Annual ReportFor the abbreviated fiscal year, May–December 2009

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avsnitt

Annual Report

For the abbreviated fiscal year, May–December 2009

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Using the same brand, the stores sell home furnishing products, with a focus on home textiles. Hemtex’s product areas comprise Bedroom, Dining & Entertainment, Bathroom and Windows. Sales in the consumer operations (including franchise stores) amounted to SEK 1,343 M, excluding VAT, in 2009. During the same period, the Hemtex Group’s sales totaled SEK 1,295 M.

Hemtex has been listed on the Mid Cap list of the NASDAQ OMX Exchange Stockholm since October 6, 2005.

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Key data ^2007/200812 months 2008/2009

12 months 2009

8 months

Net sales, SEK M 1,608.3 1,390.6 916.8

Net sales growth, % 9.4 – 13.5 – 9.4

Gross profit margin, % 52.7 53.5 50.9

Operating profit/loss, SEK M 141.1 – 32.5 – 148.0

Operating margin, % 8.8 – 2.3 – 16.1

Net profit/loss for the year, SEK M 96.5 – 42.9 – 121.3

Return on capital employed, % 22.8 – 4.8 – 36.4

Return on shareholders’ equity, % 20.0 – 10.4 – 48.8

Equity/assets ratio, % 53.4 40.1 49.7

Net debt/EBITDA, multiples 1.0 15.8 – 1.2

Earnings per share before dilution, SEK 3.31 – 1.46 – 3.04

Earnings per share after dilution, SEK 3.31 – 1.46 – 3.04

Cash flow after investments per share, SEK – 1.45 – 0.98 0.95

Equity per share, SEK 16.10 12.03 9.55

Dividend per share, SEK 2.65 — —

Total number of stores 205 223 214

Of which owned by the Group 180 193 189

Number of full-year employees 757 773 768

May–December 2009 fiscal year in brief

 Net sales declined 9.4% to SEK 916.8 M (1,012.2).

 The operating result was a loss of SEK 148.0 M (profit: 40.2).

 The operating result was charged with nonrecurring costs of SEK 109.7 M (13.0). Excluding nonrecurring costs, the operating result was a loss of SEK 38.3 M (profit: 53.2).

 The loss after tax amounted to SEK 121.3 M (profit: 23.0) and the loss per share before dilution amounted to SEK 3.04 (earnings: 0.78).

 During the abbreviated fiscal year, Hemtex reviewed its store portfolio in all countries and closed 12 stores, comprising seven proprietary stores and five franchise stores. Three stores were opened in Sweden.

 Erik Gumabon became President and CEO on November 1, 2009.

 Through bids and market acquisitions, Hakon Invest AB increased its shareholding to 68.5% at December 31, 2009. Since June 30, 2009, Hemtex AB is a subsidiary of Hakon Invest AB.

 At the Annual General Meeting on December 2, a resolution was passed concerning a change of the fiscal year to the calendar year.

Accordingly, the current fiscal year comprises only the period from May to December 31, 2009.

 No dividend is proposed for the abbreviated 2009 fiscal year.

All comparative figures pertain to the May 1 to December 31, 2009 fiscal year. Unless otherwise stated, comparisons are with the corresponding period in 2008.

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For us, 2009 was a year characterized by the work required to transform from the old to the new Hemtex.

President’s comments

" A more profitable store concept and more attractive customer offering constitute the foundation for the new Hemtex"

Growing competition in the home textile market combined with the Group’s price strategy, featuring extended discount sales over long periods of time, eroded consumer confidence in Hemtex and led to shrinking market shares. Accordingly, we launched necessary and determined efforts to convert the Group into a sustainably profitable and modern home textile chain, with roots firmly anchored in Scandinavian textile design. I would like to emphasize three actions taken during the year that laid the foundation for this work.

• We downsized the product range in 2009 by as much as 40% in order to more clearly define the customer offering, improve distribution and sharpen our focus on purchasing. As a result, we were able to sharply reduce our inventory levels.

• We implemented a share issue that, in addition to pro- viding Hemtex with SEK 164 M, also meant that our long-term majority shareholder Hakon Invest increased its ownership share from 34.6% to 68.5%. We thus gained a long-term owner with comprehensive know- ledge and experience of the Nordic retail trade.

• We changed our price strategy from extended periods of discount sales to offering continuously attractive prices and, in turn, started to restore consumer confidence in our broad range of quality products.

At year-end 2009, we were pleased to note that our actions had yielded the intended effect. In the shorter fourth quarter, we reported operating profit of SEK 26 M before nonrecurring costs. Consequently, we are prepared to realize the Group’s newly formulated business plan and take the first true strides in the rejuvenation work. The point of departure in meeting this challenge may be sum- marized as follows: we will increase our cost control and adopt a consistent approach to unprofitable structures, and we will change the fundamental concept of the brand to better reflect our ardent passion for home textiles.

We will gradually increase cost control by upgrading the business system for the flow of goods and our product- range planning covering every article’s journey from design concept to sales. The articles at the retail level will

be increased in parallel with demand and, conversely, reduced in the event of declining attractiveness. This will create increased scope for stable and healthy corporate finances. At the same time, we will take actions such as changes in depreciation periods to better reflect useful life spans in the Group and goodwill amortization in Sweden and Denmark. Accordingly, the abbreviated fiscal year (May–December 2009) includes nonrecurring costs totaling SEK 110 M.

The adjustments will be further solidified during 2010.

We are implementing responsible divestments of our Group stores in Denmark and Norway, reducing the number of stores in Finland by half and terminating our cooperation with the remaining franchisee in Poland. We are concentrating our efforts in the Swedish market, while also retaining a presence in Finland. This will provide the Group with better potential to adjust the operations, as well as greater security in our continued efforts to estab- lish a more profitable retail store concept and a more attractive customer offering.

In the autumn of 2010, we will open the doors to the new Hemtex. In a pilot store, we will demonstrate the new store concept, the changes in our visual identity and the refurbished product range, factors that collectively comprise the hub in our new image. The product range will be divided into three clearly defined product categories:

• Scandinavian, a style that represents Scandinavian simplicity in a classic expression.

• Heritage, a warm style for which we derive inspiration from our own heritage, combined with inspiration from romantic gardens and New England styles.

• Contemporary, A style reflecting a strong contemporary trend. This may involve cooperation with external designers or brands.

Borås, March 2010 Erik Gumabon, President and CEO

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President’s Comments

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The Hemtex share

Since October 6, 2005, the Hemtex share has been listed on the Mid Cap list of the NASDAQ OMX Stockholm exchange.

T

he share is traded under the symbol HEMX and included in the SX25 index for Consumer Discretion- ary items.

Share trend 2009

After a weak start, a powerful recovery occurred on stock markets worldwide during 2009. A strong recovery occurred in the Hemtex share price in March and April, resulting in a total share price increase of 110% for the full year, compared with a rise of 46.6% for the OMXS index, which reflects the performance of the exchange as a whole. During the abbreviated fiscal year from May 1 to December 31, however, the Hemtex share price remained unchanged. During the abbreviated fiscal year, the lowest price quoted was SEK 24.20 on July 9 and the highest price was SEK 36.60 on November 19. At the end of the

fiscal year, the Hemtex share price was SEK 26.40, corresponding to market capitalization of SEK 1,084 M (514).

Share capital

On December 31, 2009, the share capital in Hemtex AB amounted to SEK 102.7 M distributed among 41,072,360 shares, each with a quotient value of SEK 2.50. Each share entitles the holder to one vote at the Annual General Meet- ing, and all shares have equal rights to the company’s assets and profits.

Ownership structure

Hemtex had 3,228 shareholders on January 31, 2010. Most of the shareholders, 2,796, owned 1,000 or fewer shares.

The proportion of institutional ownership amounted to 93.7%, while foreign ownership amounted to 8.9%.

Owner relationships

On January 31, 2010, Hemtex AB had 3,228 shareholders. The relationships below refer to the owner list maintained by Euroclear Sweden AB on that date.

Owner Total number of

shares

Share of voting rights and capital

Hakon Invest AB 28,138,798 68.5%

AB Industrivärden 5,131,146 12.5%

Bomax AS 2,052,400 5.0%

Trollhassel AB and others 608,945 1.5%

SIX SIS AG 447,582 1.1%

EFG Private Bank S.A., W8IMY 326,512 0.8%

SEB Private Bank S.A., NQI 224,504 0.5%

AB Pernini and others 200,450 0.5%

Pernvik & Pernvik AB and others 135,300 0.3%

Löfman, Michael 131,045 0.3%

Other owners 3,675,678 9.0%

Total 41,072,360 100.0%

Ownership structure

Number of shares No. of owners % of all

owners No. of shares % of share capital

1–200 1,437 44.5 136,064 0.3

201–1 000 1,359 42.1 639,986 1.6

1 001–10 000 366 11.3 999,115 2.4

10 001–100 000 57 1.8 2,043,082 5.0

100 001– 9 0.3 37,254,113 90.7

Total 3,228 100.0 41,072,360 100.0

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the share

Members of Hemtex’s Group management owned a total of 4,250 Hemtex shares on January 31, 2010.

Hemtex Board members owned 12,600 shares.

New issue during 2009

At an Extraordinary General Meeting on April 21, 2009, the Board of Directors’ earlier decision regarding a new share issue in Hemtex AB was approved. On the record date of April 24, shareholders in Hemtex were entitled to a subscription right for each share held, and five subscription rights entitled the holder to subscribe for two new shares at a price of SEK 14 per share. The subscription period for the new issue was April 29 to May 13, 2009 and the issue was fully covered by subscription pledges and guarantees from Hemtex’s largest shareholders. Since the new issue was oversubscribed, the guarantee pledges that had been made did not need to be used. The new issue provided Hemtex with about SEK 164 M before issue costs.

Hakon Invest acquires shares in Hemtex AB

At the end of the preceding fiscal year, on April 28, 2009, Hakon Invest AB submitted a cash tender offer to the shareholders of Hemtex AB in compliance with the Swed- ish rules for mandatory takeover offers. Hakon Invest offered SEK 23 in cash per share together with an add-on premium of SEK 4 per share, which would be payable if Hakon Invest reached a shareholding exceeding 50% of the shares and votes in Hemtex AB. On June 18, 2009, Hakon Invest raised the consideration of the offer to SEK 27 in cash per share, with no possibility to receive any additional premium. As a result of the above offer and additional acquisitions in the market, Hakon Invest

increased its shareholding in Hemtex from 34.6% on April 30, 2009 to 68.5% on December 31, 2009. Since June 30, 2009, Hemtex AB is a subsidiary of Hakon Invest AB.

Incentives program 2007–2010

Within the Group, there is an incentives program for senior managers in the form of subscription warrants and employee options. For further information about this program, see Note 4.

Dividend policy

The Board of Directors’ goal is to propose dividends that over time correspond to approximately 30 to 50% of the Group’s profit for the year after tax. The timing, as well as the magnitude of any future dividends, will depend in part on the company’s profits, expansion and acquisition opportunities and its financial position in other respects.

For the 2009 fiscal year, the Board of Directors of Hemtex AB proposes that no dividend be paid.

Persons with insider status

Trading in shares in a company in which a person has insider status is called insider trading. Such trading must be registered according to law and reported to the Swedish Financial Supervisory Authority. Hemtex is obligated to report to the Financial Supervisory Authority which persons are insiders in Hemtex. These persons must register their shareholdings and all changes in their holdings.

Certain closely related individuals and legal entities may also be subject to the reporting obligation. Hemtex’s management, Board of Directors, auditors and certain other executives are considered to have insider status in

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Hemtex. A link to a complete list of the persons with insider status is available under Investor Relations at www.hemtex.com.

Stock market information

Hemtex’s information to the stock market must be characterized by openness, accuracy, relevance and speed. Once again this year, Hemtex has prepared a fully web-based annual report and thereby selected a distribution channel that is directly accessible to all. As a result, the format of the printed annual report has been simplified and its contents limited to the formal components. Hemtex has elected to prioritize the company’s share-related information via the web and its quarterly reports instead of pro- ducing an extensive annual report.

Hemtex’ press releases, interim reports and annual reports are available under Investor Relations at www.hemtex.com. The website also contains additional information about the company, financial trends and the share. In addition, it is possible to subscribe on the website for press releases, interim reports, annual reports and the share’s closing price.

Owner relationships

On January 31, 2010, Hemtex AB had 3,228 shareholders.

The relationships below refer to the owner list maintained by Euroclear Sweden AB on that date.

100

2006 2007 2008 2009

20 0 40 60 80 120 140

The share OMX Stockholm_PI Source: NASDAQ OMX SEK

Share turnover, 000s Source: NASDAQ OMX

2005 2006 2007 2008 2009

10,000

8,000

6,000

4,000

2,000

Hemtex share trend Hemtex share turnover

the share

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the share

Share capital trends

date transaction increase in no.

of shares total no.

of shares increase of share

capital, seK total share capital, seK

Jan. 29, 1970 Company founded 100 10,000

nov. 18, 1974 new issue 650 750 65,000 75,000

may 5, 1980 new issue 610 1,360 61,000 136,000

may 5, 1980 Bonus issue 140 1,500 14,000 150,000

Jan. 13, 1981 new issue 1,390 2,890 139,000 289,000

Jan. 13, 1981 Bonus issue 110 3,000 11,000 300,000

Jan. 18, 1982 new issue 2,950 5,950 295,000 595,000

Jan. 18, 1982 Bonus issue 50 6,000 5,000 600,000

mar. 14, 1983 new issue 2,000 8,000 200,000 800,000

Jun. 27, 1984 new issue 2,000 10,000 200,000 1,000,000

march 27, 1985 new issue 3,000 13,000 300,000 1,300,000

april 7, 1988 new issue 3,000 16,000 300,000 1,600,000

Jan. 18, 1989 new issue 7,000 23,000 700,000 2,300,000

march 2, 1990 new issue 7,000 30,000 700,000 3,000,000

Feb. 12, 1991 new issue 8,500 38,500 850,000 3,850,000

Feb. 12, 1991 Bonus issue 1,500 40,000 150,000 4,000,000

march 26, 1992 new issue 10,000 50,000 1,000,000 5,000,000

dec. 16, 1992 new issue 4,000 54,000 400,000 5,400,000

dec. 16, 1992 Bonus issue 11,000 65,000 1,100,000 6,500,000

Jan. 9, 1995 new issue 15,000 80,000 1,500,000 8,000,000

Jan. 9, 1995 Bonus issue 20,000 100,000 2,000,000 10,000,000

Jun. 2, 2000 new issue 190,000 290,000 19,000,000 29,000,000

Feb. 12, 2002 new issue 50,825 340,825 5,082,500 34,082,500

July 1, 2003 new issue 100,000 440,825 10,000,000 44,082,500

Jan. 20, 2004 new issue 155,585 596,410 15,558,500 59,641,000

oct. 13, 2004 new issue 43,740 640,150 4,374,000 64,015,000

march 1, 2005 new issue 15,000 655,150 1,500,000 65,515,000

march 16, 2005 new issue 9,660 664,810 966,000 66,481,000

aug. 18, 2005 split 40:1 25,927,590 26,592,400 66,481,000

oct. 6, 2005 new issue 1,425,000 28,017,400 3,562,500 70,043,500

June 20, 2007 new issue 400,000 28,417,400 1,000,000 71,043,500

June 20, 2007 new issue 920,000 29,337,400 2,300,000 73,343,500

may 26, 2009 new issue 11,658,080 40,995,480 29,145,200 102,488,700

June 2, 2009 new issue 76,880 41,072,360 192,200 102,680,900

The information contained in these fact boxes is updated under Investor Relations at www.hemtex.com prior to all interim reports.

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Board of Directors’ report

The Board of Directors and the President of Hemtex AB (publ), corporate registration number 556132-7056, hereby submit the annual report and consolidated accounts for the abbreviated fiscal year from May 1, 2009 to December 31, 2009.

General information about operations

Hemtex is the leading home textile chain in the Nordic region, with a total of 214 stores as of December 31, 2009, of which 147 in Sweden, 39 in Finland, 12 in Denmark, 12 in Norway, two in Estonia and two in Poland. Of the stores, 189 are owned by the Group and 25 by franchise holders. On December 31, 2009, there were 21 franchise stores in Sweden, two in Denmark and two in Poland.

Under a common brand, Hemtex sells interior decorat- ing products focused on home textiles. The assortment is divided into four product areas: Sleep, Bathe, Windows and Eat & Entertain. All product areas are supplemented by non-textile home accessories. The chain stores have two forms of operation: proprietary stores and franchise stores. Regardless of operation form, the stores are managed in accordance with the Hemtex concept and guidelines, but with scope for local business influences.

Hemtex AB is the Group’s Parent Company. The Parent Company operates Swedish stores and is responsible for concept development, marketing, business management, controlling and product supply to all stores in the chain.

In addition to the Parent Company, Hemtex AB, the Hemtex Group includes wholly-owned subsidiaries Hemtex Oy (Finland), Hemtex A/S (Denmark), Hemtex AS (Norway), Hemtex (Shanghai) Co., Ltd. and Hemtex Finans AB.

Hemtex conducts operations in Estonia through a branch office. The Group also has a representation office in Bangladesh.

Since June 2009, Hemtex AB is a subsidiary of Hakon Invest AB (556048-2837).

The Hemtex share and ownership

On December 31, 2009, Hemtex AB’s share capital amounted to SEK 102.7 M distributed among 41,072,360 shares, each with a par value of SEK 2.50. During the abbreviated fiscal year, the number of shares rose by 11,734,960 and the share capital by SEK 29.4 M due to the new share issue. The new share issue was resolved at the Annual General Meeting held during the preceding year and was completed in June 2009. All shares carry equal rights to the company’s assets and profits. There is one class of shares and no limitations in terms of the number of votes each shareholder may cast at the Annual General Meeting. There is no regulation in Hemtex’s

Articles of Association limiting the right to transfer shares. Hemtex AB has not entered into any agreements that would be affected by a possible takeover bid.

Hemtex AB is a Nordic Mid-Cap company, listed on the NASDAQ OMX Stockholm exchange. The principal owners at the close of the abbreviated fiscal year were Hakon Invest AB with 68.5% of the shares and AB Industri värden with 12.5% of the shares. No other shareholder holds, directly or indirectly, more than 10% of the shares in Hemtex AB.

The Board of Directors and any deputy Board members are appointed at the Annual General Meeting for the period until the next Annual General Meeting. There are no regulations in Hemtex’s Articles of Association concerning the appointment and dismissal of Board members.

Risk factors

Hemtex’s operations are associated with risks of varying character. Risks related to market conditions include the impact of business cycles, changes in fashion and trends, weather, seasonal variations and competitors. Risks related to business operations include increased production and distribution costs, supplier risks, inventory risks, cancellation of significant contracts, risks relating to acquisitions and disposals, the distribution center and information systems.

The financial risks include risks related to unfavorable capital and credit market terms and currency, interest and credit risks.

Market-related risks Impact of business cycles

As in all retailing, demand for Hemtex’s products is affected by general economic conditions.

Hemtex has operations in the Nordic countries (except Iceland), Poland and the Baltic countries. The general economic crisis that affected the global economy in the autumn of 2008 and largely still persists negatively affected all of Hemtex’s markets, although to varying extent. The Baltic countries, for example, were particularly affected. Continued declines in GDP and lower private consumption in Hemtex’s markets may have some negative consequences for the company’s operations, profits and financial position.

Fashion risks

Demand for home furnishings and home textiles is more influenced today than previously by fashion trends as in the clothing sector. Hemtex is therefore dependent on consumer preferences with respect to design, quality and pricing of products in Hemtex stores.

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Board oF direCtors’ rePort

Hemtex continuously monitors trends in home textiles and related sectors. When fashion trends are beginning to attain commercial volumes, Hemtex acts quickly. Time is an important factor in choosing the right product range, and it is therefore essential that design and purchasing take place as close to the sales season as possible. On the other hand, manufacturing and delivery require lead times to be able to keep costs at a reasonable level. Central functions at the head office in Borås work to ensure that the entire value chain, from concept to sales, is managed as efficiently as possible.

Weather and seasonal variations

The weather affects sales of home textiles. A mild autumn and winter normally has a negative impact on sales, and a cold and rainy summer normally contributes to higher sales figures. Extreme weather can have major consequences for the company’s sales. Sales of home textiles also have seasonal variations. During the autumn and winter, more expensive products, such as quilts and pillows for the bedroom, are sold, while summer sales comprise mostly terry towels. In general, sales are highest during the autumn and winter, with December being traditionally the best month.

Competitors

The market for Hemtex’s products and services is compet- itive, and there are several different competitors in the local markets. Hemtex’s strategy includes improving its already strong position in the market and thus preparing the company for more intense competition.

Although Hemtex has lost market share in the Swedish market over the past two years, the Group’s position remains strong. Hemtex is the market leader with about 23–24% of the market during the 2009 calendar year.

Operational risks

Production and distribution costs

A large portion of the products that Hemtex sells are manufactured in countries with lower cost and wage levels than Sweden. As a consequence, Hemtex can sell its products at a lower price than would be possible if manufacturing took place in Sweden. However, trends in the countries in which manufacturing is located change rapidly in many cases, and there are no guarantees as to how long the relatively low cost levels will prevail in the countries in question.

Hemtex works with sourcing and is constantly review- ing cost levels to enable the lowest possible price to be offered to customers. Hemtex actively seeks and

constantly evaluates existing suppliers and purchasing markets with respect to such factors as price, quality, compliance with the code of conduct and delivery times.

By purchasing more goods directly from suppliers, Hemtex can lower purchasing prices and thus strengthen its margins. Hemtex also has greater opportunities for controlling and influencing manufacturing plants than when purchases are via intermediaries. One goal in purchasing work is to increase the proportion of goods purchased directly from the producer. The proportion of direct purchases is currently slightly more than 81%, and Hemtex’s view is that it will be possible to further increase this share somewhat. For purchases from Asia, the goal is 80%, and the current proportion is 74%.

Supplier risks, etc.

Hemtex has no production of its own and instead uses a number of suppliers that produce the company’s products.

On-time delivery of goods is very important for Hemtex.

Loss of one or more suppliers, as well as delayed or missing deliveries, could have a negative impact on the company’s business. Some of the company’s products are produced in developing countries where the work environment and production conditions are different from the conditions applying in the countries where Hemtex’s products are sold. Hemtex has established a code of conduct that specifies the suppliers’ responsibilities and regulates the relationship between Hemtex and the supplier.

Hemtex conducts systematic inspections of working conditions and environmental work among its suppliers.

The purchasing offices in Dhaka in Bangladesh and Shanghai in China function as hubs for purchasing and inspection work, which are closely linked. Hemtex per- forms its own inspections and also purchases inspection services from certified external companies, such as SGS and ITS.

During 2009, work on controlling suppliers continued and action plans were formulated for those suppliers that had not been approved. Hemtex’s code of conduct is an important parameter in the evaluation of suppliers.

Inventory risk

Hemtex has a Group-wide distribution center (central warehouse), as well as inventory in the individual stores.

Inventory risk is the risk of obsolescence if inventory is not sold at a value exceeding the acquisition value.

At December 31, 2009, the value of inventory amounted to SEK 220.9 M (288.9*). The reduction was the result of a strictly controlled purchasing strategy, whereby inventory levels at the end of the abbreviated fiscal year

* Comparative figures in the running text in the Board of Directors’ report pertain to the corresponding period of the preceding year (May–December 2008); these comparative figures have not been examined by the company’s auditor. Audited comparative figures pertaining to the preceding fiscal year are presented on pages 17–53.

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were assessed to be in good balance. Of total inventories, wholesale inventories accounted for SEK 72.1 M (71.9*).

The inventory per store within the Group averaged SEK 0.8 M (1.1*) on December 31, 2009.

Cancellation of contracts

Hemtex has entered rental contracts, purchasing contracts and franchise contracts that are important for its business.

Management and the Board of Directors, consider, however, that no individual contract or similar engagement associated with operations is of critical importance for the Group’s operations, profits or financial position. The contracts can be terminated with a certain notice period, which is mainly nine months.

Acquisitions and disposals

Over the years, Hemtex has acquired a number of companies and operations. Growth through acquisitions con- stitutes a risk due to difficulties in integrating operations, employees and products.

During the abbreviated fiscal year, no acquisitions occurred. In prior years, Hemtex purchased franchise stores, which entailed that integration into the Hemtex chain was not particularly difficult.

Distribution central

Most of the goods that are sold in Hemtex stores pass through the company’s distribution center in Gothenburg.

If the distribution center or its equipment is damaged or should need to be closed, this might result in problems with deliveries to stores. If such circumstances cannot be rectified quickly and efficiently, operations might suffer.

There is insurance for property and production stoppages, but there are no guarantees that the amounts are sufficient or that they could be fully recovered.

Information systems

Hemtex is dependent on information systems for controlling the flow of goods from purchasing to sales in stores, as well as for compiling operative and statistical data.

Every prolonged service interruption or inadequate functionality in these information systems may mean that important information is lost or that actions are delayed, particularly if problems occur during a peak season, such as Christmas.

Financial risks

Information regarding financial risks and risk policies is presented in Note 30.

Key events New fiscal year

At an Extraordinary General Meeting on December 2, 2009, the company’s fiscal year was changed from previously being

the period between May 1 and April 30 to, in the future, the period corresponding to the calendar year (Jan 1–Dec 31).

Accordingly, the current fiscal year only comprises the period from May 1 to December 31, 2009. This reorganization was implemented because Hemtex AB has been a subsidiary of Hakon Invest AB, which has a calendar year as its fiscal year, since June 30, 2009.

Market

According to the most recent monthly report from the market research firm GfK, the Swedish market for home textiles declined during the first half of 2009. The visiting rate also declined during the year, by 7.5%. The total market rose 2% to SEK 5,565 M. In accordance with Hemtex’s sales during the 2009 calendar year, its market share was 23–24%.

New President and CEO

On November 1, 2009, Erik Gumabon took office as the new CEO. In connection with this comprehensive organizational change was launched in the Group. Work on implementing the new plan continues with a view to presenting the brand identity during 2010.

New share issue

At an Extraordinary General Meeting on April 21, 2009, a previous decision by the Board of Directors regarding a new share issue was approved. On the record date of April 24, 2009, Hemtex shareholders were entitled to a subscription right for each share held, and five subscription rights entitled the holder to subscribe for two new shares at a price of SEK 14 per share. The subscription period for the new share issue was from April 29 to May 13, 2009, and was fully covered by subscription pledges and guarantees from Hemtex’s largest owners. On May 19, 2009, notification was provided regarding calculation of the outcome of Hemtex AB’s new share issue. It was shown that the new share issue was oversubscribed and that the guarantees that had been issued did not need to be used.

The new share issue contributed about SEK 164 M to Hemtex before issue costs. The new share issue was fully registered with the Swedish Companies Office on June 2, 2009, whereby the total number of shares in the company amounted to 41,072,360.

Mandatory takeover offer from Hakon Invest AB At the end of the preceding fiscal year on April 28, 2009, Hakon Invest AB submitted a cash tender offer to the shareholders of Hemtex AB in compliance with the Swedish rules for mandatory takeover offers. The offer was SEK 23 per share together with an add-on premium of SEK 4 per share should Hakon Invest reach a shareholding exceeding 50% of the shares and votes in Hemtex AB. On June 18, 2009, Hakon Invest raised the considera-

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tion of the offer to SEK 27 per share, with no possibility to receive any additional premium. Through the above offer and additional acquisitions in the market, Hakon Invest’s ownership share in Hemtex AB was increased from 34.6% on April 30, 2009 to 68.5% on December 31, 2009. Since June 30, 2009, Hemtex AB has been a subsidiary of Hakon Invest AB.

Establishments and acquisitions

During the abbreviated fiscal year, Hemtex opened a total of three new stores, all in Sweden. The stores were established in Liljeholmen in Stockholm, Sala and Kalmar.

Cost rationalizations

During the abbreviated fiscal year, Hemtex reviewed its portfolio of stores in all countries and closed 12 stores.

In total, the Group closed seven proprietary stores, while five stores operated by franchisees were closed. In Sweden, the Group closed two stores in Stockholm. Four franchise stores were closed: in Vetlanda, Kalmar, Sala and Köping.

In Finland, stores were closed in Helsinki, Riihimäki and Tampere. In Denmark, a store was closed in Copenhagen and in Norway a store was closed in Hamar. In Poland, a franchise store was closed in Warsaw.

Comments on the income statement Net sales

The Group’s net sales consist of consumer retail sales via proprietary stores and wholesale sales to franchise stores in the Hemtex chain. During the abbreviated fiscal year, net sales decreased by 9.4% to SEK 916.8 M (1,012.2).

With unchanged currency rates, net sales declined by 10.7%.

Of the Group’s net sales, Swedish operations accounted for sales of SEK 687.6 M (767.6*), Finnish operations accounted for SEK 138.2 M (152.4*), operations in Denmark for SEK 46.6 M (49.5*), operations in Norway for SEK 39.2 M (37.8*) and the operation in Estonia for SEK 5.2 M (4.9*).

Other operating income amounted to SEK 7.9 M (7.8) and primarily comprised franchise fees and bonus pay- ments from suppliers and business partners.

During the 2009 calendar year, net sales at the consumer level (including franchise stores) decreased in all markets by 12.9% to SEK 1,343 M (1,542).

Consolidated net sales consist of sales to consumers in Group-owned stores and wholesale sales to franchise stores in the Hemtex chain. The Group’s total net sales declined during the 2008/2009 fiscal year by 13.5%

(increase: 9.4) to SEK 1,390.6 M (1,608.3). Excluding acquired units, the decline amounted to 13.9%. With unchanged exchange rates, the decline was 15.1%.

Of consolidated net sales, Finnish operations accounted for SEK 210.6 M (227.3), Danish operations for SEK 69.3

M (76.3), Norwegian operations for SEK 54.2 M (56.3) and operations in Estonia for SEK 7.9 M. Other operating revenues amounted to SEK 14.1 M (15.6) and consisted primarily of franchise fees and bonuses from suppliers and business partners.

Earnings

Consolidated gross profit (net sales less cost of goods sold) declined 16.8% to SEK 466.5 M (560.5*). The gross margin increased to 50.9% (55.4*). The cost of goods sold includes a total of SEK 16.5 M in nonrecurring costs pertaining to the impairment of articles being removed from the range. Excluding these costs, the gross margin amounts to 52.7% (55.4*).

At present, the portion of direct purchases from producers slightly exceeds 81%. For the portion of purchasing from Asia the aim is 80% and the current level is 74%.

To reduce the currency risk, Hemtex hedges a substan- tial portion of the Group’s contracted flows in foreign currency. The Group’s finance policy stipulates that at least 65% of contracted flows must be hedged. In total, the exchange-rate differences that affected earnings during the period were positive, amounting to SEK 6.6 M (25.6*).

The change in value of outstanding forward contracts, applying IAS 39, had a positive impact of SEK 3.6 M (6.9*) on gross profit during the abbreviated fiscal year.

Operating expenses, excluding goods for resale and depreciation and impairment losses on tangible and intangible assets, amounted to SEK 541.8 M (497.0*). As a percen tage of sales, these expenses amounted to 59.1% (49.1*).

The operating result was charged with nonrecurring costs. These costs amounted to SEK 109.7 M and derived from impairment losses on goodwill amounts in Sweden and Denmark, impairment of inventories, a change in the depreciation period for improvement expenditure on a third party property, costs for personnel changes at management level and adjustment costs. The adjustment costs pertained to costs for closing stores, changing the product range, a new store concept and a new identity.

Nonrecurring effects

SEK M 8 months, May–Dec

impairment of goodwill 36.9

impairment of inventories 16.5

Change in depreciation/amortization schedule 12.7

Cost of workforce changes 13.9

adjustment costs 29.7

Total 109.7

Earnings were charged SEK 36.9 M for the impairment of goodwill. Of depreciation/amortization of tangible and intangible fixed assets, rental rights accounted for

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SEK 3.9 M (4.2) and other depreciation/amortization for SEK 39.7 M (26.9). During the abbreviated fiscal year, other depreciation/amortization was affected by a nonrecurring charge of SEK 12.7 M. This derived from an adaptation of the useful life for the impairment of improvement expenses pertaining to a third-party property from an economic life of 20 years to a life of five years. Of the impairment loss for goodwill, SEK 19.5 M pertained to the Danish operation and the remaining SEK 17.4 M to the Swedish operation. An operating loss of SEK 148.0 M (profit: 40.2*) was reported, corresponding to an operating margin of minus 16.1% (plus 4.0*).

Excluding the nonrecurring items described above, the operating loss was SEK 38.3 (profit: 53.2*).

All markets reported operating losses during the abbreviated third quarter. The results for the various markets are presented in the section on segment reporting on page 12 of this report. The consolidated loss before tax amounted to SEK 151.6 M (profit: 31.9*), resulting in a profit margin of minus 16.5% (profit: 3.2*). The loss after tax amounted to SEK 121.3 M (profit: 23.0*).

During the fiscal year, the return on shareholders’

equity was a negative 48.8% (pos: 7.7*). Return on operating capital was a negative 40.1% (pos: 9.4*).

Comments on the balance sheet Goodwill

During December, all goodwill amounts in the Group were impairment tested. Impairment testing was based on value in use taking into account future cash flows. An impairment loss of SEK 36.9 M was posted. Of this impairment loss, SEK 19.5 M pertained to the Danish operation and the remaining SEK 17.4 M to the Swedish operation. Following the impairment loss described above, Sweden accounts for all goodwill. The Hemtex Group’s total goodwill recog- nized in the consolidated balance sheet at December 31, 2009 amounted to SEK 246.0 M (287.5*).

Inventory

On December 31, 2009, inventories amounted to SEK 220.9 M (288.9*). This reduction derived from a strictly controlled purchasing strategy, whereby inventory levels at the end of the quarter were deemed to be in balance. Of total inventories, wholesale inventories accounted for SEK 72.1 M (71.9*). On December 31, 2009, inventories per store within the Group averaged SEK 0.8 M (1.1*).

Financial position

On December 31, 2009, cash and cash equivalents amounted to SEK 85.7 M (70.9*). Net debt, defined as interest-bearing debt less cash and cash equivalents, decreased by SEK 131.7 M during the most recent 12-month period and amounted to SEK 83.3 M (215.1*)

at December 31, 2009. The net debt/equity ratio at December 31, 2009 was 21%.

The equity/assets ratio amounted to 50%, compared with 45% on the corresponding date in the preceding year.

In order to find a long-term financial solution for the company, discussions were pursued with banks and principal owners. A new agreement is expected to be in place during April 2010.

The proceeds from the recently completed rights issue totaling SEK 164 M were used to reduce interest-bearing liabilities by SEK 115 M and thus facilitated an improvement in the Group’s long-term financing.

On December 31, 2009, the Hemtex Group’s total credit facilities, including limits on letters of credit and currency forward contracts, amounted to SEK 336 M, compared with SEK 335 M on April 30, 2009. Of the total credit facilities, SEK 185 had been utilized on the closing date, compared with SEK 286 M on April 30, 2009.

The total value of purchase orders for which currency forward contracts were signed amounted to USD 5.0 M on December 31, 2009. The value of these outstanding currency forward contracts was SEK 1.3 M on the closing date.

Comments on the cash flow statement Cash flow and investments

Cash flow from operating activities during the abbreviated fiscal year declined, primarily as a result of lower sales. Cash flow after investments was negative SEK 37.8 M (neg: 35.2*).

The Group’s net investments affecting cash flow amounted to SEK 9.0 M (45,2*). Of these investments, SEK 0.0 M (8.2*) was attributable to acquisitions of stores, SEK 3.3 M (26.4*) to new establishments and remodeling and SEK 5.7 M (10.6*) to other investments.

Personnel

During the fiscal year, the number of was 768 (787*). The number of Group-owned stores during the abbreviated fiscal year declined from 192 to 189 units, down 2%. The distribution is 7% men and 93% women. Approximately 89% work in the store organization and 11% work in central functions such as purchasing, logistics, marketing and administration.

Hemtex’s gender equality plan is continuously revised and shall characterize the work being carried out in many areas. Examples contained in the policy include: salary differences based on gender must not exist, working conditions shall be adapted to both women and men and edu- cational and developmental opportunities shall be equal.

The systematic work environment effort within Hemtex is based on all employees within the Group being provided with sound, safe and pleasant workplaces and that all managers are educated within the area. Courses on working environment and safety are conducted on a continuous

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basis to include new employees in the organization.

Within Hemtex, all store managers are required to partici- pate in this course. Work environment inspections and subsequent action plans are implemented annually to continuously improve the environment and satisfaction in Hemtex operations.

A comprehensive crisis management plan is in place to ensure efficient crisis management. The plan highlights potential incidents that could occur and how they shall be handled. A central crisis management team and crisis sup- port representatives in stores were appointed and trained.

The crisis team meets on a regular basis to develop the crisis management work and ensure that the organization is prepared in the event of unforeseen incidents, such as the risk of injury to an individual employee or the company in its entirety.

Hemtex AB has collective agreements with the trade unions Unionen and the Union of Commercial Employees.

Work for sustainable development

Hemtex purchases all textiles and other products from suppliers around the world. Most of the purchases are channeled directly from about 100 suppliers. Because Hemtex has no direct control over production, the Group has developed guidelines for suppliers in the form of a Code of Conduct to be able to ensure that products are manufactured under sound working conditions and in the proper manner. The Code of Conduct is based in part on the UN’s Convention on the Rights of Children and con- ventions that the UN’s agency for labor market issues, ILO, has established for working conditions and rights in working life. The Code of Conduct deals with such issues as discrimination, child labor, working hours, salaries, working conditions and the right to form and belong to trade unions. In 2008, the Code of Conduct was updated with environmental requirements and a major chemicals update was implemented.

All Hemtex suppliers have signed framework agreements regarding delivery, quality, environmental and ethi- cal demands and also demands in terms of copyright pro- tection. The framework agreement is connected to the purchasing conditions, Hemtex Purchasing Instructions.

Environmental requirements on manufacturing

Hemtex does not conduct any operations that are subject to permit or reporting obligations according to the Envi- ronment Code. Hemtex’s operations have the greatest impact on the environment in conjunction with manufacturing and transport. Among other aspects, environmental work therefore focuses on reducing the use of harmful chemicals in manufacturing through establishing stop lists and permissible levels for certain chemicals.

In the framework agreement that is signed by suppliers, Hemtex demands that they comply with local environmental laws and have all necessary permits for their operations. The environmental requirements in Hemtex’s Code of Conduct include regulations regarding purifica- tion of air and water emissions, certificates from authori- ties, lists and safety factsheets for all chemicals and demands concerning the handling of chemicals and waste.

Environmental requirements on transports

For logistic services, suppliers are contracted who strive to be leaders in environmentally sustainable transport and logistics solutions. For the most part, shipments to Hemtex occur by sea and to a far lesser extent by air.

Procedures for when air freight may be used have been produced, and only a marginal share of Hemtex’s transports is by air.

Systematic monitoring of suppliers

Hemtex implements systematic monitoring of work conditions and environmental practices at supplier operations through own inspection.

The purchasing offices in Dhaka, Bangladesh, and in Shanghai, China, function as hubs for both purchasing and inspection activities, which are closely connected.

Hemtex carries out inspections under its own management and also contracts inspections from independent, certified companies such as SGS and ITS.

During 2009, work on inspecting suppliers continued and action plans were formulated for all suppliers that had not been approved. Hemtex’s Code of Conduct is an important parameter in the evaluation of suppliers.

A consolidation of the Group’s supplier base is under way, in which the emphasis was on important long-term suppliers and purchasing markets. The aim is to become even more efficient by concentrating purchases to fewer suppliers. Hemtex purchases down and feather products directly from suppliers in China. The other was that Hemtex performed extensive inspections of the delivery chain for down and feathers in China both through its own controls and in collaboration with other Swedish companies and Chinese industry associations. In the inspections that were performed on all suppliers in the area, no hand-plucked products were detected. Hemtex also ensured the entire delivery chain backwards from breeders and slaughterhouses to producers of quilts and pillows.

Increased commitment within the Better Cotton Initiative (BCI)

In an effort to positively influence conventional cotton production, Hemtex is committed as a partner member of

Annual ReportFor the abbreviated fiscal year, May–December 2009

Annual Report

Contents

1

May–December 2009 fiscal year in brief

2

" A more profitable store concept and more attractive customer offering constitute the foundation for the new Hemtex"

3

4

The Hemtex share

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5

6

7

8

Board of Directors’ report

9

10

11

12

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