Annual report 2 OO32OO4

Transcription

1 Annual report 2 OO32OO4

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 2003/2004 is distributed to all registered shareholders. Information is published regularly on Annual General Meeting: November 11, 2004 Interim report, July Sept: November 11, 2004 Interim report, July Dec: February 2005 Interim report, July March: May 2005 ANNUAL GENERAL MEETING The Annual General Meeting will be held at 5 pm on Thursday, November 11, 2004 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 1, 2004, and notify the company of their intended participation no later than Monday, November 8, 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 1, The year in brief 2 Airbus appoints CTT, together with German AOA gauting, to develop the humidification system for its new super jumbo aircraft, the A380. Austrian Group orders the Zonal Drying System for 15 CRJ 100/200 aircraft. The new issue is over-subscribed and brings in SEK 25 million to the company, prior to issue expenses. CTT earns four VIP orders, including two from Qatar Airways for Airbus aircraft. At the Aircraft Interior trade fair in Hamburg, CTT launches the name Cair for the company s combined humidifier and dehumidification system (formerly the Zonal Comfort System). Boeing informs its customers that the Zonal Drying System is available as an option for the B and B Net sales SEK 21.1 million (SEK 18.7 million). Loss SEK 12.8 million (SEK 16.4 million) and funds SEK 17 million (SEK 15.5 million.) Orders decreased to SEK 13 million (SEK 21 million).

3 Contents CTT in brief The year in brief Message from the President The need for CTT s products Interview Humidity control Moisture management Market overview Marketing and sales strategy Customer and product overview Competitors Background, organization, environment and quality Risk and exposure analysis The CTT share Administrative report Five year summary Income statement Balance sheet Shareholders equity Funds statement Accounting principles and notes Auditors report Board of directors and auditors Senior executives MSEK Order bookings Net sales Loss Production: Byrån i Tranås Photo: Jonas Sällberg (cover, page 3, 6, 11-13, 23, 41 and 43) Interview: Andréas Sjölander (page 12-13) Printing: NRS Tryckeri This document is a translation of the Swedish original and does not constitute an official report.

4 Message from the President During the past financial year, a large proportion of the aviation industry has recovered.we estimate that passenger figures have now returned to the same level as before the terrorist attacks of September 11, Orders for new aircraft have also returned to normal levels. Aircraft manufacturers Boeing and Airbus have announced increases in the rate of production for their smaller aircraft to meet greater demand. However, there are still many airlines experiencing serious profitability problems, despite major cost-cutting over the last few years. From a global perspective, US airlines have found it hardest to recover from the crisis. In Europe, some major airlines, such as Alitalia, still have serious problems. European budget airlines have generally fared better and many of them have continued to invest in new aircraft. One segment still experiencing major difficulties is the charter airline industry.this industry is feeling the effect of competition from the budget airlines that have created a whole new kind of travel in basic competition with the charter industry. CTT s weak order intake should be viewed against this background. ZONAL DRYING SYSTEM OPTION ON B737NG Thanks to pressure from Transavia and Air Berlin, and CTT s own development work, the Zonal Drying System was added to Boeing s B737 options catalogue in May 2004.When I joined CTT in 1996, Boeing denied the existence of condensation problems in their aircraft. Eight years down the line, it is now possible to order the system when purchasing new B737 aircraft which must be seen as one of the most significant events in the history of CTT. Over the years, we have learnt how tough it is to sell the system to airlines without the support of the aircraft manufacturers. In certain cases, the manufacturers have even actively opposed us. That s why we cannot overestimate the implications for sales of the Zonal Drying System to B737 aircraft. We are convinced that it is easier for airlines to take the decision to introduce our system when purchasing new aircraft, than to decide to retrofit the system in existing aircraft. The future will reveal the extent to which we succeed in selling our system for new aircraft; Boeing currently delivers approximately 20 B737NG aircraft per month. Our strategy is to get the Zonal Drying System included as an option for the Airbus A320 too. This aircraft is a direct competitor to Boeing s B737NG. Over the last few years, Airbus has successfully sold it to budget airlines and charter airlines. Condensation problems are particularly noticeable with these kinds of operator which means Airbus has received, and will continue to receive, complaints about condensation. The R&D departments at Airbus are currently under great pressure, which means we have to expect a possible delay before Airbus decides to add the system as an option. Sales of the Zonal Drying System have been slow on the retrofit market. European charter companies, closely linked to tour operators, have had a tough time economically for several years, and most of the companies have effectively put investments on hold. During the 2004 season, tour operators experienced a slight upturn, and, towards the end of the financial year, we succeeded in initiating concrete negotiations with several charter airlines. In July, UK tour operator Thomas Cook decided to buy the Zonal Drying System for three B First Choice, another important contact made during the year, is evaluating the system for both its A320 and B757. As the market situation for tour operators improves, we anticipate a rise in the number of orders from this segment over the coming years. We have made progress with the budget airlines during the financial year and supplied the Zonal Drying System to both Air Berlin and Transavia. The system s performance is now widely recognized among the European airlines and we know that other airlines are considering introducing the Zonal Drying System in their fleets. As these airlines either have B737NG on order, or are considering buying more, it is a great benefit to have the system as an option for the B737NG.With the Zonal Drying System now as an option, we are marketing the system more actively towards North American budget airlines. Backed by Boeing, we believe we have a good chance to earn sales on this enormous market. As far as regional jet companies are concerned, our sales efforts are focused on European CRJ operators. It was gratifying to see that Austrian followed the example of Lufthansa Cityline and Adria Airways and purchased the system for its CRJ-200 fleet. 4

5 Eight years on, it is possible to order the system when purchasing new B737, which must be seen as one of the most significant events in the history of CTT. POSITIVE DEVELOPMENT FOR CAIR It is now three years since we delivered our first Cair. SAS evaluated the system in a B767 and Lufthansa Technik installed the system in Boeing Net Jets B737VIP.Within the large VIP aircraft segment, we got off to a flying start thanks to a large order from Lufthansa Technik, and we have now delivered the system to 13 aircraft. Our sales on this market are very effective due to completion companies recommending our system to end-users, and we believe that we can continue to grow on this market over the coming years.we are working on a further two ways to increase sales of Cair for VIP aircraft.we are trying to convince Gulfstream and Bombardier the manufacturers of somewhat smaller, yet still extremely exclusive,vip aircraft to offer the system to their customers.we are also attempting to get a foothold in the market for VIP charter aircraft.the airline Privatair operates BBJ for Lufthansa, for example, with room for 50 business travellers on routes between Germany and New York. Airbus has also been successful with a variant of A319 which is capable of flying long distances with a smaller number of passengers.what s more, if we succeed, we will have the added advantage that many travellers become aware of the benefits of increased air humidity on long-haul flights. If we got a flying start regarding Cair on VIP aircraft, it is only to be expected that matters may take a little longer when it comes to passenger airlines. During the financial year, we have visited numerous airlines.they realize that they will be forced to raise air humidity in the aircraft cabin in the future and are interested in the system. Many airlines are, however, conservative and do not want to be the first to introduce such an extensive system in their aircraft. Other airlines believe that the system should be certified and installed by manufacturers in conjunction with the development and production of new aircraft. Aircraft manufacturers are hesitant to start offering humidification of the passenger cabin, partly because they want to avoid yet another system in the aircraft, and partly because they are concerned that condensation will increase, despite our Zonal Drying System. They do, however, agree that when one or several airlines introduce Cair, the other long-haul airlines will be forced to follow.that makes us extremely motivated to continue marketing Cair and to work on possible pioneer airlines to introduce a better and healthier level of humidity in the cabin. Parallel to CTT s efforts to initiate sales of Cair to long-haul airlines, there is a continuing debate on air quality in the aircraft cabin. Boeing, in particular, has promised enhanced air humidity in the cabin in its marketing of the new B7E7 Dreamliner aircraft. In our opinion, this is not possible without introducing a humidification system. During the upcoming year, Boeing will have to define which options are to be offered for the B7E7.This means we will increase our marketing of Cair both towards Boeing and Boeing s B7E7 customers. Similar marketing of Cair for Airbus and Airbus A380 customers is already underway in order to persuade Airbus to introduce humidification in the passenger cabin on the A380. For the future of CTT, it is extremely important that Cair becomes part of both Boeing s and Airbus new aircraft projects. 5

6 THE OUTLOOK FOR Three years have passed since the terrorist attacks in New York threw the aviation industry into the doldrums.we have, however, continued to develop our Zonal Drying System and we have made notable advances with Cair. During the last year, we have also perceived the start of a breakthrough with aircraft manufacturers.with an improved economic climate for charter airlines, and the Zonal Drying System as an option for B737, we anticipate a steady order intake during this financial year.the advantage of Zonal Drying System orders is that they quickly generate increased turnover, and thus reduced losses. During the financial year, we will focus even more on this segment in our marketing and sales efforts. The anticipated orders for Cair will not have such an immediate effect on CTT s turnover and profits. Nevertheless, their long-term significance is all the greater because the systems are larger. Moreover, when the breakthrough does come, we believe the increase in sales will be faster. A major advantage with Cair is that aircraft manufacturers are more interested in offering this product to their customers.we are now in the process of developing humidifiers for the Airbus A380, and it is comforting to know that these humidifiers will be sold over a long period of time, thus generating considerable turnover, especially on the after sales market. Increasing sales to aircraft manufacturers will be crucial for the company s future development and profitability. With these lines, I trust I have presented a fair picture of CTT s current situation. I understand that many shareholders feel that nothing is happening at CTT. I would, however, maintain that a lot has happened during recent years, and like you, I hope that the coming years will show a positive development in orders, and, by extension, turnover and profits. In my opinion, many factors point towards this. Nyköping, September 2004 Torbjörn Johansson President 6

7 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 exhibited extremely expansive development. In the early days, aviators flew in open, singleseat, propeller aircraft used primarily for postal and military purposes. Once it became possible to construct larger aircraft, passengercarrying, open, propeller aircraft entered the scene. The introduction of pressurized cabins represented a leap in development, enabling flights at higher altitudes where weather conditions are better. 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 entailed more and more computer-controlled systems in aircraft, which are more sensitive to condensation, as is all electronic equipment. Today s passengers are more knowledgeable about health issues and are starting 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 and extremely high safety. Based on this, we see a 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. At the same time, the aircraft is exposed to extremely low temperatures. Modern jet aircraft have a cruising altitude of over 10,000 meters 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. 7

8 OPERATIONAL EFFECTS OF CON- DENSATION 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, negative both for 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 insulation heavier and also reducing its 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 re-enters 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 weight of aircraft - Damage to insulation materials - Disturbances in electrical systems - Rain in the plane - Corrosion - Impaired insulation effect 8

9 ZONAL DRYING AND ITS BENEFITS The areas listed above are the main areas 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 can not be directly converted into money, 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 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 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 meters 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 AFFECT PEOPLE? Passenger comfort is mainly affected on long-haul flights of 5 to 18 hours. The human body is not designed to be in dry environments (lower than 20% RH) and is adversely affected by this environment. 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. Without CAIR - Condensation in the crown area Relative air humidity % Low air humidity in first class ~5% Passenger areas in the cabin Low air humidity in economy class ~10% Average air humidity with CAIR Average air humidity without CAIR With CAIR - Dry air in the crown area Increased air humidity in first class ~25% Increased air humidity in economy class ~15% 9

10 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. Inflight 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 inflight entertainment. Airlines spend millions upon millions of dollars on installing better seats, video on demand, live TV, internet connections, etc, all to satisfy passenger needs. Cair will provide humidfied, fresh air in the aircraft cabin. This will improve the passenger s sensory experiences. You will feel better. You will sleep better. Your food will taste better. After a long-haul flight you will land in better shape. Our mission is to enhance the total in-flight experience of passengers by contributing to their health and well being. Our challenge is to have passengers touch down in better shape than they took off. The Cair TM system humidifies the cabin (blue arrow and dries the intervening air (red arrow). 10

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12 With over 140 hours spent in the air every year, passenger comfort is important for Malin Svensson, product manager at Elekta Instrument AB. After six years of frequent travel, she knows what the onboard environment means and what effect it has on her work. Malin Svensson product manager with the world as her workplace On long trips, a lot of time is lost because you simply don t have the energy to work on the plane. On older aircraft it can be difficult to get anything done at all, which means a whole work day goes wasted, she says. Elekta is a leading international supplier of advanced, innovative clinical solutions and services for the precision treatment of cancer, and minimum invasive neurosurgery in the treatment of brain disease. Malin Svensson is responsible for the Leksell Stereotactic System a high-precision tool for the diagnosis and treatment of deeply embedded brain tumours and functional diseases. Her business trips are both numerous and long, with conferences and lectures around the world. Some flights you hardly notice anything at all, others can be really awful and you need up to a day to fully recover, Malin says. She describes planes that have an unpleasant smell, with dry air resulting in a dry nose and throat. Efficiency at work may be impaired both during and after the trip. It s really important to have a pleasant environment onboard. Sometimes you are due to hold a presentation, or meet customers, as soon as you arrive. It is absolutely essential that you are refreshed and feel good, Malin comments. WELCOMES BETTER PASSENGER COMFORT Over the years, the aviation industry has invested heavily in improving seating and the range of activities onboard, but progress has been slower when it comes to air quality. However, many companies are starting to understand the competitive advantage of improving air quality especially in the fight to attract business travellers. Malin welcomes that move. LIKE WALKING INTO A WALL She believes that the level of passenger comfort varies from flight to flight, and can also vary according to the airline chosen. Moreover, there is a certain difference depending on your whereabouts in the world. She cites South America and US domestic flights as examples where old aircraft with poor air quality are all too common, but she has encountered unpleasant surprises in many places. One recent example was on a flight to Vienna. When I stepped onto the plane, it was like walking into a wall, just stifling. It was really stuffy and the air was unpleasantly dry. In that kind of situation, you just know you have an arduous work day in front of you, concludes Malin, before heading for a well-deserved holiday in Sweden with her feet firmly on the ground. 12

13 It can take a whole day to recover from some flights 13

14 Humidity control the technology ZONAL DRYING SYSTEM The air in an aircraft cabin normally has a temperature of 20 C and a relative humidity, RH, of about 15 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 cabin air meets this surface, condensation occurs. In many cases, ice is formed directly and later melts. Water accumulates in the insulation blankets of the aircraft 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 Munter s 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. A large, wide-body aircraft requires two to three units. 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 has been adapted and installed in various types of aircraft. 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 core of glass fibre with specially designed air channels moistened via a spreader system.when dry air passes the moist surface of the core, the water evaporates and the air is humidified while it is cooled. By dimensioning the core according to the airflow to be humidified, as well as controlling the supply of water and air temperature before the core, the humidifier can operate without further regulation. Minerals and other contamination in the water are precipitated in the core. The core 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. Dry air is evenly distributed in the space between the cabin and the outer shell of the aircraft with the Piccolo Ducting System, ducts in lightweight material. The humidified air is led out into the cabin via the aircraft s existing ECS system. ECS Mixing Chamber Front Zonal Dryer Rear Zonal Dryer The regenerated (moist) air is led out through the aircraft s triangle area under the floor. ECS Cabin Riser Ducts Cabin humidifier for Zone 1 Cabin humidifier for Zone 2 Piccolo Ducting System Dry air distribution. This humidifier system has an average water requirement of 14 liters per hour for Zone 1 and Zone 2 (regular first or business class areas). 15

16 Market overview THREE YEAR CRISIS Over the last three years, the aviation industry has experienced its worstever crisis. The general economic recession, in combination with problems such as terrorist attacks, the Iraq war and SARS, meant that the downturn was immediate and serious. Many airlines found themselves in difficult circumstances with major losses; some have applied for payment protection. The combined losses for airlines during 2003 amounted to USD 5,400 million, according to Merrill Lynch. The low cost, budget airlines have coped best and have shown good results despite the factors listed above. FROM RECOVERY TO GROWTH If last year saw the start of recovery, we are now seeing the start of growth. Passenger numbers are on the increase worldwide, most noticeably in Asia. During the last quarter of 2003 and the start of 2004, orders for new aircraft have stabilised at more normal rates. For the first time in four to five years, Boeing and Airbus have announced increases in the production rate for their single aisle aircraft to meet greater demand. Airbus has stated that it aims to increase its production rate for the A320 family by 20% at the end of 2004 and a further 20% during Boeing intends to increase its production rate for the B737NG with an initial 36%, followed by 50%. Flight International (August 2004) illustrated the status for the various manufacturers in the table shown on page 17. FUTURE PROSPECTS Boeing, Airbus and IATA anticipate that the growth in traffic will be approximately 5% annually during Converted into aircraft, that means 20 to 25,000 new planes of which two thirds are narrow-body aircraft and one third wide-body. About 15% of the new planes will be regional jet aircraft. Asia Pacific is forecast to be the fastest-growing geographical market, in both domestic and international sectors, with approximately 7 to 8% growth per year. In the short-term, both Airbus and Boeing believe that around 800 jet aircraft for 50 passengers or more will be delivered during the next 12 months. MARKET POTENTIAL The market for narrow-body aircraft holds the greatest potential for our Zonal Drying System.There is currently a worldwide fleet of around 5,700 aircraft, primarily B737NG, A32x, B757 and CRJ. Investment decisions are difficult for the airlines, which is why we view the retrofit market as slow. However, we should be able to sell the Zonal Drying System to 5 to 10% of this market. We believe the sales potential is much higher in new manufacture of aircraft, especially since we have attained option status for Boeing 737NG and have the possibility to reach a similar position for the Airbus A320 family. When it comes to new manufacture, airlines make the investment decision during specification of the aircraft and not as a separate decision. Moreover, financing is part of the general financing for the entire aircraft.with an order book of 1, 600 aircraft and greater cooperation with manufacturers, we see great potential in this segment. In our opinion, we should be able to supply the Zonal Drying System to 10 to 20% of those aircraft that are on order and pending delivery.this market share will increase in time as our system becomes more widely recognised, tried and tested. Cair is best suited for the widebody aircraft market. Aircraft such as A330, A340, B777, B767 and B747 form the existing fleet of approximately 3,000 aircraft. As retrofitting Cair is relatively difficult, we estimate that a lower market share of around 2 to 4% is realistic.with current market trends, we believe the future for Cair is in installations in new aircraft deliveries. The A330,A340, B777, B767 and B747 have an order book of around 430 aircraft, of which the A330, A340 and B777 have a growing order book while the B767 an B747 are approaching the end of their life cycle.we judge our market potential to be 10 to 20% of those aircraft that are on order, but not yet delivered. Once again, we believe in an increased market share once Cair is established as a concept on the market. The VIP market is a stable market where we are well established among the large VIP aircraft.thanks to our good relationship with the major completion centres in the world Lufthansa Technik, Jet Aviation, AAC and Sogerma we believe that we can sell one or two Cair annually to wide-body aircraft and two to four per year to narrow-body aircraft.we also believe that there is an opportunity to sell Cair to both Global Express and Gulfstream aircraft. 16

17 NEW TYPES OF AIRCRAFT Today there are two major new aircraft projects Airbus A380 and Boeing B7E7. Both manufacturers are discussing humidification as part of the aircrafts equipment.with regard to the A380, CTT and German AOA gauting have been selected to supply humidifiers for the crew rest areas.we are also discussing the possibility of offering humidification for the passenger cabin. For Boeing and its B7E7 Dreamliner, one of the proposed benefits is the enhanced cabin humidity level of around 20%. In our opinion, this can only be achieved through active humidification and we therefore see a great opportunity to supply Cair for this aircraft. Aircraft In service Order book Orders Q1/Q2 04 Orders Q1/Q2 03 A32x 2, A330/A A B737NG 1, B757 1, B B B747 1, B7E CRJ 1, ERJ

18 Marketing and sales strategy ZONAL DRYING SYSTEM We have taken an extremely important strategic step by obtaining option status for our B737NG Zonal Drying System with Boeing.We will exploit this by really working the market for B737NG where there are currently around 1,444 aircraft and approximately 660 aircraft on order and pending delivery.this will encompass visits to operators and direct marketing to all operators worldwide of the B737NG. Our aim is to achieve a breakthrough in North America and Asia with major operators of B737NG.The charter and budget airline market is traditionally a strong market for us, which we will continue to work on for B757 and A320 aircraft too, profiling our Zonal Drying System as a costcutter for technical and maintenance departments. As in previous years, we will participate in specific operators conferences and trade fairs in order to reach decision-makers within the airlines. In the coming year, we will prioritise a continued focus on Airbus, Bombardier and Embraer with the aim of achieving the same status with A320, CRJ and ERJ aircraft as with Boeing and the B737NG. CAIR There is a clear trend in the aviation industry which puts the emphasis on passenger health and well-being during flights. Several airlines such as Emirates, Singapore Airlines,Virgin, and British Airways have already made, or aim to make, major cabin improvements to enhance passenger comfort during flights.these measures include new flat-bed seats, improved legroom, secluded cabins for maximum privacy, new lighting and sound design, etc. Cair is in line with this philosophy and airlines have shown great interest when we have presented our system. As our target group consists of long-haul aircraft and larger VIP aircraft, we market Cair towards marketing departments,vip completion centres and manufacturers (Airbus, Boeing, Bombardier and Gulfstream) as a system that enhances passenger well-being and comfort.we intend to continue to work on this target group, generating media coverage and mailing directly to decision-makers with the aim of spreading awareness of Cair and its benefits. So far we have carried out sales campaigns aimed at Airbus products A330/A340 and A380 which will proceed, but we also intend to broaden the campaign to include Boeing and its B777 and B7E7 aircraft. By continuing to focus on operators with A330/A340 and B777 aircraft, the pressure will increase on Airbus and Boeing to consider the possibility of offering Cair from manufacture. As part of this sales work, we will participate in cabin interior trade fairs. 18

19 Customer and product overview The Zonal Drying System has been supplied for the following types of aircraft: B767, MD11, MD80, A330, CRJ, B737NG, B757, B747, A320 family. The system is being adapted for A340 and MD90 aircraft. Cair is at an earlier phase.the system has been supplied for the following VIP aircraft types: BBJ1, BBJ2, B767 and B747SP. Delivery is in progress for an A330/A340 aircraft.the system has also been evaluated by SAS in a B767 aircraft.the system is being developed for Airbus A380 to humidify crew rest areas. Zonal Drying System Aircraft Total ordered Delivered Customers B737NG Sterling, Hapag-Lloyd, Air Berlin, Transavia B Icelandair, JetAviation, First Choice, Thomas Cook B Martinair, KLM, JetAviation B Lufthansa BBJ 1 1 Jet Aviation A320/A First Choice A Emirates, LTU MD Austrian MD Saudi Arabian MD KLM, Swiss, Martinair CRJ-100/ Lufthansa Cityline, Adria Airways, Austrian TP Swedish Airforce per August 31,2004 Cair Aircraft Total ordered Delivered Customers B SAS, AAC, Jet Aviation B Jet Aviation BBJ Lufthansa Technik, Jet Aviation A330/ Qatar per August 31,

20 Competitors DEHUMIDIFIER SYSTEMS CTT is currently the only supplier of active dehumidifier systems for the aviation industry. Until now, aircraft manufacturers have tackled the problem of condensation in aircraft with the following passive measures: Cover the cabin with glass fibre blankets Install gutters to lead away the water Attach pieces of foam rubber to rods, etc, to catch running water Glue felt to roof panels, etc, to catch water which should then evaporate Fit bilge trays to raise insulation in the belly of the aircraft so that condensation will run underneath The SPUD system that blows relatively dry ECS air into the crown area only during flight. 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 all the problems that implies: increased weight, corrosion, mould and fungus in the insulation, and the risk of disturbances in the electrical system and components. HUMIDIFIER SYSTEMS There are 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) supplies a humidifier that uses a heat exchanger to generate steam from the hot air expelled by the aircraft s engines. This system is available as an option for Bombardier s Global Express executive airplane. LE BOZEC FILTRATIONS & SYSTEMS Le Bozec Filtrations & Systems (France) has developed a humidifier that utilizes electrical energy to generate steam. This is available for use in the cockpit and executive aircraft. These products have the following in common: Relatively complicated technology Not met performance expectations Low reliability Cause condensation problems. 20

21 Background, organization, environment and quality BACKGROUND CTT has its origins in the concept of dehumidifiers for aircraft, as presented in 1988 by the company s founders, Christer Nordström,Thomas White and Thomas Axelsson. In August 1991, CTT Systems AB was formed to patent and exploit the idea. In 1997, the company s first global certification was obtained, based upon a system for Boeing 767 aircraft. Later that year, CTT received an SBI listing (now NGM) and joined the O-list on the Stockholm Stock Exchange in Sales have been to aircraft in service, but as of spring 2004, installation is available during the manufacture of B737 at Boeing, which means we are approaching the strategic goal of sales for new production. R&D LED TO A COMPLETE MOISTURE MANAGEMENT SYSTEM Development of a moisture management system commenced in The aim is to increase passenger and crew comfort.the humidifier system is combined with the Zonal Drying System which continously prevents condensation in the area between the cabin and the outer skin of the aircraft. This means a further development towards a total concept, Cair, an integration of the two systems. ORGANIZATION AND PERSONNEL CTT s highly competent team numbers 22 (including 5 women). Several of the employees have long experience of the aviation industry in Sweden and internationally, and the remainder have taken part in various further education programmes.their ages are evenly distributed from 20 to 55 years. Sick leave is negligible and staff turnover is low.thanks to the size of the organization, short and efficient decision processes have been created. EFFECT ON THE ENVIRONMENT The Zonal Drying System enables airlines to minimize weight, in the form of condensation, in their aircraft. This weight reduction means improved fuel economy, leading to a positive influence on carbon dioxide emissions (CO2) in the atmosphere. CTT seeks to cooperate with partners and subcontractors who understand the importance of taking the environment into account and are committed to improving it. QUALITY POLICY Our quality assurance policy is based on the letters in the company s name, CTT. C Customer Satisfaction It shall be the absolute focus of CTT Systems to keep its customers satisfied by all employees doing the utmost to ensure that we meet or exceed customer requirements. QUALITY CTT complies with Swedish Civil Aviation Authority rules and regulations applying to quality assurance in the aviation industry. Quality assurance is applied at every level, from design, through production, to delivery, followup checks and customer support. T T Technical Excellence Total Quality 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 & partners QUALITY SYSTEMS AND THIRD PARTY APPROVAL CTT currently holds certification from the Civil Aviation Authority in accordance with the common European standards issued by JAA, the Joint Aviation Authority. From September 28, 2004, these are replaced by regulations from the new EU organization, EASA (European Aviation Safety Agency); Part 21 and Part 145. CTT will thus automatically be certified by EASA. 21

22 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 complex, time-consuming process as it is specific for individual types of aircraft. An STC means that the certifying civil aviation administration (in the country where the aircraft is registered) has approved both the system and its installation as airworthy. The process is further complicated by different processing routines in different countries. As the traditional leader in the aviation industry, US certification has the highest status. Certification by the FAA (Federal Aviation Administration) is in reality the same as global certification. Certification in the European countries has gained in status in recent years.the JAA/EASA now operates as a coordinating authority. 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 organization. Lufthansa Technik maintains Supplement Type Certificates 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 in certification, plus the possibility to obtain both JAA/EASA and FAA STC. Boeing has included the Zonal Drying System in its option programme. PRODUCTION CTT s strategy is to perform final assembly, tests and maintenance of its own products. Many of the components are standard components from the aviation industry purchased from reputable suppliers. In the case of key components, long-term agreements have been signed to ensure good prices even for short production runs. Carefully selected subcontractors handle adaptation and fitting.this means that CTT can rapidly increase sales without major investments in either machines or personnel. INSTALLATION To date, the systems have been purchased for retrofit, i.e., installation in aircraft in operation.the systems have, therefore, been installed by airline personnel in conjunction with maintenance or conversions, and according to CTT s drawings and installation instructions.to facilitate initial installations, CTT provides on-site instruction for airline personnel. Installation of a Zonal Drying System requires about 70 to 150 man-hours. Installation of a complete Cair system requires approximately 200 to 250 manhours.the formal responsibility for the installation is held by the respective air-line s quality organization. The agreements with Airbus and Boeing mean that, in future, installation will also take place directly during aircraft manufacture. This took place at Boeing for the first time in March Zonal Drying System, STC FAA STC B /800 FAA STC B /300 FAA STC B757 VIP EASA STC B /800 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 Danish STC B767 APPROVAL JAR 21 Subpart G, Production Organisation Approval JAR 145, Maintenance Organisation Approval ISO9001:2000 Certified quality system by SEMKO-DEKRA Certification product approval at installation 22

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 During 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. The company s future development is noticeably dependent on these key people remaining within the organization. The departure of one or more of these persons would have a negative effect on the company s business. To reduce the risk of this, the company has introduced an incentive programme. DEPENDENCE ON MAJOR CUSTOMERS CTT has increased its customer base, thereby decreasing its dependence on a 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 postponed delivery or cancelling an order could have a negative, albeit short-term, effect. However, the company has established long relationships with its major customers, all of whom have shown longterm 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. Increased turnover in the OEM sector should reduce this risk. FUTURE CAPITAL REQUIREMENTS The company currently has a negative cashflow 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. PRODUCT LIABILITY Any kind of accident linked to CTT s products would have major consequences on the company. The risk has been minimized by extensive safety measures and stringent certification for installation. CTT has taken out comprehensive product liability insurance which provides economic protection for both the injured party and for CTT itself. ECONOMIC CLIMATE The company s development is dependent on factors beyond its control, such as the general economic situation, market conditions for customers and possible competitor products. These factors will affect future results both positively and negatively. CURRENCY EXPOSURE Company purchases are mainly made in domestic and European currencies (SEK, GBP and EUR) while products are sold in US dollars. In 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 advisable. 23

24 The CTT share SHARE CAPITAL The share capital in CTT amounts to SEK 6,382,500 distributed among 6,382,500 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 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 from 3,463 to 3,437. CLASSIFICATION OF No. of No. of SHAREHOLDERS shares shares in % Swedish individuals Swedish organizations Overseas shareholders 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, 2004 shares votes in % Volito AB Trulscom AB EFG, Private Bank, Geneva Banco Småbolagsfond Christer Nordström Anette Almgren-White Pelago Venture Partners AB Deutsche Bank, Eschborn Svenska Handelsbanken, Luxemburg Carl-Axel Rosén Tomas Torlöf Dan Johansson Christer Torlöf Swedbank Luxemburg S.A Matts Stenberg Svante Berger Total Other shareholders Total no. of shareholders Total no. of shares 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

25 Share AFV (Affärsvärlden) General 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, among 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 new issue), was noted on August 2, 2003 while the lowest price, SEK 16.70, was noted on May 12, On June 30, 2004 the final price was SEK 18 (SEK 17). 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 authorised to make statements on the company s reports and officially communicated business.the company distributes all its reports, including the close of books communiqué, and press bulletins via Waymaker.The company s website, is simultaneously updated with this information, and the annual report can also be downloaded from the website. DIVIDEND POLICY So far, 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 for growth (with regard to its financial goals) and the desire for a good direct return on investment. At the present time, it has not been deemed meaningful to quantify the size of dividends in relation to future profits. In view of the future expansion anticipated at CTT, it is judged that the dividend policy will continue to be restrictive during 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 employees. A subscription options programme (100,000 options) has been created with a subscription rate of SEK 47.To date, company employees have acquired 82,500 options.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 1.6%. 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 technology company in the aviation industry.the company s business concept is to solve the two moisture problems encountered in commercial aircraft: eliminating unwanted condensation between the cabin and the aircraft s outer skin, and enhancing cabin comfort by increasing humidity. CTT products, the Zonal Drying System and Cair, pave the way for improved profitability and air safety while offering a distinct improvement in passenger and crew comfort. CTT markets these systems to aircraft manufacturers for installation in new aircraft, and to airlines for retrofit in existing fleets.the company has its headquarters in Nyköping, Sweden, and has been listed on the O-list at the Stockholm Stock Exchange since March OPERATIONS THIS YEAR As far as sales are concerned, business has been characterized by a continued focus on European charter and budget airlines with the aim of increasing orders for the Zonal Drying System. During the year, the Cair concept has been developed and launched, generating added interest from longhaul airlines and aircraft manufacturers for our complete moisture management system. CTT has participated in aircraft trade shows in Dubai and Singapore, and the Aircraft Interiors Expo in Hamburg. In R&D, work has centred on producing A380 humidifiers and developing Cair for A VIP aircraft. The Zonal Drying System has been supplied to Air Berlin,Transavia, First Choice and Austrian Airways. Cair has been supplied to Associated Air Center, Lufthansa Technik and Jet Aviation. During the year, deliveries of spare parts and maintenance work have doubled compared with the previous financial year. IMPORTANT EVENTS In August 2003, CTT and German AOA gauting were chosen to develop the humidification system for the new Airbus super jumbo, A380. CTT will supply the humidifiers, while AOA is responsible for the integration of humidifiers in the aircraft system.the humidifier for the pilots rest area is now undergoing qualifying tests, and the humidifiers for the remaining crew rest areas are under construction. Airbus has not yet initiated development of humidifiers for the cockpit or passenger cabin.the first humidifiers for the pilots rest area are on order and will be delivered during In September, Austrian Group placed an order for the Zonal Drying System for 15 CRJ100/200 aircraft. The decision followed a successful evaluation of the system in a Tyrolean aircraft.to date, 12 systems have been supplied.the remaining three systems will be delivered during In November 2003, Lufthansa Technik ordered our Cair for a BBJ aircraft.the system was supplied during spring The new CTT stock issue in November 2003 was over-subscribed and brought in SEK 25 million before issue expenses.the stock issue guarantee, which was extended by one of our two major owners, did not have to be used. In January 2004, Jet Aviation ordered a Cair system for a Boeing B ER VIP aircraft.the system was delivered in June In early March 2004, Qatar Airways ordered a Cair system for an Airbus A VIP aircraft.the system will be delivered to Sogerma during 2004 for incorporation in the VIP interior. Sogerma is a French, EADS-owned company, specializing in aircraft maintenance and equipment of VIP airplanes (80% of Airbus is owned by EADS). Sogerma is the fourth company that CTT has cooperated with regarding large VIP airplanes. At the end of March, Qatar Airways followed up with an order for the Cair system for a further large VIP airplane, an Airbus A It has not yet been decided which installation company will fit the VIP interior in this aircraft, although delivery of the system is scheduled for spring In March 2004, Boeing installed a Zonal Drying System during final fitting of a B aircraft for delivery to Transavia.This is the first time a product from CTT has been installed during aircraft manufacture. Before installation could be completed, CTT was officially approved as a Boeing supplier following a quality system evaluation. In March 2004, during the Hamburg Aircraft Interiors Expo, CTT launched the name Cair for the company s combined humidifying and dehumidifying system (previously known as the Zonal Comfort System).The name has been selected to clearly illustrate that our job is all about the health and well-being of passengers and crew. It also provides airlines with a marketing tool to help attract more passengers to first and business classes. CTT s display and the launch of Cair earned a lot of attention, particularly from Airbus. At the end of April, Boeing distributed an official bulletin to its customers stating that the Zonal Drying System is now available as an option for B and B aircraft.the system is also included in Boeing s options catalogue, which must be considered a milestone for CTT. At the start of May, CTT and the German company AOA gauting signed a memorandum of understanding for increased cooperation. AOA gauting has overall responsibility for Airbus as regards the development of humidifiers for A380 aircraft.this collaboration has worked well and CTT and AOA gauting have decided to extend their cooperation to cover humidification systems for all of Airbus long-haul aircraft. AOA gauting will also develop software-based control units for CTT s dehumidification system. CTT and AOA gauting also intend to collaborate in marketing and worldwide product support.

27 IMPORTANT EVENTS AFTER CLOSE OF BOOKS In July 2004, Air Berlin ordered the Zonal Drying System for two of its aircraft. Air Berlin is one of CTT s biggest customers and has previously equipped 27 of its B737 with the Zonal Drying System.These two planes will be fitted with the system during the manufacturing process at Boeing. In July 2004,Thomas Cook, UK, ordered the Zonal Drying System for three of its B aircraft.thomas Cook will evaluate the system s functionality and performance before deciding whether to invest in the system for its entire fleet of around 20 planes. Also during July 2004, there was an incident with an early version Zonal Drying System installed in a B737 plane.the dehumidifier s heater section became overheated and started to smoke. The smell of smoke was noticeable in the aircraft s passenger cabin and the incident has been reported to the relevant aviation authority. Until the exact cause for the smoke and the unit s overheating has been established, CTT has advised airlines operating early versions of the Zonal Drying System in B737 and B757 aircraft to shut down the system. During autumn 2004, CTT will offer these airlines the opportunity to upgrade the system, eliminating the risk of smoke. In August 2004, a major aircraft leasing company ordered the Zonal Drying System for a CRJ-200 plane which will be operated by Adria Airways in Slovenia. Adria Airways has previously installed a CTT Zonal Drying System in its other CRJ-200 aircraft.this additional order indicates that Adria Airways is a satisfied customer and appreciates the operational benefits inherent in the system. FINANCES Both in terms of number of systems and invoice amount, the largest deliveries have been of Zonal Drying System to Transavia s B737 fleet. Other notable deliveries were those for Austrian s CRJ aircraft, and single major deliveries of Cair to VIP airplanes, fitted by Associated Air Center and Jet Aviation. The company s turnover rose to SEK 21.1 million, compared to earnings of SEK 18.7 million the previous year. The negative effect of a weak dollar on earnings has partially been eliminated by hedging. Wide-scale investments have been made on marketing and sales fronts. At the same time, design work to produce Cair for Airbus A380 has entered an intense phase with close contacts with AOA gauting and Airbus. Further systems have been certified by the relevant aviation authorities. Taken as a whole, this has meant that the result of SEK 13 million is better than last year s SEK 16 million. However, funds have fallen to show an outflow of SEK 17 million, prior to financing activities. As a result of the new stock issue, which was over-subscribed, funds have been boosted. Despite having more substantial sale discussions in progress than previously, order bookings have remained at SEK 13 million, compared to SEK 21 million last year. Orders at the time of report on August 31 amounted to SEK 11 million (SEK 20 million). INVESTMENTS During the financial year, investments of SEK 3 million have been made in intangible assets.these consist primarily of development of humidifiers for the A380 airplane, and, to a lesser extent, certification costs. Development work to adapt the equipment for the A380 is very comprehensive and should be completed during Investments for the A380 have not yet started to be depreciated, and therefore do not affect results for the financial year. During the financial year, investments in tangible fixed assets amounted to SEK 1.1 million.total investments thus amount to SEK 4.1 million (SEK 2 million). 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 AGM. 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 2003/2004, there were six Board meetings. Matters discussed included establishing strategies, business plans and budgets, interim reports, and the close of books communiqués. NOMINATION PROCESS CTT holds it AGM on November 11. Nomination and replacement questions are handled beforehand by representatives for the major shareholders in consultation with the Chairman, Karl-Axel Granlund. Opinions and nominations may be forwarded to the Chairman at the following address:volito AB, S. Förstadsgatan 4, SE Malmö, Sweden. FUTURE DEVELOPMENT The financial year 2003/2004 has been yet another tough year for CTT and the order intake has been low. However, the aviation industry has picked up during the year and we can now discern the start of a new period of growth. Passenger figures are on the rise throughout the world, most noticeably in Asia. During the latter part of 2003 and early 2004, orders for new aircraft stabilised at more normal levels. For the first time in four to five years, Boeing and Airbus have announced increased production of their smaller plane types.this is a obvious sign that more and more airlines are starting to believe in the future and are more inclined to invest, which is a prerequisite if CTT is to increase its order bookings. 27

28 Our Zonal Drying System is now widely known among charter, budget and regional jet airlines in Europe. In this segment, we expect to be able to increase sales on the retrofit market in pace with the the airlines growing willingness to invest.this applies to aircraft types B737NG, B757, CRJ and A320 family. As the Zonal Drying System is now available as an option for B737NG, we anticipate a significant order intake with regard to the new B737. Both Transavia and Air Berlin have already taken advantage of the opportunity to order the Zonal Drying System for their new aircraft.thanks to Boeing now recommending our Zonal Drying System we hope to be able to break into the North American market.we know that a number of budget airlines in North America experience condensation problems; naturally, Boeing s word carries great weight for these airlines. During the financial year, Airbus has explored the possibility of installing our Zonal Drying System directly during airplane manufacture. A solution similar to the one we have developed for B737NG aircraft is judged to be fully feasible. As the A320 airplane gains in popularity among budget airlines, we believe that it is simply a matter of time before Airbus is forced to follow Boeing and offer the system as an option. Despite CTT s overall poor order intake in the 2003/2004 financial year, orders increased for Cair in VIP aircraft.the company earned orders for the system for four airplanes from three different customers. Cair is gaining in popularity within this segment, and we expect the order intake will continue to grow over the next few years. CTT is very actively working on airlines that might install Cair in their existing long-haul aircraft, as well as on a couple of airlines that have long-haul aircraft on order.we are counting on a couple of airlines placing orders for Cair in coming financial years. Parallel to CTT s efforts to initiate sales of Cair to long-haul airlines, there is a continuing debate concerning air quality in aircraft cabins. In its marketing for the new B7E7 Dreamliner, Boeing in particular promises enhanced air humidity in the passenger cabin. In CTT s opinion, this is not possible without introducing a humidifier system. In the coming year, Boeing has to define which options will be available for the B7E7 airplane which means we will intensify our marketing of Cair both towards Boeing and Boeing s B7E7 customers.the equivalent marketing of Cair for Airbus and Airbus A380 customers has been in progress since the start of 2004.The aim is to convince Airbus to introduce humidification in the A380 s passenger cabin, too. As of 2005, all listed companies in the EU must practise IFRS, International Financial Reporting Standards, in the consolidated accounts.at the present time, it is not clear how IFRS should be handled in an individual legal entity. CTT does not currently consolidate and it is therefore not apparent when CTT will start reporting in accordance with IFRS. CTT has embarked on a review of accounting principles in order to establish how the transition to IFRS will affect the company s future accounting. As Swedish accounting principles correspond relatively well to existing IFRS, the company judges that there will not be any major effects on the financial reports.the company s financial reports will also be affected by modified demands on classification and information, which may affect key ratios.the company s overview has not yet reached the stage where it can quantify the differences. RESEARCH AND DEVELOPMENT Product development has concentrated on producing the A380 humidifier and developing Cair for A VIP airplane. Development work on the counterflow 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 Reduction of share premium account Total

29 Five year summary (SEK THOUSANDS) 2003/ / / / /2000 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 Equity capital ratio % Profit margin % Employees No. of employees, annual average Income per employee,sek thousands Salaries, SEK thousands Share data Earnings per share, SEK 2,18 3,20 1,22 2,76 2,26 Earnings per share, after conversion 2,18 3,20 1,22 2,76 2,26 Equity per share, SEK 4,61 3,64 6,85 8,07 1,16 Cash flow per share, SEK 0,72 3,33 0,43 5,25 1,84 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) ) 2003/2004 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 2,18 3,20 Earnings per share after conversion, SEK 6 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. 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. CASH FLOW PER SHARE Funds in relation to the number of shares on balance sheet date. 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 Equipment, tools, fixtures and fittings Financial fixed assets Shares in group companies 10, Total fixed assets CURRENT ASSETS Inventories Raw materials and necessities Goods in manufacture Finished goods and goods for resale Short-term receivables Accounts receivable Tax receivables Other receivables Accrued revenue and prepaid expenses Cash and bank balances Total current assets Total assets SHAREHOLDERS EQUITY AND LIABILITIES SHAREHOLDERS EQUITY 18 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 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-restricted 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, Funds 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 18 6 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 of the Swedish Financial Accounting Standards Council which came into effect for this financial year.the recommendations primarily applicable to the company are RR2:02 Reporting inventories, RR 22 Presentation of financial statements, RR 25 Segment reporting, RR 26 Events after balance date and RR 27 Financial instruments.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. 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 649,000 (SEK 188,000). 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 1,680,000 (SEK 658,000) due as shown below: Leasing income 2003/ /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 199,000 (previous year SEK 161,000). Fees in respect of other work amount to SEK 81,000 (previous year SEK 52,000). 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 1,391,000 (previous year SEK 1,182,000) for premises.the remaining leasing charges, including rent expenses for premises, amount to SEK 2,724,000 (previous year SEK 3, ).These fall due as shown below: Leasing charges 2003/ /2003 Within 1 year Within 1-5 years Later than 5 years NOTE 3 PERSONNEL Average number of employees Women 5 4 Men Company total Board Women 0 0 Men Management and President Women 1 1 Men Salaries and remunerations Board and President Other senior executives Other employees Social security expenses 2003/ /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.

35 CONT D. NOTE 3 PERSONNEL PRESIDENT Basic salary Adjustable compensation 0 0 Car benefits Pension benefits Financial instruments Chairman of the Board Board retainer Other senior executives Basic salary Adjustable compensation 0 0 Company car benefits Pension benefits Financial instruments Agreement on future pension The company s President and other senior executives are entitled to a life-long pension from the age of 65, according to the ITP plan.the pension is earned successively and is paid in full if employment continues until the agreed date of retirement. Adjustable compensation Adjustable compensation refers to a bonus system for the President,Technical Director, Director Sales and Marketing.The bonus is related to order bookings and constitutes a rise of one percentage based on the individual s annual salary.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 2003/2004 Sick leave in total 2.1% -sick leave for men 1.6% -employees years 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 2003/ /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 2003/ /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 5,882,392 (5,106,000).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 two years for Cair. As the A380 project is in progress, depreciation has not commenced. The following has been charged for R&D SEK 1.2 million (SEK 1.3 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 0 12 NOTE 9 EQUIPMENT, TOOLS, FIXTURES, AND FITTINGS Opening acquisition value Purchases Expenses for improving other s property 0 79 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 Purchases Closing accumulated acquistion value Opening depreciation 56 6 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 921 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 % 921 CTT Systems Incentive AB Nyköping % NOTE 12 TAX RECEIVABLES The company has non-utilized fiscal deficiencies amounting to SEK 95 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 5 10 Prepaid rents Prepaid insurance charges Prepaid leasing Accrued leasing revenue 79 0 Prepaid maintenance and licence fees Receivables, EU project Receivables, pending customer orders 16 0 Prepaid STC expenses Prepaid trade fair expenses Other interim receivables NOTE 14 PROVISIONS FOR WARRANTY COMMITMENTS Opening provisions Amount exploited Provisions for year Closing provisions NOTE 15 LONG-TERM LIABILITIES Refers to a loan from the Swedish Industrial Development Fund with a face value of SEK 4.5 million at an interest rate corresponding to bank rate plus four percent.the debenture loan falls due December 30, However, according to praxis, the part that falls due within one year is classified as a current liability.the Swedish Industrial Development Fund is entitled to a royalty corresponding to 1.75 percent of the net invoice value of sold units of the products and other remuneration attributable to the products. A royalty of 25 percent is also payable on all 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 shall pay royalties to the Development Fund for two years after the debenture loan is paid in full. NOTE 16 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 NOTE 17 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. 37

38 NOTE 18 SHAREHOLDERS CONTRIBUTION Volito AB has provided a conditional shareholders contribution of SEK 4,933,000. In accordance with the articles of Association, no dividend may be distributed before the amount has been repaid to Volito AB. NOTE 19 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 20 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 21 READY FUNDS The ready funds entry in the funds statement equals Cash and bank balances on the balance sheet. NOTE 22 FINANCIAL ASSETS AND LIABILITIES As of June 30, 2004, 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 0 0 Share in Nordea bond fund Total assets As of June 30, 2004, 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: 38 July August August August September October Total 2 255

39 CONT D. NOTE 22 FINANCIAL ASSETS AND LIABILITIES As of June 30, 2004, 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 23 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 cashflow 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, 2004 Karl-Axel Granlund Anders Helmner Lars Solin Chairman Tomas Torlöf Dag Waldenström Torbjörn Johansson President Our report has been issued on September 27, 2004 Håkan Andreasson 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, 2003 to June 30, 2004.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 misstatement. 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. In our opinion, the annual accounts have been drawn up in accordance with the Annual Accounts Act, and thereby provide a true representation of the company s income and financial position in conformance with generally accepted accounting principles in Sweden.We therefore recommend: that the profit and loss account and the balance sheet be adopted, that the loss be dealt with in accordance with the proposal in the Administration Report, and that the members of the Board of Directors and the President be discharged from liability for the financial year. Nyköping September 27, 2004 Håkan Andreasson Authorised Public Accountant Göran Jonsson Approved Public Accountant 40

41 Board of directors and auditors Members of the Board Karl-Axel Granlund born 1955, Chairman since Chairman and principal owner Volito AB. Chairman of LUVIT AB and Avansys AB. Board member of PEAB AB. Volito AB own 994,000 shares in CTT. Anders Helmner born 1953, member of Board since Senior Vice President Telair, Narrow Body and Single Aisle Division. Owns 2,290 shares in CTT. Lars Solin born 1959, member of Board since Senior Partner at Navet AB. Owns 1,250 shares in CTT. Tomas Torlöf born 1967, member of Board since Tomas Torlöf is Chairman of the Board at AppliedSensor and member of Board of Columbitech and i3micro technologies. Share holdings in CTT, direct and indirectly via companies, amount to 656,375. Dag Waldenström born 1957, member of Board since Sales Director, Saab Aircraft Leasing AB. Member of Board of the trade organization, Svenskt Flyg. Owns 5,622 shares in CTT. Deputy Anders Wehtje born 1964, deputy member of Board since Financial Director, Volito. Owns 5,000 shares in CTT. Auditors Håkan Andreasson Authorised public accountant, Lindebergs Grant Thornton AB. CTT accountant since Göran Jonsson Approved public accountant, Lindebergs Grant Thornton AB. CTT accountant since LEFT TO RIGHT: ANDERS HELMNER, TOMAS TORLÖF, LARS SOLIN, DAG WALDENSTRÖM, ANDERS WEHTJE AND KARL-AXEL GRANLUND. 41

42 Senior executives 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: 12,500. Subscription options: 02/05 25,000. 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: 2,500. Subscription options: 02/05 5,000. 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: 3,000. Subscription options: 02/05 10,000. 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: 4,000. Subscription options: 02/05 10,000. 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: 1,015. Subscription options 02/05 5,000. COMPLEMENTARY INFO ACCORDING TO NBK RECOMMENDATIONS PENSION The president of the company and other senior executives are entitled to a lifelong pension from 65 years of age in accordance with the ITP plan. The pension is earned successively and will be paid in full if employment continues until the agreed age of retirement. 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

43 LEFT TO RIGHT: MARIA WESTER, ULF LILJENBERG, HÅKAN GUNNARSSON, TORBJÖRN JOHANSSON AND PETER LANDQUIST 43