The Board of Directors and the Chief Executive Officer of Obducat herewith submit the Annual Report and Consolidated Accounts for the financial year of 1 January 2009 – 31 December 2009. In this report the name Obducat refers to the Group of which Obducat AB (publ.) is the parent company. Obducat AB is a public company located in Malmö. The corporate identity number is 556378-5632.

Ownership structure

Significant events during the year

The order intake during the year was marked by customers postponing their purchase decisions as a direct consequence of the financial crisis. However, Obducat judges that the long-term potential for its NIL products remains unchanged based on the one hand on the basic driving force of the technology changes already initiated, and on the other hand in the light of the highly positive growth seen in the volume of quotations in 2009.

In the second quarter the technical requirements specification pertaining to the order for a Sindre HDD HVM system was changed. The technological changes meant that delivery to the customer could not be effectuated in 2009 as previously planned.

In the second quarter the Sindre^®400 machine was introduced and demonstrated to press and invited guests at the head office at Geijersgatan in Malmö. Sindre^®400, designed for industrial production and adapted to the LED industry, is Obducat’s first fully automated machine. It is the first of its kind and the launching met with keen international interest.

As authorised by the Annual General Meeting on 18 June, the Board of Directors in the third quarter implemented a new share issue with preferential rights for Obducat’s shareholders and holders of Obducat’s convertibles 2008/2011. The issue was fully subscribed and provided the Company with about SEK 74 M before issue expenses and warranty costs.

Two new EU funded projects were started during the year, TERAMAGSTOR and SMASH, both of which Obducat participate in. The TERAMAGSTOR project aims to develop the next generation magnetic memory media with a memory capacity of 1 Tbit per square inch. Other participants in this project include STMicroelectronics and FHR Anlagenbau. The purpose of the SMASH project is to establish new materials and process technologies to be used in cost-efficient, power-efficient, white LED sources for the general lighting market. The main focus for Obucat in this project is will be on production of stamps and replication of nanostructures based on IPS®-STU®, Obducat’s proprietary nanoimprint lithography for high volume manufacturing. SMASH extends over three years with a budget totalling 11.5 million Euros.

Lars Tilly was appointed new CEO of Obducat on 30 November 2009 and formally took up his duties on 1 February 2010. Lars Tilly was previously employed at Ericsson for a number of years in the capacity of head of research.

Research and development

Costs for research and development charged to the result for the year totalled SEK 31.7 M (28.2) before depreciation, in addition to which SEK 20.5 M (12.0) was activated as capitalised development expenditure and patents. Total research and development activities in 2009 were increased by 30 per cent compared with the previous year. The increased development costs are largely attributable to the Sindre machines.

Patents

Robust patent protection is of utmost importance to Obducat. The patents create exclusiveness, which is a vital part of generating future income. Obducat’s patent portfolio comprises a total of 275 current applications pertaining to 49 inventions. 156 patents have been granted.

Sales and result

The Group’s earnings for 2009 amounted to SEK 51 603 thousand (71 503). Ingoing orders for the year was SEK 63.5 M, which at the close of the year was SEK 47.0 M resulting in a total order intake for the year of SEK 38.9 (104.3) M.

The gross profit for 2009 was SEK 26 410 thousand (41 498), corresponding to a gross profit margin of 51 (58) per cent. The operating loss for the period was SEK –45 596 thousand (–24 565), which was charged with depreciation according to plan of SEK –10 364 thousand (-13 974). Compared with 2008, the difference in the operating loss is primarily due to lower sales volumes in 2009 and that the margin was slightly lower than the previous year. The lower margin is mainly due to the changed product mix, with a comparatively larger part of sales consisting of SEM systems.

The loss after tax was SEK –52 087 thousand (–28 834).

At the end of the period the Group had a total of 63 (70) full-time employees, of which 11 (11) women. The Group continuously and actively works to adjust the organisation to the prevailing market conditions.

External factors

The global financial crisis is assessed to have significantly impacted Obducat’s progress during 2009, and the speed with which Obducat will achieve commercial success will depend on how quickly trade conditions improve. When possible, Obducat hedges prognosticated currency flows and thus estimates that currency fluctuations currently have a relatively small impact on the business.

Financing and liquidity

As authorised by the Annual General Meeting on 18 June 2009, the Board of Directors in the third quarter implemented a new share issue with preferential rights for Obducat’s shareholders and holders of its convertibles 2008/2011. The share issue was fully subscribed and yielded the Company about SEK 74 M before issue expenses and guarantee costs.

On 31 December 2009 equity amounted to SEK 68 722 thousand (57 482). Equity/assets ratio on 31 December 2009 was 42 per cent (38). Interest-bearing liabilities are composed mostly of a convertible debenture loan. The cash flow from current operations was SEK -38 443 thousand (–11 738). Total cash flow for the year was SEK 3 955 thousand (27 330), impacted primarily by the above-mentioned result and the outcome of the preferential rights issue.

Liquid assets, including current investments of surplus liquidity in an interest-based money market instrument, amounted at the close of the reporting period to SEK 51 816 thousand, to be compared with SEK 47 861 thousand at the start of the year.

The above-mentioned convertible loan matures in March 2011 and the outstanding warrants 2009/2011 A and B mature in February 2011. Since the Obducat B share is currently traded at a price which is considerably lower than both the current conversion price of SEK 1.65 for convertibles and the warrants’ strike price of SEK 0.75, it makes the forecast for conversion and exercising of warrants uncertain. This uncertainty caused the Board of Directors to call an Extraordinary General Meeting in April 2010 when it is proposed that it be resolved by the Meeting to change the conditions for Obducat’s convertibles 2008/2011 and that the warrants be recalculated in accordance with the changed conditions. The purpose of changing the conditions is to make it attractive for the holders of convertibles to convert into shares and in that way strengthen Obducat’s financial position with 2011 approaching. The speed with which Obducat’s commercial success and future need for funds will come about will on the one hand depend on how quickly Obducat can capitalise on the focused market efforts and the cost savings that are implemented, and on the other hand on how fast the trade will recover. Additionally, should the scope of conversion into shares in accordance with the above not be adequate, a need for further funding might arise over the coming twelve months. If that is the case, the Board and Management will immediately inform the shareholders of this development.

Investments

The Groups’ net investment for the year amounted to SEK 20 860 thousand (14 125), of which the greater part involves investments in intangible assets in the form of capitalised development expenditure for development and patents.

Risks

Lack of demand is the greatest risk facing Obducat. An insufficient market would put the Group’s sales at risk and in the long term also its financial position. Risks are a natural element of all business operations and they are continuously reviewed and assessed and given the highest priority. Based on each separate situation, measures to limit the risk are then decided upon. All customary property and liability risks are managed with normal insurances. The Group’s financial risks are illustrated under “Risk management in the Obducat Group”.

The Obducat share

On 31 December 2009, there were a total of 532 359 870 (335 954 523) shares outstanding with a quota value of SEK 0.10, of which 10 082 918 (6 205 294) series A shares, each representing ten votes. The remainder, 522 276 952 (329 749 229), are series B shares, each representing one vote.

On 31 December 2009 there were outstanding convertible subordinated loans 08/11A & B and warrants TO5A, TO6B, TO7A and TO8B, which could result in a maximum dilution of 39 per cent of the equity. This dilution will arise if all holders of Obducat’s convertible subordinated loan 08/11 choose to convert the loan into shares in the Company and if all warrants (TO5A, TO6B, TO7A, and TO8B) are subscribed for.

The number of shares traded in the twelve months of 2009 totalled 351.5 (203.7) million, equivalent to an average volume per trading day of 1.4 (0.8) million shares.

Parent Company

No external sales outside the Group were generated in 2009 or 2008. Loss before tax was SEK –51 549 thousand (–30 482). The result was charged with write-downs of shares in subsidiaries amounting to SEK –36 401 thousand (–11 660), equivalent to the total shareholder contribution provided to the subsidiaries in 2009 in order to cover losses. The Parent Company’s net investments totalled SEK 4 675 thousand (4 538) in 2009. The investments encompassed mostly patents, carried forward in accordance with IAS 38.

The work of the Board of Directors

The work of the Board is based on its work plan, which is updated once a year. The work plan sets out the Board members’ joint responsibilities as well as specific areas to be monitored by certain members, keeping minutes of meetings and decisions, matters to be addressed and frequency of meetings. During 2009 a total of 20 (26) minuted meetings were held. During the year the Board addressed matters concerning financing, business plan and strategy, evaluation of intangible assets, and overall issues such as business intelligence. The Board’s work procedures are described in greater detail under Corporate Governance in the Annual Report.

Post-closing events

The Sindre^®400 machine, which was previously installed at UniLite (Luxtaltek), Taiwan, was formally approved by the customer in January 2010 (Site Acceptance Test approval). UniLite is one of the world’s leading LED manufacturer and the Sindre^®400 machine is an important condition for UniLite to be able to increase the production volume and meet an increased demand for LED components.

Thanks to its market leading role as industrial provider of production equipment for LED manufacturing, Obducat at the end of January received an order for an Eitre® 6 system from Hamamatsu Photonics in Japan. The NIL system provided by Obducat will be used for product development and pilot production of novel optical components. Hamamatsu based its choice of provide on the imprint quality and on Obducat’s industrial merits and the strong local support from Canon Marketing, Obducat’s agent in Japan. The patented IPS® and STU® processes were employed during the assessments. Hamamatsu Photonics is a world-leading manufacturer of electro optical components and measure instruments, supplying products such as opto-semiconductor components, image intensifiers, light sources, and cameras to academia as well as industrial customers. The order acknowledges the recognition of Obducat as industrial supplier of imprint technology for lithography in the LED market.

The technological development of patterning of hard disk substrates is now progressing in the HDD industry towards Bit Pattern Media (BPM). In this respect Obducat is active towards the industry and is also participating in EU projects with the emphasis on this.

Lars Hain has replaced Lars Montelius on the Obducat Nomination Committee.

Obducat was invited to participate in the EU funded POLARIC project. The project aims to develop the technology in organic electronic circuits for the manufacture of so-called large-area flexible substrates. These can be used for example in large, flexible displays. The POLARIC project extends over four years and has a budget totalling 13.8 million Euros.

The Obducat Board of Directors called an extraordinary general meeting for Wednesday 7 April when it is proposed that the Meeting resolves to change the conditions for Obducat’s convertibles 2008/2011. The Board’s proposal means that the holders of the convertibles are offered the opportunity, during the period of 19-30 April 2010, to convert to shares at a rate of SEK 0.27. The reason for the proposal is that Obducat’s series B shares are currently traded at a rate which is considerably lower than the existing conversion rate of SEK 1.65. This makes the forecast for conversion uncertain in the present situation, and the convertible loan of SEK 55 million a financial uncertainty for Obducat since it matures in March 2011.

Outlook

The Company enters 2010 with a backlog equivalent to SEK 47.0 M, of which orders for HDD-HVM of SEK 30.6 M.

The basic driving forces creating a demand for Obducat’s products are believed to remain unchanged in the long run, and Obducat’s market position in the prioritised application areas is strong. In the short run it is estimated that a highly cautious attitude will characterise customers’ behaviour as far as investments in production technology and capacity are concerned, but that previously dormant investment plans will again be brought up for discussion. This, combined with industrial indicators as well as trend reports pointing to the beginning of a recovery during 2010, causes Obducat to expect the order intake to develop in a positive manner.

Obducat will continue to pursue its efforts to create long-term customer relationships and will accordingly also in the future prioritise customer relations which are expected to result in industrial orders, and consequently improved profitability.

Obducat’s application areas for patterning of various substrates by the use of NIL technology continues to comprise light-emitting diode production (LED), patterning of hard-disk substrates (HDD) and the manufacture of displays (controlled structuring of large surfaces), applicable also to the solar cell industry.

According to Gartner, Inc., provider of technology-related analyses, the LED market for lighting purposes and displays is expected to increase by 9.3% to USD 6.784 M in 2010, and by a further USD 2.062 M to USD 8.846 M until the year 2013. Lithography for patterning of substrates is a central part of the manufacturing process for LED components. Nanoimprint lithography (NIL) is a technically and economically attractive option compared with traditional optical lithography, both for LED based nanothreads and LED technology based on patterned sapphire substrates (PSS).

Obducat has captured a leading position in the market for industrial NIL production equipment used to manufacture LEDs.

The HDD market is yet again, in parallel with solid state based memory media, seeing positive progress. The industry is at present considering the introduction of a generation of hard disks with increased memory capacity, so-called “shingled write recording”. This would enable the HDD industry to continue to make progress directly towards “Bit Patterned Media” (BPM). The introduction of BPM based production is expected to take place in 2012 at the earliest.

In 2009 Obducat commenced trials to increase, by the use of its NIL technology, the effectiveness of transforming sunlight to electric power in solar cells by controlled structuring of substrates and the different cell layers. In this way Obducat will be prepared when the solar cell manufacturers are now beginning to invest in new production capacity.

Remuneration to the President and CEO and other senior executives

The Board of Directors proposes that the 2010 Annual General Meeting approves the following guidelines for remuneration to the President and CEO and other senior executives. The term “other senior executives” refers to those who, together with the CEO, form the management of the Company and who are presented on Obducat’s website and in the Annual Report 2009. Remuneration to the CEO and other senior executives shall consist of fixed salary, flexible remuneration if any, other customary benefits and pension. The combined remuneration shall be market-related and competitive in the labour market where the executive is working. Fixed salary and flexible remuneration shall be related to the responsibility and authority of the executive. The flexible remuneration shall be based on outcome in relation to established targets and have a ceiling in relation to the fixed salary. Termination or resignation is subject to 6-12 months notice by either party. Pension benefits shall be subject to fixed contributions. Matters related to the remuneration of senior executives are decided by the Remuneration Committee and, in the case of the CEO, by the Board. To the extent that a Board member is asked to perform work on behalf of the Company in addition to his or her Board work, the Board shall decide on remuneration, which shall be market related and fair. The Board of Directors may diverge from these guidelines, if there are special reasons to do so in an individual case.

Allocation of disposable funds

Parent Company
At the Annual General Meeting’s disposal:

Reduction of share premium reserve                     46 666 122
Net loss for the year                                              -51 208 852
Total                                                                        -4 542 272

The Board of Directors and the Chief Executive Officer propose that the net loss for the year of –51 208 852 be set off with 46 666 122 against non-restricted equity and that the share premium reserve be reduced by 4 542 272.

The Parent Company’s and the Group’s position on 31 December 2009 and 2008 respectively, and the results for the financial years of 2009 and 2008 respectively are accounted for in the following balance sheets and profit and loss statements together with comments and notes.