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.

* 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.

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 decorating 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 Industrivärden 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.

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 competitive, 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 reviewing 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 performs 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 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 constitutes 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 consideration 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 payments 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 substantial 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 percentage 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.

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 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 recognized 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 educational 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 basis to include new employees in the organization. Within Hemtex, all store managers are required to participate 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 support 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 conventions 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 ethical demands and also demands in terms of copyright protection. 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 Environment 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 purification of air and water emissions, certificates from authorities, 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 the Better Cotton Initiative (BCI). BCI is an international organization that works to make large-scale cotton cultivation less damaging to health and the environment and more economically viable than today’s conventional cultivation. Among other aspects, the goal is to reduce the use of pesticides, artificial fertilizers and water. Proposers and members of the BCI’s Board are global environmental organizations and leading companies in the textile industry. BCI has attained an important role in environmental work within cotton production, which results in a broader environmental impact than merely focusing on increasing the share of ecological cotton. BCI’s new methods and large-scale cultivation are scheduled to be launched during 2010. Hemtex supports the organization by means of financial assistance and by participating in meetings and contributing experiences. Read more about BCI.

Board activities during the abbreviated fiscal year

The Board of Directors is responsible for the company’s organization and management of its business, which includes establishing the company’s strategy. The Board of Directors also has the task of appointing a president. The Board’s work follows an annual agenda that is designed to secure the Board’s requirements for information. In other respects, the Board and the President follow the special work instruction established by the Board that defines the division of work between the Board and the President.

The control issues that are the responsibility of the Board are handled by the Board in its entirety.

During the fiscal year, Hemtex AB was the Franchiser in accordance with contracts signed with each Franchise Holder. The Franchise Holders are linked through an association and are represented by the Board of the Franchise Holders’ Association in contacts with Hemtex AB.

An evaluation of the Board’s work was conducted both within the Board as a whole and in individual talks.

Hemtex’s Nomination Committee has been given access to parts of the evaluation relevant to its work.

For more detailed information about the meetings held by the Board, the work of the Nomination Committee and the Remuneration Committee, refer to the Corporate ­Governance.

Guidelines for remuneration of senior executives

The Annual General Meeting held on September 2, 2009 adopted guidelines for remuneration and other employment terms for company management. A description of the principles applied in the abbreviated fiscal year is presented in Note 4.

The Board of Directors of Hemtex AB (publ), corp. reg. no. 556132-7056 (“Hemtex”) proposes that the Annual General Meeting on April 12, 2010 resolve to approve the following guidelines for remuneration and other terms of employment for senior executives.

Guidelines for remuneration of senior executives

The guidelines below address salaries and other benefits for the company’s management, including the President and CEO, hereafter called “senior executives”.

The guidelines shall be applied to employment agreements entered into after the 2010 Annual General Meeting as well as changes in current employment agreements made thereafter.

Remuneration Committee

The members of the Board appoint a Remuneration ­Committee from among their own numbers for each fiscal year. The Remuneration Committee’s tasks include the following:

(i) preparing Board decisions on issues involving remuneration principles, remuneration and other terms of employment for company management;
(ii) monitoring and evaluating ongoing programs and those concluded during the year for variable remuneration of company management; and
(iii) monitoring and evaluating the application of the guidelines for remuneration of the company’s senior executives, as well as current remuneration structures and levels in the company.

Basic principles

The remuneration of senior executives at Hemtex is based on principles involving performance, competitiveness and reasonableness. Various remuneration components are suitable for reflecting these principles to varying degrees. Consequently, a mixture of several components is used to reflect the remuneration principles in a balanced manner.

The total remuneration of senior executives consists of a fixed salary, variable components in the form of annual variable remuneration and long-term variable remuneration, pension and other benefits. These components combine to form an integrated remuneration package.

For every fiscal year, the details of the total remuneration of senior executives are to be described in the annual report for the current fiscal year, including previously approved long-term variable remuneration, which has not yet come due for payment.

The relationship between fixed and variable salary, and linkage between performance and remuneration

Fixed salary is set on the basis that it must be competitive. The absolute level depends on the scope and complexity of the particular position and the senior executives’ annual performance.

Performance is particularly reflected in the variable components, in terms of the annual and long-term variable salary portions. The variable remuneration of senior executives is related to compliance with the budget and achieving the company’s earnings targets. Normally, the variable salary of senior executives shall not exceed four months’ salary for the Chief Executive and Chief Financial Officer, and no more than two months’ salary for other members of the company’s executive management.

The relationship between fixed and variable salary shall reflect the Board’s assessment of a reasonable balance between fixed and variable remuneration and current ­market practice for senior executives.

Fixed salary during the period of notice and severance pay may jointly not exceed an amount corresponding to the fixed salary for two years. However, fixed salary and/or severance pay shall not be paid if the previous employee returns to or begins a new position during the period that such remuneration is payable. Should such remuneration nonetheless be paid, the previous employee will be subject to a repayment obligation.

Primary terms and conditions underlying the long-term incentive program

The company’s incentive program shall primarily be share price-related and encompass senior executives in the company who can impact the company’s earnings and financial position. An incentive program shall contribute to the long-term growth of Hemtex, and to employees and shareholders gaining a joint interest in seeing a positive share trend. The Board will evaluate, on an annual basis, whether or not a long-term incentive program shall be proposed to the General Meeting. A resolution regarding the incentive program shall be made at the Annual General Meeting.

Motion regarding Share Program 2010

Prior to the 2010 Annual General Meeting, the Board has proposed a combined share matching and performance share program (“Share Program 2010”) addressed to the President and senior executives. The right to participation in Share Program 2010 shall be granted to the President and another 11 senior executives.

Share Program 2010 entails, in brief, that the participants actively purchase shares in the company through NASDAQ OMX Stockholm (“Savings Shares”) during a given period of time, and retain these for a minimum three-year period (“Vesting Period”). On condition that the participants are still employed and still hold their Savings Shares at the end of the vesting period, each Savings Share held will provide the participant with entitlement free-of-charge to receive one share in Hemtex (“Matching Shares”) and a maximum of another three shares in Hemtex (“Performance Shares”). Allocation of Performance Shares is conditional upon Hemtex achieving performance requirements and that the Company’s equity/assets ratio, as per adopted balance sheets for the 2010, 2011 and 2012 fiscal years, does not fall below 25%. The share program shall comprise a maximum of 55,000 Savings Shares, 55,000 Matching Shares and 165,000 Performance Shares. The total number of Matching and Performance Shares may not exceed 220,000. The calculated maximum estimated cost for Share Program 2010 will be approximately SEK 25.8 million, including SEK 20.7 million in social security expenses.

For more information on the proposed incentive program, which is subject to the provisions of Chapter 16 of the Swedish Companies Act (2005:551), refer to Item 16 of the proposed agenda for the 2010 Annual General Meeting and the Board’s complete motion as per the same item.

The Board intends for corresponding share programs to be annually recurrent.

Previously approved incentive programs

In 2007, the Annual General Meeting of Hemtex resolved to approve the establishment of an incentive program for the management group of Hemtex, whereby the Com­pany’s senior executives were offered a combination of warrants and employee stock options with a right to acquire shares in Hemtex. In total, seven of the company’s senior executives acquired 120,000 warrants at the market price and 120,000 employee stock options free-of-charge within the scope of the program.

The right to exercise the employee stock options is conditional upon a certain increase in earnings per share in ­Hemtex during the 2007/2008 and 2009/2010 fiscal years. This target has not been achieved and, consequently, no employee stock options have been exercisable. Because the subscription price of shares subscribed for on the basis of warrants by far exceeds the current price paid for a Hemtex share, the company believes that no warrants in the scope of the incentive program will be exercised. The period of share subscription with the exercise of option rights extends from June 1, 2010 up to and including July 31, 2010.

Pension

Pension benefits shall be competitive in each country. A supplementary pension premium is paid to executives who, in their employment agreement, have contracted pension benefits that exceed ITP. This premium amounts to a certain percentage based on the fixed monthly salary for the Chief Executive Officer, as well as a certain percentage based on the fixed monthly salary of other senior executives, whose employment contracts includes such benefits. Accordingly, variable remuneration shall not be pensionable.

The retirement age is normally 65, but may vary in ­individual cases.

Other benefits

The basic rule is that other benefits, such as a company car and healthcare plans, shall be competitive in local markets.

Divergence from guidelines

The Board of Directors shall be entitled to diverge from the guidelines if there are special reasons in individual cases.

During 2009, the Board deviated from previously adopted guidelines when the company agreed that variable remuneration will not be pensionable.

Majority requirements

The Annual General Meeting’s resolution regarding guidelines for remuneration of senior executives is only valid if it is supported by shareholders representing a minimum of half of the exercised votes or, in the event of an equal number of votes, is supported by the Chairman.

Information regarding remuneration that has not come due for payment

Anders Jansson was the CEO of Hemtex up to and including November 10, 2008. He will receive a salary of SEK 225,000 per month up to and including November 2010. The cost of this was expensed in its entirety during the 2008/2009 fiscal year. No cost is charged to earnings for the 2010 fiscal year. In addition, two members of company management concluded their employment at Hemtex in autumn 2009 and will receive salary for 12 months. The cost of this was expensed in its entirety during the abbreviated 2009 fiscal year. No cost for this will be charged in ­ the 2010 fiscal year. For additional information, refer to ­Hemtex’s Annual Report for the 2009 abbreviated fiscal year.

Significant events after the close of the fiscal year

In accordance with Hemtex’s business plan, the Group is implementing a responsible divestment of all nine stores in Denmark, with the exception of stores owned by franchisees, and will also be divesting all stores in Norway. ­A review of the stores in Finland has been initiated with the aim of reducing today’s portfolio of 39 to about half that number, while the agreement with the remaining franchisee-owned store in Poland is being terminated.

During January 2010, three stores were closed, including one in Sweden and two in Norway. During early ­February, a store was closed in Ludvika. An additional three stores will be closed during the first quarter of 2010, comprising two in Sweden and one in Denmark.

Future development of the Hemtex Group

During 2010, the focus will be on profitability and the program of transformation towards the New Hemtex will gain additional shape. The decided international strategy entails that Hemtex will implement a responsible divestment of all Group-owned stores in Denmark and Norway, terminate the remaining agreement with a franchisee-owned store in Poland and reduce the store portfolio in Finland by about half. The basic objective is to develop Hemtex in profitable markets and discontinue its presence in unprofitable markets. Accordingly, Hemtex will be concentrating its resources in the Swedish market while maintaining a high presence in Finland. By the autumn, a pilot store Stockholm will be opened and serve as a shop window for the new store concept, the changed visual identity and the renewed product range. The range will be divided into three distinct offerings: Scandinavia, Heritage and Contemporary. In total, the changes will constitute the hub of the new Hemtex customer offering.