Ericsson Annual Report 2001

Plain-text annual report

A n n u a l R e p o r t 2 0 0 1 Financial Statements What were the benefits of the efficiency program? Have you reduced the volatility in your earnings? How did you turn cash flow from negative to positive? What are you doing to improve profitability? F i n a n c i a l h i g h l i g h t s 2 0 0 1 Sales and orders booked, SEK b. TOTAL CONSOLIDATED RESULTS – PRO FORMA** (SEK billion) 2001 250 200 150 100 50 0 100,000 80,000 60,000 40,000 20,000 Orders booked Sales 2000 2001 Number of employees 0 2000 2001 Total Sweden Sales by segment, SEK b. and percent 23.1 (11%) 33.4 (16%) 154.3 (73%) Mobile systems Multi-service networks Other operations Sales by market area, SEK b. and percent 25.2 (12%) 32.1 (15%) 56.4 (27%) Europe, Middle East and Africa Asia Pacific Latin America North America 97.1 (46%) Orders booked Net Sales Adjusted operating margin Adjusted income before tax Net income Earnings per share, fully diluted (SEK) Dividend per share (SEK) Cash flow before financing activities Return on capital employed (ROCE) Equity ratio Number of employees 201.8 210.8 – 9% – 21.1 – 21.3 – 2.69 0 4.2 –16% 29% 85,200 2000 239.1 221.6 8% 14.3 21.0 2.65 0.50 6.4 27% 38% 105,100 Change –16% – 5% –19% SEGMENT RESULTS – PRO FORMA** (SEK billion) 2001 2000 Change Orders booked Systems Other operations Less inter-segment orders Total Sales Systems Other operations Less inter-segment sales Total Adjusted operating income* Systems Phones Other operations Unallocated Total * Adjusted for items affecting comparability – Capital gain Juniper Networks – Non-operational capital gains – Pension refund – Restructuring costs SALES BY MARKET AREA – PRO FORMA** (SEK billion) Europe, Middle East and Africa North America Latin America Asia Pacific Total 182.8 28.5 – 9.5 201.8 187.8 33.4 –10.4 210.8 2.9 –14.6 – 4.4 –1.7 –17.9 5.5 0.3 – –15.0 2001 97.1 25.2 32.1 56.4 210.8 213.2 39.5 –13.6 239.1 194.7 40.2 –13.3 221.6 32.6 –16.2 2.2 –1.9 16.7 15.4 5.9 1.1 – 8.0 2000 108.4 25.3 38.0 49.9 221.6 –14% – 28% –16% – 4% –17% – 5% Change –10% 0% –16% 13% – 5% **Pro forma format: Sony Ericsson Mobile Communications are accounted for under the equity method and included in “Earnings from Joint Ventures and Associated Companies.” The results of the phone activities retained by Ericsson are included in “Other operations.” Focused on return to profitability Year 2001 was a tough year in the telecom business. Like most of our competitors, Ericsson incurred considerable losses for the year. Our relative market position improved, however, and after decisive restructuring and cost control efforts, our objective for 2002 is to achieve an operating margin of over five percent. Our industry has a strong growth potential and we look forward with optimism on Ericsson’s role as the top-class vendor to top-class operators. Due to the uncertainty in the telecom market under current economic conditions, we believe a solid upturn may be a couple of years away. Our long-term financial objectives are unchanged: • to grow faster than the market, which means a growth of more than 20 percent in a few years • a return on capital employed of 20–25 percent • a positive cash flow • an operating margin of at least ten percent Contents Board of Directors’ Report p2 Consolidated Income Statement p11 Consolidated Income Statement – Pro forma p12 Consolidated Balance Sheet p13 Consolidated Statement of Cash Flows p14 Parent Company Income Statement p15 Parent Company Balance Sheet p16 Parent Company Statement of Cash Flows p18 Notes to the Financial Statements p19 Auditors’ Report p38 Treasury and Financial Risk Management p39 Segments and Market Areas p42 Ten Year Summary p50 Board of Directors and Corporate Management p52 Share Information p54 Shareholder Information p56 Uncertainties in the Future (Safe Harbor Statement) p57 Annual Report 2001 F i n a n c i a l S t a t e m e n t s 1 B o a r d o f D i r e c t o r s ’ R e p o r t In this Board of Directors’ report, comments regarding the income statement items refer to a pro forma Income Statement version (see page 12), prepared to facilitate comparisons between years. In this pro forma version, restructuring charges are reported visibly, excluded from Cost of Sales and Operating expenses respectively, and the results of handset operations transferred to Sony Ericsson Mobile Communications are reported included in Share in Earnings of joint ventures and associated companies, as if the equity method had been applied for the full year 2000 and 2001. Total income is not affected by these changes. This report contains “forward-looking statements”. See “Uncertain Factors in the Future” on page 57. Strategy and goals Ericsson has a long-term perspective when assessing the market development. The current downturn in general economic conditions and its effects on near-term demand for telecommunications equipment and services has not changed this. We work in an industry with excellent growth potential and Ericsson has the market leading position in systems, which we intend to improve and grow faster than the market. The penetration of mobile subscribers across the world has yet only reached 16 percent. Compared to a penetration level of around 75 percent in Western Europe, there is still a large growth potential in many markets. Our aim is to stay ahead as the number one supplier for Mobile Internet solutions and continue as a top tier vendor for carrier-class multiservice networks based on IP. We are determined to be a top-tier player also in the handset market – both regarding development, design, marketing and sales of mobile multi-media terminals, through our joint venture with Sony, and through licensing of platform technology developed in-house. Our long-term goals are unchanged: • to grow faster than the market, which means a growth of more than 20 percent in a few years • a return on capital employed of 20–25 percent • a positive cash ﬂow • an operating margin of at least 10 percent Market environment In early 2001, we still expected a net growth for the year in our outlook for the full year 2001. Our optimism was based on strong orders in the end of year 2000, and continued strength both in orders and sales in early 2001. Soon after, general economic conditions and the telecom market changed dramatically for the worse, presenting us with a number of challenges: • An urgent need to protect our cash position and payment readiness • A need to rightsize the company and streamline the operations according to a lower business volume • Fast completion of the restructuring of our handset business to improve proﬁtability, reduce income volatility and adapt to a new market structure. Financial markets, global economy The ﬁnancial markets for equities, bonds and loans grew very cautious in the beginning of the year, particularly regarding the Internet-, IT- and telecom sectors. Rating institutions began to downgrade companies, which added to the ﬁnancing difficulties and costs. Later in the year, a general economic downturn in Latin America caused further tightening. Earnings per share diluted (SEK) Operating expenses (SEK b.) 3.00 2.00 1.00 0 –1.00 –2.00 –3.00 80 60 40 20 0 1997 1998 1999 2000 2001 2000 2001 Administrative expenses Selling expenses Research and development and other technical expenses 2 Annual Report 2001 F i n a n c i a l S t a t e m e n t s Telecom market and competition The ﬁnancing difficulties led to drastic cuts in capital expenditures by many operators, as compared with the high investment level of the previous year. The decline was most accentuated in Western Europe, where operators had the largest debt burdens and the additions of subscribers slowed down rapidly, compared to year 2000. We were forced to renegotiate and postpone planned delivery schedules and new orders were sharply reduced. In the second half, the situation deteriorated markedly also in Latin America. The situation was better in certain markets, particularly in China and Eastern Europe. In USA, a decline in TDMA sales was almost fully offset by increased GSM sales. In Japan, however, the transition to 3G led to a sharp decline for our PDC systems sales, which was not yet compensated by similar volumes of 3G shipments. We were successful in improving our market leading positions in mobile systems during the year, both for 3G and GSM. In North and Latin America, we won a major market share of contracts from operators migrating from TDMA to GSM/GPRS as the path to 3G. In China we won our ﬁrst large contract for CDMA equipment. In Europe, we passed an important milestone on the way to Mobile Internet as we were awarded our ﬁrst contract for multi-media messaging service (MMS) systems, for handling of pictures, animations and sound. Sales in Mobile Systems declined by 2 percent compared to year 2000, attributable to strong reductions in Western Europe and Latin America, partly offset by increased sales in Asia Paciﬁc and Eastern Europe. For Multiservice Networks the year started with strong orders and sales. Mid year, however, a sharp downturn occurred in Latin America, when operators stopped their investments in traditional narrow-band switching equipment, and in the end of the year, also our European customers reduced capital expenditures. Overall sales declined by 9 percent. Continued good orders growth for our packet switching solution ENGINE was not enough to offset this. We have signed some 70 ENGINE contracts representing a market share over 40 percent. The total market for handsets also declined compared to year 2000, with the number of units sold down from 409 million units to 390. The reduction was mainly attributable to a lower number of new subscribers in Europe. Ericsson’s sales of phones during the ﬁrst nine months were down approximately 45 percent, due to an unfavorable product mix and ongoing restructuring. The handset market is now in a transition phase to a new structure, with vendors specializing in different layers of the value chain: platform development, application development, handset design, marketing and distribution, as opposed to the current structure, where suppliers are developing and selling complete phones. We adapted to this shift and at the same time restructured our handset business. By sharply reducing the cost base, we lowered our exposure to future market volatility. We formed a joint venture with Sony for design, marketing and sales of next generation multimedia terminals. We are convinced that our expertise in telephony and radio technology combined with Sony’s strength in consumer electronics, multimedia and entertainment will enable the joint venture to create exciting products. We also believe we are very well positioned to have a strong market presence, capitalizing on Ericsson’s relations with leading telecom operators and Sony’s distribution and service networks and consumer marketing experience. Under our strong brand names, we as partners target to make Sony Ericsson Mobile Communications the market leader in terminals for the Mobile Internet in 4 to 5 years. Net sales by quarter (SEK b.) 70 60 50 40 30 20 10 0 2000 Q1 Q2 Q3 Q4 2001 Q1 Q2 Q3 Q4 Other operations Multiservice networks Mobile systems Annual Report 2001 F i n a n c i a l S t a t e m e n t s 3 B o a r d o f D i r e c t o r s ’ R e p o r t Ericsson will continue to be a developer and licensor of core platform technology. Sony Ericsson is our ﬁrst customer, and we already have agreements with other manufacturers of mobile devices. Partnerships and venture capital activities Ericsson and Microsoft continue to work together regarding mobile Internet applications. The form changed from a jointly owned company to a cooperation agreement. Ericsson and Juniper Networks launched a jointly owned (60 percent/40 percent) company for cooperation regarding IP routers. The partnership regarding the Symbian operating system for mobile devices continued. New members were added, among them Sony Ericsson Mobile Communications, with 1.6 percent of the stock. Ericsson still holds 19.4 percent. Many areas of development were related to 2.5G, 3G and Mobile Internet. Signiﬁcant achievements during 2001 were: • continued progress in industrialization, veriﬁcation and inter- operability tests of 3G equipment. We also performed the ﬁrst 3G roaming call between Japan and UK and released TRAM – a Tool for Radio Access Management, supporting operators in planning 3G networks • a new generation of GSM base stations, RBS 2206 HiCap, with increased capacity and reduced costs • a new release of GPRS, which put us in the lead regarding functionality and also lead to a rapid roll out of commercial GPRS service among Ericsson customers • a new state-of-the-art generation AXE, AXE 810, in a very compact design with an open architecture facilitating integration of own and 3rd party equipment • an enhanced version of ENGINE with increased capacity to New cooperation initiatives with other vendors to support manage also very large exchanges Mobile Internet development were: the Mobile Commerce Platform, for safe mobile commerce services, Mobile Games Interoperability forum (MGI), and MMS interoperability forum for Multimedia Messaging Services. We established Ericsson Mobility World for support and cooperation with 3rd party developers of applications and devices. In addition to the previous venture capital partnerships, Ericsson Venture Partners and imGO, Ericsson participated during 2001 with a minority stake in b-business partners, focusing on e-business between enterprises. Products, R&D and IPR In spite of the ongoing cost reductions, which affected also R&D activities, total spending increased by SEK 5.3 b. or 15 percent from year 2000. We have increased our investments in core areas as 3G, while pruning costs in a number of other areas. R&D as percent of sales increased to 19 (16) percent. • several new mobile phones with good market reception, for example the high-end T68 GPRS phone with color screen and internal antenna. We also launched a number of modules for wireless machine-to-machine (M2M) communication. Our perhaps most important assets are our intellectual property rights. We are very careful in protecting these through patents and defending them against infringement. Their importance lies not only in potential license revenues, but also in the cross-licensing opportunities that a strong patent portfolio offers. During 2001, we applied for close to 1,100 (1,300) new patents. We also signed some license agreements, among those a major agreement with Samsung, Korea, for mobile telephony technology. Cash flow before financing activities (SEK b.) 6 4 2 0 –2 –4 –6 –8 –10 1997 1998 1999 2000 2001 4 Annual Report 2001 F i n a n c i a l S t a t e m e n t s Financial results The result for the year was a substantial loss, with an income before tax of SEK –30.3 (28.7) b. Adjusted operating income was SEK –17.9 (16.7) b. The major reasons for the decline were a continued loss in Phones of SEK –14.6 (–16.2) b. and a sharp drop for Systems to SEK 2.9 (32.6) b. or from 17 percent to 2 percent of sales. This was driven by continued increased R&D investments in 3G, unfavorable product mix, and reduced gross margins from price pressure, lower volumes and excess capacity costs. Strong cost reduction actions could not offset the effects of a market turn-around from growth to decline. Other operations also developed unfavorably and generated SEK –4.4 b. of losses, mainly due to sharply reduced sales for Microelectronics and Cables businesses. Non-operational capital gains of SEK 5.8 (21.3) b. were generated, SEK 5.5 b. of which through the sale of remaining shares in Juniper Networks in the ﬁrst quarter. Financial net was SEK –2.0 (–1.5) b. due to increased borrowing. manufacturing and implementation could not be reduced quickly enough to avoid excess capacity. Additional margin pressure came from initial costs and price pressure from break- through contracts for GSM and CDMA in North America and China respectively. In the second quarter, we launched a massive Efficiency Program to reduce costs to the new market scenario with no near-term growth. Provisions of SEK 11 b. were made to cover such costs. The targeted reduction in annual run rate for operating expenses of SEK 20 b. was nearly achieved. The reduction in the individual fourth quarter was SEK 4.5 b. The adjusted operating margin in Systems, excluding restructuring costs and non-operational items, was 2 percent, down from 17 percent last year. The adjusted operating margin includes increased R&D investments for 3G products, and provisions of SEK 1.7 b. for increased customer ﬁnancing risks in Latin America, due to deteriorating economic conditions there. Operating margin by Segment Systems For the ﬁrst time since 1991, this year’s order bookings were less than sales. Strong orders at the end of 2000 resulted in good sales in early 2001, but 2001 order bookings were adversely affected by very restrictive capital expenditures by operators in primarily Western Europe and Latin America. Under the adverse market conditions, the results in our systems business relative to our competitors were reasonably good, with a decline in sales of 4 percent from SEK 195 b. to 188 b., and an SEK 2.9 (32.6) b. adjusted operating income before restructuring charges. Mobile Systems sales declined 2 percent and Multiservice Networks 9 percent. In the declining market, price competition was intensiﬁed, product mix became unfavorable, with sharp declines for TDMA and PDC systems, and ﬁxed costs in Phones The adjusted operating income in Phones was SEK –14.6 (–16.2) b. This was caused by a 45 percent decrease in sales for the ﬁrst nine months compared to last year, and lower margins due to price competition and an unfavorable product mix. Excess capacity, inventory write-downs, and high warranty costs due to product quality problems in the beginning of the year were other signiﬁcant contributing factors. The major part of the loss was incurred during the ﬁrst nine months of the year. From October, most of the handset operations, dramatically downsized through restructuring activities, were transferred to a joint venture with Sony. The joint venture got off to a good start, with a fast integration of transferred operations from the partners, in total 4,000 employees. The JV beneﬁted from a good product portfolio, including a number of popular high-end GPRS Income before taxes (SEK b.) Sales and Orders booked (SEK b.) 30 20 10 0 –10 –20 –30 –40 250 200 150 100 50 0 1997 1998 1999 2000 2001 2000 Sales Orders booked 2001 Annual Report 2001 F i n a n c i a l S t a t e m e n t s 5 B o a r d o f D i r e c t o r s ’ R e p o r t phones. The sales in the fourth quarter were somewhat lower than expected due to a much lower market demand and the JV incurred a loss of which our share was SEK –0.7 b. Other Operations Remaining handset activities, manufacturing in China, mobile platforms and Bluetooth and remaining phase-out costs, in total SEK –2.4 b., are included in Other Operations. Total adjusted operating income in Other operations was SEK –4.4 (2.2) b. In addition to the loss from retained handset operations, low sales volumes for Cables, Microelectronics, and Enterprise all contributed to the loss. Defense Systems operations were proﬁtable. Financial income and expenses, Taxes and Earnings per share Due to increased borrowing and also a strong build up of our cash position and payment readiness, both interest income and interest expense increased over last year. Financial net was SEK –2.0 (–1.5) b. Taxes were positive due to the reported negative Income before tax. The average tax rate was back to a more normal level of 30 percent, compared to last year’s level of 27 percent caused by non-taxable capital gains. Earnings per share (EPS) diluted were SEK –2.69 (2.65). (No dilution is considered this year, due to the loss, since it would improve the EPS.) EPS per US GAAP was SEK –3.14 (2.94). In previous years, EPS per US GAAP has normally been higher than EPS per Swedish GAAP. This year it is lower, due to negative net impact of capitalization of development costs for software products, different rules regarding timing of recognition of restructuring costs plus effects of market valuation of certain derivatives. Balance sheet, Financing and Cash flow Year 2001 early presented us with great challenges, particularly in terms of cash ﬂow and equity ratio. During the ﬁrst quarter we incurred negative cash ﬂow of SEK 17.7 b., which we addressed with some very focused actions, taken at the same time as conditions in the capital markets started to get more difficult. The largest reason for the negative cash ﬂow was a sharp rise in accounts receivable. A special program to deal with this was initiated and all top managers’ bonus targets were reset and linked to a positive cash ﬂow for Ericsson for the full year. Days sales outstanding (DSO) increased from 82 days at the end of year 2000 to 116 days at the end of the ﬁrst quarter and were reduced to 88 days by the end of the year. Inventory turnover also ﬁrst declined and later regained some of the fall-back in a similar way. Customer ﬁnancing in total increased during the year from SEK 21 b. to SEK 26 b. An increased portion was reﬁnanced externally – at the end of 2001, only approximately one third was on-balance, compared to half at the end of 2000. In a credit portfolio of in total SEK 16.1 b. sold in the market in the fourth quarter, we managed to include a substantial share of future commitments, which will keep our exposure on a controllable level. SEK 2 b. improved cash ﬂow 2001. The working capital improvements took place gradually, and positive cash ﬂows were reported for the last three-quarters, with SEK 16.4 b. in the last quarter alone, which brought the total to SEK 4.2 b. Further improvements in working capital performance will still have high priority for 2002. Equity ratio and Payment readiness (percent) Investments in tangible assets (SEK b.) 40% 30% 20% 10% 0% 12 10 8 6 4 2 0 1997 1998 1999 2000 2001 1997 1998 1999 2000 2001 Payment readiness Equity ratio 6 Annual Report 2001 F i n a n c i a l S t a t e m e n t s Organization and employees Organization and Management changes During 2001, the previous divisional structure was modiﬁed to have ﬁve business units responsible for product management, supported by a number of core units for development and supply. The previous ﬁve market areas were combined to three, and special Global Customer Units were formed to better serve certain large customers operating in multiple countries. In the context of our efficiency program, the number of market units was also consolidated from more than 100 to 35. A number of changes were made in Ericsson’s corporate executive team during 2001: • Executive Vice President Haijo Pietersma resigned and Executive Vice Presidents Bengt Forssberg, Johan Siberg and Kjell Sörme retired • A new COO function was established and Per-Arne Sandström was appointed • New Market Area managers were appointed: The Americas: Gerhard Weise Europe, Middle East & Africa: Mats Dahlin Asia Paciﬁc: Ragnar Bäck • New Business Unit managers were appointed: Mobile Systems – WCDMA & GSM: Einar Lindquist Mobile Systems – CDMA: Åke Persson Multiservice Networks: Johan Bergendahl Transport & Transmission: Björn Olsson Global Services: Bert Nordberg The negative cash ﬂow in the ﬁrst quarter plus the increasing market uncertainty highlighted the need for a strong reinforcement of our payment readiness. Therefore a borrowing program was launched in the second quarter to increase cash and to extend the maturity proﬁle of borrowings through amortization of short-term loans. The program was successful, and around SEK 26 b. raised. To safeguard our freedom of action, we increased payment readiness during the year from 11 to 28 percent, thereby establishing a necessary cushion for potential swings in the cash ﬂow. Adjusted for this temporarily increased cash balance, the equity ratio at year-end, 29 percent, would have been approximately 35 percent. During the year, we made no material acquisitions, except for our equity stake of SEK 2.8 b. in the joint venture Sony Ericsson Mobile Communications and the SEK 0.3 b. purchase of Hewlett-Packard’s remaining 19 percent holding in Ericsson Hewlett-Packard (EHPT). Operational support systems were transferred into Mobile Systems operations within Ericsson, while billing products remain in EHPT. Certain assets were divested: • in the ﬁrst quarter, remaining shares in Juniper Networks were sold with a capital gain of SEK 5.5 b. and a cash ﬂow of the same magnitude • in the second quarter, distribution operations within Enterprise Systems were sold to Apax with no capital gain, but with a cash ﬂow of SEK 3.4 b. • during the year, real estate assets and operations, including our London office at St. James’s place, were sold with a net capital gain of SEK 1.3 b. and a cash ﬂow of SEK 4.7 b. • in the fourth quarter, computers, servers and production test equipment worth SEK 2.0 b. were sold, and SEK 8.0 b. of test plants for software were sold and leased-back in a ﬁnancial lease transaction. Number of employees 100,000 1000 80,000 800 60,000 600 40,000 400 20,000 200 0 0 1997 1998 1999 2000 2001 Sweden Total Annual Report 2001 F i n a n c i a l S t a t e m e n t s 7 B o a r d o f D i r e c t o r s ’ R e p o r t Employees In the beginning of 2001, Ericsson had 105,000 employees. This number increased to 107,000 during the ﬁrst quarter. Then the Efficiency Program was launched and certain divestitures were made, which together reduced number of employees by 22,000 to be 85,000 by year-end: Efficiency Program Back-to-Proﬁt program in Phones Outsourcing/divestitures 10,600 4,000 7,400 Total 22,000 In addition, the number of consultants and temporary workers was reduced from around 15,000 in March to less than 7,000 by year-end. is continuously striving to reduce environmental impact from production. No signiﬁcant environmental liabilities are known. Board of Directors and Board procedures All Directors of the Board were re-elected at the Annual General Meeting held on March 28, 2001. The Board of Directors 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. Sixteen Board meetings were held during year 2001. Observations made by the Company auditors have been reported to the Board. These actions were necessary to reduce cost levels and remain The work of the Board is subject to a Work Procedure, competitive in a contracting market. Employee share-based compensation During the year, 47.5 million employee stock options in the 2001 program were granted to 15,000 employees. A stock purchase plan with matching contributions 1:1 was also decided, and will be implemented in 2002. To hedge potential cash ﬂow and secure delivery of matching shares, a stock issue and a subsequent repurchase of 155 million shares as treasury stock was made. This increased restricted capital stock by SEK 155 m. and reduced unrestricted capital stock by SEK 156 m. Restructuring and Efficiency Program In order to mitigate the adverse effects of the sharply declining sales, an efficiency program was launched in the second quarter, mainly related to Systems and aiming at reductions in expenses of approximately SEK 20 b. per year. An acceleration of the ongoing Back-to- Proﬁt-program in Phones was also made, in order to speed up restructuring in preparation for a partnership with Sony. Provisions of SEK 15 b. were made for charges under these programs. Both programs were carried out according to plan and projected reductions in run-rates of costs were achieved, which is essential for performance improvement in 2002. Environmental issues The ISO 14001, environmental management system is implemented in all Ericsson production units. As the ﬁrst company, Ericsson received a global ISO 14001 certiﬁcation. Ericsson was ranked number one in the communications technology industry in Dow Jones’ index for sustainability. Ericsson has production operations in x countries for manufacturing of cables and components and assembly of electronic products. Ericsson has 14-x production facilities in Sweden. For 7-y of these, permissions for emissions/noise are required and for 5-z, hazardous activities shall be reported. Ericsson adopted and revised by the Board at least once a year. The Work Procedure stipulates the distribution of work among the Board and its three committees and between the Board and the President. The members of the three committees, Audit, Finance and Remuneration, are appointed by the Board among its 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. The Audit Committee consists of three members appointed by the Board. The present members are Clas Reuterskiöld, Chairman, Peter Sutherland and Jan Hedlund. In short, the Audit Committee’s area of responsibility covers review of the scope and execution of audits performed, review of ﬁnancial reporting, internal audit functions, matters and reservations arising from audits performed and audit fees. The Finance Committee consists of four members appointed by the Board. The present members are Lars Ramqvist, Chairman, Tom Hedelius, Marcus Wallenberg and Göran Engström. In short, the Finance Committee’s area of responsibility covers to resolve investments and divestments, capital contributions to companies inside and outside the Ericsson Group, raising of loans, issuance of guarantees and similar undertakings, provision of credits to customers and suppliers as well as to continuously monitor the Group’s ﬁnancial risk exposure. The Remuneration Committee consists of two members appointed by the Board. The present members are Göran Lindahl, Chairman, and Sverker Martin-Löf. In short, the Remuneration Committee’s area of responsibility covers to review and prepare, for resolution by the Board, strategies and general guidelines for compensation to employees, including incentive plans and retirement compensation, as well as speciﬁc proposals for salary, other remuneration and retirement compensation to the President, Executive Vice Presidents, and other officers reporting directly to the President. 8 Annual Report 2001 F i n a n c i a l S t a t e m e n t s At the Annual General Meeting of Shareholders on March 28, The number of mobile phones sold in 2001 was approximately 2001, the shareholders voted for the establishment of a Nomination Committee, consisting of representatives of the owners and the Chairman of the Board. The Board of Directors is authorized to appoint the members of the Nomination Committee in co-operation with major shareholders of the Company. The present members are Lars Ramqvist, Chairman of the committee, Percy Barnevik, Investor, Bo Rydin, Industrivärden, Anders Ek, Robur, and Lars Otterbeck, Alecta. The main task of the committee is to nominate individuals to be elected Directors of the Board. The Nomination Committee shall also prepare and present for resolution by the Annual General Meeting a proposal for Board of directors’ fee. The proposals of the Nomination committee shall be a part of the notice to the general meeting at which the Board members are appointed. At the Board meeting on October 26, 2001, Lars Ramqvist announced that he will not be available for re-election at the Annual General Meeting in March 2002 and that the Nomination Committee had nominated Michael Treschow Chairman elect. Michael Treschow is currently President & C E O of Electrolux. The Board has elected Lars Ramqvist Honorary Chairman of the Board effective from the Annual General Meeting 2002. Post closing events Ericsson has won its ﬁrst global contract to supply Multimedia Messaging Services (MMS) software to Vodafone Group Plc ( U K ). The companies have agreed a rollout schedule that will see commercial availability of the service in Europe from the middle of this year. Ericsson Mobile Platforms has signed a licensing agreement regarding mobile phone technology for 2.5G and 3G / U M TS with LG Electronics (Korea). A contract is signed with Verizon Wireless (USA) for Ericsson’s CDMA 2000 AAA (Authentication, Authorization and Accounting) solution for Verizon’s CDMA 2000 1X RTT Express Network. A deposit of SEK 5.5 b. was made in January as a security for the above-mentioned ﬁnancial lease of test plants until ﬁnal reﬁnancing is in place. Market view 390 million, close to our forecasted 400 million. In 2002, we anticipate up to 10 percent unit volume growth, driven by new subscribers as well as increased availability of replacement phones with GPRS, Bluetooth, color screens and multi-media messaging. The slowdown in the telecommunications equipment market continued during the fourth quarter, resulting in a more or less ﬂat mobile systems market for the full year. The wireline systems market contracted signiﬁcantly and is likely to shrink further during 2002. These market conditions are expected to persist well into 2002 with the ﬁrst half considerably weaker than the second. We maintain our view that the global market for mobile systems will be ﬂat to down 10 percent in 2002. However, the North American market may show modest growth as operators upgrade to GSM/GPRS, 3G/EDGE and C D M A2000. The build-out of several 3G networks in Europe and Asia has begun with launch of commercial services planned for later this year. The number of 3G subscribers could reach well over one million by the end of the year, depending on the availability of phones. Our market view is based on discussions with our customers and on the current macro-economic outlook. We have assumed: • that the market downturn will last well into 2002 • that there will be signiﬁcant net subscriber additions, with increasing usage per subscriber • that GPRS traffic will gradually build up of over the next 12 months • that deployment of 3G systems will accelerate in the second half of 2002. Outlook for the year 2002 In the third quarter report, we stated that our sales of Mobile Systems during 2002 were expected to be at least in line with the market development of ﬂat to down 10 percent. We also stated an objective of an operating margin over 5 percent for the full year, even if net sales decline as much as 10 percent compared to 2001. We maintain this outlook for the full year 2002 with an operating loss in the ﬁrst quarter and results improving over the year. Our objective is also to generate positive cash ﬂow for the full year. For the ﬁrst quarter of 2002, we expect sales to be During 2001 the number of mobile subscribers worldwide grew from 721 to about 950 million, in line with our forecasted growth of around 30 percent. We expect about 200 million new subscribers to be added in 2002, a solid growth rate of 20–25 percent. Our long-term forecast of 1.6 billion mobile subscribers by the end of 2005 remains unchanged. approximately SEK 40 b., with Mobile Systems sales declining and particularly weak sales in Multiservice Networks. Income before taxes is expected to be at about the same level as in the ﬁrst quarter of 2001, including a small loss from Sony Ericsson Mobile Communications. We will implement necessary cost reductions on an ongoing basis to meet our operational targets. Annual Report 2001 F i n a n c i al S t a t e m e n t s 9 B o a r d o f D i r e c t o r s ’ R e p o r t Pro forma reporting in 2002 Next year, Ericsson will apply changed Swedish accounting principles, affecting primarily the treatment of development expenses. Subject to feasibility tests, development expenses will be capitalized and subsequently amortized. No adjustment of previous years is allowed, which means that during the ﬁrst 3–4 years of usage, reported operating income will increase, as capitalized amounts will exceed amortization. Ericsson is of the opinion that the resulting income is not comparable with previous years and may mislead investors. Ericsson has, however, for US GAAP purposes, already capitalized development expenses for many years. For improved comparability, we will therefore present pro forma income statements, reﬂecting income as if capitalization according to the new Swedish GAAP had been made also in previous years. In these pro forma statements we will also report results of the handset operations transferred to Sony Ericsson Mobile Communications net under “Share in earnings of joint ventures and associated companies” as if equity accounting had been applied for year 2001. The total income amount will not be changed. Parent company Telefonaktiebolaget LM Ericsson The Parent company business consists mainly of corporate management and holding company functions. It also includes activities performed on a commission basis by Ericsson Treasury Services AB and Ericsson Credit AB regarding internal banking and customer credit management. The Parent company has branch and representative offices in 15 (15) countries. In the second quarter, as decided at the Annual General Meeting, a stock issue and a subsequent stock repurchase was carried out related to the 2001 employee stock option and stock purchase plans. The stock issue increased the capital stock in restricted stockholders’ equity by SEK 155 m. and the repurchase of shares reduced non-restricted equity by SEK 156 m. Net sales for the year amounted to SEK 1.4 (1.2) b. and income after ﬁnancial items was SEK –6.4 (9.0) b. Write-downs of investments in subsidiaries have affected income by SEK –19.0 b. Major changes in the company’s ﬁnancial position were: • Increased investments in subsidiaries of SEK 9.1 b. • Increased current and long-term commercial and ﬁnancial receivables from subsidiaries of SEK 25.7 b. • Increased cash and short-term cash investments of SEK 23.2 b. These investments were ﬁnanced primarily through increased internal borrowing of SEK 44.3 b. and increased short and long- term external borrowing of SEK 22.0 b. At year-end, cash and short-term cash investments amounted to SEK 49.0 (25.9) b. In Ericsson Credit AB, cash ﬂow was positively affected by increased sales to the credit market of customer ﬁnancing receivables. Proposed disposition of earnings Non-restricted equity available for distribution by the shareholders at the Annual General Meeting is SEK 13,289,420,303. The Board of Directors proposes that no dividend be paid, and that the whole amount be retained within the business. Stockholm January 25, 2002 Telefonaktiebolaget LM Ericsson (publ) Org. no. 556016-0680 Tom Hedelius Deputy chairman Göran Lindahl Peter Sutherland Göran Engström 10 Annual Report 2001 F i n a n c i a l S t a t e m e n t s Lars Ramqvist Chairman Marcus Wallenberg Deputy chairman Sverker Martin-Löf Clas Reuterskiöld Eckhard Pfeiffer Jan Hedlund Kurt Hellström President and CEO Niall FitzGerald Per Lindh C o n s o l i d a t e d I n c o m e S t a t e m e n t Years ended December 31, SEK m. 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 joint ventures and 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, diluted, SEK * Of which items affecting comparability Non-operational capital gains/losses, net Capital gain, Juniper Pension refund Restructuring costs Total Adjusted operating income Adjusted income before taxes Ratios – Adjusted Income statement items as percentage of net sales Adjusted gross margin Adjusted operating expenses Adjusted operating margin Capital gains/losses, net of minority, included in income before taxes Operational gains/losses Non-operational gains/losses Ratios – Income statement items as percentage of net sales Gross margin Operating expenses Operating margin Return on sales Other Ratios Return on capital employed Capital employed turnover Accounts receivable turnover Inventory turnover Note 1 2 8 3 3 4 5 5 2001 2000 1999 231,839 –173,900 57,939 – 46,640 –31,694 –14,185 273,569 –180,392 93,177 – 41,921 – 34,706 –13,311 215,403 –125,881 89,522 – 33,123 – 30,005 –11,278 8,207 –721 –27,094 3,743 –5,782 –29,133 –1,176 –30,309 8,813 232 –21,264 –2.69 –2.69 347 5,453 – –15,000 –9,200 –17,894 –21,109 28.6% 37.0% –7.7% 5,979 5,632 347 25.0% 39.9% –11.7% –10.1% –15.8% 1.6 3.5 4.8 27,652 274 31,165 2,929 – 4,449 29,645 – 953 28,692 –7,998 324 21,018 2.67 2.65 5,933 15,383 1,100 – 8,000 14,416 16,749 14,276 36.8% 32.7% 6.1% 25,229 19,296 5,933 34.1% 32.9% 11.4% 12.5% 26.5% 2.1 3.9 5.2 2,224 250 17,590 2,273 – 2,971 16,892 – 506 16,386 – 4,358 102 12,130 1.55 1.54 – 328 – – – – 328 17,918 16,714 41.6% 34.5% 8.3% 1,843 2,171 – 328 41.6% 34.5% 8.2% 9.2% 19.0% 2.1 3.7 4.8 Annual Report 2001 F i n a n c i a l S t a t e m e n t s 11 C o n s o l i d a t e d I n c o m e S t a t e m e n t – P r o f o r m a CONSOLIDATED INCOME STATEMENT – PRO FORMA Pro forma format, reﬂecting results with parts of Phones transferred to the joint venture Sony Ericsson Mobile Communications, accounted for under the equity method, and retained parts included in Other operations, and with items affecting comparability reported separately. No change in reported total income numbers are made. SEK m Net sales Cost of sales Gross margin Gross margin as percentage of net sales Restructuring costs Gross margin after restructuring costs Research and development and other technical expenses Selling expenses Administrative expenses Operating expenses Operating expenses as percentage of net sales Restructuring costs 2001 2000 210,837 221,586 –138,123 –120,617 72,714 34.5% 100,969 45.6% Jan-Dec Change – 5% 15% – 28% –4,858 0 67,856 100,969 – 33% 15% 3% –7% 7% –40,247 –26,927 –11,175 –78,349 37.2% – 34,949 – 26,072 –12,004 –73,025 33.0% –6,242 0 Operating expenses including restructuring costs –84,591 –73,025 16% Other operating revenues Share in earnings of joint ventures and associated companies Restructuring costs, Phones Operating income* Operating margin as percentage of net sales Financial income Financial expenses Income after financial items Minority interest in income before taxes Income before taxes Taxes Net Income *Of which items affecting comparability Non-operational capital gains/losses, net Capital gain, Juniper Pension refund Restructuring costs Total Adjusted operating income Adjusted operating margin Adjusted income before taxes 8,209 –14,668 –3,900 –27,094 –12.9% 27,132 –15,911 – 8,000 31,165 14.1% 3,743 –5,782 2,929 – 4,449 28% 30% –29,133 29,645 –1,176 – 953 23% –30,309 28,692 9,045 –7,674 –21,264 21,018 347 5,453 – –15,000 5,933 15,383 1,100 – 8,000 –9,200 14,416 –17,894 –8.5% –21,109 16,749 7.6% 14,276 Restructuring costs included in cost of sales and operating expenses are shown separately to facilitate comparisons between years. 12 Annual Report 2001 F i n a n c i a l S t a t e m e n t s C o n s o l i d a t e d B a l a n c e S h e e t December 31, SEK m. ASSETS Fixed assets Intangible assets Tangible assets Financial assets Equity in joint ventures and associated companies Other investments Long-term customer financing Other long-term financial assets Current assets Inventories Receivables Accounts receivable – trade Short-term customer financing Other receivables Short-term cash investments Cash and bank Total assets STOCKHOLDERS’ EQUITY, PROVISIONS AND LIABILITIES Stockholders’ equity Capital stock Reserves not available for distribution Restricted equity Retained earnings Net income Non-restricted equity Minority interest in consolidated subsidiaries Provisions Long-term liabilities Notes and bond loans Convertible debentures Liabilities to financial institutions Other long-term liabilities Current liabilities Current maturities of long-term debt Current liabilities to financial institutions Advances from customers Accounts payable — trade Income tax liabilities Other current liabilities Total stockholders’ equity, provisions and liabilities1 1 Of which interest-bearing provisions and liabilities 81,761 (46,563), current portion 20,324 (15,477) Assets pledged as collateral Contingent liabilities Note 2001 2000 6 7, 23, 25 8 10 11 13 14 16 17, 20 18 19 20 21 13,066 16,075 4,497 3,100 4,225 13,739 54,702 12,833 22,378 2,790 2,484 6,364 3,657 50,506 24,910 43,933 57,438 2,174 41,993 36,046 32,793 195,354 250,056 8,066 29,593 37,659 52,192 –21,264 30,928 68,587 3,532 34,171 41,656 4,437 5,154 887 52,134 3,622 16,702 4,803 19,546 1,850 45,109 91,632 250,056 2,615 15,583 74,973 1,267 44,029 18,779 16,827 199,808 250,314 7,910 32,600 40,510 30,158 21,018 51,176 91,686 2,764 27,650 15,884 4,346 1,320 744 22,294 3,188 12,289 6,847 30,156 5,080 48,360 105,920 250,314 435 11,184 Annual Report 2001 F i n a n c i a l S t a t e m e n t s 13 C o n s o l i d a t e d S t a t e m e n t o f C a s h F l o w s 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 Other operating assets, provisions and liabilities, net 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 Repayment of long-term debt Stock issue Gain on sale of own stock options and convertible debentures Repurchase of own stock Dividends paid Cash flow from financing activities Effect of exchange rate changes on cash Net change in cash Note 22 2001 2000 1999 –21,264 21,018 12,130 943 926 7,749 –6,126 –16,905 20,103 1,777 19,454 –7,340 –683 –8,306 9,683 5,322 –67 –1,766 4,866 629 –70 10,936 – 25,278 1,859 –18,305 946 –10,446 7,863 –10,848 –12,293 6,620 22,643 10 264 17,244 404 18 7,382 –1,399 – 947 714 722 – 9,911 3,812 12,925 – 9,085 625 – 4,768 134 – 2,270 –15,364 4,183 6,396 – 2,439 2,542 – 34,427 –4,361 155 – –156 –4,295 28,312 738 33,233 799 1,048 1,760 –1,296 – 2,018 – 386 – 4,179 – 236 438 6,598 3,854 58 15,163 –1,515 – – – – 4,010 13,550 – 336 10,775 22 22 22 Cash and cash equivalents, beginning of period 35,606 29,008 18,233 Cash and cash equivalents, end of period 68,839 35,606 29,008 14 Annual Report 2001 F i n a n c i a l S t a t e m e n t s P a r e n t C o m p a n y I n c o m e S t a t e m e n t Years ended December 31, SEK m. 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 Deferred income taxes Net income 2000 adjusted according to RR9 – Income taxes. See Accounting Principles and Notes. Note 1 2 3 3 15 15 4 4 2001 1,374 –1,547 –173 –70 –3,446 –1,386 3,066 –2,009 19,224 –23,645 –6,430 4 1,172 1,176 115 –5,139 –219 612 –4,746 2000 1,195 –1,669 – 474 –166 –1,581 –1,142 3,061 – 302 12,352 – 3,090 8,960 74 70 144 700 9,804 – 671 –113 9,020 1999 15,375 –10,944 4,431 – 5,386 – 4,116 – 2,580 3,155 – 4,496 9,915 – 2,202 3,217 371 – 2,691 – 2,320 5,292 6,189 – 623 – 5,566 Annual Report 2001 F i n a n c i a l S t a t e m e n t s 15 P a r e n t C o m p a n y B a l a n c e S h e e t December 31, SEK m. Note 2001 2000 ASSETS Fixed assets Intangible assets Tangible assets Financial assets Investments Subsidiaries Joint ventures and associated companies Other investments Receivables from subsidiaries Long-term customer financing Other long-term financial assets Current assets Inventories Receivables Accounts receivable — trade Short-term customer financing Receivables from subsidiaries Other receivables Short-term cash investments Cash and bank Total assets Assets pledged as collateral 2000 adjusted according to RR9 – Income taxes. See Accounting Principles and Notes. 6 7, 25 8, 9 8, 9 8 12 8 8 10 11 12 13 20 111 61 44,483 3,725 54 29,673 1,894 2,919 82,920 33 96 35,353 1,008 84 22,682 6,320 1,918 67,494 2 3 805 2,197 54,495 10,237 36,399 12,616 116,751 199,671 1,493 102 629 35,757 10,117 17,361 8,501 72,470 139,964 322 16 Annual Report 2001 F i n a n c i a l S t a t e m e n t s December 31, SEK m. 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 Total stockholders’ equity, provisions and liabilities Contingent liabilities 2000 adjusted according to RR9 – Income taxes. See Accounting Principles and Notes. Note 14 15 16 17 17 17 12, 17 17 18 12 19 21 2001 2000 8,066 3,694 20 6,741 18,521 18,035 –4,746 13,289 31,810 4,086 5,055 41,656 4,437 272 45,574 128 92,067 3,344 318 17 807 57,376 – 4,791 66,653 7,910 3,685 20 6,741 18,356 13,125 9,020 22,145 40,501 5,262 2,833 15,884 4,346 322 13,345 37 33,934 2,713 4,756 34 527 45,360 265 3,779 57,434 199,671 23,597 139,964 13,406 Annual Report 2001 F i n a n c i a l S t a t e m e n t s 17 P a r e n t C o m p a n y S t a t e m e n t o f C a s h F l o w s Years ended December 31, SEK m. OPERATIONS Net income Adjustments to reconcile net income to cash Depreciation and amortization Write-downs and capital gains (–)/losses on sale of fixed assets Appropriations to/transfers from (–) untaxed reserves Unsettled contributions from (–)/to subsidiaries Unsettled dividends Deferred taxes Changes in operating net assets Inventories Customer financing, short-term and long-term Accounts receivable — trade Other operating assets, provisions and liabilities, net Cash flow from operating activities Investments Investments in tangible assets Sales of tangible assets Acquisitions/sales of other investments, net Lending, net Other Cash flow from investing activities Note 22 22 2001 2000 1999 –4,746 9,020 5,566 56 18,983 –1,176 38 –3,700 –612 1 2,858 –1,373 12,015 22,344 –20 23 –9,196 –14,037 –1,343 –24,573 56 – 2,268 –144 –190 – 3,800 –113 2 – 514 –708 3,960 5,527 – 91 331 – 3,174 – 24,086 1,705 – 25,315 322 41 2,320 – 5,200 – 3,904 – 655 – 6,188 – 450 2,047 – 4,791 – 368 1,810 – 5,185 – 4,397 –1,705 – 9,845 Cash flow before financing activities –2,229 –19,788 –14,636 Financing Changes in current liabilities to financial institutions, net Changes in current liabilities to subsidiaries Proceeds from issuance of other long-term debt Repayment of long-term debt Stock issue Repurchase of own stock Dividends paid Other Cash flow from financing activities Net change in cash Cash and cash equivalents, beginning of period Cash and cash equivalents, end of period 2000 adjusted according to RR9 – Income taxes. See Accounting Principles and Notes. –4,400 8,980 28,244 –3,582 155 –156 –3,953 94 25,382 23,153 25,862 49,015 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 18 Annual Report 2001 F i n a n c i a l S t a t e m e n t s N o t e s t o t h e F i n a n c i a l S t a t e m e n t s ACCOUNTING PRINCIPLES B Goodwill The consolidated ﬁnancial statements of Telefonaktie- bolaget 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. 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”. A Principles of consolidation C Translation of foreign currency financial statements 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. For most subsidiaries, joint ventures 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. In the consolidated Income Statement, minority interests Financial statements of companies with ﬁnance activities 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 gives a fairer 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 proportion to ownership 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. Interests in joint ventures are accounted for according to the equity method. or other companies, having such close relations with the Swedish operations that their functional currency is considered to be the Swedish krona, 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 are reported directly against stockholders’ equity. The remeasurement method, which is in accordance with US GAAP FAS 52, gives a fairer view of these ﬁnancial statements than a translation directly to Swedish kronor, since companies concerned operate in de facto US dollar- or Euro-based economies. D Translation of foreign currency items in individual companies In the ﬁnancial statements, receivables and liabilities in foreign currencies have been translated at year-end exchange rates. Annual Report 2001 F i n a n c i a l S t a t e m e n t s 19 N o t e s t o t h e F i n a n c i a l S t a t e m e n t s 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. assets are amortized over a maximum period of 5 years. See B above for amortization of goodwill. Amortisation and 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. E Valuation of and accounting for financial instruments H Receivables 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 investments, interest related derivatives and the interest component in foreign exchange 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. Foreign exchange derivatives 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 between actual and hedged ﬂows are recognized in income as soon as they are identiﬁed. Financial assets and liabilities are reported net when a legally enforceable right for offset exists and there is intent to settle on a net basis or to realise the asset and settle the liability at the same time. F Intangible and tangible fixed assets Intangible and 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. Intangible Receivables are reported at anticipated realizable value. Sales of trade receivables and customer ﬁnancing accounts are reﬂected as a reduction of receivables in the accompanying Balance Sheets and the proceeds received are included in cash ﬂows from operating activities in the accompanying Statements of Cash Flows. For sale of receivables with recourse a provision has been recorded for the estimated value of the recourse liability. The excess of the recourse obligation over the recorded liability is included in contingent liabilities. I 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 proportionally with the progress. The stage of completion is based on the value of the parts delivered in proportion to the total contract value. If costs required to complete such contracts are estimated to exceed remaining revenues, provisions are made for estimated losses. Customer contracts include a high degree of integration between different products, software and services, and are often a mix of construction-type contracts and normal delivery contracts. A disclosure in accordance with RR10, §39a, and RR11, §35b, regarding the amounts for different categories of revenue is considered misleading and is not calculated by the Company. For sales between consolidated companies, the same pricing is applied as a rule as in transactions with other customers, taking into account, however, that certain costs do not arise in transactions between affiliated companies. J Research and development costs Research and development costs are expensed as incurred. Costs based on orders from customers are included in Cost of sales. 20 Annual Report 2001 F i n a n c i a l S t a t e m e n t s K Leasing Financial leasing contracts are capitalized and reported as tangible assets and as other current liabilities and other long- term liabilities. L Deferred tax The Group and, as from 2001, also the Parent company report 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 to the extent that it is probable that future taxable proﬁts will be available against which the unused tax losses can be utilised. 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. Deferred tax assets and liabilities are, in deviation from the Swedish Financial Accounting Standards Council’s recommendation RR09, reported as current and long-term in the Balance Sheet, since the Company considers that this method gives a fairer view of the Company’s position. 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. Deferred tax assets on internal proﬁt in inventory are calculated to reﬂect the tax effect in the periods in which the temporary differences are expected to reverse. M Statement of Cash Flows 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 and cash equivalents consist of cash, bank and short-term investments due within 12 months. N 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 related hedging arrangements. O Earnings per share Basic earnings 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 were exercised (potential ordinary shares). Net income is adjusted by reversal of interest expense for convertible debentures net of tax. Potential ordinary shares are treated as dilutive when, and only when, their conversion to ordinary shares decrease net proﬁt per share. P Changes in accounting principles in 2002 The Swedish Financial Accounting Standards Council (Redovisningsrådet) has issued the following recommendations, which will be adopted by the Company in 2002: • Business Combination (RR1:00) • Intangible assets (RR15) • Provisions, contingent liabilities and contingent assets (RR16) • Impairment of assets (RR17) • Discontinuing operations (RR19) • Borrowing costs (RR21) • Related party disclosure (RR23) RR15 is expected to have a material positive effect on income for 2002. Presentation of ﬁnancial statements (RR22) will be adopted from January 1, 2003. Q 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 2000. 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 accounts for 2000 and 2001. Annual Report 2001 F i n a n c i a l S t a t e m e n t s 21 N o t e s t o t h e F i n a n c i a l S t a t e m e n t s 1 Net sales by market area and business segment 3 Financial income and expenses MARKET AREAS Consolidated Western Europe* Central and Eastern Europe, Middle East & Africa North America Latin America Asia Pacific Total * Of which Sweden * Of which EU Parent company Western Europe* Central and Eastern Europe, Middle East & Africa North America Latin America Asia Pacific Total * Of which Sweden * Of which EU BUSINESS SEGMENTS Consolidated Systems of which Mobile Systems Multiservice Networks Phones Other operations Less: Inter segment sales Total 2001 2000 1999 71,105 100,234 85,329 35,867 31,379 34,516 58,972 37,701 35,193 44,118 56,323 29,736 25,175 30,263 44,900 231,839 273,569 215,403 7,341 66,561 8,732 94,293 7,551 80,345 2001 2000 1999 – 18 7,832 1,143 – 231 – 1,374 – – 1,037 - 107 33 3,075 273 2,036 2,159 1,195 15,375 – – 2,346 8,047 2001 2000 187,777 194,747 154,343 158,083 36,664 33,434 56,279 23,567 35,927 30,816 –10,321 –13,384 231,839 273,569 Parent company sales are mainly related to business segment Systems. 2 Other operating revenues Consolidated 2001 2000 1999 Consolidated 2001 2000 1999 Financial Income Result from securities and receivables accounted for as fixed assets Other interest income and similar profit/loss items Total Financial Expenses Interest expenses and similar profit/loss items Financial Net 1,605 1,624 1,426 2,138 3,743 1,305 2,929 847 2,273 5,782 4,449 2,971 –2,039 –1,520 – 698 Swedish companies’ interest expenses on pension liabilities are included in the interest expenses shown above. Parent company 2001 2000 1999 Financial Income Result from participations in subsidiaries Dividends* Net gains on sales Result from participations in associated companies 14,442 7 6,531 228 7,750 – Dividends Net gains/losses (–) on sales 23 –6 125 1,925 122 123 Result from other securities and receivables accounted for as fixed assets Dividends Net gains on sales Other interest income and similar profit/loss items Subsidiaries Other** Total – 37 2 182 2 – 3,674 1,047 2,253 1,106 19,224 12,352 1,365 553 9,915 * Anticipated dividends amount to SEK 3,700 m. in 2001, SEK 3,800 m. in 2000 and SEK 3,900 m. in 1999. ** Of the total amount, SEK –978 m. in 2001, SEK –596 m. in 2000, and SEK –4 m. in 1999 is attributable to hedge of net investments in foreign subsidiaries. 1,962 2,107 307 Parent company 2001 2000 1999 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 –1,317 –731 – 244 5,830 24,133 1,733 –349 – 231 – 397 6,126 25,278 1,399 2,081 2,374 825 8,207 27,652 2,224 Parent company 2001 2000 1999 Financial Expenses Losses on sales of participations in subsidiaries Write-down of investments in subsidiaries Losses on sales of participations in associated companies Interest expenses and similar profit/loss items Subsidiaries Other Other financial expenses Total 5 19,000 12 – – – 109 – – 2,080 2,536 12 1,619 1,452 19 23,645 3,090 –4,421 9,262 887 1,197 9 2,202 7,713 3,068 3,128 3,210 Financial Net –2 – 67 – 55 3,066 3,061 3,155 Parent company’s interest expenses on pension liabilities are included in the interest expenses shown above. Commissions, license fees and other operating revenues Net losses (–) on sales of tangible assets Total 22 Annual Report 2001 F i n a n c i a l S t a t e m e n t s 4 Income taxes for the year INCOME STATEMENT The following items are included in Income taxes for the year: A reconciliation between actual tax income (– expense) for the year and the theoretical tax income (– expense) that would arise when applying the tax rate in Sweden, 28 percent of Income before taxes, shows as follows: Consolidated 2000 2001 Parent company 2000 2001 –5,033 – 8,927 –241 – 671 216 – 33 22 – 13,742 1,061 612 –113 Current income taxes for the year Current income taxes related to prior years Deferred income/ expense (–) taxes related to temporary differences Share of taxes in joint ventures and associated companies Income taxes for the year 8,813 –7,998 –112 – 99 – 393 – –784 Deferred tax income and expenses The amounts of deferred tax income and expenses are shown in the following table. Consolidated 2000 2001 Parent company 2000 2001 Deferred tax income* Deferred tax expenses* 17,429 –3,687 5,288 – 4,227 612 – 15 –128 Income before taxes Tax rate in Sweden (28%) Effect of foreign tax rates Current income taxes related to of prior years Tax effect of expenses that are non-deductible for tax purpose Tax effect of income that are non-taxable for tax purpose Tax effect of changes in tax rates Tax effect related to write-downs of investments in subsidiaries Tax effect of tax losses carryforwards, net Consolidated 2000 2001 Parent company 2000 2001 –30,309 8,487 986 28,692 – 8,033 –730 –5,139 1,439 – 9,804 – 2,745 – 216 – 33 22 – –864 –1,506 –220 –136 260 2,395 4,472 2,097 83 – – – – –5,320 –123 233 – – – – Income taxes for the year 9,045 * –7,674 * 393 –784 * Of which minority interest in taxes –232 (–324). Deferred taxes income/expense, net * Related to temporary differences 13,742 1,061 612 –113 The Consolidated effective tax rate is 30 (27) percent. In the Parent company the effective tax rate is 8 (8) percent. Consolidated Deferred income tax refer to tax losses carryforwards by SEK 7,986 m. (388) and to certain provisions for restructuring, off-balance sheet customer ﬁnancing, warranty commitments and allowances for doubtful receivables. Deferred tax expenses refer to reversal of temporary differences regarding certain opening provisions for restructuring and warranty commitments. Parent company Deferred income tax refer to provisions for customer ﬁnancing commitments and certain pension obligations. Consolidated Tax effect of expenses that are non-deductible refer to depreciation of goodwill and other non-deductible expenses. Tax effect of income that are non-taxable refer mainly to capital gains. Parent company Tax effect of expenses that are non-deductible refer mainly to option expenses, tax on dividend and foreign income. Tax effect of income that are non-taxable refer mainly to dividends. BALANCE SHEET Deferred tax assets and liabilities Tax effects of temporary differences have resulted in deferred tax assets and liabilities as follows: Deferred tax assets, current Deferred tax assets, long-term Deferred tax liabilities, current Deferred tax liabilities, long-term Consolidated 2000 2001 Parent company 2000 2001 11,321 6,533 9,591 1,034 216 770 1,662 2,311 771 858 – – 469 548 – – Consolidated Deferred tax assets refer to tax losses carryforwards and certain provisions for restructuring, off-balance sheet customer ﬁnancing, warranty commitments and allowances for doubtful receivables. Deferred tax assets regarding tax losses carryforwards amount to SEK 8,525 m. (515) of which SEK 335 m. (306) is reported as current and SEK 8,190 m. (209) is reported as long-term. Deferred tax liabilities refer mainly to untaxed reserves. Annual Report 2001 F i n a n c i a l S t a t e m e n t s 23 6 Intangible assets Licenses, trademarks and similar rights Patents and aquired research and develop- ment Goodwill Total Consolidated 1,410 207 Accumulated acquisition costs Opening balance Acquisitions Balances regarding acquired and sold companies Sales/disposals Translation difference for the year – 30 –120 99 1,232 83 14,300 16,942 763 473 – – – – 32 –30 –152 23 999 1,121 Closing balance 1,566 1,338 15,740 18,644 Accumulated depreciation Opening balance Depreciation for the year Balances regarding acquired and sold companies Sales/disposals Translation difference for the year –1,213 – 477 – 2,419 –4,109 –156 – 95 –1,123 –1,374 22 92 – – – 7 22 99 – 81 –11 –124 –216 Closing balance –1,336 – 583 – 3,659 –5,578 Net carrying value 230 755 12,081 13,066 Parent company Accumulated acquisition costs Opening balance Acquisitions Closing balance Accumulated depreciation Opening balance Depreciation for the year Closing balance Net carrying value Patents, licenses, trademarks and similar rights 111 105 216 –78 –27 –105 111 N o t e s t o t h e F i n a n c i a l S t a t e m e n t s Parent company Deferred tax assets refer mainly to provisions for customer ﬁnancing commitments and certain pension obligations. Investments in subsidiaries, joint ventures and associated companies Due to losses in certain subsidiaries the book value of certain investment in subsidiaries, joint ventures and associated companies are less than the tax value of these investments. However, since deferred tax assets have been reported with respect to losses in these companies and the uncertainty as to which deductions can be realized in the future, with respect to the above differences between book and tax value, these amounts are not reported. Tax losses carryforwards Deferred tax assets regarding not utilized losses carryforwards are reported to the extent that realization of the related tax beneﬁt through the future taxable proﬁts is probable also when considering the period during which these can be utilized as described below. At December 31 2001 these unutilized losses carryforwards, essentially all reﬂected as an asset, amounted to MSEK 27,613. The ﬁnal years in which these losses carryforwards can be utilized are shown in the following table: Year of expiration 2002 2003 2004 2005 2006 2007 or later Total 2001 500 133 36 214 716 26,014 27,613 The Parent company has no unutilized loss carryforwards. Tax effects reported directly to stockholders’ equity Tax effects reported directly to stockholders’ equity regarding equity hedge amount to SEK 233 m. (140). 5 Earnings per share Consolidated 2001 2000 1999 Earnings per share, basic Net income Average number of shares outstanding (millions) Earnings per share, diluted Net income 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) –21,264 21,018 12,130 7,909 7,869 7,817 –2.69 2.67 1.55 –21,264 21,018 12,130 176 207 185 –21,088 21,225 12,315 7,988 8,004 7,987 * 2.65 1.54 * Not applicable: Potential ordinary shares are not considered when their conversion to ordinary shares would increase earnings per share. 24 Annual Report 2001 F i n a n c i a l S t a t e m e n t s 7 Tangible assets Consolidated Accumulated 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 Closing balance Accumulated revaluations, net Opening balance Depreciation for the year Sales/disposals Translation difference for the year Closing balance Net carrying value Parent company Accumulated acquisition costs Opening balance Acquisitions Sales/disposals Closing balance Accumulated depreciation Opening balance Depreciation for the year Sales/disposals Closing balance Net carrying value Land and buildings 6,262 341 – 3 – 4,709 579 579 3,049 Machinery Other equipment Construction in process and advance payments 19,194 3,299 – 84 – 8,711 882 668 15,248 27,676 2,487 – 254 –7,840 1,428 1,232 24,729 1,569 2,179 – 22 –182 – 2,889 42 697 –1,609 – 314 –13,555 –1,408 –17,405 – 4,685 3 1,051 – – 283 56 5,191 – 87 – 396 94 6,377 87 – 803 –1,152 –10,199 –16,335 243 – – 212 7 38 1,935 – – – – – 3 – – 3 – – Total 54,701 8,306 –363 –21,442 – 2,521 43,723 –32,569 –6,407 153 12,619 – –1,482 –27,686 246 – –215 7 38 – – – – – – – – – – – – 5,049 8,394 697 16,075 Land and buildings Machinery Other equipment Construction in process and advance payments 23 – – 23 – – – – 23 167 – –155 12 –156 –1 146 –11 1 130 20 – 46 104 – 68 – 28 29 – 67 37 – – – – – – – – – Total 320 20 –201 139 –224 –29 175 –78 61 Annual Report 2001 F i n a n c i a l S t a t e m e n t s 25 OTHER FINANCIAL ASSETS Consolidated Accumulated acquisition costs Opening balance Acquisitions/credits granted Sales/repayments Translation difference for the year Closing balance Accumulated revaluations Opening balance Revaluations for the year Sales/repayments Translation difference for the year Closing balance Accumulated write-downs 1 Opening balance Write-downs for the year Sales/repayments Translation difference for the year Closing balance Net carrying value Other Long-term long-term financial assets customer financing Other investments 2,975 973 – 387 8,426 1,564 – 3,929 3,744 11,968 – 2,054 168 126 242 3,729 6,187 13,900 30 – – 30 – – – 521 – 45 – 3 – 2,062 –1 422 1,556 – 60 – 34 – 87 –79 10 – 5 – 629 –1,962 –161 3,100 2 4,225 13,739 3 1 Write-downs are included in Selling expenses due to the close relation to operations. 2 Market value per December 31, 2001 for listed shares was SEK 587 m. with a net carrying value of SEK 332 m. 3 Of which deferred tax assets SEK 9,591 m. (1,034). Parent company Accumulated acquisition costs Opening balance Acquisitions/credits granted Sales/repayments Long term deferred tax receivables Translation/revaluation difference for the year Closing balance Accumulated write-downs Opening balance Write-downs for the year Sales/repayments Closing balance Net carrying value Other Long-term long-term financial assets customer financing 7,455 1,248 – 5,901 – * 1,918 1,237 – 627 858 – – 467 2,802 2,919 –1,136 – 465 693 – 908 1,894 – – – – 2,919 * Opening balance is adjusted according to RR9 – Income taxes. See Accounting Principles and Notes. N o t e s t o t h e F i n a n c i a l S t a t e m e n t s 8 Financial assets EQUITY IN JOINT VENTURES AND ASSOCIATED COMPANIES Consolidated Opening balance Share in earnings Taxes Translation difference for the year Dividends Acquisitions Sales Joint Associated ventures companies – –702 60 –135 – 2,752 – 2,790 –19 –172 71 – 29 61 –180 Closing balance 1,975 2,522 Goodwill, net, amounts to SEK 19 m. (76) of the investments. Dividends received from companies accounted for under the equity method were SEK 138 m. in 2000 and SEK 131 m. in 1999. Share of assets, liabilities and income in joint ventures Consolidated Fixed assets Current assets Provisions Long-term liabilities Current liabilities Net assets Net sales Income before taxes Net income Assets pledged as collateral Contingent liabilities Total 2,790 –721 –112 –64 –29 2,813 –180 4,497 623 5,659 318 – 3,989 1,975 4,840 –702 – 642 15 112 The associated ﬁnance companies, AB LM Ericsson Finans and Ericsson Project Finance AB, are accounted for in accordance with the equity method. The companies' total assets amount to SEK 14.2 b. and are ﬁnanced by the Company at SEK 4.0 b. and by external ﬁnancing at SEK 9.0 b. In Ericsson Project Finance AB, external loans of SEK 5.7 b. are ﬁnancing customer credits of the same amount. Ericsson has, through a guarantee assumed a ﬁrst loss risk of SEK 2.9 b., remaining risk, SEK 2.8 b., is carried by the creditors. Ericsson’s guarantees of loans of the above associated companies are included in contingent liabilities. Parent company Investments Opening balance Acquisitions and stock issues Shareholders’ contribution Revaluations for the year Write-downs Reclassifications Sales Sub- sidiaries Joint Associated ventures companies Other investments 35,353 – 1,008 84 2,503 2,752 27,000 – –19,000 – –1,373 – – – – – 1 – – – –10 – 26 973 – – 2 – 10 – 42 54 Closing balance 44,483 2,752 26 Annual Report 2001 F i n a n c i a l S t a t e m e n t s 9 Investments The following listing shows certain shareholdings owned directly and indirectly by the Parent company. A complete listing of shareholdings, SHARES OWNED DIRECTLY BY THE PARENT COMPANY 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. Type Company Reg. No. Domicile Percentage of ownership Par value in local currency Carrying value 556137-8646 556090-3212 556028-1627 556056-6258 556251-3258 556251-3266 556250-2046 556329-5657 556128-5924 556250-9454 556212-7398 556577-9799 556606-5438 556018-0191 556030-9899 556381-7666 556381-7609 556329-5673 556326-0552 Subsidiaries I I I I I I I I I I I I I II II II II III III Ericsson Utvecklings AB Ericsson Enterprise AB Ericsson Microwave Systems AB Ericsson Radio Systems AB Ericsson Telecom AB Ericsson Mobile Communications AB Ericsson Radio Access AB Ericsson Sverige AB Ericsson Business Innovation AB Ericsson Global IT Services AB Ericsson Software Technology AB EHPT Sweden AB Ericsson Juniper Networks Mobile IP AB SRA Communication AB AB Aulis LM Ericsson Holding AB Ericsson Gämsta AB Ericsson Treasury Services AB Ericsson Credit AB Other (Sweden) Ericsson Austria AG LM Ericsson A/S Oy LM Ericsson Ab Ericsson Participations S.A. Ericsson GmbH Ericsson Communications Systems Hungary Ltd. LM Ericsson Holdings Ltd. Ericsson Treasury Ireland Ltd. Ericsson Financial Services Ireland Ericsson S.p.A. 7 Ericsson A/S Ericsson Corporatio AO Ericsson AG Ericsson Holding Ltd. Other (Europe, excluding Sweden) Ericsson Holding II Inc. Cía Ericsson S.A.C.I. Teleindustria Ericsson S.A. Other (United States, Latin America) Teleric Pty Ltd. Beijing Ericsson Mobile Communication Co. Ltd Ericsson Ltd. Ericsson (China) Company Ltd. Nanjing Ericsson Communication Co. Ltd. Ericsson Telecommunications Ltd. Ericsson Telecommunications Sdn. Bhd. Ericsson Telecommunications Pte. Ltd. Ericsson Taiwan Ltd. Ericsson (Thailand) Ltd. Other countries I I I II I I II III III II I I I II II I I II I I I I I I I I I Joint ventures and associated companies I III III I Sony Ericsson Mobile Communications AB 556615-6658 556008-8550 AB LM Ericsson Finans 556058-5936 Ericsson Project Finance AB Ericsson Nikola Tesla Other 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 Ireland Italy Norway Russia Switzerland United Kingdom United States Argentina Mexico Australia China China China China Indien Malaysia Singapore Taiwan Thailand Sweden Sweden Sweden Croatia 100 100 100 100 100 100 100 100 100 100 100 100 60 100 100 100 100 100 100 – 100 100 100 100 100 100 100 100 100 72 100 100 100 100 – 88 1 100 100 – 100 25 2 100 100 41 3 100 70 100 80 49 4 – 10 360 30 50 100 361 20 100 – 85 1 100 – 47 14 105 162 1 5 – 60 90 80 144 39 1,301 2 81 300 18,421 156 950 – 74 – – 5 n/a – 20 5 2 50 9 725 2 – 240 15 – 17 335 151 636 6,520 9,716 41 100 801 252 67 2,247 50 145 6 1,122 324 2 5 661 664 216 195 485 341 120 14 3,924 2,951 105 194 4 – 757 64 9,508 10 572 133 99 36 2 369 61 147 4 1 19 4 286 Total – 44,483 50 90 5 91 6 49 – Total 50 29 425 196 – – 2,752 41 510 330 92 3,725 Annual Report 2001 F i n a n c i a l S t a t e m e n t s 27 N o t e s t o t h e F i n a n c i a l S t a t e m e n t s 9 Investments continued SHARES OWNED BY SUBSIDIARIES Type Company Reg. No. Domicile Percentage of ownership Subsidiaries I I II 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 Network Technologies AB Ericsson Microelectronics AB Ericsson Cables Holding AB Ericsson France S.A. LM Ericsson Ltd. Ericsson Telecomunicazioni S.p.A. Ericsson Holding International B.V. Ericsson Nederland B.V. Ericsson Telecommunicatie B.V. Ericsson España S.A. Ericsson Ltd. Ericsson Mobile Communications (U.K.) Ltd. Ericsson Canada 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 Ericsson Consumer Products Asia Pacific Pte Ltd. Ericsson Australia Pty. Ltd. Associated Companies Symbian Ltd. I Key to type of company I Manufacturing, distributing and development companies II Holding companies III Finance companies 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 28 Annual Report 2001 F i n a n c i a l S t a t e m e n t s 556000-0365 556611-6389 556044-9489 Sweden Sweden Sweden 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 100 100 100 100 100 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 Through subsidiary holdings, total holdings amount to 100% of Ericsson Holding II Inc. 2 Through subsidiary holdings, total holdings amount to 49% of Beijing Ericsson Mobile Communications Co. Ltd., but the voting power is in excess of 50%. 3 Through subsidiary holdings, total holdings amount to 51% of Nanjing Ericsson Communication Co. Ltd. 4 Through subsidiary holdings, total holdings amount to 100% of Ericsson (Thailand) Ltd. 5 Voting power is 40%. 6 Voting power is 49%. 7 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, 2001, was SEK 4,706 m. 2001 9,185 1,224 5,728 13,653 –4,880 24,910 Consolidated 2000 2001 Parent company 2000 19,907 3,723 4,499 17,771 –1,967 43,933 1 – 3 5 –7 2 1 – 2 9 – 9 3 11 Accounts receivable — trade 14 Stockholders’ equity Consolidated 2000 2001 Parent company 2000 2001 Capital stock Capital stock at December 31, 2001, consisted of the following: Notes and accounts receivable Receivables from associated companies Total 56,404 74,591 1,034 382 57,438 74,973 753 52 805 – 102 102 Allowances for doubtful accounts amounting to SEK 2,655 m. (2,014) and SEK 276 m. (275) in the Parent company, which has reduced the amounts shown above, include amounts for estimated losses based on commercial risk evaluations. Retention receivables, recognised as revenue was SEK 6,924 m. at December 31, 2001. 12 Receivables and payables — subsidiaries Parent company Long-Term Receivables* Financial receivables Current Receivables Commercial receivables Financial receivables Total Long-Term Liabilities* Financial liabilities Current Liabilities Commercial liabilities Financial liabilities Total 2001 2000 29,673 22,682 2,218 52,277 1,548 34,209 54,495 35,757 45,574 13,345 381 56,995 648 44,712 57,376 45,360 * Including non-interest bearing receivables and liabilities, net, amounting to SEK –17,212 m. (6,224). Interest-free transactions involving current receivables and liabilities may also arise at times. 13 Other receivables Receivables from associated companies Prepaid expenses Accrued revenues Advance payments to suppliers Deferred tax assets Other Consolidated 2000 2001 Parent company 2000 2001 2,586 3,389 5,824 3,083 4,790 5,124 603 11,321 18,270 1,440 6,533 23,059 2,564 716 598 – 771 5,588 2,163 404 437 – 469 6,644 Total 41,993 44,029 10,237 10,117 A shares (par value SEK 1.00) B shares (par value SEK 1.00) Number of shares outstanding 656,218,640 7,409,285,367 8,065,504,007 Aggregate par value 656 7,410 8,066 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 155,000,000 of the above stated Ericsson B shares have been repurchased by the Parent company. The total number of treasury stock at December 31, 2001 is 156,804,000. 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 were revalued in previous years, provided they had 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 is reduced correspondingly. Cumulative translation adjustments Opening balance Changes in cumulative translation adjustments Closing balance –140 2,110 1,970 Changes in cumulative translation adjustments include changes regarding recalculation of goodwill in local currency, SEK 996 m. (SEK 779 m), net gain/loss (–) from hedging of investments in foreign subsidiaries, SEK –600 m. (SEK –360 m.) and SEK 5 m. (SEK 9 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 2001 134 28 9 171 2000 165 – 41 1 125 Annual Report 2001 F i n a n c i a l S t a t e m e n t s 29 N o t e s t o t h e F i n a n c i a l S t a t e m e n t s 14 Stockholders’ equity continued Changes in stockholders’ equity Consolidated Opening balance Stock issue Repurchase of own stock Conversion of debentures Capital discount Dividends paid Transfer between non-restricted and restricted reserves Changes in cumulative translation adjustments Net income 2001 Capital stock 7,910 155 – 1 – – – – – Equity proportion reserve 1,402 – – – – – Other restricted reserves 31,198 – – 10 –1 – Total restricted equity 40,510 155 – 11 –1 – Non- restricted equity 51,176 – –156 – – – 3,954 Total 91,686 155 –156 11 –1 –3,954 –102 – 5,024 – 5,126 5,126 – – – 2,110 – 2,110 – – – 21,264 2,110 –21,264 68,587 Closing balance 8,066 1,300 28,293 37,659 30,928 Of retained earnings, SEK 52 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. Share Total Capital stock premium Revaluation reserve reserve1 Statutory reserve restricted Disposition reserve equity Other retained earnings Non- restricted equity Total Parent company Opening balance according to adopted balance sheet for last year Adjustment due to change in accounting principles Opening balance adjusted to RR09 Stock issue Repurchase of own stock Conversion of debentures Capital discount Dividends paid Net income 2001 Closing balance 7,910 3,685 – 7,910 155 – 1 – – – 8,066 – 3,685 – – 10 –1 – – 3,694 20 – 20 – – – – – – 20 – 6,741 – – – – – – 18,356 155 – 11 –1 – – 6,741 18,521 6,741 18,356 100 21,028 21,128 39,484 – – 1,017 2 1,017 1,017 100 – – – – – – 100 22,045 – –156 – – – 3,954 – 4,746 22,145 – –156 – – – 3,954 – 4,746 40,501 155 –156 11 –1 –3,954 –4,746 13,189 13,289 31,810 1 1996 and prior years’ share premium is included in Statutory reserve. 2 Opening balance is adjusted according to RR9 – Income taxes. See Accounting Principles and Notes. In the Income statement for 2000 Income taxes for the year has increased by SEK 113 m. to SEK 784 m. In the Balance sheet for 2000 Other long-term receivables have increased by SEK 548 m. to SEK 1,918 m. and Other short-term receivables have increased by SEK 469 m. to SEK 10,117 m. 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 Reserve for doubtful receivables Income deferral reserve Total other untaxed reserves Total Untaxed Reserves Appropriations/ withdrawals(–) Jan. 1 Dec. 31 11 38 49 3,020 2,193 5,213 5,262 16 – 20 – 4 247 –1,419 –1,172 –1,176 27 18 45 3,267 774 4,041 4,086 Changes in other untaxed reserves in the Parent company in 2000 consist of the following: withdrawal of tax equalization reserve, SEK 127 m. (127 in 1999); appropriations to reserve for doubtful receivables, SEK 389 m. (–2,289 in 1999) and allocation to income deferral reserve SEK 446 m. (529 in 1999). Deferred tax liability, not accounted for, on untaxed reserves, amounts to SEK 1,144 m. in 2001, SEK 1,473 m. 2000 and SEK 1,514 m. 1999. 30 Annual Report 2001 F i n a n c i a l S t a t e m e n t s 16 Provisions Pensions and similar commitments Deferred taxes Warranty commitments Restructuring Other provisions Consolidated 2000 2001 Parent company 2000 2001 10,104 1,878 4,435 7,075 10,679 9,318 3,080 4,432 3,378 7,442 889 – – 47 4,119 5,055 943 – – – 1,890 2,833 Total 34,171 27,650 The pension liabilities include the Parent company’s and other Swedish companies’ obligations in the amount of SEK 7,459 m. (7,344) in accordance with an agreement with the Pension Registration Institute (PRI), which are covered by a Swedish law on safeguarding of pension commitments. The Parent company’s pension liabilities include an obligation in the amount of SEK 532 m. (634) in accordance with an agreement with PRI. Other provisions include amounts for risks regarding off-balance sheet customer ﬁnancing, patent disputes and changes in technique and markets. 17 Long-term liabilities Notes and bond loans (maturing 2003 – 2009) Convertible debentures (maturing 2003) Liabilities to financial institutions Liabilities to subsidiaries Other Consolidated 2000 2001 Parent company 2000 2001 41,656 15,884 41,656 15,884 4,437 4,346 4,437 4,346 5,154 1,320 272 322 – 887 – 744 45,574 128 13,345 37 Total 52,134 22,294 92,067 33,934 Long-term liabilities maturing more than ﬁve years after the balance sheet date: Notes and bond loans and liabilities to financial institutions Other Total 9,274 452 9,726 8,873 – 8,873 Of the long-term loans, SEK 22,181 m. (bond issues of EUR 2,000 m. and GBP 224 m.) have interest rates linked to the company’s credit rating. The interest rate will increase/decrease 0.25 percent per annum for each rating notch per rating agency (Standard & Poor’s and Moody’s) by which either or both have publicly announced a rating decrease/increase of the company’s credit rating below BBB+/Baa1. The interest rate applicable to these bond issues can not be less than the initial interest rate in the loan agreement. 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 in 2000 and in the same year debentures were sold externally. 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. 1 Stockholm Inter Bank Offered Rate 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. During 2001, debentures in the amount of SEK 10 m. were converted to 168,395 B shares. A conversion of all outstanding debentures would increase the number of shares with 76,454,504. During the period of January 1 through January 22, 2002 no additional conversions were made. 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 11,025 m. of which the Parent company SEK 4,456 m. In addition, the Parent company had unused long-term lines of credit amounting to SEK 17,005 m. and unutilized commercial paper- and medium term note programs amounting to SEK 38,572 m. Of total unused lines of credit of SEK 28,030 m., SEK 10,124 m. had conditions linked to the Group’s credit rating. 19 Other current liabilities Consolidated 2000 2001 Parent company 2000 2001 Liabilities to associated companies Accrued expenses Prepaid revenues Other short term liabilities Total 1,077 32,156 1,173 10,703 277 33,854 842 13,387 45,109 48,360 256 1,876 469 2,190 4,791 257 716 – 2,806 3,779 20 Assets pledged as collateral Real estate mortgages Chattel mortgage Bank deposits Other Total Parent company Bank deposits Other Total Liabilities to financial institutions Advances from customers – 1 1,281 1,273 2,555 60 – – – 60 Liabilities to financial institutions Advances from customers 1,281 212 1,493 – – – Total 2001 60 1 1,281 1,273 2,615 Total 2001 1,281 212 1,493 Total 2000 24 – 313 98 435 Total 2000 298 24 322 At December 31, 2001, the Parent company had no pledged assets in favor of subsidiaries. However, under certain conditions, it may pledge collateral for certain subsidiaries’ pension obligations. Annual Report 2001 F i n a n c i a l S t a t e m e n t s 31 Consolidated 2001 Parent company 2001 Consolidated Parent company Interest paid in 2001 was SEK 3,323 m. (1,178) and interest received was SEK 5,487 m. (1,854). Income taxes paid were SEK 93 m. (356). Major non-cash items in Investments are: Acquisitions/sales of other investments, net in 2001 with SEK 21,603 m., 2000 SEK 5,504 m. and 1999 SEK 26 m. Speciﬁcation of net change in cash attributable to cancellation of the commission agreement with Ericsson Telecom AB as of January 1, 2000. The change in cash, amounting to SEK –12 m., is shown in year 2000 as Acquisitions/sales of other investments, net. Inventories Customer financing, accounts receivable — trade and other operating assets Provisions and other operating liabilities Sales of tangible assets Lending, net Proceeds from issuance of other long-term debt Investments, other Net change in cash 23 Leasing 947 5,291 – 5,192 391 –10,897 9,456 8 –12 LEASING OBLIGATIONS Assets under ﬁnancial leases, recorded as tangible assets, consist of: 2001 – – 3,998 9,320 5,322 Financial leases Acquisition costs Land and buildings Machinery Other equipment Accumulated depreciation Land and buildings Machinery Other equipment Net carrying value 2001 2000 – 182 1,284 1,466 – 24 263 287 1,179 193 26 410 629 58 26 184 268 361 At December 31, 2001, future payment obligations for leases were distributed as follows: Consolidated 2002 2003 2004 2005 2006 2007 and later Financial Operating leases leases 8,256 85 27 – – 6 3,829 3,542 2,649 2,099 1,956 9,177 8,374 23,252 Expenses for the year for leasing of assets were SEK 3,785 m. (SEK 2,984 m. in 2000 and SEK 1,647 m. in 1999), of which variable cost SEK 203 m. N o t e s t o t h e F i n a n c i a l S t a t e m e n t s 21 Contingent liabilities Guarantees for customer financing for accounts receivable Other contingent liabilities Total Consolidated 2000 2001 Parent company 2000 2001 13,904 7,551 13,854 5,802 – 1,607 – – 1,679 2,026 9,743 7,604 15,583 11,184 23,597 13,406 Of the guarantees assumed by the Parent company, SEK 9,529 m. in 2001 and SEK 6,608 m. in 2000 are related to subsidiaries. 22 Statement of Cash Flows Consolidated Interest paid in 2001 was SEK 3,374 m. (3,416) and interest received was SEK 2,850 m. (2,959). Income taxes paid were SEK 4,873 m. (5,780). Non-cash transaction under “Cash ﬂow from operating activities” not reported separately is current year increase in pension liabilities of SEK 786 m. (SEK 920 m. in 2000 and SEK 342 m. in 1999). Acquisitions/sales of other investments Consolidated Purchase price for acquired subsidiaries Other acquisitions Sales Acquisitions/sales, net “Cash ﬂow from investing activities” includes the following major items: Consolidated Investment in Sony Ericsson joint venture Proceeds from sales of: Juniper Enterprise distribution Real estate PC and test equipment 2001 –2,800 5,500 3,400 4,700 2,100 32 Annual Report 2001 F i n a n c i a l S t a t e m e n t s The company sold certain assets relating to test plant equipment for software testing in Sweden and the US for SEK 7,897 m. in December 2001. The assets were leased back from the purchaser over a period of one year. In minimum lease payments a residual value guarantee of SEK 6,753 m. is included for 2002 and interest of SEK 229 m. This transaction is being accounted for as a ﬁnancial (capital) lease in the consolidated accounts, which means that no capital gain is reported with the ﬁnancial lease being reported net of such gain. In the Parent company accounts this transaction is accounted for as an operating lease. The lease contains various options including purchase options at amounts approximating fair market value at any time during the term of the lease. The Company has in January 2002 made a deposit of SEK 5,516 m. to secure certain obligations under the lease. At December 31,2001, future payment obligations for leases for the Parent company were distributed as follows: Parent company 2002 2003 2004 2005 2006 2007 and later Financial Operating leases leases – – – – – – – 9,732 1,871 1,464 1,211 1,065 5,222 20,565 LEASING INCOME Some consolidated companies lease equipment, mainly telephone exchanges, to customers. These leasing contracts vary in length from 1 to 8 years. The acquisition value of assets leased to others under Operating leases amounted to SEK 419 m. at December 31, 2001 (December 31, 2000: SEK 505 m.). Accumulated depreciation amounted to SEK 412 m. and net investments to SEK 7 m. at December 31, 2001 (December 31, 2000: SEK 418 m. and SEK 87 m., respectively). Net investment in Sales-type leases and Financial leases amounted to SEK 3 m. at December 31, 2001 (December 31, 2000: SEK 14 m.). Future payments receivable for leased equipment are distributed as follows: Consolidated 2002 2003 2004 Net investment Parent company 2002 2003 2004 Sales-type and Financial leases Operating leases 2 1 1 4 5 – – 5 Financial leases Operating leases – – – – 8,323 278 34 8,635 The Parent company’s operating lease income refers mainly to lease of testplant equipments to subsidiaries. 24 Reconciliation to accounting principles generally accepted in the US Elements of the Company’s accounting principles which differ signiﬁcantly from generally accepted accounting principles in the United States (US GAAP) are described below: A Capitalization of software development costs In accordance with Swedish accounting principles, software development costs are charged against income when incurred. The Company practices US GAAP SFAS 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 SFAS 86, 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 2001 2000 1999 7,091 –7,661 –1,214 10,349 – 6,664 – 7,898 – 4,460 – 989 –1,784 3,685 2,449 Write-downs of previously capitalized software costs amounting to SEK 1,214 m. was made in 2001 as a result of product reviews. Development costs for software for internal use Capitalization Amortization 2001 2000 1999 993 –1,344 – 351 990 – 542 448 1,463 –152 1,311 Amortization of previously capitalized software costs amounting to SEK 1,344 was made in 2001 mainly related to old software. B 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 US GAAP, convertible debenture loans are reported as liabilities at nominal value. When calculating income and equity in accordance with US GAAP, the effects of the capital discount are reversed. C Restructuring costs The rules for providing for payroll related expenses are stricter according to US GAAP. For termination beneﬁts, US 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. D 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 SFAS 87, Employer’s Accounting for Pensions, when calculating income according to US GAAP. The effects for the Company of using this recommendation Annual Report 2001 F i n a n c i a l S t a t e m e n t s 33 N o t e s t o t h e F i n a n c i a l S t a t e m e n t s 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. E Pension premium refund In 2000, Alecta (former SPP), a Swedish insurance company, announced a refund of pension premiums paid, of which a portion was refunded during the year. In accordance with Swedish accounting practice, the total refund was credited to income. In accordance with US GAAP, only the amount Alecta actually paid is credited to income. During 2001 the Company has utilized the major part of the portion not refunded in 2000. In accordance with US GAAP, this amount is credited to income. F Sale-leaseback of property During 2000 and 2001, the Company sold property which was leased back to subsidiaries and treated as an operating lease. 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 US 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. G Hedge accounting The Company adopted SFAS 133, Accounting for Derivative Instruments and Hedging Activities on January 2001 for calculating income and equity according to US GAAP. SFAS 133 requires Ericsson to recognise all derivatives as either assets or liabilities measured at fair value Adoption of SFAS 133 resulted in a cumulative after tax increase in net income of SEK 421 m. and a decrease in other comprehensive income of SEK 1,665 m. in the ﬁrst quarter of 2001. Under SFAS 133 for derivatives designed as a cash ﬂow hedge the gain or loss is reported in other comprehensive income and affects net income ﬁrst when the hedged exposure also affects this income. The ineffective portion of the gain and loss affects net income immediately. According to Swedish accounting practice forward currency exchange contracts and options, which are hedge of ﬁrm commitments as well as budgeted cash ﬂows regarding sales and purchases, are both accounted for as hedges. Consequently, they are valued in a manner reﬂecting the accounting for the hedged position and are not valued at market. According to US GAAP valid for 2000 and 1999, contracts and options not related to ﬁrm commitments are valued at market. H Other In-process research and development Under US 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. 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 US GAAP. Depreciation charges relating to such items have been reversed to income. 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 US GAAP, and depreciated as the assets concerned. Capitalization amounting to SEK 64 (88) m. has increased income and amortization amounting to SEK 64 (79) m. was charged against income for the period when calculating income in accordance with US GAAP. 34 Annual Report 2001 F i n a n c i a l S t a t e m e n t s I Deferred Income Taxes Deferred tax is calculated on all US GAAP adjustments to income. J Adjustment of Net Income Application of US 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. Adjustment of Net Income 2001 2000 1999 Items increasing reported net income Pensions Pension premium refund Capital discount on convertible debentures Other Deferred income taxes Items decreasing reported income Capitalization of software development costs 197 809 –146 – 856 – 416 – 116 129 2,014 147 371 – 2,005 116 1,194 –1,251 3,265 – 2,489 – 357 to be sold for internal use Sale-leaseback Restructuring costs Hedge accounting Net increase/decrease in net income Net income as reported in the consolidated Income Statement Net income per US GAAP before cumulative effect of accounting change Earnings per share, before cumulative effect of change of accounting principle Cumulative effect of accounting change, net of taxes Net income per US GAAP after cumulative effect of accounting change Reported earnings per share, diluted Earnings per share per US GAAP, diluted, after cumulative effect of accounting change –1,784 –351 –815 –1,642 –2,233 3,685 448 –1,361 2,700 – 608 2,449 1,311 – 400 – 694 –6,825 4,864 3,466 –3,560 2,375 3,109 –21,264 21,018 12,130 –24,824 23,393 15,239 –3.14 * 2.65 1.54 421 – – –24,403 23,395 15,239 –2.69 * 2.65 1.54 –3.09 * 2.94 1.92 * Potential ordinay shares are not considered when their conversion to ordinary shares would increase earnings per share. 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 US GAAP securities available for sale that have readily determinable fair values shall be measured at fair value in accordance with SFAS 115 “Accounting for Certain Investments in Debt and Equity Securities”. Unrealized gains and losses shall be included in other comprehensive income. L Comprehensive income The Company has adopted SFAS 130, “Reporting Comprehensive Income”. Comprehensive income includes net income and other changes in equity, except those resulting from transactions with owners. Comprehensive income 2001 2000 1999 Adjustment of certain balance sheet items according to US GAAP Net income in accordance with US GAAP Other comprehensive income Translation adjustments Translation adjustments for sold/liquidated companies Net gain/loss on cash flow hedges Hedging for investments Unrealized gains and losses on securities available-for-sale Minimum pension liability Deferred income taxes Cumulative effect of accounting change, net (see G) Total other comprehensive income Comprehensive income in accordance with US GAAP –24,403 23,393 15,239 2,710 2,326 – 2,442 5 2,096 –833 9 – – 500 1 – 53 –6,424 –392 1,445 –1,847 25 657 8,527 – 47 – 2,403 Intangible assets Tangible assets Other investments Accounts receivable Other receivables Minority interest in equity Provisions Convertible debentures Other current liabilities –1,665 – – M Statement of Cash Flows –3,058 670 3,689 –27,461 24,063 18,928 As per reported Balance Sheet Dec 31 2000 Dec 31 2001 13,066 16,075 3,100 57,438 41,993 12,833 22,378 2,484 74,973 44,029 As per US GAAP Dec 31 2000 31,343 22,475 9,164 76,580 44,866 Dec 31 2001 29,481 16,296 3,355 57,438 41,946 3,532 34,171 2,764 27,650 3,531 29,783 2,756 18,060 4,437 4,346 4,740 4,765 45,109 48,360 48,024 48,560 Adjustment of Equity 2001 2000 1999 Increases Capitalization of software development costs to be sold for internal use Unrealized gains and losses on available-for-sale securities Pensions Capitalization of interest, net after cumulative depreciation Restructuring costs Reductions Capital discount on convertible debentures Pension refund Sale-leaseback Deferred income taxes Hedging Other Adjustment of stockholders’ equity, net Reported stockholders’ equity Equity according to US GAAP 15,094 1,408 16,878 1,759 13,193 1,311 255 99 211 1,458 6,680 300 211 3,100 8,527 422 202 400 18,525 28,928 24,055 –303 –47 –2,176 –4,487 –2,196 –102 – 419 – 856 –1,361 – 8,197 – 332 – 232 – 566 – – – 6,731 276 – 594 –9,311 11,397 7,615 9,214 68,587 17,531 91,686 16,440 69,176 77,801 109,217 85,616 The Company in principle follows SFAS 95 when preparing the Statement of Cash Flows. According to SFAS 95, however, only cash, bank and short-term investments with due dates within 3 months shall be considered cash and cash equivalents, rather than within 12 months. Applying this deﬁnition would mean following adjustments of reported cash: Consolidated, SEK m. 2001 2000 1999 1998 Short-term cash investments, cash and bank, as reported Adjustment for items with maturity of 4–12 months Cash and cash equivalents as per US GAAP 68,839 35,606 29,008 18,233 –28,182 –16,129 – 9,731 – 5,978 40,657 19,477 19,277 12,255 N Stock compensation plan The Company, as permitted under SFAS 123 “Accounting for Stock Based Compensation”, applies Accounting Principles Board Opinion 25 (“APB 25”) and related interpretations in accounting for its plans under US 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 SFAS 123 for its stock option plans, net income and earnings per share in accordance with US GAAP. would have been changed to the pro forma amounts indicated below: Annual Report 2001 F i n a n c i a l S t a t e m e n t s 35 2001 2000 1999 27 Average number of employees and remuneration in 2001 and 2000 Average number of employees –24,824 23,393 15,239 Consolidated Men Women 2001 Total Men Women 2000 Total Western Europe* Central and Eastern Europe, Middle East and Africa North America Latin America Asia Pacific 45,223 17,247 62,470 45,229 17,993 63,222 3,491 1,181 4,672 3,419 1,182 4,601 6,947 2,910 9,857 8,903 4,532 13,435 4,969 1,787 6,756 5,568 2,238 7,806 7,894 3,770 11,664 8,497 3,992 12,489 Total 68,524 26,895 95,419 71,616 29,937101,553 * Of which Sweden * Of which EU 27,703 11,432 39,135 26,726 11,153 37,879 44,144 16,982 61,126 44,164 17,685 61,849 Parent Company Men Women 2001 Total Men Women 2000 Total Western Europe* Central and Eastern Europe, Middle East & Africa Latin America Total * Of which Sweden * Of which EU 380 465 845 319 366 685 857 7 51 3 908 10 1,244 519 1,763 653 5 977 69 2 722 7 437 1,414 380 465 845 319 366 685 380 465 845 319 366 685 Wages and salaries and social security expenses Wages and salaries Social security expenses Of which pension costs Consolidated 2000 2001 Parent company 2000 2001 41,227 38,970 14,293 13,161 3,704 2,062 795 484 345 631 384 289 N o t e s t o t h e F i n a n c i a l S t a t e m e n t s Net income Net income per US GAAP before cumulative effect of accounting change Net income, pro forma, per US GAAP before cumulative effect of accounting change Earnings per share, diluted Earnings per share per US GAAP before cumulative effect of accounting change Earnings per share, pro forma, per US GAAP before cumulative effect of accounting change –26,165 21,882 15,239 –3.14 * 2.94 1.92 –3.31 * 2.75 1.92 * Potential ordinary shares are not considered when their conversion to ordinary shares would increase earnings per share. The fair value of each option grant is estimated on the date of the grant, using the Black-Scholes option pricing model with the following weighted-average assumptions: 2001 2000 1999 Expected dividend yield Expected volatility Risk-free interest rate Expected life of option (in years) 0.6% 1.0% 40.2% 35.4% 6.0% 5.5% 4.8 3.1 – – – – 25 Tax assessment values (in Sweden) Land and land improvements Buildings Consolidated 2000 2001 Parent company 2000 2001 24 – 50 216 24 – 28 7 26 Special information regarding the Parent company Sales of the Parent company were SEK 1,374 m. (SEK 1,195 m.), of which exports accounted for 100 (100) percent. Consolidated companies were customers for 0 (0) percent of the Parent company’s sales, while 53 (40) percent of the Company’s total purchases of goods and services were from such companies. The Parent company has guaranteed up to an amount of SEK 0.2 m. for loans obtained by employees. 36 Annual Report 2001 F i n a n c i a l S t a t e m e n t s Wages and salaries per geographical area Consolidated 2000 2001 Parent company 2000 2001 26,527 25,393 488 425 Western Europe* Central and Eastern Europe, Middle East and Africa North America Latin America Asia Pacific Total * Of which Sweden * Of which EU 1,381 6,910 2,572 3,837 1,062 6,322 2,502 3,692 41,227 38,971 14,954 25,679 14,576 24,665 302 – 5 – 795 488 488 118 8.4 204 – 2 – 631 425 425 83 (8) Board of Directors, the President, the former President and present and former Executive Vice Presidents (of which bonus and similar paid for 2000 and 1999 respectively) 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: Exercise price, SEK Employees affected 212.81 1,800 132.80 8,000 Plan 1999 2000 2001 Type Exercisable 1.4 million (post split) 7-year employee call options issued by Ericsson 50.4 million (post split) 7-year employee call options issued by Ericsson 47.5 million employee call options issued by Ericsson In three lots (30/40/30%) 3– 5 years respectively after grant to year 7 In three lots, 1/3 per year 1– 3 years respectively after grant to year 7 In three lots, 1/3 per year 1– 3 years respectively after grant to year 7 The salary paid and the value of beneﬁts provided to Kurt Hellström in his capacity as President and CEO amounted to SEK 16,941,114. Sven Christer Nilsson, the former President, was entitled to a severance pay from July 7, 1999 up to July 8, 2001, in the aggregate amounting to SEK 10,664,303. During 2001, severance pay amounting to SEK 3,642,604 was paid to the former President. The following rules regarding severance pay and pension apply to the President, the 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 and the 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 members of the Corporate Management: The beneﬁts due under the so-called ITP plan apply, supplemented by the portion of salary and bonus exceeding ITP, from age 65. In addition, the employee has the right to retire with a pension at age 60, at the earliest. Following which the pension is based on the current pensionable salary at retirement and amounts to between 40 and 70 percent of this salary. Subject to certain conditions, this pension is also paid if the employee is entitled to severance pay at age 60. Costs of pensions for the former President, the President, former and present Executive Vice Presidents amounted to SEK 45,5 m. during the year. 15,000 28 Fees to auditors 64.00 and 57.00 (two grants) Audit fees Parent company Other companies Fees for other services Parent company Other companies Total fees Grants for the 1999 plan took place on March 1, 2000 and grants for the 2000 plan were made on January 17, 2000 and in addition to options issued to employees 6.7 million stock options have been issued for hedging of social security costs. The 2001 options were granted on 14 May 2001 (44.9 million) and 19 November 2001 (2.6 million). The dilutive effect on earnings per share for 2001 of outstanding employee stock option plans was less than 0.1 percent. Remuneration to members of the Board and the Corporate Management During the year the following fees have been paid to the Directors appointed by the Annual General Meeting: the Chairman SEK 2,500,000, Deputy Chairmen SEK 750,000 each and other Directors SEK 500,000 each. In addition, each such Director serving on a Board committee has received a fee of SEK 100,000. 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 1,000 per meeting was paid to the employee representatives of the Board. Further, employee representatives being also members of a committee of the Board received a fee of SEK 100 for each committee meeting. Price- waterhouse- Coopers KPMG Others Total 4 46 50 8 100 108 158 – 5 5 – 5 5 10 – 2 2 n/a n/a n/a 2 4 53 57 8 105 113 170 Annual Report 2001 F i n a n c i a l S t a t e m e n t s 37 A u d i t o r s (cid:213) R e p o r t To the Annual Ge n e ral Meeting of the shareholders of Telefonaktiebolaget L M Ericsson (publ) corporate identity number 556016-0680 We have audited the annual statements, the consolidated statements, the accounting re c o rds and the administration of the Board of Di rectors and the President of Telefonaktiebolaget L M Ericsson (publ) for the year 2 0 0 1. These statements and the administration of the company are the responsibility of the Board of Di rectors and the Pre s i d e n t . 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 25, 2002 Carl-Eric Bohlin Au t h o r i zed Public Ac c o u n t a n t Pr i c e w a t e rhouseCoopers A B Olof Herolf Au t h o r i zed Public Ac c o u n t a n t Pr i c e w a t e rhouseCoopers A B Thomas Thiel Au t h o r i zed Public Ac c o u n t a n t 3 8 Annual Report 2001 F in a n c i a l S t a t e m en t s T r e a s u r y a n d F i n a n c i a l R i s k M a n a g e m e n t Ericsson has a ﬁnancial policy approved by the Board of Directors regulating the management of ﬁnancial risks. The Finance Committee of the Board is responsible for the continuous monitoring of Ericsson’s ﬁnancial risk exposure and for approving certain matters regarding investments, loans, guarantees or customer ﬁnancing commitments. Internally, the Corporate Treasury and Corporate Customer Finance functions manage ﬁnancial risks and issue policies in this regard to Group companies. For handling of cash management and hedging activities, Ericsson has established Treasury Centers in Stockholm, Dublin, Singapore and Dallas (collectively known as Ericsson Treasury Services, the Group’s internal bank). The primary tasks of the Treasury organization are to manage and control ﬁnancial exposures in a manner consistent with underlying business risks, to actively manage the Group’s ﬁnancial assets and liabilities and to ensure that the Group always has sufficient ﬁnancing in place through loans and committed credit arrangements. 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. Ericsson classiﬁes ﬁnancial risks as either market, credit, country or funding and liquidity risks. MARKET RISK Market risk is divided into three categories: foreign exchange risk, interest rate risk and risk related to the Ericsson share price. Foreign Exchange Risk Management Ericsson reports in SEK and today operates in more than 140 countries. Foreign currency denominated assets, liabilities, sales and purchases, together with a large SEK cost base, result in substantial foreign exchange exposures. Foreign exchange risks are classiﬁed as either economic exposure, transaction exposure or translation exposure. Economic Exposure Ericsson is dependent on the development of SEK exchange rates and on economic conditions in Sweden. Around 44 percent of all employees and 20 percent of global production is located in Sweden whilst Sweden accounts for just 3 percent of all sales. With this substantial SEK cost base, a gradually weaker SEK exchange rate during 2001 has had a positive impact on Ericsson compared to our competitors with costs denominated in EUR or USD. Normally, Ericsson does not hedge economic exposure. Transaction Exposure An analysis of net exposures for the whole Group including revenues and costs for 2001 by currency, excluding parts of Consumer Products transferred to Sony Ericsson, shows a major net revenue exposure in USD, EUR, CNY, JPY and GBP. A +/-10 percent change in exchange rates between the SEK and Ericsson’s largest currency exposures would give the following effects (SEK b.) USD 1.9, EUR 1.2, CNY 1.0, JPY 0.8, GBP 0.4, before any hedging effects are considered. Both committed and forecasted transaction exposures are hedged, mainly using currency forwards, to safeguard business margins. As per December 31, 2001, anticipated net transaction exposures in USD, JPY, GBP and EUR were hedged for the next 9–12 months. Unrealized currency forwards carried a market value of approximately SEK –2 b. Due to a weaker SEK exchange rate during 2001, an unhedged position would have increased earnings by approximately SEK 2 b. Translation Exposure Ericsson has many subsidiaries operating outside of Sweden. These foreign investments are 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 exposed equity. The translation differences reported in equity during the year were positive SEK 2.1 b., mainly due to a weaker Swedish Krona. 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 net interest rate exposure by using derivative instruments, such as forward rate agreements, interest rate swaps and futures. Ericsson’s established policy is to create a net position where all interest rates are ﬂoating. During 2001 interest rate ﬁxing periods for interest bearing ﬁnancial assets and liabilities were short-term and balanced. Risk related to the Ericsson share price Ericsson is exposed to the development of its own share price through stock option and stock purchase plans for employees. The obligation to deliver shares under these plans is covered by holding ERIC B shares and warrants for issuance of new ERIC B shares. An increase in the share price will result in social security Annual Report 2001 F i n a n c i a l S t a t e m e n t s 39 T r e a s u r y a n d F i n a n c i a l R i s k M a n a g e m e n t charges, which represents a risk to both Ericsson’s income statement and cash ﬂow. The income statement exposure in some of the option programs is hedged through the purchase of call options. The cash ﬂow exposure is fully hedged through the holding of ERIC B shares and through the purchase of call options on ERIC B shares. CREDIT RISK Ericsson divides Credit risk into three categories: customer ﬁnancing risk, ﬁnancial credit risk and operational credit risk. Customer Financing Risk Management Ericsson’s credit approval process requires that all major commitments to extend ﬁnancing support to customers be approved by 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. Ericsson can add considerable value to this process and sometimes extend vendor loans. In most cases, Ericsson’s role is to bridge the short-term funding gap until medium and long- term external ﬁnancing solutions are in place. Our objective is to ﬁnd suitable off-balance sheet ﬁnancing solutions with as limited recourse to Ericsson as possible. Corporate Customer Finance units operate in all Market Areas to support the business in the early stages of negotiations. To the extent customer credits are not immediately transferred to banks, the consolidated company, Ericsson Credit AB, manages the bulk of remaining outstanding vendor loan exposures. Some of our off-balance sheet customer ﬁnancing is provided by associated ﬁnance companies, such as Ericsson Project Finance AB and AB LM Ericsson Finans. Any recourse to Ericsson for credit risk relating to off-balance sheet ﬁnancing is reported as contingent liabilities. The exposure from outstanding vendor loans and credit commitments is handled centrally. As of December 31, 2001, total gross customer ﬁnancing amounted to SEK 26.4 b., of which SEK 8.9 b. were on-balance sheet for the Ericsson Group, while the remainder were guaranteed off-balance sheet items. Around two thirds of the total outstanding exposure is now off Ericsson’s balance sheet. This reﬂects the efforts made to reduce on-balance sheet credits and improve cash ﬂow. The level of total credit risk relating to customer ﬁnance has increased over the period. However, transfer of risk to the ﬁnancial markets continues. In December 2001, Ericsson placed a portfolio of vendor credits valued at SEK 16.4 b. on the market, leading to a transfer of approximately SEK 2 b. of vendor credits from Ericsson’s balance sheet. The remainder represents credits against future commitments, thereby improving Ericsson’s risk proﬁle and reducing future cash outﬂow. Some vendor loans have been repaid during the year. Credit losses incurred during the year have been limited. A small number of credits have also been successfully restructured. Risk provisions are made for all credits. The level of provision is determined individually for each credit based on a conservative assessment of the risk exposure. Financial Credit Risk Management Financial investments and derivatives carry an element of risk that counterparties may be unable to fulﬁll their obligations. Ericsson Treasury Services limits these risks 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. Table 1 – Ericsson Treasury Services’ external investments, as of December 31, 2001, SEK b. Security Treasury Bills Cash, Bank Deposits Commercial Paper Floating Rate Notes Mortgage CP Corporate Bonds Treasury Bonds Mortgage Bonds Total 2001 2000 19.3 11.7 11.1 1.9 – 1.0 2.9 0.2 48.1 13.2 5.6 1.9 1.1 0.5 0.3 0.2 0.2 23.0 Interest bearing financial assets, SEK 81.6 b. 2.6 6.2 Interest bearing financial liabilities, SEK 81.8 b. 10.1 72.8 51.3 Short-term assets Long-term assets Deposits with associated companies 20.3 Long-term liabilities Short-term liabilities Pension liabilities Assets – 100% floating rate interest Liabilities – 95.4% floating rate interest 40 Annual Report 2001 F i n a n c i a l S t a t e m e n t s Ericsson Treasury Services’ exposure in derivative instruments is, for operational purposes, valued at market daily and expressed as a liability to, or receivable from, each counterparty. Netting contracts (ISDA agreements) are in place for all counterparties, substantially reducing the risk. Operational Credit Risk Management The year was characterized by successful efforts to reduce outstanding accounts receivable in order to minimize credit risk and reduce working capital. Action has been taken to improve the management and collection process of receivables. COUNTRY RISK 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 to foreign subsidiaries. FUNDING AND LIQUIDITY RISK Ericsson maintains sufficient liquidity through cash management, investments in highly liquid ﬁxed income securities, and by having sufficient committed and uncommitted credit lines in place for potential funding needs. Ericsson deﬁnes liquidity as cash and short-term investments (up to 12 months). During 2001, liquidity increased by SEK 33.2 b. Net liquidity, after deduction of short-term interest bearing ﬁnancial liabilities, increased by SEK 28.4 b. During the year, funding programs and long-term committed credit facilities were signiﬁcantly increased; the Euro Medium Term Note Program by USD 2,500 m., the US Commercial Paper Program by USD 500 m. and the Euro Commercial Paper Program by USD 800 m. Long-term committed credit facilities were increased by USD 600 m. Medium Term Note and Commercial Paper Programs are formats for issuing securities in the debt capital and money markets subject to market conditions and does not represent committed credit facilities. In October, 2001, a EUR 400 m. credit facility with the European Investment Bank was signed. COUNTRY RISK Total risk by geographical area SEK 139 b. 13.2 21.4 24.8 48.1 Western Europe Latin America North America Asia Pacific Eastern & Central Europe, Middle East & Africa 31.1 Table 2 – Funding programs and long-term committed credit facilities, available and utilized, as of December 31, 2001, SEK millions. Program/Facility Amount Utilized Available European Medium Term Note Program (USD 5,000m) US Commercial Paper Program (USD 1,000m) European Commercial Paper Program (USD 1,500m) Swedish Commercial Paper Program (SEK 5,000m) Long-Term Committed Credit Facilities (USD 1,600m)* Total year end 2001 Total year end 2000 53,141 46,139 7,002 10,628 15,942 5,000 17,005 0 0 0 0 101,716 46,139 49,646 23,630 10,628 15,942 5,000 17,005 55,577 26,016 * SEK 6 b. of long-term committed credit facilities are subject to conditions linked to our credit rating. Ericsson’s objective is to have a payment readiness (deﬁned as cash and short-term investments less short-term borrowings plus long-term unused credit commitments) of between 7 and 10 percent of sales to meet rapid changes in liquidity requirements. During periods of increased uncertainty, the payment readiness target may be signiﬁcantly higher. During 2001 payment readiness was increased to exceptionally high levels by raising long-term debt and increasing long-term committed credit facilities. Bond issues and bank loans increased long-term borrowings during the year by SEK 29.7 b. Payment readiness, as of December 31, 2001, was 28 percent of sales (11 percent in 2000). To support the long-term payment readiness objective, Ericsson policy stipulates that the greater part of borrowings should be long-term or supported by long-term credit commitments. During 2001 Moody’s and Standard & Poor’s lowered their ratings two notches respectively. The outlook remained negative with both agencies. Ratings, as of December 31, 2001 Rating agency Moody’s Standard & Poor’s COUNTRY RISK Total risk by category SEK 139 b. 4.2 9.1 13.7 50.1 Long-term Short-term Baa1 BBB+ P-2 A-2 61.6 Equity Subs. & Ass. Companies accounts receivable and internal lending Customer financing External accounts receivable Bank lending support Annual Report 2001 F i n a n c i a l S t a t e m e n t s 41 S e g m e n t s a n d M a r k e t A r e a s ORDERS BOOKED BY SEGMENT BY QUARTER (SEK m.) Year to date Systems of which Mobile Systems Multiservice Networks Phones Other operations Less: Intersegment orders Total Isolated quarters Systems of which Mobile Systems Multiservice Networks Phones Other operations Less: Intersegment orders Total NET SALES BY SEGMENT BY QUARTER (SEK m.) Year to date Systems of which Mobile Systems Multiservice Networks Phones Other operations Less: Intersegment sales Total Isolated quarters Systems of which Mobile Systems Multiservice Networks Phones Other operations Less : Intersegment sales Total 0003 0006 0009 57,944 48,471 9,473 14,562 11,266 – 4,298 103,503 85,757 17,746 27,988 19,991 –7,287 153,219 125,738 27,481 42,113 27,665 –10,131 2000 0012 213,164 175,609 37,555 56,937 35,751 –13,508 0103 0106 0109 62,583 52,625 9,958 7,178 8,239 –2,501 113,286 94,841 18,445 14,813 13,764 –5,198 148,561 125,430 23,131 22,234 17,902 –7,150 2001 0112 182,757 156,370 26,387 22,234 25,974 –9,488 79,474 144,195 212,866 292,344 75,499 136,665 181,547 221,477 Q1 Q2 Q3 57,944 48,471 9,473 14,562 11,266 – 4,298 45,559 37,286 8,273 13,426 8,725 – 2,989 49,716 39,981 9,735 14,125 7,674 – 2,844 2000 Q4 59,945 49,871 10,074 14,824 8,086 – 3,377 Q1 Q2 Q3 62,583 52,625 9,958 7,178 8,239 –2,501 50,703 42,216 8,487 7,635 5,525 –2,697 35,275 30,589 4,686 7,421 4,138 –1,952 2001 Q4 34,196 30,940 3,256 0 8,072 –2,338 79,474 64,721 68,671 79,478 75,499 61,166 44,882 39,930 0003 0006 0009 38,910 32,481 6,429 14,794 9,297 – 3,916 85,343 70,339 15,004 28,145 17,801 –7,171 133,440 109,061 24,379 42,473 25,888 –10,341 2000 0012 194,747 158,083 36,664 56,279 35,927 –13,384 0103 0106 0109 44,127 35,336 8,791 7,170 7,249 –2,614 94,843 76,356 18,487 15,317 14,162 –5,610 137,798 111,923 25,875 23,567 19,671 –7,735 2001 0112 187,777 154,343 33,434 23,567 30,816 –10,321 59,085 124,118 191,460 273,569 55,932 118,712 173,301 231,839 Q1 Q2 Q3 38,910 32,481 6,429 14,794 9,297 – 3,916 46,433 37,858 8,575 13,351 8,504 – 3,255 48,097 38,722 9,375 14,328 8,087 – 3,170 2000 Q4 61,307 49,022 12,285 13,806 10,039 – 3,043 Q1 Q2 Q3 44,127 35,336 8,791 7,170 7,249 –2,614 50,716 41,020 9,696 8,147 6,913 –2,996 42,955 35,567 7,388 8,250 5,509 –2,125 2001 Q4 49,979 42,420 7,559 0 11,145 –2,586 59,085 65,033 67,342 82,109 55,932 62,780 54,589 58,538 42 Annual Report 2001 F i n a n c i a l S t a t e m e n t s ADJUSTED OPERATING INCOME AND OPERATING MARGIN BY SEGMENT BY QUARTER (SEK m.) Year to date Systems Phones Other operations Unallocated* Total Items affecting comparability: – Non-operational capital gains/losses, net – Capital gain Juniper Networks – Pension refund – Restructuring costs Total As percentage of Net Sales Systems Phones Other operations Total Isolated quarters Systems Phones Other operations Unallocated* Total 0003 0006 0009 5,641 569 578 – 413 15,280 –1,544 1,058 –1,260 23,392 – 5,517 1,550 –1,171 2000 0012 32,641 –15,613 1,579 –1,858 0103 0106 0109 1,808 –5,722 –118 –331 2,382 –10,350 25 –642 2,620 –14,559 –817 –1,069 2001 0112 2,881 –17,001 –2,058 –1,716 6,375 13,534 18,254 16,749 –4,363 –8,585 –13,825 –17,894 – – – – 0 0003 14% 4% 6% 11% 4,738 – 1,100 – 6,164 – 1,100 – 5,933 15,383 1,100 – 8,000 42 5,453 – – 3 5,453 – –15,000 168 5,453 – –15,000 347 5,453 – –15,000 5,838 7,264 14,416 5,495 –9,544 –9,379 –9,200 0006 18% – 5% 6% 11% 0009 18% –13% 6% 10% 2000 0012 17% – 28% 4% 0103 0106 0109 4% –80% –2% 3% –68% 0% 2% –62% –4% 2001 0112 2% n/a n/a 6% –8% –7% –8% –8% Q1 Q2 Q3 9,639 – 2,113 480 – 847 8,112 – 3,973 492 89 5,641 569 578 – 413 6,375 2000 Q4 9,249 –10,096 29 – 687 Q1 Q2 Q3 1,808 –5,722 –118 –331 574 –4,628 143 –311 238 –4,209 –842 –427 2001 Q4 261 –2,442 –1,241 –647 7,159 4,720 –1,505 –4,363 –4,222 –5,240 –4,069 Items affecting comparability: – Non-operational capital gains/losses, net – Capital gain Juniper Networks – Pension refund – Restructuring costs Total – – – – 0 4,738 – 1,100 – 1,426 – – – – 231 15,383 – 8,000 42 5,453 – – –39 – – –15,000 5,838 1,426 7,152 5,495 –15,039 165 – – – 165 As percentage of Net Sales Systems Phones Other operations Total Q1 14% 4% 6% 11% Q2 21% –16% 6% 11% Q3 17% – 28% 6% 7% 2000 Q4 15% –73% 0% – 2% Q1 Q2 Q3 1% –57% 2% 1% –51% –15% 4% –80% –2% –8% –7% –10% –7% * “Unallocated” consists mainly of costs for corporate staffs, certain goodwill amortization and non-operational gains and losses. Annual Report 2001 F i n a n c i a l S t a t e m e n t s 43 179 – – – 179 2001 Q4 1% n/a n/a S e g m e n t s a n d M a r k e t A r e a s ORDERS BOOKED BY MARKET AREA BY QUARTER (SEK m.) Year to date 0003 0006 0009 2000 0012 0103 0106 0109 2001 0112 25,048 50,870 71,807 105,684 29,042 47,697 60,895 68,934 17,388 9,148 9,695 18,195 24,503 19,082 19,312 30,428 32,104 27,326 33,053 48,576 40,972 37,977 44,959 62,752 11,273 7,320 12,638 15,226 17,606 13,183 22,723 35,456 29,548 19,954 26,989 44,161 33,455 29,767 33,332 55,989 79,474 144,195 212,866 292,344 75,499 136,665 181,547 221,477 2,924 23,261 6,010 47,523 7,983 67,194 9,876 99,951 1,998 27,565 5,135 45,356 6,294 57,855 9,379 64,437 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 0109 0112 –15% –35% 0103 16% –35% –20% 30% –16% –5% –32% 19% 0106 –6% –28% –31% 18% 17% –5% –15% –5% –8% –27% –18% –9% –15% –21% –14% –18% –22% –26% –11% –24% –5% –36% 2001 Q4 Isolated quarters Q1 Q2 Q3 2000 Q4 Q1 Q2 Q3 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 25,048 25,822 20,937 33,877 29,042 18,655 13,198 8,039 17,388 9,148 9,695 18,195 7,115 9,934 9,617 12,233 7,601 8,244 13,741 18,148 8,868 10,651 11,906 14,176 11,273 7,320 12,638 15,226 6,333 5,863 10,085 20,230 11,942 6,771 4,266 8,705 3,907 9,813 6,343 11,828 79,474 64,721 68,671 79,478 75,499 61,166 44,882 39,930 2,924 23,261 3,086 24,262 1,972 19,671 1,893 32,757 1,998 27,565 3,137 17,791 1,159 12,499 3,085 6,582 Q1 Q2 Q3 Q4 16% –28% –37% –76% –35% –20% 30% –16% –5% –32% 19% –11% –41% 5% 65% –5% 2% –27% 57% –18% –69% –52% –35% –41% –36% –56% –8% –47% –17% –50% 63% –80% 44 Annual Report 2001 F i n a n c i a l S t a t e m e n t s NET SALES BY MARKET AREA BY QUARTER (SEK m.) Year to date 0003 0006 0009 2000 0012 0103 0106 0109 2001 0112 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 23,578 47,011 70,090 100,234 18,024 37,154 53,568 71,105 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 8,187 7,186 8,467 14,068 17,315 14,961 18,482 30,800 25,555 23,131 24,836 46,211 35,867 31,379 34,516 58,972 59,085 124,118 191,460 273,569 55,932 118,712 173,301 231,839 2,380 22,052 4,371 44,031 6,704 65,754 8,732 94,293 1,628 17,046 3,518 35,020 5,022 50,650 7,341 66,561 0103 0106 0109 0112 –24% –21% –24% –29% 12% –16% 9% 19% –5% –32% –23% 3% –22% 7% 30% –4% –20% –20% –1% –17% –14% 19% –9% –25% –23% Q1 Q2 Q3 2000 Q4 Q1 Q2 Q3 –5% –11% –22% 5% –15% –16% –29% 2001 Q4 23,578 23,433 23,079 30,144 18,024 19,130 16,414 17,537 7,323 8,549 7,781 11,854 9,476 10,714 9,553 11,857 9,051 8,441 11,619 15,152 11,851 7,489 15,165 17,460 8,187 7,186 8,467 14,068 9,128 7,775 10,015 16,732 8,240 8,170 6,354 15,411 10,312 8,248 9,680 12,761 59,085 65,033 67,342 82,109 55,932 62,780 54,589 58,538 2,380 22,052 1,991 21,980 2,333 21,723 2,028 28,539 1,628 17,046 1,890 17,974 1,504 15,630 2,319 15,911 Q1 Q2 Q3 Q4 –24% –18% –29% –42% 12% –16% 9% 19% –5% –32% –23% –4% –27% 5% 41% –3% –5% –18% –9% –3% –45% 2% –19% –36% –28% –13% 10% –36% –27% –29% 14% –44% Annual Report 2001 F i n a n c i a l S t a t e m e n t s 45 S e g m e n t s a n d M a r k e t A r e a s EXTERNAL ORDERS BOOKED BY MARKET AREA AND SEGMENT (SEK m.) Year to date 2001 Western Europe Central- and Eastern Europe, Middle East & Africa North America Latin America Asia Pacific Total Share of Total Systems Phones Other Total 49,996 31,058 23,342 29,171 48,824 7,506 1,842 5,123 2,257 4,834 11,432 555 1,302 1,904 2,331 68,934 33,455 29,767 33,332 55,989 Share Change of Total vs. 2000 (%) 31% 15% 13% 15% 26% – 35% –18% – 22% – 26% –11% 182,391 21,562 17,524 221,477 100% –24% 82% 10% 8% 100% EXTERNAL NET SALES BY MARKET AREA AND SEGMENT (SEK m.) Year to date 2001 Western Europe Central- and Eastern Europe, Middle East & Africa North America Latin America Asia Pacific Total Share of Total TOP 10 MARKETS IN ORDERS AND SALES Year to date 2001 Orders United States China Italy Mexico Brazil Japan United Kingdom Sweden Spain Germany NUMBER OF EMPLOYEES BY SEGMENT BY QUARTER Share Change of Total vs. 2000 (%) Systems Phones Other Total 51,209 32,307 22,677 30,090 51,096 7,465 2,017 6,147 2,428 5,017 12,431 1,543 2,555 1,998 2,859 71,105 35,867 31,379 34,516 58,972 31% 15% 14% 15% 25% 187,379 23,074 21,386 231,839 100% 81% 10% 9% 100% Share of total orders Sales 13% 12% 7% 6% 5% 4% 4% 4% 4% 3% United States China Mexico Italy United Kingdom Brazil Japan Spain Sweden Turkey – 29% – 5% –11% – 22% 5% –15% Share of total sales 13% 12% 6% 6% 5% 5% 4% 4% 3% 3% 2001 0112 67,898 0 15,861 1,439 0003 0006 0009 64,836 17,290 19,167 1,030 66,207 17,710 16,324 1,076 68,571 18,137 15,602 1,084 2000 0012 71,102 16,840 16,059 1,128 0103 0106 0109 75,081 14,461 16,453 1,264 76,636 7,837 14,005 1,343 71,392 6,439 13,774 1,344 102,323 101,317 103,394 105,129 107,259 99,821 92,949 85,198 0103 0106 0109 0112 16% –16% –14% 23% 16% –56% –14% 25% 4% –5% –65% –100% –1% –12% 28% 24% 5% –1% –10% –19% Systems Phones Other operations Unallocated Total Change Systems Phones Other operations Unallocated Total 46 Annual Report 2001 F i n a n c i a l S t a t e m e n t s ADJUSTED OPERATING INCOME AND OPERATING MARGIN BY SEGMENT BY QUARTER – PRO FORMA (SEK m.) Year to date Systems Phones Other operations Unallocated* Total Items affecting comparability: - Non-operational capital gains/losses, net - Capital gain Juniper Networks - Restructuring costs Total As percentage of Net Sales Systems Phones** Other operations Total Isolated quarters Systems Phones Other operations Unallocated* Total Items affecting comparability: - Non-operational capital gains/losses, net - Capital gain Juniper Networks - Restructuring costs Total As percentage of Net Sales Systems Phones** Other operations Total 0103 1,808 – 5,512 – 328 – 331 – 4,363 42 5,453 – 0106 2,382 – 9,964 – 361 – 642 0109 2,620 –13,947 –1,429 –1,069 – 8,585 –13,825 3 5,453 –15,000 168 5,453 –15,000 5,495 – 9,544 – 9,379 0103 4% – – 4% – 9% Q1 1,808 – 5,512 – 328 – 331 – 4,363 42 5,453 – 0106 3% – – 2% – 8% Q2 574 – 4,452 – 33 – 311 – 4,222 – 39 – –15,000 5,495 –15,039 Q1 4% – – 4% – 9% Q2 1% – 0% – 8% 0109 2% – – 6% – 9% Q3 238 – 3,983 –1,068 – 427 – 5,240 165 – – 165 Q3 1% – –17% –11% 2001 0112 2,881 –14,649 – 4,410 –1,716 –17,894 347 5,453 –15,000 – 9,200 2001 0112 2% – –13% – 8% 2001 Q4 261 –702 – 2,981 – 647 – 4,069 179 – – 179 2001 Q4 1% – – 27% –7% * “Unallocated” consists mainly of costs for corporate staffs, certain goodwill amortization and non-operational gains and losses ** Calculation not applicable Pro forma format, reﬂecting results with parts of Phones transferred to the joint venture Sony Ericsson Mobile Communications, accounted for under the equity method, and retained parts included in Other operations. No change in reported total income numbers are made. Annual Report 2001 F i n a n c i a l S t a t e m e n t s 47 S e g m e n t s a n d M a r k e t A r e a s ORDERS BOOKED BY SEGMENT BY QUARTER – PRO FORMA (SEK m.) Year to date Systems of which Mobile Systems Multiservice Networks Other operations Less: Intersegment orders Total Isolated quarters Systems of which Mobile Systems Multiservice Networks Other operations Less: Intersegment orders Total NET SALES BY SEGMENT BY QUARTER – PRO FORMA (SEK m.) Year to date Systems of which Mobile Systems Multiservice Networks Other operations Less: Intersegment sales Total Isolated quarters Systems of which Mobile Systems Multiservice Networks Other operations Less: Intersegment sales Total NUMBER OF EMPLOYEES BY QUARTER – PRO FORMA Year to date Systems Other operations Unallocated Total 0103 62,583 52,625 9,958 9,227 –2,501 69,309 Q1 62,583 52,625 9,958 9,227 –2,501 69,309 0103 44,127 35,336 8,791 8,247 –2,614 49,760 Q1 44,127 35,336 8,791 8,247 –2,614 49,760 0103 75,081 18,615 1,264 94,960 0106 113,286 94,841 18,445 15,653 –5,198 123,741 Q2 50,703 42,216 8,487 6,426 –2,697 54,432 0106 94,843 76,356 18,487 16,062 –5,610 105,295 Q2 50,716 41,020 9,696 7,815 –2,996 55,535 0106 76,636 16,167 1,343 94,146 0109 148,561 125,430 23,131 20,426 –7,150 161,837 Q3 35,275 30,589 4,686 4,773 –1,952 38,096 0109 137,798 111,923 25,875 22,236 –7,735 152,299 Q3 42,955 35,567 7,388 6,174 –2,125 47,004 0109 71,392 15,936 1,344 88,672 2001 0112 182,757 156,370 26,387 28,498 –9,488 201,767 2001 Q4 34,196 30,940 3,256 8,072 –2,338 39,930 2001 0112 187,777 154,343 33,434 33,381 –10,321 210,837 2001 Q4 49,979 42,420 7,559 11,145 –2,586 58,538 2001 0112 67,898 15,861 1,439 85,198 Pro forma format, reﬂecting results with parts of Phones transferred to the joint venture Sony Ericsson Mobile Communications, accounted for under the equity method, and retained parts included in Other operations. No change in reported total income numbers are made. 48 Annual Report 2001 F i n a n c i a l S t a t e m e n t s EXTERNAL ORDERS BOOKED BY MARKET AREA AND SEGMENT – PRO FORMA (SEK m.) Year to date 2001 Europe, Middle East & Africa North America Latin America Asia Pacific Total Share of Total Systems 81,054 23,342 29,171 48,824 182,391 90% EXTERNAL NET SALES BY MARKET AREA AND SEGMENT – PRO FORMA (SEK m.) Year to date 2001 Europe, Middle East & Africa North America Latin America Asia Pacific Total Share of Total TOP 10 MARKETS IN ORDERS AND SALES – PRO FORMA Year to date 2001 Systems 83,516 22,677 30,090 51,096 187,379 89% Other 11,648 1,293 1,912 4,523 19,376 10% Other 13,617 2,513 2,006 5,322 23,458 11% Total 92,702 24,635 31,083 53,347 201,767 100% Total 97,133 25,190 32,096 56,418 210,837 100% Orders China United States Italy Mexico Brazil Japan Sweden United Kingdom Spain Germany Share of total orders Sales 13% 11% 7% 6% 5% 5% 4% 4% 4% 4% China United States Mexico Italy United Kingdom Brazil Japan Spain Sweden Turkey Share of Total 46% 12% 15% 27% 100% Share of Total 46% 12% 15% 27% 100% Share of total sales 13% 11% 6% 6% 5% 5% 5% 4% 3% 3% Pro forma format, reﬂecting results with parts of Phones transferred to the joint venture Sony Ericsson Mobile Communications, accounted for under the equity method, and retained parts included in Other operations. No change in reported total income numbers are made. Annual Report 2001 F i n a n c i a l S t a t e m e n t s 49 T e n Y e a r S u m m a r y 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 diluted, SEK 1, 2, 3, 4, 5 – in accordance with US GAAP, 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 and other technical expenses6 – as percent of net sales6 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 * For 2001, proposed by the Board of Directors. 1 1992 adjusted for change in accounting principles. 2 1992–1994 adjusted for stock issue and 4-for-1 stock split. 3 1992–1995 adjusted for stock dividend element of the stock issue in 1995. 4 1992–1997 adjusted for stock issue 1:1. 5 1992–1999 adjusted for 4-for-1 stock split. 6 1992–2000 adjusted to exclude Research and development cost regarding customer orders included in Cost of sales. 2001 2000 1999 231,839 –27,094 –2,039 –30,309 250,056 102,504 153,880 16,075 68,587 81,761 –2.69 –3.14 0 * 7,908,660 8,306 6,407 46,640 20.1 –26.5 –15.8 28.8 1.1 1.7 273,569 31,165 –1,520 28,692 250,314 93,879 141,013 22,378 91,686 46,563 2.65 2.94 0.50 7,869,445 12,293 9,957 41,921 15.3 26.1 26.5 37.7 0.5 1.6 215,403 17,590 – 698 16,386 202,628 66,037 116,378 24,719 69,176 45,020 1.54 1.92 0.50 7,817,164 9,085 6,532 33,123 15.4 18.3 19.0 35.2 0.6 1.6 87,414 101,215 83,976 85,198 37,328 105,129 42,431 103,290 44,040 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 US 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). 50 Annual Report 2001 F i n a n c i a l S t a t e m e n t s 1998 1997 1996 1995 1994 1993 1992 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 7,800,900 8,965 5,545 28,027 15.2 22.5 24.9 38.9 0.4 1.6 167,740 18,757 48 17,218 147,440 53,095 80,165 19,225 52,624 23,146 1.52 1.63 0.44 7,754,968 7,237 5,422 24,242 14.5 25.7 29.9 38.7 0.4 1.7 124,266 10,758 412 10,152 112,152 36,180 61,411 17,754 40,456 17,545 0.91 1.02 0.31 7,676,336 7,188 4,216 19,837 16.0 19.0 22.4 39.1 0.4 1.5 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 7,077,536 6,457 3,614 16,891 17.1 18.9 20.7 39.6 0.4 1.6 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 6,950,120 5,137 3,004 13,762 16.7 17.7 18.2 34.4 0.7 1.5 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 6,865,088 3,805 2,651 10,976 17.4 14.5 12.9 34.5 0.7 1.6 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 6,594,112 3,847 2,193 8,945 19.0 2.8 9.6 34.5 0.8 1.6 78,990 77,499 63,401 48,401 45,671 45,296 38,050 103,667 44,979 100,774 45,360 93,949 43,896 84,513 42,022 76,144 36,984 69,597 31,796 66,232 29,979 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 2001 F i n a n c i a l S t a t e m e n t s 51 B o a r d o f D i r e c t o r s a n d C o r p o r a t e M a n a g e m e n t 1 2 3 4 5 6 7 8 Board of directors Ericsson’s Articles of Association stipulate that the Board of Directors shall consist of not less than five and not more than twelve Directors, with not more than six deputy Directors, elected each year by the shareholders at the annual general meeting. The term of office for a Director is one year, but a Director may serve any number of consecutive terms. In addition, under Swedish law, employees have the right to appoint three Directors (and their deputies). The Directors and deputy Directors and the year in which they were appointed Director (as of December 31, 2001) are as below: 1 Lars Ramqvist ( born1938 ) Director 1990. Chairman of the Finance Committee of the Board. Former CEO of Ericsson. 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. Shares held: LME B 30,206 Convertible debentures: 145,347* 2 Clas Reuterskiöld ( born 1939 ) Director 1994. Chairman of the Audit Committee of the Board. Former President and CEO of Industrivärden. Member of the Boards of Industrivärden, Sandvik, Skandia and SSAB. Shares held: LME B 50,000 5 Göran Engström ( born 1948 ) Director 1994. Employee representative and Member of the Finance Committee of the Board. Shares held: LME B 4,774 Convertible debentures: 99,120* Employee options** 6 Marcus Wallenberg ( born 1956 ) Deputy Chairman 1996. Deputy Chairman and member of the Finance Committee of the Board. President of Investor. Deputy Chairman of Saab. Member of the Boards of AstraZeneca, Investor, Scania, Stora Enso and the Foundation of Knut and Alice Wallenberg. Shares held: LME B 352,000 7 Per Lindh ( born 1957 ) Director 1995 (Deputy 1994). Employee representative. 4 Jan Hedlund ( born 1946 ) Director 1994. Employee representative and Member of the Audit Committee of the Board. Convertible debentures: 75,520* 8 Christer Binning ( born 1946 ) Deputy 1994. Employee representative. Shares held: LME B 180 Convertible debentures: 145,347* Corporate Management 3 Kurt Hellström President and CEO. Member of the Board of Atlas Copco. Shares held: LME B 22,692 Convertible debentures: 145,347* Employee options** Sten Fornell Executive Vice President and Chief Financial Officer Shares held: LME B 176,000 Employee options** Per-Arne Sandström Executive Vice President and Chief Operating Officer Shares held: LME B 2,904 Convertible debentures: 145,347* Employee options** Carl Olof Blomqvist Senior Vice President and General Counsel Legal Affairs Employee options** Björn Boström Senior Vice President Supply and Information Technology Shares held: LME B 2,228 Convertible debentures: 145,347* Employee options** Roland Klein Senior Vice President Communications Shares held: LME B 2,000 Employee options** Torbjörn Nilsson Senior Vice President Marketing and Strategic Business Development Shares held: LME B 23,031 Convertible debentures: 145,347* Employee options** 52 Annual Report 2001 F i n a n c i a l S t a t e m e n t s 9 10 11 12 13 14 15 16 9 Peter Sutherland ( born 1946 ) Director 1996. Member of the Audit Committee of the Board. Honorary Doctor. Chairman of the Boards of Goldman Sachs International and BP. Member of the Boards of Investor, Royal Bank of Scotland Group and the Foundation of the World Economic Forum. 10 Sverker Martin-Löf ( born 1943 ) Director 1993 (Deputy 1991). Member of the Remuneration Committee of the Board. President and CEO of SCA. Member of the Boards of Skanska, the Confederation of Swedish Enterprise and the Swedish Forest Industries Ass. Shares held: LME B 8,000 11 Eckhard Pfeiffer ( born 1942 ) Director 2000. Former President and CEO of Compaq Computer Corp. Chairman of the Board of Intershop Communications. Member of the Boards of General Motors, Hughes Electronics, IFCO Systems, Syntek Capital and Biogen. Member of the Business Council and the Advisory Board of Deutsche Bank. Shares held: LME B 15,200 12 Niall FitzGerald KBE ( born 1945 ) Director 2000. Chairman and CEO of Unilever plc. Member of the Board of Merck & Co. Inc. Shares held: LME B 796 13 Monica Bergström ( born 1961) Deputy 1998. Employee representative. Convertible debentures: 75,520* 14 Åke Svenmarck ( born 1942 ) Deputy 2000. Employee representative. 16 Tom Hedelius ( born 1939 ) Director 1991. Deputy Chairman and member of the Finance Committee of the Board. Former Chairman of Handelsbanken, now honorary Chairman. Honorary Doctor of Economics. Chairman of the Boards of Bergman & Beving, Svenska Le Carbone and the Foundation of Anders Sandrew. Deputy Chairman of Industrivärden, Addtech and Lagercrantz Group. Member of the Boards of Volvo and SCA. Shares held: LME B 72,616 15 Göran Lindahl ( born 1945 ) Director 1999. Chairman of the Remuneration Committee of the Board. D.Sc. hc, PhD. hc. Former President and CEO of ABB Ltd. Chairman designate of Anglo American plc. Member of the Boards of DuPont, Sony Corporation and Ratos. Member of the Salomon Smith Barney International Advisory Board. Shares held: LME A 100,000 and B 50,000 Apart from Lars Ramqvist, no Director has held any position in the management of Ericsson. No Director has any other principal business activity than the principal directorships listed above and no Director has been elected on account of any arrangement or understanding with major shareholder, customer, supplier or other. Britt Reigo Senior Vice President People and Culture Shares held: LME B 12,000 Convertible debentures: 145,347* Employee options** Jan Uddenfeldt Senior Vice President Technology Shares held: LME B 2,756 Employee options** Market Areas Ragnar Bäck Executive Vice President and Head of Market Area Asia Pacific Shares held: LME B 1,000 Convertible debentures: 145,347* Employee options** Mats Dahlin Executive Vice President and Head of Market Area Europe, Middle East and Africa Shares held: LME B 8,000 Employee options** Gerhard Weise Executive Vice President and Head of Market Area Americas Shares held: LME B 27,496 Convertible debentures: 145,347* Employee options** * Convertible debentures 1997/2003 with a conversion rate of SEK 59. ** For further information on the option plans for year 1999, 2000 and 2001, see “Employee Ownership” under “Share Information”. Annual Report 2001 F i n a n c i a l S t a t e m e n t s 53 S h a r e I n f o r m a t i o n Stock exchange trading Ericsson’s Series A and Series B shares are traded on the Stockholm stock exchange, Stockholmsbörsen. The Ericsson ticker was changed by Stockholmsbörsen on September 10, 2001 from LME A and LME B to ERIC A and ERIC B. 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 Depository Receipts (ADR) on NASDAQ, 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 36 billion shares were traded in 2001. Of this number, about 59 (44) percent were traded on Stockholms- börsen, 13.5 (31) percent on NASDAQ and 26.5 (24) percent on the London Stock Exchange. Trading on other exchanges amounted to about 1 percent of the total, unchanged from the previous year. Share price trend The total market value of the Ericsson share dropped 46 percent in 2001 to SEK 460 billion. Stockholmsbörsen’s OMX index decreased by nearly 20 percent during the year. The NASDAQ composite index decreased by 21 percent and the NASDAQ telecom index decreased by 49 percent in the same period. The Ericsson share decreased by 53 percent on NASDAQ. The difference to the development on Stockholmsbörsen is mainly attributed to currency changes SEK/USD. Shareholders In all, about 85 (90) percent of Ericsson’s shares are owned by Swedish and international institutions. At the end of 2001, about 52 (44.7) percent of the shares were held in Sweden. 25.4 (28.9) percent of the share were held in the US, 4.7 (5.2) percent in the UK, 4.5 (5.0) percent in Luxembourg, 3.3 (2.5) percent in Switzerland, 3.0 (4.1) percent in Germany and about 7.1 (9.6) percent in other countries. Employee ownership A convertible debenture loan amounting to SEK 6 b. 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. No officer or Director of the Board owns more than one percent of the company’s shares. Options have not been granted to Directors of the Board. The number of options granted to each officer is classiﬁed company information. Around 2,000 key employees and senior executives were granted 1.4 million seven-year call-options based on earnings in 1999. The size of the allotments was based on our earnings per share and the individual’s salary and bonus categories. At an Extraordinary General Meeting in November 1999, it was decided to implement a stock option plan also for year 2000. In accordance with this resolution 50.4 million employee options (adjusted for split 4:1) were issued to approximately 8,000 employees. At the 2001 Annual General Meeting it was decided to implement a Global Stock Incentive Program comprising a Stock Option Plan and a Stock Purchase Plan. The entire Global Stock Incentive Program requires 155 million new issued shares. This requires a stock issue of 50.4 million shares if all options are exercised. • Under the Stock Option Plan about 15,000 key contributors will obtain employee options. The options will be granted during the period 2001 and 2002. One hundred twenty million Ericsson B- shares will be allocated to the Stock Option Plan, including a hedge for social security cash outﬂow. During 2001, 47,5 million seven- year employee options were granted. • Most employees will be invited to participate in the Stock Purchase Plan. Participating employees will, during a two-year period, be able to save up to 7.5 percent of the gross salary, not exceeding the equivalent of SEK 50,000 annually, for the purchase of Ericsson B- shares. If the purchased shares are retained by the employee for three years and employment at Ericsson continues during that time, the employee will be given a corresponding number of shares free of charge. Thirty-ﬁve million Ericsson B-shares will be allocated to the Stock Purchase Plan, including a hedge for social security cash outﬂow. The Stock Purchase Plan will be implemented during 2002. Share capital As of December 31, 2001, Ericsson’s share capital amounted to SEK 8,065,504,007 (7,910,335,612) represented by 8,065,504,007 shares. The par value of each share is SEK 1.00. As of December 31, 2001, the shares were divided into 656,218,640 Series A shares, each carrying one vote, and 7,409,285,367 Series B shares, each carrying one-thousandth of a vote. On April 30, 155,000,000 new Series C shares were issued and later re-purchased by the Parent company. These shares were later converted into 155,000,000 Series B Shares. During the period January 1 to January 22, 2002, no additional conversions were made. Share trend Stockholmsbörsen Share turnover 2001 250 200 150 100 50 3,000 2,500 2,000 1,500 1,000 500 B-share (SEK) OMX index 1997 1998 1999 2000 2001 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Stockholm London NASDAQ 54 Annual Report 2001 F i n a n c i a l S t a t e m e n t s ERICSSON SHARE DATA Earnings per share, diluted (SEK) P/E ratio, B shares2 Dividend (SEK) Direct return % Stockholmsbörsen share prices (SEK) A at December 28 B at December 28 B high for year B low for year 1 Adjusted for 4:1 split 2 P/E ratio: Price per share at December 31, divided by earnings per share diluted 3 For 2001, proposed by the Board of Directors 4 Adjusted for 1:1 stock dividend CHANGES IN CAPITAL STOCK 1997– 2001 1997 1998 1998 1999 2000 2000 2000 2001 2001 2001 Conversions Stock dividend Conversions Conversions Stock dividend Split Conversions Conversions New issue December 31 LARGEST SHAREHOLDERS BY VOTING RIGHTS, DECEMBER 31, 2001 Person or group Investor AB AB Industrivärden Svenska Handelsbankens Pensionsstiftelse Livförsäkrings AB Skandia Pensionskassan SHB Försäkringsförening Oktogonen, Stiftelsen Gamla Livförsäkringaktiebolaget SEB-Trygg Liv Svenska Handelsbankens personalstiftelse EB-pensionstiftelsen Tredje AP Fonden SHB Fonder Wallanders och Hedelius’ stiftelse Fjärde AP-Fonden Andra AP-Fonden Första AP-Fonden Foreign ownership 1 Others Number of A shares 256,660,096 186,000,000 35,500,000 32,962,932 31,680,000 12,560,000 12,094,720 10,000,000 8,639,067 4,276,900 4,026,000 3,200,000 2,191,000 2,191,000 2,191,000 6,308,455 45,741,220 2001 2000 1 1999 1 1998 1, 4 1997 1, 4 – 2.69 – 0 3 0 58.50 57.50 122.00 32.10 2.65 40 0.50 0.5 111 108 231 101 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 Number of shares Capital stock 13,333,854 975,097,150 1,759,181 5,786,131 5,883,316,821 69,880,270 168,395 155,000,000 8,065,504,007 33,334,635 2,437,742,875 4,397,952 14,465,328 2,941,658,410 – 75,830,899 168,395 155,000,000 8,065,504,007 Number of B shares 126,018,800 3,000,000 – 86,681,174 – 343,000 54,090,280 – 169,000 61,179,613 79,452,117 – 100,709,000 79,694,814 77,663,843 3,865,111,953 2,880,824,973 Percent of total B shares 1.70% 0.04% 0.00% 1.17% 0.00% 0.00% 0.66% 0.00% 0.00% 0.82% 1.07% 0.00% 1.36% 1.08% 1.05% 52.17% 38.88% Voting rights, percent 38.70% 28.00% 5.30% 5.00% 4.80% 2.00% 1.80% 1.50% 1.30% 0.70% 0.60% 0.50% 0.30% 0.30% 0.30% 1.53% 7.30% 1:1 – 4:1 Percent of total A Shares 39.11% 28.34% 5.41% 5.02% 4.83% 1.91% 1.84% 1.52% 1.32% 0.65% 0.61% 0.49% 0.33% 0.33% 0.33% 0.96% 6.97% Total 656,218,640 100.00% 7,409,282,904 100.00% 100.00% 1 According to SIS Ägarservice AB, 2001-12-28 Of which Nats Cumco as Nominee (Total amount of ADR's listed on NASDAQ. 1 ADR = 1 B share.) – – 1,082,552,463 14.61% – Annual Report 2001 F i n a n c i a l S t a t e m e n t s 55 Change of addre s s Investor Relations Shareholder who has changed name, mail- ing address or account number should notify his/her trustee as soon as possible, or: V P C A B Box 7822 S E-103 97 Stockholm Sweden. Financial information from Ericsson Interim re p o rt Ja n . - Ma rc h : April 22, 2002 Interim re p o rt Ja n . - Ju n e : July 19, 2002 Interim re p o rt Ja n . - Se p t . : October 18, 2002 Interim re p o rt Ja n . - Dec. Full year re p o rt : January, 2003 Annual re p o rt 2002: March, 2003 Annual Reports and interim reports can be ordered on the Internet: www.erics- son.com/investor, or by contacting: Telefonaktiebolaget L M Er i c s s o n S E-126 25 Stockholm, Sweden Telephone: +46 8 719 0000 Ericsson C LO Li m i t e d 105 Wigmore Street London, W1U 1QY, United Kingdom Telephone: +44 20 7016 1000 Ericsson In c . 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 For general enquiries: Europe and Africa: investor.relations@lme.ericsson.se Americas, Asia or Oceania: investor.rela- tions@ericsson.com Ga ry Pi n k h a m Vice President, Investor Relations Telefonaktiebolaget LM Ericsson S E-126 25 Stockholm, Sweden Telephone: +46 8 719 0000 Telefax: +46 8 719 1976 E-mail: gary.pinkham@ericsson.com Maria Be rn s t r ö m Director, Investor Relations Telephone: +46 8 719 5340 E-mail: maria.bernstrom@lme.ericsson.se Lotta Lu n d i n Manager, Investor Relations Ericsson C LO Limited 105 Wigmore Street London, W1U 1QY, United Kingdom Telephone: +44 20 7016 1000 Telefax:: +44 20 7016 1039 E-mail: lotta.lundin@clo.ericsson.se Glenn Sa p a d i n Manager, Investor Relations Ericsson Inc. 100 Park Avenue, 27th floor New York N Y 10017, U S A Telephone: +1 212 685 4030 Telefax: +1 212 213 0159 E-mail: glenn.sapadin@ericsson.com Lars Ja c o b s s o n Vice President, Financial Reporting and Analysis Telephone: +46 8 719 9489 E-mail: lars.jacobsson@lme.ericsson.se S h a r e h o l d e r I n f o r m a t i o n The Annual General Meeting will be held at the Globe Arena, Arenatorget, Stockholm, at 4.30 p.m. on Wednesday, March 27, 2002. Shareholders intending to participate in the Annual General Meeting must be entered as shareholders in the share regis- ter maintained by VPC AB (Swedish Securities Register Center) not later than March 15, 2002. A shareholder whose shares are regis- tered in the name of a trustee must be temporarily entered in the share register not later than March 15, 2002, in order to participate in the Meeting. Please note that this procedure is also due for shareholders who are trading via the Internet. 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 S E-126 25 Stockholm Telephone: +46 8 719 34 44, +46 8 719 44 98 between 10 a.m. and 4 p.m., facsimile +46 8 719 95 27, or via e-mail: bolagsstaemma@lme.erics- son.se no later than 4 p.m. Thursday, March 21, 2002. P ro x y 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 26, 2002. D i v i d e n d The Board of Directors and the President have decided to propose to the Annual General Meeting that no dividend is paid for year 2001. 5 6 Annual Report 2001 F i n an c i a l S t a t e m en ts Ericsson Annual Report 2001 This document is the Ericsson Annual Report 2001 — Financial Statements. Together with the Ericsson Business Review it forms the Ericsson Annual Report 2001. If not accompanied by this document, the Business Review can be obtained from Ericsson Corporate Communications, tel +46 8 719 0000. Uncertainties in the Future This report includes (cid:210)forward-looking information(cid:211) within the meaning of Section 27A of the US Securities Act of 1933, as amended, and Section 21E of the US Securities Exchange Act of 1934, as amended, and includes assumptions about future market conditions, operations and results. These statements appear in a number of places and include statements re g a rding (i) strategies, outlook and growth prospects, (ii) positioning to deliver future plans and to realize potential for future growth, (iii) liquidity and capital re s o u rces and expenditure, (iv) growth in demand, particularly for mobile and fixed telecommunications infrastructure and terminals, (v) economic outlook, (vi) regulation and deregulation of the telecommunications market, (vii) qualitative and quantitative disclosures about market risk, (viii) competition among vendors, (ix) restructuring plans, (x) sales volumes, (xi) re s e a rc h and development expenditures and (xii) trend information. Although Ericsson believes that the expectations reflected in such forward - l o o k i n g statements are reasonable, no assurance can be given that such expectations will prove to have been correct. Accord i n g l y, results may differ materially from those set out in the forward-looking statements as a result of: ¥ general economic conditions in markets we operate in and our ability to adapt to rapid changes up or down in market conditions; ¥ political, economic and regulatory developments in markets where we operate, including allegations of health risks from electromagnetic fields and increasing cost of licenses to use radio fre q u e n c i e s ; ¥ m a n a g e m e n t (cid:213)s ability to develop and execute a successful strategy, including partnerships, acquisitions, divestitures and to manage gro w t h / d e c l i n e and to execute cost-reduction eff o r t s ; ¥ financial risks, including foreign exchange rate changes, interest rate changes, credit risks re g a rding business counterparts and risks of confiscation of assets in foreign countries and risks of insufficient liquidity to execute payments; ¥ the impact of changes in product demand, pricing and competition, including erosion of sales prices, increased competition from existing or new competitors or new technology and the risk that new products and services may fail to be accepted at the rates or levels we anticipate; ¥ customer structure, where number of customers may be reduced due to consolidations in the industry, and, where the remaining customers become larg e r, the negative business consequences of a loss of or significant decline in business with such a customer incre a s e s ; ¥ cost overruns on significant multi-year fixed price contracts and extended payment terms; ¥ p roduct development risks, including our ability to adopt new technologies, including the Internet, and to develop commercially viable products, our ability to acquire licenses to necessary technology, our ability to protect our intellectual property rights through patents and trademarks and to defend them against infringement, and results of patent litigation; ¥ supply constraints, including component- or production capacity shortages, suppliers(cid:213) abilities to deliver products in time with good quality, and risks related to concentration of purchases from a single vendor or own or outsourced production in a single facility; ¥ ability to recruit and retain highly qualified management and other employees. P roject management Ericsson Corporate Communications D e s i g n SAS Design, London P ro d u c t i o n Paues Media, Stockholm P h o t o g r a p h y Stefan Almers, Enda Bowe P roduction coord i n a t o r Aralia, Stockholm R e p ro g r a p h i c s S c a rena, Stockholm P r i n t i n g Christer Persson Tryckeri AB, K(cid:154)ping, Sweden EN/LZT 108 5525 R1A ' Telefonaktie bolaget LM Ericsson 2002 How did you manage the demand for vendor financing? Which measures strengthened the balance sheet? What is your debt position and liquidity? Where will the Sony Ericsson results be reported? How did my shares perform? S E - 1 2 6 2 5 S t o c k h o l m T e l e f o n a k t i e b o l a g e t L M E r i c s s o n E r i c s s o n , i s T C F , T o t a l l l y C h o r i n e F r e e . ) I S S N 1 1 0 0 - 8 9 6 2 s t a n d a r d s . ( M u n k e n L y n x , e s p e c i a l l y p r o d u c e d f o r P r i n t e d o n p a p e r t h a t m e e t s i n t e r n a t i o n a l e n v i r o n m e n t a l

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