order to offer aircraft manufacturers an advanced solution for humidification in aircraft cabins. Corrosion Nobody wants a rusty airplane. Zonal Drying System Provided by The air passes through the integrated humidifiers and is being led out in the cabin via the existing ECS air system The dried air is distributed evenly in the cabin Crown Area via light weight Piccolo Ducting Systems Forward Zonal Dryer and Inlet Air Filter Piccolo Ducting System (dry air distribution) Piccolo Ducting System (dry air distribution) Aft Zonal Dryer and Inlet Air Filter, Crown Area The regenerated (moist) air is disposed of via the right hand triangle area beneath the floor The regenerated (moist) air is disposed of via the aircraft s triangle area beneath the floor ECS Cabin Riser Ducts Cabin Humidifier Zone 2, right hand triangle area beneath the floor Cabin Humidifier Zone 1, left hand triangle area beneath the floor ECS air Mixing Chamber Current humidification system average water consumtion for Zone 1 & 2 (typical first/business class areas) is 14 l/h 15

16 Market Overview THE CRISIS BEHIND US The tide has turned.the long steep decline and crisis experienced by the aviation industry in recent years has come to an end for most markets, with the USA being the sole exception. Once again, it is the low cost carriers with their flexible operations who have fared best. Despite the fact that airlines, from a global perspective, continue to lose money, the trend is pointing upwards. For the first time since 2001, we are seeing airlines such as Lufthansa and British Airways reporting profits.the real worry is the North American carriers that reported combined losses totalling USD 8,300 million! FROM GROWTH TO A STABLE MARKET The growth we witnessed in 2003 has continued into 2004, as illustrated by a passenger increase of 12% measured in RPK (Revenue Passenger Kilometres). Airbus and Boeing foresee continued market growth averaging 5% annually in the coming years. The ICAO is more positive and predicts an increase of 7.6% for 2005, 6.5% for 2006, and 6.2% for Asia and Europe will see the strongest growth, whilst the USA will show a negative trend. If the order books are anything to go by, the aircraft manufacturers have good reason to be optimistic. An unusually high number of large orders were booked in 2004 and early 2005.We saw the A380 fly for the first time. Boeing recorded sales successes with the B787. Simultaneously, Airbus swiftly chalked up orders for over 100 of its new A350 aircraft. Also noteworthy, and a vindication of the optimism prevailing in the branch, is that no less than 458 new aircraft were ordered during the Paris Air Show in June, 2005.We have to go back many years to find similar figures of this scale. The fact is that sales for H exceeded the annual sales figures for each and every year Boeing and Airbus have announced that they will continue to increase production rates of their narrowbodies and Boeing has said it plans to raise production output 57% by During 2004, around 900 jet passenger aircraft for 50 or more passengers were delivered, which is 100 aircraft more than Boeing and Airbus had reckoned with 12 months earlier. The status of the different aircraft types according to Airline Monitor (December 31, 2004) and Flight International (June 30, 2005) can be seen in the table below. FUTURE PROSPECTS Boeing, Airbus and IATA estimate traffic growth in the region of approximately 5% annually during the period Converted into numbers, there will be a need for some 20-25,000 aircraft, with narrowbodies accounting for around twothirds and wide-bodies for a third of this figure. Around 15% of the new aircraft will be regional jet aircraft. Geographically, the markets that are predicted to expand fastest are in the Asia-Pacific region, both domestic and international, with an annual growth rate of around 7-8%. In the shorter perspective, both Airbus and Boeing believe some jet aircraft for 50 or more passengers will be delivered during the coming twelve months. The downside for the airlines is that fuel prices remain at record high levels and revenue per passenger continues to be low. We do however feel that the will for investment amongst airlines has improved as a whole. Instead of looking at short-term cash flow management they are now prepared to make investments that will payoff in the longer term, i.e. more than one year later. This combined with the continuing high price of fuel has led to an increased interest in our Zonal Drying System. Furthermore, competition in the business class sector for long-haul is intensifying. Cair represents a competitive advantage that we believe will appeal to a number of carriers. This is where we are seeing an increased interest from the airlines. Aircraft type Delivered* On order** Orders 2004 Orders H1 A32x A330/A A B737NG B B B B B CRJ EMBRAER *) December 31, 2004 **) June 30,

17 MARKET POTENTIAL The market for single-aisle aircraft has the greatest potential for our Zonal Drying System. In the region of some 6,000 of these aircraft are currently in service worldwide, mainly B737NG, A32x, B757 and CRJ. As decisions to invest are difficult for airlines we view the retrofit market as remaining sluggish. However, we ought to be able to sell the Zonal Drying System into 5-10% of the market.we believe the sales potential for new production aircraft to be considerably higher, especially in view of the fact that our system has now been selected as base equipment for the Boeing 787 and is an option for the Boeing 737NG. Moreover, the financing can be made within the framework of financing for the whole aircraft.with an order stock of around 2,300 aircraft and increased co-operation with the manufacturers, we see an enormous potential in this specific segment. In our judgement, we believe that we could supply Zonal Drying systems to around 15-20% of the aircraft ordered and those awaiting delivery. Our share of this market will increase successively as our system becomes more widely known and tested. Wide-bodies are the market that is best suited for Cair.The current number of wide-bodies in operation worldwide is around 2,400 aircraft and includes A330,A340 as well as B777, B767 and B Due to the fact that a retrofit of the Cair system is proportionately more difficult, we believe a market share of 2-4% to be realistic. Based on prevailing market trends we believe the future of Cair lies in systems installed in new aircraft at the time of delivery. Of the around 760 wide-body aircraft currently on order, the A330,A340,A380, B777 and B787 account for a growing share whereas the B767 and B are nearing the end of their life cycle.yet it is noteworthy that Airbus has received orders for well over 100 of its new A350 that is also well suited for Cair.We estimate our market potential to be 15-20% of those aircraft on order and awaiting delivery. Once again, we believe in a growing market share as Cair establishes itself as a concept on the market. The VIP market is stable and we have installed systems on a number of larger business aircraft. By virtue of the good relations we maintain with the world s largest completion centres Lufthansa Technik, Jet Aviation, AAC and Sogerma we believe that we can sell 1-2 Cair annually for widebodies and 2-4 for narrow-bodies.we also believe that there exists a longterm potential for selling the Cair system to both the business jet aircraft types Global Express and Gulfstream. NEW AIRCRAFT TYPES There are currently three major new aircraft projects in progress; the Airbus A380 and Boeing 787 and, in all probability, the A350 once approval is given for the project launch during the autumn. Both manufacturers are discussing humidification as a part of their aircraft equipment. Where the A380 is concerned, AOA Gauting has been appointed as supplier of humidifiers for crew rest compartments. We are also discussing possibilities of offering humidification in the passenger cabin. Boeing has promised an increased cabin humidity level of some 20% for the B787. In our opinion, this can only be achieved through active humidification. We therefore see a significant longer-term opportunity for supplying Cair for this aircraft. Our successes with the A380 and B787 will undoubtedly help us in our discussions with Airbus regarding the A

18 Sales and marketing strategy ZONAL DRYING SYSTEM We have taken a giant step forward through our agreement with Boeing, which means that our Zonal Drying System is standard on the B787.This agreement has proven itself to be advantageous in all our discussions related to the Zonal Drying System.That we have an option status for the B737NG strengthens our position further.we have taken advantage of the situation to work the market, partly though direct marketing and partly by visiting B737NG operators. At present, around 1,540 of these aircraft are in service and a further 980 are on order or awaiting delivery. In the future, we intend to intensify our direct contact with this market though more frequent visits and information. Charter and low cost carriers have traditionally been our strongest markets.we continue to work with these also for the B757 and A32x aircraft, where we directly address the technical and maintenance departments and refer to the system as a cost saver. As in previous years, we also participate in specific operator conferences and branch trade fairs to reach the right decision makers in the airlines. The high cost of fuel combined with an improved climate amongst airlines to invest has seen interest for the Zonal Drying System grow. We believe this trend will continue and gain greater momentum.the objective of our marketing efforts is to have the system installed as standard equipment on more future aircraft types.we believe the prospects for us achieving this goal are good. CAIR When an operator offers its passengers a better product, other carriers usually follow suit.this is why we believe that the interest for cabin humidification will increase as a result of Air Mauritius decision to take on the role of launch customer for Cair. The focus on the health and wellbeing of passengers, that has emerged as a trend among airlines in recent years, can also be used to our advantage. Recent years have seen the introduction of new seats, so-called flat beds, improved leg room, separate cabins offering maximum privacy, new light and sound sets, etc. Cair falls in line with this trend. At the same time, the climate for investments has improved and new product studies are underway. As our target groups are long-haul aircraft and larger executive aircraft, marketing and promotion is focused on three main target groups. Apart from airline marketing departments and VIP completion centres, we also focus our attention on the manufacturers (Airbus, Boeing, Bombardier and Gulfstream). As an airline has now chosen Cair, we can now devote more attention to aforementioned target groups and, at the same time, attract more media attention. In the ceaseless endeavour to spread the word about Cair, we now find our direct marketing activities are having a greater impact and that a growing number of decision makers are listening to our message.the focus of our sales campaign when dealing with the manufacturers will be the B787 and B777, as well as the A380, A330, A340 and A350. A continuation of our dialogue with operators of A330/A340 and B777 aircraft will increase the pressure on Airbus and Boeing to provide opportunities to offer Cair during the production process. A logical part of our marketing work is to participate in dedicated cabin interior trade fairs. How to save $ per year on your aircraft. Increased aircraft weight Who would check-in half a ton of water? $$ In two years, our system will have paid for itself. In twenty, it still saves you money. Wet insulation Mould. The one thing that benefits from wet insulation. Rain in the plane Inside an aircraft, rain should be the last thing to worry about. Corrosion Nobody wants a rusty airplane. * Electrical failures During flight, who wants to mix electricity and water? Damaged insulation Our system won t replace insulation. But with our system, you won t either. Provided by * Based on a B737NG aircraft, 3600 FH per year, 3.5% fuel efficiency factor, fuel cost USD 0.25/kg, removal of 300 kgs of water and 10% of insulation blankets replaced yearly. 18

19 Customer and product overview Zonal Drying System has been supplied for the following aircraft types: B767, MD11, MD80, A330, CRJ, B737NG, B757, B747, A320 family. Cair is at an earlier phase.the system has been supplied to VIP aircraft types BBJ1, BBJ2 as well as B767, B747SP och A Delivery of systems for Air Mauritius A aircraft are underway. Zonal Drying System Aircraft type Total ordered Delivered Customers B737NG Sterling, Hapag-Lloyd, Air Berlin, Transavia, Luxair B Icelandair, Jet Aviation, First Choice, Thomas Cook B Martinair, KLM, Jet Aviation B Lufthansa BBJ 1 1 Jet Aviation A320/A First Choice A Emirates, LTU MD Austrian MD KLM, Swiss, Martinair CRJ-100/ Lufthansa Cityline, Adria Airways, Austrian TP Swedish Air Force per August 31, 2005 Cair Aircraft type Total ordered Delivered Customers B AAC, Jet Aviation B Jet Aviation BBJ Lufthansa Technik, Jet Aviation A330/ Qatar, Air Mauritius per August 31,

20 Competition DEHUMIDIFIER SYSTEMS CTT is currently the only supplier of active dehumidifier systems for the aviation industry. Hitherto, aircraft manufacturers have tackled the problem of condensation in aircraft with the following measures: Cover the cabin with fibreglass blankets Install gutters to lead away the water Fasten pieces of rubber foam to rods, etc, to catch running water Adhere felt to roof panels, etc, to catch water which should then evaporate Install bilge trays to raise insulation in the hold of the aircraft enabling condensation to run underneath The SPUD system that blows relatively dry ECS air into the crown area during flight only. These methods do not prevent condensation. In the short-term, they stop water from entering the cabin, but water will still be present in the fuselage with the problems this entails: increased weight, corrosion, mould and fungus in the insulation, and the risk of disturbance to the electrical system and components. HUMIDIFIER SYSTEMS There are currently three other suppliers of humidifier systems for aircraft: HAMILTON SUNDSTRAND Hamilton Sundstrand (USA) has developed a humidifier in which water diffuses through a membrane system. This humidifier is available as an option for Boeing 777 and 747 aircraft. LIEBHERR-AEROSPACE Liebherr-Aerospace (Germany/France) develops a humidifier that uses a heat exchanger to generate steam with the help of hot air emitted from the aircraft s engines.the system is available as an option for the Bombardier Global Express business jet. LE BOZEC FILTRATIONS & SYSTEMS Le Bozec Filtrations & Systems (France) has developed a humidifier that utilises electrical power to generate steam. Le Bozec offers the system to airlines for the humidification of the cockpit and for business jets. These products have the following in common: relatively complicated technology, unable to meet performance expectations, low reliability, and cause condensation problems. $$ In two years, our system will have paid for itself. In twenty, it still saves you money. 20 Zonal Drying System Provided by

21 Background, organisation, environment and quality BACKGROUND CTT can trace its origins to the concept dehumidifiers in aircraft that was presented in 1988 by the company s founders, Christer Nordström, Thomas White and Thomas Axelsson. In August 1991, CTT Systems AB was established to patent and further explore the idea. In 1997, the company obtained its first global certification based upon a system for the Boeing 767. Later that year, CTT received an SBI listing (now NGM) and joined the O-list on the Stockholm Stock Exchange in Whereas we had only sold to aircraft already in service up until 2004, the recent signing of four agreements has enabled the company to realise its strategic goal of evolving as an OEM contractor. The agreements concerned are: Zonal Drying System as an option for the B737NG Humidification as an option for A380 crew rest compartments Zonal Drying System as a standard for the B787 Humidification of the crew rest compartments and cockpit as an option for the B787 FURTHER DEVELOPMENT LED TO A COMPLETE MOISTURE MANAGEMENT SYSTEM In the autumn of 1999, development of a moisture management system, aimed at increasing passenger and crew comfort, got underway.the humidifier system is combined with the Zonal Drying System to prevent condensation during humidification of the aircraft interior.this integrated concept is now marketed under the name Cair as a registered trademark. ORGANISATION AND PERSONNEL The company s organisation is arranged to match the airlines structures. CTT has recruited strategically important key individuals with core competencies within the areas of engineering, mechanics, air systems, avionics, and airworthiness administration, as well as financial matters and administration of listed companies. Several employees have long experience within the Swedish and international aviation industry. Production personnel plan and administer manufacturing that is, for the most part, subcontracted. There are a total of 22 employees, five of whom are women. Their ages are evenly distributed from 20 to 55 years. Sick leave and staff turnover are low. QUALITY POLICY Our quality assurance policy is based on the company s name, CTT. C T T Customer Satisfaction Technical Excellence Total Quality It shall be the overriding focus of CTT Systems to maintain customer satisfaction, based on every employee s utmost efforts to meet or exceed the customer s needs. CTT Systems products and systems shall be designed, produced and overhauled to meet or exceed specified requirements, performance and reliability. To effectively ensure CTT Systems long-term growth and survival our dominating factors to focus on are: Continuous Improvement in all areas Truly committed and motivated personnel Thriving relationship with suppliers & partner EFFECTS ON THE ENVIRONMENT The Zonal Drying System enables airlines to minimise weight, in the form of condensation, in their aircraft. This weight reduction translates into improved fuel economy that has a positive effect on carbon dioxide (CO2) emissions in the atmosphere. CTT seeks to co-operate with partners and subcontractors who observe various environmental aspects and are committed to environmental improvement. QUALITY CTT complies with Swedish Civil Aviation Authority rules and regulations applying to Quality Assurance in the aviation industry. Quality control is applied at every level, from design via production to delivery, follow up checks and customer support. 21

22 22 QUALITY SYSTEMS AND THIRD PARTY APPROVAL CTT currently holds certification from the Swedish Civil Aviation Authority in accordance with the common European standards issued by the EASA (European Aviation Safety Agency); Part 21 and Part 145. CTT is also certified in accordance with ISO 9001:2000 by Semko Dekra. CERTIFICATION Each aircraft sold has a Type Certificate (TC). All retrofit equipment must be approved with a Supplement Type Certificate (STC).This certification is a comprehensive, time-consuming process as it is specific for individual aircraft types. An STC means that the certifying civil aviation authority (usually in the country where the aircraft is registered) has approved both the system and its installation from an airworthiness viewpoint. The process is further complicated by process routines varying from one country to another. As the USA has traditionally led the aviation industry, American certification has the highest status. Certification by the FAA (Federal Aviation Administration) is in reality the same as global certification. Certification in European countries has gained in status in recent years A European equivalent, EASA, now operates as a coordinator for the European authorities. CTT and Lufthansa Technik have reached an agreement regarding certification and marketing. With regard to certification, this agreement means that Lufthansa Technik, as a rule, acts as CTT s formal design organisation and maintains STCs for CTT s products in return for royalties on systems sold. This agreement is very useful in the sales process as Lufthansa Technik has an excellent reputation for certification, and affords the possibility of obtaining both EASA and FAA STCs. PRODUCTION CTT s production strategy is to perform final assembly, tests and maintenance of its own products. Many of the system components are standard components from the aviation industry, which are purchased from reputable suppliers. In the case of key components, long-term agreements have been signed to ensure competitive prices even for short production runs. Carefully selected subcontractors perform processing and assembly.this enables CTT to increase sales rapidly without investing heavily in machinery or personnel. INSTALLATION To date, CTT systems have been purchased for retrofit, i.e. installation in operational aircraft.the systems have therefore, been installed by airline personnel in conjunction with conversion or maintenance checks in accordance with CTT s drawings and instructions.to facilitate initial installations, CTT provides on-site instruction for airline personnel. Installation of a Zonal Drying System requires between man-hours. Installation of a complete Cair system requires some man-hours.the formal responsibility for the installation rests with the airlines. The agreements with Airbus and Boeing mean that, in future, installation will also take place directly during the production process. This took place at a Boeing production plant for the first time in March Zonal Drying System STCs received FAA/EASA STC B /800 FAA STC B /300 FAA STC B JAA STC A320/A321 JAA STC A330 JAA STC CRJ JAA STC B JAA STC B757 JAA STC B747 Combi Dutch STC MD11 Swiss STC MD11 Austrian STC MD80 Cair STC received Danish STC B767 Rain in the plane Inside an aircraft, rain should be the last thing to worry about. Zonal Drying System Provided by

23 Risk and exposure analysis RISKS All business and share-ownership involves some measure of risk.the following list highlights some of the factors that may be significant for the future development of CTT. Factors are not listed in order of priority and do not claim to cover all aspects. DEPENDENCE ON KEY PERSONNEL For the foreseeable future, CTT will be dependent on a number of key personnel. These people have the knowledge, experience and contacts that form the basis of the company. CTT s future development is notably dependent on these key people remaining within the organisation. The departure of one or more of these persons would have a negative effect on the company s business. To reduce this risk, the company has introduced an incentive programme. DEPENDENCE ON MAJOR CUSTOMERS CTT has broadened its customer base, thereby decreasing its dependence on any single customer. However, CTT still has relatively few customers, which means the actions of each customer can have major consequences for the company. For instance, a customer requesting postponement of delivery or cancellation of an order could have a negative, if albeit short-term, effect. However, the company has established long-term relationships with its key customers, all of whom have shown long-term perspective and stability in their actions. FLUCTUATIONS IN TURNOVER AND INCOME CURVES Future income is largely dependent on a small number of major orders, significantly affecting turnover and profits. It is difficult to forecast and influence when these orders are awarded which is why there may be fluctuations in the future development of turnover and results.with the signing of OEM agreements with Boeing and Airbus, the risk for loss of turnover will decrease successively. FUTURE CAPITAL REQUIREMENTS The company currently has a negative cash flow that is expected to become positive and increasing in the financial year 2007/2008. Until then, the company is dependent on external capital contributions. As the company s products are utilised in aircraft over a long period of time, it is important that it has sufficient reserves to maintain the confidence of customers and co-operation partners.therefore, it cannot be ruled out that the company may have to execute additional new stock issues in the future. PRODUCT LIABILITY Any kind of accident that can be linked to CTT s products would have major consequences for the company. The risks for accidents have been minimised by implementing extensive safety measures and stringent certification for installation. CTT has, moreover, taken out comprehensive product liability insurance providing economic protection for any party possibly injured and CTT itself. ECONOMIC CLIMATE CTT s development is dependent on factors beyond its control, such as the general economic climate, market conditions for customers, and the advent of new competing products. These factors will affect future results both positively and negatively. CURRENCY EXPOSURE Due to the international nature of its activities, the company is exposed to currency fluctuations. Company purchases are mainly made in domestic and European currencies (SEK, GBP and EUR) while products are sold in US dollars. In the event of major delivery contracts CTT implements hedging in USD. The European aviation industry has partly begun to invoice in Euros. CTT is monitoring developments and may also commence invoicing in EUR if it is judged to be advisable. 23

24 CLASSIFICATION OF No. of No. of SHAREHOLDERS shares shares in % Swedish individuals Swedish organizations Overseas individuals Overseas organizations Total NO. OF SHARES/ No.of No.of No. of SHAREHOLDERS owners shares shares in % In total MAJOR SHAREHOLDERS No.of Capital and PER JUNE 30, 2005 shares shares in % Volito AB Trulscom AB Banco Småbolagsfond EFG, Private Bank, Geneve Matts Stenberg Svenska Handelsbanken, Luxemburg Pelago Venture Partners AB Anette Almgren-White Christer Nordström Tomas Torlöf Dan Johansson SEB Private Bank, Luxemburg Bertil Niklasson Carl-Adam Lewenhaupt Svante Berger Anders Svensson Carl-Axel Rosén Birgit Nilsson Swedbank Luxemburg S.A Christer Torlöf Deutsche Bank, Eschborn Total Other shareholders Total no. of shareholders Total no. of shares The CTT Share SHARE CAPITAL Share capital in CTT amounts to SEK 8,210,000 distributed among 8,210,000 shares with a nominal value of SEK 1. All shares give the same entitlement to the company s assets and income. Each share entitles the holder to one vote. At the AGM, each person entitled to vote may vote for the full number of shares he owns and/or represents without limitation of voting rights. GROWTH IN SHARE CAPITAL Since the company was formed in 1991, the share capital has developed as illustrated. OWNER STRUCTURE The tables on this page illustrate ownership in CTT based on information from VPC per June 30, The number of shareholders has decreased during the financial period from 3,437 to 3,400. SHARE CAPITAL. Transaction Change in Total Increase Total Nominal DEVELOPMENT no. of no. of share capital share capital amount shares shares SEK SEK SEK 1991/92 New issue /95 New issue /96 New issue /97 New issue /98 New issue /98 Split 100: /98 New issue /99 New issue /01 New issue /04 New issue /05 New issue

25 Share SAX All-share Index No. of shares traded in thousands (includes late entries) Share price development and turnover per month through August SHARE LISTINGS Shares in CTT were first listed on the SBI list in 1997, but were transferred to the O-list of the Stockholm Stock Exchange in Listing means, amongst other things, that CTT follows the Stockholm Stock Exchange s rules regarding stock market information.the company thus publishes financial reports and other stock market information, and follows other rules and practices, which apply to a listed company. The highest price for shares, SEK (recalculated for the new issue), was noted July, 5, 2004 while the lowest price, SEK 9.05 was noted February, 7, On June 30, 2005, the final price was SEK 18 (SEK 18). INFORMATION POLICY CTT management has established an information policy that takes into account the rules set out by the Stockholm Stock Exchange in the listing agreement. Apart from the Chairman and President, the Financial Director is also authorised to make statements on the company s reports and officially communicated business.the company distributes all its reports, including the Consolidated Sales Review and press bulletins via Waymaker.The company s website, is updated simultaneously with the same information, and also contains the annual report for download. DIVIDEND POLICY To date, CTT has not distributed any dividend.the standpoint of the Board is that the dividend should, in the long-term, be well balanced between the company s need for capital (with regard to its financial goals) and the desire for a good direct return on investment. At the present time, it is not deemed meaningful to quantify the size of dividends in relation to future profits. In view of the future expansion plans the Board forecasts for CTT, it is judged that the dividend policy will continue to be restrictive in the coming years.there is currently no non-restricted equity. According to the Articles of Association, no dividend may be distributed before the conditional shareholders contribution of SEK 4.9 million has been repaid to Volito AB. OPTIONS PROGRAMME As part of the company s incentive policy to retain staff, there is an options programme for the employees. A subscription options programme that comprises 100,000 options has been created with a subscription rate of SEK To date, company employees have acquired 82,500 options. Each option entitles the subscription of 1.08 shares.the remainder is reserved for new employees. Share applications are accepted from November 2004 to October If all options in the programme are subscribed, it implies a dilution of 1.2%. SHAREHOLDERS AGREEMENT To the Board s knowledge, no shareholders agreement exists between shareholders in CTT. 25

26 Administrative report 26 OPERATIONS IN GENERAL CTT Systems AB is a Swedish technology company operating in the aviation industry. The business idea is to solve the two moisture problems currently encountered in commercial aircraft, namely preventing the creation of condensation between the cabin and the aircraft s outer skin, reducing the health risks, and improving levels of comfort and well-being for passengers and crew by raising the cabin humidity level. CTT s products, Zonal Drying and Cair systems create conditions facilitating improved profitability and flight safety as well as considerably enhanced comfort for passengers and cabin personnel. CTT supplies these systems to aircraft manufacturers for installation during production of new aircraft and to airlines for existing aircraft fleets. The company has its business premises in Nyköping and has been listed on Stockholm Stock Exchange s O-List since YEAR S OPERATIONS Operations this year have been characterised by a continuation of our focus on the European charter and low-cost carriers with the aim of increasing the order stock for CTT Zonal Drying System.A special marketing campaign has also been addressing B737NG operators to take advantage of the inclusion of the Zonal Drying System on Boeing s options listing for the aircraft type since mid Marketing of the Cair system towards long-haul and aircraft manufacturers has also been stepped up. CTT also participated in the aircraft interior trade fair in Hamburg. On the product development front, work has been focused on the humidifier system for the A380 and development of Cair for the A VIP and Air Mauritius aircraft. The Zonal Drying System has been supplied to Air Berlin, Transavia, Austrian Airways, Thomas Cook and Adria Airways. Cair has been supplied to Jet Aviation and a Qatar VIP aircraft. KEY EVENTS DURING THE FINANCIAL PERIOD In July, 2004,Thomas Cook, UK, ordered the Zonal Drying System for installation in three of its Boeing series aircraft. Deliveries were made between December 2004 and March On completion of the on-going test and evaluation period, Thomas Cook will decide whether to install the system in further Boeing 757s in its fleet. In the same month, Air Berlin ordered the Zonal Drying System for two Boeing series aircraft. The systems were installed by Boeing directly on the production line at the company s manufacturing facility during the winter 2004/2005. Air Berlin is one of CTT s largest customers with the Zonal Drying System now installed on a total of 29 of its Boeing 737s. In August, 2004, CTT was awarded the first order for the humidification system developed for the Airbus superjumbo A380. These humidifiers will raise the relative humidity level in crew rest areas to 25% relative humidity. A level more healthy and congenial than current levels typically around 5-10%. In August, 2004, a major leasing company ordered the Zonal Drying System for a Bombardier CRJ200 aircraft to be operated by Adria Airways in Slovenia. The system was delivered in November, In December, 2004, two follow-up orders were received for the Zonal Drying System: one for a Boeing series aircraft operated by Icelandair, and another for a Boeing series aircraft operated by Transavia. Boeing installed the latter system in the final assembly phase during spring, In January, 2005, Jet Aviation ordered Cair systems for two Boeing 737 BBJ VIP aircraft (in total five systems have been supplied to Jet Aviation), which were delivered in April and May, In March, 2005, CTT completed the rights issue in CTT Systems AB (publ) that was oversubscribed and provided the company with SEK 17 million, excluding costs for the issue. As a result, the issue guarantee furnished by the company s two largest shareholders was not utilized. In April, 2005, CTT and Air Mauritius signed a Letter of Intent (LOI) for the installation of the Cair system in five Airbus A aircraft. Air Mauritius thereby qualifies itself as the first airline to offer humidification in both first and business class.the first systems will be installed during the course of 2006 and leased by Air Mauritius. In April, 2005, Adria Airways ordered a Zonal Drying system for a Bombardier CRJ aircraft. Delivered in May, this is the sixth Zonal Drying System supplied to Adria Airways. In May, 2005, Icelandair ordered the Zonal Drying System for two Boeing series aircraft.to date, Icelandair has ordered a total of seven Zonal Drying systems for its fleet of Boeing 757s. Delivery of this system will be made during the autumn, In the same month CTT received the first substantial A380 series order resulting from the co-operation agreement with AOA Gauting and Airbus to design and develop the optional humidification system for crew rest compartments. The order is for 26 humidifiers that will be delivered during the course of KEY EVENTS AFTER THE FINANCIAL PERIOD In July, 2005, Luxair ordered the Zonal Drying system for three Boeing series aircraft.the systems will be installed during the financial period 2005/06. In August, 2005, Boeing selected CTT as a supplier for the new Boeing 787 Dreamliner progamme.the agreement covers the development and production of the Zonal Drying System that will be base line equipment on the aircraft, as well as humidifiers which will be offered as an option for flight deck and crew rest compartments. Boeing anticipates delivery of around 2,000 of the aircraft type between 2008 and At present, Boeing has booked orders from 21 different customers

27 for a total of 256 aircraft. The introduction of the Boeing 787 is considered to be the most successful launch in the company s history, and it is hoped the market s positive acceptance will lead to a change of prevailing suppositions about production, etc. CTT will deliver the first system during It is estimated that the total income earning potential, based on the aircraft s total lifetime (around 20 years production and an operational service life averaging 20 years for each aircraft) amounts to a minimum of SEK 1.9 billion, inclusive of after sales. Earnings valued at USD 2-3 million in the financial year 2007/2008 are expected to grow in line with the increase in production levels.the volume of earnings will be dependent on how many operators opt for humidification technology. Annual production output is planned to be aircraft by 2008, increasing to units in 2009, units in 2010, reaching aircraft by Boeing expects to realize full production output of around 10 aircraft per month by the year However, CTT foresees revenues increasing in line with after market demand that, dependent on the total number of aircraft in service, will also continue to grow. FINANCES There has been something of an average year as far as deliveries of the Zonal Drying system are concerned, the result of which was that VIP and after market s relative shares of the total turnover increased. Consequently, the company s net sales decreased to SEK 12.8 million compared to last year s earnings of SEK 21.1 million.the weak Dollar has continued to have a negative effect on earnings but have been partially offset by hedging. In total, the gross margins have improved compared with last financial year. External expenses and costs for personnel have decreased. Taken as a whole, this has meant that the result of SEK million is roughly comparable with the previous year s SEK million. Funds of SEK million have fallen to SEK million, prior to financing activities, during the financial year.the new stock issue provided the company with SEK 15.8 million, after costs for the issue. The value of new orders received during the year totalled SEK 22 million, and an improvement on last year s SEK 13 million. As of August 30, 2005, when the Consolidated Sales Review was delivered, the value of the order stock totalled SEK 22 million (SEK 11 million). INVESTMENTS During the financial period, investments of SEK 4.5 million (SEK 3.0 million) were made in tangible assets, mainly for the development of humidifiers for Airbus A380 aircraft. During the financial period, investments in tangible fixed assets totalling SEK 0.4 million (SEK 1.1 million) were made.total investments thus amount to SEK 4.9 million (SEK 4.1 million). Development work undertaken to adapt the equipment for the Airbus A380 is very comprehensive.whilst this was expected to be completed during the course of 2005, increased demands mean that the work will probably continue into Depreciation on investments related to the Airbus A380 programme has not been initiated and therefore does not burden the result for the financial period. THE WORK OF THE BOARD The CTT Board of Directors consists of five members chosen at the Annual General Meeting.The members comprise persons representing the major shareholders in CTT as well as independent persons.the members have long and varied experience from areas of business that are highly relevant to the company and its operations. The board elects its officers immediately after the Annual General Meeting. At this meeting, the agenda is set, as well as directives for the President in order to secure the development of the company and fulfil the Board s requirements for information and supervision of daily operations. During 2004/2005 there were ten Board meetings. The four regular meetings comply with an agenda that requires inclusion of the following points: the preceding protocol, marketing and current situation reports, finances, organisation, and other matters. Matters discussed by the Board during the year included strategies, business plans, entered agreements, budgets, interim reports, and the company s equity requirements. Remuneration totalling SEK 95,000 has been paid to Board members, SEK 30,000 thereof to the Chairman. NOMINATION AND WORK OF THE COMMITTEE CTT holds its Annual General Meeting on November, 17. Nomination and replacement matters are discussed beforehand by representatives for the major shareholders in consultation with the Chairman, Karl-Axel Granlund. In view of the company s size and number of shareholders, the appointment of a nomination and replacement committee has not been deemed necessary. Instead, opinions and nominations are willingly accepted and can be forwarded to the Chairman at the following address: Volito AB, S. Förstadsgatan 4, SE Malmö, Sweden. Given the company s limited complexity, an audit committee has not been appointed.the external auditors have been, by virtue of their presence at Board meetings and testifying of written reports, conveying their viewpoints. INTERNATIONAL FINANCIAL REPORTING STANDARDS At present, the company has no plans to account in accordance with the IFRS (International Financial Reporting Standards) accounting principles. The reason for not adopting IFRS is that these rules are suitable for Group Accounting, a status for which CTT does not qualify. It is the company s opinion that a transition to IFRS would not have had any impact on its own capital or authorized accounts. Until further notice, annual reports will be drawn up in compliance with RR32 Accounting of Legal Entities. 27

28 28 FUTURE DEVELOPMENT The agreement with Boeing is by far the most important single event in CTT s history and significant for three reasons: 1) to have the Zonal Drying System selected as a standard installation in all aircraft of a totally new model represents an acknowledgement of the system as a solution to condensation problems, 2) the appointment of CTT as a supplier to Boeing (as opposed to subsupplier or intermediary) gives the company increased credibility and 3) that the company s cash flow is expected to be positive and on the increase from the financial period 2007/2008. The last time Boeing launched a new aircraft type was in 1994 (Boeing 777). Boeing is now considering the possibility of replacing the Boeing 737 with a newly developed aircraft around Even Boeing s faithful old servant, the Boeing 747 (jumbo jet), has chalked up new orders of late thereby improving the chances of the Boeing 747 Advanced being put into production. In addition to the A380, Airbus already has advanced plans to launch a new aircraft type that will compete directly with the Boeing 787, namely the Airbus A350.The unofficially launched project has recorded around 125 orders to date. It is expected that the project will be launched officially in the autumn. Humidifiers for the Airbus A380 are now reaching the final stages of the qualifying trials. Deliveries of the first humidifiers commenced during the month of September and CTT expects to have delivered all the 26 units ordered so far before the year s end. However, we believe the A380 project will be delayed somewhat resulting in a delivery pace for 2006 and 2007 that is slower than was previously forecast by branch analysts. The company expects earnings generated by these new aircraft types will be realized in 2007 and thereafter. Until then, the company must successfully work the market with its existing range of products. Apart from the Boeing 737, for which the Zonal Drying System exists as an option for new production aircraft, it is a case of equipping aircraft which are already in service.the share of newly manufactured Boeing 737s equipped with the Zonal Drying System has so far fulfilled the company s expectations. It is hoped that sales and marketing work addressing airlines existing aircraft fleets will be facilitated as a result of the Boeing 787 agreement.this agreement will strengthen the market s perception of the Zonal Drying System as a technically sound product and in the longer-term show how it is economically practical to install the system. The discussion with the airlines is mainly about how short the payback periods are for the system in relation to the remaining operating hours. The decision by the first airline customer, Air Mauritius, to install the system in its new Airbus A aircraft has seen the marketing strategy for the Cair system enter a new phase. All five systems are expected to be installed during In addition to these, Air Mauritius has also ordered three additional A aircraft from Airbus for delivery in 2006 and The fact that both Airbus and Boeing have selected our humidification technology for their latest longdistance aircraft types (A380/B787) further strengthens our position on the humidification market. Everything considered, it is our opinion that we are very well placed to respond when airlines and/or aircraft manufacturers begin to introduce humidification for aircraft passengers. Adaptation of the system for new aircraft types involves increased development costs that become comprehensive when there is a requirement to fully integrate the system within the production line process. During the coming years, the company will be burdened by development costs for the Boeing 787, the financing of which has been secured through the wording of the agreement. As a direct result of the Boeing agreement, CTT will need to recruit personnel.we expect 5-10 people will be recruited by the end of RESEARCH AND DEVELOPMENT Product development has concentrated on producing the A380 humidifier and the development of Cair for the Air Mauritius A and the A VIP aircraft. Development work on the counter-flow dehumidifier has been pursued within the framework of the European research project FACE (Friendly Aircraft Cabin Environment). PROPOSED DISPOSITION OF ACCUMULATED DEFICIT From company s accumulated deficit 0 Deficit for the year Accumulated deficit for disposition Proposed disposition Wet insulation Mould.The one thing that benefits from wet isolation Provided by Reduction of share premium discount Total Zonal Drying System

29 Five-year summary (SEK Thousands) 2004/ / / / /2001 Income statement Income Expenses Depreciation Profit/loss after depreciation Financial income Financial expenses Profit/loss for the financial year Balance sheet Assets Intangible fixed assets Tangible fixed assets Financial fixed assets Other current assets Cash and bank balances Total assets Shareholders equity and liabilities Shareholders equity Allocations Long-term liabilities Short-term liabilities Total shareholders equity and liabilities Key ratios Share of risk capital % Return on equity % Return on total assets % Return on employed capital % Liquidity ratio % Interest coverage ratio Operating margin % Debt ratio 0,0 0,1 0,2 0,2 0,2 Equity capital ratio % Profit margin % Personnel No. of personnel, average Income per employee, SEK thousands Salaries, SEK thousands Share data Earnings per share, SEK 1,92 2,18 3,20 1,22 2,76 Earnings per share, after conversion 1,92 2,18 3,20 1,22 2,76 Equity per share, SEK 3,80 4,61 3,64 6,85 8,07 Equity per share, after conversion,sek 3,80 4,61 3,64 6,85 8,07 Cash flow per share, SEK 0,69 0,72 3,33 0,43 5,25 Number of shares Number of shares after conversion Average number of shares during the period Share rate on balance sheet date, SEK Dividends per share, SEK 1) ) 2004/2005 refers to proposed dividends 29

30 Income statement (SEK Thousands) Note Net sales Capitalized expenditure on product development Other operating income Operating expenses Raw materials and necessities Other external expenses Personnel costs Depreciation of tangible and intangible assets Other operating expenses Total operating expenses Operating profit/loss Results from financial investments Interest income and similar Interest expenses and similar Net profit/loss for the year Earnings per share, SEK 6 1,92 2,18 3,20 Earnings per share after conversion, SEK 6 1,92 2,18 3,20 Definitions SHARE OF RISK CAPITAL Equity plus deferred tax liabilities divided by total assets. RETURN ON SHAREHOLDERS EQUITY Profit/loss after net financial items as a percentage of average shareholders equity. RETURN ON TOTAL ASSETS Profit/loss after net financial items plus financial expenses as a percentage of average total assets. RETURN ON EMPLOYED CAPITAL Profit/loss after net financial items excl. financial expenses as a percentage of average employed capital. SHAREHOLDERS EQUITY PER SHARE Shareholders equity in relation to the number of shares on balance sheet date. INCOME PER EMPLOYEE Operating income divided by the average number of employees. CASH FLOW PER SHARE Funds in relation to the number of shares on balance sheet date. LIQUIDITY Current assets excluding stock but including any approved overdraft facilities divided by short-term liabilities. EARNINGS PER SHARE Profit/loss after net financial items divided by average number of shares. INTEREST COVERAGE RATIO Income after net financial items plus financial expenses divided by financial expenses OPERATING MARGIN Profit/loss after depreciation as a percentage of net sales for the year. DEBT RATIO Interest bearing liabilities divided by shareholders equity. EQUITY CAPITAL RATIO Equity as a percentage of total assets. PROFIT MARGIN Profit after net financial items as a percentage of net sales for the year. 30

31 Balance sheet (SEK Thousands) ASSETS Note FIXED ASSETS Intangible fixed assets Capitalized expenditure on development Tangible fixed assets Plant and machinery Inventories, tools, fixtures and fittings Financial fixed assets Shares in group companies 10, Total fixed assets CURRENT ASSETS Inventories Raw materials and necessities Goods in production Finished goods and goods for resale Short-term receivables Accounts receivable Tax receivable Other receivables Prepaid expenses and accrued income Cash and bank balances Total current assets Total assets SHAREHOLDERS EQUITY AND LIABILITIES SHAREHOLDERS EQUITY 17 Restricted equity Share capital Share premium account Non-restricted equity Loss brought forward Profit/loss for the year Total equity PROVISIONS Provisions for warranty commitments Total provisions LONG-TERM LIABILITIES Liabilities to financial institutions, interest bearing Other liabilities, non-interest bearing Total long-term liabilities SHORT-TERM LIABILITIES Loans from credit institutions Advance payments from customers Accounts payable, trade Other short-term liabilities Accrued expenses and prepaid income Total short-term liabilities Total equity and liabilities MEMORANDUM ITEMS Security pledged Floating charges

32 Shareholders equity Share Share premium Non-rextricted Changes in shareholders equity capital account equity Total Shareholders equity June 30, Profit/loss for the year Shareholders equity June 30, New issue Issue expenses Reduction in share premium account Profit/loss for the year Shareholders equity June 30, New issue Issue expenses Reduction in share premium account Repaid VAT for issue expenses Profit/loss for the year Shareholders equity June 30, Cash flow statement (SEK Thousands) Note OPERATING ACTIVITIES Payments from customers, etc Payments to suppliers and employees Funds from operating activities before interest and income taxes Interest received Interest paid Funds from operating activities CAPITAL EXPENDITURE Acquisition of intangible assets Acquisition of financial assets Acquisition of tangible assets Funds from capital expenditures FINANCING ACTIVITIES New issue Amortization Funds from financing activities Funds this year Ready funds at beginning of year Exchange rate difference in ready funds Ready funds at year-end

33 Accounting principles and notes CTT SYSTEMS AB (PUBL.) REGISTRATION NUMBER GENERAL The annual accounts have been drawn up in accordance with the applicable act or legal statutes, and in accordance with generally accepted auditing standards for listed companies. During the year, the company has started to apply the recommendations RR 29 Remuneration to employees. The application of these recommendations has not had any significant effect on the company s results or position.the accounting principles are otherwise unchanged in comparison with the previous year. REVENUE RECOGNITION The company follows the Swedish Financial Accounting Standards Council recommendation number 11, Revenue, when entering revenue. Products are not installed by the company but by the customer, whereby the risk is transferred to the customer at delivery. Revenue is therefore reported upon delivery. RECEIVABLES, LIABILITIES AND READY FUNDS IN FOREIGN CURRENCY Monetary assets and liabilities in foreign currencies have been converted at the exchange rates applying on the balance sheet date. Non-monetary assets and liabilities have been converted at the exchange rates applicable on date of purchase. In hedging via forward foreign exchange contracts, the relevant receivable or liability has been valued according to the forward rate.the company purchases primarily in SEK and European currencies although products are sold in USD. In major delivery contracts, CTT implements hedging in USD. STOCK Stock has been valued at the lower purchase value in accordance with the first in first out principle and actual value. Actual value is equal to sales value, less sales overheads. SEGMENT REPORTING CTT Systems AB (publ) has a single identifiable business area, which encompasses the activities of the company as a whole.the business area covers sales of products and services for humidity control in aircraft. Company sales have hitherto been to a limited number of countries on the global market of the aviation industry. All invoicing, with the exception of a minor amount in SEK, is in USD. No major differences as regards risks or possibilites exist in the various countries. No accounting per segment has thus been deemed necessary. GROUP FINANCIAL STATEMENTS CTT Systems AB (Publ.) is the parent company for wholly owned subsidiaries CTT Systems Incentive AB ( ) headquartered in Nyköping, Sweden, and CTT Systems Inc. headquartered in Delaware, USA. Neither subsidiary has been active. No purchases or sales have taken place between group companies. As the holdings are not significant in order to give a correct picture of the company s results and position, no consolidated financial accounts have been established. RECEIVABLES Receivables are reported at the amount expected to be collected after individual assessment. FIXED ASSETS Tangible and intangible assets are depreciated systematically on the basis of an assessed economic life of five years. However, data processing equipment acquired wef the accounting period 2004/2005 is depreciated over three years. Expenses for improving property owned by someone else are depreciated for the remainder of the lease after said investment. WRITEDOWNS Assets are written down when the reported value exceeds the recoverable value. Recoverable value refers to the greater of an asset s net sales value and the usage value. R&D EXPENDITURE Direct expenses for the company s research and development are capitalized until it is likely that the financial advantages associated with possession will accrue to the company. Expenses for day-to-day maintenance, adaptation and modification of existing products are entered directly. Linear depreciation is applied over a period of five years. LEASING Leasing agreements are reported as legal entities according to regulations for operational leasing agreements. The purchaser and seller bear the full risk of the leasing item. It means that leasing fees and rental are entered directly and that leasing income is accrued and reported linearly for the duration of the agreement. WARRANTY COMMITMENTS Provision for warranty commitments is made at a standard rate based on the company s system sales. LOAN EXPENSES Loan expenses are charged in the period to which they relate. 33

34 NOTE 1 NET SALES Leasing income Net sales include leasing income related to Zonal Drying System rentals to the amount of SEK 702,000 (SEK 649,000). Leasing is invoiced in USD. Estimated future leasing income has been converted at the exchange rates applying on balance sheet date. Remaining leasing income amounts to SEK 1,170,000 (SEK 1,680,000) due as shown below: Leasing income 2004/ / /2003 Within 1 year Within 1-5 years Later than 5 years NOTE 2 OTHER EXTERNAL EXPENSES Auditors expenses The item Other external expenses includes fees and remunerations to auditors as follows. Fees in respect of auditors work amount to SEK 141,000 (previous year SEK 199,000). Fees in respect of other work amount to SEK 64,000 (previous year SEK 81,000). Auditors work is defined as examination of the annual report and accounts, the administration of the Board and President, other work performed by the company s auditor and advice or other assistance rendered necessary by observations in the course of such examination or execution of other work of this nature. All further expenses relate to other work. Leasing charges The item Other external expenses includes rent expenses of SEK 1,250,000 (previous year SEK 1,391,000) for premises.the remaining leasing charges, including rent expenses for premises, amount to SEK 1,810,000 (previous year SEK 2,724,000).These fall due as shown below: Leasing charges 2004/ / /2003 Within 1 year Within 1-5 years Later than 5 years NOTE 3 PERSONNEL Average number of employees Women Men Company total Board Women Men Management and President Women Men Salaries and remunerations Board and President Other senior executives Other employees Social security expenses 2004/ / /2003 Pension charges for Board and President Pension charges for other senior executives Pension charges for other employees Other charges Remuneration and benefits for Chairman of the Board and President Remunerations paid to the President and Board are in accordance with the AGM.There is no special remuneration for committee work.tomas Torlöf has waived remuneration for his work on the Board. Remuneration to the President consists of basic salary, adjustable compensation, company car benefits, pension benefits and financial instruments. 34

35 CONT D. NOTE 3 PERSONNEL PRESIDENT Basic salary Adjustable compensation Car benefits Pension benefits Financial instruments Chairman of the Board Board retainer Other senior executives Basic salary Adjustable compensation Company car benefits Pension benefits Financial instruments Agreement on future pension The pension is earned successively and is paid in full if employment continues until the agreed date of retirement. Adjustable compensation There are no further agreeements regarding pension age, or future pension, for the President or other senior executives. The company subscribes to a pension plan for the individual where the company s commitment is limited to paying the agreed premium during the period of employment. Termination of employment and severance pay The President and certain executives are covered by agreements on severance pay if the person is obliged to leave his position at the company s request. In no case does severance pay, including salary during the period of notice, exceed one year s salary Sick leave 2004/ /2004 Sick leave in total 3,4% 2,1% -sick leave for men 4,1% 1,6% -employees years 4,8% 1,9% Information on long-term sick leave is not included as this may be traced to the individual, nor is information regarding groups of 10 or fewer. NOTE 4 OPERATING INCOME 2004/ / /2003 Exchange differences affected operating income as below: Exchange differences on receivables and liabilities of an operational nature NOTE 5 PROFIT/LOSS FOR THE YEAR 2004/ / /2003 Exchange differences affected profit/loss for the year as below: Exchange differences on receivables and liabilities of an operational nature Exchange differences on receivables and liabilities of a financial nature NOTE 6 EARNINGS PER SHARE Earnings per share are calculated as result for the year divided by the average number of shares outstanding during the period.the average number of shares was 6,914,375 (5,882,392). The subscription rate in the options programme significantly exceeds the stock exchange rate.the number of shares has thus not been affected in the calculation of earnings per share after dilution. 35

36 NOTE 7 CAPITALIZED EXPENSES FOR RESEARCH AND DEVELOPMENT Opening acquisition value Purchases Closing accumulated acquisition value Opening depreciation Depreciation for the year Closing accumulated depreciation Opening writedowns Writedowns for the year Closing accumulated writedowns Closing planned residual value The capitalized amount refers to Cair and development of humidification for A380. The remaining period of depreciation is one year for Cair. As the A380 project is in progress, depreciation has not commenced. The following has been charged for R&D SEK 2.0 million (SEK 1.2 million ). NOTE 8 PLANT AND MACHINERY Opening acquisition value Closing accumulated acquisition value Opening depreciation Depreciation for the year Closing accumulated depreciation Closing planned residual value NOTE 9 INVENTORIES, TOOLS, FIXTURES AND FITTINGS Opening acquisition value Purchases Expenses for improving other s property Disposals Closing accumulated acquisition value Opening depreciation Disposals Depreciation for the year, equipment, tools Depreciation for the year, improvement expenses on other s property Closing accumulated depreciation Closing planned residual value of which rented equipment: Opening acquisition value Depreciation for the year Closing accumulated depreciation Opening depreciation Depreciation for the year Closing accumulated depreciation Closing planned residual value NOTE 10 SHARES IN GROUP COMPANIES Opening acquisition value Purchases Closing accumulated acquistion value Closing book value The amount of SEK 1,000 refers to the North American sales company that is currently resting, and SEK 100,000 refers to CTT Systems Incentive AB which administers the incentive programme for current and future employees. 36

37 NOTE 11 SHARES IN GROUP COMPANIES Company HQ No. of shares Capital share Book value CTT Systems Inc. Delaware % 1 CTT Systems Incentive AB Nyköping % NOTE 12 TAX RECEIVABLE The company has non-utilized fiscal deficiencies amounting to SEK 108 million. No deferred tax receivable has been calculated on these deficiencies.there is no difference between nominal and actual tax.there is also no due date on non-utilized fiscal deficiencies. NOTE 13 PREPAID EXPENSES AND ACCRUED REVENUE Accrued income interest Prepaid rents Prepaid insurance charges Prepaid leasing Accrued leasing revenue Prepaid maintenance and licence fees Receivables, EU project Receivables, pending customer orders Prepaid STC expenses Prepaid trade fair expenses Other interim receivables NOTE 14 PROVISIONS FOR WARRANTY COMMITMENTS 2004/ Opening provisions Amount exploited Provisions for year Closing provisions NOTE 15 ACCRUED EXPENSES AND PREPAID REVENUE Vacation pay liability Accrued social security charges Accrued salary tax Accrued commission and royalty Accrued sales discount Prepaid EU subsidy Accrued consultancy fees Other interim liabilities The Swedish Industrial Development Fund is entitled to a royalty corresponding to 1.75% of the net invoice value of sold units of the products and all other remuneration attributable to the products. A royalty of 25% is also payable on all other revenues earned by CTT as a result of agreements with third parties regarding options on obtaining rights, or on disposition of rights to licensed manufacture, or sale of the products or other remuneration attributable to the products. CTT has an obligation to pay royalties to the Development Fund until the end of NOTE 16 FLOATING CHARGES Floating charges refer to security for the company s approved bank overdraft facility of SEK 3 million.this facility was not utilized at close of books. NOTE 17 SHAREHOLDERS CONTRIBUTION Volito AB has provided a conditional shareholders contribution of SEK 4,900,000. In accordance with the articles of Association, no dividend may be distributed before the amount has been repaid to Volito AB. 37

38 NOTE 18 PAYMENTS FROM CUSTOMERS, ETC Net sales according to the income statement Other operating revenue according to income statement Changes in accounts receivable Changes in advance payments from customers Changes in prepaid operating revenue Changes in accrued operating revenue NOTE 19 PAYMENTS TO SUPPLIERS AND EMPLOYEES Raw materials and necessities according to the income statement Capitalized expenses for product development Other external expenses according to the income statement Personnel expenses according to the income statement Exchange differences of an operational nature Changes in inventory Changes of prepaid expenses Changes in other receivables entries Changes in trade debts Changes in other liability entries NOTE 20 READY FUNDS The ready funds entry in the funds statement equals Cash and bank balances on the balance sheet. NOTE 21 FINANCIAL ASSETS AND LIABILITIES As of June 30, 2005, the company had the following financial assets and liabilities for turnover: Actual Accounting value value Assets Ready funds in SEK Ready funds in USD Ready funds in EUR 1 1 Share in Nordea Institutional Money Market Fund Share in Nordea Likviditetsinvest Fund Total assets As of June 30, 2005, the company had the following holdings due: Actual Accounting Maximum value value credit risk Assets Forward foreign exchange contracts Liabilities Bank overdraft facility Loans at financial institutions Total liabilities Forward foreign exchange contracts refer to rate changes of accounts receivable in USD, due for payment as shown below: September October Total

39 CONT D. NOTE 21 FINANCIAL ASSETS AND LIABILITIES As of June 30, 2005, the company had assets and liabilities generated by operations: Actual Accounted Maximum value value credit risk Assets Accounts receivable Other short and long-term receivables Total assets Liabilities Accounts payable, trade Other short and long-term liabilities Total liabilities NOTE 22 POLICY FOR FINANCIAL RISK MANAGEMENT The general aim of the company s financial organ is to provide cost-effective financing of the company s operations and to provide secure administration of assests with market returns on invested funds.the general aim in financial risk management is to minimize the risks for negative influence on the company s results.thus the company s financial investments shall have a low risk profile. If the risk exposure is greater, such as in exchange rate differences, hedging shall be applied. The company s risk exposure and management is described below: Currency risks The company mainly operates in Sweden but through its international operations it is exposed to currency fluctuations. Purchases are mainly made in domestic and European currencies (SEK, GBP and EUR) while products are sold in US dollars.the company s policy is to safeguard 70 % of the accounts receivable for the coming 12 month period, when the currency exposure is not balanced by equivalent liabilities in the foreign currency. Interest risks The company s interest risks refer to holdings of interest-bearing securities and the company s financing at financial institutions. Holdings of interest-bearing securities shall always be in bonds with high liquidity which can quickly be sold in the event of possible changes in the general interest situation. Market risks The company s market risks consist of holdings of market securities decreasing in value due to general changes in value. Holdings of market securities shall always be in bonds with high liquidity which can quickly be sold in the event of possible changes in the general interest situation. Credit risks The company s credit risks are primarily linked to customer receivables. Due to the close contact between the company and the customer prior to delivery, a good credit evaluation can be performed before delivery and can be continued as part of customer relations. Cash flow risks The company currently has a negative cash flow and is dependent on capital contributions from company shareholders. As the company s products are utilized in aircraft over a long period of time, it is important that the company has sufficient reserves to maintain the confidence of customers and partners.the company may have to execute new stock issues in the future. 39

40 NYKÖPING SEPTEMBER 27, 2005 Karl-Axel Granlund Anders Helmner Lars Solin Chairman Tomas Torlöf Dag Waldenström Torbjörn Johansson President Our report has been issued on October 3, Håkan Andréasson Authorised Public Accountant Lindebergs Grant Thornton AB Göran Jonsson Approved Public Accountant Lindebergs Grant Thornton AB Auditors report We have audited the annual accounts, the accounting records and the administration of the Board of Directors of CTT Systems AB (publ.) for the financial year July 1, 2004 to June 30, 2005.These accounting records and the administration of the company are the responsibility of the Board of Directors and the President. Our responsibility is to express an opinion on the annual income and the administration based on our audit. We conducted our audit in accordance with generally accepted auditing standards in Sweden.These standards require that we plan and perform the audit to obtain reasonable assurance that the annual accounts are free of material errors. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the annual accounts. An audit also includes assessing the accounting principles used and their application by the Board of Directors and the President, as well as evaluating the overall presentation of information in the annual accounts. We have examined significant decisions, actions taken and circumstances of the company in order to be able to determine the possible liability to the company of a Board member or the President, or whether they have in any way acted in contravention of the Companies Act, the Annual Accounts Act or the Articles of Association.We believe that our audit provides a reasonable basis for our opinion set out below. The annual report has been prepared in accordance with the Swedish Annual Accounts Act, and therefore provides a true and fair view of the company's results and financial position in accordance with generally accepted accounting principles in Sweden.The administrative report is consistent with the rest of the annual report. We therefore recommend: that the profit and loss account and the balance sheet be adopted and that the members of the Board of Directors and the President be discharged from liability for the financial year. Nyköping October 3, 2005 Håkan Andréasson Authorised Public Accountant Göran Jonsson Approved Public Accountant 40

41 Board of directors and auditors Members of the Board Dag Waldenström born 1957, Master of Science Aeronautical Engineering KTH, member of Board since Sales Director, Saab Aircraft Leasing AB. Member of Board of the trade organization, Svenskt Flyg. Owns 4,622 shares in CTT. Karl-Axel Granlund born 1955, Master of Science in Industrial Engineering and Management, Linköping, Chairman since Chairman and principal owner Volito AB. Chairman of Avansys AB. Board member of PEAB AB. Volito AB own 1,333,333 shares in CTT. Lars Solin born 1959, Master of Science in Thermodynamics, KTH, member of Board since Partner at Experia. Owns 1,666 shares in CTT. Deputy Anders Wehtje born 1964, Master of Business Administration, deputy member of Board since Vice President and Financial Director, Volito Group. Owns 6,666 shares in CTT. Tomas Torlöf born 1967, Master of Science in Mechanical engineering, KTH, member of Board since Tomas Torlöf is member of Board at AppliedSensor, Columbitech and i3micro Technologies. Share holdings in CTT, direct and indirectly via companies, amount to 875,165. Anders Helmner född 1953, Master of Science, Lund, member of Board since Senior Vice President Telair, Narrow Body and Single Aisle Division. Owns 3,053 shares in CTT. Auditors Håkan Andréasson Authorised public accountant, Lindebergs Grant Thornton AB. CTT accountant since Göran Jonsson Approved public accountant, Lindebergs Grant Thornton AB. CTT accountant since

42 Senior executives Peter Landquist Technical Director, born Graduate industrial technology high school, Production and design AB Nyge Aero Head of Design CTT Systems AB Technical Director CTT Systems AB from Number of shares: 4,000. Subscription options: 02/05 10,000. Torbjörn Johansson President, born Master of Science in mechanical engineering, Linköping Institute of Technology. Engineer s education at SAAB aircraft division Development engineer on JAS39 Gripen, SAAB Development engineer/manager, EPI GmbH (now Telair), Germany Engineering Director, Elektrometall GmbH, Germany Technical Director, CTT Systems AB President of CTT Systems AB since No. of shares in CTT: 16,666. Subscription options: 02/05 25,000. Ulf R. Liljenberg Director Sales and Marketing, born Master of Science in mechanical engineering Lund Institute of Technology. Market economics, IHM. Engineering Manager, Transwede Airways Technical Manager, Transwede Airways Marketing Manager, Europe, Credit Lyonnais/PK Airfinance (CLPK), Luxembourg Joint owner, Director of Finance and Business Development, Eurowind AB Director Sales and Marketing, CTT since Number of shares in CTT: 10,666. Subscription options: 02/05 10,000. Håkan Gunnarsson Financial Director, born Graduate in administrative social studies, Örebro College. Economics, language and law studies at Linköping University and in the USA and Germany. Property Accountant, Oskarshamn Municipality Economist, Östergötland County Council Financial Manager, Swedish Table Tennis AB in Sweden and the USA Administrative Manager, Fix Trikåfabriker AB Independent consultant Administrative Manager, ODAL Maskin AB Financial Director at CTT Systems AB since Number of shares: 3,333. Subscription options: 02/05 5,000. Maria Wester Quality Manager, born High school engineer. Studies in quality engineering, economics and marketing at Mälardalen College. Project management/sales, Trade Motion Technical/financial assistant, Burndy AB/FCI Quality and Personnel Manager, Framatome Connectors Sweden AB Quality Manager, CTT Systems AB since Number of shares in CTT: 1,353. Subscription options 02/05 5,000. COMPLEMENTARY INFO IN ACCORDANCE WITH NBK S RECOMMENDATIONS There are no further agreeements regarding pension age, or future pension, for the President or other senior executives. The company subscribes to a pension plan for the individual where the company s commitment is limited to paying the agreed premium during the period of employment. NOTICE AND SEVERANCE PAY The President and certain executives have an agreement that permits severance pay if the executive is obliged to leave his post at the company s request. Such severance pay, including salary during the period of notice, does not exceed one year s salary. 42

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