Ericsson
Annual Report 2000

Plain-text annual report

LISTEN TO (cid:9) OUR RESULTS Annual Report 2000 Financial Statements Ericsson Annual Report 2000 This document is the Ericsson Annual Report 2000 – Financial Statements. Together with the Ericsson Annual Report 2000 – Understanding our business it forms the Ericsson Annual Report 2000. If not accompanied by this document, Understanding our business can be ordered from Ericsson Corporate Communications, tel +46 8 719 0000. Uncertain factors in the future ‘Safe Harbor’ Statement under the US Private Securities 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, effect of economic conditions, exchange-rate and interest-rate fluctuations, impact of competing products and their pricing, product development, product introductions 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. Cover: Oskar In the Czech Republic, Ericsson installed a complete GSM system in record time. Within six months of receiving the order, over 500 base stations were installed and put into operation. Contents 2 Key Financial Highlights 3 Ericsson in brief 4 Board of Director’s Report 13 Consolidated Income Statement 14 Consolidated Balance Sheet 16 Consolidated Statement of Cash Flows 17 Parent Company Income Statement 18 Parent Company Balance Sheet 20 Parent Company Statement of Cash Flows 21 Notes to the Financial Statements 38 Auditors’ Report 39 Treasury and Financial Risks 42 Ten Year Summary 44 Board of Directors, Auditors and Company Management 46 Segment Report 52 Share Information 54 Glossary 56 Shareholder Information 2001 Annual Report 2000 Financial Statements 1 Key financial highlights Total consolidated results (SEK billion) Orders booked Net Sales Income before tax Net income Earnings per share, fully diluted (SEK) Dividend (SEK) Cash flow before financing activities Return on capital employed (ROCE, %) Equity ratio (%) Number of employees 2000 292.3 273.6 28.7 21.0 2.65 0.50 6.4 26.5 37.7 Changes in% 31 27 75 74 72 1999 223.8 215.4 16.4 12.1 1.54 0.50 –2.4 19.0 35.2 105,129 103,290 2 Segment results Orders booked Network operators Consumer products Enterprise solutions Other operations Less inter-segment Total Sales Network operators Consumer products Enterprise solutions Other operations Less inter-segment orders Total Operating income Network operators1 Consumer products 2 Enterprise solutions Other operations 3 Unallocated expenses Total Incl. capital gain from Juniper shares 1 Incl. restructuring costs 2 Incl. non-operational items 3 Market Area sales Western Europe Central- and Eastern Europe, Middle East & Africa North America Latin America Asia Pacific Total 212.4 57.0 17.8 18.6 –13.5 292.3 194.1 56.3 17.5 19.0 –13.3 273.6 48.5 –24.2 0.0 7.6 –0.7 31.2 15.4 –12.7 7.0 100.3 37.7 35.2 44.1 56.3 273.6 151.8 47.6 18.0 22.0 –15.6 223.8 149.9 46.4 17.3 16.8 –15.0 215.4 19.6 0.3 0.1 0.1 –2.5 17.6 – – –0.3 85.3 29.7 25.2 30.3 44.9 215.4 40 20 –1 –16 –13 31 29 21 1 14 –11 27 17 27 40 46 25 27 2 Annual Report 2000 Financial Statements Ericsson in brief Our main achievements in the year 2000: • We took the lead in Mobile Internet: Named supplier in 22 of 33 announced 50 percent of GPRS market won with64agreements agreements for 3G infrastructure Complete WCDMA and CDMA 2000 systems product portfolio launched New data and network protocols launched, including IP v6 and VOICE OVER IP OVER WCDMA PARTNERSHIPS formed with MICROSOFT, IBM and WORLDCOM for development of Mobile Internet applications • We continued to lead 2G mobile systems: MAJOR CONTRACT WINS for new or expanded networks achieved, including AT&T Wireless, Telcel, Pegaso and China Telecom GSM SYSTEMS SALES reached record levels 40PERCENT of mobile traffic passes across Ericsson systems • We took the lead in the wireline migration market: ENGINE gained35percent market share SUBSTANTIAL DELIVERIES of ENGINE made to BT, UK ENGINE ACCESS RAMP, a platform for broadband network access, LAUNCHED SUCCESSFULLY • We established a strong position for datacom and IP backbone: PARTNERSHIP formed with Juniper Networks Inc., USA, in Mobile Internet routers BREAK-THROUGH ORDERS won from Telia International and China Telecom • We focused Consumer Products on return to profit: Clear strategy for CONSUMER PRODUCTS defined and under implementation SMARTPHONE R380, GPRS/Bluetooth-enabled R520, youth orientatedT20 mobile phones and a new Bluetooth headset introduced Key financial objectives • Strong and competitive value growth for our shareholders is one of Ericsson's most important overall objectives. Our long-term growth objectives were established in 1999, and remain unchanged: We intend to grow faster than the market, at a rate of at least 20 percent annually, viewed over a five year period. To reach this objective we will maintain or improve our positions in both the Operator and the Consumer oriented areas of our business. 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 capital employed of between 20 and 25 percent for Ericsson as a whole. We must therefore maintain an average operating margin of at least 10 percent and a capital turnover of two or better. Return requirements may vary for different parts of our business. A lower operating margin can also be offset by a higher rate of capital turnover. Ericsson long term financial objectives: For year 2000 we reached all our financial objectives but one: •SALES GROWTH: 27 PERCENT (TARGET + 20) •CASH FLOW: POSITIVE SEK6.4 B. (TARGET POSITIVE) •CAPITAL TURNOVER: 2.1 (TARGET 2) •RETURN ON CAPITAL EMPLOYED: 26.5 PERCENT (TARGET 20-25) •OPERATING MARGIN: 6.1 PERCENT (TARGET: >10) Annual Report 2000 Financial Statements 3 Board of directors’ report Ericsson’s mission is to understand its customers’ opportunities and needs and to provide communications solutions better than any competitor. In doing so, Ericsson shall generate a competitive economic return for its shareholders. Our long-term goals are to grow faster than the market, with a return on capital employed of 20 to 25 percent and with a positive cash flow before strategic acquisitions. Our strategy is to maintain our market leadership in mobile systems and to establish Ericsson as the major vendor for Mobile Internet solutions and as a top tier supplier of carrier class multi-service networks with broadband and IP capabilities. We intend to remain a top tier player in mobile phones. In our outlook for year 2000, we expected a revenue growth of more than 20 percent, combined with a substantial growth in earnings, while maintaining a positive cash flow. Developments during the year made us change the outlook, so that after nine months we expected a higher revenue growth of around 25 percent, but, due to the difficulties in mobile phones, a reduced operating margin of 6-7 percent compared to 8.2 percent last year, and a negative cash flow. The full year results are in line with the nine months outlook, with a sales increase of 27 percent and an adjusted operating margin of 6.1 percent. The cash flow was improved over the forecast to be positive through a sale of shares in Juniper Networks in December. The operational performance by our systems business was very strong during the year, with a sales growth faster than the market at sustained margins. We were encouraged by a very favorable result in 3G awards plus a strong penetration for our ENGINE solution in the “Circuit-to Packet” market. In our handset business, however, we incurred severe setbacks, which we are addressing in our “Back to Profits”-program and with accelerated outsourcing of manufacturing of phones. The resulting overall financial performance is below our goals, and we are taking vigorous actions to restore profitability. The major area of concern is, of course, to solve the problems in our Consumer Products division. Our goal was also to strengthen our balance sheet and achieve an equity ratio of 40 percent, compared to 35 percent last year. We reached 38 percent and are determined to continue to focus on increased efficiency in capital utilization during 2001. Capital market, economy The IT industry had a turbulent year in the stock markets, driven by uncertainty about the “new economy” and speed in market penetration of Internet services. The stock market adjustment also had adverse impact on the market capitalization of more traditional and well-established telecom suppliers, in spite of the favorable overall growth in mobile telephony. Our own market capitalization, which almost tripled from 381 b. to 1 073 b. in 1999 declined 21 percent to 852 b. by the end of 2000. In relation to most of our main competitors, however, our decline is less unfavorable. Market and Competition Network Operators Continued strong subscriber growth and increased minutes of usage per subscriber resulted in strong traffic increases, which led to another year of favorable development for mobile telephony infrastructure. We managed to increase our market share in mobile systems, where we are the undisputed market leader. In fixed networks we achieved a strong market position regarding solutions to migrate current circuit-switched networks to packet-switched for handling of data and Internet traffic. License granting for 3G started, beginning in Japan and Europe. Initially, license prices in auctions were very high, but declined in auctions later in the year. We have been even more successful than we could hope for and been selected as vendor in 22 of 33 announced deals until the end of the year. This is in recognition of our technology leadership and our proven capabilities as a systems integrator and end-to-end supplier. No competitor is close to this track record. In the financial markets, some concerns were noticed regarding the operators’ financing needs for build-out of 3G networks. New “greenfield” operators were expected to require substantial amounts of vendor financing. Both operators and vendors have received slightly downgraded credit ratings. We continued to increase our market share also for 2G infrastructure equipment and also won a majority 4 Annual Report 2000 Financial Statements Board of directors’ report of the orders for GPRS-systems (“2.5G”).A favorable development in 2000 was the decision by many US- and Latin American operators to switch to GSM technology for their 2.5G networks as a better transition path to 3G. This will benefit us as the market leader in GSM/GPRS. During the year we began to ship 2G CDMA systems, as a result of our acquisition last year of Qualcomm’s infrastructure division. We are the only supplier in the market offering all mobile technologies. We also introduced CDMA handsets during the year. In 2000, we enjoyed strong demand for Ericsson’s ENGINE solution for upgrading of existing networks with capabilities for datacom and IP-based telephony. ENGINE is to a large extent utilizing our own earlier development in the broadband area, such as broadband ISDN and optical transmission systems. Thanks to this and our new generation of AXE switches with substantially improved performance, sales and profitability developed favorably also for the multi- service networks operations. Network Operators sales were particularly strong in the US, Japan and Latin America. The sales development in China was somewhat slower than anticipated, while orders booked increased in the end of the year and we believe capital expenditures for infrastructure is picking up momentum. Consumer Products For Consumer Products, year 2000 was characterized by strong market growth, where the global handset volume increased 47 percent from 278 million units sold in 1999 to around 410 million. We were however unable to capitalize in full of this, mainly due to severe problems regarding component supply and quality and to some extent an unfavorable product mix in the entry level segment. The component shortages relate to a fire in a key component supplier’s plant as well as a general component shortage in the market. We also incurred quality deficiencies in shipments from another supplier of key components. The shortages led to severe delays in shipments and our products had to be sold at extra discounts. In addition, substantial write- offs of excess and obsolete components and renegotiation of supplier contracts had to be made. An action program including restructuring activities, partnering and full outsourcing of manufacturing was implemented, with the goal to have the handset business back to profit in the second half of 2001. With a unit volume of 43.3 million, an increase of 38 percent, we lost some market share, but we maintained our number three position among handset vendors. The price competition in handsets increased in the fourth quarter, as a consequence of over-supply mainly in Western Europe, where penetration in many countries is now around operations 60 percent or higher. Enterprise and Other operations Our Enterprise operations were reorganized during the year. Increased focus was put on development of Mobile Internet applications, which will be key for the market development of 3G. The PBX and data networks business developed unfavorably. We expect to improve the business substantially going forward, by restructuring of the distribution channels from in- house to third party. Other operations developed very well, in particular Cables, which increased the sales of fiber optic cables strongly. In our Microelectronics operations, Bluetooth chips started to be shipped, and volumes are expected to increase in the first half of 2001 after release of the approved Bluetooth standard. Defense Systems also had a good year. In the third quarter, Ericsson acquired parts of Hewlett Packard’s minority share in the Ericsson-Hewlett Packard joint venture for 1.4 b. Ericsson then integrated the OSS software product activities with the mobile systems operations. The profitability in the remaining EHPT operations within the OSS product segment was unsatisfactory. Products During the year, we launched a number of new products and solution elements. In the infrastructure operations, the enhanced AXE, the ENGINE solution, GPRS and CDMA equipment were all very well received. Our new service offering for managed network services was also positively received and we won a number of such contracts. Several new mobile phones were introduced, such as the WAP phone R320, the smart- phone R380, a CDMA phone and the T20, aimed at the entry-level market. Annual Report 2000 Financial Statements 5 Board of directors’ report The Ericsson brand was further strengthened by various activities. For the first time, Ericsson participated on the COMDEX fair in the US, with positive attention. Patents During the last two decades patents have become increasingly more important for manufacturers within the telecom and IT industries. A strong, well balanced patent portfolio covering present and future technologies and products is now a prerequisite for success within these industries. Such an intangible asset, although not directly traceable in the balance sheet of a company, gives the patent holder strategic as well as other business advantages, for example possibilities to get access to technology through cross- licensing with other companies. At the same time, this focus on patents within the converging technologies also means an increased exposure to allegations of infringement of patents of others. Since the beginning of the 1990’s, Ericsson has safeguarded its investments in Research & Development and met the intense competition by developing a world- class patent portfolio to support its business. Accordingly, Ericsson is well prepared to meet the challenges during the next decade. During 2000, Ericsson filed in excess of 1300 patent applications to protect our intellectual property rights. Production and supply Component shortages were recognized in the industry during the first three quarters of the year, resulting in delivery delays and inventory build-up. In addition, Ericsson was hit by consequences from a fire at a plant belonging to a key component supplier to our mobile phones. In other areas, our supply was greatly improved with considerably shorter lead times for many products. We are also in trials with several customers and vendors for e-commerce solutions. Outsourcing of production continued under year 2000 within both mobile phones and infrastructure, as a reflection of our strategic intent to focus on more value adding areas of development and systems integration. At the end of the year, we decided to outsource all manufacturing of mobile phones and in January, 2001, we signed a memorandum of understanding with Flextronics for this, where production will be transferred in the first half of 2001. Focused organization We continued to increasingly focus our business operations on core areas and divested Private Radio Systems and Energy Systems operations during the year. Also most of our real estate properties were sold and real estate management activities in Sweden were outsourced during the year. Also outsourced were activities for internal computer and local area network support in Sweden and other European countries. Manufacturing and design activities in Longuenesse, France, and Östersund and Katrineholm, Sweden, were outsourced in the beginning of the year to Solectron, AU-system and Flextronics. Acquisitions, partnerships and venture capital funds In November, we acquired Microwave Power Devices Inc. (MPD) with important competence as a developer of multi-carrier power amplifiers, essential for next generation mobile networks. MPD will be renamed Ericsson Amplifier Technology Inc. The joint venture with Microsoft was established during the year. Its first product, Outlook via Mobile, was launched. We also entered a partnership with Juniper Networks to deliver data-ready Mobile Internet solutions. The cooperation among the industry leaders in the Symbian joint venture for the EPOC operating system for mobile devices continued successfully, as did the WAP forum for advancement of a standard protocol for mobile phone applications. These joint ventures are key in establishing de facto standards as a base for application development, which will be a key driver for a fast adoption of 3G services. As a major 3G vendor, we are, of course, actively participating in the 3G Partnership Program (3GPP) for further development of the 3G standard. In order to support the development of Mobile Internet applications, products and services, we initiated and participated in a number of venture capital initiatives during the year in cooperation with financial power- houses: Ericsson Venture Partners together with Investor, Industrivärden and Merrill Lynch, and imGO with Investor and Hutchison Whampoa. In addition, we also made some direct investments in companies to support Mobile Internet applications, content and technology, such as Red Jade, Merrimac Industries, Littauer Technologies and Mediatude. 6 Annual Report 2000 Financial Statements Board of directors’ report In preparation for an expected massive roll out of 3G networks starting at the end of year 2001, we entered a number of cooperation agreements with reputable construction companies such as ABB, SKANSKA and NCC. The objective is to safeguard sufficient capacity and competence to satisfy network build-out demand. Financial results Orders booked increased by 31 percent and sales by 27 percent (33 percent and 29 percent, for comparable units), slightly above our outlook. Argentina in particular, plus Brazil. Also in Latin America, operators will go the GSM/GPRS-way to 3G. In Asia Pacific, the two major markets China and Japan showed slightly different developments. China had moderate sales increases, but strong orders booked. Sales in Japan were very strong but orders increased slower. It seems as if the market in China is beginning to pick up momentum after a comparatively low investment level in 2000. Exports from Sweden were 158 (131) b., up 21 percent, including sales to consolidated companies. Orders and sales in our Network Operator segment Other operating revenue includes capital gains net of developed well during the year with orders up 40 percent and sales up 29 percent. Strong demand for 2G infrastructure and ENGINE were main drivers. In our mobile phones business, sales increased by 21 percent and units shipped by 38 percent. Sales and gross margins were severely impacted by delivery problems from a key supplier, leading to delays and reductions in sales, lower prices and large inventory write-offs. In addition, we also decided to implement an aggressive restructuring program for the phone operations and incurred additional costs. A total of 12.7b. of restructuring charges burdened the operating income of –24.2b., for phones. The restructuring is expected to generate annual savings of 15b from 2002. Sales increases slowed down the fourth quarter, in particular in Western Europe, North America and Japan. In Europe, operators have begun to cut subsidies of mobile phones, reducing the growth of new subscribers and slowing down replacement. As the penetration is now around 60 percent in many countries, the main objective for operators is to keep the current customer base. A number of firm contracts for 3G were signed in the fourth quarter, underlining our leading position. ENGINE continues to dominate the “Circuit-to- Packet” market. A major break through order for IP backbone network including Juniper routers was won with Telia International. Our North American operations increased sales for the year strongly. Operators have decided to go for GSM for their 2.5G networks as a way into 3G, which is favorable for us as the market leader in GSM and GPRS. GPRS trials are ongoing. CDMA sales started to pick up momentum and a strategic order for cable modems was won. In Latin America, sales were very strong in Mexico and minorities of 25.2b. of which 19.3b. are operational, including 15.4b. from sales of shares in Juniper Networks. Non-operational capital gains of 5.9b. are the results from divesting of Energy Systems and real estate properties. A pension premium refund in Sweden of 1.1b. is also included among Other operating revenues and considered non-operational. Operating expenses were 33 percent of sales, above our target of 30 percent, due to increased R&D investments and ramp-up of capacity for 3G as a consequence of higher than expected volume of 3G awards. R&D expenses increased 27 percent, the same rate as sales, whereas Selling and G&A expenses increased slower. R&D and other technical expenses, including development costs on customer orders increased by 26 percent to 43.8 b. or 16 (16) percent of Net Sales. Overall, we achieved an adjusted operating margin of 6.1 percent, excluding the capital gain of 15.4 b. from sale of Juniper shares, the additional restructuring provision in phones of 8.0b. and non-operational items of 7.0b. Income effects of changed currency exchange rates compared to the rates during last year were around +1.3b. For mobile phones, however, effects were negative around -3.4b. due to unfavorable exposure from purchases in Japanese yen and US dollars combined with a large share of revenues in Euros. Income before tax was 28.7 (16.4) b., up 75 percent. The tax rate year to date was as low as 27 percent, since portions of the capital gains were non-taxable. Earnings per share, fully diluted, were SEK 2.65 (1.54). The dilutive effect of this year’s employee stock option programs was around 0.2 percent. Earnings per share according to US GAAP were SEK 2.94 (1.92). Annual Report 2000 Financial Statements 7 Board of directors’ report Inventory turnover for the year reached 5.2 (4.8), affected by inventory write-downs. Our target was a level of more than 5.0. Receivables turnover for the year was 3.9 (3.7) turns, slightly below target of 4.0. Customer financing is granted very selectively and preferably as bridge-financing until our customers find permanent solutions. During the year, we managed to reduce gross on-balance sheet financing by 17 percent, whilst off-balance sheet gross exposure increased only slightly. Investments in tangible fixed assets were 12.3b., of which 5.1b. in Sweden. The equity ratio at year-end was 37.7 (35.2) percent. We did not reach our target of 40 percent and we will continue our efforts to improve capital efficiency, in particular regarding inventory and receivables. Cash flow before financing activities year to date was 6.4 (-2.4) b., with the positive effects of sales of shares and divestment of Energy Systems and real estate offsetting increases in inventory and receivables. Cash flow from financing activities includes cash receipts from sales of convertible debentures and cash outlays for repurchases of our own stock related to the employee stock option programs. Network operators With order growth and sales stronger than the market, operating margin improved to 17 (13) percent. Orders and sales were strong for all mobile standards, and good order bookings were achieved for our ENGINE solution. Also Mini-link transmission equipment had a strong increase from last year. The operating income reflects an increased investment level in R&D and other preparations for rapid rollout of 3G. Consumer products We increased unit sales by 38 percent to 43.3 million units. Revenues in SEK grew slower, by 21 percent, to 56.3b., a result of lost sales due to component supply, unfavorable product mix and an over-supply situation in the end of the year, with strong price erosion. The full year loss at –16.2b. is in line with guidance after nine months and includes 4.7b. of restructuring charges. Additional restructuring provisions of 8b. were made at year-end, of which 2b. relate to the original restructuring program and an additional 6b. relate to the complete outsourcing of manufacturing of phones to Flextronics. In the third quarter, we entered an outsourcing agreement with Taiwan-based ARIMA, for development and production of mobile phones according to our specifications. A similar agreement was entered with another Taiwanese company, GVC, in January, 2001. Enterprise solutions The consulting business grew substantially during the year and was increasingly focused on Internet applications. Orders and sales were flat and the operating margin was slightly down, however, in the traditional business with enterprise communications solutions of PBXs and data networks we are reorganizing the distribution channels in order to improve the profitability. Segment results 2000 Segment (SEK b.) Network Operators Consumer Products Enterprise Solutions Other operations Unallocated Inter-segment sales Total Adjustments: Capital gain Juniper Non-operational items Additional restructuring Operating income Orders booked 212.4 57.0 17.8 18.6 –13.5 292.3 Order growth percent 40 20 –1 –16 31 Sales growth percent Adjusted Operating income 29 21 1 14 33.1 –16.2 0 1.7 –1.9 27 16.7 Sales 194.1 56.3 17.5 19.0 –13.3 273.6 Adjusted Operating margin 2000 percent 17 –29 0 9 6 Adjusted Operating margin 1999 percent Employees 13 1 0 2 70,317 16,840 8,324 8,520 1,128 8 105,129 15.4 7.0 –8.0 31.2 8 Annual Report 2000 Financial Statements Board of directors’ report Other operations and unallocated costs During the year we have divested our Energy systems business and real estate properties. These effects are reported among non-operational capital gains. Among remaining business operations, Cables, Defense systems and Microelectronics all had very strong sales increases. Orders increased very well too, except in Defense systems, where a large ERIEYE order last year makes this year’s bookings lower. Unallocated costs decreased more than 20 percent compared to last year. A pension premium refund of 1.1b. is included in non-operational items. New segment reporting for 2001 For enhanced comparability with peer companies in our industry as well as competitive reasons, we will in 2001 report orders, sales and operating income according to our primary areas of business - Systems, Phones and Other operations. Within the Systems business, orders and sales for mobile systems and multi-service networks will be separately disclosed, although there is a high degree of integration within systems for R&D, customers, implementation and support services. Changes within Ericsson during the year A new organization was implemented during the second half to enhance Ericsson’s competitive position in a market with converging telecom and data networks and new operators. The business operations directly addressing our key markets will be handled in three divisions: •• Mobile Systems •• Multi-service Networks •• Consumer Products Three additional divisions were established to focus on development and supply of products and services in core areas of infrastructure business: Global Services, with focus on systems implementation and integration plus other key services, such as network management and optimization. We know that many operators will need new network management tools and services for the increasingly complex networks we will see in 3G, with new types of traffic and new business models for billing and revenue generation. Data Backbone and Optical networks, with focus on packet-switching and IP telephony to support multi-service networks as well as Mobile networks with data traffic capabilities for fixed and Mobile Internet. Internet applications, which we look upon as an important ingredient for operators to be successful in the 3G environment, to be competitive and to generate traffic and revenue in their networks. These divisions will enhance the competitiveness of Ericsson’s infrastructure offering to our key network operator customers of mobile and fixed networks. The previous segment Enterprise Solutions was restructured, with consulting operations transferred to the new Internet applications division and internal IT support activities organized as a new internal service unit. The remaining enterprise market related activities for PBXs, business phones and data networks were organized in a new unit, “Enterprise Networks”, included in Other business operations, and its sales and distribution channels in local Ericsson companies are planned to be spun-out and sold to a third party. Other business operations now include Cables, Defense systems, Enterprise Networks and Microelectronics. At the beginning of the year, Private Radio Systems was sold to US-based Com-Net Critical Communications with no material capital gain. Energy Systems were sold to Emerson on April 1, with a net capital gain of 4.5b. Most of our real estate properties were sold during 2000, with a net capital gain of 1.5b. The component distribution activities within the Microelectronics operations were sold to France-based Electrodis. Employees At year-end 2000, Ericsson had 105,129 employees world-wide, a net increase of 1,839 during the year, mainly as a result of increased R&D efforts for 3G. A reduction of approximately 5,900 related to outsourced or divested operations was offset by additions of 400 in purchased units and 7,400 in other increases. Extensive employee training activities were held during 2000 to increase the knowledge and understanding of the Internet. All employees were encouraged to take certificates in PC and general data/Internet skills. During the year, two seven year employee stock option programs were implemented, affecting around 8,000 employees. For year 2000, these programs had a dilutive effect on earnings per share of 0.2 percent. Annual Report 2000 Financial Statements 9 Board of directors’ report Environmental issues Ericsson has production operations in nine 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 analysis of our products show the largest impact on the environment to be their energy consumption in use. Ericsson is fully exploiting the IT industry’s inherent possibilities to miniaturize products and reduce their energy consumption, which often reduces the unfavorable environmental impact for a given function considerably. Swedish regulations requiring permissions or reporting Ericsson has 14 production facilities in Sweden. For seven of these, permission is required for operations due to noise or emissions into air or water, while five units are obliged to report certain hazardous activities. No material requests or complaints have been received during the year. ISO-certificates The ISO 14001 environmental management system is scheduled for implementation in all production units. In Sweden, most of Ericsson’s production units have already been certified with remaining units to be audited in 2001. Environmental liabilities Within the environmental management system, the Company’s environmental liabilities are continuously monitored. When needed, additional controls are made of real estate properties and production facilities. Around half of the Company’s manufacturing units are located in Sweden. In connection with the sales during 2000 of a majority of the Company’s real estate properties, environmental liabilities were identified and resolved. For the Swedish units, the total remaining liability for environmental damages is less than SEK 40 million. 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. No other material liabilities are known. For further information on Ericsson’s environmental activities, please see our separate Environmental Report for 2000. The Board of Directors and board procedures On January 7, 2000, Lars-Eric Petersson resigned from the Board of Directors in relation to being appointed Chairman of Telia, the Swedish network operator. Messrs Niall FitzGerald and Eckhard Pfeiffer were elected directors of the Board at the Annual General Meeting on March 31, 2000. The Board of Directors of Telefonaktiebolaget LM Ericsson consists of nine directors elected by the shareholders at the Annual General Meeting, as well as three employee representatives, each with a deputy, appointed by their respective employee organization. Eleven Board meetings were held during year 2000. The observations made by the Company auditors have been reported to the Board. The work of the Board is subject to a work procedure of the Board adopted and revised by the Board at least once a year. The work procedure stipulates the division of work among the Board and its three committees and between the Board and the President and the CEO, respectively. The members of the three committees, Audit, Finance and Remuneration are all Board members. The Board has authorized each committee to decide on certain issues and the Board may also provide extended authorization to a committee to decide on specific matters. Management changes Effective February 15, Jan Wäreby, previously Executive Vice President Market area Europe/Middle East/Africa, succeeded Johan Siberg as Executive Vice President for the Consumer Products segment. Johan Siberg, Executive Vice President, assumed a position as coordinator of Swedish operations, reporting to the President. Ragnar Bäck and Karl Alsmar, Presidents in our Italian and German subsidiaries, took up positions as Executive Vice Presidents head of of Market Area Western Europe and Market Area Central- and Eastern Europe, Middle East and Africa respectively. Per-Arne Sandström was appointed Executive Vice President, and head of Market Area North America, succeeding Bo Dimert, who retired. 10 Annual Report 2000 Financial Statements Board of directors’ report phones and increased 3G investments. Later in the year we will begin to benefit from the restructuring of our phones business. For the full year 2001, we expect sales to grow between 15 and 20 percent and an operating margin in the range of 6-8 percent. Parent company Telefonaktiebolaget LM Ericsson The parent company’s results include the operations conducted on commission basis by Ericsson Treasury Services AB and Ericsson Credit AB. The commission agreement with Ericsson Telecom AB was cancelled as per January 1, 2000, at which time also assets of 6.6 b. were transferred. The parent company has branch- and representative offices in 44 (45) countries. Net Sales for the parent company were 1.2 (15.4) b. The lower sales are related to the termination of the commission agreement with Ericsson Telecom AB. Income after financial items was 9.0 (3.2) b. Major changes in the company’s financial position were: •• increased investments of 11b., of which 9.5b. in subsidiaries in Sweden •• increased short-term and long-term loans to subsidiaries of 18.2b. •• increased cash and short-term cash investments of 8.7 b. These investments were financed primarily through increased internal borrowings. At year-end, cash and short-term cash investments amounted to 25.8 (17.1) b. Repurchase of shares Repurchase of shares became possible in Sweden in 2000 due to new legislation. Ericsson has utilized this opportunity and repurchased 1.8 million shares related to an employee stock option program. Such shares are not entitled to dividends. Carl Olof Blomquist was appointed Senior Vice President and Head of Corporate function Legal Affairs. Three new divisions were established mid-year, led by Executive Vice Presidents: •• Data Backbone and Optical Networks, Mike Thurk •• Internet Applications, Haijo Pietersma •• Global Services, Bert Nordberg Effective January 1, 2001, the Board of Directors appointed President Kurt Hellström also Chief Executive Officer. Post closing events In January, Ericsson was appointed also by Portuguese operator TMN as a 3G supplier. Ericsson has entered a partnership in Japan with eBANK to advance the use of e-commerce in Japan. The services will be made safe using Ericsson’s products: the Internet payment server Safetrader™ and the Jalda™ system. In January, Ericsson won another significant order for ENGINE with WorldCom. Ericsson is supporting faster roll out of 3G through the opening on March 1 of two centers for 3G inter-operability testing, where other vendors can bring their equipment to be tested against Ericsson’s complete systems. Ericsson is also forming a wholly owned company dedicated to support Internet services in mobile and multiservice networks, Ericsson Internet Applications and Solutions AB. At the same time, the division Internet Applications is dissolved, and Executive Vice President Haijo Pietersma will leave Ericsson. The Internet Solutions organization is transferred to division Global Services. Outlook for year 2001 A more uncertain economic environment and a more cautious capital market contribute to more uncertainty also in our industry. However, we remain optimistic about our business. We have won most of the contracts for the next generation networks. Therefore we are increasing investments to secure our fast start in 3G. For the first quarter 2001, we see continued strong growth for systems and lower sales for phones. Overall, we expect to increase sales by around 15 percent for comparable units. Income before tax is expected to be around zero, affected by operating losses in Annual Report 2000 Financial Statements 11 Proposed disposition of earnings Available for distribution by the shareholders at the Annual General Meeting are SEK 21,128,328,952. The Board of Directors proposes that earnings be distributed as follows: An unchanged dividend of SEK 0:50 per share to be paid to shareholders duly registered on the Record date The remainder to be retained within the business Total amount available SEK 3,954,289,352 SEK 17,174,039,600 SEK 21,128,328,952 1,804,000 Ericsson B shares held as treasury stock by the parent company are not entitled to a dividend. Stockholm January 26, 2001 Telefonaktiebolaget LM Ericsson (publ) Org. no. 556016-0680 Tom Hedelius Deputy chairman Göran Lindahl Peter Sutherland Göran Engström Lars Ramqvist Chairman Marcus Wallenberg Deputy chairman Sverker Martin-Löf Clas Reuterskiöld Eckhard Pfeiffer Niall FitzGerald Jan Hedlund Per Lindh Kurt Hellström President and CEO 12 Annual Report 2000 Financial Statements Consolidated Income Statement Years ended December 31, SEK m. Note 2000 1999 1998 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 income 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, basic SEK Earnings per share, fully diluted, SEK 1 2 3 3 4 5 5 *Capital gains/losses, net of minority, included in income before taxes Operational gains/losses Non-operational gains/losses Ratios – Income statements items as percentage of net sales Gross margin Operating expenses Operating margin Adjusted operating margin** Return on sales Other Ratios Return on capital employed Capital employed turnover Accounts receivable turnover Inventory turnover **Operating income adjustments for items affecting comparability Capital gain Juniper Networks Non-operational gains/losses Pension premium refund Additional restructuring provision in Consumer Products Total adjustments Adjusted operating income 273,569 –180,392 93,177 –41,921 –34,706 –13,311 215,403 –125,881 89,522 –33,123 –30,005 –11,278 184,438 –105,251 79,187 –28,027 –24,108 –8,922 27,652 274 31,165 2,929 –4,449 29,645 –953 28,692 –7,998 324 21,018 2.67 2.65 25,229 19,296 5,933 34.1% 32.9% 11.4% 6.1% 12.5% 2,224 250 17,590 2,273 –2,971 16,892 –506 16,386 –4,358 102 12,130 1.55 1.54 1,843 2,171 –328 41.6% 34.5% 8.2% 8.3% 9.2% 995 148 19,273 2,228 –2,465 19,036 –826 18,210 –5,409 240 13,041 1.67 1.67 234 876 –642 42.9% 33.1% 10.4% 10.8% 11.7% 26.5% 19.0% 24.9% 2.1 3.9 5.2 15,383 5,933 1,100 –8,000 14,416 16,749 2.1 3.7 4.8 – –328 – – –328 17,918 2.1 3.8 4.2 – –642 – – –642 19,915 Annual Report 2000 Financial Statements 13 Consolidated Balance Sheet December 31, SEK m. Note 2000 1999 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 6 7, 23, 25 8 10 11 13 12,833 22,378 2,790 2,484 6,364 3,657 10,548 24,719 2,712 1,751 6,657 4,972 50,506 51,359 43,933 25,701 74,973 1,267 44,029 18,779 16,827 63,584 1,749 31,227 13,415 15,593 199,808 151,269 250,314 202,628 Assets pledged as collateral 20 435 2,068 14 Annual Report 2000 Financial Statements December 31, SEK m. Note 2000 1999 Consolidated Balance Sheet Stockholders’ equity, provisions and liabilities Stockholders’ equity Capital stock Reserves not available for distribution 14 Restricted equity Retained earnings Net income Non-restricted equity 7,910 32,600 40,510 30,158 21,018 51,176 91,686 4,893 32,618 37,511 19,535 12,130 31,665 69,176 Minority interest in consolidated subsidiaries 2,764 2,182 Provisions 16 27,650 22,552 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 17, 20 18 19 15,884 4,346 1,320 744 22,294 3,188 12,289 6,847 30,156 5,080 48,360 105,920 17,486 5,453 1,448 567 24,954 1,491 10,519 6,437 21,618 2,397 41,302 83,764 Total stockholders’ equity, provisions and liabilities1 250,314 202,628 1 Of which interest-bearing provisions and liabilities 46,563 (45,020) (current portion 15,477 (12,010)) Contingent liabilities 21 11,184 10,127 Annual Report 2000 Financial Statements 15 Consolidated Statements of Cash Flows Years ended December 31, SEK m. Operations Net income Adjustments to reconcile net income to cash Minority interest in net income Undistributed earnings of associated companies Depreciation and amortization Capital gains 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 Cash flow from investing activities Cash flow before financing activities Financing 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 Gain on sale of own stock options and convertible debentures1 Repurchase of own stock 1 Dividends paid Cash flow from financing activities Effect of exchange rate changes on cash Net change in cash Cash and cash equivalent, beginning of period Cash and cash equivalent, end of period Note 22 22 22 2000 1999 1998 21,018 12,130 13,041 629 –70 10,936 –25,278 1,859 –18,305 946 –19,545 16,962 –10,848 –12,293 6,620 22,643 10 264 17,244 404 18 7,382 –1,399 –947 714 722 –19,562 13,463 12,925 –9,085 625 –4,768 134 –2,270 –15,364 586 –359 6,081 –230 –2,301 –2,056 –5,727 –10,695 9,054 7,394 –8,965 632 –8,865 35 –56 –17,219 6,396 –2,439 –9,825 799 1,048 1,760 –1,296 2,018 –386 –4,179 –236 438 6,598 29,008 35,606 3,854 58 15,163 –1,515 – – –4,010 13,550 –336 10,775 18,233 29,008 955 19 3,366 –1,332 – – –3,800 –792 –277 –10,894 29,127 18,233 16 Annual Report 2000 Financial Statements Years ended December 31, SEK m. Note 2000 1999 1998 Parent Company Income Statement Net sales Cost of sales Gross margin Research and development and other technical expenses Selling expenses Administrative expenses Other operating revenues Operating income 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 Income before taxes Income taxes for the year Net income 1 2 3 3 15 15 4 1,195 –1,669 –474 –166 –1,581 –1,142 3,061 –302 12,352 –3,090 8,960 74 70 144 700 15,375 –10,944 4,431 16,836 –11,657 5,179 –5,386 –4,116 –2,580 3,155 –4,496 9,915 –2,202 3,217 371 –2,691 –2,320 5,292 –6,324 –2,370 –1,889 2,666 –2,738 6,052 –1,942 1,372 204 –174 30 4,749 9,804 6,189 6,151 –671 9,133 –623 5,566 –419 5,732 Annual Report 2000 Financial Statements 17 Parent Company Balance Sheet December 31, SEK m. Note 2000 1999 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 6 7, 25 8, 9 8, 9 8 12 8 8 10 11 12 13 33 96 35,353 1,008 84 22,682 6,320 1,370 66,946 3 102 629 35,757 9,648 17,361 8,501 72,001 56 828 24,364 1,039 53 17,925 6,320 2,129 52,714 952 2,402 178 22,336 9,184 12,062 5,028 52,142 Total assets 138,947 104,856 Assets pledged as collateral 20 322 1,845 18 Annual Report 2000 Financial Statements December 31, SEK m. Note 2000 1999 Parent Company Balance Sheet Stockholders’ equity, provisions and liabilities Stockholders’ 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 14 15 16 17 17 17, 20 12, 17 17 18 12 19 7,910 3,685 20 6,741 18,356 11,995 9,133 21,128 39,484 4,893 1,941 20 9,681 16,535 10,734 5,566 16,300 32,835 5,262 5,406 2,833 5,513 15,884 4,346 322 13,345 37 33,934 2,713 4,756 34 527 45,360 265 3,779 57,434 17,486 5,453 370 3,454 53 26,816 587 929 252 821 25,601 229 5,867 34,286 Total stockholders’ equity, provisions and liabilities 138,947 104,856 Contingent liabilities 21 13,406 11,611 Annual Report 2000 Financial Statements 19 Parent Company Statement of Cash Flows Years ended December 31, SEK m. Note 2000 1999 1998 22 9,133 5,566 5,732 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 Cash flow from operating activities Investments Investments in tangible assets Sales of tangible assets Acquisitions/sales of other investments, net 22 Lending, net Other Cash flow from investing activities 56 –2,268 –144 –190 –3,800 2 –514 4,023 –771 5,527 –91 331 –3,174 –24,086 1,705 –25,315 322 41 2,320 –5,200 –3,904 655 –6,188 –155 1,752 –4,791 –368 1,810 –5,185 –4,397 –1,705 –9,845 442 1,022 –30 –4,700 –2,290 164 –164 5,133 –237 5,072 –396 247 –5,978 –4,706 - –10,833 Cash flow before financing activities –19,788 –14,636 –5,761 Financing Changes in current liabilities to financial institutions, net Changes in current liabilities to subsidiaries Proceeds from issuance of other long-term debt Repayments of long-term debt Repurchase of own stock Dividends paid Other Cash flow from financing activities Net change in cash Cash and cash equivalent, beginning of period Cash and cash equivalent, end of period 3,797 29,628 – –55 –386 –3,918 –506 28,560 8,772 17,090 25,862 890 11,120 13,323 –556 – –3,904 456 21,329 6,693 10,397 17,090 –206 –4,181 2,645 –428 – –3,410 269 –5,311 –11,072 21,469 10,397 20 Annual Report 2000 Financial Statements Notes to the financial statements Accounting principles The consolidated financial statements of Telefonaktiebolaget LM Ericsson and its subsidiaries (“the Company”) are prepared in accordance with accounting principles generally accepted in Sweden, thereby applying the Swedish Financial Accounting Standards Council’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 influence. Intercompany transactions have been eliminated. The consolidated financial statements have been prepared in accordance with the purchase method, whereby consolidated stockholders’ 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’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’s share of income before tax in these companies is reported in item “Share in earnings of associated companies”, included in the Operating Margin. Taxes are included in item “Taxes”. 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 “Equity proportion reserve”. Minor 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’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 “Research and development and other technical expenses”, “Selling expenses” or ‘‘Administrative expenses”. 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 considered 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’ equity. When a company accounted for in accordance with these principles is sold, accumulated translation adjustments are included in the consolidated income. Financial statements of companies with finance activities or other companies, having such close relations with the Swedish operations that their functional currency is considered to be the Swedish krona, are labeled “integrated companies” and are translated using the monetary method. Adjustments from translation of financial statements of these companies are included in the consolidated Income Statement (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 resulting from this remeasurement are included in the consolidated 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 adjustments Annual Report 2000 Financial Statements 21 Notes to the financial statements Accounting principles are reported directly against stockholders’ equity. 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 operate in de facto US dollar-, Euro- or Deutchmark-based economies. between actual and hedged flows are recognized in income as soon as they are identified. Financial assets and liabilities, including unrealized gains and losses on derivatives, are reported net in the Balance Sheet only when accounting principles so permit, for example when ISDA-agreements are signed. 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 Stockholders’ equity, net of tax effects. E Valuation of short-term cash investments 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 to the lowest of total acquisition cost and total market value in accordance with the lower of cost or market principle. Unrealized gains are reserved. Derivative instruments are used mainly to hedge financial interest and currency risks. Forward exchange options and investments hedging certain positions have been valued in a manner reflecting the accounting for the hedged position. Interest-related derivatives linked to specific investments or loans or which are applied to hedge interest positions are valued in the same manner as the hedged position. Gains and losses from derivatives in Ericsson Treasury Services AB are reported net as other financial income/ expenses. For other companies, gains and losses are reported in the same manner as the underlying position. When a transaction hedged in advance ceases to be an exposure, the hedge is closed. Hereby deviations F Tangible fixed assets Tangible fixed assets are stated at cost less accumulated depreciation, adjusted with net value of revaluations. Annual depreciation is reported as plan depreciation, generally using the straight-line method, with estimated useful lives of, in general, 40 years on 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 lower 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 discounts and allowances. Revenue from construction-type 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 do not arise 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. J Leasing Property leases with the company as lessee are normally expensed over the term of the lease. The Company 22 Annual Report 2000 Financial Statements Notes to the financial statements Accounting principles M Employee stock options Compensation costs of providing shares or rights to shares are charged to the income statement over the vesting period. The compensation cost is the difference between the market price of the share at grant date and the price to be paid by the employee. When the options are exercised, in certain countries, social security charges are to be paid on the value of the employee benefit. During the vesting period, preliminary social security charges are accrued. These are reduced by income from hedging arrangements. N Earnings per share Basic earning per share are calculated by dividing net income by the average number of shares outstanding during the year. Diluted earnings per share are calculated by dividing adjusted net income by the sum of the average number of shares outstanding plus all additional shares that would have been outstanding if all convertible debentures were converted and stock options are exercised. Net income is adjusted by reversal of interest expense for convertible debentures net of tax. O Operations on commission basis reported in the Parent Company Ericsson Treasury Services AB and Ericsson Credit AB conducted their operations on commission basis for the Parent Company as in 1999. The commission agreement between Ericsson Telecom AB and the Parent Company, signed in 1987, was cancelled as per January 1, 2000. Therefore, the company is not included in the Parent Company figures. applies the Swedish Financial Accounting Standards Council’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. Such items reported by consolidated companies have been reversed, applying the current tax rate applicable 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’ 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 operations, investing activities and financing activities respectively. Foreign subsidiaries’ 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 investment 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. Cash consists of cash, bank and short-term investments due within 12 months. Annual Report 2000 Financial Statements 23 Notes to the financial statements In millions of Swedish kronor (except per share amounts), unless otherwise stated. 1 Net sales by market area and business segment Market areas Consolidated 2000 1999 1998 Western Europe* 100,234 85,329 75,650 Central and Eastern Europe, Middle East & Africa North America Latin America Asia Pacific Total 37,701 29,736 21,806 35,193 25,175 18,560 44,118 30,263 25,537 56,323 44,900 42,885 273,569 215,403 184,438 *Of which Sweden 8,732 7,551 8,509 *Of which EU 94,293 80,345 71,094 Parent Company 2000 1999 1998 Commissions, license fees and other operating revenues Net losses (–) on sales of tangible assets Total 3 3,128 3,210 2,735 -67 –55 –69 3,061 3,155 2,666 Financial income and expenses Consolidated Financial Income Result from securities and receivables accounted for as fixed assets Other interest income and similar profit/loss items Parent Company Western Europe* Central and Eastern Europe, Middle East & Africa North America Latin America Asia Pacific Total *Of which Sweden *Of which EU 2000 18 1999 1998 7,832 8,839 1,037 3,075 2,476 Total – 107 33 273 2,036 2,159 202 2,362 2,957 Financial Expenses Interest expenses and similar profit/loss items 1,195 15,375 16,836 Total – – 2,346 8,047 2,062 7,903 Financial Net 2000 1999 1998 1,624 1,426 892 1,305 2,929 847 2,273 1,336 2,228 4,449 4,449 –1,520 2,971 2,971 –698 2,465 2,465 –237 2000 1999 1998 Business segments Consolidated 2000 1999 Network operators and service providers Consumer products Enterprise solutions Other operations 194,074 149,943 56,343 46,444 17,479 17,345 19,027 16,750 Less: inter segment sales –13,354 –15,079 Total 273,569 215,403 Parent Company sales are mainly related to business segment Network operators and service providers. 2 Other operating revenues Consolidated 2000 1999 1998 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 Sub-total Commissions, license fees and other operating revenues Total 2,107 307 89 –731 –244 –303 24,133 1,733 1,208 –231 –397 25,278* 1,399 2,374 825 27,652 2,224 –764 230 765 995 * Operational gains/losses Network operators and service providers Consumer products Enterprise solutions Other operations Non operational gains/losses Total 17,817 911 99 545 5,906 25,278 24 Annual Report 2000 Financial Statements Parent Company Financial Income Result from participations in subsidiaries Dividends* 6,531 7,750 4,026 Net gains on sales 228 – 468 Result from participations in associated companies Dividends Net gains on sales 125 1,925 122 123 Result from other securities and receivables accounted for as fixed assets Dividends Net gains on sales 2 182 2 – 6 – 2 – Other interest income and similar profit/loss items Subsidiaries Other** Total 2,253 1,106 1,365 553 892 658 12,352 9,915 6,052 Financial Expenses Losses on sales of participations in subsidiaries Losses on sales of participations in associated companies – – Interest expenses and similar profit/loss items 109 – 1 2 Subsidiaries Other Other financial expenses Total Financial Net 1,619 1,452 19 3,090 9,262 887 1,104 1,197 9 2,202 7,713 824 11 1,942 4,110 * ** Dividends from Ericsson Cables Holding AB, in 1998 of SEK 1,420 m. has been reported as a net write-down of the investment in the company. Of the total amount, SEK –596 m. in 2000, SEK –4 m. in 1999, SEK –150 m. in 1998 is attributable to hedge of net investments in foreign subsidiaries. Swedish companies’ interest expenses on pension liabilities are included in the interest expenses shown above. 4 6 Income taxes for the year Intangible assets Notes to the financial statements Licenses, trademarks and Patents and purchased research and Consolidated similar rights development Goodwill Total Acquisition costs Opening balance Acquisitions Balances regarding acquired and sold companies Sales/disposals Translation difference for the year 1,423 105 1,170 11,136 13,729 89 2,309 2,503 –4 –175 –6 –34 –26 –27 –36 –236 61 13 908 982 Closing balance 1,410 1,232 14,300 16,942 Accumulated depreciation Opening balance –1,159 –405 –1,617 –3,181 Depreciation for the year Balances regarding acquired and sold companies Sales/disposals Translation difference for the year –120 –98 –761 –979 3 109 –46 6 27 –7 4 15 13 151 –60 –113 Closing balance –1,213 –477 –2,419 –4,109 Net carrying value 197 755 11,881 12,833 Parent Company Acquisition costs Opening balance Acquisitions Sales/disposals Closing balance Accumulated depreciation Opening balance Depreciation for the year Sales/disposals Closing balance Net carrying value Patents, licenses, trademarks and similar rights 457 – –346 111 –401 –23 346 –78 33 Consolidated 2000 1999 1998 Income tax current Income tax deferred –9,059 –4,756 –5,214 1,061 398 –195 Tax on profit for the year –7,998 –4,358 –5,409 As explained under Accounting Principles (K), the Company reports deferred taxes attributable to untaxed reserves. The Company also reports deferred taxes attributable 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 likelihood that they will be used is deemed to be greater than 50 percent. At December 31, these unutilized loss carryforwards amounted to SEK 1,059 m. The final years in which these loss carryforwards can be utilized are shown in the following table. The Parent Company had no unutilized loss carryforwards. Year of expiration 2001 2002 2003 2004 2005 2006 or later Total Amount 94 21 47 33 240 624 1,059 The Parent Company’s deferred taxes for the period amount to SEK 105 m., SEK 491 m. 1999, and SEK –158 m. 1998. 5 Earnings per share Consolidated 2000 1999 1998 Earnings per share, basic Net income 21,018 12,130 13,041 Average number of shares outstanding (millions) 7,869 2.67 7,817 1.55 7,801 1.67 Earnings per share, fully diluted Net income 21,018 12,130 13,041 Interest expenses on convertible debentures, net of income taxes Net income after full conversion Average number of shares after full conversion and exercise of stock options (millions) 207 185 265 21,225 12,315 13,306 8,004 2.65 7,987 1.54 7,988 1.67 Annual Report 2000 Financial Statements 25 Notes to the financial statements 7 Tangible assets Consolidated Acquisition costs 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 Land and buildings Machinery Other equipment 10,073 390 –43 –4,762 332 272 6,262 –2,429 –407 16 1,349 –67 –71 16,111 3,499 –241 –2,122 1,474 473 19,194 –9,980 –5,488 232 1,879 65 –263 25,000 5,525 –265 –4,527 1,038 905 27,676 –15,990 –4,061 169 3,050 2 –575 Closing balance –1,609 –13,555 –17,405 Accumulated revaluations, net Opening balance Depreciation for the year Sales/disposals Translation difference for the year Closing balance 303 –1 –75 16 243 – – – – – 3 – – – 3 Construction in process and advance payments 1,628 2,879 –2 –133 –2,844 41 1,569 – – – – – – – – – – – – Total 52,812 12,293 –551 –11,544 0 1,691 54,701 –28,399 –9,956 417 6,278 0 –909 –32,569 306 –1 –75 16 246 Net carrying value 4,896 5,639 10,274 1,569 22,378 Parent Company Acquisition costs 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 Sales/disposals Closing balance Net carrying value Land and buildings Machinery Other equipment Construction in process and advance payments 366 22 –416 51 23 –63 –5 68 0 6 –6 0 23 425 – –258 — 167 –378 –3 225 –156 – – – 11 1,306 65 –1,246 5 130 –952 –26 910 –68 – – – 62 118 4 –66 –56 0 – – – – – – – 0 Total 2,215 91 –1,986 0 320 –1,393 –34 1,203 –224 6 –6 0 96 26 Annual Report 2000 Financial Statements 8 Financial assets Notes to the financial statements Equity in associated companies Other financial assets Consolidated Opening balance Share in earnings Taxes Translation difference for the year Dividends Acquisitions Sales Closing balance 2,712 274 –99 33 –138 37 –29 Consolidated Acquisition costs Opening balance Acquisitions/credits granted Other investments Other Long-term customer long-term financing receivables 1,742 3,469 9,513 4,764 5,100 1,377 Sales/repayments –2,265 –5,962 –2,819 Translation difference for the year 29 111 86 2,790 Closing balance 2,975 8,426 3,744 Goodwill, net, constitutes SEK 76 m. (125) of the investments. Dividends received from companies accounted for under the equity method were SEK 131 m. in 1999 and SEK 12 m. in 1998. Parent Company Investments Other Associated Subsidiaries companies investments Accumulated revaluations Opening balance Revaluations for the year Closing balance 21 9 30 – – – – – – Opening balance 24,364 1,039 Acquisitions and stock issues Shareholders’ contribution Revaluations for the year Reclassifications Sales 3,125 7,874 – –2 –8 39 – – –22 –48 Closing balance 35,353 1,008 53 6 – 7 24 –6 84 Accumulated write-downs 1 Opening balance –12 –2,856 –128 Write-downs for the year Sales/repayments Translation difference for the year Closing balance –480 –11 –357 1,210 –18 –59 –521 –2,062 45 –2 –2 –87 Net carrying value 2,484)3 6,364 2 3,657 1 2 3 Write-downs are included in Selling expenses due to the close relation to operations. Of which deferred tax assets SEK 1,034 m. (SEK 964 m. 1999). Market value per December 31, 2000 for listed shares was SEK 7,630 m. Parent Company Acquisition costs Opening balance Acquisitions/credits granted Sales/repayments Translation/revaluation difference for the year Closing balance Accumulated write-downs Opening balance Sales/repayments Write-downs for the year Closing balance Other Long-term customer long-term financing receivables 8,072 4,623 –5,240 – 7,455 –1,752 967 –350 –1,135 2,129 211 – –970 1,370 – – – – Net carrying value 6,320 1,370 Annual Report 2000 Financial Statements 27 Notes to the financial statements 9 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 Reporting and Analysis, SE-126 25 Stockholm, Sweden. Shares directly owned by the parent company Type Company Reg. No. Domicile Percentage of ownership Par value Subsidiaries I I I I I I I I I I I I I II II II II III III 556137-8646 556090-3212 556028-1627 556056-6258 556251-3258 556381-7609 556251-3266 556250-2046 556329-5657 556250-9454 556212-7398 556549-1098 556577-9799 556018-0191 556030-9899 556044-9489 556381-7666 556329-5673 556326-0552 Ericsson Utvecklings AB Ericsson Enterprise AB Ericsson Microwave Systems AB Ericsson Radio Systems AB Ericsson Telecom AB Ericsson Gämsta AB Ericsson Mobile Communications AB Ericsson Radio Access AB Ericsson Sverige AB Ericsson Business Consulting AB Ericsson Software Technology AB Ericsson Microelectronics AB EHPT Sweden 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 Financial Services Ireland Ericsson S.p.A. Ericsson A/S Ericsson Corporatio AO Ericsson AG Ericsson Holding Ltd. Other Ericsson Holding II Inc. Cía Ericsson S.A.C.I. Teleindustria Ericsson S.A. Other Teleric Pty Ltd. Beijing Ericsson Mobile Communication Co. Ltd. Ericsson Ltd. Ericsson (China) Company 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 Sweden Sweden 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 Ireland Italy Norway Russia Switzerland United Kingdom Europe (excluding Sweden) United States Argentina Mexico United States, Latin America Australia China China China China India Malaysia Singapore Taiwan Thailand Other countries I I I II I I III III II I I I II II I I II I 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 556008-8550 556058-5936 Sweden Sweden Croatia 28 Annual Report 2000 Financial Statements 100 100 100 100 100 100 100 100 100 100 100 100 81 100 100 100 100 100 100 – 100 100 100 100 100 100 100 100 72 100 100 100 100 – 88)1 100 100 – 100 25)2 100 100 51 100 70 100 80 49 )3 – Total 90 )4 91)5 49 – Total 10 360 30 50 100 162 361 20 100 85 1 60 – 47 14 455 105 1 5 – 60 90 80 144 39 800 81 143 18,421 156 950 – 74 – – 5 n/a – 20 5 2 50 11 525 2 – 240 15 – – 29 425 196 – – Carrying value 17 335 151 636 2,520 1,024 5,516 41 100 252 67 60 881 145 6 969 1,122 2 5 708 662 216 195 485 341 120 3,924 1,403 105 194 4 – 757 79 10,591 10 572 135 99 36 2 369 76 105 4 1 19 4 288 35,353 41 510 330 127 1,008 Notes to the financial statements 9 Investments continued Shares owned by subsidiaries Type Company Subsidiaries I I I I I II II I I I I I I I I I I I I I I I I I I I I Ericsson Cables 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 España 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 Amplifier Technologies Inc. Ericsson Telekomunikasyon A.S. Ericsson Telecomunicações S.A. Ericsson Servicos de Telecomunicações Ltda Ericsson Telecom S.A. de C.V. Nippon Ericsson K.K. Ericsson Mobile Communications Sdn Bhd Malaysia Ericsson Consumer Products Asia Pacific Pte Ltd. Ericsson Australia Pty. Ltd. Associated Companies Symbian Ltd. I Key to type of company I II III Manufacturing, distributing and development companies Holding companies Finance companies Reg. No. Domicile Percentage of ownership 556000-0365 Sweden France France Ireland Italy The Netherlands The Netherlands The Netherlands Spain United Kingdom United Kingdom Canada USA USA USA USA USA USA USA Turkey Brazil Brazil Mexico Japan Malaysia Singapore Australia United Kingdom 100 100 100 100 72 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 98 98 100 90 100 100 100 21 1 2 3 4 5 Through subsidiary holdings, total holdings amount to 100% of Ericsson Holding II Inc. Through subsidiary holdings, total holdings amount to 49% of Beijing Ericsson Mobile Communications Co. Ltd., but the voting power is in excess of 50%. Through subsidiary holdings, total holdings amount to 100% of Ericsson (Thailand) Ltd. Voting power is 40%. Voting power is 49%. The subsidiary, Ericsson S.p.A., is listed on the Milan stock exchange in Italy. Ericsson’s share of the market value as per December 31, 2000, was SEK 8,278 m. 10 Inventories Raw material, components and consumables Manufacturing work in process Finished products and goods for resale Contract work in process Less advances from customers Inventories, net 2000 19,907 3,723 4,499 17,771 –1,967 43,933 Consolidated 1999 2000 Parent Company 1999 13,324 1,823 1,972 13,398 –4,816 25,701 1 – 2 9 –9 3 105 – 104 774 –31 952 Annual Report 2000 Financial Statements 29 Notes to the financial statements 11 14 Accounts receivable — trade Stockholders’ equity Consolidated 1999 2000 Parent Company 1999 2000 Capital stock Capital stock at December 31, 2000, consisted of the following: Notes and accounts receivable 74,591 63,380 – 2,292 Receivables from associated companies 382 204 Total 74,973 63,584 102 102 110 2,402 A shares (par value SEK 1.00) 656,218,640 B shares (par value SEK 1.00) 7,254,116,972 Number of shares Aggregate par value outstanding 656 7,254 7,910 7,910,335,612 Allowances for doubtful accounts amounting to SEK 2,014 m. (2,550) and SEK 275 m. (479) in the Parent Company, which has reduced the amounts shown above, include amounts for estimated losses based on commercial risk evaluations. 12 Receivables and payables — subsidiaries Parent Company 2000 1999 Long-Term Receivables* Financial receivables Current Receivables Commercial receivables Financial receivables Total Long-Term Liabilities* Financial liabilities Current Liabilities Commercial liabilities Financial liabilities Total 22,682 17,925 1,548 2,989 34,209 19,347 35,757 22,336 648 2,296 44,712 23,305 45,360 25,601 The capital stock of the Company is divided into two classes: Class A shares (par value SEK 1.00) and Class B shares (par value SEK 1.00). 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. During the year 1,804,000 of the above stated Ericsson B shares have been repurchased by the Parent Company. Reserves not available for distribution In accordance with statutory requirements in Sweden and certain other countries in which the Company is operating, restricted reserves, not available for distribution, are reported. According to the Swedish Annual Accounts Act, tangible 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. Cumulative translation adjustments Opening balance 13,345 3,454 Changes in cumulative translation adjustments Closing balance –2,115 1,975 –140 Changes in cumulative translation adjustments include changes regarding recalculation of goodwill in local currency, SEK 779 m. (SEK 393 m), net gain/loss (–) from hedging of investments in foreign subsidiaries, SEK –360 m. (SEK 38 m.) and SEK 9 m. (SEK 1 m.) from sold/liquidated companies. Currency gains/losses resulting from translation of financial statements of integrated companies are included in the following items in the consolidated income statement: Cost of sales Financial income Taxes Total 2000 165 –41 1 125 1999 65 –11 –3 51 * Including non-interest bearing receivables and liabilities, net, amounting to SEK 6,224 m. (11,772). Interest-free transactions involving current receivables and liabilities may also arise at times. 13 Other receivables Consolidated 1999 2000 Parent Company 1999 2000 Receivables in associated companies 3,083 Prepaid expenses Accrued revenues Advance payments to suppliers Deferred tax assets 4,790 5,124 1,440 6,533 2,358 3,231 3,083 887 3,413 2,163 1,828 404 437 – – 283 651 15 – Other Total 23,059 18,255 44,029 31,227 6,644 9,648 6,407 9,184 30 Annual Report 2000 Financial Statements 14 Stockholders’ equity continued Changes in stockholders’ equity Notes to the financial statements Consolidated Opening balance Repurchase of own stock Stock dividend Conversion of debentures Capital discount Proceeds from unclaimed stock dividend shares Dividends paid Gains on sale of own options and convertable debentures Revaluation of fixed assets Transfer between non-restricted and restricted reserves Changes in cumulative translation adjustments Net income 2000 Closing balance Capital stock 4,893 – 2,941 76 – – – – – – – – Equity proportion reserve 1,289 – – – – – – – – Other restricted reserves 31,329 – –2,941 1,839 –105 1 – – –7 Total restricted equity 37,511 – – 1,915 –105 1 – – –7 113 –893 –780 7,910 1,402 – – 1,975 – 31,198 1,975 – 40,510 Non- restricted equity 31,665 –386 – – – – –3,919 2,018 – 780 – 21,018 51,176 Total 69,176 –386 0 1,915 –105 1 –3,919 2,018 –7 0 1,975 21,018 91,686 Of retained earnings, SEK 86 m. will be appropriated to reserves not available for distribution, in accordance with the proposals of the respective companies’ boards of directors. 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 translated at the year-end exchange rate. Cumulative translation adjustments have been distributed among unrestricted and restricted stockholders’ equity. Parent Company Opening balance Repurchase of own stock Stock dividend Conversion of debentures Capital discount Proceeds from unclaimed stock dividend shares Dividends paid Net income 2000 Closing balance Capital stock 4,893 – 2,941 76 – – – – Share Total premium Revaluation reserve reserve)1 Statutory reserve restricted Disposition reserve equity Other retained earnings Non- restricted equity Total 1,941 20 9,681 16,535 100 16,200 16,300 32,835 – – 1,839 –95 – – – – – – – – – – – –2,941 – – 1 – – – – 1,915 –95 1 – – – – – – – – – –386 –386 –386 – – – – – – – – 0 1,915 –95 1 –3,919 –3,919 –3,919 9,133 9,133 9,133 7,910 3,685 20 6,741 18,356 100 21,028 21,128 39,484 1 1996 and prior years’ share premium is included in Statutory reserve. 15 Untaxed reserves Parent Company Accumulated depreciation in excess of plan Intangible assets Tangible assets Total accumulated depreciation in excess of plan Other Untaxed Reserves Tax equalization reserve Reserve for doubtful receivables Income deferral reserve Total other untaxed reserves Total Untaxed Reserves Jan. 1 Appropriations/ withdrawals(–) Dec. 31 11 112 123 127 3,409 1,747 5,283 5,406 – –74 –74 –127 –389 446 –70 –144 11 38 49 0 3,020 2,193 5,213 5,262 Changes in other untaxed reserves in the Parent Company in 1999 consisted of the following: withdrawal of tax equalization reserve, SEK 127 m. (127); appropriations to reserve for doubtful receivables, SEK 2,289 m. (53) and allocation to income deferral reserve SEK 529 m. (354). Annual Report 2000 Financial Statements 31 Notes to the financial statements 16 Provisions Consolidated 1999 2000 Parent Company 1999 2000 During 2000, debentures in the amount of SEK 1,391 m. were converted to 20,466,176 B shares. A conversion of all outstanding debentures would increase the number of shares with 76,622,912. During the period of January 1 through January 22, 2001, additional debentures, carrying rights to dividends for 2000, were converted to 47,092 B shares. During the year a convertible debenture loan, issued in 1993, fell due for payment. In 2000 debentures of SEK 525 m. were converted to 49,414,094 B shares. A total of SEK 5 m was repaid on the due date. 943 3,037 1 Stockholm Inter Bank Offered Rate Pensions and similar commitments Deferred taxes Warranty commitments Other provisions 9,318 3,080 4,432 10,820 8,398 1,220 3,607 9,327 Total 27,650 22,552 – – – – 1,890 2,833 2,476 5,513 The pension liabilities include the Parent Company’s and other Swedish companies’ obligations in the amount of SEK 7,344 m. (6,483) in accordance with an agreement with the Pension Registration Institute (PRI), which is covered by a Swedish law on safeguarding of pension commitments. The Parent Company’s pension liabilities include an obligation in the amount of SEK 634 m. (2,788) in accordance with its agreement with PRI. Other provisions include amounts for risks regarding off-balance sheet customer financing, patent disputes, restructuring and changes in technique and markets. 18 Current liabilities to financial institutions and unused lines of credit Liabilities to financial institutions consist of bank overdrafts, bank loans and other short-term financial loans. Unused portions of short-term lines of credit for the Company amounted to SEK 7,470 m. and for the Parent Company SEK 705 m. In addition, the Parent Company had unused long- term lines of credit amounting to SEK 9,499 m. The Company has also unutilized commercial paper and medium term note programs amounting to SEK 16,517 m. 17 Long-term liabilities 19 Other current liabilities Consolidated 1999 2000 Parent Company 1999 2000 Consolidated 1999 2000 Parent Company 1999 2000 Notes and bond loans (maturing 2001 – 2009) Convertible debentures (maturing 2003) Liabilities to financial institutions Liabilities to subsidiaries Other Total 15,884 17,486 15,884 17,486 Accrued expenses 33,854 27,233 Prepaid revenues 842 966 Liabilities to associated companies 277 823 4,346 5,453 4,346 5,453 1,320 1,448 322 370 – 744 – 13,345 3,454 22,294 24,954 33,934 26,816 13,387 12,280 48,360 41,302 Other Total 20 567 37 53 Assets pledged as collateral Consolidated long-term liabilities maturing five years or more after the balance sheet date: Consolidated Advances Liabilities to financial from institutions customers Notes and bond loans and liabilities to financial institutions Other Total 5,108 382 5,490 Real estate mortgages Bank deposits Other Total – 313 98 411 24 – – 24 257 716 – 2,806 3,779 738 1,691 29 3,409 5,867 Total 2000 24 313 98 435 Total 2000 298 24 322 Total 1999 36 1,824 208 2,068 Total 1999 1,824 21 1,845 The Parent Company has one convertible debenture loan outstanding. The loan, in the amount of SEK 6,000 m., was issued in 1997. Of the total amount, convertible debentures amounting to SEK 4,859 m. were sold to Ericsson employees, and SEK 1,141 m. were sold to the wholly owned subsidiary AB Aulis. During the year the convertible debentures were sold externally, and up until October 15, 2000, debentures were offered at market price to new employees. The debentures which carry an interest defined as 12 months STIBOR1 less 1.5 percent, are convertible to B shares from November 19, 1999, up to and including May 30, 2003. After the stock dividend and split in 2000, the conversion price is SEK 59 per share. In the 1997 consolidated accounts, a capital discount amounting to SEK 816 m. was calculated, based on a market interest rate of 6.87 percent. The capital discount was 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’s recommendation RR03. The capital discount is charged to income as interest expense during the period of the loan. 32 Annual Report 2000 Financial Statements Parent Company Bank deposits Other Total Advances Liabilities to financial from institutions customers 298 24 322 – – – At December 31, 2000, the Parent Company had no pledged assets in favor of subsidiaries. However, under certain conditions, it may pledge collateral for certain subsidiaries’ pension obligations. 21 Contingent liabilities 23 Leasing Notes to the financial statements Consolidated 1999 2000 Parent Company 1999 2000 Leasing obligations Assets under Financial leases, recorded as tangible assets, consist of: Guarantees for customer financing for accounts receivable Other contingent liabilities 7,551 7,497 5,802 6,756 1,607 1,104 – 1,000 Financial leases Acquisition costs Land and buildings Machinery 2,026 1,526 7,604 3,855 Other equipment Total 11,184 10,127 13,406 11,611 Of the guarantees assumed by the Parent Company, SEK 6,608 m. in 2000, and SEK 4,582 m. in 1999, are related to subsidiaries. 22 Statement of Cash Flows Consolidated Interest paid in 2000 was SEK 3,416 m. (2,560) and interest received was SEK 2,959 m. (1,516). Income taxes paid were SEK 5,780 m. (5,563). Non-cash transaction under “Cash flow from operating activities” not reported separately is current year increase in pension liabilities of SEK 920 m. (SEK 342 m. in 1999 and SEK 855 m. in 1998). Non-cash items in “Financing activities” In 2000, conversions of debentures were made for SEK 76 m. (1999 SEK 15 m., 1998 SEK 4 m.). Acquisitions/sales of other investments Consolidated Cash Goodwill Intangible assets Other net assets Purchase price for acquired subsidiaries Cash in acquired subsidiaries Other acquisitions Sales Acquisitions/sales, net –35 –2,310 –2 83 –2,264 35 –969 25,841 22,643 Parent Company Interest paid in 2000 was SEK 1,178 m. (693) and interest received was SEK 1,854 m. (302). Income taxes paid were SEK 356 m. (354). Specification of net change in cash attributable to cancellation of the commission agreement with Ericsson Telecom AB as of January 1, 2000 is shown below. The change in cash, amounting to SEK -12 m., is shown as Acquisitions/sales of other investments, net. 2000 1999 193 26 410 629 58 26 184 268 291 26 215 532 141 26 71 238 Accumulated depreciation Land and buildings Machinery Other equipment Net carrying value 361 294 At December 31, 2000, future payment obligations for leases were distributed as follows: 2001 2002 2003 2004 2005 2006 and later Financial Operating leases leases 131 75 36 17 17 107 383 3,003 2,659 2,357 1,985 2,125 6,366 18,495 During the year, sale-leaseback transactions concerning real estate have been made. The lease agreements have been classified as operating leases, as the terms have been established at fair value and for limited amounts. Expenses for the year for leasing of assets were SEK 2,984 m. (SEK 1,647 m. in 1999 and SEK 1,770 m. in 1998), of which variable cost SEK 208 m. Leasing income Some consolidated companies lease equipment, mainly telephone 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 505 m. at December 31, 2000 (December 31, 1999: SEK 523 m.). Accumulated depreciation amounted to SEK 418 m. and net investments to SEK 87 m. at December 31, 2000 (December 31, 1999: SEK 422 m. and SEK 101 m., respectively). Net investment in Sales-type leases and Financial leases amounted to SEK 14 m. at December 31, 2000 (December 31, 1999: SEK 17 m.). Future payments receivable for leased equipment are distributed as Parent Company Inventories Customer financing, accounts receivable — trade and other operating assets Provisions and other operating liabilities Sales of tangible assets Lending, net 947 5,291 –5,192 391 –10,897 Proceeds from issuance of other long-term debt 9,456 follows: 2001 2002 2003 2004 2005 and later Investments, other Net change in cash –8 –12 Less: interest Net investment Sales-type and Operating leases Financial leases 14 2 1 – – 17 –3 14 24 14 5 3 2 48 – 48 Annual Report 2000 Financial Statements 33 Notes to the financial statements 24 Reconciliation to accounting principles generally accepted in the U.S. Elements of the Company’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 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. 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 “Accounting for the Cost of Computer Software to be Sold, Leased or Otherwise Marketed” and effective 1999, it has adopted SOP 98-1, “Accounting for the costs of Computer Software Developed or Obtained for Internal use”. According to these statements, development costs are capitalized after the product involved has reached a certain degree of technological feasibility. Capitalization 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 Capitalization Amortization Write-downs 2000 1999 1998 10,349 7,898 7,170 –6,664 –4,460 –3,824 – 3,685 –989 2,449 – 3,346 Write-downs of previously capitalized software costs amounting to SEK 989 m. was made in 1999 since one project was reclassified to non-commercial. Development costs for software for internal use Capitalization Amortization 2000 990 –542 448 1999 1,463 –152 1,311 1998 – – – 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 discount, 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 calculating income and equity in accordance with U.S. GAAP, the effects of the capital discount are reversed. D Restructuring costs The rules for providing for payroll related expenses are stricter according to U.S. GAAP. For termination benefits, U.S. GAAP requires for a liability to be recognized that prior to the date of the final financial statements, the benefit arrangements be communicated to employees. There is no such requirement under Swedish 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, accordingly, the Company may not change these. Effective 1989, the Company has adopted FAS No. 87, Employer’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 Pension premium refund SPP, a Swedish insurance company, has announced a refund of pension premiums paid, of which a portion has been refunded during the year. In accordance with Swedish accounting practice, the total refund is credited to income. In accordance with U.S. GAAP, only the amount SPP actually paid is credited to income. G Sale-leaseback of property During the year, the Company sold property which was leased back to subsidiaries. In Sweden, the gain on sale of property is credited to income, if the rent to be paid is in par with market price. In accordance with U.S. GAAP, the part of the gain exceeding present value of future lease payments is credited to income when occurred. The remaining part is distributed during the lease period. H Other Hedge accounting The Company has forward currency exchange contracts and options as hedges of firm commitments as well as budgeted cash flows regarding sales and purchases. According to Swedish accounting practice, both kinds are considered hedges and are not valued at market. According to U.S. GAAP, contracts and options not related to firm commitments are valued at market. In-process research and development Under U.S. GAAP, acquired technology, including in-process research and development is to be charged to expenses if this technology has not reached technological feasibility and has no alternative use. Under Swedish GAAP, acquired technology is amortized to income over its expected economic life. Tax on undistributed earnings in associated companies In accordance with Swedish accounting practice, no accrual is made for withholding taxes on undistributed profits of companies 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. 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 88 (81) m. has increased income and amortization amounting to SEK 79 (151) m. was charged against income for the period when calculating income in accordance with U.S. GAAP. 34 Annual Report 2000 Financial Statements 24 Notes to the financial statements Reconciliation to accounting principles generally accepted in the U.S. continued I Deferred Income Taxes Deferred tax is calculated on all U.S. GAAP adjustments to income. J Adjustment of Net Income Application of U.S. GAAP as described above would have had the following approximate effects on consolidated net income. 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. K Unrealized gains and losses on securities available-for-sale 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 “Accounting for Certain Investments in Debt and Equity Securities”. Unrealized gains and losses shall be included in other comprehensive income. Adjustment of Net Income 2000 1999 1998 Items increasing reported net income L Comprehensive income The Company has adopted FAS No 130, “Reporting Comprehensive Income”. Comprehensive income includes net income and other changes in equity, except those resulting from transactions with owners. 1 28 33 Comprehensive income 2000 1999 1998 Depreciation on revaluation of assets Capitalization of software development costs to be sold for internal use Capital discount on convertible debentures Restructuring costs 3,685 448 147 2,700 6,981 2,449 1,311 3,346 – 116 400 120 – 4,304 3,499 Items decreasing reported income Pensions Pension premium refund Sale-leaseback Other Deferred income taxes Net increase in net income 146 856 1,361 238 2,005 4,606 2,375 416 –211 – – –472 1,251 1,195 3,109 – – 258 954 1,001 2,498 Net income as reported in the consolidated Income Statement 21,018 12,130 13,041 Approximate net income per U.S. GAAP 23,393 15,239 15,539 Approximate net income in accordance with U.S. GAAP Other comprehensive income 23,393 15,239 15,539 Translation adjustments 2,326 –2,442 732 Translation adjustments for sold/liquidated companies Hedging for investments Unrealized gains and losses on securities available-for-sale Minimum pension liability Deferred income taxes Total other comprehensive income Approximate comprehensive income in accordance with U.S. GAAP 9 –500 1 53 94 –107 –1,847 8,527 25 657 –47 –2,403 – – 30 670 3,689 749 24,063 18,928 16,288 Adjustment of Equity 2000 1999 1998 Increases Capitalization of software development costs to be sold for internal use Reported earnings per share, fully diluted Approximate earnings per share per U.S. GAAP, fully diluted 16,878 13,193 10,744 1,759 1,311 2.65 1.54 1.67 Unrealized gains and losses on available-for-sale securities 6,680 8,527 2.94 1.92 1.97 Pensions Capitalization of interest, net after cumulative depreciation Restructuring costs 300 211 3,100 422 202 400 – – 885 273 – Reductions Revaluation of assets Capital discount on convertible debentures Pension refund Sale-leaseback Deferred income taxes Other 28,928 24,055 11,902 114 419 856 1,361 8,197 450 372 566 – – 434 682 – – 6,731 3,092 –54 488 11,397 7,615 4,696 Adjustment of stockholders’ equity, net 17,531 16,440 7,206 Reported stockholders’ equity 91,686 69,176 63,112 Approximate equity according to U.S. GAAP 109,217 85,616 70,318 Annual Report 2000 Financial Statements 35 Notes to the financial statements 24 Reconciliation to accounting principles generally accepted in the U.S. continued Adjustment of certain balance sheet items according to U.S. GAAP SEK m. As per reported Balance Sheet Dec 31 1999 Dec 31 2000 As per U.S. GAAP Dec 31 1999 Dec 31 2000 The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions: Expected dividend yield Expected volatility Risk-free interest rate Expected life of option (in years) 2000 1.0% 35.4% 6.0% 3.1 1999 1998 – – – – – – – – Intangible assets 12,833 10,548 31,343 24,828 Tangible assets 22,378 24,719 22,475 24,544 Other investments 2,484 1,751 9,164 10,278 25 Accounts receivable 74,973 63,584 76,580 63,584 Tax assessment values (Sweden) Other receivables 44,029 31,227 44,866 33,133 Minority interest in equity Provisions Convertible debentures Other current liabilities 2,764 2,182 2,756 2,177 27,650 22,552 18,060 30,489 Land and land improvements 4,346 5,453 4,765 6,019 Buildings Consolidated 1999 2000 Parent Company 1999 2000 50 216 385 2,656 28 7 41 162 48,360 41,302 48,560 40,902 Provisions include the tax effect of undistributed earnings in associated companies. M Statement of Cash Flows 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: 26 Special information regarding the Parent Company Sales of the Parent Company were SEK 1,195 m. (SEK 15,375 m.), of which exports accounted for 100 (85) percent. Consolidated companies were customers for 0 (67) percent of the Parent Company’s sales, while 40 (65) percent of the Company’s total purchases of goods and services were from such companies. Consolidated, SEK m. 2000 1999 1998 1997 Loans totaling SEK 0.6 m. have been made to a total of 60 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 35,606 29,008 18,233 29,127 employees for the purchase of shares in LM Ericsson’s Share Savings Fund. The Parent Company has guaranteed up to an amount of SEK 0.4 m. for loans obtained by employees for the purchase of housing. –16,129 –9,731 –5,978 –15,004 27 19,477 19,277 12,255 14,123 N Stock compensation plan The Company, as permitted under FAS 123 “Accounting for Stock Based Compensation”, applies Accounting Principles Board Opinion 25 (“APB 25”) and related interpretations in accounting for its plans under U.S. GAAP. No compensation expense has been reflected in the consolidated Income Statement because no compensation expense arises when the strike price of the employee’s stock options equals the market value of the underlying stock at grant date, as in the case of options granted to the employees. If the Company had chosen to adopt the optional recognition provisions of FAS 123 for its stock option plans, net income and earnings per share in accordance with U.S. GAAP. would have been changed to the pro forma amounts indicated below: Net income Approximate net income per U.S. GAAP Approximate net income, proforma, per U.S. GAAP 2000 1999 1998 23,393 15,239 15,539 21,882 15,239 15,539 Earnings per share, fully diluted Approximate earnings per share, per U.S. GAAP Approximate earnings per share, proforma, per U.S. GAAP 2.94 1.92 1.97 2.75 1.92 1.97 36 Annual Report 2000 Financial Statements Average number of employees and remuneration in 2000 and 1999 Average number of employees Consolidated Men Women 2000 Total Men Women 1999 Total Western Europe* 45,229 17,993 63,222 48,597 19,134 67,731 Central and Eastern Europe, Middle East & Africa North America Latin America Asia Pacific Total *Of which Sweden *Of which EU 3,419 1,182 4,601 3,119 1062 4,181 8,903 4,532 13,435 8,189 3,985 12,174 5,568 2,238 7,806 6,571 2,054 8,625 8,497 3,992 12,489 7,826 4,429 12,255 71,616 29,937 101,553 74,302 30,664 104,966 26,726 11,153 37,879 30,254 12,939 43,193 44,164 17,685 61,849 47,368 18,868 66,236 Parent company Men Women 2000 Total Men Women 1999 Total 366 319 Western 2,664 Europe* Reconciliation to accounting principles generally accepted in the U.S. continued Central and Eastern Europe, Middle East & Africa 685 653 722 568 69 Latin America 5 2 7 5 1,268 3,932 77 1 645 6 Total 977 437 1,414 3,237 1,346 4,583 *Of which Sweden *Of which EU 319 366 685 2,670 1,269 3,939 319 366 685 2,670 1,269 3,939 Wages and salaries and social security expenses Wages and salaries Social security expenses Of which pension costs Consolidated 1999 2000 Parent Company 1999 2000 38,970 37,068 631 1,997 13,161 11,305 384 1,131 2,062 2,151 289 522 Wages and salaries per geographical area Consolidated 1999 2000 Parent Company 1999 2000 Western Europe* 25,393 25,159 425 855 Central and Eastern Europe, Middle East & Africa North America Latin America Asia Pacific 1,062 6,322 2,502 3,692 839 6,360 1,816 2,894 Total 38,970 37,068 *Of which Sweden 14,576 14,308 *Of which EU 24,665 24,415 Board of Directors, President and Corporate Executive Vice Presidents (of which bonus and similar) 204 141 – 2 – 631 425 425 83 (8) – 1 – 1,997 1,855 1,855 60 (6) Remuneration in foreign currency has been translated to Swedish kronor at average exchange rates for the year. Stock option plans Option plans have been implemented as a complementary remuneration to key employees: Notes to the financial statements Benefits to members of the Board, and the Company Management During the year, Lars Ramqvist in his capacity as Chairman of the Board of Directors received a fee of sek 2,500,000 plus sek 100,000 for his work as member of the Finace Committee. These fees were determined by the Board of Directors within the total amount of Board fees approved by the Annual 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 representatives of the Board. The value of the benefits paid to Lars Ramqvist in his capacity as Chief Executive Officer amounts to sek 12,000,000, which amount, together with the benefits earned by him and provided for during 1999, was paid during year 2000. The salary paid to Kurt Hellström in his capacity as President amounts to sek 7,561,240 and the value of benefits, including compensation for tax, provided to him, amounts to sek 9,040,119. Provision has also been made for a bonus to Kurt Hellström of sek 222,386 earned 2000. Sven Christer Nilsson, the former President, is also entitled to agreed severance pay from July 7, 1999 up to July 8, 2001, in the aggregate amounting to sek 10,664,303. During 2000, severance pay amounting to sek 7,007,148 was paid. The following rules regarding severance pay and pension apply to the President, Executive Vice Presidents and Senior Vice Presidents. 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 manner, affect the content of work or the condition for respective positions, is equated with notice of termination served by the company. Upon termination of employment, severance pay amounting to two years’ 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 the President Executive Vice Presidents and Senior Vice Presidents consists of affiliation with the so-called ITP plan or corresponding arrangements. The employee’s pension is premium-based. For the portion 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’s salary plus a standard bonus. Most of the Executive Vice Presidents and Senior Vice Presidents are already covered by this system. As described in earlier Annual Reports, the following principles apply to other Executive Vice Presidents: 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 Average number of employees and and amounts to between 40 and 70 percent of this salary. Subject to remuneration in 2000 and 1999 certain conditions, this pension is also paid if the employee is entitled to severance pay at age 60. Costs of pensions for the former President, the President, one former and twelve Executive Vice Presidents amounted to SEK 53,1 m. during the year. 28 Plan 1998 1999 2000 Type 2,5 million (post split) 7-year call options issued by third party Exercisable 1999 Employees affected 500 Fees to auditors 1,4 million (post split) 7-year call options issued by Ericsson In 3 lots (30/40/30%) 3–5 years respectively after grant to year 7 50,4 million (post split) 7-year In 3 lots, 1/3 per year call options issued by Ericsson 1–3 years respectively after grant to year 7 1,800 8,000 Audit fees Parent company Other companies The options for the 1998 plan were granted in 1999. Grants for the 1999 plan took place on March 1, 2000 and grants for the 2000-plan were made on January 17, 2000. In addition to options issued to employees 6,7million stock options have been issued for hedging of social security costs. The dilutive effect on earnings per share of this year’s employee stock option programs was around 0,2 percent. Fees for other services Parent company Other companies Total fees Price)- waterhouse)- Coopers KPMG Others Total 3 41 44 27 73 100 144 – 9 9 – 18 18 27 – 3 3 – 1 1 4 3 53 56 27 92 119 175 Annual Report 2000 Financial Statements 37 Auditor’s report To the Annual General Meeting of the shareholders of Telefonaktiebolaget LM Ericsson (publ) Corporate identity number 556016-0680 We have audited the annual statements, the consolidated statements, the accounting records and the administration of the Board of Directors and the President of Telefonaktiebolaget LM Ericsson (publ) for the year. These statements and the administration of the company are the responsibility of the Board of Directors and the President. Our responsibility is to express an opinion on the annual statements, the consolidated statements 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 reasonable assurance that the annual statements and the consolidated statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the statements. An audit also includes assessing the accounting principles used and their application by the Board of Directors and the President, as well as evaluating the overall presentation of information in the annual statements and the consolidated statements. 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 President. We also examined whether any board member or the President has, in any other way, acted in contravention of the Companies Act, the Annual Statements Act or the Articles of Association. We believe that our audit provides a reasonable basis for our opinion set out below. The annual statements and the consolidated statements have been prepared in accordance with the Annual Accounts Act and, thereby, give a true and fair view of the company’s and the group’s financial position and results of operations in accordance with generally accepted accounting principles in Sweden. We recommend to the Annual 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 proposal of the Board of Directors and that the members of the Board of Directors and the President be discharged from liability for the financial year. Stockholm, January 26, 2001 Carl-Eric Bohlin Authorized Public Accountant PricewaterhouseCoopers Olof Herolf Authorized Public Accountant PricewaterhouseCoopers Thomas Thiel Authorized Public Accountant 38 Annual Report 2000 Financial Statements Treasury and financial risk management Ericsson has a financial policy approved by the Board of Directors regulating the management of financial risks. To support this, Ericsson has established Treasury Centers in Stockholm, Dublin, Singapore and Dallas (collectively known as Ericsson Treasury Services, the Group’s internal bank), and a Corporate Treasury unit in London. The primary focus of the Treasury organization is to manage and control financial exposures in a manner consistent with underlying business risks. It aims to neutralize adverse effects on underlying business profitability caused by fluctuations in the financial markets. Responsibility for identifying and hedging financial risks arising in the Group’s operations rests with the individual Ericsson companies. Risks are hedged through Ericsson Treasury Services, which in turn manages the Group’s exposure centrally within risk limits given by the Board. Stock option programs for employees have created an exposure for Ericsson to the development of our own share price. An increase in share price will result in higher salary related expenses, a risk which has been hedged through the purchase of LME B shares and call options. Ericsson classifies other financial risks as either market, credit or liquidity risks. Market risk Market risk is divided into two categories: foreign exchange risk and interest rate risk. Foreign exchange risk management Ericsson reports in Swedish Krona and today operates in more than 140 countries. Foreign currency denominated assets, liabilities, sales and purchases, together with a large cost base in Sweden, result in substantial foreign exchange exposures. Foreign exchange risks are classified as either economic exposure, transaction exposure or translation exposure. Economic exposure Ericsson is very dependent on the development of exchange rates in the Swedish Krona and on economic conditions in Sweden. Around 40 percent of all employees and 25 percent of total production is located in Sweden, but Sweden accounts for just 3 percent of all sales. With this substantial cost base in Swedish Krona, for example, adverse exchange rate developments during 2000 have had a negative impact on Ericsson compared to our competitors with costs denominated in Euro. Normally, Ericsson does not hedge economic exposure. Transaction exposure An analysis of net exposures for the whole Group including revenues and costs by currency shows a major net revenue exposure in Euro, but a more balanced position for US dollars. A +/-10 percent change in exchange rates between the Swedish Krona and Euro or US dollars, would have an approximate impact of +/- SEK 3.0 billion and +/- SEK 0.3 billion respectively, before any hedging effects are considered. Ericsson would from this perspective benefit from Swedish participation in the European Monetary Union with a currency conversion to Euro. The unfavorable effects of the weaker Euro during 2000 were more than offset by hedging activities, and by positive developments in a number of other currencies in which Ericsson also has a net revenue exposure (such as Japanese Yen, British Pounds, Thai Baht and others). Translation exposure As Ericsson has many subsidiaries operating outside of Sweden, the value in Swedish Krona of Ericsson’s foreign investments is exposed to exchange rate fluctuations. Translation exposure in foreign subsidiaries is hedged within a policy established by the Board: •• Monetary net in companies translated using the temporal method (translation effects in investments affecting the income statement) is hedged to 100 percent. •• Equity in companies translated using the current method (translation effects reported directly in stockholders’ equity in the balance sheet) is hedged selectively up to 20 percent of the total equity. The translation differences reported in equity during the year were positive SEK 2.0 billion, mainly due to a weaker Swedish Krona. Annual Report 2000 Financial Statements 39 Treasury & financial risk management Interest bearing financial assets and liabilities Interest rate risk management Ericsson is exposed to interest rate risks through market value fluctuations of certain balance sheet items and changes in interest expenses and revenues. Interest rate risks are managed centrally by Ericsson Treasury Services. The Group hedges its interest rate exposure by using derivative instruments, such as forward rate agreements, interest rate swaps and futures. During 2000, interest rate periods for interest bearing financial assets and liabilities were short- term and balanced. Credit risk Credit risk is divided into three categories: customer financing risk, country risk and financial credit risk. Customer financing risk management Ericsson’s credit approval process requires that all major customer financing commitments involve the Finance Committee of the Board of Directors. Ericsson works actively with our customers in early discussions to structure financing of new investments in the best possible way. Vendors can add considerable value to this process and sometimes extend vendor loans. Focus has, however, in many cases shifted to vendors bridging the funding gap until medium and longer-term debt facilities are in place. Often this results in only short-term involvement, with an emphasis on a role as intermediary between the customer and financial markets. Our objective is to find suitable off-balance sheet financing solutions. At the beginning of 2000, Corporate Customer Finance was established as a separate finance function reporting directly to the Chief Financial Officer. Risk management is centralized and Regional Corporate Customer Finance offices have been positioned in all Market Areas. As of December 31, 2000, total gross customer financing amounted to SEK 19.6 b., of which SEK 10.0 b. were on-balance sheet for the Ericsson Group, while the remainder were guaranteed off- balance sheet items. A decrease in total credit risk relating to customer financing over the period is the result of successful efforts to transfer existing vendor loans (in particular in Brazil and the US) to the international bank market. No actual credit losses were incurred during the year. A small number of credits have been successfully restructured. Country risk management Country risk measures Swedish companies’ risk in relation to all foreign receivables and guarantees, equity investments in foreign subsidiaries and associated companies and lending from the internal bank by foreign subsidiaries. Financial credit risk management Financial instruments carry an element of risk that counterparties may be unable to fulfil their obligations. Ericsson Treasury Services limit this risk by investing excess liquidity primarily in government paper, as well as commercial paper and corporate bonds, with short-term ratings of at least A2/P2 and long-term ratings of at least A. No credit losses were incurred during the year. Ericsson Treasury Services' external investments, as of December 31, 2000, SEK billions. Security Treasury Bills Cash, Bank Deposits Commercial Paper Floating Rate Notes Mortgage CP Corporate Bonds Treasury Bonds Mortgage Bonds Total 2000 13.2 5.6 1.9 1.1 0.5 0.3 0.2 0.2 1999 7.0 5.7 2.1 0.0 0.0 0.8 2.1 0.1 23.0 17.8 Ericsson Treasury Services’ exposure in derivative instruments is valued at market daily and expressed as a liability to, or receivable from, each counterparty. Netting contracts (ISDA agreements) are in force for all counterparties, substantially reducing the risk. 40 Annual Report 2000 Financial Statements Treasury & financial risk management Ericsson’s long-term objective is to achieve payment readiness (defined as cash and temporary investments less short-term borrowings plus long-term unused credit commitments) of between 7 and 10 percent of sales to adapt to changes in liquidity requirements. Payment readiness, as of December 31, 2000, was 11 percent of sales (12 percent in 1999). To support this long-term payment readiness objective, Ericsson policy stipulates that the greater part of borrowings should be long-term or covered by long-term credit facilities. Ratings, as of December 31, 2000 Rating agency Moody’s Standard & Poor’s Long-term Short-term A1 A+ P-1 A-1 During 2000 Moody’s and Standard & Poor’s revised Ericsson’s rating outlook from stable to negative. Ericsson’s current long-term rating A1/A+ is one of the highest among its peers. Liquidity risk Ericsson maintains sufficient liquidity through cash management, investments in highly liquid fixed income securities and negotiation of committed and uncommitted credit lines for potential funding needs. Ericsson defines liquidity as cash and short-term investments (to 12 months). During 2000 liquidity increased by SEK 6.6 billion. Net liquidity, after deduction of short-term interest bearing financial liabilities, increased by SEK 3.1 billion. Net liquidity is affected by changes in operating net assets and long- term debt and equity. A build up in working capital - especially inventories - adversely affected the Group’s liquidity position in 2000. The year was characterized by a number of initiatives that had a positive liquidity impact including sales of real estate, divestments of operations and sales of financial instruments. These initiatives generated SEK 26.6 billion in total. Short and long-term borrowing programs and committed credit facilities remained unchanged. Funding programs and long-term committed credit facilities, available and utilized, as of December 31, 2000, SEK millions. Program/Facility Amount Utilized Available US Commercial Paper Program (USD 500m) European Commercial Paper Program (USD 700m) Swedish Commercial Paper Program (SEK 5,000m) European Medium Term Program (USD 2,500m) Long-Term Committed Credit Facility (USD 1,000m) Total 4,750 0 4,750 6,649 4,018 2,631 5,000 695 4,305 23,748 18,917 4,831 9,499 0 9,499 49,646 23,630 26,016 Annual Report 2000 Financial Statements 41 Ten year summary SEK Million Results for the year Net sales Operating income 1 Financial net Income before taxes 1 Year-end position Total assets 1 Working capital Capital employed Tangible assets Stockholders’ equity 1 Interest-bearing provisions and liabilities Other information Earnings per share fully diluted, SEK 1, 2, 3, 4, 5 – in accordance with U.S. GAAP, fully diluted 2, 4, 5 Cash dividends per share, SEK 2, 4, 5 Shares outstanding – average (in thousands) 2, 4, 5 Additions to tangible assets Depreciation on tangible assets 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 – World wide – Sweden * 1 2 3 4 5 For 2000, proposed by the Board of Directors. 1991–1992 adjusted for change in accounting principles. 1991–1994 adjusted for stock issue and 4-for-1 stock split. 1991–1995 adjusted for stock dividend element of the stock issue in 1995. 1991–1997 adjusted for stock issue 1:1. 1991–1999 adjusted for 4-for-1 stock split. 2000 1999 1998 273,569 31,165 –1,520 28,692 250,314 93,879 141,013 22,378 91,686 46,563 2.65 2.94 0.50* 215,403 17,590 –698 16,386 202,628 66,037 116,378 24,719 69,176 45,020 1.54 1.92 0.50 184,438 19,273 –237 18,210 167,456 52,978 92,637 22,516 63,112 27,474 1.67 1.97 0.50 7,869,445 7,817,164 7,800,900 12,293 9,957 38,968 14.2 26.1 26.5 37.7 0.5 1.6 9,085 6,532 28,330 13.2 18.3 19.0 35.2 0.6 1.6 8,965 5,545 25,189 13.7 22.5 24.9 38.9 0.4 1.6 101,215 83,976 78,990 105,129 42,431 103,290 44,040 103,667 44,979 Working capital Current assets less current non-interest-bearing provisions and liabilities. Capital employed Capital employed is defined as total assets less noninterest-bearing provisions and liabilities. Earnings per share See Accounting principles for information of principles for calculation earnings per share. For earnings per share in 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’ equity (based on the amounts at January 1 and December 31). 42 Annual Report 2000 Financial Statements 1997 1996 1995 1994 1993 1992 1991 167,740 18,757 48 17,218 124,266 10,758 412 10,152 147,440 112,152 53,095 80,165 19,225 52,624 23,146 1.52 1.63 0.44 36,180 61,411 17,754 40,456 17,545 0.91 1.02 0.31 98,780 8,164 58 7,615 90,832 29,394 51,566 15,521 34,263 15,554 0.73 0.89 0.22 82,554 6,553 –386 5,610 72,999 20,899 41,611 13,678 23,302 16,522 0,54 0.66 0.17 62,954 3,530 8 3,108 67,490 20,869 40,168 12,363 21,305 16,868 0.39 0.47 0.14 47,020 1,754 –204 1,241 56,637 20,063 35,842 11,093 17,720 16,321 0.07 0.19 0.11 45,793 2,282 –189 1,595 50,080 17,497 31,539 10,477 17,050 12,913 0.13 0.23 0.11 7,754,968 7,676,336 7,077,536 6,950,120 6,865,088 6,594,112 6,587,968 7,237 5,422 20,906 12.5 25.7 29.9 38.7 0.4 1.7 7,188 4,216 17,467 14.1 19.0 22.4 39.1 0.4 1.5 6,457 3,614 15,093 15.3 18.9 20.7 39.6 0.4 1.6 5,137 3,004 13,407 16.2 17.7 18.2 34.4 0.7 1.5 3,805 2,651 10,924 17.4 14.5 12.9 34.5 0.7 1.6 3,847 2,193 7,377 15.7 2.8 9.6 34.5 0.8 1.6 3,583 1,863 7,054 15.4 5.3 12.0 38.1 0.7 1.7 77,499 63,401 48,401 45,671 45,296 38,050 28,777 100,774 45,360 93,949 43,896 84,513 42,022 76,144 36,984 69,597 31,796 66,232 29,979 71,247 31,244 Return on capital employed Defined as the total of operating income plus financial income as a percentage of average capital employed (based on the amounts at January 1 and December 31). Equity ratio Defined as the total of stockholders’ equity and minority interest in equity of consolidated subsidiaries, expressed as a percentage of total assets. Debt-equity ratio Defined as total interest-bearing provisions and liabilities divided by the total of stockholders’ equity and minority interest in equity of consolidated subsidiaries. Current ratio Current assets divided by the sum of current provisions and liabilities. Capital turnover Net sales divided by average capital employed. Accounts receivable turnover Net sales divided by average accounts receivable. Inventory turnover Cost of sales divided by average inventory. Return on sales Operating income plus Financial income divided by net sales. Annual Report 2000 Financial Statements 43 Board of Directors and Auditors Lars Ramqvist (1938*) 1 Chairman and (until December 31, 2000) CEO. Chairman of the Finance Committee of the Board. 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: LME B 30,206 Convertible debentures: 145,347** 2 Tom Hedelius (1939*) Deputy Chairman and member of the Finance Committee of the Board. Honorary Doctor of Economics. Chairman of the Boards of Handelsbanken, Bergman & Beving, Svenska Le Carbone and the Foundation of Anders Sandrew. Deputy Chairman of Industrivärden. Member of the Boards of Volvo and SCA. Member of SAS Assembly of Representatives. Member since 1991 Shares held: LME B 72,616 3 Marcus Wallenberg (1956*) Deputy Chairman and member of the Finance Committee of the Board. President of Investor. Deputy Chairman of Saab. Member of the Boards of Astra, AstraZeneca, Investor, Scania, Stora Enso, SAS Assembly of Representatives, and the Foundation of Knut and Alice Wallenberg. Member since 1996 Shares held: LME B 352,000 4 Kurt Hellström (1943*) President and (as of January. 1, 2001) CEO. Member of the Board of Atlas Copco. Shares held: LME B 22,692 Convertible debentures: 145,347** Options1 6 Göran Engström (1948*) Employee representative and member of the Finance Committee of the Board. Member since 1994 Shares held: LME B 4,774 Convertible debentures: 99,120** Jan Hedlund (1946*) 7 Employee representative and member of the Audit Committee of the Board. Member since 1994 Convertible debentures: 75,520** 8 Göran Lindahl (1945*) Chairman of the Remuneration Committee of the Board. Honorary Doctor of Technology. President and CEO of ABB Ltd (until December 31, 2000). Member of the Boards of ABB Ltd. and DuPont. Member of the Salomon Smith Barney International Advisory Board. Member since 1999 Shares held: LME B 50,000 9 Per Lindh (1957*) Employee representative. Member since 1994 10 Sverker Martin-Löf (1943*) Member of the Remuneration Committee of the Board. 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: LME B 8,000 11 Eckhard Pfeiffer (1941*) Chairman of the Board of Intershop Communications AG. Member of the Boards of General Motors Corp., Hughes Electronics Corp., IFCO Systems, N.V., NxView Technologies. Member of the Business Council and the Advisory Board of Deutsche Bank. Member since 2000 Shares held: LME B 15,200 5 Niall FitzGerald (1945*) President and CEO of Unilever PLC. Member of the Board of Merck & Co. Inc. Member since 2,000 Shares held: LME B 796 12 Clas Reuterskiöld (1939*) Chairman of the Audit Committee of the Board. President and CEO of Industrivärden. Member of the Boards of Handelsbanken, SCA, Sandvik and Skanska. Member since 1994 Shares held: LME B 40,000 44 Annual Report 2000 Financial Statements Ericsson Executive Team Corporate Management Ragnar Bäck (1944*) Jan Uddenfeldt (1950*) Kurt Hellström (1943*) President and CEO Shares held: LME B 22,692 Convertible debentures: 145,347** Western Europe Technology Shares held: LME B 1,000 Shares held: LME B 2,756 Convertible debentures: 145,347** Convertible debentures: 145,347** Employee options 1 Employee options 1 Employee options 1 Bengt A. Forssberg (1937*) Sten Fornell (1948*) Executive Vice President and Chief Financial Officer Shares held: LME B 176,000 Employee options 1 Heads of Business Divisions (Executive Vice Presidents) Mats Dahlin (1954*) Mobile Systems Shares held: LME B 8,000 Employee options 1 Einar Lindqvist (1959*) Multiservice Networks Shares held: LME B 1,000 Employee options 1 Bert Nordberg (1956*) Global Services Shares held: LME B 1,000 Convertible debentures: 145,347** Employee options 1 Haijo Pietersma (1953) Internet Solutions Convertible debentures: 145 347** Employee options 1 Michael Thurk (1952*) Data Backbone and Optical Networks Shares held: LME B 2,000 Convertible debentures: 145,347** Employee options 1 Jan Wäreby (1956*) Consumer Products Shares held: LME B 1,000 Convertible debentures: 145,347** Employee options 1 Heads of Market Areas (Executive Vice Presidents) Karl Alsmar (1949*) Central & Eastern Europe, Middle East and Africa Shares held: LME B 18,000 Employee options 1 Latin America Shares held: LME B 4,000 Other Operations Convertible debentures: 145,347** Bo Andersson (1951*) Employee options 1 President, Ericsson Microelectronics Per-Arne Sandström (1947*) North America Shares held: LME B 2,904 Shares held: LME B 5 208 Convertible debentures: 145,347** Options 1 Convertible debentures: 145,347** Ulf Berg (1951*) Employee options 1 President, Ericsson Microwave Kjell Sörme (1939*) Asia Pacific Systems Options 1 Shares held: LME B 125,592 Bernt Ericsson (1945*) Convertible debentures: 145,347** Vice President, Ericsson Foresight Employee options 1 Shares held: LME B 6 984 Swedish Operations (Executive Vice President) Johan Siberg (1944*) Corporate Office Sweden Shares held: LME B 60,000 Convertible debentures: 145,347** Options 1 Jöran Hoff (1943*) President, Ericsson Business Innovation Options 1 Convertible debentures: 145 347** Thomas Ivarsson (1954*) Employee options 1 President, Ericsson Hewlett-Packard Heads of Corporate functions (Senior Vice Presidents) Shares held: LME B 26 Convertible debentures: 145,347** Options 1 Janne Sjödén (1944*) Carl Olof Blomqvist (1951*) President, Ericsson Network Legal Affairs Technologies Employee options 1 Shares held: LME B 2 000 Björn Boström (1947*) Supply and Information Technology Convertible debentures: 145,347** Options 1 Shares held: LME B 2,228 Lars Svensson (1950*) Convertible debentures: 145,347** President, Ericsson Enterprise Employee options 1 Shares held: LME B 412 Roland Klein (1954*) Communications Shares held: LME B 2,000 Employee options 1 Torbjörn Nilsson (1953*) Marketing and Strategic Business Developments Shares held: LME B 23,301 Convertible debentures: 436,041** Options 1 * Year of birth ** Convertible debentures 1997/2003 with a conversion rate of SEK 59 1 For further information on the option plans for year 1999 and 2000, see the Board of Directors’ Report under ‘Employees’. Convertible debentures: 145,347** Employee options 1 Britt Reigo (1943*) People and Culture Shares held: LME B 12,000 Convertible debentures: 145,347** Employee options 1 Annual Report 2000 Financial Statements 45 13 Peter Sutherland (1946*) Member of the Audit Committee of the Board. Honorary Doctor. Chairman of the Boards of Goldman Sachs International and BP Amoco. Member of the Boards of Investor, ABB Ltd. and the Foundation of the World Economic Forum. Member since 1996 14 Monica Bergström (1961*) Employee representative. Member since 1998 Convertible debentures: 75,520** 15 Christer Binning (1946*) Employee representative. Member since 1994 Convertible debentures: 145,347** 16 Åke Svenmarck (1942*) Employee representative Member since 2000 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 Holmström Authorized Public Accountant Segments and Market Areas Segments Net sales by segment by quarter (SEK m.) Year to date 0003A 0006A 0009A 2000 0012A 9903A 9906A 9909A 1999 9912A Network operators & service providers 38,718 84,819 132,693 194,074 28,505 Consumer products Enterprise solutions Other operations 14,794 28,145 3,858 5,343 7,864 9,935 42,483 11,635 14,269 56,343 17,479 19,027 9,696 3,446 3,312 64,314 20,064 7,841 7,301 99,208 149,943 29,797 11,949 11,326 46,444 17,345 16,750 Less: Inter segment sales –3,628 –6,645 –9,620 –13,354 –3,388 –7,137 –10,632 –15,079 Total Change Network operators & service providers Consumer products Enterprise solutions Other operations Less: Inter segment sales Total Isolated quarters Network operators & service providers Consumer products Enterprise solutions Other operations 59,085 124,118 191,460 273,569 41,571 92,383 141,648 215,403 0003A 0006A 0009A 0012A 36% 53% 12% 61% 7% 42% 32% 40% 0% 36% –7% 34% 34% 43% –3% 26% –10% 35% Q1 Q2 Q3 29% 21% 1% 14% –11% 27% 2000 Q4 Q1 Q2 Q3 38,718 14,794 3,858 5,343 46,101 13,351 4,006 4,591 47,874 14,338 3,771 4,334 61,381 13,860 5,844 4,758 28,505 9,696 3,446 3,312 35,809 10,368 4,395 3,989 34,894 9,733 4,108 4,025 1999 Q4 50,735 16,647 5,396 5,424 Less: Inter segment sales –3,628 –3,016 –2,975 –3,734 –3,388 –3,749 –3,495 –4,447 Total Change Network operators & service providers Consumer products Enterprise solutions Other operations Less: Inter segment sales Total 59,085 65,033 67,342 82,109 41,571 50,812 49,265 73,755 Q1 36% 53% 12% 61% 7% 42% Q2 29% 29% –9% 15% –20% 28% Q3 37% 47% –8% 8% –15% 37% Q4 21% –17% 8% –12% –16% 11% 46 Annual Report 2000 Financial Statements Orders booked by segment by quarter (SEK m.) Year to date 0003A 0006A 0009A 2000 0012A 9903A 9906A 9909A 1999 9912A Segments Network operators & service providers 57,465 102,735 152,262 212,440 Consumer products Enterprise Solutions Other operations Less: Inter segment sales 14,562 27,988 5,486 5,854 –3,893 9,428 10,770 –6,726 42,123 13,097 14,724 57,001 17,834 18,573 32,672 10,116 4,259 3,795 69,879 110,916 151,762 20,196 8,835 8,134 31,948 13,290 12,769 47,552 17,978 22,021 –9,340 –13,504 –3,381 –7,371 –11,111 –15,485 Total Change 79,474 144,195 212,866 292,344 47,461 99,673 157,812 223,828 0003A 0006A 0009A 0012A Network operators & service providers Consumer products Enterprise solutions Other operations Less: Inter segment sales Total 76% 44% 29% 54% 15% 67% 47% 39% 7% 32% –9% 45% 37% 32% –1% 15% –16% 35% Isolated quarters Q1 Q2 Q3 Network operators & service providers 57,465 Consumer products Enterprise solutions Other operations 14,562 5,486 5,854 45,270 13,426 3,942 4,915 49,527 14,135 3,669 3,954 40% 20% –1% –16% –13% 31% 2000 Q4 60,178 14,878 4,737 3,849 Q1 Q2 Q3 32,672 10,116 4,259 3,795 37,207 10,080 4,576 4,339 41,037 11,752 4,455 4,635 1999 Q4 40,846 15,604 4,688 9,252 Less: Inter segment sales –3,893 –2,832 –2,614 –4,164 –3,381 –3,990 –3,740 –4,374 79,474 64,721 68,671 79,478 47,461 52,212 58,139 66,016 Q4 47% –5% 1% –58% –5% 20% 2000 0012A 70,317 16,840 8,324 8,520 1,128 9903A 9906A 9909A 65,530 14,116 9,856 11,046 669 65,909 14,053 10,329 11,278 809 65,359 14,970 10,262 11,474 712 1999 9912A 64,695 16,446 9,615 11,525 1,009 Total Change Network operators & service providers Consumer products Enterprise solutions Other operations Less: Inter segment sales Total Q1 76% 44% 29% 54% 15% 67% Q2 22% 33% –14% 13% –29% 24% Q3 21% 20% –18% –15% –30% 18% Number of employees by segment by quarter 0003A 0006A 0009A Network operators & service providers 63,616 17,290 9,130 11,257 1,030 65,005 17,710 8,687 8,839 1,076 66,973 18,137 8,739 8,461 1,084 Consumer products Enterprise solutions Other operations Unallocated Total Change Network operators & service providers Consumer products Enterprise solutions Other operations Unallocated Total 102,323 101,317 103,394 105,129 101,217 102,378 102,777 103,290 Q1 –3% 22% –7% 2% 54% 1% Q2 –1% 26% –16% –22% 33% –1% Q3 2% 21% –15% –26% 52% 1% Q4 9% 2% –13% –26% 12% 2% Annual Report 2000 Financial Statements 47 Segments Adjusted operating income and operating margin by segment by quarter (SEK m.) Year–to–date Network operators & Service providers Consumer products Enterprise solutions Other operations Unallocated* Total adjusted operating income Adjustments Non–operational items Additional restructuring Capital gain Juniper Networks As percentage of net sales Network operators & Service providers Consumer products Enterprise solutions Other operations Total 0003A 5,760 457 29 543 –414 6,375 0006A 0009A 2000 0012A 15,581 23,688 33,072 –1,829 –5,932 –16,195 –21 1,060 –256 1,925 22 1,708 –1,257 –1,171 –1,858 9903A 2,108 –23 –222 221 –205 9906A 5,758 –56 –216 629 –666 9909A 1999 9912A 10,919 19,637 –675 –382 426 253 64 403 –1,098 –2,439 13,534 18,254 16,749 1,879 5,449 9,190 17,918 0 0 0 5,838 7,264 0 0 0 0 7,033 –8,000 15,383 0003A 15% 3% 1% 10% 11% 0006A 18% –6% 0% 11% 11% 0009A 18% –14% –2% 13% 10% –93 –287 –287 –328 0 0 0 0 0 0 9903A 9906A 9909A 7% 0% –6% 7% 5% 9% 0% –3% 9% 6% 11% –2% –3% 4% 6% Q1 Q2 Q3 0 0 1999 9912A 13% 1% 0% 2% 8% 1999 Q4 2000 0012A 17% –29% 0% 9% 6% 2000 Q4 Isolated quarters Q1 Q2 Q3 Network operators & Service providers 5,760 9,821 8,107 9,384 2,108 3,650 5,161 8,718 Consumer products Enterprise solutions Other operations Unallocated* Total adjusted operating income Adjustments Non–operational items Additional restructuring Capital gain Juniper Networks As percentage of net sales Network operators & Service providers Consumer products Enterprise solutions Other operations Total –2,286 –4,103 –10,263 457 29 543 –414 6,375 –50 517 –843 7,159 –235 865 86 278 –217 –687 4,720 –1,505 1,879 –23 –222 221 –205 –33 6 408 –461 3,570 –619 –166 –203 –432 3,741 928 446 –23 –1,341 8,728 0 0 0 5,838 1,426 0 0 0 0 –231 –8,000 15,383 Q1 15% 3% 1% 10% 11% Q2 21% –17% –1% 11% 11% Q3 17% –29% –6% 20% 7% 2000 Q4 15% –74% 5% –5% –2% –93 –194 0 0 Q1 7% 0% –6% 7% 5% 0 0 Q2 10% 0% 0% 10% 7% 0 0 0 Q3 15% –6% –4% –5% 8% –41 0 0 1999 Q4 17% 6% 8% 0% 12% “Unallocated” consists mainly of costs for corporate staffs, certain goodwill amortization and non–operational gains and losses * 48 Annual Report 2000 Financial Statements Segment reporting New format for 2001 Orders booked by segment by quarter (SEK m.) Isolated quarters Systems of which mobile system multi service networks Phones Other operations Less: Intersegment sales Total Q1 Q2 Q3 Q4 2000 Total YTD 57,944 48,471 9,473 14,562 11,266 –4,298 45,559 37,286 8,273 49,706 39,981 9,725 13,426 14,135 8,725 7,674 59,891 213,100 49,871 175,609 10,020 14,878 8,086 37,491 57,001 35,751 –2,989 –2,844 –3,377 –13,508 79,474 64,721 68,671 79,478 292,344 Net sales by segment by quarter (SEK m.) Isolated quarters Systems of which Mobile System Multi Service Networks Phones Other operations Q1 Q2 Q3 Q4 2000 Total YTD 38,910 32,481 6,429 46,433 37,858 8,575 48,087 38,722 9,365 14,794 13,351 14,338 9,297 8,504 8,087 61,253 194,683 49,022 158,083 12,231 13,860 10,039 36,600 56,343 35,927 Less : Intersegment sales –3,916 –3,255 –3,170 –3,043 –13,384 Total 59,085 65,033 67,342 82,109 273,569 Adjusted operating income segment by quarter (SEK m.) Isolated quarters Systems Phones Other operations Unallocated* Total Adjustments Q1 Q2 Q3 Q4 Total YTD 5,753 9,812 8,242 9,416 33,223 457 578 –413 6,375 –2,286 –4,103 –10,263 –16,195 480 –847 7,159 492 89 29 1,579 –687 –1,858 4,720 –1,505 16,749 Non–operational items Additional restructuring Capital gain Juniper Networks 0 0 0 5,838 1,426 –231 7,033 0 0 0 0 –8,000 –8,000 15,383 15,383 Adjusted operating margin by segment by quarter Isolated quarters Systems Phones Other operations Total Q1 15% 3% 6% 11% Q2 21% –17% 6% 11% Q3 17% –29% 6% 7% Q4 15% –74% 0% –2% Number of employees by segment by quarter Systems Phones Other operations Unallocated* Total 0003A 0006A 0009A 64,836 17,290 19, 167 1,030 66,207 17,710 16,324 1,076 68,571 18,137 15,602 1,084 102,323 101,317 103,394 105,129 2000 YTD 17% –29% 4% 6% 2000 0012A 71,102 16,840 16,059 1,128 “Unallocated” consists mainly of costs for corporate staffs, certain goodwill amortization and non–operational gains and losses * Annual Report 2000 Financial Statements 49 Market Areas Net sales by Market Area by quarter (SEK m.) Year–to–date Western Europe* Central and Eastern Europe, Middle East & Africa North America Latin America Asia Pacific Total *Of which Sweden *Of which EU* Change Western Europe* Central and Eastern Europe, Middle East & Africa North America Latin America Asia Pacific Total *Of which Sweden *Of which EU Isolated quarters Western Europe* Central and Eastern Europe, Middle East & Africa North America Latin America Asia Pacific Total *Of which Sweden *Of which EU Change Western Europe* Central and Eastern Europe, Middle East & Africa North America Latin America Asia Pacific Total *Of which Sweden *Of which EU 0003A 0006A 0009A 2000 0012A 9903A 9906A 9909A 1999 9912A 23,578 47,011 70,090 100,234 17,350 36,374 55,890 85,329 7,323 8,549 7,781 11,854 16,799 19,263 17,334 23,711 25,850 27,704 28,953 38,863 37,701 35,193 44,118 56,323 59,085 124,118 191,460 273,569 2,380 4,371 6,704 8,732 4,779 4,179 4,920 10,343 41,571 1,685 12,621 11,387 12,186 19,815 19,528 17,610 18,916 29,704 29,736 25,175 30,263 44,900 92,383 141,648 215,403 3,868 5,461 7,551 22,052 44,031 65,754 94,293 16,261 34,299 52,411 80,345 0003A 36% 53% 105% 58% 15% 42% 41% 36% 0006A 29% 33% 69% 42% 20% 34% 13% 28% 0009A 25% 32% 57% 53% 31% 35% 23% 25% Q1 Q2 Q3 0012A 17% 27% 40% 46% 25% 27% 16% 17% 2000 Q4 Q1 Q2 Q3 1999 Q4 23,578 23,433 23,079 30,144 17,350 19,024 19,516 29,439 7,323 8,549 7,781 11,854 59,085 2,380 9,476 10,714 9,553 11,857 65,033 1,991 9,051 8,441 11,619 15,152 67,342 2,333 11,851 7,489 15,165 17,460 82,109 2,028 4,779 4,179 4,920 10,343 41,571 1,685 7,842 7,208 7,266 9,472 6,907 6,223 6,730 9,889 50,812 49,265 2,183 1,593 10,208 7,565 11,347 15,196 73,755 2,090 22,052 21,980 21,723 28,539 16,261 18,038 18,112 27,934 Q1 36% 53% 105% 58% 15% 42% 41% 36% Q2 23% 21% 49% 31% 25% 28% –9% 22% Q3 18% 31% 36% 73% 53% 37% 46% 20% Q4 2% 16% –1% 34% 15% 11% –3% 2% 50 Annual Report 2000 Financial Statements Market Areas Orders booked by Market Area by quarter (SEK m.) Year–to–date Western Europe* Central and Eastern Europe, Middle East & Africa North America Latin America Asia Pacific Total *Of which Sweden *Of which EU Change Western Europe* Central and Eastern Europe, Middle East & Africa North America Latin America Asia Pacific Total *Of which Sweden *Of which EU Isolated quarters Western Europe* Central and Eastern Europe, Middle East & Africa North America Latin America Asia Pacific Total *Of which Sweden *Of which EU Change Western Europe* Central and Eastern Europe, Middle East & Africa North America Latin America Asia Pacific Total *Of which Sweden *Of which EU 0003A 0006A 0009A 2000 0012A 9903A 9906A 9909A 1999 9912A 25,048 50,870 71,807 105,684 19,096 40,380 63,882 95,707 17,388 24,503 32,104 40,972 9,197 14,764 25,786 30,626 9,148 19,082 27,326 37,977 6,024 12,523 9,695 19,312 33,053 44,959 3,432 11,032 19,622 17,816 27,468 27,797 18,195 30,428 48,576 62,752 9,712 20,974 30,706 42,230 79,474 144,195 212,866 292,344 47,461 99,673 157,812 223,828 2,924 6,010 7,983 9,876 1,565 3,517 5,248 7,182 23,261 47,523 67,194 99,951 17,826 37,990 60,050 90,562 0003A 31% 89% 52% 182% 87% 67% 87% 30% 0006A 26% 66% 52% 75% 45% 45% 71% 25% 0009A 12% 25% 39% 86% 58% 35% 52% 12% Q1 Q2 Q3 0012A 10% 34% 38% 62% 49% 31% 38% 10% 2000 Q4 Q1 Q2 Q3 1999 Q4 25,048 25,822 20,937 33,877 19,096 21,284 23,502 31,825 17,388 9,148 9,695 18,195 79,474 2,924 7,115 9,934 9,617 12,233 64,721 3,086 7,601 8,244 13,741 18,148 68,671 1,972 8,868 10,651 11,906 14,176 79,478 1,893 9,197 6,024 3,432 9,712 47,461 1,565 5,567 6,499 7,600 11,262 52,212 1,952 11,022 7,099 6,784 9,732 4,840 7,846 9,981 11,524 58,139 66,016 1,731 1,934 23,261 24,262 19,671 32,757 17,826 20,164 22,060 30,512 Q1 31% 89% 52% 182% 87% 67% 87% 30% Q2 21% 28% 53% 27% 9% 24% 58% 20% Q3 –11% –31% 16% 103% 86% 18% 14% –11% Q4 6% 83% 36% 19% 23% 20% –2% 7% Annual Report 2000 Financial Statements 51 Share information Stock exchange trading Ericsson’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 Düsseldorf, Frankfurt, Hamburg, London and Paris, and on the “Swiss Exchange” 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. Ericsson shares have been traded in Euros in Frankfurt and Paris since January 1, 1999. More than 17 billion shares were traded in 2000. Of this number, about 44 (48) percent were traded on the OM Stockholm Stock Exchange, 31 (22) percent via the NASDAQ exchange and 24 (29) percent on the London Stock Exchange. Trading on other exchanges amounted to about 1 percent of the total, unchanged from the previous year. During 1993 a subordinated convertible debenture loan was issued with a par value of SEK2,171,719,760 and with a term of seven years. These convertibles were traded on the OM Stockholm Stock Exchange and as American Depositary Debentures (ADDs) on the NASDAQ system. The convertibles and the ADDs carried the right to convert to the Ericsson B shares. Last day for conversion was May 31, 2000. Date of maturity for the 1993/2000 convertible debenture loan was June 30, 2000. At that date, less than 1 percent of the outstanding convertible debenture loan remained unexchanged and was redeemed including one final interest payment. Share price trend The total market value of the Ericsson share dropped 21 percent in 2000 to SEK852 billion. The index for the OM Stockholm Stock Exchange decreased by 12 percent during the year. The NASDAQ composite index decreased by 39 percent and the NASDAQ telecom index decreased by 54 percent in the same period. The Ericsson share decreased by 32 percent on NASDAQ. The difference to the development on OM Stockholmsbörsen is mainly attributed to currency changes SE/USD. Shareholders In all, about 90 percent of Ericsson’s shares are owned by Swedish and international institutions. At the end of 2000, about 55 (55) percent of the shares were held outside Sweden, with 29 (33) percent in the US, 5 (6) percent in the UK, 5 (2) percent in Luxemburg, 4 (4) percent in Germany, and 12 (12) percent in countries. Employee ownership The Ericsson Savings Fund (Ericssons Allemansfond) was started in 1984. The Fund, which has 1,156 participants, invests in Ericsson’s shares. At the end of 2000 the Fund held 3,540,000 shares. The price per unit at year-end was SEK5,762 (SEK7,568). A convertible debenture loan amounting to SEK6,000 Million was issued in 1997 with preferential rights to Ericsson’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 received seven-year employee options based on earnings in 1999. At an Extraordinary General Meeting in November, 1999, it was decided to implement a stock option plan also for fiscal year 2000. In accordance with this resolution, 50.4 million employee options (adjusted for split 4:1) were issued to approximately 8,000 employees. Share capital As of December 31, 2000, Ericsson’s share capital consisted of SEK7,910,335,612 (4,892,846,303), represented by 7,910,335,612 shares. The par value of each share is SEK1.00. As of December 31, 2000, the shares were divided into 656,218,640 Series A shares, each carrying one vote, and 7,254,116,972 Series B shares, each carrying one-thousandth of a vote. On April 18, 2000 Ericsson effected a stock dividend through which the par value of the share increased from SEK2.50 to SEK4.00, followed by a stock split 4:1. The share capital increased to SEK7,844,422,428, represented by 7,844,422,428 shares. As a consequence of the split, the par value of the share is SEK1.00. During the period January 1 to January 22, 2001, convertible debentures related to convertible liabilities for 1997 were converted to 47,092 B shares. 52 Annual Report 2000 Financial Statements Share data Earnings per share, fully diluted (SEK) P/E ratio, B shares 2 Dividend (SEK) Direct return % 2000)1 2.65 40 0.50)3 0.5 OM Stockholm Stock Exchange share prices (SEK) A at December 29 B at December 29 B high for year B low for year 111 108 231 101 1 2 3 4 Adjusted for 4:1 split P/E ratio = Price per share at December 31, divided by earnings per share fully diluted For 2000, proposed by the Board of Directors Adjusted for 1:1 stock dividend 1999)1 1998)1, 4 1997)1, 4 1996 1, 4 Share information 1.54 89 0.50 0.4 144 137 143 44 1.67 29 0.50 1.0 52 48 67 30 1.52 25 0.44 1.2 39 37 48 26 0.91 29 0.31 1.2 27 27 27 14 Changes in capital stock 1996–2000 1996 1996 1997 1998 1998 1999 2000 2000 2000 2000 January 1 Conversions Conversions Stock dividend Conversions Conversions Stock dividend Split Conversions December 31* of which treasury stock 1,804,000 * Number of shares Capital stock 957,614,897 2,394,037,243 3,547,308 8,868,270 13,333,854 33,334,635 1:1 975,097,150 2,437,742,875 1,759,181 5,786,131 4,397,952 14,465,328 – 2,941,658,410 4:1 5,883,316,821 – 69,880,270 75,830,899 7,910,335,612 7,910,335,612 Largest shareholders by voting rights, December 31, 2000 Number of shares Voting rights percent AB Industrivärden Investor AB Wallenberg-stiftelser Svenska Handelsbankens Pensionsstiftelse Livförsäkrings AB Skandia Pensionskassan SHB Försäkringsförening Oktogonen, Stiftelsen SEB-Trygg Liv SEB-stiftelsen Svenska Handelsbankens personalstiftelse Fjärde AP-Fonden Svenska Handelsbankens aktiefonder Wallanders och Hedelius’ stiftelse Foreign ownership 186,000,000 273,506,800 109,172,096 41,600,000 76,852,806 31,680,000 12,903,000 64,594,900 11,322,120 10,000,000 302,060,000 51,047,972 3,200,000 4,292,228,436 28.0 22.2 16.5 5.4 5.0 4.8 1.9 1.8 1.7 1.5 1.4 0.6 0.5 1.9 Annual Report 2000 Financial Statements 53 Glossary 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 copper 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. Edge A technology that gives GSM and TDMA similar capacity to handle services for the third generation of mobile telephony. Developed to enable the transmission of large amounts of data at a high speed, 384 kilobits per second in mobile applications. ATM (Asynchronous Transfer Mode) A technology for broadband transmission of voice, data and video transmission of telecom signals in large amounts. In addition to high-capacity signal trans- mission, ATM provides considerable flexibility, since the individual subscriber is able to adapt the capacity of a switched connection to current requirements. AXE An open architecture, Ericsson’s communications platform. A system for computer-controlled digital exchanges that constitute the nodes in large public telecommunications networks. The basis for Ericsson’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 phones, computers and other devices without the use of wires. CDMA (Code Division Multiple Access) A technology for digital transmission of radio signals between, for example, a mobile phone and a radio base station. In CDMA, a frequency is divided into a number of codes. Circuit Switching A switched circuit is only maintained while the sender and recipient are communicating, as opposed to a dedicated circuit which is held open regardless of whether data is being sent or not. Epoc An operating system for mobile terminals, developed by Symbian (Ericsson joint-venture company including Matsushita, Motorola, Nokia and Psion). GPRS (General Packet Radio Service) A packet-switched technology that enables high-speed (115 kilobits 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’s most widely used mobile system. It is used on the 900 MHz and 1800 MHz frequencies in Europe, Asia and Australia, and the 1900 MHz frequency in North America and Latin America. IP (Internet Protocol) The Internet protocol defines how information travels between networks across the Internet. ISDN (Intergrated Services Network) A technology which offers high speed transmission of voice, data and video through existing fixed line infrastructure. 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 network operator. ITU (International Telecommunication Union) A United Nations agency that deals with telecommunications issues. 54 Annual Report 2000 Financial Statements LAN (Local Area Network) A small data network covering a limited area, such as within a building or group of buildings. Packet switching A method of switching data in a network where individual packets of a set size and format are accepted by the network and delivered to their destinations. The sequence of the packets is maintained and the destination established by the exchange of control information (also contained in the packets) between the sending terminal and the network before the transmission starts. PBX (Private Branch Exchange) An exchange system used in companies and organizations to handle internal and external calls. PDC (Personal Digital Cellular) A Japanese standard for digital mobile telephony in the 800 MHz and 1500 MHz bands. 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. SMS (Short Message Service) Available on digital networks, allowing messages of up to 160 characters to be sent and received via the network operator’s message center to your mobile phone. 3GPP (Third-generation Partnership Project) A global cooperative project in which standardization bodies in Europe, Japan, South Korea and the United States as founders are coordinating 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 technology based on the IS-136 standard. TDMA is the current designation for what was formerly known as 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 phone calls over the Internet using packet-linked routes. Also called IP telephony. WAP (Wireless Application Protocol) A free, unlicensed protocol for wireless communications 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. WCDMA (Wideband Code Division Multiple Access) A technology for wideband digital radio communications of Internet, multimedia, video and other capacity-demanding applications. WCDMA, developed by Ericsson and others, has been selected for the third generation of mobile phone systems in Europe, Japan, Korea and the US. The technology is also the principal alternative being discussed in the remaining parts of the world. WDM (Wavelength Division Multiplexing) A 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. Annual Report 2000 Financial Statements 55 Shareholder information 2001 The Annual General Meeting will be held at the Globe Arena, Arenatorget, Stockholm, at 4,30 p.m. on Wednesday, March 28, 2001. Shareholders intending to participate in the Annual General Meeting must be entered as shareholders in the share register maintained by VPC AB (Swedish Securities Register Center) not later than March 16, 2001. A shareholder whose shares are registered in the name of a trustee must temporarily be entered in the share register not later than March 16, 2001, in order to participate in the Meeting. Notice of participation in the Annual General Meeting In addition to the requirements listed above, shareholders 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 4 p.m. Thursday, March 22, 2001. Proxy 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 27, 2001. Dividend and Dividend Payment A resolution adopted by shareholders at the Annual 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 2, 2001 as the record date. If the proposal is approved, dividends are expected to be paid by VPC AB to all registered shareholders on April 5, 2001. Change of Address Shareholders who have changed their name, mailing 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 20, 2001 Interim report Jan.–March July 20, 2001 Interim report Jan.–June October 26, 2001 Interim report Jan.–Sept. Interim report Jan.-Dec. Full year report. January 2002 March 2002 Annual report 2001 Annual Reports and Interim reports can be ordered on the Internet: www.ericsson.com/investors, or by contacting: Telefonaktiebolaget LM Ericsson SE-126 25 Stockholm, Sweden Telephone: +46 8 719 0000 Ericsson CLO Limited 1, St James’s Square London, SW1Y 4ER, United Kingdom Telephone: +44 20 7451 5000 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 Investor Relations Gary Pinkham Vice President, Investor Relations 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 Maria Bernström Director, Investor Relations Telefonaktiebolaget LM Ericsson SE-126 25 Stockholm, Sweden Telephone: +46 8 719 0000 Telefax: +46 8 719 1976 E-mail: maria.bernstrom@lme.ericsson.se Lotta Wiklund Manager, Investor Relations Ericsson CLO Limited 1, St James´s Square London SW1Y 4ER, Great Britain Telephone: +44 20 7451 5000 Telefax: +44 20 7451 5669 E-mail: lotta.wiklund@clo.ericsson.se 56 Annual Report 2000 Financial Statements ISSN 1100 - 8962 Telefonaktiebolaget LM Ericsson SE-126 25 Stockholm Project management Ericsson Corporate Communications Design and production SAS Design, London, UK Photography Mike Goldwater, Stefan Almers Production coordinator Aralia Reprographics Scarena AB Printing Christer Persson Tryckeri AB, Köping EN/LZT 108 4712 R1 © Telefonaktiebolaget LM Ericsson 2001 

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