Ericsson
Annual Report 1999

Plain-text annual report

2 ERICSSON(cid:213)S MISSION is to understand its customers(cid:213) opportunities and needs, and to provide communication solutions better than any competitor. IN DOING SO, Ericsson shall generate a competitive economic return for its shareholders. R380, dual-band telephone with built-in PDA, based on EPOC. Communication tool, calendar, built-in modem. ERICSSON IN BRIEF 1999 third-generation mobile systems: In November, itu established wcdma as the standard for 3g mobile systems under the name imt2000 Direct Spread. The decision was welcomed by Erics- son, which can now offer its operator customers all three major versions of this standard. qualcomm: In terms of number of employees, the takeover of Qualcomm(cid:213)s infrastructure division was Ericsson(cid:213)s largest acquisition during 1999, provid- ing Ericsson with a complete product portfolio of second- and third-generation mobile systems. It also accelerated the pace of work in the standardiza- tion area, which was appreciated by the industry as a whole, particularly by the operators. datacom acquisition: Ericsson acquired the American companies Torrent and TouchWave and the Danish company Telebit a/s to further strengthen its position in the market for ip and datacom solutions. microsoft: In December, Ericsson and Microsoft announced that they would cooperate in the devel- opment and marketing of total solutions for wire- less Internet access. The parties will establish a jointly owned company to market and supply mobile e-mail solutions. Ericsson will be the majority owner in the new company. engine: During 1999, Ericsson achieved major successes with engine, a solution for migrating circuit-switched fixed telecommunications net- works to a next-generation network that can handle circuit-switched and ip-based, packet-linked traf- fic. bt in the U.K., kpn in the Netherlands, Telia in Denmark and Telef(cid:151)nica in Spain chose engine during the year. new management: At the beginning of July, Kurt Hellstr(cid:154)m was appointed president of Erics- son, succeeding Sven-Christer Nilsson, who left the Company. Group Chairman Lars Ramqvist was appointed Chief Executive Officer. ¥ UNCERTAIN FACTORS IN THE FUTURE (cid:210)Safe Harbor(cid:211) Statement under the U.S. Private Securi- ties Litigation Reform Act of 1995: Some statements in this Annual Report are forward looking and actual results may differ materially from those stated. In addition to the factors discussed, among other factors that may affect results are product demand, the effect of economic conditions, exchange- rate and interest-rate movements, the impact of competing products and their pricing, product development, commercialization and technological difficulties, political risks in the countries in which the Company has operations or sales, supply constraints, and the results of customer financing efforts. ¥ 3 1998 SEK m . Percent change ERICSSON IN BRIEF 1999 Orders booked Net sales Income before taxes Earnings per share, SEK 1999 SEK m . 223,828 215,403 16,386 6.17 7.68 2.00 * 187,415 184,438 18,210 6.66 7.87 2.00 19 17 —10 —7 —2 - - Earnings per share according to U.S. GAAP, SEK Dividend per share, SEK Number of employees, December 31 103,290 103,667 * For 1999, proposed by the Board of Directors NET SALES AND ORDERS BOOKED (SEK m.) ERICSSON(cid:213)S 10 LARGEST MARKETS, (PERCENT OF TOTAL SALES) SEK m. 220,000 180,000 140,000 100,000 60,000 20,000 0 1995 1996 1997 1998 1999 Net sales(cid:13) Orders booked LIABILITIES AND EQUITY (SEK m.) SEK m. 200,000 160,000 120,000 80,000 40,000 1995 1995 0 1996 1996 1997 1997 1998 1999 1998 1999 United States(cid:13) 11(cid:13) 11(cid:13) China(cid:13) Britain(cid:13) Brazil(cid:13) Spain(cid:13) Italy(cid:13) Turkey(cid:13) Japan(cid:13) Sweden(cid:13) Germany 9(cid:13) 9(cid:13) 7(cid:13) 7(cid:13) 7(cid:13) 7(cid:13) 6(cid:13) 6(cid:13) 6(cid:13) 6(cid:13) 5(cid:13) 5(cid:13) 4(cid:13) 4(cid:13) 4(cid:13) 4(cid:13) 3 3 MARKET CAPITALIZATION YEAR-END 1995—1999 (SEK m.) SEK m. 1,000,000 800,000 600,000 400,000 200,000 0 1995 1996 1997 1998 1999 INCOME PER SHARE (SEK), AND RETURN ON CAPITAL EMPLOYED (PERCENT) Percent 32 24 16 8 0 SEK 8 6 4 2 0 Equity(cid:13) Minority interests Long-term liabilties(cid:13) Current liabilties 1995 1996 1997 1998 1999 Return on capital employed, % Income per share, SEK (cid:13) (cid:13) (cid:13) (cid:13) (cid:13) (cid:13) (cid:13) (cid:13) (cid:13) (cid:13) (cid:13) (cid:13) (cid:13) 4 share capital As of December 31, 1999, Ericsson(cid:213)s share capital consisted of sek 4,892,846,303 (4,878,380,975), represented by 1,957,138,521 shares. The par value of each share is sek 2.50. As of December 31, 1999, the shares were divided into 164,054,660 Series A shares, each carrying one vote, and 1,793,083,861 Series B shares, each carrying one-thousandth of a vote. During 1999 the number of shares was increased by 5,786,131 through conversions of convertible debentures. During the period January 1 to January 21, 2000, convertible debentures related to convert- ible liabilities for 1997 were converted to 228,975 B shares. Between January 1 and February 5, 2000, additional debentures related to convertible liabili- ties for 1993 were convertible to shares, with rights to dividend for 1999. stock exchange trading Ericsson(cid:213)s Series A and Series B shares are traded on the om Stockholm Stock Exchange, and the Series B shares are also traded on the exchanges in D(cid:159)ssel- dorf, Frankfurt, Hamburg, London and Paris, and on the (cid:210)Swiss Exchange(cid:211) in Switzerland. Ericsson shares are also traded in the United States in the form of American Depositary Receipts (adrs) through the nasdaq system, under the symbol ericy. Each adr represents one Series B share. American Depositary Debentures (adds) are also traded on the nasdaq system under the symbol ericz. Each add represents one convertible deben- ture related to the 1993/2000 convertible debenture loan. Ericsson shares have been traded in Euros in Frankfurt and Paris since January 1, 1999. Nearly five billion shares were traded in 1999. Of this number, about 48 (39) percent were traded on the om Stockholm Stock Exchange, 22 (30) percent via the nasdaq exchange and 29 (30) per- cent on the London Stock Exchange. Trading on other exchanges amounted to about 1 percent of the total, unchanged from the previous year. share price trend The total market value of the Ericsson share rose ERICSSON SHARE DATA 1999 183 percent in 1999 to sek 1,073 b. The index for the om Stockholm Stock Exchange rose 65.9 per- cent during the year. shareholders In all, about 90 percent of Ericsson(cid:213)s shares are owned by Swedish and international institutions. At the end of 1999, about 55 (50) percent of the share- holders were outside Sweden, with 33 (30) percent in the U.S., 6 (6) percent in Britain, 4 (4) percent in Germany, and 12 (10) percent in other countries. employee ownership The Ericsson Savings Fund (Ericssons Allemans- fond) was started in 1984. The Fund, which has 1,254 participants, invests in Ericsson(cid:213)s shares. At the end of 1999 the Fund held 962,000 shares. The price per unit at year-end was sek 7,568 (sek 2,654). A convertible debenture loan amounting to sek 6,000 m. was issued in 1997 with preferential rights to Ericsson(cid:213)s employees. Employees who joined Ericsson after October 10, 1997, were given an opportunity to purchase convertible debentures issued by ab Aulis, an Ericsson company. In 1998, an option plan was implemented for 500 key personnel, who were allotted seven-year call options in Ericsson. The size of the allotment was decided by earnings per share for 1998, and the employee salary and bonus category. Based on the same principles, some 2,000 key employees and senior executives will receive seven-year call options based on earnings in 1999. At an Extraordi- nary General Meeting in November, 1999, it was decided to implement a stock opion plan also for fiscal year 2000. In accordance with this resolution, 12.6 million options will be issued to approximate- ly 8,000 employees. bonus issue and split The Board proposes a bonus issue by way of an increase of the par value of the share from sek 2.50 to sek 4.00, followed by a split 4:1. Trading with the new par value of sek 1.00 is expected to com- mence in the beginning of May 2000. ¥ SHARE TREND 1995—1999 SHARE TURNOVER 1999 600 520 440 360 280 200 120 80 40 B share Afv General Index Million shares 800 700 600 500 400 300 200 100 0 London(cid:13) Nasdaq(cid:13) Stockholm 1995 1996 1997 1998 1999 Jan Mar May Jul Sep Nov ERICSSON SHARE DATA 1999 SHARE DATA Earnings per share P/E ratio, (cid:210)B(cid:211) shares 2) Dividend Direct return % OM Stockholm Stock Exchange share prices (SEK) A at December 30 B at December 30 B high for year B low for year CHANGES IN CAPITAL STOCK 1995—1999 1995 1995 January 1 Split 1995 New issue 1995 Conversions 1996 Conversions 1997 Conversions 1998 Bonus issue 1998 Conversions 1999 Conversions 1999 December 31 4:1 1:1 5 1999 6.17 89 2.0 3) 0.4 575.0 548.0 571.0 175.0 1998 4) 6.66 29 2.00 1.0 209.5 193 268 118.5 1997 4) 6.08 25 1.75 1.2 157 149 192 102.5 1996 4) 3.64 1995 1) 4) 2.92 29 1.25 1.2 109 106 106 56.5 22 0.88 1.3 69 65 89 48 1) After 4:1 split. 2) P/E ratio = Price per share at December 31, divided by earnings per share after full conversion. 3) For 1999, proposed by the board of directors. 4) After 1:1 bonus issue. Number of shares 217,229,118 651,687,354 87,009,390 1,689,035 3,547,308 13,333,854 975,097,150 1,759,181 5,786,131 Capital stock 2,172,291,180 - 217,523,475 4,222,588 8,868,270 33,334,635 2,437,742,875 4,397,952 14,465,328 1,957,138,521 4,892,846,303 LARGEST SHAREHOLDERS, BY VOTING RIGHTS, DECEMBER 31, 1999 AB Industriv(cid:138)rden Investor AB Wallenberg-stiftelser Svenska Handelsbankens Pensionsstiftelse Livf(cid:154)rs(cid:138)krings AB Skandia Pensionskassan SHB F(cid:154)rs(cid:138)kringsf(cid:154)rening Oktogonen, Stiftelsen SEB-stiftelsen Svenska Handelsbankens personalstiftelse Fj(cid:138)rde AP-Fonden SEB-Trygg F(cid:154)rs(cid:138)kring Svenska Handelsbankens aktiefonder Wallanders och Hedelius(cid:213) stiftelse Number of shares 46,520,000 68,376,700 27,293,024 10,640,000 21,855,843 7,920,000 4,020,000 3,140,000 2,460,000 75,998,018 19,893,560 10,782,600 800,000 Foreign ownership 897,506,209 Voting rights percent 28.0 22.3 16.5 5.6 5.0 4.8 1.9 1.5 1.5 1.4 1.3 0.8 0.5 2 6 Ericsson well prepared for the new millennium T he past year was exciting and eventful for Ericsson. It began slowly but finished in high gear. Income before tax for the fourth quarter reached a record level — sek 8.5 billion. The performance of the Ericsson share was highly favorable during the year, increa- sing 183 percent in value. This meant that the value of shareholders(cid:213) investments in the company rose by sek 694 billion in 1999. Ericsson is the global leader in mobile commu- nications. More than 70 percent of our sales are generated from mobile systems and terminals. It is significant that this is where Ericsson(cid:213)s real strength lies, because mobile communications is now the largest and fastest-growing area in our industry — an industry that in the past few years has undergone more rapid and extensive transformation than any other. The mobile Internet and mobile datacom are becoming a reality. This development is increasing- ly apparent in trend-setting countries such as Japan and the U.S. In Japan, the star player in 1999 was i-Mode, a solution for direct connection to the Internet via mobile terminals; in the U.S., the deve- lopment shows in the fact that operators of Mobitex networks from Ericsson experienced substantial growth in the number of subscribers in 1999. This development has not come as a surprise to Ericsson. On the contrary, we have been preparing for it for a long time. We have been working on developing the third generation of mobile systems for more than a decade. We are currently the only supplier offering a large number of test systems to customers worldwide — 17 systems to be exact. In 1999 we received several commercial orders for such systems — for example, from ntt DoCoMo in Japan. significant business opportunities The growing number of mobile subscribers creates demand and development in the market. As early as 2003 we expect the number of subscribers to have reached one billion. Some 120 million are expected to be using third-generation systems as early as 2004. The mobile Internet brings significant business opportunities to Ericsson, not only because the mobile networks must be upgraded and adapted with equipment for the new generation of systems. The demand for various types of mobile data ser- vices also brings a strongly increased need for capa- city in the mobile networks, resulting in demand for new infrastructure investments by operators. To take full advantage of the new technology, subscri- bers will require new and advanced mobile termi- nals — terminals that are currently being developed by Ericsson. focus on the mobile internet The first major step toward the mobile Internet is now being taken with the help of wap technology. Its current position as the focus of market interest clearly demonstrates the growing importance of the mobile Internet, even now before the higher trans- mission speeds of third-generation systems can be achieved. As one of the initiators of the wap standard, Ericsson is well prepared. We currently have the market(cid:213)s broadest range of wap knowledge, inclu- ding hardware, applications development, consul- tants and terminals. In a campaign during late autumn, we offered the services of 400 highly qua- lified consultants to companies interested in deve- loping wap services. The next step toward third-generation systems is gprs. This is a packet-switched technology that considerably increases the capacity of the mobile networks, which also makes it possible to introduce new services and provide better service to the sub- scriber. In 1999, Ericsson won well over 50 percent of the world(cid:213)s gprs orders. We are also leading in edge, a third-generation technology for existing frequency bands. With the U.S. launch scheduled for the beginning of 2001, edge will be the first third-generation mobile system to be placed in commercial operation. During the year Ericsson installed test systems for edge and signed the first major contracts. This is further confirmation that we are leading the way to the next generation of systems. unique knowledge for sale In addition to technology, applications are crucial to the development of the mobile Internet. The key is to offer customers simple, fast and secure solu- tions for e-commerce. During the year, Ericsson(cid:213)s achievements included a strategic partnership with Visa International and a joint development with Sonera SmartTrust for the world(cid:213)s first digital signature for secure e-commerce using wap phones. In 1999, Ericsson brought together its resources in service offerings and business consulting. Erics- son Services offers operators a powerful portfolio of TO THE SHAREHOLDERS 7 Lars Ramqvist, Chairman of the Board and Chief Executive Officer Kurt Hellstr(cid:154)m, President services, thus strengthening Ericsson(cid:213)s position as complete supplier, system integrator and partner. Ericsson Business Consulting, which targets the enterprise sector, had 2,700 highly qualified employees in 36 countries at year-end, making Ericsson the leading supplier of Internet-based business solutions. Customers during the year included Reuters, the Dutch daily newspaper, de telegraaf, Scania, lycos and sas. Ericsson(cid:213)s goal is to lead the development of the mobile Internet. We will do so, based on our strong position as a complete supplier of communications solutions ranging from backbone networks and mobile infrastructure to applications, consulting and terminals. strengthened position in ip and data communications During the year Ericsson gradually strengthened its position in next-generation ip-based core networks. Ericsson(cid:213)s solution for the successive migration of existing circuit-switched networks, to enable them to support ip and atm-based services, has also been highly successful. The year began with a break- through order from bt, which was followed by orders from Diginet in Latin America, Telia in Denmark, Dutch kpn and Spanish Telef(cid:151)nica. During the autumn, Ericsson(cid:213)s offering was presen- ted under the engine concept. For third-generation mobile systems, Ericsson has developed a new platform that handles atm and ip traffic. As a real-time router it is called the rxi 820. A number of important strategic acquisitions were carried out during the year to further streng- then Ericsson(cid:213)s position in the market for ip and data-communications solutions. The American companies Torrent and TouchWave contribute broad expertise and a complementary product port- folio in data communications. Ericsson(cid:213)s incorporation of the Danish compa- ny, Telebit a/s, which is world-leading in the next generation of the Internet protocol, ip version 6, has given Ericsson access to leading-edge expertise in a strategically key area. a welcome acquisition The largest single acquisition, by number of employees, was the infrastructure division of Qual- comm. This enabled Ericsson to offer a complete product portfolio in both second and third-genera- tion mobile systems. In addition, the acquisition had a favorable effect on standardization, which stimulated the entire industry. Other examples of strategic partnerships that were deepened or commenced during the year include the partnership with Juniper and Ericsson(cid:213)s cooperation with Microsoft. Together with Micro- soft we have established a company that will develop mobile Internet applications, such as wire- less e-mail. The joint development work of the Symbian consortium on the epoc operating system has cont- inued to advance favorably. The first mobile phones using epoc were introduced during the year. a year of innovations The business segment Consumer Products showed unsatisfactory results during most of the year. This trend, however, was broken during the fourth quar- 8 ter. Targeted production speed was achieved at the end of the year. During the year, a number of new phones were presented, together with a range of new accessories, several of which were strikingly innovative and attracted much attention in the market, especially among younger consumers. Ericsson(cid:213)s Chatboard, fm-radio attachment and mp3 player are proof that innovations are now receiving great attention within the company. Ericsson now has a very competitive product portfolio, which will be expanded in 2000 with more products based on the entirely new technical platform developed in 1999. Measures have been taken with the objective of gaining market share and regaining the position as number two in the world. turnaround in the second half We can now conclude that the unfavorable opera- tional performance that was developing at mid-year has been reversed. The dramatic trend of rising costs was broken. Negative cash flow has turned positive. Ericsson(cid:213)s business is once again under good control and improving. Ericsson is entering the new millennium with strong momentum, a clear vision of our strategic direction, a first-class product portfolio and a uni- que position of market leadership in the most expansive area of the industry. The continuing growth of mobile communications in all markets, improving conditions in several key markets and the strong market interest in the mobile Internet all indicate that the year 2000 will be one of the most exciting in Ericsson(cid:213)s history. financial targets unchanged For the full year 2000, we believe in continued strong market growth, where Ericsson gains bene- TO THE SHAREHOLDERS fits from its leading position in mobile telephony and its unique ability to offer customers compre- hensive solutions. Our long-term financial targets remain unchanged. We intend to grow faster than the market, which means growing by at least 20 percent, with a return on capital employed of 20—25 percent, positive cash flow before strategic acquisi- tions and operating margin of at least 10 percent. We expect sales to increase by more than 20 percent during the year 2000, and earnings to grow substantially. We intend to achieve this with a positive cash flow. We are convinced that Ericsson will reach its objective of being the leading company in tomorrow(cid:213)s integrated data and telecommunica- tions market. The combination of our expertise in systems, applications and in mobile terminals is a strong indication that in the future Ericsson will continue to provide its owners a favorable return on their investment in the company. It is pleasing to note that an increasingly larger number of Ericssson employees can now also bene- fit from the favorable trend of the Ericsson share through participation in the personnel convertibles and options programs. It is in fact their skills and professional efforts that have paved the way to Ericsson(cid:213)s successes. ¥ lars ramqvist Chairman and ceo kurt hellstrm President FINANCIAL OBJECTIVES 9 Ericsson to grow faster than the market O One of ericsson’s most important overall objectives is to create strong, competitive, value growth for its share- holders. growth objective units — business units, product units, and market units — have a distinct profitability responsibility. This means that each unit, in addition to being responsible for profit, is also responsible for its share of capital employed. Ericsson(cid:213)s long-term objective remains unchanged. The objective is that the company will grow faster than the market, which involves long-term growth of at least 20 percent annually. This growth objecti- ve should be viewed over a five-year period, since the Company does not expect certain growth mar- kets, particularly mobile data communications, to accelerate until we are a few years into the 21st century. The growth objective is to be reached by main- taining or improving positions within all three of Ericsson(cid:213)s business segments: Network Operators and Services Providers, Consumer Products and Enterprise Solutions. cash flow and capital turnover Ericsson strives to have a positive cash flow before strategic acquisitions. Growth of at least 20 percent with a positive cash flow requires a return on capi- tal employed of between 20 and 25 percent for Ericsson as a whole. To reach this objective Ericsson must maintain an average operating margin of at least 10 percent and a capital turnover rate of two or better. However, return requirements may vary for different segments. A lower operating margin can also be offset by a higher rate of capital turnover. In the Ericsson organization, all the different financial results A very strong fourth quarter with record levels of orders, sales, income and cash flow made the year(cid:213)s results better than expected. We did not successfully fulfill all our long-term objectives in 1999, mainly due to the weak perfor- mance during the first half of the year. ¥ The sales growth was 18 percent for comparable units vs. target +20 percent. ¥ We reached a positive cash flow before acquisi- ¥ We reached a capital turnover of 2.1 turns vs. tions, sek +2.9 b. target 2.0. ted 20‒25 percent. ¥ roce at 19 percent was slightly below the targe- ¥ Operating margin at 8.2 percent of sales is below the target of at least 10 percent. outlook for 2000 Continued market growth is expected throughout 2000, where Ericsson will gain benefits from its leading position in mobile telephony and the growth in mobile Internet. Sales is expected to increase by more than 20 percent, and earnings to show a substancial growth. These objectives are intended to be achieved with a ¥ positive cash flow. OUR LONG-TERM financial goals are retained. We shall grow by at least 20 percent per year, which is faster than the market. Return on capital employed will be 20 to 25 percent, and cash flow will be positive before strategic acquisitions. The operating margin will be at least 10 percent. STEN FORNELL, EXECUTIVE VICE PRESIDENT CHIEF FINANCIAL OFFICER 0 1 w e i v r e v o Æ i Internet and mobile communications to explode As restructuring and consolidation now begin to transform the Internet access market also, the major traditional operators are active in acquiring newly started, successful isps (Internet Service Providers). outsourcing Some major operators are beginning to outsource portions of their operations to their suppliers. This trend applies to established and new operators. Cable & Wireless and Global Crossing are examples of operators that in this manner increasingly focus on their own core operations. Another clear trend, on the other hand, is the growing business among operators who take over telecom operations from major corporate customers — in response to cus- tomers outsourcing data and telecommunications in order to focus on their core operations. mobile explosion Several factors indicate that traffic growth in mobile telephone networks is about to explode. Prepaid calls, reduced charges for normal mobile calls and a sharp increase in wireless data commu- nications are important factors driving growth. In some countries, prepaid service now accounts for more than 40 percent of all traffic. D evelopment of the increasingly con- verging data and telecommunications markets is now proceeding extremely rapidly. During 1999, two factors were more evident than any others in driving this trend: continued and sharply accelerating growth of mobile telephony and an equally rapid expansion in Internet use. Both development trends are fueling a sharp increase in demand for telecommunications — to the benefit of Ericsson and other suppliers of the world(cid:213)s telecom operators. The closing year of the 1900s was the high point — thus far, at least — of the momentous changes that are transforming the global telecom industry. Over the past decades, a wave of privatization and deregu- lation has swept the world and triggered a global- ization of the major telecom operators. Globaliza- tion, in turn, has prompted many mergers, acquisi- tions, partnerships and strategic alliances among operators. At the same time, fantastic opportunities are being created for new operators to establish themselves in the market, often as niche operators in one of the many data and telecom market segments or as operators in a limited geographical region. The global alliances, which to an increasing degree are shaping the market, also include compa- nies that are not traditional telecom companies. Internet companies, entertainment companies and companies with a clear datacom focus are more and more frequently included in the new alliances. The boundaries between data and telecom and the media industry are becoming increasingly blurred. mega-operators at&t is one of the very large operators that has been extremely active during 1999 in building new alliances. Together with bt, the company started the joint venture Concert for the two operators(cid:213) international operations. Through acquisitions of, or partnerships with, several cable tv companies, at&t has gained direct access in its home market to millions of U.S. homes. The mobile operators Vodafone and Airtouch merged during the year. At the end of 1999, Voda- fone began an attempt to take over Mannesmann in what could become the largest deal to date between two telecom operators. The largest merger in the history of telecommunications thus far took place in October, when mci Worldcom acquired the Ameri- can operator Sprint for usd 129 billion. This was one of several examples of how fixed network operators are trying to enter the lucrative wireless industry. MARKET AND BUSINESS CONDITIONS — TODAY The very strong growth in sales of Ericsson(cid:213)s mobile systems in North America during 1999 is an excellent example of how rapidly traffic can grow when these trends take effect. The introduction of gprs — which is a step toward next-generation mobile telephony — and wap services are other factors that will contribute strongly to traffic growth in mobile networks over the coming years. At year-end 1999, there were nearly 475 million mobile phone subscribers around the world, of whom half use gsm systems. In early 2003, the number of mobile subscribers is expected to exceed one billion. This massive increase, however, will be dwarfed by the growth in traffic, which is expected to increase by more than fivefold over the coming five years. increased need for fixed networks In the fixed networks, the growth curve for tradi- tional voice telephony is now starting to level off. Instead, the already strong growth of data traffic in these networks is accelerating, particularly in what are called packet-switched networks, which today are increasingly based on ip (Internet Protocol). Traditional voice traffic continues to generate the major share of operator revenues, but a rapid shift toward lower call charges has begun. Internet traffic plays an important role in traffic growth in the fixed networks. During 1999, the number of Internet users in the world increased from 118 to 180 million. By 2002, nearly 300 million users are expected to be connected to the Internet. At the same time, the average time that Internet users are connected is increasing by 20 percent annually. During 1999, this resulted in a sharp increase in 1 1 the demand for established solutions for increasing bandwidth, such as isdn and adsl. Similarly, investments in next-generation atm- and ip-based networks began to gain momentum. brand increasingly important Less and less of the value of a mobile phone lies in the unit itself. As with personal computers, appli- cations and software now account for an ever- greater proportion of the value of the product. Manufacturers are already developing increasingly sophisticated products and are increasing the num- ber of functions in phones. The assortment of mobile phones — or more accu- rately, mobile terminals — is increasing dramatically, and this trend will continue. Tomorrow(cid:213)s mobile phones may be built into portable cd players, watches, cameras, pocket computers and similar devices. This also means that the major manufactur- ers of such products will become competitors to companies like Ericsson, Nokia and Motorola but also that these companies(cid:213) demands for Ericsson(cid:213)s products for wireless communication will increase. In such a situation, the brand is increasingly important. This is why Ericsson over the past few years has been investing so heavily in strengthen- ing its brand. These investments are only begin- ning, but they have already produced tangible and positive results. environmental issues more important More and more of Ericsson(cid:213)s customers are express- ing interest in how their suppliers manage environ- mental issues. These issues influence customers(cid:213) purchasing decisions to an increasing extent. This is a positive trend for Ericsson, which is well posi- tioned to take advantage of interest for the environ- ment both in its branding and with respect to strengthening the Company(cid:213)s image in general. Ericsson has long given environmental concerns high priority and can point to major achievement in this area. Efforts to reduce the environmental impact of production and of finished products is good busi- ness. Ericsson has found many clear correlations between the efficient use of resources and cost- effectiveness. health and safety Extensive press coverage has actively contributed to that individual consumers now and then express concern for their health and safety when using mobile phones and installing radio base stations. Ericsson supports research in the field, through, among others, the World Health Organization (who). ¥ MC218, separate WAP-based PDA (personal digital assistant), based on Psion 5. 2 1 w e i v r e v o Æ i MARKET AND BUSINESS CONDITIONS — TOMORROW Moving toward a mobile future D uring the autumn of 1999, Ericsson launched the (cid:210)Power of Mobility(cid:211) concept as the theme for its marketing to network operators and enterprises. The choice of this theme was dictated by the Company(cid:213)s view of how the converging media, data and telecom markets will develop over the coming years. It also reflects the assessment of tomorrow(cid:213)s market on which Ericsson is basing its new business strategy. Over the coming years, global network operators will continue to group themselves. They will require new strategies to protect revenue streams from fixed and wireless networks. In tomorrow(cid:213)s competition, there is every indication that opera- tors who focus on volume and/or specialization will be the winners. Aggressive marketing, innovative new services and packaged solutions in which even content — for instance in the form of entertainment or information — is included in the offer are some of the methods that will be used in the battle to win customers. The leading companies will be recog- nized for their ability to offer personalized services in which mobility will be one of the greatest bene- fits offered to customers. paradigm shift Ericsson believes that the market is facing a para- digm shift in which mobility and content will be the key concepts. Users will rank different suppli- ers on the basis of their ability to provide both fixed and wireless access to the network. They will Switch circuit for third-generation/ WCDMA networks. demand simple solutions that allow them to be connected to the network at all times (while paying only for the actual time they use it), to have a single telephone number and a single e-mail address, to receive a single invoice for all services used, and so on. And — not least important — to have a single place to turn when they need service, want to order new services or need help in managing their per- sonal communications. To meet these user demands, the operators(cid:213) net- works must allow mobility in a broad sense. This means the mobility provided by wireless networks as well as other forms of mobility, such as enabling a subscriber to be reached at the same telephone number or e-mail address regardless of where in the world he or she might be located. new business logic New operators are now attracting subscribers by offering free access to communication networks. These operators are seeking revenues higher up in the value chain by offering online services such as electronic commerce and entertainment. This trend is a future threat to established operators who must offer the same terms to their customers. This is why operators are already beginning to offer Internet portals and forming alliances with content-oriented companies in the entertainment and information industries. It is vitally important that today(cid:213)s operators choose the right strategy as they face the years ahead. They must also modernize their networks so that they are able to meet the demand for increas- ingly bandwidth-hungry services, including those we can foresee and others of which we as yet have no clear perception. The network upgrades now required must also be made without sacrificing profitability in today(cid:213)s service offering. New initia- tives, and in many cases revolutionary solutions, are required to ensure future competitiveness. strong business strategy The vision of a future in which mobility is a cen- tral feature, and in which an entirely new business logic demands innovative solutions, has provided the foundation for Ericsson(cid:213)s new business strate- gy. It is a strategy that takes as its starting point the Company(cid:213)s position as the undisputed global leader in mobile communications — viewed from all perspectives — and its well-documented ability to offer innovative technology. What Ericsson now offers its customers are solutions for migrat- ing to tomorrow(cid:213)s network architecture by gradu- ally expanding network capacity and improving quality. ¥ ERICSSON(cid:213)S STRATEGIES Developing Ericsson(cid:213)s business with focus on profitable growth 1 3 new generation of network infrastructure and applications. Ericsson(cid:213)s product portfolio spans over the new backbone networks that will handle many different types of service and includes solutions for accessing these networks. Within business communications, Ericsson is already the leading supplier of systems and services for cordless telephony. Now the goal is also to take the lead in solutions for wireless data networks for business. Ericsson will take advantage of its unique ability to offer total solutions that include infrastructure, terminals, applications and services, while continu- ing to promote open standards for data and telecommunications. ¥ CREATE ADDED VALUE FOR CUSTOMERS AND STRENGTHEN CUSTOMER RELATIONS This is an important cornerstone in Ericsson(cid:213)s busi- ness strategy. The Company(cid:213)s new and strongly market-oriented organization is a valuable asset, because it clearly defines responsibility at a high level for all existing global and key accounts and also for important customers among the increasing number of new telecom operators. Great emphasis is placed on increasing understanding of user needs so that Ericsson will be better able to offer its oper- ator customers the new solutions that users will demand. Ericsson is active in more than 140 countries around the world and has over 120 years built up the largest customer base of any company in the indus- try. It is therefore essential — and in line with Erics- son(cid:213)s corporate values of professionalism, respect and perseverance — that we do not to leave existing cus- tomers in the lurch. Ericsson(cid:213)s business strategy thus emphasizes the importance of continuity in business relations, both between Ericsson and its customers, and between our customers and their customers. ERICSSON(cid:213)S MISSION is to understand its customers(cid:213) opportunities and needs, and to provide communication solutions better than any competitor. IN DOING SO, Ericsson shall generate a competitive economic return for its shareholders. E-box, gateway for management of intelligent home equipment. E ricsson’s corporate Executive Team worked intensively during 1999 to further refine the business strategy that was formu- lated in 1998 and presented in last year(cid:213)s Annual Report. The Company(cid:213)s strategic focus is now even clearer: Ericsson will be the leader in tomorrow(cid:213)s converged data and telecom market by focusing its strengths on solutions for the mobile Internet and mobile telephony. It is perfectly clear that communications will play the central role in tomorrow(cid:213)s world. In this world, voice, data, images and video can be com- municated anywhere and anytime using many different types of device. This will increase produc- tivity and the quality of life around the globe, thus creating a new world in which resources are used more efficiently. Many progressive forces around the world are contributing to create these opportunities. Ericsson is one of the foremost and intends to be a driving force in the creation of tomorrow(cid:213)s sophisticated com- munications solutions and a prime model of network- based organizations in which innovators and entre- preneurs work together in global teams. ericsson’s business strategy ¥ FOCUS ON PROFITABLE GROWTH Ericsson will be the industry leader by focusing strongly on the sectors that the Company views as the most lucrative for the future — Internet solu- tions in the widest sense, but with particular emphasis on solutions for wireless access to the Internet. Total network solutions and applications and terminals for the mobile Internet are the areas that offer Ericsson the greatest business opportuni- ties and that will be most strongly in focus in a few years. When third-generation mobile phone systems become a reality, extremely strong growth is pre- dicted for the mobile Internet. The development of wireless data communication is already picking up speed, and the pace will accelerate over the year, as gprs and other new technologies increase speeds for wireless data transmission. ¥ SOLUTIONS TO TOMORROW(cid:213)S NEEDS Because established operators control the public communication networks, they have an advantage over the competition. Ericsson can help these operators exploit their advantage by offering cost- effective solutions for the necessary transition to a 4 1 w e i v r e v o Æ i AS THE EMPHASIS in data and telecom- munications shifts to the mobile Internet, Ericsson will take the lead. Our dominance in mobile systems and unique expertise in wireless data provide a strong foundation for achieving this position. TORBJ(cid:133)RN NILSSON, SENIOR VICE PRESIDENT, MARKETING AND STRATEGIC BUSINESS DEVELOPMENT. ¥ REDUCE COSTS AND INCREASE EFFICIENCY In order to meet the market(cid:213)s demands, Ericsson must become faster and more cost-efficient and offer products of even higher quality. Increasing demands are also being placed on the Company(cid:213)s ability to develop new products and services quickly. To meet these demands, Ericsson is working on a broad scale in the Global ttc (Time To Customer) project, which is intended to reduce lead times drastically and to make the ordering of Ericsson products and services signifi- cantly easier and more reliable. The major upgrades of Ericsson(cid:213)s internal it infrastructure now in progress are another important factor in increasing efficiency. ¥ STIMULATE INNOVATION Ericsson set a new record in 1999 in the number of patent applications. A strong patent portfolio is extremely important in a technology-intensive industry such as data and telecommunications. Creating an innovative environment in which new product ideas can be evaluated quickly — and quickly brought to market— is therefore a high priority for Ericsson. It is essential that the Compa- ny works unceasingly to identify new business opportunities. ¥ STRENGTHEN THE MARKET(cid:213)S PERCEPTION OF ERICSSON THROUGH BRANDING AND MARKETING A large share of Ericsson(cid:213)s sales are made directly to consumers, making it all the more important to strengthen the Ericsson brand. The Company will therefore invest even more heavily in aggressive communication of its marketing messages and in other activities that will increase recognition and appreciation of Ericsson among broad groups. An increased emphasis on contacts with public author- ities is motivated by the need to strengthen the Company(cid:213)s position among government agencies and organizations. ¥ DEVELOP THE INTERNAL CULTURE, AWARENESS AND COMPETENCE Ericsson(cid:213)s products must be renewed faster than ever. At the same time, customers(cid:213) are increasingly expecting us to understand their needs. Ericsson employees must therefore increase their awareness of what the industry is like today and how it will develop in the future. During 1999, Ericsson initiated its greatest-ever effort to increase internal competence and aware- ness of the industry(cid:213)s constantly changing condi- tions. Also, salaries and other benefits are being reviewed to make it easier for Ericsson to recruit and retain top talent. The extended option plan approved by an Extraordinary General Meeting during the autumn is an example of the type of measures that are now needed. E ricsson strengthened its market posi- tion substantially during 1999 through acquisitions and new strategic alliances. In line with its strategy to focus on small and med- ium-size companies with skills that supplement Ericsson(cid:213)s own expertise, Ericsson acquired several companies and became part-owner in others. In other cases, Ericsson broadened its skills and exper- tise through far-reaching programs of cooperation. A strategic alliance with Microsoft, which was announced in the beginning of December, attracted the most attention, but many other important strategic moves were also made during 1999 to strengthen Ericsson(cid:213)s competitiveness. Some of the most important, in alphabetical order, were: ELECTROLUX, SWEDEN A joint venture company was established by Electrolux and Ericsson to research, develop and market products with access to the Internet to private homes. JUNIPER NETWORKS, USA Ericsson has entered a strategic alliance with Juniper in the area of next-generation multiservice- ip networks. Ericsson has gained distribution rights to Juniper(cid:213)s m40 router under the designa- tion Ericsson axi 520. Ericsson and Juniper will work together to develop new solutions for voice and ip communications. MATEC, BRAZIL Ericsson Telecommunica(cid:141)(cid:155)es in Brazil acquired an additional 67.5 percent of all shares outstanding in Matec. Prior to the acquisition, Ericsson owned 30 percent of the Brazilian company, which sells Ericsson(cid:213)s solutions for enterprise communications in the Brazilian market. MICROSOFT, USA A strategic alliance that focuses on the development and sales of total solutions for wireless Internet access has been formed. The alliance is based on a shared vision of convenient and rapid access to information anytime, anywhere, on any device. Microsoft and Ericsson will establish a joint-venture company to market and supply wireless e-mail solutions. Erics- son will be the majority owner of the new company. The agreement provides Microsoft with access to Ericsson(cid:213)s wap software, while Ericsson, in turn, will be entitled to use Microsoft Mobile Explorer for its more advanced wireless terminals. The joint venture will focus on building, market- ing and using solutions based on Microsoft Windows nt Server and Exchange platforms with Ericsson(cid:213)s infrastructure and mobile Internet technologies. OZ.COM, ICELAND Ericsson is a part owner of the Icelandic company, which develops Internet software. The companies ¥ 1 5 ERICSSON(cid:213)S STRATEGIES have cooperated in the past on projects such as iPulse, an Internet portal for simple Internet com- munications. QUALCOMM, USA Ericsson has acquired the infrastructure division of Qualcomm Inc., based in San Diego, ca, in the U.S. The acquisition was part of a larger agreement between Ericsson and Qualcomm, whereby all patent disputes between the two companies were resolved. The acquisition includes Qualcomm(cid:213)s produc- tion and development units for cdma systems in San Diego, ca and Boulder, co. Ericsson also acquired Qualcomm(cid:213)s customer contracts for the systems, including some customer financing. SARA(cid:236)DE-COM, USA Ericsson has become a minority owner of the San Francisco-based company. Sara(cid:149)de develops and provides sophisticated data communications ser- vices for mobile operators. Ericsson(cid:213)s investment is intended to stimulate the use of innovative services for mobile data communications. SYMBIAN, UK Ericsson(cid:213)s cooperation within the parameters of the Symbian consortium is not affected by the year-end agreement with Microsoft. Symbian, which devel- ops operating systems for mobile terminals, was joined during the year by another important part- ner: Matsushita Communication Industrial Co., the world(cid:213)s fourth largest manufacturer of mobile phones. Previous owners were Ericsson, Motorola, Nokia and Psion. SYMBOL TECHNOLOGIES, USA The companies will jointly market and exchange technical expertise in wireless lan-based telephony and datacom solutions. The alliance is focused on the market for local mobility within business enterprises via a common network for voice and data. WebSwitch and other access products are now being offered to Symbol, which, in turn, provides tele- phones for VoIP (Voice over ip), portable computers and other products. TELEBIT A/S, DENMARK Ericsson acquired 75 percent of the Danish compa- ny, which specializes in the development of next- generation Internet. Telebit is the world leader in ip version 6, and was the first company to offer commercial router solutions for this version of the Internet protocol. Software for IPv6 and multi- protocol solutions will be integrated into Ericsson(cid:213)s mobile network offering. TELULAR, USA Cooperation focused on the development and sales of Telular(cid:213)s terminals for fixed cellular tdma net- works. The alliance provides Ericsson with opportu- nities to offer turnkey solutions for these networks. The companies will work together on further devel- opment of Telular(cid:213)s terminals by integrating Ericsson(cid:213)s radio modules for tdma into the products. TORRENT NETWORKING TECHNOLOGIES, USA Ericsson acquired the Maryland-based company in the beginning of 1999. Torrent manufactures high- capacity aggregation routers. Its router products offer strong supplements to Ericsson(cid:213)s own solutions for ip over atm networks. Torrent(cid:213)s operations have been integrated into Ericsson(cid:213)s Datacom and ip busi- ness unit under the name of Ericsson IP Infrastruc- ture Inc. TOUCHWAVE, USA Ericsson acquired TouchWave, an American com- pany based in Silicon Valley, in the beginning of 1999. The company develops and manufactures ip- telephony solutions for enterprise communications. As a result of the acquisition, Ericsson is now able to offer total solutions for ip-pbx systems, which operate with VoIP. The company(cid:213)s most important product is WebSwitch 2000, an ip-based enterprise switch for small companies. TouchWave is now included in Ericsson(cid:213)s Enterprise Solutions business segment under the name Ericsson WebCom Inc. ¥ Bluetooth, module for wireless communication over short distances. 6 1 w e i v r e v o Æ i ERICSSON(cid:213)S STRATEGIES Complete product portfolio for tomorrow(cid:213)s networks D uring 1999, work was started to refine Ericsson(cid:213)s product portfolio, so that it better corresponds to the Com- pany(cid:213)s strategic focus on wireless multi- media and broadband access, as well as to the new generation of infrastructure that will be required. To understand the logic behind the strategic product portfolio that Ericsson is now building, the reader must first understand the logic behind tomorrow(cid:213)s data and telecommunications networks. The next generation of communications networks will be built according to a model with three clearly distinguishable and mutually independent levels: ¥ CONTENT, APPLICATIONS AND PORTALS ¥ CONTROL AND MANAGEMENT ¥ CONNECTION AND TRANSPORT The content level contains applications for individ- ual users. These may be made available over the Internet or on special network servers. The control level contains all the functionality required for controlling and managing the net- work, keeping track of subscribers, handling mobility, monitoring the network, and so on. In short, it provides everything needed to set up a connection for data or telecommunication. The connection and transport level is that which most resembles a traditional communications net- work. It contains all functionality for access to the network, as well as the central transport or back- bone network. Simply put, it provides the physical channel for communication and information. Viewing the network from these three levels makes it easier to understand the logical division of labor in tomorrow(cid:213)s communication networks. The model can be applied to all types of network — public or enterprise. This applies to fixed or wire- less, voice or data, and so on. Each individual layer plays its own role in generating revenues for the operator. focus on information The primary source of revenue for tomorrow(cid:213)s net- work operators will be found at the content and applications level. This is where the information- based services are located for which users are will- ing to pay, either in relation to the time they are connected or the volume of information that is downloaded via the network. Electronic commerce and other online services are good examples of applications found at this level. Another strong growth area is asp (Application Service Provision- ing), which is a technique for enabling users to download application software over the Internet for a fixed price instead of buying it over the counter. In the future, traditional voice communications with good speech quality will be just one of many services and applications. Voice recognition is an example of how tomorrow(cid:213)s networks will some- times need to employ real-time voice communica- tions. The various services at this level will primarily be developed by specialized companies that have entered into partnerships or some other form of alliance with network operators. The equipment required at this level consists primarily of server platforms with open interfaces and software that enables communication. Ericsson has developed a concept called Open Service Architecture (osa) for this level. osa sup- ports all forms of access and global interoperability and works with technical equipment from most suppliers. wap services are another area in which Ericsson is extremely active in supporting the development of new applications at the content level. The busi- ness logic for Ericsson is simple: the more services and applications that can attract end-users at this level, the greater will be the load at lower levels and the corresponding need for Ericsson(cid:213)s systems and solutions for these levels. The partnership with Microsoft, which was announced in December, should also be viewed against the background of the new business logic. The same applies to investments during 1999 in the companies oz.com and Sara(cid:149)de, both of which are focused on developing attractive services for net- work operators(cid:213) customers. retaining control essential The Internet would not be possible without mecha- nisms for linking public and private networks. These mechanisms, communications protocols and signaling standards, are regulated at the communi- cation control and management level. For the operator, this level simply must function, otherwise revenues are lost. This level contains the system logic for systems such as gsm, fixed telecom net- works, data and ip networks and, of course, for future systems such as third-generation mobile systems and other multimedia networks. Much of the network operator(cid:213)s profits will be 1 7 RXI 820, the world(cid:213)s first real-time router for wireless networks. generated at this level. According to the business model, if operators are to retain their position at this level of the network model, they must protect their competence in this area and make the required investments in server platforms. Ericsson has developed several such server solu- tions, launching Telephony Server during 1999, which is a technology for voice communication over ip (Voice over ip, VoIP), as well as a solution for messaging in ip networks (Messaging over ip), which can also handle mobility. Ericsson is also a leader with respect to manage- ment and operations support systems for communi- cations networks. In this area, Ericsson works in partnership with companies like Hewlett-Packard, Compaq, and Bull. complete network portfolio The level for connection and transport provides the mechanisms for the transport of all types of informa- tion: voice, data or multimedia. In the future, these mechanisms will be based on ip and atm technolo- gy. For operators, the challenge is to find the most cost-effective solution for building this network level. The architecture required at this level encom- passes the transport (backbone) and access networks. The development of products for tomorrow(cid:213)s access network receives high priority at Ericsson. This is also the part of the network architecture that accounts for the major share of investments at this level in the network model. For mobile access, where Ericsson is the world leader, systems are offered for every standard cur- rently in operation. Extensive investments in gprs, which will significantly increase data rates in gsm networks, have also made Ericsson the leader in this area. In next-generation (3g) systems, Ericsson has been driving development for some time and is the only supplier able to offer 3g systems in accordance with all currently established 3g variants. three solutions for broadband access 3g offers wireless broadband access. For broadband access to the fixed network, Ericsson has focused on three solutions: adsl for broadband access over ordinary copper cable, lmds (mini-link bas) for broadband access to the fixed network over radio, and PipeRider for broadband communication via the cable tv network. In tomorrow(cid:213)s ip-based networks, communica- tion will be switched from the access network to the transport network via access routers. Ericsson has developed a common platform for the access network that can handle both ip and atm. The rxi 820 is a first-of-a-kind real-time router developed specifically for wireless networks. It is intended for use in ip-based networks that require real-time performance and low fault toler- ance. It handles the latest versions of the Internet protocol, ipv4 and ipv6, and can be expanded incre- mentally as capacity requirements increase. Another access router from Ericsson is the axc 711 (Tigris). In the backbone network, signals are first for- warded to aggregation routers. With the purchase of Torrent Networking Technologies Inc. last spring, Ericsson gained access to a gigabit aggrega- tion router, the axi 540. For traffic in atm-based networks, the company has developed the axd 301, which is a scalable atm switch and the cornerstone in Ericsson(cid:213)s engine concept for incrementally introducing ip and atm technology into the back- bone network. At the highest level in the network, Ericsson, through its partnership and equity stake in Juniper Networks, can offer the axi 520, a router for data speeds of 40 gigabits per second and higher. ¥ 8 1 w e i v r e v o Æ i A2618, dual-band phone with exchangeable snap-on covers and extended personalization features. Technical development supports Ericsson(cid:213)s strategy E ricsson’s strategic product portfolio is being enhanced continuously. In order to strengthen its position in the market for datacom and ip networks, Ericsson has made a number of strategic acquisitions and entered important partnerships in recent years. However, within its own core business, mobile telephony and real-time telecommunications networks, Ericsson is a global leader in technology development. Ericsson(cid:213)s corporate function Technology has as its primary mission to ensure that product develop- ment is in line with the Company(cid:213)s business strate- gy and to define the strategies that determine when new products will be introduced. The corporate function Technology is also charged with identify- ing areas in which synergies in Ericsson(cid:213)s technical development can be exploited. During 1999, Ericsson invested sek 34,700 m. (30,200) in technical development, corresponding to 16 percent of net sales. The number of employees active in research and development during the year was 23,500 distributed among research centers in 25 countries. The fact that Ericsson(cid:213)s technical development is so highly decentralized is primarily due to histori- cal reasons. The Company(cid:213)s research and develop- ment organization has expanded greatly over the past 20 years thanks to the axe system(cid:213)s success. One of the advantages of axe is that it is a modular system. As a consequence, it has been easy to dele- 1 9 THE ITU DECISION in 1999 to adopt WCDMA as a standard for third- generation mobile tele- phony is a major cause for celebration. Ericsson has been promoting this solu- tion for several years and driving efforts to harmonize the various proposals for third-generation systems. JAN UDDENFELDT, SENIOR VICE PRESIDENT, TECHNOLOGY TECHNICAL DEVELOPMENT gate design responsibility for local adaptations to Ericsson units in the markets in which the Compa- ny(cid:213)s largest axe customers are active. In many cases, establishing local technical resources in this manner was a political prerequisite for winning contracts at a time when many operators were state-controlled monopolies. consolidation now necessary In view of the pending technology shift, in which circuit-switched systems such as axe are merging with ip- and atm-based communications systems, the demands on Ericsson(cid:213)s development organization are also changing. In tomorrow(cid:213)s systems, it will be necessary to make modifications for local markets quickly and within the framework of common and open standards. This will require a concentration of resources to fewer and stronger resource centers. The goal is that it should be possible to imple- ment this process without losing valuable exper- tise. The new technology organization that is tak- ing shape will be sufficiently flexible to handle the widely varying demands on development resources made by today(cid:213)s product cycles. the standard for 3g. This led to the formation of the global standards organization 3gpp. In March 1999, an agreement was reached between Ericsson and Qualcomm, which meant that both companies would back a common global wcdma standard. The agreement paved the way for an itu decision in November 1999 establishing wcdma as the standard for 3g under the name imt-2000 Direct Spread. The first release of the standard was finalized by 3gpp in December 1999. With the acquisition of Qualcomm(cid:213)s infrastruc- ture division, Ericsson also gained access to is-95 and its enhancement in the form of the technology called imt-2000 Multi-carrier. Ericsson is pleased that the itu recently also established edge as a standard for 3g. edge pro- vides a natural migration of gsm to 3g but will also be an important 3g technology for existing tdma operators in the U.S. and Latin America. These operators will be able to use edge to intro- duce 3g in existing frequency bands, while wcdma will require specially allocated frequencies in the 2 GHz band, which has been reserved in most parts of the world for umts and imt-2000. focused product units new network architecture Ericsson(cid:213)s product development takes place in special product units. Operations in these units were streamlined during 1999 to encompass only product development. In cases where resources had been built up for sales and marketing, for example, they were transferred to the business unit to which the product unit belongs. The result of this stream- lining is greater efficiency and a clearer focus for each product unit. driving force behind 3g Ericsson(cid:213)s position as the technology leader in mobile systems is undisputed. No other company can offer its customers mobile systems according to every existing analog and digital system up to and including second-generation mobile systems, which are now in operation all over the world. Neither can any other company offer customers as broad a range of solutions for what is called 3g (third-generation) mobile systems. At year-end 1999, Ericsson had 17 functioning 3g test systems in operation. The first of these was approved in early 1998 by ntt DoCoMo in Japan, which in April 2001 is expected to be the world(cid:213)s first operator to take a commercial system into operation — supplied largely by Ericsson. Ever since discussion of a new global system for third-generation mobile telephony began, Ericsson has played a leading role. The Company can now take satisfaction in the fact that wcdma, the tech- nology that Ericsson began developing in 1990, is now the established standard for 3g. During 1998, a decision was taken by etsi and arib, the European and Japanese standards bodies, to adopt wcdma as Third-generation mobile systems offer wireless broadband communications at speeds up to 100 times faster than today. There are many application areas for this technology including wireless Inter- net access, e-mail and the transmission of multi- media to portable terminals or postcards directly from mobile phones to the receiver. This revolution in wireless communications will also require modifications in the fixed network. This is why 3g is such a powerful driving force behind the new network architecture now on the horizon. New solutions have been developed to make this architecture possible. A platform that handles both atm and ip has been developed. It functions as a media gateway that mediates access to the backbone network from 3g networks. Ericsson successfully tested the plat- form in Japan during 1999 and expects to make the product available when 3g networks start to be deployed in 2001. The same platform is included in the new rxi 820 ip router, which is a part of Ericsson(cid:213)s solution for the 3g network. The platform was developed specifically for wireless broadband networks and their demands for real-time functionality; for example, to handle the synchronization of base stations. migration for the customer’s sake Many of Ericsson(cid:213)s technical solutions are character- ized by their facilitating a smooth migration from previously installed systems to a new system. This was the case, for example, with mobile systems for tdma, for which operators of analog amps networks Eight-inch silicon wafer with datacom circuits. Denmark-based company, Telebit, during the autumn, Ericsson was assured of leading-edge expertise in the development of IPv6, which is the next version of the protocol. Telebit is a world leader in developing this important next-genera- tion ip technology and already has the world(cid:213)s largest installed base of next-generation routers. wap and bluetooth for consumers Never before has Ericsson introduced as many mobile phones as in 1999. With the t28, a transi- tion was made to an entirely new technical plat- form using three volts instead of four and with many new technical features, including a new chip 0 2 w e i v r e v o Æ i were offered a technology that was added to the existing infrastructure and which thereby digitized the network. This method of migrating from one technology to another is extremely cost-effective for the customer and allows shifts in technology to be made incrementally, without affecting end-users. Ericsson(cid:213)s wcdma technology is designed to allow today(cid:213)s gsm customers to migrate easily to the new technology. The corresponding migration technology for the fixed network is provided by engine, which accommodates circuit-switched and packet- switched services in the same network. Existing axe switches, for example, can be expanded with axd 301, Ericsson(cid:213)s scalable atm switch, in order to handle a growing volume of data traffic in the same network. This solution for next-generation networks achieved a breakthrough in 1999. new generation axe For more than 20 years, axe has been the founda- tion of Ericsson(cid:213)s success in fixed and wireless communications. During these years, development of the axe system has continued. During 1999, work continued with the next- generation axe system, which is scheduled for introduction during 2000. The new-generation system will constitute yet another giant step in increased capacity and reduced size for axe switch- es. Development of the axe system will continue for several years. complete router family Ericsson achieved major advances in the market for ip and data communication during 1999. The goal of becoming a leading supplier even in this area has not yet been completely realized, but the Compa- ny(cid:213)s position was strengthened considerably. The axd 301 atm switch, which was developed by Ericsson, is beginning to achieve commercial success. Ericsson(cid:213)s platform for combined ip and atm traffic in 3g networks is another technically very powerful solution. In addition, the Company strengthened its position in routers during 1999 through several strategic acquisitions and partner- ships. A previously established partnership with Juniper Networks regarding the development of backbone routers was extended during the year. Ericsson obtained the right to market Juniper(cid:213)s 40 gigabit router under its own brand. In March, Ericsson acquired Torrent Network- ing Technologies in Maryland in the U.S. Marketed as the Ericsson axi 520 and axi 540, Juniper(cid:213)s and Torrent(cid:213)s aggregation routers fit well into Ericsson(cid:213)s product portfolio, as does the Tigris access router obtained from the California-based company acc, which was acquired in 1998. ip-based communication is one application area for routers. With the acquisition of the (cid:129)rhus, TECHNICAL DEVELOPMENT set and a new radio subsystem employing homo- dyne technology. This platform will be used for new models to be introduced during the year 2000. Three different terminals were also introduced during 1999 that employ wap (Wireless Applica- tion Protocol) technology for more efficient exchange of information between the Internet and the wireless device. The mc218, which was intro- duced first, is a separate handheld computer for wireless communication and includes an infrared port. The epoc operating system is also built into the mc218, making it the first concrete result for Ericsson of the Symbian joint venture. The Sym- bian partnership, which was started by Ericsson, Motorola, Nokia, Psion and others, was expanded in 1999 to include the Japanese company Matsushi- ta. The r320 and the r380 are wap-phones that will be avilable in volumes during 2000. The r320 can most easily be described as a t28 with a consid- erably larger display and extra keys for wap-navi- gating in the display. The larger r380 has a larger display that can be used to access built-in applica- tions such as a calendar, an e-mail client and a web browser. Bluetooth is a new, small and inexpensive radio- frequency chip that Ericsson Components has 2 1 MINI-LINK BAS, system for wireless—fixed network access using so-called LMDS point-to- mulitpoint solutions. already taken into production. The chip is based on technology that was developed by Ericsson and offered to other companies as early as 1998, when a consortium was established by Ericsson, ibm, Nokia and Toshiba to support the technology. Dur- ing 1999, the special interest group that was estab- lished for Bluetooth grew from 400 to close to 2,000 companies. Bluetooth is thus the de facto global standard for radio communication between different devices over short distances. At the Comdex exhibition in the U.S. in the autumn of 1999, Ericsson demonstrated its first Bluetooth product, which consisted of a cordless headset equipped with a microphone that communi- cates with a mobile phone that can be carried in a pocket or a purse or located elsewhere within the 10-meter range of current Bluetooth technology. strategies for broadband access Toward the end of 1999, Ericsson established its strategy for access products. This decision marked a concentration of the Company(cid:213)s development efforts to three areas: adsl, lmds and ip via cable- tv networks. adsl (Asymmetrical Digital Sub- scriber Line), a technique for increasing capacity in existing copper networks, provides very high band- width for the downstream link. This technology is particularly suitable for using existing telephone lines for video on demand, high-speed Internet access and similar services. Ericsson has a leading position in this area. Swedish network operator Telia is building an extensive adsl network with the help of Ericsson and other suppliers. lmds (Local Multipoint Distribution Services) is a technology for high-speed radio networks in which microwave transmission provides a high- speed connection to voice and Internet services for small and medium-size business and multiple unit dwellings. Radio technology is thus employed to rapidly and cost-efficiently provide broadband access to the fixed network. Ericsson(cid:213)s main product in this area is mini- link bas, which is available for European and U.S. radio standards. The U.S.-based Diginet is one customer who has already ordered this access solu- tion from Ericsson for deployment in its network in Latin America. For the third type of broadband access, which is cable tv, Ericsson introduced the PipeRider product in 1999. PipeRider is a cable-tv modem that is used to provide voice and Internet access in the home. In its first generation, PipeRider was designed according to the American docsis stan- dard. Using its router products, Ericsson is also developing infrastructure for ip communication and delivery of voice and data over cable-tv net- works. ¥ T28 and T28 World, dual-band phones based on new technology and hardware platform. Voice control, lithium polymer battery. 2 2 s u c o f n i Æ i i TIME TO CUSTOMER How to save money while pleasing customers even more S Succeeding in the data and telecommunica- tions market requires being able to deal with rapid change. Ericsson(cid:213)s customers — network operators and businesses — are keenly aware of the same operator(cid:213)s network somewhere else. Glob- al customers demand the same simple ordering routines and delivery procedures, regardless of where in the world the product will be put into operation. this. That is why they demand so much of their suppliers: fast delivery, rapid development of new solutions requested by users, quick response when a problem needs to be solved, and so on. THE GOAL OF TTC Global is to sharply reduce lead times and to simplify the entire supply chain. The economic potential of such improve- ment is substantial. We can reduce personnel requirements in the supply chain by 25 percent, which in terms of money is at least 3 percent of sales for all products that can be handled in this way. BJ(cid:133)RN BOSTR(cid:133)M, SENIOR VICE PRESIDENT, SUPPLY AND INFORMATION TECHNOLOGY Ericsson has been working hard and conscien- tiously over a period of years to reduce lead times at all levels. When the new organization was intro- duced at year-end 1998, the need for speed was given additional emphasis. Over the past year, major steps have been taken within the framework of ttc Global, an Ericsson-wide project led by the corporate function Supply & it that, among other things, aims at reducing lead times. Shortening ttc, or Time to Customer, is the overriding goal of the project, by reducing the time from when the customer places an order until a product has been delivered and is ready to be put into operation. The target for ttc Global is to reduce lead times in the supply chain by 50 percent or more. At the same time, using Internet technol- ogy, simpler and thereby faster ordering routines are being created for customers. high-level deliverables One of the most important means of achieving the ttc Global goals is a transition from previous delivery methods to what is called high-level deliv- erables. This means that products delivered to customers should be as ready to use as possible. A radio base station, for example, should have all software installed and be ready to take into opera- tion. It should be delivered completely assembled and ready for rapid installation, which entails sim- ply connecting the necessary power and communi- cations cables. The transition to high-level deliverables means that the customer can identify a suitable solution in Ericsson(cid:213)s product portfolio based on current requirements and order a complete package via a web-based application. The ttc Global management is aware that not all of Ericsson(cid:213)s product portfolio can be ordered in this manner, but most products can be delivered using the simplified routines. Because the operations of Ericsson(cid:213)s customers are becoming more global, this method of delivery is much appreciated. What a mobile operator needs for a network in one part of the world is often exactly the same as what was purchased for The transition to direct ordering via the Internet enables substantial savings through rationalization. Previously, orders were often sent from one order office to another within Ericsson before finally reaching the unit that would complete the delivery. Most of these intermediary points in the old process can now be eliminated. Every step in the process that does not add value for the customer will be removed. base station in 15 days The methods developed by ttc Global were tested successfully during 1998 and 1999 with deliveries of radio base stations to Germany. This experience proved that the methods are sound. Customer reactions were overwhelmingly positive. The sim- plified ordering routines pleased the customers and earned them money, since deliveries of needed capacity increases could be guaranteed in half the time previously required. Customers are also receiving better information than before. Web technology is being used to simplify customer orders, and to allow the customer to track how orders are being processed within Ericsson(cid:213)s organization. spreading throughout ericsson The new methods are now being used with more products throughout Ericsson. Wide application of the ttc Global methods is being given the highest priority by executive management, not only because they improve and strengthen the relationship with the customer, but also because of economic incentives. ttc Global has shown that it is possible to reduce personnel requirements in the supply chain by 25 percent. In monetary terms, this corresponds to at least 3 per- cent of invoiced sales for all products that can be handled in this manner. Vodafone Airtouch, which is one of Ericsson(cid:213)s largest customers in mobile systems, gave the Company the highest possible marks for its working methods last year when the operator decided that this delivery model would be the stan- dard for all its networks around the world. ¥ R250 PRO, the world(cid:213)s first water- and shock-resistant mobile phone. Combined mobile phone and private radio. THE MILLENNIUM SHIFT AND IT 2 3 Millennium shift renews it structure T The guiding principles for Ericsson(cid:213)s millennium program were to uphold cus- tomer confidence, to protect shareholder investments and to secure the Company(cid:213)s internal working conditions. All three of these goals were achieved inasmuch as Ericsson did not experience a single serious inci- dent during the transition to the new millennium. After the New Year, work resumed among Erics- son(cid:213)s customers without interruptions. Ericsson took the y2k issue seriously. An exten- sive program to handle the transition was started as early as 1997. The program encompassed all Erics- son companies and operations and was monitored by executive management. The total cost of the Millennium Program was sek 2,700 m. Ericsson made a great effort to eliminate and minimize all y2k-related problems. All products were tested to determine whether or not they are y2k-compliant. In certain cases, customers were offered upgrades. An extensive review was also conducted of mission-critical information systems and of all steps in the delivery chain from order to installation. working around the world To assist customers around the world, more than 3,000 Ericsson employees were on duty on New Year(cid:213)s Eve in more than 200 locations around the world. To coordinate their activities, a number of new routines and systems were implemented and tested, including a worldwide communications system for the rapid collection of information. At the millennium shift, the load on public telephone systems was at times extremely high. In some areas, subscribers experienced problems in making calls, but this was due entirely to over- loading of the networks. When traffic returned to normal, service levels were also restored to nor- mal. more reliable it infrastructure As a result of the millennium shift, Ericsson(cid:213)s inter- nal it infrastructure is more highly optimized, more secure and more efficient than ever before. All software used throughout Ericsson was reviewed. Many systems and applications were phased out entirely, while others were upgraded. Work to create uniform standards, including the continued PipeRider, modem for data communication over cable-TV networks. introduction of esoe (Ericsson Standard Office Environment), was speeded up by the Millenium Program. esoe means that an Ericsson employee is able to sit at any pc anywhere throughout the organization and immediately begin working with familiar soft- ware in a familiar computing environment. This increases internal efficiency and makes it easier to relocate employees temporarily or permanently. Several major virus attacks during 1999 also confirmed the strength of the esoe concept. Thanks to central administration of virus protec- tion and frequent updates, Ericsson has withstood all severe virus attacks to date without major dam- age. By year-end 1999, nearly 80 percent of all Ericsson employees had esoe installed in their pcs. The goal is to complete the implementation of this standard environment during the year 2000. new administrative systems sap r/3 has also been introduced as a standardized environment for many of Ericsson(cid:213)s administrative routines. To date, 36 major installations have been completed throughout Ericsson. During 1999, a number of new intranet-based systems for internal administration were taken into operation. (cid:210)Click to Buy(cid:211) is one example of the increased efficiency made possible using intranet technology. This is a system for purchasing and ordering non-product related goods that will grad- ually replace traditional methods, which are often cumbersome and bureaucratic. For input goods, the ¥ electronic transfer of information already exists. 4 2 s u c o f n i Æ i i NEVER BEFORE HAS Ericsson worked so hard to increase internal com- petence and to change the way of thinking and acting on the job. If we are to succeed in the new telecom world, every employee must under- stand how it works and what will be demanded of our customers if they are to succeed. BRITT REIGO, SENIOR VICE PRESIDENT, HUMAN RESOURCES AND ORGANIZATION A new Ericsson emerging T en years ago, ericsson had 70,000 employees, more than half of whom worked in a business area called Public Telecommunications. It was built up around the axe switch and dominated Ericsson(cid:213)s business totally. This was the unit that generated the profits that financed Ericsson(cid:213)s bold new invest- ments in mobile telephony, business systems and component manufacturing. Ericsson(cid:213)s customers were state-owned ptts, one in every country, that at regular intervals went to the market and requested tenders for new deliveries based on very detailed technical specifications devel- oped by the customer(cid:213)s engineers. A typical tender occupied several meters of shelf space and took months for a team of skilled engineers to prepare. That was what the telecom world was like ten years ago. Just about what it was like 50 years ago. Today, ten years later, it is history. Communica- tion in fixed telecom networks is still an important business for Ericsson, but it is no longer the motor in the Company(cid:213)s operations. Instead, mobile telephony accounts for the lion(cid:213)s share of revenues and totally dominates the business. The ten years that have passed have entailed enormous changes in the Com- pany. The ten years ahead will bring even greater changes. Restructuring is a word that Ericsson and other companies in the industry will need to learn to live with. Tomorrow(cid:213)s winners will be the companies that are best at change and best in reallocating competence and resources. Daring structural initiatives, distinct and proac- tive management and smart working methods will unquestionably be needed to provide the flexibility the market demands. But above all, an open mind will be required of everyone working in the Com- pany, meaning that the business culture must be one that encourages change and seeks opportunities in change. This is why one of the most important aspects of Ericsson(cid:213)s business strategy is the one that concerns the people within the Company. ¥ DEVELOP THE INTERNAL CULTURE, AWARENESS AND COMPETENCE continued restructuring During 1999, work to restructure Ericsson continued at an increasingly rapid pace. The organization that was introduced in January 1999 was polished and further refined during the year. Great effort was devoted to promoting understanding of the new organization among the Company(cid:213)s employees and to defining and disseminating knowledge of the new division of roles and responsibilities in the Company. slightly fewer employees At year-end 1998, Ericsson had 103,700 employees. One year later this number had fallen to 103,300. This relatively modest decline is the net result of 8,000 persons leaving Ericsson during the year, while 7,600 joined the Company through acquisi- tions or strengthening of resources in strategic areas for the future. Mobility within Ericsson remains high. This trend will continue in 2000, as a result of letters of intent that were signed in late 1999, and through a continued realignment of work assign- ments. The sale of the Energy Systems business in January 2000 was a first step in Ericsson(cid:213)s contin- ued focus on core operations, meaning that 2,300 persons begin working for a new employer. Several important company acquisitions during 1999 greatly contributed to strengthening Erics- son(cid:213)s competence in the datacom and ip field. With the Company(cid:213)s current strategic focus, additional strengthening of resources in this and other central areas will be required. Ericsson is therefore contin- HUMAN RESOURCES 2 5 The Bluetooth Headset contains a wireless earpiece and microphone for mobile phones. uing to pursue an acquisition strategy that seeks to identify small and medium-size companies with key expertise that supplements the already high level of skills within Ericsson. Individual recruitment of highly skilled new employees is also a high priority for Ericsson. Dur- ing 1999, a completely new policy was established for new recruitment by which we will not recruit to fill vacancies in existing operations, but instead actively seek the most talented people, offer employment, and thus secure the skills the compa- ny needs. An international working group is now working to develop guidelines for implementing this policy. To support the new recruitment model, Ericsson is also working actively to become more visible and NUMBER OF EMPLOYEES BY GEOGRAPHIC REGION Europe, Middle East, Africa USA and Canada Latin America Asia Pacific Total Of which Sweden Of which EU 1999 1998 1994 Number of employees percent Number of employees percent Number of employees percent 70,900 12,200 8,200 12,000 103,300 43,500 65,700 68 12 8 12 42 64 74,900 72 9,800 7,800 9 8 11,200 11 103,700 44,600 70,000 43 67 59,300 78 8 6 8 6,200 4,500 6,100 76,100 36,600 17,700 48 23 During 1999, the number of Ericsson employees declined slightly. The markets in which the number of employees increased the most are primarily markets, such as the U.S. and Brazil, in which companies were acquired during the year. In Sweden, the number of employees continued to decline as a consequence of operations being sold to other companies. 6 2 s u c o f n i Æ i i better represented at leading universities and col- leges around the world. The Company has long had excellent relations with the academic world, which will now be cultivated in order to make Ericsson even more known as an excellent and exciting employer. global trainee program Ericsson(cid:213)s global presence in more than 140 coun- tries gives the Company a very broad base for recruitment, while allowing new employees to be offered an opportunity to work internationally. An excellent start for an international career at Erics- son is the new global trainee program that was started during 1999. This is a two-year program consisting of three six-month job training periods interspersed with theoretical studies. One job-training period is spent with an Ericsson customer, while the theory units are arranged in cooperation with leading universi- ties worldwide. The program is very international with study units arranged in different parts of the world and in the composition of the trainee group. Several thousand persons applied for the 17 places in the first program. Six women and eleven men from nine different countries were selected. All had high grades from university, and most had two degrees. The trainee program is actively supported at the highest level in the Company. The steering com- mittee for the program includes three of the fourteen members of the executive management team. going for a shift in skills During the spring of 1999, Ericsson(cid:213)s executive management began planning for what would be Chatboard, keyboard to facilitate the writing of SMS messages and e-mail. EMPLOYEES BY AGE GROUP 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 9 1 — 4 2 — 0 2 9 2 — 5 2 4 3 — 0 3 9 3 — 5 3 4 4 — 0 4 9 4 — 5 4 4 5 — 0 5 9 5 — 5 5 4 6 — 0 6 Sweden (total: 43,500) Rest of the world (total: 59,800) The average age of Ericsson employees is gradually declining. More than half of all employees are 35 or younger. The lowest average ages are found in growth countries, such as China and Brazil, where it is 32. The average age in Sweden is 39. HUMAN RESOURCES EMPLOYEES BY LEVEL OF EDUCATION 9 % 27 % 43 % 21 % Mandatory school(cid:13) Higher secondary(cid:13) education Specialized school(cid:13) University degree(cid:13) or higher The level of education of Ericsson employees has increased throughout the 1990s. Today, 49 percent of all Ericsson employ- ees have an academic degree, which is an increase of five per- centage points over the past two years. The average level of education is highest in growth markets in Asia and Eastern Europe, as well as in parts of Latin America. In several countries, more than 75 percent of all employees have an academic degree. the Company(cid:213)s largest investment in skills enhancement to date. Through the Competence Shift, as the program is called, the intention is that all of the Company(cid:213)s 100,000 employees will gain an increased understanding of how the new telecom world functions. The Competence Shift focuses on explaining new technology, new business logic and the new market situation that Ericsson is facing. The idea is that awareness of the forces driving development will make it easier to understand and accept the Company(cid:213)s business and product strate- gies. An internal development program this compre- hensive would not be possible without the very technology that the Competence Shift is designed to explain. A new web site on Ericsson(cid:213)s intranet provides the base for the entire program. Here employees can start by playing an entertaining diagnostic game that reveals the gaps in their knowledge. These gaps can then be filled through various interactive courses. In addition to the centrally initiated Compe- tence Shift, a number of similar activities were started throughout Ericsson in 1999. The gsm Systems business unit provided training in data communications for 4,500 employees during the year. The Knowledge Step, as the program is called, is now being extended to many other companies and units within Ericsson. For customer account managers, Ericsson Busi- ness Academy developed an intensive course called Inside the ip tornado, which describes the business logic in Silicon Valley. During 2000, at least 300 persons will participate in this training. There are also various local initiatives in the area based on needs in respective Ericsson markets. ¥ (cid:13) (cid:13) (cid:13) (cid:13) (cid:13) (cid:13) (cid:13) CORPORATE CITIZENSHIP 2 7 Good reputation in society increasingly important M Many companies around the world have realized the importance of being perceived as a respectable and responsi- ble citizen in society. They have under- A1018, mobile phone for the low-price segment. Available in five different colors. stood that a good reputation also has a commercial value. It is easy to appreciate that public authorities and organizations are more favorably disposed to companies that contribute to improving society and make their resources available in emergency situa- tions. Not quite as self-evident — but no less impor- tant — is that today(cid:213)s consumers increasingly expect that the companies whose products they purchase should be companies that distinguish themselves from others and through their actions win the cus- tomer(cid:213)s confidence. It is becoming increasingly nat- ural for today(cid:213)s consumers to prefer doing business with (cid:210)good(cid:211) companies rather than with (cid:210)bad(cid:211) ones. positive image Ever since the Company was founded more than 120 years ago, Ericsson has taken pride in being ethical in its actions and practicing fair business methods. This is a part of the business culture that Lars Magnus Ericsson established and something that has contributed to creating a positive image of Ericsson as a company. Through the years, this image has been strength- ened by activities that have been conducted in various parts of the world to demonstrate Ericsson(cid:213)s social responsibility in the countries in which it is active. With the support of local management, Ericsson employees in many countries have participated in different social projects. Such work not only strength- ens Ericsson(cid:213)s positive image, but also contributes to strengthening the team spirit within the Company. These often spontaneous expressions of solidarity are very valuable, but more is required. The realiza- tion that it is essential to coordinate and develop such activities, resulted in a comprehensive review being conducted in 1999 of Ericsson(cid:213)s role in soci- ety. A special group was established within Erics- son(cid:213)s marketing function that was charged with further developing Ericsson(cid:213)s activities in this area. emergency assistance Experiences during 1999 confirm that humanitari- an assistance in the form of communications sys- tems in conjunction with natural catastrophes and similar situations is the area in which Ericsson can provide the greatest benefit. During the preceding year, significant efforts were made in several situa- tions around the world. Following the major earthquake in Turkey, Ericsson(cid:213)s local company worked together with the local mobile operator Turkcell to ensure that mobile communication in the affected area contin- ued to function. Ericsson employees in Turkey donated money, gave blood and provided other assistance during rescue efforts. When floods struck Vietnam in November, Ericsson(cid:213)s local office provided emergency assis- tance in a number of ways. Ericsson volunteer workers, mobile phones and other resources were placed at the disposal of the authorities during the reconstruction work. In Canada, Ericsson quickly provided a mobile base station on wheels to assist rescue personnel and the families of victims following a major air crash. the erica prize Obviously, catastrophes make headlines, but there are many countries in the world that face major challenges every day. These challenges range from helping people to find food, work or housing to teaching them to read and write. In order to support and reward innovative efforts in this area, Ericsson founded the erica Award (Erics- son Internet Community Award). This award, which is also sponsored by other companies, is given to non- profit organizations that use Internet technology to help others. In 1999, a total of usd 250,000 was awarded. The prize was shared by three winners: the National Library for the Blind in Great Britain, Med- ical Training Worldwide in Novato, California and Kids HealthLINK in San Francisco, California. leading role Ericsson will continue to provide humanitarian assistance in the form of communications systems. In this way, the Company will play a leading role in helping to reduce human suffering in conjunction with catastrophes. The message to the world is clear: Ericsson is a company that takes responsibility, that really makes a difference. It is a company which is characterized by high ethical standards and which is a respectable and responsible employer that takes a long-term view of environmental issues and has been doing so for some time. It is a company that cares. ¥ THROUGH public service activities, Ericsson companies around the world are strengthening our positive image. This is very important in a market where people increasingly let their hearts dictate business and purchasing decisions. LARS A. ST(cid:129)LBERG, SENIOR VICE PRESIDENT, COMMUNICATIONS 8 2 s u c o f n i Æ i i Solid growth for mobile systems and new fixed network solutions E ricsson’s goal of being the leading supplier in the new telecom world demands that the Company should be able to offer a broad portfolio of network solutions and continue to focus strongly on the ip and datacom market. Achievements during 1999 show that the prospects for achieving this goal are favorable. Ericsson(cid:213)s Network Operators/Service Providers business segment experienced an eventful year in 1999. A dramatic increase in traffic was noted in all telecommunications networks. Very rapid growth in mobile telephony and continued strong growth of Internet traffic combined to generate exponential growth in network traffic. In mobile networks, the number of subscribers increased by 53 percent during the year, while traf- fic increased even more. More than 60 million new users were connected to the Internet during 1999. The result was that network capacity had to be increased during the year at a much faster rate than anyone had expected. For this business segment, these trends con- tributed to extremely strong growth, strengthen- ing the segment(cid:213)s position as Ericsson(cid:213)s largest, with 69 percent of net sales. Net sales amounted to sek 149,9oo m. (123,200) in 1999, which was an increase of 22 per- cent. With an operating margin of 13 percent, the business segment is also Ericsson(cid:213)s most profitable. all mobile standards One of the reasons why Ericsson is the world leader in mobile systems is that Ericsson is the only com- pany able to offer mobile systems according to all existing standards. This has applied to first- and second-generation systems and is now also true for third-generation systems. Ericsson has long been one of the principal drivers behind the development of third-genera- tion (3g) mobile communications. With the announcement in March 1999 of an agreement with the American company, Qualcomm, Ericsson further strengthened its position in mobile systems. As part of the agreement, Ericsson acquired Qualcomm(cid:213)s infrastructure operations, thus allowing the Company to expand its product portfolio with cdmaOne, previously known as cdma is-95. When the itu, at the end of 1999, announced its decision on 3g, it became clear that Ericsson will be able to supply systems for each of the three most important standards. far ahead in 3g During the year, Ericsson signed the first commer- cial contract for a 3g system with ntt DoCoMo in Japan. Ericsson will supply radio base stations and terminals for ntt(cid:213)s network, which when it is taken into commercial operation next year, will be the world(cid:213)s first 3g network. Additional contracts were signed during the year covering commercial and test systems. Test systems for wcdma and edge are now in operation with more than 15 operators, which means that Ericsson is far ahead of its main competitors in this area. Planning for 3g systems is underway all over the world. Many operators have applied for 3g licenses, and Ericsson is discussing deliveries with most of them. However, license allocation is not expected to gain momentum until sometime in 2000, which means that the rest of the world will be somewhat behind Japan when 3g is taken into commercial operation. gprs and edge In anticipation of 3g systems, gprs has attracted considerable interest during the year. This is a part of the gsm system that makes it possible to signifi- cantly increase data capacity using packet- switching techniques in gsm networks. Ericsson signed a large number of gprs contracts during the year, thereby winning half of all business as measured by the operator(cid:213)s subscriber base. Ericsson is also leading the way with respect to the 3g standard, edge. BellSouth and Rogers Cantel have placed orders for such systems, which are expected to be taken into operation by 2001. mobile internet Technologies that allow wireless access to the Inter- net received considerable attention during the year. The business segment is working hard to further strengthen Ericsson(cid:213)s offering with respect to these technologies, which include operating systems, BUSINESS SEGMENT NETWORK OPERATORS AND SERVICE PROVIDERS 1999 1999 1998 Orders booked, SEK b. Net sales, SEK b. 151.8 149.9 Operating margin, SEK b. 19.6 Operating margin, percent 13 127.6 123.2 15.3 12 Change (percent) 19 22 Number of employees 64,695 68,645 —6 DURING 1999 our mobile systems operations grew by more than 40 percent. We took the lead in all areas of the mobile Inter- net and we developed and sold systems that help our customers to migrate their existing investments forward into the new telecom world and its network architecture. MATS DAHLIN, EXECUTIVE VICE PRESIDENT, BUSINESS SEGMENT NETWORK OPERATORS AND SERVICE PROVIDERS. BUSINESS SEGMENT NETWORK OPERATORS AND SERVICE PROVIDERS 2 9 communications platforms and content. Ericsson is active on a broad front in this area. Content is being developed in cooperation with a large number of companies and operators. Erics- son(cid:213)s demonstration systems for 3g in various parts of the world are a valuable asset in illustrating the opportunities provided by the new technology. In order to further promote the development of applications for 3g and other technologies, Ericsson took an ownership stake in companies such as oz.com and Sara(cid:149)de during the year. Although these investments might seem to be somewhat peripheral to Ericsson(cid:213)s core business, Ericsson intends to take an active part in driving a market for the mobile Internet and to support new ip- based solutions that generate more network traffic. new generation in fixed networks With a market share of over 30 percent, Ericsson dominates the market for mobile systems. Ericsson is also one of the leading suppliers of infrastructure for fixed communications. The axe system, the sales of which exceed those of any other switching system, is the foundation of Ericsson(cid:213)s success in each of these markets. During 1999, more axe lines were sold than ever before, bringing the total installed base up to 150 million fixed lines. This is the world(cid:213)s largest installed base for fixed telecom- munications and a major source of future revenues. Several of Ericsson(cid:213)s operator customers are now beginning the work of upgrading their networks to the next-generation network architecture. This architecture will handle data and multimedia com- munications in fixed and wireless networks. migration solution for ip During 1999, Ericsson(cid:213)s engine concept achieved considerable success. This is a solution for the migration of circuit-switched networks for fixed telecommunications to a new generation of net- works that will handle circuit-switched and ip/atm-based packet-switched traffic. During 1999, bt in Great Britain, kpn in the Netherlands, Telia in Denmark and Telef(cid:151)nica in Spain chose engine for modernizing their networks. An order from Diginet, which intends to use engine for an extensive Latin American ip network with wireless access, confirms that this is a solution that also fits newly established operators. engine(cid:213)s success was the result of strategic marketing activities to reposition Ericsson as a supplier of networks for data and telecommunica- tions. This was made possible by restructuring the Wireline Systems business unit to become a suppli- er of total solutions and services. The positive results achieved by engine are not the only examples that confirm that Ericsson is one of the key players in the ip and datacom market. In the area of ip-based voice telephony, called VoIP (Voice over ip), Ericsson is now the world leader after having signed several important contracts during 1999. Ericsson(cid:213)s systematic investments in ip commu- nication also resulted in the establishment of the Datacom and ip Services business unit in Boston in the U.S. total supplier The concerted effort to further strengthen Ericsson(cid:213)s expertise in ip technology made during the past few year was accelerated significantly during 1999. Sever- al important acquisitions and partnerships were announced during the year. Consequently, Ericsson now has a complete product portfolio for tomorrow(cid:213)s data and telecom networks. Today, Ericsson has a unique capacity to offer total solutions for all types of wireless and fixed networks. In order to strengthen Ericsson(cid:213)s offering to the segment(cid:213)s customer groups, Ericsson Services was RBS 2401, complete picobase station for installation indoors. 0 3 s u c o f n i Æ i i BUSINESS SEGMENT NETWORK OPERATORS AND SERVICE PROVIDERS Systems will continue, and the workforce will be adapted to order volumes and new technology. The implemented structural measures, together with satisfactory sales and new solutions, generated earnings that exceeded expectations and contributed positively to Ericsson(cid:213)s profitability. The dominant share of reductions within the business segment during 1999 took place through outsourcing. For example, 2,500 employees began working for new employers when production units in Visby, Katrineholm, (cid:133)stersund, Longuenesse and Madrid were transferred to external partners. In Norrk(cid:154)ping, 300 employees were transferred to the staffing company Proffice. A similar solution for affected personnel in the Stockholm area was arranged through the establishment of Framtidsfo- rum, which is helping about 1,000 employees in the business segment to find new career paths. Those who have not succeeded within one year will be offered employment with Manpower, another staffing company. innovation cells The New and Special Business Operations business unit includes operations that Ericsson is preparing to phase out of its product portfolio and operations that are completely new and have not yet resulted in finished commercial products. One example is the Private Radio Systems Unit, which was sold in the beginning of 2000 to the U.S. company, Com-Net Critical Communications. The business unit also includes units of a purely entrepreneurial character, often organized as inno- vation cells, which are groups formed around ideas that are considered to be worth developing. For instance, E-box, Ericsson(cid:213)s product for remotely controlling household equipment via the telephone ¥ network, was developed by such a group. established as a new business unit during the year. With a strong portfolio of services, Ericsson(cid:213)s posi- tion as a total supplier, systems integrator and partner is strengthened. investments in data capacity Several of the business segment(cid:213)s mature products continued to show favorable margins during 1999. Mobitex is one such product, which during 1999 underwent somewhat of a renaissance. Increased demand for wireless data communication in the U.S. more than doubled the number of subscribers of one of Ericsson(cid:213)s customers during the year. Ericsson received new orders for equipment for the Mobitex network, which for the time being is the country(cid:213)s only nation-wide network for wireless data communication. lmds, Ericsson(cid:213)s system for wireless broadband access, optimized for high-speed ip traffic, has attracted major interest in the market. Ericsson signed its first contracts and the system is now being used in trials by the American operator nextlink. Ericsson is mainly targeting the enter- prise market, but in the long-term lmds can enjoy wider application, as new licenses are issued and new operators surface. The system is based on Ericsson(cid:213)s successful mini-link system, which currently holds a 30-percent market share. Ericsson also offers cdpd, a first packet- switched technology for tdma that provides for services at twice the speed of existing networks. A number of important contracts were signed during the year with at&t and others. During 1999, isdn made a strong comeback. Ericsson(cid:213)s customers have a large installed base of copper networks offering conventional narrowband services that are an excellent source of add-on sales. The strong growth in Internet traffic increased interest among operators for investing in greater capacity in the existing copper network. Ericsson products easily allow these operators to increase bandwidth at the desired rate, first with isdn and possibly later with adsl. Ericsson(cid:213)s wdm technology substantially increases capacity in wireline transportation net- works while maintaining a high transmission secu- rity level. Contracts were signed with Telef(cid:151)nica in Spain and U.S.-based aol during the year. shrinking rapidly The business segment(cid:213)s internal work during 1999 was characterized by continued restructuring of operations. This applied primarily to the Wireline Systems business unit, which during the past year sharply reduced the number of employees. During the 1990s, the number of employees in the compa- nies currently included in this business unit was reduced by more than 50 percent and totaled some 16,000 persons at year-end 1999. During 2000, the restructuring of Wireline MacroDens, power module for supplying current to PC circuit cards and similar components. OTHER OPERATIONS Components Microwave Systems 3 1 Ericsson components (now Ericsson E Microelectronics) reported net sales of sek 8,600 m. (6,700) in 1999. Operations consist of the Energy Systems, Microelec- tronics and Electronic Distribution business units. Energy Systems had an extremely good year. One of the high points was a contract with Telef(cid:151)nica del Peru that gave Energy Systems total responsibility for supplying power to their some 2,000 customer instal- lations. Through a general agreement with Siemens, Energy Systems became a strategic supplier to the German manufacturer of telecom systems. Ericsson strengthened its position as a world leader in power modules, delivering its 10 millionth module from the pkf family, a unique record in the industry. focus on microelectronics Microelectronics showed very strong growth dur- ing the year. Thanks to an increased focus on appli- cations for broadband and mobile telephony, large volumes of components could be delivered, particu- larly in mobile telephony. Significant investments were made during the year to increase manufacturing capacity for integrat- ed circuits in Kista. An important partnership agreement was signed with Chartered Semiconduc- tor for joint development and production of inte- grated circuits for next-generation radio technology. Demand for power transistors for radio base stations continued to show strong growth, both from internal and external customers. Continued upgrading to digital lines, a trend that is driven by increasing Internet use, resulted in a doubling of deliveries of line circuits for network terminals installed as customer premises equipment. Volume production of radio modules for the Bluetooth standard was started during the year. Demand for these chips is strong among various application developers both within Ericsson and externally. Microelectronics is currently the leader in developing and supplying Bluetooth modules. The Electronic Distribution business unit contin- ued to grow geographically and in terms of sales. New offices were opened in Germany and the U.K. In addition to successful projects for customers, such as Electrolux and Lego, a new generation of Erics- son(cid:213)s Internet catalogue was developed, enabling customers to pay for purchases with a credit card. organizational change Effective February 1, 2000, Microelectronics(cid:213) activi- ties will be carried out at Ericsson Microelectronics ab and its foreign operations. An agreement was reached in January covering the sale of the energy system operations to Emerson Electric Co. in the U.S. Microelectronics now also includes power modules. ¥ Ericsson microwave systems can look E back on a period of rapid growth, which is expected to continue with the new business opportunities provided by the company(cid:213)s two main product areas: defense systems and microwave communications. The company(cid:213)s sales amounted to sek 7,325 m. Erieye, system for airborne surveillance. Shown mounted on the Brazilian Embraer EMB145. Continued rapid growth of traffic in fixed and wireless networks serves to promote the company(cid:213)s primary civil product, which is the mini-link microwave link. During 1999, more than 60,000 such units were produced. Over the past several years, Ericsson(cid:213)s mini-link has dominated the world market for microwave links. new market for mini-link A new application area was added with the intro- duction of mini-link bas in the beginning of 1999. This is a system for broad- band access via a micro- wave link. The market potential is expected to be substantial. Another important part of civil operations at Erics- son Microwave Systems is the development of base stations for wcdma. Ericsson received its first wcdma contract from ntt DoCoMo in Japan at the beginning of the year. favorable trend for defense systems Ericsson(cid:213)s focus in defense systems is on sensors and information technology. This is a direction that is favored by trends in a market that is generally characterized by increasing demands for advanced technology systems. Sensors, such as control and communications systems, are an area of top priority for many countries(cid:213) military forces. During 1999, Ericsson Microwave Systems received an additional foreign contract for the air- borne surveillance radar, Erieye, from the Greek Air Force, which ordered four such systems. The Swedish Armed Forces, in which Erieye is already operational, commissioned Ericsson to continue developing the next generation of airborne radar. The so-called aesa technology, on which this radar is based, represents a major advance in radar technology. The Arthur artillery localization radar system was delivered to the Swedish and Norwegian defense forces during 1999. Additional contracts for these systems were signed with two other countries during the year. The South African order of the jas 28 Gripen aircraft was another important event for Ericsson Microwave Systems and the associated company, Ericsson saab Avionics. ¥ 2 3 s u c o f n i Æ i i HPR-08, a small FM radio that can be connected to a mobile phone A year of innovative concepts PROFITS WERE a disappointment in 1999, but an upturn was noted in the fourth quarter. With our new product portfolio we will recapture our market position and can hope to improve margins. JOHAN SIBERG, EXECUTIVE VICE PRESIDENT, BUSINESS SEGMENT CONSUMER PRODUCTS NEW HEAD of Business Segment Consumer Prod- ucts as of February 15, 2000, is Jan W(cid:138)reby, previously head of Market Area Europe, Middle East and Africa. N ever before has Ericsson launched so many new products for the consumer market as it did during 1999. Some 20 new mobile phones were introduced, of which several were based on an entirely new gener- ation of technical platforms. However, delay in the process of increasing volume production of the new phones, caused products in the lower price seg- ments to dominate sales during the year, thus sharply reducing profitability for the business seg- ment. Ericsson(cid:213)s business segment Consumer Products is still mainly focused on the sales of mobile phones. During 1999, however, a special business unit for Home Communications was established that initial- ly will offer consumers cordless phones for the home and Ericsson(cid:213)s PipeRider, a modem for ip communi- cation via the cable-tv network. Net sales for the business segment amounted to sek 46,400 m. in 1999, an increase of 3 percent compared with the preceding year. The segment thus accounted for 21 percent of Ericsson(cid:213)s total net sales. In terms of volume, 1999 was a record year, with 31 million phones sold compared with 24 million in 1998. Because the low-price segment accounted for a larger share of sales, the sales increase in sek was not as strong. This, plus the high costs for technical renewal of the product portfolio incurred during the year, resulted in an operating margin for the business segment of only 1 percent compared with 7 percent in 1998. However, a clear trend reversal was noted in the fourth quarter, during which sales of the t28 and other new models contributed posi- tively to profitability. The consumer market is different in many respects from Ericsson(cid:213)s other markets. In particu- lar, the brand plays an essential role. During 1999, Ericsson continued to invest heavily in various activities to strengthen the Company(cid:213)s brand. Although global advertising campaigns, spon- sorship events and intensive tv advertising are costly, these measures are now beginning to produce results. In the prominent international study of brand awareness, conducted over the past ten years by the distinguished research firm Interbrand, Ericsson ranked 17th in the world in 1999. This ranking provided a strong incentive for continuing systematic work to build the Ericsson brand. A strong brand is extremely important for Erics- son at this point in time. Advances in technology are making it increasingly easy for manufacurers in China and Southeast Asia to begin competing with Ericsson, Motorola and Nokia, the current market leaders in mobile phones. segmented market To provide a foundation for future product develop- ment, Ericsson is constantly conducting careful studies of the market and consumers. At the Com- pany(cid:213)s Consumer Lab in Lund, Sweden, mobile phone users(cid:213) behavior and preferences are analyzed in detail. These market studies and analyses show that there are different types of users. Based on these observations, the product portfo- lio is now being adapted to the customer segments that Ericsson has chosen to target. For younger users and users who often purchase a mobile phone with prepaid calling time, the a1018 and t10 phones were launched during 1999. The former is a true volume product, which accounted for a very large proportion of Ericsson(cid:213)s sales during the year. For more professional users in job categories in BUSINESS SEGMENT CONSUMER PRODUCTS BUSINESS SEGMENT CONSUMER PRODUCTS 1999 1999 1998 Change (percent) Orders booked, SEK b. Net sales, SEK b. Operating margin, SEK b. Operating margin, percent 47.6 46.4 0.3 1 44.9 45.2 3.2 7 6 3 pany was started for telephone production. Expansion of production in Brazil continued. In addition to expanding its own production capacity, the business segment continued to out- source production to external partners. Together with Ericsson(cid:213)s own production increases, this means that the Company is well prepared to meet the increase in volume expected in 2000. Number of employees 16,446 14,193 16 creative thinking which the phone is subjected to rough treatment, the r250 pro was launched as the world(cid:213)s first water-, dust- and shockproof mobile phone. This phone is designed for gsm pro, which means that it can also be used as a private radio terminal. The t28 and t28 world models are phones that target consumers who want high quality and are prepared to pay for intelligent functions. Ericsson(cid:213)s mc218 was the first wap product on the market. It is a handheld computer, which via a built-in infrared port for communication with a mobile phone, allows wireless access to the Internet and e-mail. It also includes software for word process- ing, image transmission and other functions. For the demanding Japanese market, Ericsson produced a variation on the t28 for ntt DoCoMo. This phone, which was sold in limited test quanti- ties, was very well received in the market. component shortages The telephone that was most in the spotlight dur- ing 1999 was the t28. When it was first shown in January, it generated considerable attention due to its extremely light weight, modern design and advanced functions. The market(cid:213)s reception was very positive, and expectations were high that the t28 would sell extremely well. It was not until the autumn, however, that the tremendous demand for the t28 could be satisfied by greater volumes. This was due to component shortages that affected the entire industry, as well as delays in trimming in production. The t28 is based on a completely new technical platform, which includes a new processor, a new radio sub- system and an innovative new battery technology that Ericsson was first to bring to market. During the latter part of the year, the situation improved, and production of the t28 is gradually being stepped up. The technical difficulties in the transition to the new technical platform have been overcome, suggesting that forthcoming models based on the same platform will be significantly easier to industrialize. increased capacity To meet sharply increasing volumes, Ericsson signifi- cantly increased its production capacity during 1999. A new production plant in Malaysia was taken into operation, and in China a second joint-venture com- Several new accessories for Ericsson mobile phones were launched during the year. The accessories market is increasingly important, since it often offers greater margins than volume phone sales. Several of the new accessories were entirely new innovations — and the result of creative thinking on the part of the Company(cid:213)s product developers. Chatboard is a small keyboard which is connect- ed to the mobile phone to facilitate entry of sms messages and which can even be used to send e-mail. An fm radio that also functions as a hands- free headset was another popular new product, as was the mp3 player shown at Telecom 99 in Geneva. During the autumn, the first Blue- tooth product, a cordless handsfree headset, was also shown. Bluetooth is a technology for wireless transmission over short distances that was devel- oped by Ericsson but released to the public domain. Development is being continued by Ericsson, 3Com, ibm, Intel, Lucent, Motorola, Nokia, and Toshiba. Close to 2,000 companies have adopted the technology and are developing Bluetooth products. Ericsson Components is one of the manufacturers that is already producing Bluetooth chips for inte- gration into these future products. important partnerships The partnership between Ericsson and Microsoft that was announced in December will have a significant impact on the business segment(cid:213)s con- tinued product development. With this partner- ship, that relates to the mobile Internet, Ericsson gains access to Microsoft(cid:213)s Mobile Explorer for its more advanced telephones. The agreement with Microsoft does not affect collaboration through the Symbian consortium, in which Ericsson is working with Matsushita, Motorola, Nokia and Psion to further refine the epoc operating system for wireless terminals. During 1999, Ericsson introduced the epoc-based mc218, as well as the r380, which will begin to be sold in full scale during 2000. The partnership for the networked home of the future, which was announced by Ericsson and Elec- trolux during the autumn, is based in large part on forthcoming products from the business segment Consumer Products. ¥ 3 3 HS210, cordless display phone for home communications. Provides direct access to the Internet and e-mail using Bluetooth technology and a small base station. T10, dual-band phone with vibrating alert. Available in five different colors. 4 3 s u c o f n i Æ i i Focus on ip-telephony services and mobile enterprise solutions B usiness is driving the development of tomorrow(cid:213)s multimedia communications. Business users already account for most broadband traffic and are the driving force behind new Internet and intranet applications, such as e-commerce and e-mail. Companies are becoming more aware that their customers are increasingly mobile. The mobile Internet will allow them to create completely new channels for communicating with customers and offering personalized services. Increasingly, employ- ees are also being given access to network services and information, even when out of the office. These trends are the primary drivers in developing new applications that will generate most of the traffic and content in next-generation mobile networks. investing in growth Ericsson(cid:213)s business segment Enterprise Solutions is of great strategic importance in responding to these trends. The business segment(cid:213)s sales for comparable units increased 19 percent in 1999 to sek 17,300 m., which corresponded to 8 percent of Ericsson(cid:213)s total sales. Several different improvement programs dur- ing the year contributed actively to improving earn- ings, which nonetheless remain at a low level, due to continued heavy investment in future growth areas. The number of employees increased as a result of company acquisitions and organic growth in new areas such as business consulting, while the work- force was reduced by more than 20 percent in tradi- tional operations, primarily business switches. The business segment had 9,600 employees at year-end. To strengthen Ericsson(cid:213)s position as a supplier of tomorrow(cid:213)s business systems, while improving the segment(cid:213)s profitability, operations were consolid- ated in 1999. A MULTI-YEAR contract with the Metropolitan Police shows that Ericsson is a long-term strategic partner for companies who want assistance with operating and developing their operations and their communications solutions in a world that will be characterized by mobility and the Internet. HAIJO PIETERSMA, EXECUTIVE VICE PRESIDENT, BUSINESS SEGMENT ENTERPRISE SOLUTIONS In 2000, continued emphasis will be put on the development of sales channels, the launching of ip switches and on increased growth for the business consulting operations that provides business solu- tions for the Internet. Development work was refocused on ip applica- tions and mobile Internet solutions. Investments were increased in developing tomorrow(cid:213)s wireless business networks, an area where Ericsson will offer high-capacity networks for data transmission based on the HiperLAN standard. large number of consultants Another important component in the segment(cid:213)s focus on the future are efforts to establish and expand business consulting activities. The goal is that Ericsson should be the leader in providing companies with business solutions and services for the mobile Internet. During 1999, the Ericsson Business Consulting business unit was formed through a merger of internal consulting and service operations from parts of Ericsson Data, which was recently dissolved. Several new business consultants were also recruited. Approximately 2,700 of the business unit(cid:213)s 4,000 employees work as business consultants, it and telecom consultants and wap consultants in 36 markets. Other employees of the business segment work with the operations and maintenance of Erics- son(cid:213)s it activities. In business solutions for the mobile Internet, Ericsson is focusing on the banking and finance, transport, travel, media and entertainment seg- ments. These efforts, plus Ericsson(cid:213)s wap expertise, have strengthened customer confidence in Ericsson as a partner in developing new business concepts combined with new systems solutions. Bank trans- actions over the Internet, wap solutions for wireless WebSwitch 2000, IP-based business switch for small companies. Developed by EricssonWebCom Inc., formerly TouchWave Inc. 3 5 BUSINESS SEGMENT ENTERPRISE SOLUTIONS BUSINESS SEGMENT ENTERPRISE SOLUTIONS 1999 1999 1998 Orders booked, SEK b. Net sales, SEK b. Operating margin, SEK b. Operating margin, percent 18.0 17.3 0.1 0 14.6 14.6 0.1 0 Change (percent) 23 19 Number of employees 9,615 9,966 —4 banking services and wireless e-commerce are examples of concepts developed during the year. As companies focus more on core operations, they are outsourcing operation, maintenance and development of their communication networks to external partners. Ericsson Business Consulting can offer customers an opportunity to migrate existing systems to new mobile solutions. A five-year contract, signed in 1999, to maintain and supply Britain(cid:213)s Metropolitan Police network marked a breakthrough in this area. ip traffic in the switch The acquisition in May 1999 of the U.S. company, TouchWave Inc., gave Enterprise Solutions access to WebSwitch2000, which is an ip-based switch that can handle conventional analog and ip-based telephony for smaller companies. Products from this company, which was renamed Ericsson WebCom, will play an important role in the ip product portfolio, as well as for Erics- son(cid:213)s continued expansion in the U.S. WebSwitch2000 received several prestigious awards during the year at telecom shows in the U.S. WebCom has already sold more than 1,000 switches to customers in the U.S. An important aspect of Ericsson(cid:213)s U.S. product strategy is expan- sion of indirect sales channels for the Company(cid:213)s new ip-based products. good year for business switches The business segment is not only developing in new areas of operations. Sales of Ericsson(cid:213)s business switches also increased in 1999, with more lines sold than ever of md110 (for large) and Business- Phone (for small and mid-size companies). Growth in Europe, especially in the U.K. and Italy, was particularly strong. Ericsson sells call-center solutions that support customer service functions. Ericsson is the leader in this segment, particularly in Europe. During 1999, Ericsson launched a new generation of server-based call centers. With its large installed base in business commu- nications — 45,000 large companies have purchased md110 — Ericsson(cid:213)s business potential for tomor- row(cid:213)s ip-based solutions is substantial. R320, WAP telephone with built-in IR modem and calendar that can be synchronized with PC or PDA. Weighs less than 100 grams. Meanwhile, rationalization continues in tradi- tional operations involving business switches. Two of the segment(cid:213)s research and development centers were discontinued during the year, as were two product areas peripheral to core operations. Plants in Austria and China were transferred to external partners through outsourcing. Restructuring will continue in 2000 with strong focus on continued expansion of the distributor network and on reducing costs for direct sales. Central to these efforts is an emphasis on profitabil- ity and cost reductions and the need to increase Ericsson(cid:213)s presence in the market segment for small ¥ and mid-size companies. 6 3 s u c o f n i Æ i i Strong year thanks to growth in mobile systems and fixed networks E ricsson’s successful year in global business during 1999 was charac- terized by two strong market trends: continued exceptionally strong growth in the world(cid:213)s mobile phone systems and increased investments in fixed communi- cation networks to satisfy requirements for increased capacity due to similarly exceptionally strong growth in the number of Internet subscribers. A review of important contracts announced during the year confirms these trends. As always with Ericsson, it must be emphasized that 70 percent of the Company(cid:213)s sales repre- sent ongoing sales to existing customers that are not registered as new sales in the list below. europe, middle east and africa Ericsson(cid:213)s sales in this market area increased 18 percent during the year, but there were large variations between individual markets. The most rapid growth in relative terms was in Belgium (+147 percent), but Spain was the market that increased most in real terms, from SEK 7.0 to 13.0 b . Turkey (+117 percent) and the U.K. (+15 percent) were two other markets showing strong sales growth. For the first time, Turkey became one of Ericsson(cid:213)s ten largest markets. In central and eastern Europe, the trend was also positive in 1999, while a downturn was noted in Russia (—55 percent). Sales also declined in Denmark (—40 percent), Finland (—16 percent) and Norway (—12 percent). The trend for mobile telephony is driving the positive development of Ericsson(cid:213)s business in the market area. Several large networks were added during the year, while at the same time the growth in the number of subscribers was high in existing networks, which forced investment in increased capacity. As a result of development during the year, Ericsson strengthened its overall position in the area and grew faster than the market. Important contracts announced in 1999: CZECH REPUBLIC ITALY Telespazio SpA — Infrastructure for broadband access via satellite for the Astrolink system. Cesky Mobil — Turnkey GSM/GPRS system valued at SEK 1,630 m. MOROCCO DENMARK Telia Danmark — Multiservice net- work for voice and data Telia Danmark — GSM Mobile Cen- trex, new mobile solution for business ESTONIA Eesti Mobiltelefon AS — Positioning system for GSM FINLAND Telephone Company of Vaasa Province — GSM 1800 system GERMANY o.tel.o — Turnkey WDM system (owned since April by Mannesmann) Siemens — OEM supplier of power systems, SEK 1,650 m. GREECE Greek Air Force — Erieye airborne surveillance radar, four systems, valued at SEK 4,900 m. Medi Telecom — Turnkey GSM network valued at SEK 1,150 m. NETHERLANDS Telfort — GPRS system and GSM expansion valued at more than SEK 1,000 m. WISH — Infrastructure for Internet access valued at SEK 100 m. KPN International Network Ser- vices — ENGINE solution for integra- ted data and telecom WISH — Payment system for electro- nic commerce based on Ericsson(cid:213)s Jalda technology KPN Telecom — AXE Transgate switches NORWAY Telenor Mobil — Introduction of wireless e-commerce solution deve- loped together with Ericsson, movie tickets via mobile phones Telenor Mobil — Development of WAP services ICELAND POLAND Islandssimi hf — Multiservice voice and data network with IP over ATM Polska Telefonia Cyfrowa — GSM network expansion valued at more than SEK 660 m. ERICSSON strengthened its overall position in Europe during 1999, where growth exceeded the market average and was bolstered significantly by the continuing exceptionally strong trend for mobile telephony in the region. JAN WÄREBY, EXECUTIVE VICE PRESIDENT, EUROPE, MIDDLE EAST AND AFRICA EFFECTIVE February 15, Ragnar B(cid:138)ck succeeded Jan W(cid:138)reby as manager of the new Western Euro- pe market area. The manager of the new Eastern Europe, Middle East and Africa market area had not been appointed at the time of printing. ERICSSON AROUND THE WORLD 3 7 L(cid:138)nder d(cid:138)r Ericsson har bolag eller kontor(cid:13) Countries in which Ericsson has companies or offices(cid:13) L(cid:138)nder utan Ericssonbolag eller -kontor Countries in which Ericsson is not represented Ericsson has had an international focus since the earliest days of its history. Today, the company is one of the most geographically diversified enterprises in the world. With operations in more than 140 countries, Ericsson is unique in its industry and is one of the companies that is best equipped to assist increasingly more global companies. Ericsson has companies or offices in the following countries Europe, Middle East and Africa Austria Albania Algeria Bahrain Belarus Belgium Bosnia- Herzogovina Botswana Bulgaria Croatia Cyprus Czech Republic Denmark Egypt Estonia Ethiopia Finland France Gabon Georgia Germany Ghana Greece Hungary Iran Ireland Iceland Israel Italy Jordan Kazakhstan Kyrgyzstan Latvia Lebanon Libya Lithuania Luxembourg Macedonia Malta Moldavia Morocco Netherlands Nigeria Norway Oman Poland Portugal Romania Russian Federation Saudi Arabia Serbia Slovakia Slovenia South Africa Spain Switzerland Sweden Syria Tajikistan Tanzania Tunisia Turkey Ukraine United Arab Emirates United Kingdom Uzbekistan Yemen Yugoslavia Zimbabwe Pakistan Philippines Singapore Republic of Korea Sri Lanka Taiwan Thailand Vietnam North America Canada United States Asia and Oceania Australia Bangladesh China Hong Kong & Macao India Indonesia Japan Malaysia New Guinea New Zealand Latin America Argentina Bolivia Brazil Chile Colombia Costa Rica Ecuador El Salvador Guatemala Honduras Jamaica Mexico Netherlands Antilles Nicaragua Panama Paraguay Peru Puerto Rico Uruguay Venezuela 8 8 3 3 s u s u c o k f o f n i i Æ Æ i i i i Netia Holdings SA — Nationwide network for IP services TURKEY Turkcell — Expansion of GSM net- work valued at SEK 8,510 m. PORTUGAL Interoute — Network for IP telephony UKRAINE ROMANIA Rom Telecom — Breakthrough AXE order for fixed networks valued at SEK 830 m. Digital Cellular Communications — TDMA expansion valued at SEK 250 m. Ukrtelecom — SDH network valued at SEK 255 m. SLOVENIA UNITED ARAB EMIRATES Mobitel — GSM network expansions valued at SEK 1,200 m. Etisalet Telecommunications — Access network based on ADSL SOUTH AFRICA UNITED KINGDOM MTN — World(cid:213)s first GSM Pro net- work, including terminals, valued at SEK 210 m. SPAIN Interoute Telecommunicaciones SA — Nationwide system for IP tele- phony valued at SEK 90 m. Telef(cid:151)nica — Cenaxis, Ericsson(cid:213)s new network-based call-center solution, valued at SEK 83 m. Telef(cid:151)nica — ENGINE solution for integrated data and voice communi- cations SWEDEN Telia Mobile — Introduction of a new platform for real-time data communi- cation via GSM WCDMA system for testing by ope- rators One2One — GPRS contract as part of major infrastructure expansion valued at SEK 2,560 m. Vodafone — Joint development of 3G and WCDMA Metropolitan Police Service — Five- year management and development contract for all telecom services valued at SEK 990 m. One2One — Test system for GSM on the Net with IP-based wireless multi- media services Virgin Radio — Joint development and testing of radio broadcasting via 3G mobile networks Vodafone Airtouch Plc — Infrastruc- ture for GPRS BT — ENGINE solution featuring AXE/AXD301 hybrid switches for multiservice network valued at SEK 1,500 m. IN THE U.S., people are talking about the Mobile Millennium in view of the expected development for mobile data communi- cations. During 1999, the number of mobile tele- phone subscribers sky- rocketed, with an increase of nearly 50 percent. At the same time, the price of Internet connections drop- ped dramatically. Together, these two trends are dri- ving the market towards wireless Internet access. BO DIMERT, EXECUTIVE VICE PRESIDENT, NORTH AMERICA north america The trend for Ericsson in the North American market area, which inclu- des Canada and the United States, was very positive in 1999. The intro- duction of new and simpler calling charges resulted in strong growth for mobile telephony in the U.S. The number of mobile phone subscribers increased by nearly 50 percent during the year. As a result, sales and order booking for mobile sys- tems were extremely strong. Erics- son(cid:213)s total sales in the U.S. increa- sed 39 percent to nearly SEK 24 b., thereby re-establishing the U.S. as Ericsson(cid:213)s largest single market. Sales in Canada increased by 2 percent. For the market area as a whole, the sales increase amounted to a full 36 percent in 1999.Another notable trend in this market during the year was the continued consoli- dation among network operators, Internet companies and companies in the media industry. Important contracts announced in 1999: CANADA Cescom — Five-year contract for Voice over IP valued at SEK 118 M Rogers Cantel — Development of third-generation mobile network valued at SEK 2,800 m. BridgePoint Enterprises — Solu- tions for IP telephony and data networks valued at SEK 530 m. UNITED STATES BellSouth Cellular Corporation — Infrastructure for 14 U.S. markets valued at SEK 6,300 m. America Online (AOL) — ERION Networker and WDM infrastructure SBC Wireless — Jambala open service platform for TDMA networks in Chicago and Springfield, Illinois NEXTLINK — Field trials of point-to- point microwave systems (MINI- LINK BAS) Sprint PCS — Seven-year contract for expansion of cdmaOne network Omnipoint Communications — Installation and first U.S. field trials of GPRS Tritel Communications — Contract for TDMA (IS-136) infrastructure valued at SEK 2,310 m. ERICSSON AROUND THE WORLD 3 9 Market Area Western Europe(cid:13) Market Area Eastern Europe, Middle East and Africa(cid:13) Market Area Asia Pacific Market Area North America(cid:13) Market Area Latin America In conjunction with the release of its year-end financial report on 1999 operations, Ericsson announced that it is reorganizing the Europe, Africa and Middle East market area, dividing it into two areas: Western Europe market area, which comprises the EU countries plus Norway and Switzerland, and the Eastern Europe, Middle East and Africa market area. latin america Thanks to very strong growth of sales in Mexico (+74 percent) and continu- ed solid development in Brazil — despite the strong devaluation at the beginning of the year — the market area as a whole showed favorable growth during 1999 (+19 percent). The development in Central America was also positive during the year. Brazil is Ericsson(cid:213)s single largest market in the area and Ericsson(cid:213)s fourth largest market globally, with sales in 1999 of slightly more than SEK 14 b. (+20 percent). Mobile systems and phones account for the majority of growth in the area. Nonetheless, investments continue to be made in expansions of the fixed telephone network, particularly in Brazil and Mexico. Important contracts announced in 1999: ARGENTINA CHILE CTC Startel (Telef(cid:151)nica) — TDMA network expansion. Entel PCS — GSM expansion Telecom and Telef(cid:151)nica — TDMA networks valued at SEK 3,300 m. MEXICO BRAZIL TIM (Telecom Italia Mobile) — Expansion of TDMA networks. TESS (Telia) — Expansion of TDMA networks. Vesper S.A. (previously Mirror S.A.) — cdmaOne network for wire- less access to the fixed network. Telcel — Prepaid services for Telcel(cid:213)s entire TDMA network VENEZUELA Movinet — Expansion of TDMA network for 3G valued at SEK 1,700 m. SEVERAL COUNTRIES Diginet Americas — Broadband network for wireless access covering several Latin American countries valued at SEK 2,500 m. ERICSSON(cid:213)S MARKET share for mobile tele- phony in Latin America exceeds 40 percent, but the Company also has a leading position in fixed telecommunications. During the more than 100 years that Ericsson has been active in this market, a strong customer base has been established in virtually every country. BENGT FORSSBERG, EXECUTIVE VICE PRESIDENT, LATIN AMERICA 0 4 s u c o f n i Æ i i THE YEAR was characterized by very strong growth in Japan and India, while sales in China declined. The decline in China was due to a weakening of the market, which Ericsson considers to be temporary, and by restructuring among Chinese operators. An upturn was noted during the fourth quarter. KJELL S(cid:133)RME, EXECUTIVE VICE PRESIDENT, ASIA PACIFIC (TOOK OVER THE POSITION DURING THE YEAR) asia pacific After the deep economic crisis in 1998, conditions stabilized in several countries during 1999. This resulted in modest, but nonetheless positive growth (+5 percent) of Ericsson(cid:213)s sales in the market area as a whole. There were significant differences between countries, however. China, which was Ericsson(cid:213)s largest market in 1998, declined sharply. As a result of the restructu- ring currently in progress among Chinese operators and changes in market regulation, market activity tapered off significantly. For Erics- son, the result was a 16-percent decline in sales in both infrastructure and mobile phones. In Japan, on the other hand, Erics- son(cid:213)s sales increased by 78 percent, while sales in India increased by 82 percent. Increases were also noted in Australia (+24 percent) and New Zealand (+22 percent), while sales declines in Malaysia (—34 percent), Singapore (—29 percent) and in the Philippines (—17 percent) reflect continuing economic uncertainty in these countries. ERICSSON AROUND THE WORLD Important contracts announced in 1999: AUSTRALIA Enermet — GSM modules for rea- ding energy consumption at consu- mer sites, SEK 160 m. Queensland Ambulance — Mobitex system, SEK 45 m. PHILIPPINES Globe Telecom — GSM system valued at SEK 355 m. JAPAN Japanese Digital Phone Corp. — Expansion of PDC system valued at SEK 1,470 m. Japanese Digital TuKa Group — Three-year general agreement for continued expansion and upgrading valued at SEK 1,700 m. CHINA Inner Mongolia Post and Telecom Administration — GSM system valued at SEK 345 m. Liaoning Post and Telecommuni- cations Administration — Expan- sion of GSM network valued at SEK 1,260 m. China Telecom (Hong Kong) Ltd. — GSM expansion in Guandong valued at SEK 2,416 m. SmarTone Mobile Communica- tions Ltd, Hong Kong — WCDMA test system and GPRS infrastructure Guandong Mobile Communica- tions Co. Ltd. — GSM expansion valued at SEK 650 m. China Unicom — GSM expansion in six provinces valued at more than SEK 1,000 m. Shandong MCC — Expansion of GSM network valued at SEK 840 m. Sichuan Mobile Communications Co. — GSM expansion valued at SEK 835 m. SmarTone Mobile Communica- tions Ltd., Hong Kong — WAP sys- tem SRI LANKA Mobitel — Digitization of AMPS network valued at SEK 160 m. TAIWAN Chungwa Telecom of Taiwan — Upgrading of AMPS network, SEK 390 m. Far EasTone Communications — GPRS system THAILAND Advanced Info Service Public Company Ltd. — Expansion of GSM ¥ network valued at SEK 450 m. NET SALES PER MARKET AREAS (SEK m.) Europe, Middle East and Africa *) North America Latin America Asia Pacific *) of which Sweden *) of which EU 1999 115,065 25,175 30,263 44,900 1998 97,456 18,560 25,537 42,885 215,403 184,438 7,551 80,345 8,509 71,094 Percent change 18.1 35.6 18.5 4.7 16.8 —11.3 13.0 1998 figures restated according to the Market Area organization that was introduced on January 1, 1999. 4 1 TREASURY MANAGEMENT AND FINANCIAL RISKS 1999 has been characterized by continued success for the U.S. economy. During the year, Asia recovered strongly after the crisis 1997—1998 and Europe showed gradual signs of recovery. In Latin America the Brazilian economy strengthened some after the substantial devaluation in the begin- ning of the year. Ericsson(cid:213)s liquidity increased during the year with sek 10.8 b. and net, after deduction of short- term interest-bearing liabilities, with sek 5.4 b. This in spite of a number of strategic investments, including the acquisitions of Torrent Networking Technologies Inc. (U.S.), Qualcomm Infrastructure Division (U.S.), TouchWave Inc. (U.S.), Telebit a/s (Denmark) and minority shares in Juniper (U.S.), Sara(cid:149)de (U.S.) and oz.com (Iceland). These invest- ments of approximately sek 5.3 b. were financed primarily through a number of bond issues amounting to sek 12.9 b. The bond issues in May, of sek 10 b., were the largest ever by a Nordic corporation. In addition, a number of liquidity strengthening activities were implemented, such as the establishment of a pan-European securitization program, which was utilized to sek 850 m., and factoring. During the year, all short- and long-term borrowing programs and long-term credit facilities have been increased and updated. financial risks Ericsson has a policy for managing financial risks established by the Board of Directors. Respons- ibility for identifying and hedging financial risks arising in the Group(cid:213)s operations rests with the individual Ericsson companies. Risks are normally hedged through Ericsson(cid:213)s internal bank, Ericsson Treasury Services, which in turn manages the Group exposure externally. The major part of the risks assumed by the internal bank in this way are hedged in the financial market, but the bank also has the right to take positions in the financial market with- in the framework of the policy established by the Board of Directors. The risk mandate which amounts to sek 200 m., is based on a 5 percent change in each open foreign exchange position and a change of one percentage point in interest rates. Ericsson Treasury Services operates via treasury centers in Stockholm, Dublin, Singapore and Dal- las. Ericsson hedges financial risks by balancing assets and liabilities with respect to currencies and interest-rate periods and by using derivative instru- ments. currency risks FINANCIAL EXPOSURE With exports from Sweden amounting to approxi- mately sek 131 b. (sek 110 b. in 1998) and sales in Sweden of sek 8 b. (sek 9 b. in 1998), Ericsson is relatively heavily dependent on the development of exchange rates between the Swedish currency and foreign currencies, as well as on economic condi- tions in Sweden. As opposed to the transaction exposure, and to some extent translation exposure, Ericsson does not have a policy to hedge the finan- cial exposure. TRANSACTION EXPOSURE To limit currency risks as much as possible in con- junction with import and export activities, pur- chases and sales in foreign currencies are hedged by currency forward contracts in cases that involve firm commitments with customers and suppliers. In addition, estimated purchases and sales are hedged for periods of up to 12 months, based on assessments of stability in volumes, pricing and other factors within Ericsson(cid:213)s business segments. Outstanding bids are also hedged, normally with currency options. Hedge periods agree with the timing of the anticipated future cash flows. The foreign exchange exposure is concentrated mainly in the large production companies, notably the Swedish units, since the foreign subsidiaries are invoiced in their local currencies. Table 1 shows the distribution of commercial net cash flows of major currencies for Ericsson(cid:213)s companies in Sweden. TABLE 1 — NET CASH FLOWS OF CURRENCIES TO AND FROM SWEDEN (PERCENT) Specification of currencies with net flows exceeding SEK 0.5 billion Currency 1999 1998 AUD CHF EUR HKD GBP JPY USD Other 6 4 42 2 4 7 37 —2 4 3 35 8 5 4 34 7 100 100 The table is based on statistical data pertaining to flows to and from Ericsson(cid:213)s companies in Sweden. 2 4 s u c o f n i Æ i i The net currency exposure for the Swedish compa- nies is mainly in usd and Euro, with balance between the two respective currencies. This means that Ericsson has limited exposure to an isolated eur/usd change. With the exception of a few less important currencies, Ericsson is mainly exposed to the development of the Swedish krona. Based on the net currency flows to and from the Swedish companies, a lasting change of the Swedish krona against usd and Euro of 10 percent would have an effect on the consolidated net income of approximately sek 1.3 b. and sek 1.5 b. respective- ly. The net income effect for 1999 of changes in foreign currency exchange rates compared to last year(cid:213)s rates was approximately sek 0.4 b. CHART 1 — MONETARY NETS AS OF DECEMBER 31, 1999, IN PERCENT OF TOTAL FOREIGN MONETARY NET Other currencies HKD AUD USD TABLE 2 — NET CURRENCY FORWARDS BALANCES AS OF DECEMBER 31, 1999, PERTAINING TO ACCOUNTS RECEIVABLE, ACCOUNTS PAYABLE AND FUTURE CASH FLOWS, SEK BILLIONS MYR JPY GBP BRL CNY EUR Currency AUD CHF DKK EUR GBP GRD HKD JPY NOK USD Other currencies Sell (+) Buy (—) 0.2 1.5 0.2 32.6 6.6 1.2 —0.2 —0.6 —0.2 34.2 0.7 76.2 Exposure arising from borrowing is limited, since most loans by foreign subsidiaries are denominated in local currencies. Currency balances in subsid- iaries are monitored to secure minimum transaction exposure in Ericsson companies. TRANSLATION EXPOSURE Exposures in foreign subsidiaries are hedged within a framework established by Company management: ¥ Monetary net in companies translated according to the temporal method are hedged to 100 per- cent. ¥ Equity in companies translated according to the current method are hedged very selectively up to 20 percent of the total monetary net in such subsidiaries. One percent of such monetary net was hedged at year-end 1999. Monetary nets in foreign companies, by functional currency, as of December 31, 1999 (including associated companies and companies with financial operations). SEK billions. The translation differences reported in equity dur- ing the year are sek —2.4 b., mainly as a result of the devaluation in Brazil. interest-rate risks Ericsson(cid:213)s interest-rate risks are managed centrally. The focus during the year was short-term and bal- anced interest-rate periods for interest-bearing assets and liabilities. TABLE 3 — DISTRIBUTION OF FIXED AND FLOATING INTEREST RATES, SEK BILLIONS Interest-bearing assets Short-term financial assets Long-term financial assets, floating rate Total interest-bearing assets Interest-bearing liabilities Short-term financial liabilities Pension liabilities Long-term financial liabilities, fixed rate Long-term financial liabilities, floating rate Total interest-bearing liabilities 1999 1998 31.5 10.8 42.3 12.0 8.4 0.7 23.7 44.8 18.2 11.4 29.6 6.6 8.1 2.3 10.5 27.5 4 3 TREASURY MANAGEMENT AND FINANCIAL RISKS credit and counterparty risks in financial operations Ericsson(cid:213)s policy is to invest excess liquidity mainly in government papers, as well as in commercial paper and corporate bonds with ratings of a1/p1 or higher. Ericsson Treasury Services has credit limits for each issuer and counterparty. The exposure in derivative instruments is valued at market daily and is expressed as a liability to, or receivable from, each counterparty. Netting contracts — so-called isda agreements — are in force for most of the counterparties, which substantially reduces coun- terparty risk. Counterpatry limits are reviewed continuously. No credit losses were incurred during the year. credit risk related to customer financing The ability and willingness among telecom vendors to offer financing support has become an increas- ingly important factor for customers(cid:213) when select- ing a supplier. Customer finance is a very powerful means of competing. The granting of credits and the implied credit risk has continued to increase, but without major losses during the year. In total, the credit risk exposure amounts to sek 21.0 b., of which sek 12.0 b. is on the balance sheet while the remaining part relates to contin- gent liabilities. Credit risks are continuously sold to financial institutions, when market conditions are appropri- ate. TABLE 4 — ERICSSON TREASURY SERVICE(cid:213)S INVESTMENTS, DECEMBER 31, 1999, SEK BILLIONS financing Treasury bills Treasury bonds Mortage bonds Commercial papers Corporate bonds Cash, bank deposits Total TABLE 5 — NET RISK IN INTEREST-RATE DERIVATIVES, SEK MILLIONS Type of instrument Forward-rate agreements (FRA) Interest-rate swap contracts Interest-rate futures Total net risk in interest-rate derivatives 7.0 2.1 0.1 2.1 0.8 5.7 17.8 Ericsson(cid:213)s long-term objective is to have a payment readiness amounting to between 7 and 10 percent of sales in order to cope with rapid changes in liquidi- ty requirements. Payment readiness is defined as net liquidity — liquid funds less short-term borrow- ing, plus long-term unutilized credit commitments. TABLE 6 — PAYMENT READINESS, SEK BILLIONS 83.1 212.8 3.3 152.3 Cash, bank deposits and short-term investments Confirmed long-term credit lines Short-term borrowing Short-term portion of long-term debt 1999 1998 29.0 8.5 —10.5 —1.5 25.5 11.8 18.2 1.6 —5.4 —1.1 13.3 7.2 Net risk in interest-rate derivatives expressed as the effect of a change of one percentage point in interest rates as of December 31, 1999, SEK millions. Payment readiness Percent of sales To ensure long-term payment readiness, Ericsson(cid:213)s policy is that the greater part of its borrowing should be long-term or its needs should be covered through long-term credit commitments. Long- term borrowing should have an evenly distributed maturity structure, and very long maturities should be avoided in order to obtain flexibility. TABLE 7 — RATING Rating agency Moody(cid:213)s Standard & Poor(cid:213)s Long-term Short-term A1 A+ P-1 A-1 Ericsson(cid:213)s current rating a1 /a+ is well in line with its peer group. 4 4 n o i t a m r o f n i l a i c n a n i f Æ i i i important events during the year The year 1999 was characterized by fast growth in demand in the area of mobile telephony, driven by both increased number of subscribers and increased talk-time. The year will also be remem- bered as the year when our industry became fully aware of the potential of Internet communica- tion, not only for chatting and surfing on the Web, but also for a lot of business applications, which will generate vast amounts of traffic in coming years. This was certainly recognized by the stock market, and reflected in sharply rising stock prices of it-companies, and Internet- related companies in particular. Ericsson started the year with a new organiza- tion, with a matrix of customer-oriented business segments for the provisioning of products and solutions and market areas for sales. Mid-year, Kurt Hellstr(cid:154)m replaced Sven-Christer Nilsson as President. The Chairman of the Board, Dr. Lars Ramqvist, also temporarily assumed a posi- tion as Chief Executive Officer. This action was taken by the Board to safeguard company perfor- mance, to maintain the speed in restructuring, and to focus on near-term issues regarding operating expenses, cash flow and mobile phone product launches. In December, Sten Fornell, previously Controller for the business segment Network Operators and Service Providers, was appointed Executive Vice President and Chief Financial Officer. A number of significant acquisitions and joint venture agreements were concluded in 1999. Among the most important were: ¥ In March, Ericsson and Qualcomm struck a deal that lead to the unlocking of closed posi- tions regarding cdma patents for the third- generation (3g) wcdma standardization. Ericsson and Qualcomm agreed on intellectual property rights and thereby eliminated patent litigation issues. Ericsson also acquired Qual- comm(cid:213)s infrastructure division and is now, as sole supplier, able to deliver mobile phone systems of all standards. ¥ In the second quarter, Ericsson acquired two U.S.-based companies specialized in Internet access routers, Torrent Network Technologies Inc. and TouchWave Inc. Their products will complement Ericsson(cid:213)s offering regarding Inter- net access. ¥ In December, a joint-venture company, to be managed by Ericsson, was established with Microsoft to develop and market solutions for mobile Internet. The agreement gives Microsoft access to Ericsson(cid:213)s wap technology, and enables Ericsson to use Microsoft Mobile Explorer in more sophisticated mobile phones. SALES AND ORDERS BOOKED (SEK m.) 220,000 180,000 140,000 100,000 60,000 20,000 0 1995 1996 1997 1998 1999 Orders booked(cid:13) Net Sales INCOME BEFORE TAXES (SEK m.) 18,000 14,000 10,000 6,000 2,000 0 1995 1996 1997 1998 1999 TOTAL TECHNICAL COSTS (SEK m.) 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 1995 1996 1997 1998 1999 Research and development(cid:13) Other technical costs BOARD OF DIRECTORS(cid:213) REPORT FOR 1999 financial results A very strong fourth quarter with record levels of orders, sales, income and cash flow made the 1999 results better than expected earlier in the year. We did not, however, succeed to meet all our long-term goals in 1999, mainly due to weak performance during the first half of the year. ¥ Growth in sales was 18 percent for comparable units vs. a target of +20 percent. ¥ We reached a positive cash flow before acquisi- ¥ We reached a capital turnover of 2.1 turns vs. a ¥ roce at 19 percent was slightly below target- tions, sek +2.9 b. target of 2.0. ed 20—25 percent. ¥ Operating margin at 8.2 percent of sales is below the target of at least 10 percent. ORDERS, SALES AND INCOME Orders booked in total increased by 19 percent from last year to sek 223.8 b., which is slightly below our long-term annual growth expectations of over 20 percent. This is mainly related to three factors: ¥ a slow build-out of capacity in China, our largest wireless market due to internal restruc- turing within customer organizations. ¥ introduction problems for our new generation of mobile phones with lower volumes and subsequent price pressure on older models. ¥ flat orders in our wireline business due to price pressure driven by vendor overcapacity. In our wireless markets, excluding China, growth was well above 50 percent, with very strong volumes in the U.S., Spain and Turkey. Significant orders included 17 orders for trial 3g systems — far ahead of any of our competitors. Another key achievement during 1999 was the capturing of more than 50 percent of all gprs orders. We also received strategic orders for our engine solution for migrating fixed line net- works to multiservice capabilities, and an order for an airborne surveillance system to Greece. This positions Ericsson very well for the future. Orders in China have picked up in the fourth quarter in a promising way. Total order backlog for Ericsson increased from sek 79 b. to sek 84 b. (cid:13) (cid:13) (cid:13) (cid:13) (cid:13) (cid:13) (cid:13) (cid:13) (cid:13) BOARD OF DIRECTORS(cid:213) REPORT FOR 1999 Net sales increased by 17 percent to sek 215.4 b., where an increase of over 40 percent in mobile systems is offset by slightly lower sales in Wireline Systems and a modest 3 percent increase for mobile phones. Sales in Enterprise Solutions were up 19 percent over last year, and an increas- ing portion of the sales is generated from the consulting and services activities, such as wap- applications. The U.S. again became Ericsson(cid:213)s largest market with 11 percent of sales. The North American market area sales increased by 36 per- cent and Latin America and Europe/Middle East/Africa by 19 and 18 percent respectively, with strong growth in Brazil, Mexico, Spain and Turkey. Asia/Pacific sales increased by only 5 percent, due to a 16 percent decline in China, partly offset by strong increases in Japan, Aus- tralia and India. Exports from Sweden, including sales to consolidated companies, increased by 19 percent to sek 131 (110) b. The gross margin declined from 42.9 percent of Net sales to 41.6 percent, driven by the unfavor- able product mix in mobile phones, with a larger share of older models than planned, plus price pressure in our wireline business. Gross margins were stable in mobile systems. The increased sales volume, however, more than offsets the impact of a lower gross margin percentage, resulting in an sek 10.3 b. increase in gross margin. Operating expenses developed unfavorably, with an sek 13 b. (22 percent) increase over last year. The main cause was higher selling expenses from general growth, but in particular also from pro- motion efforts in mobile phones, increased risk provisions for customer financing, and project costs for process development in our time-to- customer (ttc) flow and supply chain. Restruc- turing and y2k expenses also contributed to the increased expense level compared to last year. Research and development (r&d) expenses, including costs related to customer orders of sek 0.5 (1.3) b., were sek 28.3 (25.2) b. or 13 (14) percent of sales. Total technical expenses, includ- ing market adaptations, were sek 34.7 (30.2) b. or 16 (16) percent of sales. The focus of our r&d efforts is on mobile Internet and 3g, as well as on adapting our switching products to the acquired cdma products from Qualcomm. Other operating revenues increased by sek 1.2 b. from 1998, mainly due to capital gains from sales of shares in Intracom, and a minor portion of Ericsson(cid:213)s holdings in Juniper. Due to previous overpayment of pension pre- miums, a potential credit amount of sek 1.3 b. may be received from spp in year 2000, this has not affected income in 1999. The resulting Operating Margin declined to 8.2 (10.4) percent of sales, mainly because operating expenses increased faster than sales (22 percent vs. 17). Compared to 1998, the effects of foreign cur- rency exchange rate changes had a favorable effect of sek +0.4 (+0.8) b. on income. Financial net was reduced to sek —0.7 (—0.2) b. as a result of a negative cash flow, in particular in the first half of the year. Higher borrowings led to increased financial expenses. Minority interest in income was sek —0.5 (—0.8) b., due to the large minority holdings last year during January—August in our Brazilian sub- sidiary edb, which were acquired by Ericsson in September of 1998. Income before taxes, sek 16.4 b., is sek 1.8 b. below last year(cid:213)s record level of sek 18.2 b. Due to a couple of successfully settled tax cases plus non-taxable capital gains, the tax rate became very favorable, 26.0 (28.4) percent, resulting in a Net Income of sek 12.1 (13.0) b. Earnings per share are down 7 percent to sek 6.17 (6.66). The equity ratio dropped from 38.9 percent to 35.2 percent during the year. Adjusted for temporary excess cash at year-end, the equity ratio is approximately 37 percent, which still is below our long-term target of 40 percent. Reported directly in stockholders(cid:213) equity accord- ing to generally accepted accounting principles in Sweden and U.S.A. are effects of translation of financial statements of foreign subsidiaries of sek —2.4 b., of which sek —2.6 b. as a result of the devaluation in Brazil. 5 4 n o i t a m r o f n i l a i c n a n i f Æ i i i FINANCIAL NET (SEK m.) 1998 1999 1995 1996 1997 500 400 300 200 100 0 —100 —200 —300 —400 —500 —600 —700 CASH FLOW BEFORE EXTERNAL FINANCING, (SEK m.) 10,000 8,000 6,000 4,000 2,000 1995 0 1996 1997 1998 1999 —2,000 —4,000 —6,000 —8,000 —10,000 6 4 n o i t a m r o f n i l a i c n a n i f Æ i i i EQUITY RATIO, % 40 32 24 16 8 0 1995 1996 1997 1998 1999 INVESTMENTS IN TANGIBLE ASSETS, (SEK m.) 9,000 7,000 5,000 3,000 1,000 0 1995 1996 1997 1998 1999 NUMBER OF EMPLOYEES 100,000 80,000 60,000 40,000 20,000 0 1995 1996 1997 1998 1999 Worldwide(cid:13) Sweden segment results 1999 Segment Network Operators Consumer Products Enterprise Solutions Other Operations Unallocated costs Less: inter-segment sales Ericsson INVESTMENTS, FINANCING AND CASH FLOW Investments in tangible fixed assets in 1999 were sek 9.1 (9.0) b., of which sek 4.1 (3.4) b. in Swe- den. Strategic acquisitions during the year amounted to sek 5.3 b. in total, including: ¥ Qualcomm(cid:213)s infrastructure division ¥ Torrent Networking Technologies Inc., now renamed Ericsson ip Infrastructure Inc. ¥ TouchWave Inc., now renamed Ericsson Web- Com Inc. ¥ Telebit a/s and ¥ Minority investments in Sara(cid:149)de, oz.com and Juniper Benchmark bond issues of sek 12.9 b. were successfully launched under our European Medi- um Term Note (emtn) program. The issues in Euro and U.S. dollars were the largest ever made by a Nordic corporation and substantially over- subscribed. Cash flow before financing activities was sek —2.4 (—9.8) b. due to a very strong fourth quarter of sek 9.5 b. We managed to reach our target of favorable cash flow before strategic acquisitions. Adjusted for sek —5.3 b. of acquisi- tions, cash flow was sek +2.9 b. The improve- ment in operating cash flow is mainly a result of improved inventory, active management of cus- tomer receivables and increased operating liabili- ties including advances from customers. Among the segments, only Network Operators and Service Providers performed in line with our long-term goals. The market for mobile telepho- ny experienced very strong growth in most mar- kets, excluding China, with increases in the num- bers of subscribers coupled with increased min- utes of usage per subscriber. In addition, many operators have chosen to enhance their networks for mobile Internet capabilities. BOARD OF DIRECTORS(cid:213) REPORT FOR 1999 Net sales (SEK b.) Growth (percent) Operating income Operating margin (percent) 149.9 46.4 17.3 16.8 -15.0 215.4 22 3 19 10 10 17 19.6 13.1 (12.4) 0.5 ( 7.0) 0.4 ( 0.7) 0.4 ( 9.6) 0.3 0.1 0.1 -2.4 17.6 8.2 (10.4) The Network Operator segment increased sales by 22 percent and with improved margins. Sales of mobile systems products increased by more than 40 percent, while sales in Wireline Systems declined slightly. Ericsson is now the undisputed market leader in mobile systems with a market share above 30 percent, more than twice that of the closest competitor(cid:213)s. Today, 40 percent of all subscribers in the world are connected to Ericsson systems, and all of the top ten largest operators have chosen Ericsson. In 1999, Ericsson won more than 50 percent of the orders for gprs. With the Qualcomm acquisition, Ericsson is now the only supplier able to offer all mobile telephony standards, which opens up a new mar- ket for year 2000. The Operating margin improved, in spite of a negative effect of sek —1.3 b. from acquired units. The Wireline Systems unit improved per- formance during 1999 with an operating income of 5.6 percent of sales, demonstrating that the restructuring activities have been successfully implemented and a stable turnaround achieved. Several strategic orders for the engine product concept for migrating circuit-switched networks into multi-service network ip and atm capabili- ties were received during 1999 from customers, such as bt, knp and Telefonica. For Consumer Products the market share dropped during the year, in spite of a 30 percent increase in volumes to 31 million units. Due to delayed volume production of the new product portfolio, older phones were sold to unfavorable prices resulting in increased sales of only 3 per- cent. During the fourth quarter, however, the volumes reached targeted levels, and operating margin rose to 5.6 percent of sales, compared to 0.5 percent for the full year. With ramp-up of production now under control and a much more (cid:13) (cid:13) (cid:13) (cid:13) (cid:13) (cid:13) (cid:13) (cid:13) (cid:13) (cid:13) (cid:13) (cid:13) (cid:13) (cid:13) 7 4 n o i t a m r o f n i l a i c n a n i f Æ i i i EARNINGS PER SHARE (SEK) 7 6 5 4 3 2 1 0 1995 1996 1997 1998 1999 BOARD OF DIRECTORS(cid:213) REPORT FOR 1999 competitive product portfolio, Ericsson is well positioned to win back market share in 2000, as market demand continues to look strong. Enterprise Solutions(cid:213) external sales increased by 19 percent to sek 11.6 (9.8) b. with strong volumes of the pbx md110. Income was at break even compared to last year, with continued devel- opment expenses for ip and wireless communica- tions solutions for private networks. Business consulting activities are focusing on solutions and services for mobile Internet. Other Operations includes the Dedicated Networks unit, which will be closed down, pre- viously reported in the Enterprise Solutions seg- ment. Dedicated Networks reports a loss of sek —0.8 b. due to unsuccessful projects. Also includ- ed in this group is Defense Systems, with lower sales and operating income compared to last year due to fewer orders from the Swedish Armed Forces. Defense Systems however posted a large order of sek 4.9 b. for airborne surveillance equipment to Greece in the fourth quarter. Unallocated costs mainly include core corpo- rate staff expenses and goodwill amortization on certain acquisitions. The costs increased from last year due to changes in the corporate staff struc- ture, increased millennium expenses, common it projects and goodwill amortization. employees The number of employees in total did not change significantly during 1999 and was 103,290 (103,667) at year-end. Almost 2,400 employees were added through acquisitions and about 5,400 were recruited into new jobs, mainly in Con- sumer Products. Around 9,600 employees were affected by outsourcing and other restructuring activities. During the year, a decision was made to implement a stock option plan for year 2000 in addition to the two earlier plans for 1998 and 1999, which were based on market solutions. The 2000 plan consists of options (so-called (cid:210)employee options(cid:211) that are hedged by warrants issued by Ericsson, which if fully utilized, will have a dilutive effect on earnings per share of 0.7 percent. The allottment and subscription prices under the programs for 1999 and 2000 will be estab- lished at the beginning of 2000. restructuring After initial delays, the program announced in early 1999 is now implemented as planned. Some decisions made will take place in early year 2000. In total sek 2.4 b. were spent in 1999, with cost savings of sek 0.6 b. As indicated above, 9,600 employees were affected. Some of the employees participate in a training program for enhanced skills, to make them more attractive on the labor market, and with a guaranteed employment in a manning-company, should they not find new jobs within a year. Expected net savings are sek 1.8 b. in 2000 and sek 3.7 b. from 2001. Since the program is now well under control, from this point on it will be considered a part of Ericsson(cid:213)s regular operations. millennium The objectives for Ericsson(cid:213)s millennium pro- gram were to retain satisfied customers, to pro- tect shareholder value and to secure working conditions. All three objectives were met and no major incident was experienced during the tran- sition. The total accumulated costs of the project are sek 2.7 b., of which sek 1.8 b. during 1999, mainly as part of selling and administration expenses. Additional costs of around sek 0.4 b. are expected for year 2000. environmental issues Ericsson has production operations in 38 facilities in 13 countries, for the assembly of electronic components and manufacturing of cables and components. The environmental impact of these operations consists of emissions to air and water, waste products and noise. Chemicals used include flux and soldering paste and powder lacquer. Life-cycle analyses of our products show the largest impact on the environment to be their energy consumption in use. Ericsson is fully exploiting the it industry(cid:213)s inherent possibilities to miniaturize products and reduce their energy consumption, which often reduces the unfavor- able environmental impact for a given function considerably. SWEDISH REGULATIONS REQUIRING PERMISSIONS OR REPORTING Ericsson has 15 production facilities in Sweden. For 8 of these, permission is required for opera- tions due to noise or emissions into air or water, while 5 units are obliged to report certain haz- ardous activities. No material requests or com- plaints have been received during the year. 8 4 n o i t a m r o f n i l a i c n a n i f Æ i i i ISO-CERTIFICATES The iso 14001 environmental management system is scheduled for implementation in all production units at the latest at the end of year 2000. In Swe- den, 10 of Ericsson(cid:213)s 15 production units have already been certified and another 3 are recommended but have not yet received their certificates. ENVIRONMENTAL LIABILITIES The situation regarding so-called environmental liabilities has been examined. For the Swedish units, the total liability for environmental damages is less than sek 100 million. Remedial actions for sek 20 million will be carried out during year 2000. For units outside Sweden, only one material damage is known concerning a facility in Holland. The liability issue is now regulated in an agreement with the Dutch authorities and a provision for this liability is made in the accounts. For further information on Ericsson(cid:213)s environ- mental activities, please see our separate Environ- mental Report for 1999. the board of directors and its procedures Telefonaktiebolaget LM Ericsson(cid:213)s Board of Direc- tors consists of nine members, without deputies, who are elected by the Annual General Meeting, and three members with deputies, who are appointed by the employee organizations. In July, ceo Sven-Christer Nilsson resigned from the Board and was not replaced, which reduced the number of directors elected by the Annual Gener- al Meeting to eight. Company staff participate in Board meetings delivering special presentations. During fiscal year 1999, the Board held nine meetings. The company auditors have reported their observations from the audits to the Board. The work of the Board follows a set plan, which is designed to meet the Board(cid:213)s need for information and otherwise follows the arrange- ment the Board has adopted with respect to the division of work between the Board and the Pres- ident. Accordingly, matters handled by the Board include Ericsson(cid:213)s strategy and organizational structure, major investments in businesses and plants, major sales of operations and plants, large customer financing projects, and rules governing cash management. The Board has also established a presidium, consisting of the Chairman, the two Vice Chair- men and the President, which during the period between Board meetings act on urgent matters, such as projects involving customer financing and acquisitions and divestments based on autho- rization by the Board. The presidium also estab- lishes the terms of employment for the president and reports them to the Board for approval. BOARD OF DIRECTORS(cid:213) REPORT FOR 1999 The Board(cid:213)s annual review of its work proce- dures has resulted in a new plan for allocation of responsibilities for year 2000. Three committees composed of Board members, namely the Finance Committee, the Remuneration Committee and the Audit Committee have substituted the pre- sidium. The Board has authorized the Finance Committee and the Remuneration Committee to decide on certain kinds of matters. The Board may also provide further authorization to its Committees to decide on specific matters. The purpose of this change is to make the work of the Board even more effective in a business that is subject to rapid development and to enable the Board to devote additional time to strategic mat- ters and over all planning. changes within ericsson during the year In early 1999, Ericsson sold its majority holdings in the Italian network construction company Cosir S.p.A. Ericsson retains a minority holding. During the year, the following acquisitions were made: ¥ the Brazilian company Matec s.a. is now a subsidiary, since ownership has increased from 30 percent to 97.5 percent. ¥ the Infrastructure division of Qualcomm Inc. was acquired and incorporated as Ericsson Wireless Communications Inc. ¥ the Mobile network planning and field mea- surement division of lcc International Inc. was acquired and incorporated as Ericsson NetQual Inc. ¥ Torrent Networking Technologies Inc., renamed Ericsson ip Infrastructure Inc. ¥ TouchWave Inc., renamed Ericsson WebCom Inc. ¥ Telebit a/s ¥ Ericsson increased its holdings in the Nigerian company LM Ericsson (Nigeria) Ltd to 55 percent and the company is now a consolidat- ed subsidiary ¥ Holdings in a new associated company: across holding ab ¥ Minority holdings in:Juniper, Sara(cid:149)de, oz.com, iD2 Technologies ab A shared service company was established in Sweden, Ericsson Shared Services ab, supporting Swedish subsidiaries regarding accounting, reporting, payroll and travel management ser- vices. LM Ericsson Data ab and Semantica ab changed their names to Ericsson Business Con- sulting ab and Ericsson Business Consulting Sverige ab, respectively. These companies are a part of the business segment Enterprise solutions(cid:213) consulting unit. 9 4 n o i t a m r o f n i l a i c n a n i f Æ i i i BOARD OF DIRECTORS(cid:213) REPORT FOR 1999 In Spain, the three subsidiaries Ericsson Info- com Espana s.a., Ericsson Radio s.a. and Erics- son Redes s.a. merged into Ericsson Espana s.a. In France, s.a. Ericsson and Ericsson Radio s.a. and parts of met Commutation have merged into Ericsson s.a. Ericsson signed a letter of intent with Compaq to outsource it support, starting in the Nordic region and involving more than 40,000 work stations. Other outsourcing activities include manufac- turing and software design operations in Longue- nesse, France, and (cid:133)stersund, Sweden, to Solec- tron and in Katrineholm, Sweden, to Flextronics. A software development unit in (cid:133)stersund, Swe- den, has been transferred to au-system ab. During the year it was decided that Ericsson will divest the majority of its real estate holdings and focus capital utilization on its core business activities. These divestitures will occur in year 2000. Real estate management and services in the Stockholm area will be outsourced to Skanska early in year 2000. Ericsson has branch and representative offices in 45 (42) countries. post-closing events DIVESTITURES Agreements have been entered into to divest the Private Radio Systems business in USA to Com- Net Critical Communications in the first quarter and the Energy Systems part of Ericsson Compo- nents to Emerson Electric Co during the second quarter. BOARD OF DIRECTORS On January 7, 2000, Lars-Eric Petersson resigned as a board member upon his appointment as chairman of the Swedish network operator Telia. MANAGEMENT CHANGES Effective February 15, Jan W(cid:138)reby, previously Executive Vice President Market area Europe/Middle East/Africa, will succeed Johan Siberg as Executive Vice President for the Con- sumer Products segment. Johan Siberg, Executive Vice President, will assume a position as coordinator of Swedish oper- ations, reporting to the President. Ragnar B(cid:138)ck, currently President in our Ital- ian subsidiary, will take up a position as a mem- ber of the Corporate Executive Team and Execu- tive Vice President, head of of Market Area West- ern Europe. Also effective February 15, 2000. Appointment of a manager for Market Area Eastern Europe/Middle East/Africa will be announced shortly. outlook for year 2000 For the full year 2000, we believe in continued strong market growth where Ericsson gains bene- fits from our leading position in mobile telepho- ny and in the growth of mobile Internet. Our long-term financial targets remain unchanged: we intend to grow faster than the market, which means growing by at least 20 percent, and with a return on capital employed of 20—25 percent with positive cash flow before strategic acquisitions, and an operating margin of at least 10 percent. During 2000, we expect sales to increase by more than 20 percent and a substantial growth in earnings. We intend to achieve this with a posi- tive cash flow. The first quarter of 1999 was exceptionally weak, affected by restructuring costs and slow development in China and for mobile phones. For the first quarter of year 2000, we expect a sales growth of more than 30 percent and income before taxes in the range of three times that of the first quarter of 1999. parent company telefonaktiebolaget lm ericsson The parent company(cid:213)s results include the opera- tions conducted on commission basis by Erics- son Telecom ab, Ericsson Treasury Services ab and, since January 1, the newly established company Ericsson Credit ab, which manages Ericsson(cid:213)s customer financing credit portfolio. The commission agreement with Ericsson Tele- com ab has been cancelled as per January 1, 2000. Net Sales for the parent company were sek 15.4 (16.8) b. and Income before appropria- tions to/from untaxed reserves and taxes was sek 3.2 (1.3) b. Major changes in the company(cid:213)s financial position were: ¥ increased investments in subsidiaries of sek 5.1 b., of which sek 3.3 b. were attribut- able to stock issues in Ericsson Holding II Inc. (USA). ¥ increased long-term loans to subsidiaries of sek 5.6 b. ¥ increased long-term customer financing of sek 6.0 b. ¥ increased bank and short-term cash invest- ments of sek 6.7 b. These investments were financed through increased borrowings. During the year, the com- pany sold a major part of its real estate holdings to Ericsson companies in Sweden. At year-end, cash and short-term cash investments amounted to sek 17.1 b. 0 5 n o i t a m r o f n i l a i c n a n i f Æ i i i proposed bonus issue and stock split The Board of Directors will propose to the Annu- al General Meeting a bonus issue, by way of an increase of the par value of A and B shares from sek 2.50 to sek 4.00 followed by a split 4:1. Trading with shares of the new par value sek 1.00 is expected to commence in the beginning of May 2000. repurchase of shares The Board of Directors welcome the proposed change in legislation to enable repurchase of shares and will present a proposal to the Annual General Meeting in light of the final decisions taken by legislative bodies in Sweden. BOARD OF DIRECTORS(cid:213) REPORT FOR 1999 proposed disposition of earnings Available for distribution by the shareholders at the Annual General Meeting are sek 16,300,310,622. The Board of Directors pro- poses that these earnings be distributed as fol- lows: an unchanged dividend of sek 2.00 per share to be paid to shareholders duly registered on the Record date the remainder to be retained within the business sek 3,944,088,906 sek 12,356,221,716 Total amount available sek 16,300,310,622 Debentures 1993/2000 converted up to Febru- ary 7, 2000, are also entitled to dividend for 1999. Assuming all such debentures are converted by February 7, the dividend will amount to the sum specified above. Stockholm January 28, 2000 Telefonaktiebolaget LM Ericsson (publ) Org. no. 556016-0680 Tom Hedelius Vice Chairman Lars Ramqvist Chairman and ceo Marcus Wallenberg Vice Chairman G(cid:154)ran Lindahl Sverker Martin-L(cid:154)f Clas Reuterski(cid:154)ld Peter Sutherland G(cid:154)ran Engstr(cid:154)m Jan Hedlund Per Lindh Kurt Hellstr(cid:154)m President CONSOLIDATED INCOME STATEMENT Years ended December 31, SEK m. 1999 1998 1997 Net sales Cost of sales Gross Margin Research and development and other technical expenses Selling expenses Administrative expenses Other operating revenues Share in earnings of associated companies Operating Margin Financial income Financial expenses Income After Financial Items Minority interest in income before taxes Income Before Taxes Taxes Income taxes for the year Minority interest in taxes NET INCOME Earnings per share, SEK NOTE 1 215,403 184,438 167,740 —125,881 —105,251 —97,868 89,522 79,187 69,872 NOTE 2 —33,123 —28,027 —24,242 —31,205 —24,108 —20,464 —10,078 —8,922 —7,755 2,224 250 995 148 866 480 17,590 19,273 18,757 NOTE 3 NOTE 3 2,273 —2,971 2,228 —2,465 2,413 —2,365 16,892 19,036 18,805 —506 —826 —1,587 16,386 18,210 17,218 NOTE 4 —4,358 -5,409 -5,755 102 240 478 12,130 13,041 11,941 NOTE 5 6.17 6.66 6.08 1 5 n o i t a m r o f n i l a i c n a n i f Æ i i i 2 5 n o i t a m r o f n i l a i c n a n i f Æ i i i December 31, SEK m. 1999 1998 CONSOLIDATED BALANCE SHEET ASSETS Fixed Assets Intangible assets Tangible assets Financial assets Equity in associated companies Other investments Long-term customer financing Other long-term receivables Current Assets Inventories Receivables Accounts receivable - trade Short-term customer financing Other receivables Short-term cash investments Cash and bank TOTAL ASSETS NOTE 6 NOTE 7, 23, 25 NOTE 8 NOTE 10 NOTE 11 NOTE 13 10,548 24,719 6,354 22,516 2,712 1,751 6,657 4,972 2,777 1,438 5,937 2,902 51,359 41,924 25,701 26,973 63,584 53,900 1,749 31,227 13,415 15,593 3,837 22,589 6,356 11,877 151,269 125,532 202,628 167,456 Assets Pledged as Collateral NOTE 20 2,068 1,203 3 5 n o i t a m r o f n i l a i c n a n i f Æ i i i CONSOLIDATED BALANCE SHEET December 31, SEK m. 1999 1998 STOCKHOLDERS(cid:213) EQUITY, PROVISIONS AND LIABILITIES Stockholders(cid:213) Equity Capital stock Reserves not available for distribution NOTE 14 Restricted equity Retained earnings Net income Non-restricted equity Minority Interest in Equity of Consolidated Subsidaries Provisions Long-Term Liabilities Notes and bond loans Convertible debentures Liabilities to financial institutions Other long-term liabilities Current Liabilities Current maturities of long-term debt Current liabilities to financial institutions Advances from customers Accounts payable — trade Income tax liabilities Other current liabilities NOTE 16 NOTE 17, 20 NOTE 20 NOTE 18 NOTE 19 4,893 4,878 32,618 28,053 37,511 19,535 12,130 31,665 69,176 32,931 17,140 13,041 30,181 63,112 2,182 2,051 22,552 22,284 17,486 5,453 1,448 567 4,470 6,241 1,898 459 24,954 13,068 1,491 10,519 6,437 1,188 5,427 8,398 21,618 18,246 2,397 41,302 83,764 1,957 31,725 66,941 TOTAL STOCKHOLDERS(cid:213) EQUITY, PROVISIONS AND LIABILITIES 1) 202,628 167,456 Contingent Liabilities NOTE 21 1) Of which interest-bearing provisions and liabilities 10,127 8,063 45,020 27,474 4 5 n o i t a m r o f n i l a i c n a n i f Æ i i i CONSOLIDATED STATEMENT OF CASH FLOWS Years ended December 31, SEK m. 1999 1998 1997 OPERATIONS Net income NOTE 22 12,130 13,041 11,941 Adjustments to Reconcile Net Income to Cash Minority interest in net income Undistributed earnings of associated companies Depreciation and amortization Capital gains (-)/losses on sale of fixed assets Taxes Changes in Operating Net Assets Inventories Customer financing, short-term and long-term Accounts receivable - trade and other operating assets Provisions and other operating liabilities Cash Flow From Operating Activities INVESTMENTS Investments in tangible assets Sales of tangible assets Acquisitions/sales of other investments, net Net change in capital contributed by minority Other 404 18 7,382 —1,399 586 —359 6,081 —230 —947 —2,301 1,109 —90 5,756 152 619 714 722 —2,056 —5,727 —3,396 —347 —19,562 —10,695 —15,828 13,463 9,054 14,986 12,925 7,394 14,902 —9,085 —8,965 —7,237 625 632 NOTE 22 —4,768 —8,865 134 —2,270 35 —56 642 —69 21 —513 Cash Flow From Investing Activities —15,364 —17,219 —7,156 Cash Flow Before Financing Activities —2,439 —9,825 7,746 FINANCING NOTE 22 Changes in current liabilities to financial institutions, net Issue of convertible debentures Proceeds from issuance of other long-term debt Repayments of long-term debt Dividends paid Cash Flow From Financing Activities Effect of exchange rate changes on cash Net Change in Cash Cash, Beginning of Period CASH, END OF PERIOD 3,854 58 15,163 —1,515 —4,010 13,550 —336 955 19 3,366 —1,332 —3,800 —792 —277 96 4,875 2,571 —2,672 —2,805 2,065 256 10,775 —10,894 10,067 18,233 29,127 19,060 29,008 18,233 29,127 5 5 n o i t a m r o f n i l a i c n a n i f Æ i i i PARENT COMPANY INCOME STATEMENT Years ended December 31, SEK m. 1999 1998 1997 Net sales Cost of sales Gross Margin Research and development and other technical expenses Selling expenses Administrative expenses Other operating revenues Operating Margin Financial income Financial expenses Income After Financial Items Appropriations to (-)/transfers from untaxed reserves Changes in depreciation in excess of plan Changes in other untaxed reserves Contributions from subsidiaries, net NOTE 1 15,375 16,836 16,217 —10,944 —11,657 —12,205 4,431 5,179 4,012 —5,386 —4,116 —2,580 3,155 —6,324 —2,370 —1,889 2,666 —6,635 —1,568 —1,329 2,368 —4,496 —2,738 —3,152 NOTE 2 NOTE 3 NOTE 3 9,915 —2,202 6,052 —1,942 6,223 —1,827 3,217 1,372 1,244 NOTE 15 NOTE 15 371 —2,691 —2,320 5,292 204 —174 30 4,749 337 —504 —167 4,074 Income Before Taxes 6,189 6,151 5,151 Income taxes for the year NOTE 4 —623 —419 —393 NET INCOME 5,566 5,732 4,758 6 5 n o i t a m r o f n i l a i c n a n i f Æ i i i December 31, SEK m. 1999 1998 PARENT COMPANY BALANCE SHEET ASSETS Fixed Assets Intangible assets Tangible assets Financial assets Investments Subsidiaries Associated companies Other investments Receivables from subsidiaries Long-term customer financing Other long-term receivables Current Assets Inventories Receivables Accounts receivable — trade Short-term customer financing Receivables from subsidiaries Other receivables Short-term cash investments Cash and bank TOTAL ASSETS NOTE 6 NOTE 7, 25 NOTE 8, 9 NOTE 8, 9 NOTE 8 NOTE 12 NOTE 8 NOTE 8 NOTE 10 NOTE 11 NOTE 12 NOTE 13 56 828 78 2,625 24,364 19,262 1,039 53 974 46 17,925 12,329 6,320 2,129 280 127 52,714 35,721 952 1,607 2,402 178 2,544 30 22,336 18,617 9,184 12,062 5,028 7,618 5,732 4,665 52,142 40,813 104,856 76,534 Assets Pledged As Collateral NOTE 20 1,845 402 7 5 n o i t a m r o f n i l a i c n a n i f Æ i i i PARENT COMPANY BALANCE SHEET December 31, SEK m. 1999 1998 STOCKHOLDERS(cid:213) EQUITY, PROVISIONS AND LIABILITIES Stockholders(cid:213) Equity Capital stock Share premium reserve Revaluation reserve Statutory reserve Restricted equity Retained earnings Net income Non-restricted equity Untaxed Reserves Provisions Long-Term Liabilities Notes and bond loans Convertible debentures Liabilities to financial institutions Liabilities to subsidiaries Other long-term liabilities Current Liabilities Current maturities of long-term debt Current liabilities to financial institutions Advances from customers Accounts payable — trade Liabilities to subsidiaries Income tax liability Other current liabilities NOTE 14 NOTE 15 NOTE 16 NOTE 17 NOTE 17 NOTE 17, 20 NOTE 12, 17 NOTE 17 NOTE 20 NOTE 18 NOTE 12 NOTE 19 4,893 1,941 20 9,681 4,878 1,687 95 9,680 16,535 16,340 10,734 5,566 16,300 32,835 8,832 5,732 14,564 30,904 5,406 3,086 5,513 3,731 17,486 5,453 370 3,454 53 4,470 6,195 320 2,821 21 26,816 13,827 587 929 252 821 558 26 365 1,203 25,601 17,448 229 5,867 104 5,282 34,286 24,986 TOTAL STOCKHOLDERS(cid:213) EQUITY, PROVISIONS AND LIABILITIES 104,856 76,534 Contingent Liabilities NOTE 21 11,611 6,968 8 5 n o i t a m r o f n i l a i c n a n i f Æ i i i Years ended December 31, SEK m. 1999 1998 1997 PARENT COMPANY STATEMENT OF CASH FLOWS OPERATIONS Net income Adjustments to Reconcile Net Income to Cash Depreciation and amortization Capital gains (-)/losses on sale of fixed assets Appropriations to/transfers from (-) untaxed reserves Unsettled contributions from (-)/to subsidiaries Unsettled dividends Changes in Operating Net Assets Inventories Customer financing, short-term and long-term Accounts receivable — trade and other operating assets Provisions and other operating liabilities 5,566 5,732 4,758 322 41 2,320 —5,200 —3,904 655 —6,188 —155 1,752 442 1,022 —30 —4,700 —2,290 164 —164 5,133 —237 665 94 167 —4,000 —3,269 —311 —86 —5,079 5,158 Cash Flow From Operating Activities —4,791 5,072 —1,903 INVESTMENTS Investments in tangible assets Sales of tangible assets Acquisitions/sales of other investments, net Lending, net Other Cash Flow From Investing Activities —368 1,810 —5,185 —4,397 —1,705 —396 247 —5,978 —4,706 - —622 401 —97 —3,370 —111 —9,845 —10,833 —3,799 Cash Flow Before Financing Activities —14,636 —5,761 —5,702 FINANCING Changes in current liabilities to financial institutions, net Changes in current liabilities to subsidiaries Issue of convertible debentures Proceeds from issuance of other long-term debt Repayments of long-term debt Dividends paid Other Cash Flow From Financing Activities Net Change in Cash Cash, Beginning of Period Cash, End of Period 890 —206 207 11,120 —4,181 13,199 - 13,323 —556 - 2,645 —428 —3,904 —3,410 456 269 6,000 1,866 —1,804 —2,404 —38 21,329 —5,311 17,026 6,693 —11,072 11,324 10,397 21,469 10,145 17,090 10,397 21,469 9 5 n o i t a m r o f n i l a i c n a n i f Æ i i i NOTES Notes to the Financial Statements In millions of Swedish kronor (except per share amounts) at December 31 each year, unless otherwise stated. The consolidated financial statements of Telefonaktiebolaget LM Ericsson and its subsidiaries ((cid:210)the Company(cid:211)) are prepared in accordance with accounting principles generally accepted in Sweden, thereby applying the Swedish Financial Accounting Standards Council(cid:213)s (rr) recommendations. These accounting principles differ in certain respects from those in the United States. For a description of major differences, see Note 24. (A) PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Parent Company and all subsidiaries. Subsidiaries are all companies in which the Company has an ownership and directly or indirectly has a voting majority or by agreement has a decisive influ- ence. Intercompany transactions have been eliminated. The consolidated financial statements have been prepared in accordance with the purchase method, whereby consolidated stockholders(cid:213) equity includes equity in subsidiaries and associated companies earned only after their acquisition. In the consolidated Income Statement, minority interests are, in deviation from the Swedish Financial Accounting Standards Council(cid:213)s recommendation rr01, divided into two items; share in income before taxes and share in taxes. The reason is that this method, considering the significant minority interest holdings in the group during the last years, gives a more fair view of the important measure Income before taxes. Material investments in associated companies, where voting stock interest is at least 20 percent but not more than 50 percent, are accounted for according to the equity method. Ericsson(cid:213)s share of income before tax in these companies is reported in item (cid:210)Share in earnings of associated companies(cid:211), included in the Operating Margin. Taxes are included in item (cid:210)Taxes(cid:211). Unrealized internal profits in inventory in associated companies purchased from subsidiaries are eliminated in full in the consolidated accounts. Investments in associated companies are shown at equity after adjustments for unrealized intercompany profits and unamortized goodwill (see (B) below). Undistributed earnings of associated companies included in consolidated restricted equity are reported as (cid:210)Equity proportion reserve(cid:211). Minor Accounting principles investments in associated companies and all other investments are accounted for as Other investments, and carried at the lower of cost or fair market value. (B) GOODWILL Goodwill, positive and negative, resulting from acquisitions of consolidated companies is amortized/reversed according to individual assessment of each item(cid:213)s estimated economic life, resulting in amortization periods of up to 20 years. Depending on the nature of the acquisition, goodwill amortizations are reported under (cid:210)Research and development and other technical expenses(cid:211), (cid:210)Selling expenses(cid:211) or (cid:212)(cid:212)Administrative expenses(cid:211). (C) TRANSLATION OF FOREIGN CURRENCY FINANCIAL STATEMENTS For most subsidiaries and associated companies, the local currency is the currency in which the companies primarily generate and expend cash, and is thus con- sidered their functional (business) currency. Their financial statements plus goodwill related to such companies, if any, are translated to sek using the current method, whereby any translation adjustments are reported directly to stockholders(cid:213) equity. When a company accounted for in accordance with these prin- ciples is sold, accumulated translation adjustments are included in the consolidated income. Financial statements of companies with finance activities or other companies, having such close rela- tions with the Swedish operations that their functional currency is considered to be the Swedish krona, are labeled (cid:210)integrated companies(cid:211) and are translated using the monetary method. Adjustments from translation of financial statements of these com- panies are included in the consolidated income state- ment (see Note 14). Financial statements of companies operating for example in countries with highly inflationary economies, whose functional currency is considered to be another currency than local currency, are translated in two steps. In the first step, remeasurement is made into the functional currency. Gains and losses result- ing from this remeasurement are included in the con- solidated income statement. In the second step, from the functional currency to Swedish kronor, balance sheet items are translated at year-end exchange rates, and income statement items at the average rates of exchange during the year. The resulting translation 0 6 n o i t a m r o f n i l a i c n a n i f Æ i i i adjustments are reported directly against stockholders(cid:213) equity. The remeasurement in step one is a deviation from the Swedish Financial Accounting Standards Council(cid:213)s recommendation rr08, which requires infla- tion adjustment of such financial statements. In our opinion, the remeasurement method, which is in accordance with u.s. gaap fas 52, gives a more fair view of these financial statements, since companies concerned opereate in de facto dollar-based economies. (D) TRANSLATION OF FOREIGN CURRENCY ITEMS IN INDIVIDUAL COMPANIES In the financial statements, receivables and liabilities in foreign currencies have been translated at year-end exchange rates. Gains and losses on foreign exchange are divided into operational and financial. Net operational gains and losses are included in Cost of sales. Gains and losses on foreign exchange attributable to financial assets are included in financial income, and gains and losses related to financial liabilities are included in financial expenses. Translation effects related to permanent financing of foreign subsidiaries are reported directly to Stockholder(cid:213)s equity, net of tax effects. (E) VALUATION OF SHORT-TERM CASH INVEST- MENTS AND DERIVATIVES Short-term cash investments held by companies other than Ericsson Treasury Services ab are valued at the lowest of acquisition cost plus accrued interest and market value. Short-term cash investments and interest related derivatives in Ericsson Treasury Services ab are valued at market value, and net unrealized gains are reserved. Gains and losses from derivatives in Ericsson Treasury Services ab are reported net as Other finan- cial income/expense. Financial assets and liabilities, including un- realized gains and losses on derivatives, are reported net in the Balance Sheet only when accounting prin- ciples so permit, for example when isda-agreements are signed. Derivative instruments are used mainly to hedge financial interest- and currency risks. In order to limit currency risks, purchases and sales in foreign currencies are hedged using forward currency contracts in all cases involving firm commit- ments with suppliers and customers. In addition, anticipated future cash flows in foreign currencies are also hedged for periods of 6—9 months. The hedge periods shall agree with expected future cash flow. Some bids are also hedged, normally through curren- cy options. NOTES Forward exchange options and investments hedging certain positions have been valued in a man- ner reflecting the accounting for the hedged position. Interest-related derivatives linked to specific invest- ments or loans or which are applied to hedge interest positions are valued in the same manner as the hedged instrument. Other foreign exchange related derivatives are valued at market. When a transaction hedged in advance ceases to be an exposure, the hedge is closed. Hereby deviations between actual and hedged flows are recognized in income as soon as they are identified. Currency forward contracts related to future cash flows correspond to 6—9 months of future sales. Net unrealized loss after market evaluation of contracts related to future cash flows was sek —0.9 b., which is a result mainly of higher dollar spot rates at year- end than when hedging was made. This effect has not been included in income for 1999, since these con- tracts are entered into as hedges of committed and reasonably assured cash flows and therefor by Swedish accounting principles are not valued at market. The use of currency forward contracts as hedges is entirely according to Ericsson(cid:213)s policy to avoid cur- rency speculation and minimize risk. The hedges have served their purpose of safeguarding our calculated sales margins. Forward contract periods for estimated cash flows are chosen to give us sufficient lead time to adjust or renegotiate prices with customers or ven- dors or take other actions, which means that effects of nominal currency rate changes are to a large extent moderated. To calculate a gain or loss as if hedges had not been made is therefore somewhat artificial — it shows an opportunity gain or loss which would imply a speculation element by not hedging. This opportuni- ty cost effect during the year is varied, with a net overall loss. The loss is mainly due to usd contracts, driven by the stronger dollar resulting in hedged rates lower than spot rates, which is partly offset by gains related mainly to a weaker Euro, where the hedged rates were higher than spot rates. Since we receive more foreign currency than we pay, our for- ward contracts are net sales contracts where we sell our excess foreign currency to banks, which is the rea- son why a higher rate is more favorable than a lower rate. (F) TANGIBLE FIXED ASSETS Tangible fixed assets are stated at cost less accumu- lated depreciation, adjusted with net value of revalua- tions. Annual depreciation is reported as plan deprecia- tion, generally using the straight-line method, with estimated useful lives of, in general, 40 years on 1 6 n o i t a m r o f n i l a i c n a n i f Æ i i i NOTES buildings, 20 years on land improvements, 3 to 10 years on machinery and equipment, and up to 5 years on rental equipment. Depreciation is included in Cost of Sales and in the respective functional operating expenses. (G) INVENTORIES Inventories are valued at the lowest of cost or market on a first-in, first-out (fifo) basis. Consideration has been given to risks of obsolescence. (H) REVENUE RECOGNITION Sales revenue is recorded upon delivery of products, software and services according to contractual terms and represent amounts realized, excluding value- added tax, and are net of goods returned, trade dis- counts and allowances. Revenue from long-term customer contracts is recognized successively. If costs required to complete such contracts are estimated to exceed remaining revenues, provision is made for estimated losses. For sales between consolidated companies, as a rule the same pricing is applied as in transactions with other customers, taking into account, however, that certain costs are eliminated in transactions between affiliated companies. (I) RESEARCH AND DEVELOPMENT COSTS Research and development costs are expensed as incurred. Costs based on orders from customers are included in Cost of sales. Such items reported by consolidated companies have been reversed, applying the current tax rate applica- ble in each country. The deferred tax so calculated is shown in the consolidated income statement as Deferred taxes. The after-tax effect is stated in the income statement as part of net income for the year, and in the balance sheet as restricted stockholders(cid:213) equity. The accumulated deferred tax liability is adjusted each year by applying the current tax rate in each country and is reported in the consolidated balance sheet as Deferred tax. An adjustment of deferred tax liability attributable to changes in tax rates is shown in the consolidated income statement as a part of the deferred tax expense for the period. (L) STATEMENT OF CASH FLOWS Statement of Cash Flows is prepared principally in accordance with recommendation rr07 from the Swedish Financial Accounting Standards Council. The Statement of Cash Flows shows changes in the cash position during the year attributable to opera- tions, investing activities and financing activities respectively. Foreign subsidiaries(cid:213) transactions are translated at the average exchange rate during the period. Subsidiaries purchased and/or sold, net of cash acquired/sold, are reported as cash flow from invest- ment activities and do not affect reported cash flow from operations. In preparation of the Statement of Cash Flows, changes in deferred tax assets and liabilities have been taken into account. (J) LEASING (M) OPERATIONS ON COMMISSION BASIS REPORTED IN PARENT COMPANY ACCOUNTS Ericsson Treasury Services ab and Ericsson Telecom ab have conducted their operations on commission basis for the Parent Company as in previous years. Ericsson Credit ab has been added as a commission- ary company in 1999. The agreement about operations on commission basis between Ericsson Telecom ab and the Parent Company, signed in 1987, has been cancelled as per January 1, 2000. Property leases with the company as lessee are nor- mally expensed over the term of the lease. The Company applies the Swedish Financial Accounting Standards Council(cid:213)s recommendation No. 6 for material lease contracts. Accordingly, certain leasing contracts are capitalized and reported as acquisitions of tangible assets and as other current liabilities and other long-term liabilities. (K) DEFERRED TAX IN UNTAXED RESERVES The Company reports deferred taxes attributable to temporary differences between the book value of assets and liabilities and their tax value, and also deferred tax receivables attributable to unutilized loss carryforwards with a probability to be used greater than 50 percent. Appropriations and Untaxed reserves are not reported in the consolidated financial statements. 2 6 n o i t a m r o f n i l a i c n a n i f Æ i i i NOTES 1 Net sales by market area and business segment 3 Financial income and expenses Market Areas CONSOLIDATED 1999 1998 1997 CONSOLIDATED 1999 1998 1997 Europe*, Middle East, Africa North America Latin America Asia Pacific Total** 115,065 25,175 30,263 44,900 215,403 97,456 18,560 25,537 42,885 83,490 18,973 21,267 44,010 184,438 167,740 Of which Sweden * ** Of which EU 7,551 80,345 8,509 71,094 9,320 64,244 Financial Income Result from securities and receivables accounted for as fixed assets Other interest income and similar profit/loss items 1,426 892 491 847 1,336 1,922 Total financial income 2,273 2,228 2,413 Financial Expenses Interest expenses and similar profit/loss items 2,971 2,465 2,365 PARENT COMPANY 1999 1998 1997 Total financial expenses 2,971 2,465 2,365 Europe*, Middle East, Africa North America Latin America Asia Pacific Total** Of which Sweden * ** Of which EU 10,907 273 2,036 2,159 15,375 2,346 8,047 11,315 202 2,362 2,957 16,836 2,062 7,903 11,171 282 2,185 2,579 16,217 3,789 6,064 Business Segments CONSOLIDATED Network Operators and Service Providers Consumer Products Enterprise Solutions Other operations Less: intersegment sales Total 1999 1998 149,943 123,219 45,237 46,444 14,561 17,345 15,170 16,750 —15,079 —13,749 215,403 184,438 Parent Company sales are mainly related to business seg- ment Network Operators and Service Providers. 2 Other operating revenues CONSOLIDATED 1999 1998 1997 Commissions, license fees and other operating revenues Gains on sales of intangible and tangible assets Losses on sales of intangible and tangible assets Gains on sales of investments and operations Losses on sales of investments and operations 825 307 765 1,017 89 9 —244 —303 —159 1,733 1,208 —397 2,224 —764 995 64 —65 866 PARENT COMPANY 1999 1998 1997 Commissions, license fees and other operating revenues Net losses (—) on sales of tangible assets 3,210 2,735 2,398 —55 —69 —30 3,155 2,666 2,368 Financial Net —698 —237 48 PARENT COMPANY 1999 1998 1997 Financial Income Result from participations in subsidiaries Dividends* Net gains on sales Result from participations in associated companies Dividends Net gains on sales Result from other securities and receivables accounted for as fixed assets Other interest income and similar profit/loss items 7,750 - 4,026 468 4,326 7 122 123 2 6 - 2 54 2 1 Subsidiaries Other** 1,365 553 892 658 650 1,183 Total financial income 9,915 6,052 6,223 Financial Expenses Losses on sales of participations in subsidiaries Losses on sales of participations in associated companies Interest expenses and similar profit/loss items Subsidiaries Other Other financial expenses 109 - 1 2 887 1,197 9 1,104 824 11 - 74 859 888 6 Total financial expenses 2,202 1,942 1,827 Financial Net 7,713 4,110 4,396 * Dividends from Ericsson Cables Holding AB amounting to SEK 1,420 m. in 1998 has been reported net of a SEK 1,420 m. write-down of the investment in the company. ** Of the total amount, SEK —4 m. in 1999, SEK —150 m. in 1998, SEK —105 m. in 1997 is attributable to hedge of net investments in foreign subsidiaries. Swedish companies(cid:213) interest expenses on pension liabilities are included in the interest expenses shown above. 3 6 n o i t a m r o f n i l a i c n a n i f Æ i i i NOTES 4 Income taxes for the year 5 Earnings per share CONSOLIDATED 1999 1998 1997 CONSOLIDATED 1999 1998 1997 Income tax paid Income tax deferred —4,756 398 —5,214 —195 —6,551 796 Tax on profit for the year —4,358 —5,409 —5,755 Net income Interest expenses on convertible debentures, net of income taxes 12,130 13,041 11,941 185 265 55 Net income after full conversion 12,315 13,306 11,996 Average number of shares outstanding after full conversion and stock issue including stock dividend element (millions) Earnings per share 1,996.9 6.17 1,996.9 6.66 1,974.4 6.08 As explained under Accounting Principles (K), the Company reports deferred taxes attributable to untaxed reserves. The Company also reports deferred taxes attribut- able to temporary differences between the book values of assets and liabilities and their tax values. In addition, the Company reports deferred tax assets attributable to unutilized loss carryforwards, if the likeli- hood that they will be used is deemed to be greater than 50 percent. At December 31, the Company had total unuti- lized loss carryforwards of sek 468 m. The final years in which these loss carryforwards can be utilized are shown in the following table. The Parent Company had no unuti- lized loss carryforwards. Year of expiration Amount 2000 2001 2002 2003 2004 2005 or later 88 14 26 33 137 170 468 The Parent Company(cid:213)s deferred taxes for the period amount to sek 491 m., sek —158 m. 1998 and sek 123 m. 1997. 6 Intangible assets CONSOLIDATED Acquisitions Cost Opening balance Acquisitions Balances regarding acquired and sold companies Sales/disposals Translation difference for the year Closing balance Accumulated Depreciation Opening balance Depreciation for the year Balances regarding acquired and sold companies Sales/disposals Translation difference for the year Closing balance Total Licenses, trademarks and similar Patents and purchased research and rights development Goodwill Total PARENT COMPANY Patents, licenses, trademarks and similar rights 1,298 256 —4 —10 —117 1,423 —1,144 —136 3 8 110 —1,159 264 505 745 —117 52 —15 1,170 —424 —30 122 —83 10 —405 765 7,078 4,372 8,881 5,373 9 —65 —258 —112 —23 —390 11,136 13,729 —959 —2,527 —850 —684 2 44 —20 127 —31 100 —1,617 —3,181 Acquisitions Cost Opening balance Acquisitions Sales/disposals Closing balance Accumulated Depreciation Opening balance Depreciation for the year Sales/disposals Closing balance 9,519 10,548 Total 457 - - 457 —379 —22 - —401 56 4 6 n o i t a m r o f n i l a i c n a n i f Æ i i i 7 CONSOLIDATED Acquisitions Cost Opening balance Acquisitions Balances regarding acquired and sold companies Sales/disposals Reclassifications Translation difference for the year Closing balance Accumulated Depreciation Opening balance Depreciation for the year Balances regarding acquired and sold companies Sales/disposals Reclassifications Translation difference for the year Closing balance Accumulated Revaluations, Net Opening balance Revaluations for the year Depreciation for the year on revaluations Sales/disposals Translation difference for the year Closing balance Total PARENT COMPANY Acquisitions Cost Opening balance Acquisitions Sales/disposals Reclassifications Closing balance Accumulated Depreciation Opening balance Depreciation for the year Sales/disposals Closing balance Accumulated Revaluations, Net Opening balance Depreciation for the year on revaluations Sales/disposals Closing balance Total NOTES Tangible assets Construction in process and advance payments 1,210 2,149 24 —60 —1,675 —20 1,628 - - - - - - - - - - - - - Total 47,475 9,121 309 —3,425 - —668 52,812 —25,422 —6,515 179 2,944 - 415 —28,399 463 - —53 —82 —22 306 Land and buildings Machinery Other equipment 9,441 537 —53 —29 342 —165 10,073 —2,183 —343 - 3 —2 96 —2,429 461 - —53 —83 —22 303 14,438 2,401 195 —1,435 691 —179 16,111 —8,440 —2,442 7 1,114 —335 116 —9,980 - - - - - - 22,386 4,034 143 —1,901 642 —304 25,000 —14,799 —3,730 172 1,827 337 203 —15,990 2 - - 1 - 3 7,947 6,131 9,013 1,628 24,719 Land and buildings Machinery Other equipment Construction in process and advance payments 2,017 1 —1,744 92 366 —463 —46 446 —63 157 —4 —147 6 309 523 2 —100 0 425 —398 —45 65 —378 - - - - 47 1,576 142 —542 130 1,306 —1,078 —205 331 —952 - - - - 291 224 —175 —222 118 - - - - - - - - 354 118 Total 4,407 369 —2,561 0 2,215 —1,939 —296 842 —1,393 157 —4 —147 6 828 During the year the Parent Company has sold to other Swedish Ericsson group companies, land, buildings and other equip- ment with a total book value of sek 1,662 m. NOTES 8 EQUITY IN ASSOCIATED COMPANIES Opening balance Share in earnings Taxes Translation difference for the year Dividends Acquisitions Sales Closing balance 2,777 250 —109 —28 —131 32 —79 2,712 Goodwill, net, constitutes sek 125 m. (79) of the invest- ments. Dividends received from companies accounted for under the equity method were sek 12 m. in 1998 and sek 142 m. in 1997. Asso- ciated com- panies Other invest- ments Sub- sidiaries PARENT COMPANY Investments Opening balance Acquisitions and stock issues Shareholders(cid:213) contribution Revaluations for the year Write-downs Reclassifications Sales 19,262 3,426 1,789 - —51 3 —65 974 94 - - - —3 —26 Closing balance 24,364 1,039 5 6 n o i t a m r o f n i l a i c n a n i f Æ i i i Financial assets Long term Other customer finan- cing invest- ments Other long- term receiv- ables 1,456 587 —270 —31 1,742 7,582 8,326 —6,307 —88 9,513 2,926 2,844 —754 84 5,100 21 21 —39 —12 39 - —12 - - - - —1,645 —3,847 2,656 —20 —2,856 —24 —62 —47 5 —128 CONSOLIDATED Acquisitions Cost Opening balance Acquisitions/credits granted Sales/repayments Translation difference for the year Closing balance Accumulated Revaluations Opening balance Closing balance Accumulated Write-Downs 1 Opening balance Write-downs for the year Sales/repayments Translation difference for the year Closing balance 46 6 - 1 - - - 53 Total 1,751 6,657 4,972 2 1 Write-Downs are included in Selling expenses due to the close relation to operations. 2 Of which deferred tax assets SEK 964 m. (SEK 789 m. 1998). PARENT COMPANY Acquisitions Cost Opening balance Acquisitions/credits granted Sales/repayments Closing balance Accumulated Write-Downs Opening balance Acquired allowances Write-downs for the year Closing balance Total Long-term customer financing Other long-term receivables 285 8,017 —230 8,072 —5 —921 —826 —1,752 6,320 127 2,052 —50 2,129 - - - - 2,129 6 6 n o i t a m r o f n i l a i c n a n i f Æ i i i 9 NOTES Investments The following listing shows certain shareholdings owned directly and indirectly by the Parent Company. A complete listing of shareholdings, prepared in accordance with the Swedish Annual Accounts Act and filed with the Swedish Patent and Registration Office, may be obtained upon request to: Telefonaktiebolaget LM Ericsson, Corporate Financial Control, se-126 25 Stockholm, Sweden. SHARES DIRECTLY OWNED BY THE PARENT COMPANY Type Company Reg. No. Domicile Percen- tage of owner- ship Par Carrying value value Subsidiaries I I I I I I I I I I I II II II II III III Ericsson Utvecklings AB Ericsson Business Networks AB Ericsson Microwave Systems AB Ericsson Radio Systems AB Ericsson Telecom AB EHPT Sweden AB Ericsson Mobile Communications AB Ericsson Radio Access AB Ericsson Sverige AB Ericsson Business Consulting AB Ericsson Software Technology AB SRA Communication AB AB Aulis Ericsson Cables Holding AB LM Ericsson Holding AB Ericsson Treasury Services AB Ericsson Credit AB Other Ericsson Austria AG LM Ericsson A/S Oy LM Ericsson Ab Ericsson France S.A. Ericsson GmbH Ericsson Communications Systems Hungary Ltd. Ericsson Treasury Ireland Ltd. Ericsson S.p.A. Ericsson A/S Ericsson Corporatio AO Ericsson AG Ericsson Holding Ltd. Other Ericsson Holding II Inc. C(cid:146)a Ericsson S.A.C.I. Teleindustria Ericsson S.A. Other Teleric Pty Ltd. Beijing Ericsson Mobile Communication Co. Ltd. Ericsson Ltd. Nanjing Ericsson Communication Co. Ltd. Ericsson Communication Private Ltd. Ericsson Telecommunications Sdn. Bhd. Ericsson Telecommunications Pte. Ltd. Ericsson Taiwan Ltd. Ericsson (Thailand) Ltd. Other I I I II I I III II I I I II II I I II I I I I I I I I Associated Companies III III I AB LM Ericsson Finans Ericsson Project Finance AB Ericsson Nikola Tesla Other 556137-8646 556090-3212 556028-1627 556056-6258 556251-3258 556381-7609 556251-3266 556250-2046 556329-5657 556250-9454 556212-7398 556018-0191 556030-9899 556044-9489 556381-7666 556329-5673 556326-0552 Sweden Sweden Sweden Sweden Sweden Sweden Sweden Sweden Sweden Sweden Sweden Sweden Sweden Sweden Sweden Sweden Sweden Sweden Austria Denmark Finland France Germany Hungary Ireland Italy Norway Russia Switzerland United Kingdom Europe (excluding Sweden) United States Argentina Mexico United States, Latin America Australia China China China India Malaysia Singapore Taiwan Thailand Other countries 556008-8550 556058-5936 Sweden Sweden Croatia 100 100 100 100 100 60 100 100 100 100 100 100 100 100 100 100 100 - 100 100 100 100 100 100 100 72 100 100 100 100 - 88 1) 100 100 - 100 25 2) 100 51 100 70 100 80 49 3) - 10 360 30 50 - 97 361 20 100 85 1 47 14 455 105 - 5 - 60 90 80 144 39 800 81 18,421 156 950 - 74 - - 5 n/a - 20 5 2 11 525 2 - 160 15 - 17 335 151 636 - 108 516 41 100 102 67 145 6 969 1,122 2 5 710 662 216 195 485 341 48 3,924 105 194 4 - 757 103 10,591 10 572 134 99 36 2 76 105 4 1 19 4 645 Total - 24,364 90 4) 91 5) 49 - 29 425 196 - 41 510 330 158 Total - 1,039 7 6 n o i t a m r o f n i l a i c n a n i f Æ i i i NOTES 9 SHARES OWNED BY SUBSIDIARIES Type Company Reg. No. Domicile 556000-0365 556577-4469 Subsidiaries I I I I I I II II I I I I I I I I I I I I I I I I I Ericsson Cables AB Ericsson Components AB Ericsson S.A. MET S.A. LM Ericsson Ltd. Ericsson Telecomunicazioni S.p.A. Ericsson Holding International B.V. Ericsson Holding Netherland B.V. Ericsson Telecommunicatie B.V. Ericsson Espa(cid:150)a S.A. Ericsson Ltd. Ericsson Mobile Communications (U.K.) Ltd. Ericsson Communications Inc. Advanced Computer Communications Inc. Ericsson Inc. Ericsson NetQual Inc. Ericsson WebCom Inc. Ericsson Wireless Communication Inc. Ericsson IP Infrastructure Inc. Ericsson Telekomunikasyon A.S. Ericsson Telecomunica(cid:141)(cid:155)es S.A. Ericsson Telecom S.A. de C.V. Nippon Ericsson K.K. Ericsson Mobile Communications Sdn Bhd Malaysia Ericsson Australia Pty. Ltd. Associated Companies I Symbian Ltd. KEY TO TYPE OF COMPANY Sweden Sweden France France Ireland Italy The Netherlands The Netherlands The Netherlands Spain United Kingdom United Kingdom Canada USA USA USA USA USA USA Turkey Brazil Mexico Japan Malaysia Australia United Kingdom Investment, continued Percentage of ownership 100 100 100 100 100 72 100 100 100 100 100 100 100 100 100 100 100 100 100 100 98 100 90 100 100 21 I Manufacturing, distributing and development companies 1 Through subsidiary holdings, total holdings amount to 100% II Holding companies III Finance companies of Ericsson Holding II Inc. 2 Through subsidiary holdings, total holdings amount to 49% of Beijing Ericsson Mobile Communications Co. Ltd., but the voting power is in excess of 50%. 3 Through subsidiary holdings, total holdings amount to 100% of Ericsson (Thailand) Ltd. 4 Voting power is 40%. 5 Voting power is 49%. The subsidiary, Ericsson S.p.A., is listed on the Milan stock exchange in Italy. Ericsson(cid:213)s share of the market value as per December 31, 1999, was sek 9,041 m. 10 Inventories Consolidated 1998 1999 Parent Company 1999 1998 Raw material, components and consumables Manufacturing work in process Finished products and goods for resale Contract work in process Less advances from customers 13,324 10,696 2,926 1,823 105 - 388 30 1,972 4,356 13,398 11,643 —4,816 —2,648 80 104 774 1,152 —43 —31 Inventories, net 25,701 26,973 952 1,607 8 6 n o i t a m r o f n i l a i c n a n i f Æ i i i 11 Accounts receivable — trade 14 Stockholders(cid:213) equity Consolidated 1998 1999 Parent Company 1999 1998 Capital stock Capital stock at December 31, 1999, consisted of the following: NOTES Notes and accounts receivable Receivables from associated companies 63,380 53,775 2,292 2,535 204 125 110 9 63,584 53,900 2,402 2,544 Allowance for doubtful accounts amounting to sek 2,550 m. (2,308) and sek 479 m. (369) in the Parent Company which has reduced the amounts shown above, includes amounts for estimated losses based on commercial risk evaluations. The allowance does not include provisions for potential losses of a political nature. 12 Receivables and payables — subsidiaries PARENT COMPANY 1999 1998 Long-Term Receivables* Financial receivables Current Receivables Commercial receivables Financial receivables Long-Term Liabilities * Financial liabilities Current Liabilities Commercial liabilities Financial liabilities 17,925 12,329 2,989 19,347 2,398 16,219 22,336 18,617 2,296 23,305 1,480 15,968 25,601 17,448 * Including non-interest bearing receivables and liabilities, net, amounting to SEK 11,772 m. (8,191). Interest-free transactions involving current receivables and liabilities may also arise at times. . 13 Receivables in associated companies Prepaid expenses Accrued revenues Advance payments to suppliers Deferred tax assets Other Other receivables Consolidated 1998 1999 Parent Company 1999 1998 2,358 3,231 3,083 887 3,413 3,057 1,828 2,907 190 1,990 272 1,695 1 704 - 3,275 18,255 11,868 6,407 4,248 283 651 15 - 31,227 22,589 9,184 7,618 A shares (par value SEK 2.50) B shares (par value SEK 2.50) Number of shares Aggregate par value outstanding 164,054,660 1,793,083,861 1,957,138,521 410 4,483 4,893 The capital stock of the Company is divided into two class- es: Class A shares (par value sek 2.50) and Class B shares (par value sek 2.50). Both classes have the same rights of participation in the net assets and earnings of the Company. Class A shares, however, are entitled to one vote per share while Class B shares are entitled to one thousandth of one vote per share. Reserves not available for distribution In accordance with statutory requirements in Sweden and cer- tain other countries in which the Company is operating, restricted reserves, not available for distribution, are reported. According to the Swedish Annual Accounts Act, tangi- ble and financial assets may be revalued, provided they have a reliable and lasting value significantly greater than book value. Revaluation amounts must either be used for stock issue/stock split or be appropriated to a revaluation reserve. When assets are sold or discarded the revaluation reserve shall be reduced correspondingly. Opening, balance Changes in cumulative translation adjustment Closing balance 288 —2,403 —2,115 Changes in cumulative translation adjustments include change in cumulative translative adjustments (including goodwill) in Brazil, sek —2,622 m. change regarding recal- culation of goodwill in local currency (excluding goodwill in Brazil), sek 393 m., net gain/loss (—) from hedging of investments in foreign subsidiares, sek 38 m. (sek —77 m. in 1998) and sek 1 m. (sek 94 m. in 1998) from sold/liqui- dated companies. Currency gains/losses resulting from translation of finan- cial statements of integrated companies are included in the following items in the consolidated income statement: Cost of sales Financial income Taxes 1999 1998 65 —11 —3 51 34 14 —2 46 3,454 2,821 Cumulative translation adjustments NOTES 14 continued Changes in stockholders(cid:213) equity CONSOLIDATED January 1, 1999 Conversion of debentures Capital discount Proceeds from unclaimed stock dividend shares Dividends paid Revaluation of fixed assets Transfer between non- restricted and restricted reserves Changes in cumulative translation adjustments Net income 1999 Capital stock 4,878 15 - - - - - - - Equity proportion reserve Other restricted Restricted equity reserves Non- restricted equity 26,778 269 —7 1 - —36 32,931 284 —7 1 - —36 30,181 - - - —3,905 - Total 63,112 284 —7 1 —3,905 —36 6,727 6,741 —6,741 - —2,403 - —2,403 - - 12,130 —2,403 12,130 1,275 - - - - - 14 - - December 31, 1999 4,893 1,289 31,329 37,511 31,665 69,176 Of retained earnings, sek 65 m. will be appropriated to reserves not available for distribution, in accordance with the proposals of the respective companies(cid:213) boards of direc- tors. In evaluating the consolidated financial position, it should be noted that earnings in foreign companies may be subject to taxation when transferred to Sweden and that, in some instances, such transfers of earnings may be limited by currency restrictions. Consolidated unrestricted retained earnings are translat- ed at the year-end exchange rate. Cumulative translation adjustments have been distributed among unrestricted and restricted stockholders(cid:213) equity. 9 6 n o i t a m r o f n i l a i c n a n i f Æ i i i PARENT COMPANY January 1, 1999 Conversion of debentures Capital discount Reversal of revaluation reserve Proceeds from unclaimed stock dividend shares Dividends paid Net income 1999 Capital premium stock reserve 1 4,878 15 - - - - - 1,687 269 —15 - - - - Share Revalua- tion Statutory restricted equity reserve reserve Total Disposi- tion Other Non- retained restricted equity reserve earnings 95 - - —75 - - - 9,680 - - - 1 - - 16,340 284 —15 —75 1 - - 100 - - - - - - 14,464 - - 75 - —3,905 5,566 Total 30,904 284 —15 - 14,564 - - 75 - —3,905 5,566 1 —3,905 5,566 December 31, 1999 4,893 1,941 20 9,681 16,535 100 16,200 16,300 32,835 1 1996 and prior years(cid:213) share premium is included in Statutory reserve. Allocations/ Jan. 1 withdrawals(—) Dec. 31 Untaxed reserves Changes in other untaxed reserves in the Parent Company in 1998 consisted of the following: with- drawal of tax equalization reserve, sek 127 m. (110); allocation to reserve for doubtful receivables, sek 53 m. (270) and allocation to income deferral reserve sek 354 m. (344). 15 PARENT COMPANY 1999 Accumulated Depreciation In Excess Of Plan Intangible assets Tangible assets Total accumulated depreciation in excess of plan 11 483 494 Other Untaxed Reserves Tax equalization reserve 254 Reserve for doubtful receivables 1,120 1,218 Income deferral reserve Total other untaxed reserves Total Untaxed Reserves 2,592 3,086 - —371 11 112 —371 123 —127 2,289 529 2,691 2,320 127 3,409 1,747 5,283 5,406 0 7 n o i t a m r o f n i l a i c n a n i f Æ i i i 16 Pensions and similar commitments Deferred taxes Other provisions Provisions Consolidated 1998 1999 Parent Company 1998 1999 8,398 8,056 3,037 - 1,220 2,388 12,934 11,840 2,476 2,900 - 831 22,552 22,284 5,513 3,731 The pension liabilities include the Parent Company(cid:213)s and other Swedish companies(cid:213) obligations in the amount of sek 6,483 m. (5,902) in accordance with an agreement with the Pension Registration Institute (pri), which are covered by a Swedish law on safeguarding of pension commitments. The Parent Company(cid:213)s pension liabilities include an oblig- ation in the amount of sek 2,788 m. (2,717) in accordance with its agreement with pri. Other provisions include amounts for warranty commit- ments, risks regarding off-balance sheet customer financ- ing, restructuring and changes in techique and markets. 17 Notes and bond loans (maturing 2001—2003) Convertible debentures (maturing 2000) (maturing 2003) Liabilities to financial institutions Liabilities to subsidiaries Other Long-term liabilities Consolidated 1998 1999 Parent Company 1998 1999 17,486 4,470 17,486 4,470 - - 725 5,453 5,516 5,453 370 1,448 1,898 - 3,454 53 - 567 459 679 5,516 320 2,821 21 24,954 13,068 26,816 13,827 Consolidated long-term liabilities maturing five years or more after the balance sheet date: Notes and bond loans and liabilities to financial institutions Other 4,669 138 4,807 The Parent Company has two convertible debenture loans outstanding. One, issued in 1993, with preferential rights for Ericsson shareholders, was in the amount of sek 2,172 m. and carries interest of 4.25 percent. The debentures are convertible up to and including May 31, 2000, at a conver- sion price after stock split, bonus issue and adjustments for new stock issue, of sek 36.10 per B share. During 1999 debentures in the amount of sek 195 m. were converted to 5,411,111 B shares. Upon conversion of all outstanding debentures, there would be a further increase of 14,676,957 in the number of shares. During the period January 1 to February 7, 2000, additional debentures may be converted to B shares carry- ing right to dividend for 1999. NOTES In the 1993 consolidated accounts, the equity component sek 654 m. — calculated as the difference between the con- vertible debenture interest rate, 4.25 percent, at expiration of the subscription period on July 1, 1993 and the Company(cid:213)s alternative interest rate, 10.55 percent — has been credited to the Statutory reserve as addition to capital in the Parent Company only. This capital discount is charged to income as interest expense under the duration of the loan. A convertible debenture loan in the amount of sek 6,000 m. was issued during 1997. Of the total amount, convertible debentures amounting to sek 4,859 m. were sold to Ericsson employees, and debentures amounting to sek 1,141 were sold to the wholly owned subsidiary ab Aulis. The debentures held by ab Aulis are offered at mar- ket price to new employees. The debentures, which carry an interest defined as stibor 1 less 1.5 percent, are convert- ible to B shares from November 19, 1999, up to and includ- ing May 30, 2003, at a conversion price, after the 1998 bonus issue, of sek 236 per share. In the 1997 consolidated accounts, a capital discount amounting to sek 816 m. has been calculated, considering a market interest rate of 6.87 percent. The capital discount has been credited to the Statutory reserve as an addition to capital in the consolidated financial statements as well as in the Parent Company (Share premium reserve) in accordance with the Swedish Financial Accounting Standards Council(cid:213)s recommendation rr03. The capital discount is charged to income as interest expense under the duration of the loan. The capital discount is re-calculated annually, based on stibor intest rate changes. During 1999 debentures in the amount of sek 89 m. were converted to 375,020 B shares. Upon convertion of all outstanding debentures, there would be a further increase of 25,048,681 in the number of shares. During the period January 1 through January 21, 2000, additional debentures, carrying rights to dividends for 1999, were converted to 228,975 B shares. 1 Stockholm Inter Bank Offered Rate 18 Current liabilities to financial insti- tutions and unused lines of credit Liabilities to financial institutions consist of bank over- drafts, bank loans and other short-term financial loans. Unused portions of short-term lines of credit for the Company amounted to sek 5,431 m. and for the Parent Company sek 46 m. In addition, the Parent Company had unused long-term lines of credit amounting to sek 8,527 m. 19 Liabilities to associated companies Accrued expenses Prepaid revenues Other Other current liabilities Consolidated 1998 1999 Parent Company 1998 1999 598 823 738 27,233 20,716 1,691 29 12,280 9,472 3,409 966 939 546 1,600 4 3,132 41,302 31,725 5,867 5,282 1 7 n o i t a m r o f n i l a i c n a n i f Æ i i i NOTES 20 Consolidated Real estate mortgages Chattel mortgages Bank deposits Other Parent Company Chattel mortgages Bank deposits Other Assets pledged as collateral Liabilities Advances to financial institutions customers from Total 1999 Total 1998 23 Leasing Leasing obligations Assets under Financial leases, recorded as tangible assets, consists of: Financial Leases 1999 1998 - - 1,824 208 2,032 - 1,824 21 1,845 36 - - - 36 36 - 1,824 208 249 369 212 373 2,068 1,203 Acquisitions Cost Land and buildings Machinery Other equipment - - - - - 1,824 21 1,845 160 208 34 402 Accumulated Depreciation Land and buildings Machinery Other equipment 291 26 215 532 141 26 71 238 294 321 25 41 387 146 25 25 196 191 At December 31, 1999, the Parent Company had no pledged assets in favor of subsidiaries. However, under cer- tain conditions, it may pledge collateral for certain sub- sidiaries(cid:213) pension obligations. 21 Guarantees for customer financing for accounts receivable Other contingent liabilities Contingent liabilities Consolidated 1998 1999 Parent Company 1998 1999 7,497 1,104 1,526 4,034 - 4,029 6,756 1,000 3,855 2,155 - 4,813 10,127 8,063 11,611 6,968 Of the guarantees assumed by the Parent Company, sek 4,582 m. in 1999 and sek 4,566 m. in 1998 are related to subsidiaries. 22 Statement of cash flows Interest paid in 1999 was sek 2,560 m. (1,425) and interest received was sek 1,516 m. (1,969). Income taxes paid were sek 5,563 m. (6,258). Non-cash transaction under (cid:210)Cash flow from operating activities(cid:211) not reported separately is current year increase in pension liabilities of sek 342 m. (sek 855 m. in 1998 and sek 945 m. in 1997). Non-cash items in (cid:210)financing activities(cid:211) In 1999, conversions of debentures were made for sek 15 m. (1998 sek 4 m., 1997 sek 961 m.). Acquisitions/sales of other investments Cash Goodwill Intangible assets Other net assets Purchase price for acquired subsidiaries Cash in acquired subsidiaries Other acquisitions Sales Acquistions/sales, net 62 4,297 750 203 —5,312 62 —592 1,074 —4,768 Net value At December 31, 1998, future payment obligations for leas- es were distributed as follows: 2000 2001 2002 2003 2004 2005 and later Financial leases Operating leases 107 95 39 17 16 120 394 1,995 1,629 1,311 991 873 2,902 9,701 Expenses for the year for leasing of assets were sek 1,647 m. (sek 1,770 m. in 1998 and sek 1,659 m. in 1997), of which variable cost sek 86 m. Leasing income Some consolidated companies lease equipment, mainly tele- phone exchanges, to customers. These leasing contracts vary in length from 1 to 14 years. The acquisition value of assets leased to others under Operating leases amounted to sek 523 m. at December 31, 1999 (December 31, 1998: sek 517 m.). Accumulated depre- ciation amounted to sek 422 m. and net investments to sek 101 m. at December 31, 1999 (December 31, 1998: sek 446 m. and sek 71 m., respectively). Net investment in Sales-type leases and Financial leases amounted to sek 17 m. at December 31, 1999 (December 31, 1998: sek 36 m.). Future payments receivable for leased equipment are distributed as follows: Sales-type and Financial leases Operating leases 2000 2001 2002 2003 2004 2005 and later Less: interest Net investment 15 2 1 - - - 18 —1 17 26 32 12 7 4 - 81 81 2 7 n o i t a m r o f n i l a i c n a n i f Æ i i i NOTES 24 Reconciliation to accounting princi- ples generally accepted in the U.S. Elements of the Company(cid:213)s accounting principles which differ significantly from generally accepted accounting principles in the United States (u.s. gaap) are described below: (A) Revaluation of Assets Business combination adjustments When applying Swedish accounting practice, the Company has shown negative goodwill as a deferred credit which is released to income over on average 5—10 years (see also Notes to the financial statements, Accounting Principles (B) and Note 6). In accordance with u.s. gaap, negative goodwill should first be applied as a reduction of noncurrent assets acquired and be amortized over the economic life of each asset. Certain tangible assets have been revalued at amounts in excess of cost. Under certain conditions, this procedure is allowed in accordance with Swedish accounting practice. Revaluation of assets in the primary financial statements is not permitted under u.s. gaap. Depreciation charges relating to such items have been reversed to income. In-process research and development In 1999, the Company acquired technology including in-process research and development. The in-process research and develop- ment was valued at sek 233 m. Since this technology has not reached technological feasibility and has no alternative use it was charged to expense under u.s. gaap. (B) Capitalization of Software Development Costs In accordance with Swedish accounting principles, software development costs are charged against income when incurred. The Company practices u.s. gaap fas No. 86 (cid:210)Accoun- ting for the Cost of Computer Software to be Sold, Leased or Otherwise Marketed(cid:211) and effective 1999, it has adopted sop 98-1, (cid:210)Accounting for the costs of Computer Software Develop- ed or Obtained for Internal use(cid:211). According to these statements development costs are capitalized after the product involved has reached a certain degree of technological feasibility. Capitaliza- tion ceases and amortization begins when the product is ready for its intended use. The company has adopted an amortization period for capitalized software to be sold of three years and for capitalized software for internal use of three to five years. Development costs for software to be sold Captalization Amortization Write-downs 1999 1998 1997 7,898 —4,460 —989 7,170 5,232 —3,824 —3,934 - - 2,449 3,346 1,298 Write-downs of previously capitalized software costs amounting to sek 989 m. has been made in 1999 since one project has been reclassified to non-commercial. Development costs for software for internal use Captalization Amortization 1999 1998 1997 1,463 —152 1,311 - - - - - - The amortization is low compared to the capitalization since a couple of projects are not ready for their intended use and some finished projects have been amortized only for a short period of time. (C) Capital Discount on Convertible Debentures In accordance with Swedish accounting principles, the 1997/2003 convertible debenture loan and its nominal interest payments are valued at present value, based on market interest rate. The difference from the nominal amount, the capital dis- count, is credited directly to equity. (Please refer to note 17 for details.) In accordance with u.s. gaap, convertible debenture loans are reported as liabilities at nominal value. When calcu- lating income and equity in accordance with u.s. gaap, the effects of the capital discount are reversed. (D) Other Hedge accounting Ericsson has currency forward exchange contracts and options as hedges of firm commitments as well as budgeted cash flows regarding sales and purchases. According to Swedish account- ing practice, both kinds are considered hedges and are not val- ued at market. According to u.s. gaap, contracts and options not related to firm commitments are valued at market. Tax on undistributed earnings in associated companies In accordance with Swedish accounting practice, no accrual is made for withholding taxes on undistributed profits of compa- nies which are consolidated applying the equity accounting method. Under u.s. gaap, the company holding shares should accrue for withholding taxes on possible repatriation of profits. Sale-leaseback of property In 1987, group companies sold a property which was leased to subsidiaries under contracts expiring in 1997. Under u.s. gaap, the sale during 1987 is considered a financing arrangement and the gains are deferred and the pro- ceeds are therefore treated as a liability. In accordance with Swedish accounting practice at the time, no deferral of profit had to be made if the sale price did not exceed the market value and if leasing costs did not exceed normal market leasing rates. During 1997, Ericsson waived its option to repurchase and canceled the rental contract on the property. Consequently, the income portion of the sales proceeds were recognized in income for the period in accordance with u. s. gaap. (E) Pensions The Company participates in several pension plans, which in principle cover all employees of its Swedish operations as well as certain employees in foreign subsidiaries. The Swedish plans are administered by an institution jointly established for Swedish industry (pri) in which most companies in Sweden participate. The level of benefits and actuarial assumptions are established by this institution and, accord- ingly, the Company may not change these. Effective 1989, the Company has adopted fas No. 87, Employer(cid:213)s Accounting for Pensions, when calculating income according to u.s. gaap. The effects for the Company of using this recommendation principally relate to the actuarial assumptions, and that the calculation of the obligation should reflect future compensation levels. The difference relative to pension liabilities already booked at the introduction in 1989 is distributed over the estimated remaining service period. (F) Capitalization of Interest Expenses In accordance with Swedish accounting practice, the Company has expensed interest costs incurred in connection with the financing of expenditures for construction of tangible assets. Such costs are to be capitalized in accordance with u.s. gaap, and depreciated as the assets concerned. Capitalization amounting to sek 81 m. (55) has increased income and amor- tization amounting to sek 151 m. (122) was charged against income for the period when calculating income in accordance with u.s. gaap. (G) Deferred Income Taxes Deferred tax is calculated on all u.s. gaap adjustments to income. Application of u.s. gaap as described above would have had the following approximate effects on consolidated net 3 7 n o i t a m r o f n i l a i c n a n i f Æ i i i ADJUSTMENT OF EQUITY 1999 1998 1997 Increases Capitalization of software development costs to be sold for internal use Unrealized gains and losses on available-for-sale securities Pensions Capitalization of interest, net after cumulative depreciation Other Reductions Revaluation of assets Capital discount on convertible debentures Deferred income taxes Adjustment of stockholders(cid:213) equity, net Reported stockholders(cid:213) equity Approximate equity according to U.S. GAAP 13,193 1,311 10,744 7,398 - - 8,527 422 - 885 - 674 202 454 273 —488 339 —305 24,109 11,414 8,106 372 434 425 566 6,731 682 803 3,092 2,138 7,669 4,208 3,366 16,440 69,176 7,206 4,740 63,112 52,624 85,616 70,318 57,364 ADJUSTMENT OF CERTAIN BALANCE SHEET ITEMS ACCORDING TO U.S. GAAP SEK m. Intangible assets Tangible assets Other investments Other receivables Minority interest in equity Provisions Convertible debentures Other current liabilities As per reported balance sheet As per U.S. GAAP Dec 31 Dec 31 Dec 31 Dec 31 1998 1999 1999 1998 10,548 24,719 1,751 31,227 2,182 22,552 5,453 41,302 1,438 10,278 6,354 24,828 17,098 22,516 24,544 22,256 1,438 22,589 33,133 23,745 2,021 2,177 22,284 30,489 25,646 6,923 6,019 31,725 40,902 32,143 2,051 6,241 Provisions include the tax effect of undistributed earnings in associated compa- nies. The Company in principle follows fas No. 95 when preparing the statement of cash flows. According to fas No. 95, however, only cash, bank and short-term investments with due dates within 3 months shall be considered cash and cash equivalents, rather than within 12 months. Applying this definition would mean following adjustments of reported cash: Consolidated, SEK m. 1999 1998 1997 1996 Short-term cash investments, cash and bank, as reported Adjustment for items with maturity of 4—12 months Cash and cash equivalents as per U.S. GAAP 29,008 18,233 29,127 19,060 —9,731 —5,978 —15,004 —8,396 19,277 12,255 14,123 10,664 NOTES income and stockholders(cid:213) equity. It should be noted that, in arriving at the individual items increasing or decreasing reported net income, consideration has been given to the effect of minority interests. ADJUSTMENT OF NET INCOME 1999 1998 1997 Items increasing reported net income Depreciation on revaluation of assets Capitalization of software development costs to be sold for internal use Capital discount on convertible debentures Other Items decreasing reported income Pensions Capitalization of interest expenses, net after depreciation Deferred income taxes Net increase in net income Net income as reported in the consolidated income statements Approximate net income in accordance with U.S. GAAP Reported income per share, fully diluted Approximate income per share in accordance with U.S. GAAP, fully diluted 28 33 22 2,449 1,311 3,346 1,298 - - 116 942 120 13 —191 —207 4,846 3,308 1,126 416 —211 72 70 1,251 1,737 67 954 810 3,109 2,498 10 137 219 907 12,130 13,041 11,941 15,239 15,539 12,848 6.17 6.66 6.08 7.68 7.87 6.53 (H) Unrealized gains and losses on available-for-sales securities In accordance with Swedish accounting principles investments are valued at lower of cost and market. Under u.s. gaap securities available for sale that have readily determinable fair values shall be measured at fair value in accordance with fas No. 115 (cid:210)Accounting for Certain Investments in Debt and Equity Securities(cid:211). Unrealized gains and losses shall be included in other comprehensive income. (I) Comprehensive income The company has presented comprehensive income in accor- dance with fas No 130, (cid:210)Reporting Comprehensive Income(cid:211). Comprehensive income includes net income and other changes in equity, except those resulting from transactions with owners. COMPREHENSIVE INCOME Aproximate net income in accordance with U.S. GAAP Other comprehensive income Cumulative translation adjustments Cumulative translation adjustments for sold/liquidated companies Hedging for investments Unrealized gains and losses on available-for-sale securities Minimum pension liability Deferred income taxes 15,239 15,539 12,848 —2,442 732 904 1 53 94 —107 8,527 —47 —2,403 - - 30 —30 —86 - - 24 Total other comprehensive income 3,689 749 812 Approximate comprehensive income in accordance with U.S. GAAP 18,928 16,288 13,660 4 7 n o i t a m r o f n i l a i c n a n i f Æ i i i 25 Tax assessment values (Sweden) Consolidated 1998 1999 Parent Company 1998 1999 Land and land improvements Buildings 385 2,656 383 2,557 41 162 244 1,538 26 Special information regarding the Parent Company Sales of the Parent Company were sek 15,375 m. (sek 16,836 m.), of which exports accounted for 85 (88) percent. Consolidated companies were customers for 67 (62) percent of the Parent Company(cid:213)s sales, while 65 (51) percent of the Company(cid:213)s total purchases of goods and services were from such companies. Loans totaling sek 1 m. have been made to a total of 70 employees for the purchase of shares in LM Ericsson(cid:213)s Share Savings Fund. The Parent Company has guaranteed up to an amount of sek 5 m. for loans obtained by employees for the pur- chase of housing and private cars. 27 Average number of employees and remuneration in 1999 and 1998 Average number of employees CONSOLIDATED Europe, Middle East, Africa USA and Canada Latin America Asia Pacific 1999 Men Women Total 1998 Men Women Total 51,716 20,196 71,912 52,365 19,661 72,026 8,189 6,571 7,826 3,985 12,174 2,054 8,625 4,429 12,255 6,421 6,279 7,303 3,533 1,837 9,954 8,116 4,086 11,389 74,302 30,664 104,966 72,368 29,117 101,485 Of which Sweden 30,254 12,939 43,193 28,907 12,647 41,554 Of which EU 47,368 18,868 66,236 48,260 18,446 66,706 1999 PARENT COMPANY Men Women Total 1998 Men Women Total Europe, Middle East, Africa USA and Canada Latin America Asia Pacific 3,232 1,345 4,577 4,571 1,958 6,529 - 5 - - 1 - - 6 - - - - - - - - - - Of which Sweden Of which EU 3,237 2,670 2,670 1,346 1,269 1,269 4,583 3,939 3,939 4,571 4,018 4,018 1,958 1,892 1,892 6,529 5,910 5,910 Wages and salaries and social security expenses Consolidated 1998 1999 Parent Company 1998 1999 Wages and salaries Social security expenses Of which pension costs 37,068 11,305 2,151 32,226 10,952 2,605 1,997 1,131 522 2,254 1,331 722 NOTES Wages and salaries per geographical area Europe, Middle East, Africa USA and Canada Latin America Asia Pacific Of which Sweden Of which EU Consolidated 1998 1999 Parent Company 1998 1999 25,998 6,360 1,816 2,894 37,068 14,308 24,415 23,627 4,806 1,642 2,151 32,226 13,301 22,380 1,996 - 1 - 1,997 1,855 1,855 2,254 - - - 2,254 2,153 2,153 Board of Directors, President and Corporate Executive Vice Presidents (of which bonus and similar) 60 (6) 50 (12) Remuneration in foreign currency has been translated to Swedish kronor at average exchange rates for the year. Option plans have been implemented as a complemen- tary remuneration to key employees: Plan Type Exercisable Employees affected 1999 500 1998 1999 0.7 million 7-year call options issued by third party 7-year call options issued by Ericsson (number of options not yet decided) 2000 12.2 million 7-year call options issued by Ericsson In 3 lots (30/40/30%) 3—5 years respec- tively after grant to year 7 In 3 lots, 1/3 per year 1—3 years respec- tively after grant to year 7 2,000 8,000 The options for the 1998 plan were granted in 1999. Grants for the 1999 plan will take place after March 1, 2000 and grants for the 2000-plan were made on January 17, 2000. The 1999 year plan is planned to be hedged by a swap agreement. The 2000 plan is hedged by issuance of Ericsson warrants, which, if fully utilized will have a dilu- tive effect on earnings per share of 0.7 percent. Benefits paid to members of the corporate executive team The Chairman of the Board of Directors received a fee of sek 1,500,000 during the year. This fee was determined by the Board of Directors within the total amount of Board fees approved by the General Meeting. Members and deputy members of the Board who are Ericsson employees received no remuneration or benefits other than their entitlements as employees. However, a fee of sek 900 per meeting was paid to the employee repre- sentatives on the Board. The value of the benefits, to which the present Chief Executive Officer in such his capacity is entitled for 1999, amounts to sek 6,000,000, for which amount provision has been made. In addition, the ceo has received sek 462,240 constituting bonus earned 1998 when he was President. The salary and value of benefits paid to the present company President amount to sek 8,905,795. Provision has also been made for a bonus of sek 919,589 earned 1999. The salary and value of benefits paid to the former President in 1999 amount to sek 10,253,995, of which sek 7,142,032 constitute salary, car benefit and other bene- fits, and sek 1,348,200 constitute bonus earned during 1998. In addition, the Company has carried pension costs for the former President in 1999 amounting to sek 3,250,000. Moreover, he is also entitled to agreed severance 5 7 n o i t a m r o f n i l a i c n a n i f Æ i i i NOTES pay up to July 8, 2001, in an aggregate amount of sek 10,664,303. The following rules regarding severance pay and pen- sion apply to persons, including the President, who are member of the corporate executive team. Severance payments are not made if an employee resigns voluntarily. The same applies if employment is terminated as a result of flagrant disregard of responsibilities. Notice given by the employee, when such significant structural changes or other events occur that, in a determining man- ner, affect the content of work or the condition for respec- tive positions, is equated with notice of termination served by the company. Upon termination of employment, sever- ance pay amounting to two years(cid:213) salary is normally paid. In certain cases, if the employee is 50 years of age or older, 40 to 60 percent of the employees final salary, depending on age, is paid annually to age 60. Such payments are made currently during the pertinent period and cease at age 60. The basic security in the pension arrangements for mem- bers of the corporate executive team consists of affiliation with the so-called itp plan or corresponding arrangements. The employee(cid:213)s pension is premium-based. For the por- tion of a salary in excess of 20 basis amounts, the company pays to a capital insurance an amount that is related both to the age of the executive and to the executive(cid:213)s salary plus a standard bonus. Most of the member of the corporate execu- tive team are already covered by this system. As described in earlier Annual Reports, the following principles apply to other members of the corporate execu- tive team: The benefits due under the so-called itp plan apply, supplemented by the portion of salary and bonus exceeding itp, from age 65. In addition, the employee has the right to retire with a pension at age 60, at the earliest. Following which the pension is based on the current pensionable salary at retirement and amounts to between 40 and 70 percent of this salary. Subject to certain conditions, this pension is also paid if the employee is entitled to severance pay at age 60. Costs of pensions for the former and present Presidents and eight present and two former executive vice presidents amounted to sek 50,7 m. during the year. 28 Fees to auditors Fees for other services Fees to auditors Price- waterhouse- Coopers KPMG Others Total 31,895 3,835 7,145 42,875 101,183 17,679 133,078 21,514 - - - - Audit report To the general meeting of the shareholders of Telefonaktiebolaget LM Ericsson (publ) Corporate identity number 556016-0680 We have audited the annual accounts, the consolidated accounts, the accounting records and the administration of the board of directors and the managing director of Telefon- aktiebolaget LM Ericsson (publ) for the year. These accounts and the administration of the company are the responsibility of the board of directors and the managing director. Our responsibility is to express an opinion on the annual accounts, the consolidated accounts and the administration based on our audit. We conducted our audit in accordance with generally accepted auditing standards in Sweden. Those standards require that we plan and perform the audit to obtain reason- able assurance that the annual accounts and the consolidated accounts are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the accounts. An audit also includes assessing the accounting principles used and their application by the board of directors and the managing director, as well as evaluating the overall presentation of information in the annual accounts and the consolidated accounts. As a basis for our opinion concerning discharge from liability, we examined significant decisions, actions taken and circumstances of the company in order to be able to determine the liability, if any, to the company of any board member or the managing director. We also examined whether any board member or the managing director has, in any other way, acted in contravention of the Companies Act, the Annual Accounts Act or the Articles of Association. We believe that our audit provides a reasonable basis for our opinion set out below. The annual accounts and the consolidated accounts have been prepared in accordance with the Annual Accounts Act and, thereby, give a true and fair view of the company(cid:213)s and the group(cid:213)s financial position and results of operations in accordance with generally accepted accounting principles in Sweden. We recommend to the general meeting of shareholders that the income statements and balance sheets of the parent company and the group be adopted, that the profit of the parent company be dealt with in accordance with the pro- posal in the administration report and that the members of the board of directors and the managing director be dis- charged from liability for the financial year. Stockholm, January 28, 2000 Carl-Eric Bohlin Authorized Public Accountant PricewaterhouseCoopers Olof Herolf Authorized Public Accountant PricewaterhouseCoopers Thomas Thiel Authorized Public Accountant 6 7 n o i t a m r o f n i l a i c n a n i f Æ i i i MSEK Results For The Year Net sales Operating margin 1) Financial net Income before taxes 1) Year-End Position Total assets 1) Working capital Capital employed Tangible assets Stockholders(cid:213) equity 1) — after full conversion 1) Interest-bearing provisions and liabilities Other Information Earnings per share, SEK 1) 3) 4) 5) — in accordance with U.S. GAAP, fully diluted 2) 3) 5) Adjusted stockholders(cid:213) equity per share after full conversion, SEK 1) 3) 5) Cash dividends per share, SEK 3) 5) Shares outstanding — average (in thousands) 3) 5) Additions to tangible assets Depreciation Research and development — expenses — as percent of net sales Ratios Return on equity, percent 1) Return on capital employed, percent 1) Equity ratio, percent 1) Debt-equity ratio 1) Current ratio Statistical Data, Year-End Backlog of orders Number of employees — Worldwide — Sweden TEN-YEAR SUMMARY 1999 1998 1997 1996 1995 215,403 17,590 —698 16,386 202,628 66,037 116,387 24,719 69,176 75,159 45,020 6.17 7.68 38 2.00 * 184,438 19,273 —237 18,210 167,456 52,978 92,637 22,516 63,112 69,353 27,474 6.66 7.87 35 2.00 167,740 18,757 48 17,218 147,440 53,095 80,165 19,225 52,624 59,490 23,146 6.08 6.53 30 1.75 124,266 10,758 412 10,152 112,152 36,180 61,411 17,754 40,456 42,269 17,545 98,780 8,164 58 7,615 90,832 29,394 51,566 15,521 34,263 36,353 15,554 3.64 2.92 4.08 3.56 22 1.25 20 0.88 1,954,291 9,085 6,532 1,950,225 8,965 5,545 1,938,742 7,237 5,422 1,919,084 1,769,384 6,457 3,614 7,188 4,216 28,330 13.2 25,189 13.7 20,906 12.5 17,467 14.1 15,093 15.3 18.3 19.0 35.2 0.6 1.6 22.5 24.9 38.9 0.4 1.6 25.7 29.9 38.7 0.4 1.7 19.0 22.4 39.1 0.4 1.5 18.9 20.7 39.6 0.4 1.6 83,976 78,990 77,499 63,401 48,401 103,290 44,040 103,667 44,979 100,774 45,360 93,949 43,896 84,513 42,022 * For 1999, proposed by the Board of Directors. Working capital 1) 1991—1992 adjusted for change in accounting principles. 2) From 1991 adjustment is made for 1993 adoption of Current assets less current non-interest-bearing pro- visions and liabilities. FAS106, Employers(cid:213) Accounting for Postretirement Benefits Capital employed Other Than Pensions and FAS109, Accounting for Income Taxes. Capital employed is defined as total assets less non- interest-bearing provisions and liabilities. 3) 1990—1994 adjusted for stock issue and 4-for-1 stock split. Earnings per share 4) 1990—1995 adjusted for stock dividend element of the stock issue in 1995. 5) 1990—1994 adjusted for stock dividend element of the stock issue in 1995. 6) 1990—1997 adjusted for stock issue 1:1. Earnings per share is based on average number of shares per year after full conversion of convertible debentures and after stock dividend element of stock issue, i. e. dilution due to favorable stock issue pricing. Net income according to the Income Statement is adjusted by reversal of interest expense for convertible debentures net of tax. 7 7 n o i t a m r o f n i l a i c n a n i f Æ i i i TEN-YEAR SUMMARY 1994 1993 1992 1991 1990 MSEK 82,554 6,553 —386 5,610 72,999 20,899 41,611 13,678 23,302 25,519 16,522 2.15 2.65 15 0.69 62,954 3,530 8 3,108 67,490 20,869 40,168 12,363 21,305 23,512 16,868 1.54 1.86 13 0.57 47,020 1,754 —204 1,241 56,637 20,063 35,842 11,093 17,720 18,349 16,321 0.28 0.76 11 0.44 45,793 2,282 —189 1,595 50,080 17,497 31,539 10,477 17,050 17,690 12,913 0.52 0.91 10 0.44 45,702 5,694 —163 4,855 47,167 16,965 27,906 9,058 16,753 17,398 9,366 1.71 1.98 10 0.44 1,737,530 1,716,272 3,805 2,651 5,137 3,004 1,648,528 3,847 2,193 1,646,992 3,583 1,863 1,642,976 3,448 1,572 13,407 16.2 10,924 17.4 7,377 15.7 7,054 15.4 4,901 10.7 17.7 18.2 34.4 0.7 1.5 14.5 12.9 34.5 0.7 1.6 2.8 9.6 34.5 0.8 1.6 5.3 12.0 38.1 0.7 1.7 20.4 25.9 39.3 0.5 1.7 45,671 45,296 38,050 28,777 30,415 Results For The Year Net sales Operating margin 1) Financial net Income before taxes 1) Year-End Position Total assets 1) Working capital Capital employed Tangible assets Stockholders(cid:213) equity 1) — after full conversion 1) Interest-bearing provisions and liabilities Other Information Earnings per share, SEK 1) 3) 4) 5) — in accordance with U.S. GAAP, fully diluted 2) 3) 5) Adjusted stockholders(cid:213) equity per share after full conversion SEK 1) 3) 5) Cash dividends per share 3) 5) Shares outstanding — average (in thousands) 3) 5) Additions to tangible assets Depreciation Research and development — expenses — as percent of net sales Ratios Return on equity, percent 1) Return on capital employed, percent 1) Equity ratio, percent 1) Debt-equity ratio 1) Current ratio Statistical Data, Year-End Backlog of orders Number of employees 76,144 36,984 69,597 31,796 66,232 29,979 71,247 31,244 70,238 30,817 — Worldwide — Sweden For earnings per share accordance with u.s. gaap, see Note 24 to the financial Statements. Return on equity Defined as net income expressed as a percentage of average adjusted stockholders(cid:213) equity (based on the amounts at January 1 and December 31). Year 1990 adjusted for increases resulting from a reduction in the tax rates used when calculating the equity por- tion of timing differences. Equity ratio Defined as the total of stockholder(cid:213)s equity and minority interest in equity of consolidated subsidia- ries, expressed as a percentage of total assets. Debt-equity ratio Defined as total interest-bearing provisions and lia- bilities divided by the total of stockholders(cid:213) equity and minority interest in equity of consolidated sub- sidiaries. Return on capital employed Current ratio Defined as the total of operating margin plus finan- cial income as a percentage of average capital employed (based on the amounts at January 1 and December 31). Current assets divided by the sum of current provi- sions and liabilities. 7 8 BOARD OF DIRECTORS AND PRESIDENT 1999 board of directors and president deputy members LARS RAMQVIST KURT HELLSTR(cid:133)M SVERKER MARTIN-L(cid:133)F MONICA BERGSTR(cid:133)M (1943*). President (from July 7). Shares held in Ericsson: B 5,000. Convertible debentures: 1997/2003: 145,347***. Call options: 5,187. G(cid:133)RAN ENGSTR(cid:133)M (1948*). Employee representative. Member since 1994. Shares held in Ericsson: B 1,320. Convertible debentures: 1993/2000: 6,250**. 1997/2003: 99,120***. JAN HEDLUND (1946*). Employee representative. Member since 1994. Convertible debentures: 1997/2003: 75,520***. G(cid:133)RAN LINDAHL (1945*). Honorary Doctor of Technology. President and CEO of ABB Ltd. Member of the Board of DuPont. Member of the Salomon Smith Barney International Advisory Board. Member since 1999. PER LINDH (1957*). Employee representative. Member since 1994. (1938*). Chairman and (as of July 7) CEO. Doctor of Philosophy. Honorary Doctor of Technology. Honorary Doctor of Philosophy. Chairman of the Boards of Skandia and Volvo. Member of the Boards of AstraZeneca and SCA. Member of the Royal Swedish Academy of Sciences, the Royal Swedish Academy of Engineering Sciences and the European Round Table of Industrialists. Member since 1990. Shares held in Ericsson: B 7,548. Convertible debentures: 1997/2003: 145,347***. TOM HEDELIUS (1939*). Deputy Chairman. Honorary Doctor of Economics. Chairman of the Boards of Handelsbanken, Bergman & Beving, Svenska Le Carbone and the Founda- tion of Anders Sandrew. Deputy Chairman of Industriv(cid:138)rden. Member of the Boards of Volvo and SCA. Member of SAS Assembly of Representa- tives. Member since 1991. Shares held in Ericsson: B 18,154. MARCUS WALLENBERG (1956*). Deputy Chairman. President of Investor. Deputy Chairman of Saab. Member of the Boards of Astra, AstraZeneca, Investor, Scania, SEB, Stora Enso, Volvo and the Foundation of Knut and Alice Wallenberg. Member since 1996. Shares held in Ericsson: B 88,000. (1943*). President and CEO of SCA. Member of the Boards of the Federation of Swedish Industries and the Swedish Forest Industries Ass. Member since 1991. Shares held in Ericsson: B 2,000. LARS-ERIC PETERSSON (1950*). President and CEO of Skandia. Chairman of the Boards of the National Agency for Higher Educa- tion, the Swedish Insur- ance Federation and the Swedish Coalition of Ser- vice Industries. Member of the Boards of Pohjola, the Swedish Employers(cid:213) Con- federation and the Federa- tion of Swedish Industries. Member since 1996. Shares held in Ericsson: B 1,000. (Lars-Eric Petersson resigned from the Board of Directors in Januari 2000. CLAS REUTERSKI(cid:133)LD (1939*). President and CEO of Industriv(cid:138)rden. Member of the Boards of Handels- banken, SCA, Sandvik and Skanska. Member since 1994. Shares held in Ericsson: B 10,000. PETER SUTHERLAND (1946*). Honorary Doctor. Chair- man of the Board of Goldman Sachs Inter- national, Co-Chairman of BP Amoco. Member of the Boards of Investor, ABB Ltd and the Foundation of the World Economic Forum. Member since 1996. (1961*). Employee representative. Member since 1998. Convertible debentures: 1997/2003: 75,520***. CHRISTER BINNING (1946*). Employee representative. Member since 1994. Convertible debentures: 1993/2000: 750** 1997/2003: 145,347***. CHRISTER (cid:129)KERLIND (1950*). Employee representative. Member since 1994. Shares held in Ericsson: B 88. Convertible debentures: 1997/2003: 145,347***. statutory auditors CARL-ERIC BOHLIN Authorized Public Accountant, PricewaterhouseCoopers. OLOF HEROLF Authorized Public Accountant, PricewaterhouseCoopers. THOMAS THIEL Authorized Public Accountant. deputy auditors BO HJALMARSSON Authorized Public Accountant, PricewaterhouseCoopers. JEANETTE SKOGLUND Authorized Public Accountant, PricewaterhouseCoopers. STEFAN HOLMSTR(cid:133)M Authorized Public Accountant. * Year of birth ** Conversion rate: SEK 36:10 SEK 236 *** Conversion rate: BOARD OF DIRECTORS AND PRESIDENT 1999 7 9 Clas Reuterski(cid:154)ld Clas Reuterski(cid:154)ld Lars-Eric Petersson Lars-Eric Petersson Monica Bergstr(cid:154)m Monica Bergstr(cid:154)m G(cid:154)ran Lindahl G(cid:154)ran Lindahl Peter Sutherland Peter Sutherland G(cid:154)ran Engstr(cid:154)m G(cid:154)ran Engstr(cid:154)m Jan Hedlund Jan Hedlund Christer (cid:129)kerlind Christer (cid:129)kerlind Sverker Martin-L(cid:154)f Sverker Martin-L(cid:154)f Christer Binning Christer Binning Per Lindh Per Lindh Tom Hedelius Tom Hedelius Lars Lars Ramqvist Ramqvist Kurt Kurt Hellstr(cid:154)m Hellstr(cid:154)m Marcus Wallenberg Marcus Wallenberg 8 0 CORPORATE EXECUTIVE TEAM MATS DAHLIN (1954)* Executive Vice President, Business Segment Net- work Operators and Ser- vice Providers. B. Sc. Joined Ericsson in 1980. Senior positions in the U.S. and Canada. Regional manager for mobile operations in Asia Pacific. Marketing manager for the American markets and PCS operations. EVP, Ericsson Radio Systems and manager for GSM Business Unit, 1997. Shares held in Ericsson: STEN FORNELL (1948)* Executive Vice President and Chief Financial Officer. B. Sc. (Econ.) Joined Ericsson in 1982. Business Area Controller, Ericsson Information Systems. Vice President Finance Control- ling, Business Area Mobile Systems. VP and Con- troller, Business Segment Network Operators. Shares held in Ericsson: B 44,000. B 2,000. BO DIMERT (1943)* Executive Vice President, Market Area North Ameri- ca. M.B.A. VP Sales for IBM in Sweden and President, Digital Equipment Corporation, Nordic, before joining Ericsson in 1995, as VP, in charge of Business Enterprise Net- works. President, Ericsson Inc. in the U.S., 1998. Shares held in Ericsson: B 4,400. Convertible debentures: 1997/2003: 145,347.*** Call options: 1,618. Call options: 2,593. Call options: 2,910. KURT HELLSTR(cid:133)M (1943)* As of July 7, President of Ericsson. M. Sc., and master degree from the Stockholm School of Economics. Joined Ericsson in 1984. Has held a number of senior positions in mobile telephony, with emphasis on marketing and sales. Named head of Business Area Mobile Systems in 1990. Executive Vice Presi- dent, Market Area Asia Pacific in 1999. Shares held in Ericsson: B 5,000. Convertible debentures: 1997/2003: 145,347.*** Call options: 5,187. HAIJO PIETERSMA (1953)* Executive Vice President, Business Segment Enter- prise Solutions. Native of the Nether- lands. B. Sc. Has been with Ericsson in various positions in Sweden and the Netherlands since 1978. President of local company in the Nether- lands, 1994. Convertible debentures: 1997/2003: 145,347.*** Call options: 3,527. JOHAN SIBERG (1944)* Executive Vice President, Business Segment Con- sumer Products. M. Sc. and B. Sc. (Econ.). Joined Ericsson in 1970. Production manager in the Business Area Public Telecommunications, responsible for telecom establishment in the U.S. Head of Corporate Supply and Distribution. Since 1994, head of Mobile Phones and Terminals. Shares held in Ericsson: B 15,000. Convertible debentures: 1997/2003: 145,347.*** Call options: 4,150. KJELL S(cid:133)RME (1939)* Executive Vice President, Market Area Asia Pacific. B.Sc. Joined Ericsson in 1966. Head of Product Management and VP Systems Design, Public Telecommunications. Head of Network Systems Divi- sion Ericsson, U.S. VP Systems Design, Ericsson Telecom. President Erics- son Australia 1990—1999. Shares held in Ericsson: B 31,398. Convertible debentures: 1997/2003: 145,347.*** Call options: 4,547. SVEN-CHRISTER NILSSON (1944)* President and Chief Executive Officer up to July 7. CARL WILHELM ROS (1941)* Senior Executive Vice President and Chief Financial Officer up to June 30. CORPORATE EXECUTIVE TEAM 8 1 BENGT A. FORSSBERG (1937)* Executive Vice President, Market Area Latin America. B. Sc. Joined Ericsson in BJ(cid:133)RN BOSTR(cid:133)M (1947)* Senior Vice President, Supply and Information Technology. 1960. Held various senior positions in Portugal, Egypt, Saudi Arabia, Malaysia and the U.K. Named SVP Corporate Markets in 1996. Shares held in Ericsson: M. Sc. Joined Ericsson in 1970. Has held various positions in Sweden, Mexi- co and Ireland. Named head of Production in Mobile Systems in 1989. Shares held in Ericsson: B 1,000. B 300. Convertible debentures: 1997/2003: 145,347.*** Convertible debentures: 1997/2003: 145,347.*** TORBJ(cid:133)RN NILSSON (1953)* Senior Vice President, Marketing and Strategic Business Development. M. Sc. and M. B. A. Joined Ericsson in 1978. Senior positions in Market- ing and Product Manage- ment. VP Strategic Busi- ness Development in Mobile Systems, 1992. Shares held in Ericsson: B 5,510. Convertible debentures: 1993/2000: 8,950.** 1997/2003: 145,347.*** Call options: 2,801. Call options: 1,660. Call options: 1,660. other senior executives STEPHAN ALMQVIST Senior Vice President, Corporate Audit and Security. Convertible debentures: 1997/2003: 145,347.*** Call options: 1,563. CARL OLOF BLOMQVIST Senior Vice President, Corporate Legal Affairs. VIDAR MOHAMMAR Senior Vice President, Corporate Treasury. Convertible debentures: 1997/2003: 145,347.*** Call options: 606. BRITT REIGO (1943)* Senior Vice President, Human Resources and Organization. M. Sc. Joined Ericsson in 1988 as Senior Vice President Human Resources and Organiza- tion. Earlier, with SAS as Director of Inflight Service, with SSAB as Administra- tive VP, and with SPP as VP Personnel. Worked in China in 1995, building up local company(cid:213)s organiza- tion. Shares held in Ericsson: B 3,000. Convertible debentures: 1997/2003: 145,347.*** Call options: 3,112. * Year within paren- theses indicates date of birth ** Conversion price: SEK 36.10 *** Conversion price: SEK 235 LARS A ST(cid:129)LBERG (1940)* Senior Vice President, Communications. M. B. A. Joined Ericsson in 1989 following a long career in the Swedish Ministry of Foreign Affairs, where he held a number of diplomatic positions. VP Corporate Markets. SVP Information since 1996. Convertible debentures: 1997/2003: 145,347.*** Call options: 2,178. JAN WÄREBY (1956)* Executive Vice President, Market Area Europe, Mid- dle East and Africa. M. Sc. Joined Ericsson in 1980, in the transmission business. Various senior positions in Mobile Sys- tems, including VP in Sales and Marketing in Ericsson Radio Systems U.S. and EVP American Standard, Ericsson Radio Systems, 1998. Shares held in Ericsson: B 1,940. Convertible debentures: 1997/2003: 145,347.*** Call options: 2,481. JAN UDDENFELDT (1950)* Senior Vice President, Technology. D. Tech., Hon. D. Tech. Joined Ericsson in 1978. Since 1985 has held senior positions in research and development of Mobile Systems. Named VP Tech- nology in Ericsson Radio Systems and manager of Mobile Systems(cid:213) world- wide R&D operations in 1990. Shares held in Ericsson: B 208. Convertible debentures: 1993/2000: 2,400.** 1997/2003: 145,347.*** Call options: 1,867. 8 2 T This glossary has been prepared for a broad group of readers who may not be familiar with technical terms in this Annual Report. However, brief definitions of these terms cannot provide complete explanations. adsl (Asymmetrical Digital Subscriber Line) A method to increase transmission speed in a cop- per cable. adsl facilitates the division of capacity into a channel with higher speed to the subscriber, typically for video transmission, and a channel with significantly lower speed in the other direction. amps (Advanced Mobile Phone System) The original American standard specification for analog systems. Used primarily in North Ameri- ca, Latin America, Australia and parts of Russia and Asia d-amps (Digital Advanced Mobile Phone System) Earlier designation of American standard for digital mobile telephony used primarily in North America, Latin America, Australia and parts of Russia and Asia. Now known as tdma. See also tdma and is-136. edge A technology that gives gsm and tdma similar capacity to handle services for the third generation of mobile telephony. Developed to enable the trans- mission of large amounts of data at a high speed, 384 kilobits per second in mobile applications. epoc An operating system for mobile terminals, devel- oped by Symbian (Ericsson joint-venture company including Matsushita, Motorola, Nokia and Psion). atm (Asynchronous Transfer Mode) gprs (General Packet Radio Service) A technology for broadband transmission of voice, data and video transmission of telecom signals in large amounts. In addition to high- capacity signal transmission, atm provides con- siderable flexibility, since the individual sub- scriber is able to adapt the capacity of a switched connection to current requirements. asf (Application Service Positioning) A technology that facilitates downloading of software of the Internet instead of purchasing the program over the counter — against a fixed fee. axe An open architecture, Ericsson(cid:213)s communications platform. A system for computer-controlled digital exchanges that constitute the nodes in large public telecommunications networks. The basis for Ericsson(cid:213)s wireline and mobile systems. Bluetooth A radio technology developed by Ericsson and other companies built around a new chip that makes it possible to transmit signals over short distances between telephones, computers and other devices without the use of wires. A packet-linked technology that enables high- speed (115 kilobit per second) wireless Internet and other data communications. gsm (Global System for Mobile Communication) Originally developed as a pan-European standard for digital mobile telephony, gsm has become the world(cid:213)s most widely used mobile system. It is used on the 900 MHz and 1800 MHz frequencies in Europe, Asia and Australia, and the MHz 1900 frequency in North America and Latin America. imt-2000 (International Mobile Telecommunica- tions) Standard adopted by the itu for the third gener- ation of mobile telephony. Actually a family of five different specifications for the radio interface in this new system generation. ip (Internet Protocol) The Internet protocol defines how information travels between systems across the Internet. is-95 A digital mobile telephony standard based on cdma technology. See also cdma. cdma (Code Division Multiple Access) is-136 MP3 player, based on three volt platform, to be attached to mobile phone. A technology for digital transmission of radio signals between, for example, a mobile telephone and a radio base station. In cdma, a frequency is divided into a number of codes. See also is-95. A digital mobile telephony standard based on tdma technology. See also tdma and d-amps. isp (Internet Service Provider) A company specializing in offering end-users access to the Internet. As a rule does not have own communications network but functions as a link between the user and the net operator. itu (International Telecommunication Union) A United Nations agency that deals with telecommunications issues. GLOSSARY 8 3 A standard for digital signal transmission within transport networks. 3gpp (Third-generation Partnership Project) A global cooperative project in which in which standardization bodies in Europe, Japan, South Korea and the United States as founders are coor- dinating wcdma issues. See also wcdma. tdma (Time Division Multiple Access) A technology for digital transmission of radio signals between, for example, a mobile phone and a radio base station. In tdma, the frequency band is split into a number of channels that are stacked into short time units so that several calls can share a single channel without interfering with one another. tdma is also the name of a digital tech- nology based on the is-136 standard. tdma is the current designation for what was formerly known as d-amps. See also is-136 and d-amps. umts (Universal Mobile Telecommunications System) The name of the third-generation mobile phone standard in Europe, standardized by etsi. VoIP (Voice over Internet Protocol) A technology for transmitting ordinary telephone calls over the Internet using packet- linked routes. Also called ip telephony. wap (Wireless Application Protocol) A free, unlicensed protocol for wireless commu- nications that makes it possible to create advanced telecommunications services and to access Internet pages from a mobile telephone. wap is the de facto standard that is supported by a large number of suppliers. Cordless Phone 260, cordless DECT-phone with built-in speaker and digital answering machine. lan (Local Area Network) A small data network covering a limited area, such as within a building or group of buildings. lmds (Local Multipoint Distribution System) American standard for high-speed transmission of voice and data using so-called pmp (Point-to- Multipoint) solutions. Used to provide wireless broadband traffic to small and medium-size companies or in apartment buildings. pbx (Private Branch Exchange) wcdma (Wideband Code Division Multiple An exchange system used in companies and orga- nizations to handle internal and external calls. pcs (Personal Communications Services) Collective term for American mobile telephone services in the 1900 MHz frequency band. pdc (Personal Digital Cellular) A Japanese standard for digital mobile telephony in the 800 MHz and 1500 MHz bands. Access) A technology for wideband digital radio commu- nications of Internet, multimedia, video and other capacity-demanding applications. wcdma, developed by Ericsson and others, has been selected for the third generation of mobile tele- phone systems in Europe, Japan and the United States. The technology is also the principal alter- native being discussed in other parts of the world, notably Asia. Router A data switch that handles connections between different networks. A router identifies the addresses on data passing through the switch, determines which route the transmission should take and collects data in so-called packets that are then sent to their destinations. sdh (Synchronous Digital Hierarchy) wdm (Wavelength Division Multiplexing) A new technology that uses optical signals on different wavelengths to increase the capacity of fiber optic networks in order to handle a number of services simultaneously. w-lan (Wireless-Local Area Network) A wireless version of the lan. Provides access to the lan even when the user is not in the office. ¥ 8 4 ANNUAL GENERAL MEETING, REPORTING DATES 2000 T S he annual general meeting will be held in the Victoria Hall, Stockholm Inter- national Fairs, Stockholm, at 5:00 p.m. on Friday, March 31, 2000. Shareholders intending to participate in the Annual General Meeting must be entered as share- holders in the share register maintained by vpc ab (Swedish Securities Register Center) not later than March 21, 2000. A shareholder whose shares are registered in the name of a trustee must temporarily be entered in the share register not later than March 21, 2000, in order to participate in the Meeting. notice of participation in the annual general meeting In addition to the requirements listed above, share- holders shall provide notice of attendance to: Telefonaktiebolaget LM Ericsson Corporate Legal Affairs se-126 25 Stockholm, Sweden Tel: +46 8 719 3444 or +46 8 719 4498 (between 10 a.m. and 4 p.m. daily), fax: +46 8 719 9527 or e-mail: bolagsstaemma@lme.ericsson.se not later than Friday, March 24, 2000, 4 p.m. change of address Shareholders who have changed their name, mail- ing address or account number should notify their trustees as soon as possible, or vpc ab, Box 7822, se-103 97 Stockholm, Sweden. financial information from ericsson April 28, 2000 Interim report January—March July 21, 2000 Interim report January—June Interim report Jan.—September October 20, 2000 January 26, 2001 Preliminary year-end report March 2001 Annual report 2000 Annual Reports and interim reports are available on request on the Internet: www.ericsson.com/reports, or by contacting: Telefonaktiebolaget LM Ericsson se-126 25 Stockholm, Sweden Telephone: +46 8 719 0000 Ericsson Inc. 100 Park Avenue, 27th floor New York NY 10017, U.S.A. Telephone: +1 212 685 4030 Information about Ericsson is available on the Internet: www.ericsson.com proxy investor relations In order to attend and vote as proxy on behalf of a shareholder at the Meeting, a power of attorney must be presented to the Company, preferably at the above address not later than March 30, 2000. dividend and dividend payment A resolution adopted by shareholders at the Annu- al General Meeting will specify the date on which the share register and related list of pledge holders will be reconciled as the record day. The Board of Directors and President have proposed April 5, 2000, as the record date. If the proposal is approved, dividends are expected to be paid by vpc ab to all registered shareholders on April 10, 2000. Karin Almqvist Liwendahl Director, Corporate Communications Telefonaktiebolaget LM Ericsson se-126 25 Stockholm Telephone: +46 8 719 0000 Telefax: +46 8 719 1976 E-mail: karin.almqvist.liwendahl@lme.ericsson.se Gary Pinkham Vice President, Ericsson Inc. 100 Park Avenue, 27th floor New York NY 10017, U.S.A. Telephone: +1 212 685 4030 Telefax: +1 212 213 0159 E-mail: gary.pinkham@ericsson.com 

Continue reading text version or see original annual report in PDF format above