Ericsson
Annual Report 2002

Plain-text annual report

Annual Report 2002 e Contents Forward-looking Statements Board of Directors(cid:213) Report Financial Statements Accounting Principles Notes to the Financial Statements Auditors(cid:213) Report Treasury and Customer Finance — Financial Risk Management Information on the Company Segments and Market Areas Directors, Corporate Management and Auditors Five-year Summary Risk Factors Share Information Shareholder Information 1 2 9 17 21 49 50 56 66 72 76 78 84 88 F O R W A R D - L O O K I N G S T A T E M E N T S ¥ 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 systems and services may fail to be accepted at the rates or levels we anticipate; ¥ our customer structure, where the number of customers may be reduced due to consolidation in the industry, and the remaining customers will become larger, and the negative business consequences of a loss of, or significant decline in, our business with such a customer; ¥ the impact of a downgrading of our credit rating; ¥ defaults by our customers under significant customer financing arrangements; ¥ product development risks, including our ability to adopt new technologies and to develop commercially viable systems and services, 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 on time with good quality, and risks related to concentration of purchases from a single vendor or proprietary or outsourced production in a single facility; and ¥ our ability to recruit and retain highly qualified management and other employees. Certain of these factors are discussed in more detail elsewhere in this Annual Report, including under (cid:210)Risk Factors(cid:211) and (cid:210)Information on the Company(cid:211). We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law or stock exchange regulation. Forward-looking Statements This Annual Report includes (cid:210)forward-looking statements(cid:211) and includes assumptions about future market conditions, operations and results. The words (cid:210)believe(cid:211), (cid:210)expect(cid:211), (cid:210)anticipate(cid:211), (cid:210)intend(cid:211), (cid:210)may(cid:211), (cid:210)plan(cid:211) and similar expressions are intended to identify these statements. Forward-looking statements appear in a number of places including, without limitation, (cid:210)Board of Directors(cid:213) Report(cid:211), (cid:210)Risk Factors(cid:211) and (cid:210)Information on the Company(cid:211), and include statements regarding: ¥ strategies, goals and growth prospects; ¥ future plans and potential for future growth; ¥ liquidity, capital resources and capital expenditure, and our credit ratings; ¥ growth in demand for our systems and services; ¥ our joint venture activities; ¥ economic outlook and industry trends; ¥ developments of our markets and competition; ¥ the impact of regulatory initiatives; ¥ research and development expenditure; ¥ plans to launch new products, systems and services; and ¥ expected cost savings from our various cost reduction measures. Although we believe that the expectations reflected in these and other forward-looking statements are reasonable, we can give no assurance that these expectations will prove to be correct. Because these statements involve risks and uncertainties, results could differ materially from those set out in the forward-looking statements as a result of: ¥ conditions in the telecommunications industry and general economic conditions in the markets in which we operate, and our ability to adapt to rapid changes in market conditions; ¥ political, economic and regulatory developments in the markets in which we operate, including allegations of health risks from electromagnetic fields and increasing cost of licenses to use radio frequencies; ¥ management(cid:213)s ability to develop and execute a successful strategy, including partnerships, acquisitions, divestitures and ability to manage growth and decline and to execute cost-reduction efforts; ¥ financial risks, including foreign exchange rate changes, interest rate changes, credit risks in relation to counterparties, risks of confiscation of assets in foreign countries and risks of insufficient liquidity to execute payments; E R I C S S O N — A N N U A L R E P O R T 2 0 0 2 1 B O A R D O F D I R E C T O R S (cid:213) R E P O R T Board of Directors(cid:213) Report This report contains (cid:210)forward-looking statements(cid:211). See (cid:210)Forward-looking Statements(cid:211) on page 1. Figures within brackets represent last year. STRATEGY AND GOALS Ericsson(cid:213)s core business is to be a preferred vendor of carrier- class telecommunication systems and services to leading operators of mobile and fixed networks. We believe that we are the leading supplier of mobile communication systems, including 2G, 2.5G and 3G systems, and we have a strong position in solutions for fixed networks regarding next generation of IP-based communication of voice and data. During the last two years, the telecommunications industry has seen a dramatic downturn from the phenomenal growth during the years 1997 to 2000. As this is an industry with relatively few but large vendors and customers, it takes time for the industry to adjust to such a large decline in the market as the one we have been exposed to recently. Consequently, the last years have been characterized by negative results reported by most vendors and massive restructuring efforts and layoffs. This said, however, we want to emphasize that we have a positive long-term view of the market. We strongly believe this is a growth industry. The need for telecommunications is still large and growing. The penetration of mobile telephony world- wide is only 18 percent. Many countries have penetration levels as high as 70—80 percent, but many developing countries are still below 5 percent. There are now more than 1.1 billion mobile subscribers in the world, with around 190 million new subscribers added in 2002, i.e. more than 500,000 subscribers per day. We believe that the number of mobile subscribers remains on track to exceed 1.5 billion within three years, with 165—180 million net additions anticipated in 2003. The penetration of fixed line telephony is approximately 17 percent. The subscriber base is, however, almost the same as for mobile, and the combined penetration is still below 20 percent. Accordingly, there is a large growth potential in increasing the number of subscribers. In addition, we expect the usage per subscriber to increase due to lower tariffs, new applications and services. On top of this, next generation networks will add data traffic and we will see more machine-to- machine communications in mobile and fixed networks. Our customer base includes most of the largest mobile network operators, many of which operating on a regional or global scale. Our strategy is to develop products and systems to offer the best solutions to these sophisticated customers, to expand our business through increased focus on value added services, and to be present where the customer(cid:213)s business is. 2 E R I C S S O N — A N N U A L R E P O R T 2 0 0 2 Mobile operators are becoming fewer and larger through mergers and acquisitions and organic growth. The 20 largest operators together now serve 75 percent of all subscribers worldwide. Ericsson is a supplier to 18 of the 20. Our goal is to maintain and improve our market leadership in combination with a recovery of our financial performance. For 2003, we believe we will be able to maintain our market share in mobile systems, and in the current uncertain environment we focus on reducing costs and adjusting to the market conditions. We recognize that it is necessary to provide a competitive return on our shareholders(cid:213) investments, and our intention is to return to profit some time this year. MARKET ENVIRONMENT In line with industry consensus, we believe the mobile systems market declined by approximately 20 percent during 2002 to an estimated USD 42 billion. This was due in part to over- investments in 2001 with excess capacity as a result. In 2002, many operators also had to postpone needed expenditures to conserve cash and improve their financial position, due to the negative sentiment in the financial markets regarding the telecom industry. Consequently, the service quality of many networks decreased beyond our expectations during the year. In our opinion there is a need for increased capacity in many markets. The implementation of third generation (3G) networks also developed somewhat slower than we anticipated due to financial problems of certain operators, unavailability of handsets as well as issues in several markets regarding building permits for sites and towers. The market for fixed infrastructure, which includes traditional circuit-switching, broadband access, optical transmission and multi-service networks, declined by more than 30 percent during 2002. Complementing the infrastructure market, there is a large and growing opportunity for providing services to network operators. Excluding network rollout services, which are embedded within the systems infrastructure market, the available market in 2003 for professional services is estimated to be approximately USD 30 billion, with a compounded annual growth rate of more than 10 percent. Professional services include systems integration, network operations outsourcing as well as a range of other advisory and operational support services. In the current downturn for infrastructure, competition among vendors increased. Price pressure intensified on both 2G equipment and for new 3G contracts. As we are accustomed to a certain degree of price erosion every year, we believe that we have been able to cope with this increased competition reasonably well. Our sales declined by 31 percent for comparable units. We believe we kept our market share in mobile systems despite this, however, as the decline is, to a large extent, attributable to low sales of TDMA and PDC systems. The overall market for these technologies declined sharply and we have previously had a relatively large share of our sales in these areas. Our sales in GSM/WCDMA declined by only 14 percent, indicating a sustained strong market position. We have also mitigated our decline through increased focus on services sales. Our sales of value added services such as network integration, network management and consulting increased year over year by 11 percent and now constitute 15 percent (9 percent) of total Systems sales. Sales by Market Area 2001—2002 Market Area (SEK billion) 2002 2001 Change Europe, Middle East and Africa North America Latin America Asia Pacific Total 74 23 13 36 97 25 32 56 — 24% — 8% — 59% — 36% 146 210 — 31% The decline in sales during 2002 was largest in Latin America due to local macro-economic conditions. The planned shift in the region from TDMA technology to GSM was stalled. In North America this shift generated good demand and the overall decline was moderate. In Europe the subscriber growth was moderate, as the penetration is already high and third generation investments have not yet picked up momentum. It is in Europe the effects of financial constraints on operators(cid:213) capital expenditures were most visible, due to the effects of the previous investments in licenses and acquisitions of other operators. In Asia Pacific, the decline was largely attributable to China, where the investments in 2001 created excess capacity which has been reduced during 2002, and Japan, where a sharp decline in investments in PDC technology was not offset by corresponding WCDMA volumes. Financial Markets The telecom industry is currently in a correction phase after the abnormal growth in 1997—2000 and over-investments in certain markets in 2001. This has affected the financial market(cid:213)s view of the industry and access to capital has been severely restricted for many operators and vendors. The rating agencies have also continued to lower their ratings. Both Moody(cid:213)s and Standard & Poor(cid:213)s downgraded Ericsson and other telecom industry players on several occasions. In this financial market environment, we successfully managed to secure additional funding through a stock issue that raised SEK 29 billion net in increased cash. B O A R D O F D I R E C T O R S (cid:213) R E P O R T Partnerships and Joint Ventures Handsets and terminals are an important element of our end- to-end strategy — i.e. to be able to offer our customers solutions that work with carrier-class performance and reliability. Our joint venture with Sony, Sony Ericsson Mobile Communications, is therefore an important partnership. Compared with the large losses in our handset operations in previous years, our strategy to right-size and then find a partner has developed well. Sony and we have demonstrated our continued full commitment to this exciting business by announcing that we will increase our investment by EUR 150 million each in the beginning of 2003, to provide Sony Ericsson increased working capital for expected growth. We also cooperate with Juniper Networks for data backbone solutions, and we continue to work with external application developers in Ericsson Mobility World to stimulate the creation of applications for 3G. Products, R&D and IPR We have reviewed our products and services thoroughly and consolidated them into a clear and integrated portfolio. We now focus our efforts on the most valuable products for our customers: GSM, ENGINE, AXE and 3G. We have outsourced non-core products and services to partners and discontinued or sold others. This and the ongoing concentration of R&D sites are key elements for our return to profit. We have not let our cost cutting harm our core products, and we continue to enhance our patent portfolio, which we believe is one of the strongest in the industry. In addition to licensing of mobile platform technology, we have also entered into license agreements for systems technology with Samsung and Huawei during the year. The major part of our R&D efforts have been focused on strengthening our market-leading position in mobile systems. The results are strong enhancements in our product portfolio for both 2G and 3G, with increased width regarding both standards and frequency bands, new functionality, improved performance and increased cost efficiency for our customers and us. Some highlights: ¥ a new generation radio base stations and mobile switches for GSM, with strong performance improvement and lower running costs for operators ¥ new and improved GSM-systems for GPRS ¥ radio base stations with EDGE functionality for the US market ¥ 3G WCDMA solutions have been verified and tested for inter- operability ¥ a new product generation for CDMA2000 1X with market leading performance, based on the same technology and system platforms as GSM/WCDMA ¥ a new high-capacity MINI-LINK version of short-haul radio links E R I C S S O N — A N N U A L R E P O R T 2 0 0 2 3 B O A R D O F D I R E C T O R S (cid:213) R E P O R T ¥ we have made a strong improvement in our market position for service platforms and mobile services for messaging, wireless Internet and mobile media. We are now the clear market leader in MMS and pre-paid ¥ we also leverage our R&D spending by basing our wireline products to a large extent on the same technology and platforms as for wireless networks, thereby increasing cost efficiency and competitiveness for AXE switches and ENGINE solutions ¥ Ethernet DSL (digital subscriber line) Access is Ericsson(cid:213)s new generation broadband access solution with unique scalability for cost-effective use also in places with fewer users. FINANCIAL RESULTS Income before taxes was SEK —23.3 billion, a SEK 7.0 billion lower loss compared to SEK —30.3 billion in 2001. Excluding approximately SEK 9 billion of items affecting comparability each year, adjusted income before tax was SEK —14.5 and —21.1 billion respectively. The net improvement of SEK 6.6 billion is a result of a sharp reduction in the previous losses in Phones, partially offset by a loss for Systems: (SEK billion) 2002 2001 Change Systems Phones Other operations and Unallocated Financial net Minority interests Total — 4.9 —1.3 — 6.3 —1.5 —0.5 3.2 —14.6 — 6.8 —1.8 —1.1 —14.5 — 21.1 — 8.1 13.3 0.5 0.3 0.6 6.6 Items affecting comparability were SEK —8.8 (—9.2) billion, consisting of certain capital gains, restructuring costs and the net effect in 2002 of SEK 3.2 billion of capitalization of development costs. We adjust this amount for comparability purposes since 2002 is the first year of capitalization and development costs are reduced with SEK 3.2 billion net, as there is not yet a representative accumulated capitalized base to amortize. The net effect of changes in foreign currency exchange rates compared to the rates one year earlier was positive by SEK 1.7 billion. The effects were positive in the first three quarters but changed to a negative of SEK —0.1 billion in the fourth quarter due to the decline in the value of USD. The negative effect was delayed due to hedging. 4 E R I C S S O N — A N N U A L R E P O R T 2 0 0 2 Segment Results Systems Orders booked, net, for Systems declined by 37 percent from 2001 to SEK 115 billion. Adjusted for order cancellations, however, order intake decline was 30 percent. Orders, net, declined less for GSM/WCDMA — 25 percent. Bookings for the mature mobile technologies TDMA and PDC were down around 80 percent, and orders for multi-service networks decreased more than 50 percent. Services orders were 30 percent (23 percent) of total orders. We won some important contracts regarding multi-media services (MMS) with Vodafone, Telecom Italia Mobile, Amena, Wind, China Mobile, Orange, Telenor, Telcel and others, and we participated in the world(cid:213)s first full-scale MMS launch in Hungary. We are happy to see that these new types of services are picking up momentum. We were also booking orders for WLAN solutions to complement GPRS and WCDMA technology in (cid:210)hot spots(cid:211), such as airports and shopping malls. We won a break-in contract for CDMA in China, which was strategically important fur us. We need to increase the volume of this business to make it profitable. On the fixed network side we continued to get ENGINE business in Australia, China, Colombia, Egypt, Norway, Sweden and the UK, and we will deliver IP backbone products from our joint venture with Juniper to China, Germany and other markets. We secured contracts for outsourced network management in Belgium, Brazil and Australia. Net sales for Systems were SEK 132 (189) billion, a decline of 30 percent year over year. GSM/WCDMA sales declined only 14 percent, indicating a continued very solid market position, whereas TDMA, PDC and fixed network equipment sales declined around 60 percent. The reduced revenues could not be sufficiently compensated by lower costs during the year. Adjusted operating income, excluding restructuring costs, the net effect of capitalization of development expenses and non-operational capital gains, was SEK —4.9 (3.2) billion. Through restructuring efforts and reduced excess capacity, operating income improved gradually over the year. Adjusted also for additional risk provisions for customer financing, adjusted operating income was positive SEK 0.2 billion and 0.4 billion respectively in the third and fourth quarters. Phones The adjusted operating loss in Phones in year 2001, of SEK 14.6 billion was sharply reduced to SEK 1.3 billion. This is a result of the dramatic restructuring and downsizing in 2001 and the partnering with Sony. The joint venture Sony Ericsson Mobile Communications started with a product portfolio inherited from the joint venture partners and had a successful first quarter and reached break-even. A number of strong new products were created during 2002. Certain delays in launches of new products, however, led to lower volumes than anticipated and resulted in a full year loss before taxes. Items adjusting income consist of a net positive amount of SEK 0.2 billion related to restructuring of our previous handset business. Lagging costs of SEK 1.6 billion for inventory write- downs, scrapping and warranty costs were offset by an insurance compensation of SEK 1.8 billion related to damages as a consequence of a fire in a supplier(cid:213)s factory. Sony Ericsson sold 22.9 million units during the year, which is approximately 6 percent of the estimated 395 million units sold-through worldwide. This should be compared to 390 million units sold-through in 2001. We believe that the total units sold-through during 2003 will be more than 430 million units. Other Operations Total sales in Other operations declined by 26 percent from last year. This is a net of sharp reductions for the Microelectronics, Network Technology and Enterprise operations, resulting in operating losses. Sales in our Defense business were almost flat and the operations developed well. Revenue in the mobile platform licensing business increased strongly, with contracts with Sony Ericsson and also third party handset manufacturers, such as Benefon, GVC, LG Electronics, Microcell and TCL Mobile communications. This business is still in investment mode and volumes are not yet sufficient to break even. Other operations also include a couple of support units for internal IT-services and facility management. During the year, some excess space due to employee reductions resulted in unabsorbed costs in the facility management unit. Total adjusted operating income was SEK —4.7 (—5.1) billion. During the year, we sold parts of the Microelectronics unit to Infineon. We will continue to purchase products from Infineon, and we will also operate a factory in Stockholm for Infineon during 2003 and 2004. Financial Income and Expenses, Taxes and Earnings per Share Financial net improved from SEK —1.8 billion to SEK —1.5 billion. The main driver was income from the proceeds of the stock issue in September 2002. Financial expenses increased somewhat during the year as a result of increased interest rates in our EMTN-program, triggered by several rating downgrades by Moody(cid:213)s and Standard and Poor(cid:213)s. Minority interests were reduced due to lower income in units with minority holdings. Income taxes for the year are net positive due to deferred tax assets recognized based on reported losses. However, with insufficient taxable income reported in Sweden, certain foreign withholding taxes were not possible to deduct from income taxes in Sweden. In addition, rulings in tax court cases resulted in denied tax deductions for the capital discount on convertible debentures and other costs. Earnings per share were SEK —1.51 (—1.94). B O A R D O F D I R E C T O R S (cid:213) R E P O R T Balance Sheet, Financing and Cash Flow Total assets were reduced by SEK 50 billion or almost 20 percent. The decrease was largely related to working capital, with inventory down SEK 11 billion and accounts receivable SEK 21 billion. A new type of asset from 2002, due to implementation of new Swedish GAAP (RR15), is capitalized development expenses of SEK 3.2 billion. Customer financing credits on-balance declined slightly, despite the addition of a previous off-balance sheet credits, including SEK 4.1 billion to Mobilcom. As a consequence, off-balance sheet customer financing was reduced from SEK 13 billion to less than SEK 2 billion during 2002. Due to further losses in 2002, deferred tax assets increased from SEK 21 billion at the beginning of the year to SEK 26 billion. Approximately half of this amount is related to temporary differences, i.e. cost is not yet claimed as a deduction in a tax return, and consequently no expiry time is currently consumed. The remainder represents declared tax losses, of which the absolute majority is related to Sweden, with an unlimited period of utilization, or other countries with up to 20 years of utilization. Cash and short-term cash investments decreased marginally from SEK 69 billion to SEK 66 billion, due to the net effect of repayment of debt and the cash infusion of SEK 29 billion from the stock issue. Stockholders(cid:213) equity increased by net SEK 5 billion, as the loss of SEK 19 billion and negative effects of changes in foreign currency exchange rates of SEK 5 billion were offset by the SEK 29 billion addition from the stock issue. The equity ratio increased from 28 percent to 37 percent. Interest-bearing liabilities were repaid over the year by SEK 29 billion, and net debt of SEK 21 billion at the end of 2001 was turned into a net cash position of SEK 6 billion at the end of the year. Cash flow before financing activities in 2002 was SEK —7.1 (6.7) billion. A negative cash flow from income of SEK —20.8 billion was partly compensated by reduced working capital of SEK 10.8 billion. There were substantial reductions in inventory and accounts receivable, and we reached the goals of an inventory turnover of 5 times and days sales outstanding around 90. Capitalization of development expenses of SEK —3.4 billion is reported under investing activities. Other investing activities generated SEK 6.4 billion, including releases of cash collaterals for off-balance sheet customer financing of SEK 3.3 billion, proceeds from sales of parts of Microelectronics of SEK 2.3 billion and net sales of R&D units of SEK 0.5 billion. Cash flow improved gradually during the year and was positive in the fourth quarter by SEK 1.6 billion. Adjusting for one-offs, such as dissolved customer finance off-balance sheet portfolio including Mobilcom credits of SEK 4.1 billion and R&D unit sales proceeds of SEK 0.5 billion, cash flow before financing activities in the fourth quarter was SEK 5.2 billion. E R I C S S O N — A N N U A L R E P O R T 2 0 0 2 5 B O A R D O F D I R E C T O R S (cid:213) R E P O R T ORGANIZATION AND EMPLOYEES Organization and Management In the beginning of the year, the operations for Mobile Systems and Multi-service Networks were merged to achieve synergies related to the increased demand for integrated wireless and wireline solutions with common service platforms and transport networks. Restructuring program In addition to the efficiency program launched in 2001, we implemented further restructuring measures in 2002. The actions in 2001 reduced the run-rate in operating expenses by SEK 20 billion from SEK 88 billion to SEK 68 billion. The new measures are expected to reduce annual operating expenses by another SEK 30 billion and bring the run-rate to SEK 38 billion in the end of 2003. Reductions in cost of sales are also planned in order to offset effects of price pressure and to improve the gross margin by 2—4 percentage points net. During the year, numerous measures were taken to reduce costs and headcount. ¥ Market units have been further reduced to lower selling expenses and achieve better resource utilization of implementation workforce. This has reduced excess capacity costs and overhead costs ¥ Workforce reductions were made in our own factories, and transfer of production to countries with lower costs was carried out or initiated for both outsourced and own production ¥ A substantial reduction in the number of local design centers was carried out from over 80 sites to around 40 with a target of 25 ¥ Costs for internal IS/IT operations were trimmed ¥ In Sweden, some 20 legal entities were merged into one large operating company, Ericsson AB. We expect this will reduce operating expenses. As a result, the annual run-rate in operating expenses was reduced from SEK 68 billion in the beginning of the year to SEK 51 billion in the fourth quarter. The program is well on track to reach the target level of SEK 38 billion. Employees The planned restructuring efforts are intended to bring headcount below 60,000 employees at the end of 2003. The initiated restructuring activities, including divestments, have reduced the number of employees by 24 percent during the year from 85,200 to 64,600 at year-end. Employee compensation Share-based compensation Share-based compensation is based on Swedish practice regarding grant sizes and values. These are modest in comparison with international standards. All executives and other key contributors are eligible, and vesting is on a time basis only. Most previous grants were made at strike prices well above the current market price, with the options now in so called under water status. Early in 2002, a stock purchase plan was also launched under which employees are entitled to purchase Ericsson stock for a limited amount of their base salary. If the employee continues the employment with Ericsson for three years and keeps the shares, then the Company will match the purchased shares one-for-one. All 35 million shares available under the program were reserved for future matching or utilized under the terms of the program during the year. For the stock purchase plan, a compensation cost is recognized, based on the market price on the employee(cid:213)s investment date, and allocated over the vesting period. Total salary cost for the stock purchase plan is approximately SEK 100 million per year over the three-year vesting period. In certain countries, social security charges are to be paid when shares are matched based on the employee benefit. Such social security charges are accrued during the respective vesting periods. In November 2002, 53 million additional options, with a strike price of SEK 7.80 were granted to employees as part of the Stock Option Plan 2001‒2002. The program consists of 7- year stock options, which vest gradually during three years with one third of granted options for each year of service. All of the available 101 million options in the plan have now been granted during 2001 and 2002. No salary costs are recognized for our current stock option plans, as the strike prices have been equal to market prices at grant dates. This is in accordance with generally accepted accounting principles in Sweden. In certain countries, social security charges are to be paid if and when options are used, based on the employee benefit. We have estimated the effects on salary costs if employee stock options had been accounted for at fair value at grant date. (Please see Note 29 to the financial statements). Performance-based compensation A substantial part of executive remuneration is performance- based. A part of an executive(cid:213)s salary is variable and depending on achievement of certain targets. The level of base pay plus variable pay is set to make it possible to reach a salary level equal to the upper quartile level in the general industry. The variable portion of salary varies from 0 to 50 percent. For 2002, no payout was made to any executive or the approximately 200 top managers, since corporate performance targets were not met. However, for a number of non-executive managers eligible to variable pay programs, a smaller portion, up to 20 percent of the variable pay amount, may have been paid out depending on achievement of local individual targets. 6 E R I C S S O N — A N N U A L R E P O R T 2 0 0 2 B O A R D O F D I R E C T O R S (cid:213) R E P O R T The Remuneration Committee reviewed and prepared, 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 or the Chief Operating Officer. At the Annual General Meeting of Shareholders in 2001, the shareholders voted for the establishment of a Nomination Committee, consisting of representatives of the owners and the Chairman of the Board. The Annual General Meeting of Shareholders appoints the members of the Nomination Committee. The Nomination Committee nominated individuals to be elected Directors of the Board and also prepared and presented for resolution by the Annual General Meeting a proposal for Board of Directors(cid:213) fee. On June 6, 2002, an Extraordinary General Meeting of Shareholders authorized the Board to carry out a new stock issue. STOCK ISSUE AND SHARES A stock issue was successfully carried out during the year and finalized early September. The issue was oversubscribed and generated SEK 29 billion in net proceeds. The number of class B shares increased to 15,164 million. Number of shares outstanding (million) Class A Class B Total As of December 31, 2001 656 7,253 7,909 2002 656 15,164 15,820 Due to the decline of the stock price, the ratio on the NASDAQ exchange of American Depositary Shares (ADS) to shares was changed in October 2002 from 1:1 to 1:10 to avoid having an ADS priced below one USD. POST-CLOSING EVENTS In January, 2003, Ericsson sold its optoelectronics operations to Northlight Optronics AB. On January 29, Ericsson and Sony announced that the two companies had decided to make an additional capital injection to their 50/50-owned joint venture Sony Ericsson Mobile Communications of EUR 150 million each in the first quarter. Environmental issues Ericsson(cid:213)s ranking among companies in the communications technology industry in Dow Jones(cid:213) sustainability index was number two in 2002. Ericsson is continuously striving to reduce environmental impact from products and processes. Ericsson has production operations in ten countries for manufacturing of cables and components and assembly of electronic products. Ericsson has twelve production facilities in Sweden. For six of those, permissions for emissions/noise are required and for five, hazardous activities shall be reported. No significant environmental liabilities are known. BOARD OF DIRECTORS AND BOARD PROCEDURES At the Annual General Meeting on March 27, 2002, four Directors resigned and three new Directors were elected. The Board of Directors consists of eight 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 organizations. Tom Hedelius, Deputy Chairman since 1991, has announced that he will not be available for re-election at the Annual General Meeting 2003. The work of the Board is subject to a work procedure, 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 Board among its members appoints the members of the three committees: Audit, Finance and Remuneration. 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. Thirteen Board meetings were held during 2002. Among the matters resolved were the stock issue, certain divestments, such as the sales of parts of Microelectronics to Infineon, effects of new US and Swedish regulations on corporate governance and financial reporting, the restructuring program and customer financing matters, such as sales and cancellations of off-balance sheet credit portfolios. The company auditors have presented to the Board their observations from the audit. The Audit Committee reviewed the scope and execution of audits performed, the financial reporting, the internal audit functions, matters and observations arising from audits performed and audit fees. The Finance Committee resolved matters regarding investments and divestments, capital contributions to companies inside and outside the Ericsson Group, raising of loans, issuance of guarantees and similar undertakings, and granting of credits to customers or suppliers and monitored the Group(cid:213)s financial risk exposure. E R I C S S O N — A N N U A L R E P O R T 2 0 0 2 7 B O A R D O F D I R E C T O R S (cid:213) R E P O R T 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 16 (15) countries. Net sales for the year amounted to SEK 2.0 (1.4) billion and income after financial items was SEK 2.3 (—6.4) billion. Write- downs of investments in subsidiaries have affected income by SEK —3.8 (—19.0) billion. Major changes in the company(cid:213)s financial position for the year were: ¥ Decreased commercial and financial receivables from subsidiaries of SEK 35.5 billion ¥ Increased short-term and long-term customer financing of SEK 6.2 billion ¥ Increased investments in subsidiaries of SEK 6.1 billion ¥ Short- and long-term internal borrowings decreased by SEK 37.2 billion. Notes, bond loans and convertible debentures, including short-term portion, decreased by SEK 5.4 billion. Stockholders(cid:213) equity has increased by SEK 30.1 billion and cash and short-term cash investments have increased by SEK 10.3 billion, mostly due to the stock issue in September 2002. At year-end, cash and short-term cash investments amounted to SEK 59.3 (49.0) billion. In accordance with the conditions of the Stock Purchase Plan for Ericsson employees, 1,893,195 shares from treasury stock were distributed during the fourth quarter to employees who left Ericsson. An additional 291,635 shares were sold during the fourth quarter, in order to cover social security payments related to the Stock Purchase Plan. The holding of treasury stock at December 31, 2002, was 154,360,278 Class B shares. PROPOSED DISPOSITION OF EARNINGS Non-restricted equity available for distribution by the shareholders at the Annual General Meeting is SEK 14,401,459,586. The Board of Directors proposes that no dividend is paid and the whole amount is retained within the business. Stockholm February 3, 2003 Telefonaktiebolaget LM Ericsson (publ) Org. no. 556016-0680 Tom Hedelius Deputy chairman Michael Treschow Chairman Marcus Wallenberg Deputy chairman Peter Sutherland Peter Bonfield Eckhard Pfeiffer Sverker Martin-L(cid:154)f Lena Torell Per Lindh G(cid:154)ran Engstr(cid:154)m Kurt Hellstr(cid:154)m President and CEO Jan Hedlund 8 E R I C S S O N — A N N U A L R E P O R T 2 0 0 2 Notes 1 2 8 3 3 4 5 5 CONSOLIDATED INCOME STATEMENT Years ended December 31, SEK million Net sales Cost of sales Restructuring costs Gross margin Research and development and other technical expenses Selling expenses Administrative expenses Capitalization of development expenses, net Restructuring costs Total operating expenses Other operating revenues Share in earnings of joint ventures and associated companies Restructuring costs net, Phones Operating income1) Financial income Financial expenses Income after financial items Minority interest in income before taxes Income before taxes1) Taxes Income taxes for the year Minority interest in taxes Net income Average number of shares, basic million Average number of shares, diluted million Earnings per share, basic SEK Earnings per share, diluted SEK 1) Of which items affecting comparability Non-operational capital gains/losses, net Capital gain, Juniper Pension refund Restructuring costs, net Capitalization of development expenses, net Total Adjusted gross margin Adjusted operating expenses Adjusted operating margin Adjusted income before taxes Adjusted return on sales 2) 2001 and 2000 figures are restated for: F I N A N C I A L S T A T E M E N T S 2002 145,773 — 98,635 — 5,589 41,549 — 29,331 — 20,422 — 9,556 3,200 — 6,292 — 62,401 20012) 20002) 20013) 20003) 210,837 —138,123 — 4,858 67,856 — 40,247 — 27,585 —11,175 — — 6,242 — 85,249 221,586 —120,617 — 100,969 — 34,949 — 26,563 —12,004 — — —73,516 231,839 —165,555 — 8,345 57,939 — 43,094 — 30,844 —12,409 — — 6,655 — 93,002 273,569 —172,892 —7,500 93,177 — 41,421 — 35,197 —13,311 — — 500 — 90,429 543 8,575 27,463 8,398 27,983 —1,220 230 — 21,299 4,253 — 5,789 —14,662 — 3,900 — 27,380 4,815 — 6,589 — 22,835 — 29,154 — 488 — 23,323 —1,155 — 30,309 4,165 145 8,813 232 —19,013 — 21,264 12,573 12,684 —1.51 —1.51 — 42 — — —11,962 3,200 — 8,804 47,138 — 59,309 — 8.6% —14,519 — 5.7% 10,950 11,072 —1.94 —1.94 347 5,453 — —15,000 — — 9,200 72,714 —79,007 — 8.6% — 21,109 — 6.3% —16,088 — 8,000 30,828 3,698 — 4,887 29,639 — 947 28,692 —7,998 324 21,018 10,896 11,100 1.93 1.91 5,933 15,383 1,100 — 8,000 — 14,416 100,969 —73,516 7.4% 14,276 9.1% —715 — 97 — — 27,380 30,828 4,815 — 6,589 — 29,154 —1,155 — 30,309 8,813 232 — 21,264 10,950 11,072 —1.94 —1.94 347 5,453 — —15,000 — — 9,200 66,284 — 86,347 —7.8% — 21,109 — 5.8% 3,698 — 4,887 29,639 — 947 28,692 —7,998 324 21,018 10,896 11,100 1.93 1.91 5,933 15,383 1,100 — 8,000 — 14,416 100,677 — 89,929 6.0% 14,276 7.3% — Changed accounting principles in Sweden 2002 regarding consolidation of companies according to new RR1. — Results with parts of Phones transferred to the joint venture Sony Ericsson Mobile Communications accounted for under the equity method reported under Share in earnings of joint ventures and associated companies. 3) Income statement as reported in 2000 and 2001. Restated for changed accounting principles in Sweden 2002 regarding consolidation of companies according to new RR1. E R I C S S O N — A N N U A L R E P O R T 2 0 0 2 9 F I N A N C I A L S T A T E M E N T S CONSOLIDATED BALANCE SHEET December 31, SEK million Notes 2002 20012) Assets Fixed assets Intangible assets Tangible assets Financial assets Equity in joint ventures and associated companies Other investments Long-term customer financing Deferred tax assets Other long-term receivables Current assets Inventories Receivables Accounts receivable — trade Short-term customer financing Other receivables Short-term cash investments Cash and bank Total assets Stockholders(cid:213) equity, provisions and liabilities Stockholders(cid:213) equity Capital stock Reserves not available for distribution Restricted equity Retained earnings Net income Non-restricted equity Minority interest in consolidated subsidiaries Provisions Pensions Other 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(cid:213) equity, provisions and liabilities1) Assets pledged as collateral Contingent liabilities 6 7, 23, 24 8 10 11 13 14 16 16 17, 20 18 19 20 21 12,609 9,964 1,835 2,243 12,283 24,533 2,132 65,599 13,066 16,641 3,135 3,101 7,933 9,591 6,980 60,447 13,419 24,910 36,538 1,680 24,817 48,252 17,962 142,668 208,267 15,974 39,950 55,924 36,696 —19,013 17,683 73,607 2,469 10,997 21,357 32,354 33,074 — 3,043 949 37,066 11,083 2,392 2,672 12,469 619 33,536 62,771 57,236 6,833 39,171 36,046 32,878 197,074 257,521 8,066 29,593 37,659 52,192 — 21,264 30,928 68,587 3,653 10,104 22,831 32,935 41,656 4,437 7,906 887 54,886 3,622 22,068 4,803 19,511 1,856 45,600 97,460 208,267 257,521 2,800 3,116 10,857 12,299 1) Of which total interest-bearing provisions and liabilities 60,617 (89,879), of which current portion 13,475 ( 25,690). 2) Restated for changed accounting principles in Sweden 2002 regarding consolidation of companies according to new RR1. 10 E R I C S S O N — A N N U A L R E P O R T 2 0 0 2 CONSOLIDATED STATEMENT OF CASH FLOWS Years ended December 31, SEK million OPERATIONS Net income Adjustments to reconcile net income to cash Depreciation and amortization Taxes Capital gains/losses on sale of fixed assets, net Other non-cash items 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 Capitalization of development expenses 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 Sale/repurchase of own stock Dividends paid Cash flow from financing activities Effect of exchange rate changes on cash Net change in cash and cash equivalents Cash and cash equivalents, beginning of period Cash and cash equivalents, end of period F I N A N C I A L S T A T E M E N T S Notes 22 2002 20011) 20001) —19,013 — 21,264 21,018 22 22 22 6,537 — 9,171 721 81 8,599 — 2,140 9,839 — 5,541 —10,088 — 2,738 2,977 2,703 — 3,442 503 2,981 2,984 7,828 —16,983 — 6,126 1,724 20,103 3,903 19,653 —7,420 1,418 — 8,726 10,155 5,393 — — 83 —1,488 5,251 11,020 1,873 — 25,278 574 —18,305 — 2,752 —10,404 8,135 —14,119 —12,643 6,415 22,643 — 13 —1,959 14,469 —7,104 6,669 350 —17,168 — 540 — 6,072 28,940 — 2 — 645 5,597 —1,203 — 2,710 3,343 — 35,169 — 8,470 155 — —156 — 4,295 25,746 738 33,153 4,929 1,048 5,206 — 3,622 — 2,018 — 386 — 4,179 5,014 438 5,802 68,924 35,771 29,969 66,214 68,924 35,771 1) Restated for changed accounting principles in Sweden 2002 regarding consolidation of companies according to new RR1. E R I C S S O N — A N N U A L R E P O R T 2 0 0 2 11 F I N A N C I A L S T A T E M E N T S CONSOLIDATED STOCKHOLDERS(cid:213) EQUITY Years ended December 31, SEK million Opening Balance Stock issue, net Sale of own stock Stock purchase plan Conversion of debentures Repurchase of own stock Dividends paid Gains on sale of own options and convertible debentures Changes in cumulative translation effects due to changes in foreign currency exchange rates Net income Other changes Closing balance 2002 68,587 28,940 2 12 — — — — — 4,921 —19,013 — 73,607 2001 91,686 155 — — 11 —156 — 3,954 — 2,110 — 21,264 —1 68,587 2000 69,176 — — — 1,915 — 386 — 3,919 2,018 1,975 21,018 —111 91,686 12 E R I C S S O N — A N N U A L R E P O R T 2 0 0 2 PARENT COMPANY INCOME STATEMENT Years ended December 31, SEK million 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 Transfers from untaxed reserves Changes in depreciation in excess of plan Changes in other untaxed reserves Contributions to (—)/from subsidiaries, net Income before taxes Income taxes for the year Net income F I N A N C I A L S T A T E M E N T S 2002 2,017 — 2,358 — 341 — 37 — 3,099 —1,345 2,769 — 2,053 12,997 — 8,620 2,324 20 1,977 1,997 — 2,184 2,137 —1,027 1,110 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 — 5,139 393 — 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 —784 9,020 Notes 1 2 3 3 15 15 4 E R I C S S O N — A N N U A L R E P O R T 2 0 0 2 13 F I N A N C I A L S T A T E M E N T S PARENT COMPANY BALANCE SHEET December 31, SEK million Notes 2002 2001 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 Stockholders(cid:213) equity, provisions and liabilities Stockholders(cid:213) equity Capital stock Share premium reserve Revaluation reserve Statutory reserve Restricted equity Retained earnings Net income Non-restricted equity Untaxed reserves Provisions Long-term liabilities Notes and bond loans Convertible debentures Liabilities to financial institutions Liabilities to subsidiaries Other long-term liabilities Current liabilities Current maturities of long-term debt Current liabilities to financial institutions Advances from customers Accounts payable—trade Liabilities to subsidiaries Income tax liability Other current liabilities Total stockholders(cid:213) equity, provisions and liabilities Assets pledged as collateral Contingent liabilities 14 E R I C S S O N A N N U A L — R E P O R T 2 0 0 2 6 7, 24 8, 9 8, 9 8 12 8 8 10 11 12 13 14 15 16 17 17 17 12, 17 17 18 12 19 20 21 79 38 50,600 3,210 39 20,916 9,099 905 84,886 111 61 44,483 3,725 54 29,673 1,894 2,919 82,920 2 2 98 1,156 27,735 13,133 47,752 11,563 101,439 186,325 15,974 24,726 20 6,741 47,461 13,291 1,110 14,401 61,862 2,089 3,586 33,074 — 411 18,716 102 52,303 10,931 21 14 264 47,022 306 7,927 66,485 805 2,197 54,495 10,237 36,399 12,616 116,751 199,671 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 66,653 186,325 199,671 1,918 16,587 1,493 23,597 PARENT COMPANY STATEMENT OF CASH FLOWS Years ended December 31, SEK million 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 used in investing activities Cash flow before financing activities 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 Sale of own stock Dividends paid Other Cash flow from financing activities Net change in cash and cash equivalents Cash and cash equivalents, beginning of period Cash and cash equivalents, end of period F I N A N C I A L S T A T E M E N T S Notes 22 2002 2001 2000 1,110 — 4,746 9,020 22 49 3,792 —1,997 2,254 — 3,108 347 — — 6,164 1,399 2,323 5 — 2 7 —1,275 — 6,503 — 2,219 — 9,992 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 — 9,987 — 2,229 —19,788 — 293 — 3,666 232 — 4,641 28,940 — 2 — — 287 20,287 10,300 49,015 59,315 — 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 E R I C S S O N — A N N U A L R E P O R T 2 0 0 2 15 F I N A N C I A L S T A T E M E N T S PARENT COMPANY STATEMENT OF CHANGES IN STOCKHOLDERS(cid:213) EQUITY Years ended December 31, SEK million Opening balance Adjustments due to changes in accounting principles Adjusted opening balance Stock issue, net Repurchase of own stock Sale of own stock Conversion of debentures Capital discount Proceeds from unclaimed stock dividend shares Dividends paid Net income Closing balance 2002 31,810 — 31,810 28,940 — 2 — — — — 1,110 61,862 2001 39,484 1,017 40,501 155 —156 — 11 —1 — — 3,954 — 4,746 31,810 2000 32,835 — 32,835 — — 386 — 1,915 — 95 1 — 3,919 9,133 39,484 16 E R I C S S O N — A N N U A L R E P O R T 2 0 0 2 Accounting Principles The consolidated financial statements of Telefonaktiebolaget LM Ericsson and its subsidiaries ((cid:210)the Company(cid:211)) are prepared in accordance with accounting principles generally accepted in Sweden, applying the Swedish Financial Accounting Standards Council(cid:213)s (Redovisningsr(cid:140)det) recommendations (RR). These accounting principles differ in certain respects from generally accepted accounting principles in the United States (US GAAP). For a description of major differences as applicable to the Company(cid:213)s financial statements, see Note 29. In 2002 the following recommendations were adopted: ¥ Consolidated Financial Statements (RR1:00) ¥ Intangible assets (RR15) ¥ Provisions, contingent liabilities and contingent assets (RR16) ¥ Impairment of assets (RR17) ¥ Earnings per share (RR18) ¥ Discontinuing operations (RR19) ¥ Interim financial reporting(RR20) ¥ Borrowing costs (RR21) ¥ Related party disclosure (RR23). As a consequence of the adoption of RR1:00, certain finance companies previously accounted for under the equity method were consolidated. Previous years are restated. RR15 had a material positive effect on income for 2002. Only prospective application is allowed. PARENT COMPANY The financial statements of the Parent Company are also prepared in accordance with accounting principles generally accepted in Sweden. Investments in subsidiary and associated companies are accounted for on a cost basis. Parent Company income includes dividends received from subsidiaries and other inter-company revenues and costs, which are eliminated in the consolidated accounts. RESTATEMENT OF FINANCIAL STATEMENTS As from January 1, 2002, Ericsson consolidates certain finance companies previously accounted for under the equity method. The consolidated financial statements for 2000 and 2001 have been restated. In accordance with RR 1:00, these companies were consolidated by the Company since it retains the majority of the residual or ownership risks of the entity. The entities were previously not consolidated by the Company since Ericsson does not own a majority of the voting power or control the companies through an agreement with the other shareholders, which were requirements for consolidation in the previous standard, RR 1:96, followed by Ericsson through 2001. A C C O U N T I N G P R I N C I P L E S The Parent Company financial statements have not been restated to reflect the changed classification of these entities to subsidiaries. The adoption of RR 1:00 has not resulted in any change to net income (loss) or stockholders(cid:213) equity for year 2000 or 2001. The restatement of the balance sheet resulted in an increase in consolidated total assets (primarily short-term and long-term customer financing) and an increase in consolidated total liabilities (primarily current and long-term liabilities to financial institutions) of SEK 7,465 million as of December 31, 2001 and SEK 12,968 million as of December 31, 2000. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Parent Company and all subsidiaries. Subsidiaries are all companies in which the Company has an ownership and directly or indirectly has a voting majority or by agreement has a decisive influence or it retains the majority of the residual or ownership risk of the entity. Intercompany transactions have been eliminated. The consolidated financial statements have been prepared in accordance with the purchase method, whereby consolidated stockholders(cid:213) equity includes equity in subsidiaries and associated companies earned only after their acquisition. In the consolidated Income Statement, minority interests are, in deviation from RR1:00, divided into two items; share in income before taxes and share in taxes. The reason is that this method gives a more fair view of the important measure Income before taxes. Material investments in associated companies, including joint ventures, where voting stock interest is at least 20 percent but not more than 50 percent, are accounted for according to the equity method. Ericsson(cid:213)s share of income before tax in these companies is reported in item (cid:210)Share in earnings of joint ventures and associated companies(cid:211), included in Operating Income. Taxes are included in item (cid:210)Taxes(cid:211). 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 Goodwill below). Undistributed earnings of associated companies included in consolidated restricted equity are reported as (cid:210)Equity proportion reserve(cid:211), as detailed in Note 14. Minor investments in associated companies and all other investments are accounted for as Other investments, and carried at the lower of cost or fair value. E R I C S S O N — A N N U A L R E P O R T 2 0 0 2 17 A C C O U N T I N G P R I N C I P L E S GOODWILL Goodwill, positive and negative, resulting from acquisitions of consolidated companies is amortized/reversed according to individual assessment of each item(cid:213)s estimated economic life, resulting in amortization periods of up to 20 years. Depending on the nature of the acquisition, goodwill amortization is reported under (cid:210)Research and development and other technical expenses(cid:211), (cid:210)Selling expenses(cid:211) or (cid:212)(cid:212)Administrative expenses(cid:211). TRANSLATION OF FINANCIAL STATEMENTS IN FOREIGN CURRENCY 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 consolidated stockholders(cid:213) equity. When a company accounted for in accordance with these principles is sold, accumulated translation adjustments are included in consolidated income. Financial statements of companies with finance activities and other companies, having such close relations with the Swedish operations that their functional currency is considered to be SEK, 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 a currency other than the local currency, are translated in two steps. In the first step, re- measurement 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 SEK, 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 consolidated stockholders(cid:213) equity. The remeasurement method gives a more fair view of these financial statements than a translation directly to SEK, since companies concerned operate in de facto USD- or EUR-based economies. TRANSLATION OF FOREIGN CURRENCY ITEMS IN INDIVIDUAL COMPANIES In the financial statements, receivables and liabilities in foreign currencies have been translated at year-end exchange rates. Gains and losses on foreign exchange are divided into operational and financial. Net operational gains and losses are included in (cid:210)Cost of sales(cid:211). 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. 18 E R I C S S O N — A N N U A L R E P O R T 2 0 0 2 Translation effects related to permanent financing of foreign subsidiaries are reported directly to consolidated stockholders(cid:213) equity, net of tax effects. VALUATION OF AND ACCOUNTING FOR FINANCIAL INSTRUMENTS 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 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 interest rate gains are reserved. For companies other than Ericsson Treasury Services AB 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 rate- related derivatives linked to specific investments or loans or which are applied to hedge interest rate 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. As a result, 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 set-off exists and there is intent to settle on a net basis or to realize the asset and settle the liability at the same time. 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 assets are amortized over a period of maximum 5 years. See Goodwill above for amortization of goodwill. Amortization and depreciation is included in (cid:210)Cost of Sales(cid:211) and in the respective functional operating expenses. The costs of computer software developed or obtained for internal use as well as the costs incurred for the development of software that will be sold, leased or otherwise marketed are, in accordance with RR15, capitalized as intangible assets when technological feasibility has been established and when future economic benefits can be demonstrated. See also Research and Development Costs. Impairment reviews of tangible and intangible fixed assets, including goodwill, are performed whenever there is an indication of possible impairment. The carrying values of fixed assets, including goodwill related to those assets, are not considered to be recoverable when the expected discounted cash flows from those assets are less than their carrying values. An impairment loss is determined based on the amount by which the carrying value exceeds the fair value of those assets. Losses on fixed assets to be disposed of are determined in a similar manner, taking into account the selling price reduced by the costs of disposal. 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. RECEIVABLES Receivables are reported at anticipated realizable value. Sales of trade receivables and customer financing accounts are reflected as a reduction of receivables in the balance sheets and the proceeds received are included in cash flows from operating activities. 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 provision is included in contingent liabilities. REVENUE RECOGNITION The majority of our products and services are sold as a part of a contract. The nature of the products and services being sold, and the contractual terms taken as a whole, determine the appropriate revenue recognition method. Sales revenues are recorded net of value added taxes, goods returned, trade discounts and allowances. Revenue from hardware is recognized with reference to all significant contractual terms when there is persuasive evidence of an arrangement, when the product has been delivered, when the fee is fixed and determinable and when collection is reasonably assured and provided that there are no undelivered elements that are essential to the functionality of the delivered elements. Revenue from software is also recognized with reference to all significant contractual terms when persuasive evidence of an arrangement exists, the product has been delivered, the fee is fixed and determinable and when collection is reasonably assured. A C C O U N T I N G P R I N C I P L E S For delivery-type contracts that have multiple elements, revenue is allocated to each element based on evidence of fair values. When vendor specific objective evidence of fair value is not available for all elements we defer the recognition of revenue until all elements have been delivered or evidence of fair value exists for the undelivered elements. We do not generally provide extended payment terms but may provide customer financing on construction-type contracts. Revenues from construction-type contracts are generally recognized using the percentage-of-completion method. Completion is measured using either the milestone output method or the cost-to-cost method. The terms of construction- type contracts generally define certain milestones which, in addition to providing basis for progress billing, are also the basis of measuring the degree of completion of the contract. Revenues from contracts associated with new technology are not recognized until specified functionality has been achieved, customer acceptance has been obtained and other contractual terms have been satisfied. The profitability of long-term contracts is periodically assessed and revised, if necessary, based on changes in circumstances. Provisions for losses are immediately recorded when such losses become known. Revenue for maintenance services, including post-contract customer support, is recognized ratably over the contract term. Revenue for training, consulting, engineering, installation and other services is generally recognized when these services are performed. 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-type contracts. A disclosure in accordance with RR10, ⁄39a, and RR11, ⁄35b, regarding the amounts for different categories of revenue is considered not meaningful and is not calculated by the Company. For sales between consolidated companies, the same pricing is normally applied as in transactions with other customers, taking into account, however, that certain costs do not arise in transactions between affiliated companies. RESEARCH AND DEVELOPMENT COSTS Research and development costs are charged to expense as incurred. However, the costs incurred for the development of software that will be sold, leased or otherwise marketed are capitalized when technological feasibility has been established. These capitalized costs are subject to an ongoing assessment of recoverability based on anticipated future revenues and changes in technologies. Costs that are capitalized include direct labor and related overhead. Amortization of capitalized development costs begins when the product is available for general release. Amortization is made on a product-by-product basis according to either the straight-line method over periods not exceeding five years or the sales ratio method. Unamortized capitalized development costs determined to be in excess of net realizable value are expensed immediately. E R I C S S O N — A N N U A L R E P O R T 2 0 0 2 19 A C C O U N T I N G P R I N C I P L E S Research and development costs directly related to orders from customers are accounted for as a part of cost of sales. LEASING Financial leasing contracts are capitalized and reported as tangible assets and as other current liabilities and other long- term liabilities. 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 utilized. 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 included in the consolidated income statement in Income taxes for the year. The after-tax effect is stated in the income statement as part of net income for the year, and in the balance sheet as restricted stockholders(cid:213) equity. Deferred tax assets and liabilities are, in deviation from RR9, reported as current and long-term in the balance sheet, since the Company considers that this method gives a more fair view of the Company(cid:213)s financial 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 included in the consolidated income statement in Income taxes for the year. 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 be reversed. STATEMENT OF CASH FLOWS Foreign subsidiaries(cid:213) transactions are translated at the average exchange rate during the period. Subsidiaries purchased and/or sold, net of cash acquired/sold, are reported as cash flow from investment activities and do not affect reported cash flow from operations. EMPLOYEE STOCK OPTIONS AND STOCK PURCHASE PLAN No compensation cost is recognized for any of our current stock option plans, as the employee strike price is equal to the market price at grant date. When the options are exercised, however, social security charges are to be paid, in certain countries, on the value of the employee benefit; based on the difference between the market price of the share and the strike price. During the vesting period, preliminary costs for such social security charges are accrued. In some plans, these costs are reduced by income from related hedging arrangements. For the stock purchase plan, a compensation cost, based on market price of the share at the employee(cid:213)s investment date, is recognized in the income statement and accrued during the vesting period. When shares are matched, social security charges are to be paid in certain countries on the value of the employee benefit. The employee benefit is based on the share(cid:213)s market value at the matching date. During the vesting period, preliminary social security charges are accrued. 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. CHANGES IN ACCOUNTING PRINCIPLES IN 2003 The following new recommendations will be adopted by the Company in 2003: ¥ Presentation of financial statements (RR22) ¥ Investment property (RR24) ¥ Segment reporting (RR25) ¥ Events after the balance sheet date (RR26) ¥ Financial instruments: Disclosure and presentation (RR27) ¥ Accounting for Government Grants (RR28) Cash and cash equivalents consist of cash, bank and short- term investments due within 12 months. The recommendation Employee Benefits (RR29) will be adopted from January 1, 2004. 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 and 2001. 20 E R I C S S O N — A N N U A L R E P O R T 2 0 0 2 2002 74,124 23,068 12,676 35,905 97,133 25,190 32,096 56,418 145,773 210,837 8,303 43,396 6,656 59,206 2001 1,143 — 231 — 1,374 — — Notes to the financial statements 1 NET SALES BY MARKET AREA AND BUSINESS SEGMENT Market areas Consolidated Europe1), Middle East & Africa North America Latin America Asia Pacific Total 1) Of which Sweden 1) Of which EU Parent Company Europe1), Middle East & Africa North America Latin America Asia Pacific Total 1) Of which Sweden 1) Of which EU Parent Company sales are mainly related to business segment Systems. Business segments Consolidated Systems of which Mobile Systems of which Multi-Service Networks Phones Other operations Less: Intersegment sales Total Export from Sweden including internal sales 2) 2001 and 2000 figures are restated for: 2002 1,715 — 302 — 2,017 — — 2002 131,955 120,256 11,699 — 23,533 — 9,715 145,773 86,695 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 20012) 20002) 2001 2000 106,972 31,379 34,516 58,972 231,839 7,341 66,561 137,935 35,193 44,118 56,323 273,569 8,732 94,293 108,426 25,247 38,036 49,877 221,586 7,150 72,682 2000 1,055 — 107 33 1,195 — — 2001 2) 2000 2) 2001 2000 188,697 161,554 27,143 — 31,762 — 9,622 210,837 110,717 196,173 166,484 29,689 — 37,553 —12,140 221,586 127,502 187,777 154,343 33,434 23,567 30,816 —10,321 231,839 121,277 194,747 158,083 36,664 56,279 35,927 —13,384 273,569 158,338 — Changed accounting principles in Sweden 2002 regarding consolidation of companies according to new RR1. — Results from parts of Phones transferred to the joint venture Sony Ericsson Mobile Communications, reported under Share in earnings of joint ventures and associated companies for the full year. — Transfer of services activities from Multi-service Networks to Mobile Systems. E R I C S S O N — A N N U A L R E P O R T 2 0 0 2 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 2 OTHER OPERATING REVENUES Consolidated Gains on sales of intangible and tangible assets Losses on sales of intangible and tangible assets Capital losses on tangible assets related to restructuring 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) 2001 and 2000 figures are restated for: 2002 20011) 20001) 20012) 20002) 166 1,962 2,107 1,962 2,107 — 251 —1,317 —731 —1,317 —731 — 311 267 — 593 —722 1,265 543 — 5,830 — 349 6,126 2,249 8,575 — — — 24,133 5,830 24,133 — 231 25,278 2,185 27,463 — 349 6,126 2,272 8,398 — 231 25,278 2,705 27,983 — Changed accounting principles in Sweden 2002 regarding consolidation of companies according to new RR1. — Results from parts of Phones transferred to the joint venture Sony Ericsson Mobile Communications, reported under Share in earnings of joint ventures and associated companies for the full year. 2) Income statement as reported in 2000 and 2001. Restated for changed accounting principles in Sweden 2002 regarding consolidation of companies according to new RR1. Parent Company Commissions, license fees and other operating revenues Net losses (—) on sales of tangible assets Total 2002 2001 2000 2,770 —1 2,769 3,068 — 2 3,066 3,128 — 67 3,061 22 E R I C S S O N — A N N U A L R E P O R T 2 0 0 2 3 FINANCIAL INCOME AND EXPENSES Parent Company 2002 2001 2000 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 Consolidated 2002 2001 2000 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 1,049 2,677 2,393 3,204 4,253 2,138 4,815 1,305 3,698 5,789 6,589 4,887 —1,536 —1,774 —1,189 Subsidiaries Other Financial Expenses Losses on sales of participations in subsidiaries Write-down of investments in subsidiaries Losses on sales of participations in associated companies Losses on sales of participations in other companies Interest expenses and similar profit/loss items: Other financial expenses Total Financial Net — 5 3,800 19,000 35 2 12 — — — — — 2,399 2,370 14 2,080 2,536 12 8,620 23,645 4,377 — 4,421 1,619 1,452 19 3,090 9,262 Swedish companies(cid:213) interest expenses on pension liabilities are included in the interest expenses shown above. Parent Company 2002 2001 2000 Financial Income Result from participations in subsidiaries Dividends1) Net gains on sales Result from participations in associated companies Dividends Net gains/losses (—) on sales 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 Other2) Total 5,077 20 14,442 7 6,531 228 48 — 58 24 23 — 6 — 37 125 1,925 2 182 3,346 4,424 3,674 1,047 2,253 1,106 12,997 19,224 12,352 1) Anticipated dividends amount to SEK 3,100 million in 2002, SEK 3,700 million in 2001 and SEK 3,800 million in 2000. 2) Of the total amount, SEK 2,161 million in 2002, SEK —978 million in 2001 and SEK —596 million in 2000 is attributable to hedge of net investments in foreign subsidiaries. Parent Company(cid:213)s interest expenses on pension liabilities are included in the interest expenses shown above. E R I C S S O N — A N N U A L R E P O R T 2 0 0 2 23 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 4 INCOME TAXES FOR THE YEAR Income Statement The following items are included in Income taxes for the year: 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 2002 — 2,579 —1,456 7,996 204 Consolidated 2001 2000 — 5,108 216 13,680 25 — 8,920 — 33 1,008 — 53 2002 —187 — 493 — 347 — Income taxes for the year 4,165 8,813 —7,998 —1,027 Parent Company 2001 2000 — 241 22 612 — 393 — 671 — —113 — —784 Deferred tax income and expenses The amounts of deferred tax income and expenses are shown in the following table: Deferred tax income Deferred tax expenses Deferred taxes income/expense, net 2002 10,269 — 2,273 Consolidated 2001 2000 17,429 — 3,749 5,288 — 4,325 7,996 13,680 963 Parent Company 2001 2000 612 — 612 15 —128 —113 2002 29 — 376 — 347 Consolidated Deferred income taxes refer to tax losses carryforwards by SEK 5,615 million (SEK 7,986 million in 2001, SEK 388 million in 2000) and to certain provisions for mainly restructuring, inventory write-down, warranty commitments and allowances for doubtful receivables. Deferred tax expenses refer to reversal of temporary differences regarding certain provisions for restructuring and warranty commitments. Parent Company Deferred income taxes refer mainly to provision for certain pension obligations. Deferred tax expenses refer to reversal of temporary differences regarding provisions for customer financing commitments. 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, is shown in the table: Income before taxes Tax rate in Sweden (28%) Effect of foreign tax rates Current income taxes related to 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 Income taxes for the year 2002 —23,321 6,530 47 —1,456 —1,091 365 — 21 — — 64 Consolidated 2001 2000 — 30,309 8,487 986 216 — 864 260 83 — —123 28,692 — 8,033 —730 — 33 —1,506 2,395 — — 233 4,3101) 9,0451) —7,674 Parent Company 2001 2000 — 5,139 1,439 — 22 — 220 4,472 — — 5,320 — 9,804 — 2,745 — — —136 2,097 — — — 393 —784 2002 2,137 — 598 — — 493 — 584 1,712 — —1,064 — —1,027 1) Of which minority interest in taxes SEK 145 million (SEK 232 million in 2001, SEK 324 million in 2000). Consolidated Income taxes related to prior years consist mainly of foreign withholding taxes that were not deductible due to insufficient taxable income, and due to rulings by Swedish tax authorities disallowing deductions of capital discounts on convertible debentures and other costs. Tax effect of expenses that are non-deductible include amortization of goodwill, tax on capital discount and costs related to customer financing. Parent Company Income taxes related to prior years consist mainly of non- deductible capital discounts on convertible debentures and other costs. Tax effect of expenses that are non-deductible refer mainly to costs related to customer financing, non-deductible group contribution and tax on capital discount. Tax effect of income that are non-taxable refer mainly to dividends. 24 E R I C S S O N — A N N U A L R E P O R T 2 0 0 2 Balance sheet Deferred tax assets and liabilities Tax effects of temporary differences including unutilized tax loss carryforwards have resulted in deferred tax assets and liabilities as follows: Consolidated Parent Company 2001 2002 2002 2001 Deferred tax assets, current 1,514 Deferred tax assets, long-term 24,533 233 Deferred tax liabilities, current Deferred tax liabilities, long-term 1,278 11,321 9,591 346 1,662 591 691 — — 771 858 — — Consolidated Deferred tax assets refer to tax loss carryforwards and temporary differences due to certain provisions for mainly restructuring, inventory write-down, warranty commitments and allowances for doubtful receivables. Deferred tax assets regarding tax losses carryforwards amount to SEK 13,567 million (SEK 8,525 million in 2001, SEK 515 million in 2000) of which SEK 143 million (SEK 335 million in 2001, SEK 306 million in 2000) is reported as current and SEK 13,424 million (SEK 8,190 million in 2001, SEK 209 million in 2000) is reported as long-term. Deferred tax liabilities refer mainly to capitalization of software development costs. Deferred tax assets are expected to be utilized as we believe Ericsson will be able to report sufficient taxable income in the future to benefit from these tax reductions. Most of the tax loss carryforwards are related to countries with long or indefinite periods of utilization, mainly Sweden. Of the SEK 13,567 million in deferred tax assets related to tax loss carryforwards, SEK 10,300 million will not expire until 2008 or later. Parent Company Deferred tax assets refer mainly to costs related to customer financing 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 those 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 also to losses in these companies and due to the uncertainty as to which deductions can be realized in the future, with respect to the above differences between book and tax value, no additional deferred tax assets are reported for these differences. 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 Tax loss carryforwards Deferred tax assets regarding unutilized tax loss 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, 2002, these unutilized tax loss carryforwards, amounted to SEK 45,782 million. The tax effect of the tax losses carryforwards is reported as assets. The final years in which these loss carryforwards can be utilized are shown in the following table: Year of expiration 2003 2004 2005 2006 2007 2008 or later Total 2002 417 139 180 314 388 44,344 45,782 The Parent Company has no unutilized tax loss carryforwards. Tax effects reported directly to stockholders(cid:213) equity Tax effects reported directly to stockholders(cid:213) equity amount to SEK 523 million (SEK 233 million 2001, SEK 140 million 2000). 5 EARNINGS PER SHARE Consolidated Net income Average number of shares (millions) Earnings per share, basic2) 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 (million) 2002 20012) 20002) —19,013 — 21,264 21,018 12,573 10,950 10,896 —1.51 —1.94 1.93 —19,013 — 21,264 21,018 219 176 207 —18,794 — 21,088 21,225 12,684 11,072 11,100 Earnings per share, diluted —1.511) —1.941) 1.91 1) Potential ordinary shares are not considered when their conversion to ordinary shares would increase earnings per share. 2) 2001 and 2000 adjusted for stock dividend element of stock issue. E R I C S S O N — A N N U A L R E P O R T 2 0 0 2 25 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 6 INTANGIBLE ASSETS Consolidated Accumulated acquisition costs Opening balance Acquisitions/capitalization Balances regarding acquired and sold companies Sales/disposals Translation difference for the year Closing balance Accumulated amortization Opening balance Amortization for the year Balances regarding acquired and sold companies Sales/disposals Translation difference for the year Closing balance Net carrying value Parent Company Accumulated acquisition costs Opening balance Acquisitions Closing balance Accumulated amortization Opening balance Amortization for the year Closing balance Net carrying value Licenses, trademarks and similar rights Patents and acquired research and development Goodwill Capitalized development costs, to be sold Capitalized acquired development costs, for internal use Capitalized internal development costs, for internal use Total 1,566 106 — 21 — 273 — 59 1,319 —1,336 —138 4 212 34 —1,224 95 1,338 165 — — 370 — 31 1,102 — 583 —191 — 360 23 — 391 711 15,740 — —17 —178 — 2,611 12,934 — 3,659 —1 064 17 7 368 — 4,331 8,603 — 3,074 — — — 3,074 — — 223 — — — — 223 2,851 — 220 — — — 220 — —11 — — — —11 209 — 148 18,644 3,713 — — — — 38 — 821 — 2,701 148 18,797 — — 8 — — — — 8 — 5,578 —1,635 21 579 425 — 6,188 140 12,609 Patents, licenses trademarks and similar rights 216 — 216 —105 — 32 —137 79 26 E R I C S S O N — A N N U A L R E P O R T 2 0 0 2 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 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 revaluation, net Opening balance Translation difference for the year Closing balance Accumulated write-downs, net Opening balance Write-downs for the year Sales/disposals/reversals of write-downs Translation difference for the year Closing balance Net carrying value Land and buildings Machinery and other technical assets Other equipment, tools and installations Construction in process and advance payments 3,049 207 —73 — 812 —71 — 355 1,945 —1,147 — 216 11 384 34 168 —766 38 — 2 36 — 5 — — 1 — 4 1,211 15,248 431 —1,861 — 2,874 — 22 —752 10,170 — 9,335 —1,618 1,594 1,886 — 475 — 6,998 — — — — 864 —101 773 13 —179 2,993 25,417 1,859 — 418 — 5,307 583 — 2,054 20,080 —16,405 — 3,680 —136 4,480 — 34 1,252 —14,523 — — — — 52 — 60 — 10 —102 5,455 697 241 —117 — 53 — 490 27 305 — — — — — — — — — — — — — — — 305 Opening balances regarding accumulated depreciation/write-down are restated to show our write-downs separately. 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 Machinery and other technical assets Other equipment, tools and installations Construction in process and advance payments 23 — — 23 — — — — 23 12 — —12 0 —11 — 11 0 0 104 2 — 37 69 — 67 —16 29 — 54 15 — — — — — — — — — Total 44,411 2,738 — 2,469 — 9,046 — — 3,134 32,500 — 26,887 — 5,514 1,469 6,750 — 1,895 — 22,287 38 — 2 36 — 921 —161 773 24 — 285 9,964 Total 139 2 — 49 92 —78 —16 40 — 54 38 E R I C S S O N — A N N U A L R E P O R T 2 0 0 2 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 8 FINANCIAL ASSETS Equity in joint ventures and associated companies in 2002 Joint ventures Associated companies Consolidated Opening balance Share in earnings Taxes Translation difference for the year Dividends Acquisitions Sales Closing balance 1,975 —1,333 230 —73 — — — 799 Total 3,135 —1,220 204 —156 — 8 246 — 366 1,160 113 — 26 — 83 — 8 246 — 366 1,036 1,835 Dividends received from companies accounted for under the equity method were SEK 27 million in 2001 and SEK 35 million in 2000. 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 854 5,767 437 13 5,372 799 19,107 —1,333 —1,103 139 75 Parent Company Investments Opening balance Acquisitions and stock issues Shareholders(cid:213) contribution Write-downs Reclassifications Sales Closing balance Sub- sidiaries Other Joint Associated invest- companies ments ventures 44,483 2,752 1,358 12,007 — 3,800 516 — 3,964 50,600 — — — — — 2,752 973 26 — — — 506 — 35 458 54 2 — — —10 —7 39 28 E R I C S S O N — A N N U A L R E P O R T 2 0 0 2 Other financial assets 2002 Other investments in shares and partici- pations Consolidated Long- term Other long- term customer Deferred financial financing3) assets taxes Accumulated acquisition costs Opening balance Additions Sales/repayments/ deductions Reclassifications Translation difference for the year Closing balance Accumulated write-downs Opening balance Write-downs for the year Sales/repayments/ deduction Reclassifications Translation difference for the year Closing balance 3,730 519 — 887 — — 218 3,144 11,329 13,043 — 4,460 — —709 19,203 9,591 9,203 7,141 437 —1,156 8,044 — 5,148 — —1,149 24,533 —125 2,305 — 629 — 3,396 — 334 — 3,134 — 43 — 105 — 901 1,353 —1,748 5 — 6,9201) — — — — — — —161 — — 6 — — 6 —173 2,132 Net carrying value 2,2432) 12,283 24,533 1) Write-downs are included in Selling expenses due to the close relation to operations. 2) Market value per December 31, 2002, for listed shares was SEK 382 million with a net carrying value of SEK 756 million. 3) From time to time, customer financing amounts may include equity instruments or equity-related instruments in our customers due to reconstruction activities of troubled debt. This is a result of that we sometimes receive such instruments as security for our receivable. Our policy is to sell such instruments as soon as feasible. Parent Company Accumulated acquisition costs Opening balance Acquisitions/credits granted Sales/repayments/deduction Translation/revaluation difference for the year Closing balance Accumulated write-downs Opening balance Write-downs for the year Reclassification Sales/repayments Closing balance Net carrying value Long-term customer financing Deferred taxes Other long-term financial assets 2,802 11,796 —1,780 — 12,818 — 908 —1,615 —1,625 429 — 3,719 9,099 858 — —167 — 691 — — — — — 2,061 47 —1,877 —17 214 — — — — — 691 214 9 INVESTMENTS The following listing shows certain shareholdings owned directly and indirectly by the Parent Company. A complete listing of shareholdings, prepared in accordance with the Shares owned directly by the Parent Company 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 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 556056-6258 556251-3266 556250-9454 556606-5438 556251-3258 556137-8646 556018-0191 556030-9899 556381-7666 556381-7609 556329-5673 556326-0552 556058-5936 Subsidiaries I I I I II II II II II III III III III Ericsson AB Ericsson Shared Services AB Ericsson Global IT Services AB Ericsson Juniper Networks Mobile IP AB Ericsson Telecom AB Ericsson Utvecklings AB SRA Communication AB AB Aulis LM Ericsson Holding AB Ericsson G(cid:138)msta AB Ericsson Treasury Services AB Ericsson Credit AB Ericsson Project Finance AB Other Ericsson Austria GmbH 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. 4) Ericsson A/S Ericsson Corporatio AO Ericsson AG Ericsson Holding Ltd. Other (Europe, excluding Sweden) Ericsson Holding II Inc. US Statutory Trust 2001 C(cid:146)a Ericsson S.A.C.I. Teleindustria Ericsson S.A. Other (United States, Latin America) Teleric Pty Ltd. Ericsson Ltd. Ericsson (China) Company Ltd. Nanjing Ericsson Panda Communication Co. Ltd. Ericsson India Private Ltd. Ericsson Malaysia Sdn. Bhd. Ericsson Telecommunications Pte. Ltd. Ericsson Taiwan Ltd. Ericsson (Thailand) Ltd. Other countries Total I I I II I I II III III II I I I II II III I I II I I I I I I I I Joint ventures and associated companies I I I Sony Ericsson Mobile Communications AB Ericsson Nikola Tesla Beijing Ericsson Mobile Communications Co. Ltd Other Total 556615-6658 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 United States Argentina Mexico Australia China China China India Malaysia Singapore Taiwan Thailand Sweden Croatia China 100 100 100 60 100 100 100 100 100 100 100 100 100 — 100 100 100 100 100 100 100 100 100 72 100 100 100 100 — 100 100 100 100 — 100 100 100 251) 100 70 100 80 492) — 50 49 25 3) — 50 361 85 — 100 10 47 14 105 162 1 5 469 — 4 90 13 22 20 1,301 2 81 300 10 156 5 — 74 — — 22 5 n/a — 20 2 50 5 725 2 — 240 15 — — 50 196 5 — — 12,636 5,916 252 87 6,520 17 145 6 1,122 324 2 5 567 623 664 216 195 485 341 120 14 3,924 2,951 105 194 5 — 757 136 9,508 198 10 1,549 133 99 2 369 37 147 4 1 19 4 191 50,600 2,752 330 36 92 3,210 E R I C S S O N — A N N U A L R E P O R T 2 0 0 2 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 9 INVESTMENTS (CONTINUED) Shares owned by subsidiaries Type Company Reg. No. Domicile Percentage of ownership 556577-9799 556000-0365 556128-5924 556090-3212 556028-1627 556329-5657 556250-2046 556044-9489 556008-8550 Subsidiaries I I I I I I II II III I I I II II I I I I I I I I I I I I I I I I I I I Ericsson Shared Services V(cid:138)st AB Ericsson Network Technologies AB Ericsson Business Innovation AB Ericsson Enterprise AB Ericsson Microwave Systems AB Ericsson Sverige AB Ericsson Radio Access AB Ericsson Cables Holding AB AB LM Ericsson Finans Ericsson France S.A. LM Ericsson Ltd. Ericsson Telecommunicazioni S.p.A. Ericsson Holding International B.V. Ericsson Nederland B.V. Ericsson Telecommunicatie B.V. Ericsson Espa(cid:150)a S.A. Ericsson Telekomunikasyon A.S. Ericsson Ltd. Ericsson Mobile Communications (U.K.) Ltd. Ericsson Canada Inc. Ericsson Inc. Ericsson NetQual Inc. Ericsson WebCom Inc. Ericsson Wireless Communications Inc. Ericsson IP Infrastructure Inc. Ericsson Amplifier Technologies Inc. Ericsson Telecommunica(cid:141)(cid:155)es S.A. Ericsson Servicos de Telecomunica(cid:141)(cid:155)es Ltda. Ericsson Telecom S.A. de C.V. Ericsson Australia Pty. Ltd. Nippon Ericsson K.K. Ericsson Mobile Communications Sdn Bhd Ericsson Consumer Products Asia Pacific Pte Ltd. Sweden Sweden Sweden Sweden Sweden Sweden Sweden Sweden Sweden France Ireland Italy The Netherlands The Netherlands The Netherlands Spain Turkey United Kingdom United Kingdom Canada USA USA USA USA USA USA Brazil Brazil Mexico Australia Japan Malaysia Singapore 100 100 100 100 100 100 100 100 100 100 100 72 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 Key to type of company 1 Through subsidiary holdings, total holdings amount to 51% of Nanjing Ericsson Panda I Manufacturing, distribution and development companies II Holding companies III Finance companies Communication Co. Ltd. 2 Through subsidiary holdings, total holdings amount to 100% of Ericsson (Thailand) Ltd. 3 Through subsidiary holdings, total holdings amount to 46% of Beijing Ericsson Mobile Communications Co. Ltd. 4 The subsidiary Ericsson S.p.A. is listed on the Milan stock exchange in Italy. Ericsson(cid:213)s share of the market value as per December 31, 2002, was SEK 3,348 million. 30 E R I C S S O N — A N N U A L R E P O R T 2 0 0 2 10 INVENTORIES Consolidated Parent Company 2001 2002 2002 2001 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 4,348 653 9,185 1,224 2,990 9,935 — 4,507 5,728 13,653 — 4,880 13,419 24,910 — — 1 4 — 3 2 1 — 3 5 —7 2 11 ACCOUNTS RECEIVABLE — TRADE Consolidated Parent Company 2001 2002 2002 2001 Notes and accounts receivable Receivables from associated companies and joint ventures Total 35,814 56,561 63 753 724 675 36,538 57,236 35 98 52 805 Allowances for doubtful accounts amounting to SEK 1,909 million (SEK 2,655 million in 2001) and SEK 271 million (SEK 276 million in 2001) in the Parent Company, which has reduced the amounts shown above, include amounts for estimated losses based on commercial risk evaluations. Retention receivables recognized as revenues were SEK 5,378 million (SEK 6,924 million in 2001) at December 31, 2002. 12 RECEIVABLES AND PAYABLES — SUBSIDIARIES Parent Company Long Term Receivables1) Financial receivables Current Receivables Commercial receivables Financial receivables Total Long Term Liabilities1) Financial liabilities Current Liabilities Commercial liabilities Financial liabilities Total 2002 2001 20,916 29,673 1,525 26,210 2,218 52,277 27,735 54,495 18,716 45,574 367 46,655 381 56,995 47,022 57,376 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 Included in Other are cash colleterals and restricted bank deposits, amounting to SEK 4,962 million (SEK 1,032 million in 2001). 14 STOCKHOLDERS(cid:213) EQUITY Capital stock 2002 Capital stock at December 31, 2002, consisted of the following: Parent Company A shares (par value SEK 1.00) B shares (par value SEK 1.00) Number of shares Aggregate par value 656,218,640 15,318,040,038 15,974,258,678 656 15,318 15,974 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. The total number of treasury shares at December 31, 2002, is 154,360,278 (156,804,000 in 2001). The decrease in treasury shares is due to the Stock purchase plan. Cumulative translation adjustments Opening balance Changes in cumulative translation adjustments Closing balance 1,970 — 4,921 — 2,951 Changes in cumulative translation adjustments include changes regarding recalculation of goodwill in local currency of SEK —1,515 million (SEK 996 million in 2001), net gain/loss (—) from hedging of investments in foreign subsidiaries of SEK 1,346 million (SEK —600 million in 2001) and SEK —107 million (SEK 5 million in 2001) 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: 1) Including non-interest bearing receivables and liabilities, net, amounting to SEK —29,506 million (SEK -17,212 million in 2001). Interest-free transactions involving current receivables and liabilities may also arise at times. 13 OTHER RECEIVABLES Cost of sales Financial income Taxes Total Consolidated Parent Company 2001 2002 2002 2001 Receivables from associated companies and joint ventures Prepaid expenses Accrued revenues Advance payments to suppliers Deferred tax assets Other 461 2,245 2,582 545 1,514 17,470 176 3,389 5,824 603 11,328 17,851 — 759 754 — 591 11,029 2,564 716 598 — 771 5,588 Total 24,817 39,171 13,133 10,237 2002 2001 — 45 —198 3 — 240 134 28 9 171 E R I C S S O N — A N N U A L R E P O R T 2 0 0 2 31 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(cid:213) EQUITY (CONTINUED) Changes in stockholders(cid:213) equity Consolidated January 1, 2002 Stock issue Stock purchase plan Sale of own stock Transfer between non-restricted and restricted reserves Changes in cumulative translation adjustments Net income 2002 December 31, 2002 Capital stock 8,066 7,908 — — — — — 15,974 Equity proportion reserve Other restricted reserves Total restricted equity Non- restricted equity 491 — — — 181 — — 672 29,102 21,032 — — 37,659 28,940 — — 30,928 — 12 2 Total 68,587 28,940 12 2 — 5,935 — 5,754 5,754 — — 4,921 — 39,278 — 4,921 — 55,924 — —19,013 17,683 — 4,921 —19,013 73,607 Of retained earnings, SEK 279 million will be appropriated to reserves not available for distribution, in accordance with the proposals of the respective companies(cid:213) 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, 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(cid:213) equity. Consolidated January 1, 2001 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 Other restricted reserves Total restricted equity Non- restricted equity 447 32,153 — — — — — 44 — — — — 10 —1 — — 5,170 2,110 — 40,510 155 — 11 —1 — — 5,126 2,110 51,176 — —156 — — — 3,954 5,126 — — — 21,264 December 31, 2001 8,066 491 29,102 37,659 30,928 Consolidated January 1, 2000 Repurchase of own stock Stock dividend Conversion of debentures Capital discount Proceeds from unclaimed stock dividend shares Dividends paid Gains on sale of own options and convertible debentures Revaluation of fixed assets Transfer between non-restricted and restricted reserves Changes in cumulative translation adjustments Net income 2000 Capital stock 4,893 — 2,941 76 — — — — — — — — Equity proportion reserve Other restricted reserves Total restricted equity Non- restricted equity 348 — — — — — — — — 99 — — 32,270 — — 2,941 1,839 —105 1 — — —7 — 879 1,975 — 37,511 — — 1,915 —105 1 — — —7 —780 1,975 — 31,665 — 386 — — — — — 3,919 2,018 — 780 — 21,018 51,176 December 31, 2000 7,910 447 32,153 40,510 Parent Company January 1, 2002 Stock issue Sale of own stock Net income 2002 December 31, 2002 stock 8,066 7,908 — — 15,974 Share Revalua- Capital premium reserve 1) tion Statutory reserve reserve Total Disposi- tion reserve restricted equity Other retained earnings Non- restricted equity 3,694 21,032 — — 24,726 20 — — — 20 6,741 — — — 6,741 18,521 28,940 — — 47,461 100 — — — 100 13,189 — 2 1,110 14,301 13,289 — 2 1,110 14,401 61,862 Total 91,686 155 —156 11 —1 — 3,954 — 2,110 — 21,264 68,587 Total 69,176 — 386 0 1,915 —105 1 — 3,919 2,018 —7 0 1,975 21,018 91,686 Total 31,810 28,940 2 1,110 1) 1996 and prior years(cid:213) share premium are included in statutory reserve. 32 E R I C S S O N — A N N U A L R E P O R T 2 0 0 2 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 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 Jan. 1 Withdrawals Dec. 31 27 18 45 3,267 774 4,041 4,086 —7 —13 — 20 —1,977 — —1,977 —1,997 20 5 25 1,290 774 2,064 2,089 Swedish GAAP and tax regulations require a company to report certain differences between the tax basis and book value as an untaxed reserve in the balance sheet of the stand-alone financial statements. Changes to these reserves are reported as an appropriation or withdrawal to untaxed reserves in the income statement. Changes in other untaxed reserves in the Parent Company in 2000 consist of the following: withdrawal of tax equalization reserve, SEK 0 million (SEK 127 million in 2001); appropriations to reserve for doubtful receivables, SEK 247 million (SEK —389 million in 2001) and withdrawal of income deferral reserve SEK 1,419 million (SEK —446 million in 2001). Deferred tax liability, not accounted for, on untaxed reserves, amounts to SEK 585 million in 2002, SEK 1,144 million in 2001 and SEK 1,473 million 2000. 16 PROVISIONS Consolidated Opening balance Additions To cover costs incurred Excess amounts Balances regarding acquired and sold companies Reclassification Translation difference for the year Closing balance Parent Company Opening balance Additions To cover costs incurred Excess amounts Reclassification Translation difference for the year Closing balance Pensions and similar provisions 10,104 2,128 — 864 — —1 —147 — 223 10,997 Deferred taxes Warranty commitments Restructuring Customer financing 2,009 1,142 —1,247 — 21 — 488 74 1,511 4,435 2,711 — 3,563 — — 177 — 206 3,554 7,075 7,195 — 6,593 — 86 —14 157 —199 7,535 2,212 445 — 680 — 571 — —1,126 —102 178 Total other provisions 22,831 17,521 —15,159 — 876 — 60 —1,490 —1,410 21,357 Other 7,100 6,028 — 3,076 — 219 — 67 — 210 — 977 8,579 Pensions and similar provisions Restructuring Customer financing 889 264 — 54 — 57 — 1,156 47 63 — 8 — — 39 — 63 3,769 84 — — —1,625 — 2,228 Other 350 3 — —184 —19 —11 139 Pensions The Company participates in local pension plans in countries in which we operate. There are principally two types of pension plans: ¥ Defined contribution plans, where the Company(cid:213)s only obligation is to pay a pension premium to a fund or insurance company on behalf of the employee. No liability is recorded on the books. ¥ Defined benefit plans, where the Company(cid:213)s undertaking is to provide pension benefits related to services rendered and salary levels. These plans are managed in two ways: — by setting up a trust to manage the company(cid:213)s contri- butions to the plan, in which case the recorded provision on the balance sheet is the net of benefit obligations and plan assets. — by recording of total accumulated benefits as a provision on the balance sheet with no assigned plan assets. This method is used in Sweden and subject to insurance with the Pension Registration Institute (PRI) which is covered by Swedish law on safeguarding of pension commitments. In the Ericsson group, most companies have defined contribution plans and therefor no pension provisions on the books. In a dozen countries other than Sweden, the subsidiaries have defined benefit plans with trust funds, and record the net E R I C S S O N — A N N U A L R E P O R T 2 0 0 2 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 of accumulated benefit obligations and plan assets as provisions. In Sweden, the total pension benefits are a mixed solution, with some parts being defined contribution-type and others defined benefit: ¥ social security payroll taxes for all employees include fees for state-governed basic pension benefits. No liability is recorded in company books. ¥ all blue-collar employee plans and certain parts of white- collar plans, such as death and disability, are defined contribution plans. Some parts of early-retirement plans are also arranged as defined contribution plans. ¥ white-collar employees(cid:213) age pension benefits are defined benefit-type plans. No trust is established and the full liability is recorded on the books with compulsory insurance coverage. The liability is calculated by a third party institution, PRI, according to actuarial assumptions defined outside the company(cid:213)s control. PRI also administers the pension payments to employees. The main part of total provisions for pensions and similar benefits amounting to SEK 10,997 million, is attributable to the Swedish pension plans, of which SEK 9,175 million (SEK 7,459 million in 2001) are PRI-liability. The Parent Company(cid:213)s pension liabilities include an obligation in the amount of SEK 716 million (SEK 532 million in 2001) in accordance with an agreement with PRI. In accordance with new Swedish accounting principles, RR29, to be adopted in 2004, actuarial assumptions such as future salary levels and expected return on any plan assets among other, are required to disclose costs and net liabilities for defined benefit plans. Ericsson will apply RR29 in year 2004 and the cumulative effect of the accounting change will be charged directly to equity. If Ericsson would have applied RR29 as of January 1, 2003, the pension provisions would have been increased by approximately SEK 2.8 billion. The effect on equity, net after taxes, would have been approximately SEK 2 billion. Deferred taxes Deferred tax liabilities as of December 31, 2002, relate mainly to capitalization of development costs. Warranty commitments Warranty provisions are made based on sales and contractual warranty periods of products sold. As the sales have decreased during the year compared to last year and warranties for Phones are now included in the accounts of SEMC, provisions have also decreased. Restructuring During 2001, two restructuring programs were implemented and expenses of SEK 15 billion were recognized, of which SEK 7 billion remained as unutilized provisions at the end of 2001. In 2002, the remaining provisions have largely been reversed to cover actual costs. At the end of this year, SEK 500 million remained and we 34 E R I C S S O N — A N N U A L R E P O R T 2 0 0 2 expect that these will be dissolved during the first quarter of 2003. During 2002, further restructuring activities were implemented. At year end, provisions of SEK 7 billion related to these activities remained. We expect that the main part of the SEK 7 billion will be dissolved to cover costs during 2003 and the remaining part during the first quarter of 2004. Customer financing Total provisions for off-balance sheet customer financing is the sum of all individual provisions for each risk. The individual provisions are based on a specific evaluation of each risk exposure. Other A significant part is related to contractual penalties. Other provisions also include amounts for risks related to patent and other litigations and changes in techniques and markets. At year end 2002, we were involved in two ongoing patent litigations related to mobile communications, one with Interdigital Communications Corporation and another with Harris Corporation. We have in both cases contested the claim of the other party. 17 LONG-TERM LIABILITIES Consolidated Parent Company 2001 2002 2002 2001 Notes and bond loans (maturing 2004— 2010) Convertible debentures (maturing 2003) Liabilities to financial institutions Liabilities to subsidiaries Other 33,074 41,656 33,074 41,656 — 4,437 — 4,437 3,043 — 949 7,906 — 887 411 18,716 102 272 45,574 128 Total 37,066 54,886 52,303 92,067 Long-term liabilities maturing more than five years after the balance sheet date: Consolidated Parent Company 2002 2002 Notes and bond loans and liabilities to financial institutions Other Total 7,608 6 7,614 7,422 — 7,422 Of the long-term loans, SEK 21,484 million (note issuances of EUR 2,000 million and GBP 226 million pursuant to our Euro Medium Term Note program) have interest rates linked to the company(cid:213)s credit rating. The interest rate will increase/decrease 0.25 percent per annum for each rating notch per rating agency (Standard & Poor(cid:213)s and Moody(cid:213)s) by which either or both have publicly announced a rating decrease/increase of the company(cid:213)s credit rating from 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 was issued in 1997, in the amount of SEK 6,000 million. Of the total amount, SEK 4,859 million were sold to Ericsson employees and SEK 1,141 million were sold to our wholly owned subsidiary AB Aulis. In 2000, Aulis(cid:213) debentures were sold externally. The debentures bear interest at 12 months Stockholm Inter Bank Offered Rate (STIBOR) less 1.5 percent and are convertible to B shares from November 19, 1999, up to and including May 30, 2003. The loan matures on June 30, 2003. The outstanding amount per December 31, 2002, was SEK 4,486 million. After the stock issue in 2002, the conversion price is SEK 41,70 per share. In the 1997 consolidated accounts, a capital discount amounting to SEK 816 million 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(cid:213)s recommendation RR03. The capital discount is charged to income as interest expense during the period of the loan. During 2002, debentures in the amount of SEK 0.03 million were converted to 560 B shares. A conversion of all outstanding debentures would increase the number of shares with 108,172,247. 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 5,603 million. The Parent Company has none. The Parent Company had unused long-term lines of credit amounting to SEK 14,045 million and unutilized commercial paper and medium term note programs amounting to SEK 36,005 million. Of total unused lines of credit of SEK 19,648 million, SEK 5,267 million had conditions linked to the Company(cid:213)s credit rating. Due to lowered credit ratings access to liquidity under our commercial paper programs is now limited. 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 19 OTHER CURRENT LIABILITIES Consolidated Parent Company 2001 2002 2002 2001 Liabilities to associated companies and JV Accrued expenses Prepaid revenues Other short term liabilities Total 444 25,605 1,833 5,654 1,077 32,189 1,208 11,126 33,536 45,600 — 2,435 427 5,065 7,927 256 1,876 469 2,190 4,791 20 ASSETS PLEDGED AS COLLATERAL Consolidated Parent Company 2001 2002 2002 2001 Real estate mortgages Chattel mortgage Bank deposits Other Total — — 2,800 — 60 1 3,007 7,789 2,800 10,857 — — 1,918 — 1,918 — — 1,281 212 1,493 The major items included in Bank deposits are collateral for Swedish pension commitments amounting to SEK 1,500 million (SEK 0 in 2001) and collateral for inventory financing amounting to SEK 773 million (SEK 0 in 2001). The major items included in Bank deposits are Parent Company collateral for Swedish subsidiaries(cid:213) pension commitments amounting to SEK 1,500 million (SEK 0 in 2001). The bank deposits related to pension commitments has in January 2003 increased to SEK 3,000 million. 21 CONTINGENT LIABILITIES Consolidated Parent Company 2001 2002 2002 2001 Guarantees for customer financing 1,339 1,777 Other contingent liabilities 10,620 1,679 3,467 13,120 13,854 9,743 Total 3,116 12,299 16,587 23,597 Guarantees for customer financing relate to such arrangements, where Ericsson is the guarantor for customers(cid:213) payment obligations under credit facilities. A lender under these credit facilities is normally a bank, which thus is the beneficiary of the Ericsson guarantee, covering the entire or part of the outstanding principal amount and accrued interest. The guarantees for customer finance are shown above at their net value (i.e. after provisions). Of other contingent liabilities assumed by Ericsson, consolidated SEK 635 million in 2002 (SEK 1,082 million in 2001) are related to guarantees for performance provided to certain customers and SEK 830 million in 2002 (SEK 287 million in 2001) to guarantees for loans to other companies. Of other contingent liabilities assumed by the Parent Company, SEK 12,521 million in 2002 (SEK 9,529 million in 2001) are related to subsidiaries and eliminated in consolidated E R I C S S O N — A N N U A L R E P O R T 2 0 0 2 35 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 accounts. The largest guarantees are for Swedish subsidiaries(cid:213) pension commitments, SEK 8,242 million in 2002 (SEK 5,536 million in 2001), and subsidiaries(cid:213) borrowing from financial institutions, SEK 1,883 million in 2002 (SEK 2,306 million in 2001). Other contingent liabilities also include Parent Company guarantees for subsidiaries(cid:213) performance (bid bonds, performance bonds and other similar instruments) provided to certain customers and guarantees for loans to other companies. The probability that Ericsson might need to make future payments of substantial amounts under the guarantees is remote. 22 STATEMENT OF CASH FLOWS Consolidated Interest paid in 2002 was SEK 3,342 million (SEK 3,822 million in 2001, SEK 3,763 million in 2000) and interest received was SEK 1,833 million (SEK 3,659 million in 2001, SEK 3,728 million in 2000). Income taxes paid were SEK 2,892 million (SEK 4,873 million in 2001, SEK 5,780 million in 2000). Included in Other non-cash items under Adjustments to reconcile net income to cash are undistributed earnings of associated companies and joint ventures and minority interest in net income. Non-cash transaction under (cid:210)Cash flow from operating activities(cid:211) not reported separately is current year(cid:213)s increase in pension liabilities of SEK 893 million (SEK 786 million in 2001, SEK 920 million in 2000). Acquisitions/sales of other investments Consolidated Purchase price for acquired subsidiaries Other acquisitions Sales Acquisitions/sales, net 2002 — 208 — 246 3,157 2,703 The major item in sales of SEK 3,157 million were net proceeds from sales of parts of Microelectronics of SEK 2,313 million. Investments, other The major items were releases of cash collaterals for off-balance sheet customer financing of SEK 3,273 million. Parent Company Interest paid in 2002 was SEK 4,286 million (SEK 3,323 million in 2001, SEK 1,178 million in 2000) and interest received was SEK 4,868 million (SEK 5,487 million in 2001, SEK 1,854 million in 2000). Income taxes paid were SEK 44 million (SEK 93 million in 2001, SEK 356 million in 2000). Major non-cash items in Investments are: Acquisitions/sales of other investments, net, in 2002 of SEK 8,104 million (SEK 21,603 million in 2001, SEK 5,504 million in 2000). 36 E R I C S S O N — A N N U A L R E P O R T 2 0 0 2 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 million, is shown in year 2000 as Acquisitions/sales of other investments, net. Parent Company 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: Financial leases Acquisition costs Machinery Other equipment Accumulated depreciation Machinery Other equipment Net carrying value 2002 2001 — 2 2 — —1 —1 1 182 1,284 1,466 24 263 287 1,179 At December 31, 2002, future payment obligations for leases were distributed as follows: Consolidated 2003 2004 2005 2006 2007 2008 and later Financial leases Operating leases 7 5 4 3 0 2 21 3,339 2,884 2,254 1,952 1,792 7,601 19,822 Expenses in 2002 for leasing of assets were SEK 3,986 million (SEK 3,406 million in 2001), of which variable expenses were SEK 6 million (SEK 203 million in 2001). The company sold certain assets relating to test plant equipment for software testing in Sweden and the US for SEK 7,897 million in December 2001. The assets were leased back from the purchaser over a period of one year. This transaction was accounted for as a financial (capital) lease in the consolidated accounts, and no capital gain was reported. The entity owning these assets was acquired in 2002, by the Parent Company, and this capital lease is no longer reported in the consolidated accounts, as it has become internal. The future internal leasing obligations and internal leasing receivables are included in operating leases in the Parent Company. At December 31, 2002, future payment obligations for leases for the Parent Company were distributed as follows: Parent Company 2003 2004 2005 2006 2007 2008 and later Financial leases Operating leases — — — — — — — 3,247 2,877 2,587 2,370 2,213 3,945 17,239 Leasing income Some consolidated companies lease equipment, mainly telephone exchanges, to customers. These leasing contracts vary in length from 1 to 8 years. Leasing income also includes income from sublease of property. At December 31, 2002, future payment receivables are distributed as follows: Consolidated 2003 2004 2005 2006 2007 2008 and later Parent Company 2003 2004 2005 2006 2007 2008 and later Sales-type and Financial leases Operating leases 263 200 143 112 5 3 726 35 36 36 37 28 62 234 Sales-type and Financial leases Operating leases — — — — — — — 1,531 1,251 1,181 1,145 1,109 51 6,268 The Parent Company(cid:213)s operating lease income is mainly due to lease of test plant equipment to subsidiaries. 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 24 TAX ASSESSMENT VALUES IN SWEDEN Consolidated Parent Company 2001 2002 2002 2001 Land and land improvements 24 24 24 24 25 SPECIAL INFORMATION REGARDING THE PARENT COMPANY Sales of the Parent Company in 2002 were SEK 2,017 million (SEK 1,374 million in 2001), of which exports accounted for 100 percent (100 percent also in 2001). No consolidated companies were customers of the Parent Company(cid:213)s sales in 2002 or 2001, while 66 percent (53 percent in 2001) of the Company(cid:213)s total purchases of goods and services were from such companies. The Parent Company has guaranteed up to SEK 0.1 million for loans obtained by employees. 26 NUMBER OF EMPLOYEES AND REMUNERATION Employees Average number of employees Consolidated Europe1), Middle East and Africa North America Latin America Asia Pacific 2002 Men Women Total Men Women 2001 Total 37,968 13,380 51,348 48,714 18,428 67,142 9,857 2,910 1,787 6,756 3,770 11,664 2,223 7,989 913 4,251 2,959 9,832 5,766 3,338 6,873 6,947 4,969 7,894 Total 53,945 19,475 73,420 68,524 26,895 95,419 1) Of which Sweden 22,200 1) Of which EU 8,747 30,947 27,703 11,432 39,135 33,627 11,997 45,625 44,144 16,982 61,126 Parent Company Europe1), Middle East and Africa Latin America Total 1) Of which Sweden 1) Of which EU 2002 Men Women Total Men Women 1,127 16 1,143 353 353 420 1,547 20 4 1,237 7 424 1,567 1,244 368 368 721 721 380 380 516 3 519 465 465 2001 Total 1,753 10 1,763 845 845 Number of employees, consolidated Employees by region Europe, Middle East and Africa1) North America Latin America Asia Pacific Total 1) Of which Sweden 1) Of which EU As per December 31, 2000 2001 2002 47,700 6,328 2,822 7,771 60,743 8,929 5,333 10,193 71,144 13,481 8,457 12,047 64,621 85,198 105,129 30,241 44,467 37,328 56,427 42,431 66,241 E R I C S S O N — A N N U A L R E P O R T 2 0 0 2 37 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 Employees per segment Systems Phones Other operations1) 2) Unallocated2) Total As per December 31, 2000 2001 2002 51,390 — 12,846 385 68,525 — 16,286 387 71,102 16,840 16,059 1,128 64,621 85,198 105,129 1) Approximately 3,000 employees in our Phones segment were transferred to Sony Ericsson Mobile Communications in 2001. Employees in retained operations are now included in Other Operations. 2) In 2001, 750 employees were transferred from Unallocated to Other operations due to internal reorganization. The majority of our employees in Sweden belong to the following trade unions: SIF (the Swedish Union of Salaried Employees), the Swedish Association of Graduate Engineers, the Swedish Union of Industrial Supervisors and the Swedish Metal Worker(cid:213)s Union. Many of our employees located outside Sweden, in particular those located in other European countries, also belong to trade unions. Central and industry- wide agreements on wages and salaries in Sweden were renegotiated in 2001 and remain applicable through the first quarter of 2004, resulting in an estimated average increase of 3.0—3.5 percent per annum. We believe that our relations with these unions and our employees in general are good. Remuneration Wages and salaries and social security expenses Consolidated Parent Company 2001 2002 2002 2001 Wages and salaries Social security expenses Of which pension costs 33,650 13,221 4,133 41,227 14,293 3,704 825 569 451 795 484 345 Wages and salaries per geographical area Consolidated Parent Company 2001 2002 2002 2001 Europe1), Middle East and Africa North America Latin America Asia Pacific Total 22,979 6,100 1,571 3,000 27,908 6,910 2,572 3,837 33,650 41,227 814 — 11 — 825 790 — 5 — 795 1) Of which Sweden 13,327 488 1) Of which EU 20,539 488 Remuneration in foreign currency has been translated to sek at average exchange rates for the year. 14,954 25,679 516 516 38 E R I C S S O N — A N N U A L R E P O R T 2 0 0 2 Ericsson(cid:213)s Remuneration Committee The Board of Directors appoints members to Ericsson(cid:213)s Remuneration Committee each year. During 2002, the following Board members served on the Committee: Peter Sutherland (Chairman), Lena Torell, Michael Treschow and Per Lindh. As mentioned in the section (cid:210)Board of Directors and Board Procedures(cid:211), the Remuneration Committee(cid:213)s area of responsibility includes to review and prepare for resolution by the Board, strategies and general guidelines for compensation of 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 or to the Chief Operating Officer. The Remuneration Committee meets at least three times a year. In November or December, the Committee will review salary survey data to approve any increase to base pay for the following year for executives. Increases, if any, are effective from the following January. At the same meeting a decision will be made on the incentive targets for the following year. In January or February, the Committee will approve any incentive payments to be made from the previous year(cid:213)s plan and agree to any new long term incentive plan prior to being presented to shareholders. In the middle of the year the Committee meets again for a strategic compensation review with representatives from the Company. They will consider trends in compensation, legislative changes, disclosure rules and the general global environment surrounding executive pay. The outcome is to agree the direction that Ericsson will follow so that program designs and pay policies all align with the business. Throughout Ericsson all remuneration decisions must comply with Ericsson(cid:213)s compensation policies and must be formally approved by the next most senior person in direct line of authority. Compensation policies and Remuneration to Senior Executives and the Corporate Management This note to the financial statements covers information about employees and employee costs and is in accordance with applicable laws, rules and recommendations. The remuneration for Senior Executives and Corporate Management is reported in accordance with recommendations issued by The Swedish Industry and Commerce Stock Exchange Committee (N(cid:138)ringslivets B(cid:154)rskommitt(cid:142), NBK) on August 15, 2002. The Senior Executives are: ¥ the Chairman of the Board, Michael Treschow, and ¥ the President and Chief Executive Officer, Kurt Hellstr(cid:154)m. The Chairman of the Board The Corporate President Management The Total overall structure. The Corporate Management includes the following persons: Per-Arne Sandstr(cid:154)m, Carl Olof Blomqvist, Sten Fornell, Torbj(cid:154)rn Nilsson, Britt Reigo, Henry St(cid:142)nson, Jan Uddenfeldt, Ragnar B(cid:138)ck, Mats Dahlin, Gerhard Weise and two previous members of the Corporate Management, Bj(cid:154)rn Bostr(cid:154)m and Roland Klein. Remuneration to the Senior Executives and the Management (SEK) Base salary/ board fee Variable pay Other benefits Pension cost Employee options 2,500,000 15,341,864 44,355,673 62,197,537 3,884,373 — — 6,059,417 — 22,369,389 39,087,873 61,457,262 5,333,600 — 0 1,289,509 3,884,373 4,769,908 4,655,600 678,000 Total 2,500,000 39,678,762 96,753,427 138,932,189 Comments to the table ¥ 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 attended meeting was paid to each employee representative on the Board. Further, employee representatives being also members of a committee of the Board received a fee of SEK 100 for each committee meeting. ¥ Members of the Board, who are not employees of the company, have not received any other compensation than the fees paid for board duties. ¥ Variable pay for the Corporate Management refers to short term incentives paid for 2001. ¥ The President and the Corporate Management earned no variable pay during 2002. ¥ As no component of other benefits was significant, these are not reported separately. ¥ The pension cost for defined benefit plans has been calculated according to IAS 19. ¥ Employee options were granted at no cost for the employee. The value of granted options has been calculated according to the Black & Scholes(cid:213) method. Severance pay For the President and the Corporate Management the following applies. Severance payments are not payable if an employee resigns voluntarily, or if the employment is terminated as a result of flagrant disregard of responsibilities. Notice of termination given by the employee due to significant structural changes or other events occurred that, in a determining manner, affect the content of work or the condition for the position, is equated with notice of termination served by the company. Upon termination of employment, severance pay amounting to two years(cid:213) salary is normally paid. Such payments are made 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 currently during the pertinent period and cease at retirement age. Ericsson(cid:213)s View on Compensation Compensation is an ever changing environment. In such circumstances it is vital to maintain direction by following some basic principles: ¥ each program — from base pay through to benefits — is designed to support and encourage specific behaviors and outcomes. ¥ all the programs, taken together, should form a coherent ¥ many programs involve complex detail, but the fundamental principles of each should be simple to understand. International competitiveness and expatriation Ericsson operates in several international markets — including that for talent. However, we do not believe that there is a true global market for executive talent, too many local cultural factors intrude. Our chosen method of operation in this environment is to set pay levels according to competitive home country practice of each executive — normally the most relevant market. Consequently, we expect to tolerate some pay inequality between executives of different nationalities in similar jobs. Where an executive, for work reasons, is required to be based outside his/her home country, Ericsson applies an expatriate pay structure. This is based on competitive pay levels from a variety of different countries, with additional payments to cover costs associated with hardship, housing and transport. Payment is based on EUR and adjusted for tax, cost-of-living and exchange rates. Fixed salary We have a policy of tracking base pay for executives at the median of the general industry of their respective home country. The competitive level is set using comparative salary survey data from several recognized independent consultants. Salaries are compared on a job-to-job basis and also using a recognized points factor job evaluation system. Increases for executives are mainly based on movements in this market data and the performance of the individual. Variable pay We believe that a substantial part of executive remuneration should be performance based. Our policy is that together with median base pay, the variable part should be designed to achieve upper quartile total pay, compared to the general industry. In 2002, the variable payment target level was 25 percent of base pay but actual payment could range from 0 to 50 percent. This target applied to all executives including the President. In 2002, no variable pay was earned since performance targets were not met. E R I C S S O N — A N N U A L R E P O R T 2 0 0 2 39 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 Because variable pay is integrated with base pay, targets are chosen each year to be demanding but fair, consistent with the prevailing business environment. In practise this means that variable pay is not directly related to the absolute level of profitability of the company. Usually each executive has a range of financial and measurable non-financial targets relating not only to the overall Ericsson results, but also to his/her own area of responsibility. Performance against the targets is measured and independently audited each year. Long term incentive Ericsson does not yet aim for a specific competitive position when making grants of stock options to executives. It has been our custom, within limits, to follow Swedish practice when deciding on grant sizes and values. These are modest in comparison with international standards. Grants are usually made once per year and all executives are eligible. Although there are established grant guidelines — usually based on the scope and the complexity of work tasks — variation in grant size to an individual can be made for local competitive reasons or for exceptional individual performance. Most grants are at strike prices well above the current share price. However, our view is that this is a fair alignment with shareholders and therefore do not seek any repricing for the underwater options. In accordance with current accounting standards, the most recent plan design has not been expensed. Since 1998 we have had a variety of different option designs and some have been expensed and some not. We do not offer any performance plans or other long term stock price linked award schemes for executives. All employees including executives — except for jurisdictions prohibiting such schemes — were eligible to participate in the convertible debenture programs offered in 1997 and the employee stock purchase plan of 2002. During 2002, the President was granted 150,000 employee options. These options had an estimated fair market value at the time of grant of SEK 678,000, calculated according to the Black & Scholes(cid:213) method. Between 1999 and 2001, a total of 753,924 options have been granted to the President. During 2002, the members of the Corporate Management were granted a total of 1,030,000 employee options. These options had an estimated fair market value at the time of grant of SEK 4,655,600, calculated according to the Black & Scholes(cid:213) method. Between 1999 and 2001, a total of 4,004,304 options were granted to the Corporate Management. The President and six members of the Corporate Management also participate in Ericsson(cid:213)s convertible debenture program 1997/2003, with a nominal value of SEK 145,347 each and a conversion rate of SEK 41,70 per share. 40 E R I C S S O N — A N N U A L R E P O R T 2 0 0 2 Pension Ericsson(cid:213)s policy regarding pension is to follow the competitive practice in the home country of the executive. There are different supplementary pension plans for the President and the Corporate Management, either premium- based or benefit-based plans. For all pension arrangements, the pensionable salary consists of the annual base salary and the target pay out according to the short term incentive plan. For premium based pensions, the company pays to a capital insurance company on salary portions in excess of 20 base amounts (one base amount = SEK 37,900) a percentage of the executive(cid:213)s pensionable salary, between 25 and 35 percent per year, depending on the age of the executive. The pension age is 60/62 years and premiums are paid up to the retirement age. From 65 years, the old age pension includes the ITP plan. For most of our executives in Corporate Management, premium- based pensions are applied. For benefit-based pensions, the old age pension amounts to 45—70 percent of the executives(cid:213) pensionable salary, including benefits in the ITP plan or corresponding arrangements. The pension age is 60 years. The President has the right to retire at the age of 60 years. Between 60 and 65 years, his pension will be 70 percent of his pensionable income, and from 65 years 50 percent, including the benefits from the so called ITP plan. The President(cid:213)s pensionable salary during 2002 was SEK 10,875,000. In the case his employment with the company is terminated before the age of 60 years, he will be entitled to the vested rights of his old age pension. Benefits As with pensions, Ericsson follows the competitive practice of the home country of an executive for benefits. While the programs offered — particularly medical — may be similar, plan designs vary widely according to the taxation and legal framework in different countries. Employee Share Ownership Employee convertible debentures, options and shares The below figures in relation to number of options, conversion and exercise prices have, when appropriate, been subject to recalculation as a result of bonus issue, split and new issue of shares. If all options outstanding as of December 31, 2002, were exercised, all shares allocated for future matching under the Stock Purchase Plan were transferred, and shares designated to cover social security costs and payments were disposed of as a result of the exercise and the matching, approximately 55 million B shares would be issued and approximately 142 million B shares, held as treasury stock, would be transferred. The total, approximately 198 million B shares, corresponds to 1.25 percent of the total number of shares outstanding, 15,820 million. Outstanding options/ shares as of December Shares to cover social security costs/ Type of plan Year 31, 2002 payments Total Option Option Option Stock purchase 1999 2000 2001— 2002 2001 1 46 91 27 165 — 9 18 6 33 1 55 109 33 198 Convertible debentures In 1997, convertible debentures of nominal SEK 4,859 million were issued to employees. The debentures are convertible at the option of the holder into B-shares for SEK 41.70 per share through May 30, 2003. Outstanding loans as of December 31, 2002, equaled SEK 4,510,782,694 due June 30, 2003, to the extent not converted. Employee option plans The following table sets forth information with respect to employee options issued to senior management and other key contributors as of December 31, 2002. Each employee option gives the right to acquire one B share at the exercise price applicable for the respective plan. Option Plan No of employees 1999 1,800 2000 8,000 2001— 2002 15,000 employee Original number Outstanding options as options of December exercise date granted 31, 2002 Final Exercise price, SEK 1.4 million 71.6 million 101.4 million 1 million 46 million 91 million February 28, 2007 January 18, 2007 May 14/ November 19, 2008/ November 11, 2009 128 93.80 30.50/ 25.70/ 7.80 1999 Option plan The 1999 Option Plan is based on 1.8 million repurchased B shares, including shares designated for covering social security payments. In March of 2000, employee options were granted to approximately 1,800 key employees and senior executives, corresponding to approximately 1.4 million shares. Of the originally granted employee options, there remained, as of December 31, 2002, options outstanding corresponding to approximately 1 million shares. Each option entitles the holder to purchase one B share at SEK 128. The options expire February 28, 2007, and are subject to vesting requirements, meaning that they are exercisable as follows: 30 percent in 2003, an additional 40 percent in 2004 and the remaining 30 percent in 2005. 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 Millennium stock option plan The Millennium Stock Option Plan is based on warrants, i.e. options that entitles the holder to subscribe for approximately 81.1 million new B shares, including warrants designated for covering social security costs. In order to hedge the social security cost we entered into an arrangement with a bank. In January 2000, employee options, corresponding to approximately 71.6 million shares, were granted to approximately 8,000 key employees and senior executives. Of the originally granted employee options, there remained, as of December 31, 2002, options outstanding corresponding to approximately 46 million shares. Each employee option entitles the holder to purchase one B share for SEK 93.80. The employee options expire January 18, 2007 and are subject to vesting requirements, meaning that one third is exercisable after one year, another third after two years and the last third after three years. The global stock incentive program 2001 The Global Stock Incentive Program 2001 is comprised by two parts, one Stock Option Plan 2001—2002 and one Stock Purchase Plan. Stock option plan 2001—2002 The Stock Option Plan 2001—2002 is based on 120 million B- shares (issued as C shares, repurchased and converted to B- shares), including shares designated for covering social security payments. In May and November 2001 (44.9 and 2.6 million options respectively) and in November 2002 (53.9 million options) employee options, corresponding to approximately 101.4 million shares, were granted to approximately 15,000 key employees. Of the originally issued employee options, there remained, as of December 31, 2002, employee options outstanding corresponding to approximately 91 million shares. Each employee option entitles the holder to purchase one B- share for SEK 30.50 (the May 2001 grant), SEK 25.70 (the November 2001 grant) and SEK 7.80 (the November 2002 grant), respectively. The options expire May 14, 2008 (the May 2001 grant), November 19, 2008 (the November 2001 grant) and November 11, 2009 (the November 2002 grant), and are subjects to vesting requirements, meaning that one third is exercisable after one year, another third after two years and the last third after three years from grant. Stock purchase plan The Stock Purchase Plan is based on 35 million B shares (issued as C shares, repurchased and converted to B shares), including shares designated for covering social security payments. During a 24-month period participants are able to save up to 7.5 percent of the gross salary, not exceeding the equivalent of SEK 50,000 per twelve-month period, for purchase of B shares. If the purchased shares are retained by the employee for three years after the investment and employment with the Ericsson Group continues during that time, the employee will be given a corresponding number of B shares free of consideration, a so called matching. E R I C S S O N — A N N U A L R E P O R T 2 0 0 2 41 In addition, we are party to related party transactions with our owners Investor AB and AB Industriv(cid:138)rden as follows: ¥ Cooperation continued in the venture capital company Ericsson Venture Partners. ¥ The holdings in the venture capital partnership imGO were sold during the year by all the parties. ¥ Ericsson purchased Investor(cid:213)s and Industriv(cid:138)rden(cid:213)s holdings in Ericsson Project Finance AB and AB LM Ericsson Finans, which are now fully owned subsidiaries. 28 FEES TO AUDITORS Price- waterhouse- Coopers KPMG Others Total Audit fees Parent Company Other companies Fees for other services Parent Company Other companies 311) 42 73 28 42 70 — 9 9 — 7 7 Total fees 143 16 1) Of which SEK 21 million has been charged to equity. — 2 2 — — — 2 31 53 84 28 49 77 161 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 The Stock Purchase Plan was implemented in 2002 and a majority of the employees were invited to participate. During 2002, approximately 27,000 employees in 71 countries participated in the plan and invested in approximately 29.6 million shares. The initially scheduled 24-month period of employee salary deductions and investments had to be pre- terminated in the autumn of 2002, since all shares included in the plan for future matching and for covering social security payments had been reserved earlier than expected due to the high participation rate and the low share price. There will be no further employee investments made under the plan. As of December 31, 2002, approximately 2.5 million shares of the total 35 million shares available had been either transferred to employees, through premature matching as a result of redundancy, or sold on Stockholmsb(cid:154)rsen in order to cover the social security payments incurred by the matching. 27 RELATED PARTY TRANSACTIONS In October 2001, Sony Ericsson Mobile Communications (SEMC) was organized as a joint venture between Sony Corporation and Ericsson, and a substantial portion of our handset operations was sold to SEMC. As part of the joint venture, contracts have been entered into between Ericsson and SEMC. During 2002, transactions were executed pursuant to such contracts, including the following, based on terms customary in the industry and on an arm(cid:213)s-length basis. ¥ Sales. The Company records sales regarding mobile phone platform design. ¥ Royalty. Both owners of SEMC, Sony corporation and the Company receives royalties for SEMC usage of trade marks and intellectual property. ¥ Purchases. The Company purchases mobile phones from SEMC due to that the Company has contracts for mobile systems including also limited quantities of phones with a number of customers. ¥ The owners have also issued guarantees to banks as security for a SEMC subsidiary(cid:213)s loans in Japan. The Company(cid:213)s guarantees up to SEK 824 million. ¥ Repair costs for remaining warranty periods were charged to the Company for phones sold by the Company prior to October 1, 2001. Related party transactions Sales Royalty Purchases Related party balances Receivables Liabilities Contingent liabilities 2002 952 320 414 274 146 824 42 E R I C S S O N — A N N U A L R E P O R T 2 0 0 2 29 RECONCILIATION TO ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE US Since Ericsson shares are also listed in the US on NASDAQ, reconciliation of results to US GAAP is made. For additional information required by foreign registrants, please refer to our form 20-F, filed with the US Securities and Exchange Commission. Principal differences between Swedish GAAP and US GAAP The principal differences between Swedish GAAP and US GAAP that affect our net income (loss), as well as our stockholders(cid:213) equity, relate to the treatment of capitalization of development expenses, provisions for restructuring, pension costs, hedge accounting, marketable securities, deferred taxes and goodwill. New Swedish GAAP recommendations related to development costs and restructuring costs have been implemented. After the Company(cid:213)s adoption of these new recommendations from 2002 no difference exists between Swedish and US GAAP amounts capitalized by the Company for development costs. The income statement and the balance sheet will differ between Swedish and US GAAP, until amounts capitalized prior to 2002 have been fully amortized. Since 2002 goodwill shall not be amortized under US GAAP. New US GAAP standards In 2002, the following FASB standards were adopted: ¥ SFAS141, Business Combinations ¥ SFAS142, Goodwill and Other Intangible Assets ¥ SFAS144, Accounting for the Impairment or Disposal of Long-Lived Assets ¥ SFAS145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections were adopted. With exception for SFAS142 the adoptions did not have a material impact on income 2002. The effects of the adoption of SFAS142 are presented under H. Amortization of Goodwill and K. Adjustment of Net Income below. The following FASB standards will be adopted in 2003: ¥ SFAS143, Accounting for Obligations Associated with the Retirement of Long-Lived Assets ¥ SFAS146, Accounting for Costs Associated with Exit or Disposal Activities ¥ SFAS148, Accounting for Stock-Based Compensation — Transition and Disclosure an amendment of FASB Statement No. 123. The Company continues to apply the intrinsic value method and presents separately the effects, net of tax effects, as if the fair value method had been applied to all awards ¥ EITF00-21, Accounting for Revenue Arrangements with Multiple Deliverables 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 ¥ FIN45, Guarantor(cid:213)s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others ¥ FIN46, Consolidation of Variable Interest Entities, an interpretation of ARB51. The effect of these adoptions in 2003 are not yet evaluated by the Company. Significant differences between Swedish GAAP and US GAAP A. Capitalization of development costs Prior to 2002, and in accordance with Swedish accounting principles, software development costs were charged against income when incurred. As described in Accounting Principles, the Company in 2002 adopted RR15, (cid:210)Intangible assets(cid:211). Consequently, intangible assets arising from internal development have been recognized when the intangible asset can be demonstrated to have technical feasibility and future economic benefits. The Company has adopted US GAAP SFAS86 (cid:210)Accounting for the Cost of Computer Software to be Sold, Leased or Otherwise Marketed(cid:211) and SOP98-1, (cid:210)Accounting for the costs of Computer Software Developed or Obtained for Internal use(cid:211). According to SFAS86, 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 of three to five years. The Company(cid:213)s capitalization of development costs under Swedish and US GAAP is from 2002 identical, but amortization amounts are different, since restating of prior years, for effects of RR15, is not allowed according to Swedish GAAP. Development costs for software to be sold, before taxes Capitalization Amortization Write-downs 1) Less net amount already reported per Swedish GAAP 2002 2001 2000 3,074 — 3,070 —1,171 7,091 10,349 — 6,664 — —7,661 —1,214 — 2,851 — — — 4,018 —1,784 3,685 1) Write-down is made subject to impairment test regarding future revenue for capitalized products. Development costs for software for internal use, before taxes Capitalization Amortization Less net amount already reported per Swedish GAAP 2002 2001 2000 368 — 941 — 349 — 922 993 —1,344 990 — 542 — — — 351 448 E R I C S S O N — A N N U A L R E P O R T 2 0 0 2 43 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 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 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 adopted SFAS87, (cid:212)(cid:212)Employer(cid:213)s Accounting for Pensions(cid:213)(cid:213), when calculating income according to US GAAP. The effects for the Company of using this recommendation principally relate to the actuarial assumptions, and that the calculation of the obligation should reflect projected salary of each employee at retirement age. The difference relative to pension liabilities already booked at the introduction in 1989 is distributed over the estimated remaining service period. In addition to the Swedish defined benefit plans described in Note 16, the Company have defined benefit plans in several foreign countries, with major plans in the United States and the United Kingdom. For more information about pensions, see Note 16. Provisions for pensions according to US GAAP Weighted-average assumptions as of December 31 In percent Discount rates Expected rates of future salary increases Expected investment return In SEK million Accumulated Benefit Obligation Estimated future salary increases Projected Benefit Obligation Fair value of plan assets Funded status Unrecognized prior service cost Unrecognized actuarial loss, net Unrecognized net asset at initial application of SFAS87 Pension Provision as per US GAAP Additional minimum pension liability Total Pension Provision as per US GAAP Sweden 5.0% 3.5% — Sweden 8,144 2,095 10,239 0 —10,239 —701 2) 2,804 3) —10 — 8,146 0 — 8,146 2002 Other 6.0% 4.0% 7.3% 2002 Other 5,050 1,662 6,712 4,675 — 2,037 138 1,556 — 40 — 383 — 645 —1,028 Sweden 5.5% 3.5% — Total Sweden 13,194 3,757 16,951 4,675 1) —12,276 — 563 4,360 — 50 — 8,529 — 645 — 9,174 5,892 2,608 8,500 0 — 8,500 0 1,436 — 22 —7,086 0 —7,086 2001 Other 6.4% 4.3% 7.3% 2001 Other 5,881 1,789 7,670 5,556 — 2,114 257 1,309 —13 — 561 — 574 —1,135 1) Negative returns on plan assets and translation differences have reduced the value of plan assets during 2002. 2) Pension plan changes in Sweden have resulted in reduced benefits. 3) Unrecognized actuarial loss in Sweden increased due to lower interest rate for discounting and more unfavorable population demographics. Total 11,773 4,397 16,170 5,556 —10,614 257 2,745 — 35 —7,647 — 574 — 8,221 44 E R I C S S O N — A N N U A L R E P O R T 2 0 0 2 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 According to SFAS142 goodwill is not subject to amortization subsequent to the date of adoption. Goodwill shall be tested for impairment both at adoption and annually. The Company has performed such tests which did not result in write-downs of goodwill. The amortization of goodwill made according to Swedish GAAP is reversed under US GAAP. I. Deferred Income Taxes Deferred tax is calculated on all US GAAP adjustments to income, and the US GAAP balance sheet reflects the gross recognition of deferred tax assets and liabilities. J.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 are used. K. Adjustment of Net Income Application of US GAAP as described above would have had the following 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. 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 2002 the Company has received the remaining part not refunded in 2000 and 2001. In accordance with US GAAP, this amount is credited to income. F. Sale-leaseback of property During 2000 and 2001, the Company sold real and personal 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 SFAS133, (cid:212)(cid:212)Accounting for Derivative Instruments and Hedging Activities(cid:213)(cid:213), as amended, on January 1, 2001, for calculating income and equity according to US GAAP. SFAS133 requires recognition of all derivatives as either assets or liabilities measured at fair value. Under SFAS133 for qualifying derivatives designated 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 income. The ineffective portion of the gain or loss affects net income immediately. According to Swedish accounting practice, forward currency exchange contracts and options, which are used to hedge firm commitments and 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. Prior to 2001, contracts and options not related to firm commitments were valued at market according to US GAAP. Adoption of SFAS133 resulted in a cumulative after tax increase in net income of SEK 421 million and a decrease in other comprehensive income of SEK 1,665 million on January 1, 2001. H. Amortization of goodwill Under Swedish GAAP goodwill is amortized over its estimated useful life according to Swedish GAAP. In June 2001, US GAAP was changed due to the adoption SFAS141, (cid:210)Business combinations(cid:211) and SFAS142, (cid:210)Goodwill and Other Intangible Assets(cid:211). The adoption of SFAS141 did not have an impact on the results of operations or financial condition of the Company. E R I C S S O N — A N N U A L R E P O R T 2 0 0 2 45 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 Adjustment of Net Income (loss) 2002 20012) 20002) M. Trade receivables and customer financing receivables and related borrowings Under Swedish GAAP, financial assets and liabilities are reported net, when a legally enforceable right for offset exists and there is an intent to settle on a net basis or to realize the asset and settle the liability at the same time. Under US GAAP, the accounting for the offset of amounts related to these contracts is not applicable and consequently, for US GAAP purposes, the Company reported additional accounts receivable and customer financing balances, and additional borrowings of SEK 847 million respectively as of December 31, 2002 (SEK 3,781 million as of December 31, 2001). Sales criteria for transfers of accounts receivable differ between Swedish and US GAAP, with certain of the US GAAP criteria such as the legal isolation requirement in SFAS140 being more prescriptive. Under Swedish GAAP, a receivable should be de-recognized when an entity has lost control of the contractual rights that comprise the receivable. As of December 31, 2002, no such transactions existed. At December 31, 2001, amounts of SEK 4,061 million, were recorded as long-term customer financing and a corresponding amount as a borrowing for US GAAP purposes, since certain sales customer finance credits under Swedish GAAP did not meet the requirements of US GAAP for sale recognition. No gain or loss was recorded in the Swedish GAAP accounts for these sales. N. Comprehensive income The Company has adopted SFAS130, (cid:210)Reporting Comprehensive Income(cid:211). Comprehensive income includes net income (loss) and other changes in equity, except those resulting from transactions with owners. Comprehensive net income 2002 2001 2000 Net income (loss) in accordance with US GAAP Other comprehensive income (loss) Translation adjustments Translation adjustments for sold/ liquidated companies Net gain 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) —19,918 — 24,403 23,393 — 6,160 2,710 2,326 —107 2,057 1,869 5 2,096 — 833 9 — — 500 —199 —71 —1,024 — 6,424 — 392 1,445 —1,847 25 657 Total other comprehensive income (loss) — 3,635 — 3,058 Comprehensive income (loss) in accordance with US GAAP — 23,553 — 27,461 24,063 — —1,665 — 670 Items increasing reported net income (loss) Pensions Pension premium refund Capital discount on convertible debentures Goodwill amortization Deferred income taxes Sale-leaseback Hedge accounting Items decreasing reported net income (loss) Capitalization of software development costs 412 47 124 1,064 966 113 2,884 5,610 197 809 —146 — 856 116 — 2,014 — 815 — 2,233 147 — — 2,005 —1,361 — 608 88 — 4,829 to be sold for internal use Restructuring costs Other Net increase/decrease in net income (loss) Net income (loss) as reported per Swedish GAAP — 4,018 — 922 —1,240 — 335 —1,784 — 351 —1,642 129 3,685 448 2,700 371 — 6,515 — 3,648 7,204 — 905 — 3,560 2,375 —19,013 — 21,264 21,018 Net income (loss) per US GAAP before cumulative effect of accounting change Earnings (loss) per share per US GAAP, diluted before cumulative effect of change of accounting principle2) Cumulative effect of accounting change, net of taxes Net income (loss) per US GAAP after cumulative effect of accounting change —19,918 — 24,824 23,393 —1.58 1) — 2.27 1) 2.12 — 421 — —19,918 — 24,403 23,393 Reported earnings (loss) per share, diluted, per Swedish GAAP2) Earnings (loss) per share per US GAAP, diluted, after cumulative effect of accounting change2) Average number of shares, diluted per US GAAP (million)2) Basic earnings per share SEK after cumulative effect of accounting change per US GAAP2) Average number of shares basic (million) per US GAAP2) —1.51 1) —1.94 1) 1.91 —1.58 1) — 2.23 1) 2.12 12,684 11,057 11,017 —1.58 — 2.23 2.15 12,573 10,950 10,896 1) Potential ordinary shares are not considered when their conversion to ordinary shares would increase earnings per share. 2) 2000—2001 adjusted for stock dividend element of stock issue. L. 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 SFAS115 (cid:210)Accounting for Certain Investments in Debt and Equity Securities(cid:211). Unrealized gains and unrealized temporary losses shall be included in other comprehensive income. Other than temporary unrealized losses shall be charged to income. 46 E R I C S S O N — A N N U A L R E P O R T 2 0 0 2 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 Changes in Comprehensive Income 2002 Opening balance, net of tax Changes during the period Closing balance, net of tax Cumulative translation adjustments Hedging for investments 3,681 — 6,267 — 2,586 —1,711 1,346 — 365 Unrealized gains and losses on available- for-sale securities 184 —143 41 Net gain/ loss on cash flow hedge Minimum pension liability —156 1,480 1,324 — 414 — 51 — 465 Accumulated other compre- hensive income 1,584 — 3,635 — 2,051 Adjustment of Stockholders(cid:213) Equity 2002 2001 2000 Increases Capitalization of software development costs to be sold for internal use Capitalization of interest, net after cumulative depreciation Goodwill Hedging Restructuring costs Pensions Reductions Capital discount on convertible debentures Pension refund Sale-leaseback Deferred income taxes Unrealized gains and losses on available-for-sale securities Other 11,076 486 15,094 1,408 16,878 1,759 172 1,064 2,744 217 440 211 — — 2,196 1,458 99 211 — — 332 3,100 300 16,199 16,074 21,916 —179 — — 2,063 — 4,021 — 303 — 47 — 2,176 — 4,487 — 419 — 856 —1,361 — 8,197 — 314 — 26 255 —102 6,680 — 232 — 6,603 — 6,860 — 4,385 The Swedish GAAP balance sheet, including the amounts in the above presentation, reflects the restatement discussed under (cid:210)Accounting Principles, Restatement of financial statements(cid:211). For purposes of US GAAP, the same adjustments were made to appropriately consolidate subsidiaries that were not previously consolidated. O. Statement of Cash Flows The Company follows SFAS95 when preparing the Statement of Cash Flows, except that it considers cash, bank and short-term investments with due dates within 12 months as cash and cash equivalents, rather than within 3 months as required by SFAS95. Applying this definition would mean following adjustments of reported cash, with the offsetting difference reflected in cash flow from investing activities in the Statement of Cash Flows: Consolidated 2002 2001 2000 Short term cash investments, cash and bank, as reported Adjustment for items with maturity of 4—12 months 66,214 68,924 35,771 —28,069 — 28,182 —16,129 38,145 40,742 19,642 Adjustment of stockholders(cid:213) equity, net Reported stockholders(cid:213) equity 9,596 73,607 9,214 68,587 17,531 91,686 Cash and cash equivalents as per US GAAP Stockholders(cid:213) equity according to US GAAP 83,203 77,801 109,217 Adjustment of certain balance sheet items according to US GAAP, as per reported Balance Sheet Swedish GAAP Dec. 31 Dec. 31 Dec. 31 2002 2002 20012) As per US GAAP Dec. 31 20012) 12,609 Intangible assets 9,964 Tangible assets Other investments 2,243 Long-term customer financing 12,283 36,538 Accounts receivable 24,817 Other receivables Provisions1) 32,354 Convertible debentures, long-term Current maturities of long-term debt Other current liabilities Long-term liabilities to financial Institutions 11,083 33,536 3,043 — 13,066 16,641 3,101 7,933 57,236 39,171 32,935 25,235 10,109 1,929 12,283 37,385 29,726 35,717 29,481 16,862 3,356 14,712 58,299 39,124 34,869 4,437 — 4,740 3,622 45,600 11,262 36,856 3,622 51,060 7,906 4,798 15,681 P. Stock option plans The Company, as permitted under SFAS123 (cid:210)Accounting for Stock Based Compensation(cid:211), applies Accounting Principles Board Opinion 25 (APB25) and related interpretations in accounting for its stock option plans under US GAAP. No compensation expense has been reflected in the consolidated income statement as no compensation expense arises when the strike price of the employee(cid:213)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 SFAS123 for its stock option plans, net income (loss) and earnings (loss) per share in accordance with US GAAP would have been changed to the amounts indicated below: 1) Of which short-term 19,678 20,306 19,461 20,245 2) Restated for changes in accounting principles in Sweden 2002 regarding consolidation of companies according to the new RR1. E R I C S S O N — A N N U A L R E P O R T 2 0 0 2 47 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 Consolidated 2002 20012) 20002) Net income (loss) Net income per US GAAP before cumulative effect of accounting change Adjustment for recognitions of provisions per SFAS123 Net income, adjusted, per US GAAP before cumulative effect of accounting change Earnings (loss) per share, diluted Earnings (loss) per share per US GAAP before cumulative effect of accounting change Earnings (loss) per share, adjusted, per US GAAP before cumulative effect of accounting change —19,918 — 24,824 23,393 —193 —1,341 —1,511 — 20,111 — 26,165 21,882 —1.581) — 2.271) 2.12 —1.601) — 2.391) 1.99 1) Potential ordinary shares are not considered when their conversion to ordinary shares would increase earnings per share. 2) 2000—2001 adjusted for stock dividend element of stock issue. The fair value of each option grant is estimated on the date of the grant, using the Black & Scholes(cid:213) option pricing model with the following weighted-average assumptions: 2002 2001 2000 Expected dividend yield Expected volatility Risk-free interest rate Expected life of option (in years) 0.6% 0.6% 1.0% 43.1% 40.2% 35.4% 6.0% 3.1 5.4% 5.4 5.5% 4.8 Q. Valuation qualifying accounts and reserves Reserves deducted from assets to which they apply: Allowance for doubtful notes and accounts receivables and customer financing for the years ended December 31, 2002, 2001 and 2000 (SEK million). Description 2002 2001 2000 Balance beginning of period Charged (credited) to cost and expenses Charged (credited) to other accounts Deductions 6,578 4,079 1,771 — 3,375 5,525 3,732 267 — 2,946 7,016 1,417 — 243 — 2,665 Balance end of period 9,053 6,578 5,525 48 E R I C S S O N — A N N U A L R E P O R T 2 0 0 2 A U D I T O R S (cid:213) R E P O R T Auditors(cid:213) Report To the Annual General Meeting of the shareholders of Telefonaktiebolaget LM Ericsson (publ), corporate identity number 556016-0680 We have audited the annual statements, the consolidated statements, the accounting records and the administration of the Board of Directors and the President of Telefonaktiebolaget LM Ericsson (publ) for the year 2002. These statements and the administration of the company are the responsibility of the Board of Directors and the President. Our responsibility is to express an opinion on the annual statements, the consolidated statements and the administration based on our audit. We conducted our audit in accordance with generally accepted auditing standards in Sweden. Those standards require that we plan and perform the audit to obtain reasonable assurance that the annual statements and the consolidated statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the statements. An audit also includes assessing the accounting principles used and their application by the Board of Directors and the President, as well as evaluating the overall presentation of information in the annual statements and the consolidated statements. As a basis for our opinion concerning discharge from liability, we examined significant decisions, actions taken and circumstances of the company in order to be able to determine the liability, if any, to the company of any board member or the President. We also examined whether any board member or the President has, in any other way, acted in contravention of the Companies Act, the Annual Statements Act or the Articles of Association. We believe that our audit provides a reasonable basis for our opinion set out below. The annual statements and the consolidated statements have been prepared in accordance with the Annual Accounts Act and, thereby, give a true and fair view of the company(cid:213)s and the group(cid:213)s financial position and results of operations in accordance with generally accepted accounting principles in Sweden. We recommend to the 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, February 3, 2003 Carl-Eric Bohlin Authorized Public Accountant PricewaterhouseCoopers AB Olof Herolf Authorized Public Accountant PricewaterhouseCoopers AB Thomas Thiel Authorized Public Accountant E R I C S S O N — A N N U A L R E P O R T 2 0 0 2 49 T R E A S U R Y A N D C U S T O M E R F I N A N C E — F I N A N C I A L R I S K M A N A G E M E N T Treasury and Customer Finance — Financial Risk Management Our financial risk management is governed by a policy approved by the Board of Directors. The Finance Committee of the Board is responsible for the continuous monitoring of our financial exposures and for approving certain matters regarding investments, loans, guarantees and customer financing commitments. Internally, the Corporate Treasury and Corporate Customer Finance functions manage financial risks and the Group(cid:213)s financial assets and liabilities and issue policies governing our consolidated companies. The Corporate Treasury function(cid:213)s principal role is to ensure that the group has sufficient financing in place through loans and committed credit arrangements, to actively manage the group(cid:213)s liquidity as well as financial assets and liabilities, and to manage and control financial exposures in a manner consistent with underlying business risks and financial policies. We have established treasury centers in Stockholm, Dublin, Singapore and Dallas (collectively known as Ericsson Treasury Services) for cash management and handling of hedging activities. The major part of the risks assumed by Ericsson Treasury Services are hedged in the financial markets, but Ericsson Treasury Services may also take positions in the financial markets within the framework of the policy established by the Board of Directors. The risk mandate, SEK 200 million, is based on a five percent change in exchange rates against the total foreign exchange position and a one percentage point change in interest rate. As of December 31, 2002, the market risk amounted to SEK 116 (151) million. This is also complemented by a Value at Risk calculation given a confidence level of 99 percent and a one-day horizon. Our Corporate Customer Finance function(cid:213)s main objective is to find suitable third-party financing solutions for our customers and to minimize recourse to Ericsson. The Corporate Customer Financing function operates in all market areas to support the business in the early stages of negotiations. To the extent customer loans are not immediately provided by banks, the consolidated subsidiary Ericsson Credit AB manages the bulk of Ericsson(cid:213)s own outstanding vendor credits. The exposure from outstanding vendor loans and credit commitments are monitored centrally by the Corporate Customer Finance function. FINANCIAL INSTRUMENTS We use different financial instruments to hedge group financial exposures arising from business operations, group funding and asset and liability management. We define the financial instruments as either primary or derivative. Primary instruments are mainly loans, investments and foreign exchange spot transactions. As a complement to the primary instruments we use derivative instruments to reduce our financial exposures. Derivatives used are mainly currency swaps, interest rate futures and interest rate swaps. The use of other types of derivatives is limited. Except for the SEK 200 million risk mandate given to Ericsson Treasury Services, all risk associated with our use of financial instruments corresponds to actual and forecasted currency and interest rate commitments. We classify financial risks as either market risk, credit risk, country risk or funding and liquidity risk. MARKET RISK Market risk is divided into three categories: foreign exchange risk, interest rate risk and risk related to our share price. Foreign Exchange Risk Ericsson is domiciled in Sweden and reports in SEK and currently conducts business in more than 140 countries. We have significant revenues, costs, assets and debt in currencies other than SEK, which result in substantial foreign exchange exposures. Fluctuations in exchange rates between SEK and foreign currencies may affect our earnings. It is our policy to reduce this effect to the extent possible through a variety of hedging activities. Net risk in currency derivatives (SEK billion) Type of instrument Net foreign exchange risk in external currency derivatives December 31, 2002 2001 2.9 2.7 In the table above, net foreign exchange risk in external currency derivatives is expressed as the effect on the market value of our currency derivatives portfolio of a five percent change in exchange rates against the total currency derivatives position. Offsetting items in the balance sheet, future commitments and forecasted flows are not included. Foreign exchange risks are classified as economic exposure, transaction exposure or translation exposure. 50 E R I C S S O N — A N N U A L R E P O R T 2 0 0 2 T R E A S U R Y A N D C U S T O M E R F I N A N C E — F I N A N C I A L R I S K M A N A G E M E N T Economic exposure We are dependent on the development of exchange rates in SEK and on economic conditions in Sweden. As of December 31, 2002, approximately 47 percent of all employees were located in Sweden, while Sweden accounted for only 6 percent of total sales in 2002. Our exports from Sweden are normally invoiced in foreign currencies. With this substantial SEK-denominated cost base, a gradually stronger SEK exchange rate during 2002 had a negative impact on us, compared to our competitors with costs denominated in EUR or USD. Transaction exposure An analysis of net transaction exposures for 2002 by currency, shows net revenue exposures in US Dollar (USD), Euro (EUR), Chinese Renminbi (CNY), Japanese Yen (JPY) and British Pound Sterling (GBP). A +/—10 percent change in the exchange rates between SEK and the currencies with the largest exposures would have had the following effects (in SEK billions) on income before taxes in 2002 before any hedging effects are considered: USD +/—1.6 (1.9), EUR +/—0.8 (1.2), CNY +/—0.7 (1.0), JPY +/—0.5 (0.8) and GBP +/—0.4 (0.4). Both committed and forecasted transaction exposures are hedged to safeguard business margins and to reduce volatility in earnings. Due to the stronger SEK, the effects of hedging during 2002 increased earnings by approximately SEK 2 billion, calculated by comparing the average hedged rates on the hedge contract portfolio as of January 1, 2002, with average spot rates during 2002. As of December 31, 2002, anticipated net transaction exposures were hedged for the next 9—12 months, giving us time to react to fluctuations in foreign exchange rates by changing prices or renegotiating contracts with customers and vendors. Unrealized currency forwards carried a positive market value of approximately SEK 3 billion at year-end. Hedging activities are centralized to Ericsson Treasury Services to the extent possible. The local companies enter into currency forward agreements with Ericsson Treasury Services, which in turn reverses these transactions in the financial markets. In general, internal sales from Sweden to subsidiaries operating outside Sweden are made in the same currency as the local company use when selling to the external customer, in order to minimize the exposure in the non Swedish companies. Translation exposure We have many subsidiaries operating outside Sweden. The value of such foreign investments is exposed to exchange rate fluctuations, which affects the consolidated balance sheet and income statement when translated to SEK. Translation exposure in foreign subsidiaries is hedged according to the following policy established by our Board of Directors: ¥ 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 are reported directly in stockholders(cid:213) equity in the balance sheet) is hedged up to 20 percent in selected companies. The translation differences reported in equity during 2002 were negative SEK 4.9 billion, mainly due to a stronger SEK. Interest Rate Risk We are exposed to interest rate risks through market value fluctuations of certain balance sheet items and through changes in interest expenses and revenues. Interest rate risks are managed centrally by Ericsson Treasury Services. The net debt position was SEK —5.6 billion at the end of 2002. In managing our interest rate exposure we use derivative instruments, such as forward rate agreements, interest rate swaps and futures. Net risk in interest rate derivatives (SEK million) December 31, 2002 2001 Type of instrument Forward rate agreements and interest rate forwards Interest rate swaps Interest rate futures 354.1 77.4 1,381.2 1,082.7 115.9 22.1 Net risk 1,725.8 889.5 In the table above, net risk in external interest rate derivatives is expressed as the effect on the market value of our interest derivatives portfolio of a change of one percentage point in interest rates. The table describes the net interest rate risk in external derivatives only, hence offsetting items in the balance sheet, future commitments and forecasted flows are not included. The calculation takes netting effects into account; the total net risk is therefore not the sum of the individual amounts. Our aim is to avoid risk in the form of a mismatch between fixed and floating interest bearing balance sheet items. To achieve this, having large gross interest revenues and costs, we strive to a position where all interest rates are floating. Interest-bearing financial assets and liabilities (SEK billion and percent) As of December 31, 2002 Assets Long-Term Short-Term Total Liabilities Long-Term1) Short-Term1) Pensions Total 21.6 66.2 87.8 47.1 2.5 11.0 60.6 24.6% 75.4% 100.0% 77.7% 4.1% 18.2% 100.0% 1) Current maturities of long-term debt of SEK 11.1 billion is included in long- term liabilities. As of December 31, 2002, 94 percent (96 percent in 2001) of our interest-bearing liabilities and 100 percent (100 percent in 2001) of our interest-bearing assets had floating interest rates. E R I C S S O N — A N N U A L R E P O R T 2 0 0 2 51 T R E A S U R Y A N D C U S T O M E R F I N A N C E — F I N A N C I A L R I S K M A N A G E M E N T Risk Related to our 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 B shares in treasury and warrants for issuance of new B shares. An increase in the share price will result in social security charges, which represents a risk to both Ericsson(cid:213)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 B shares in treasury and through the purchase of call options on B shares. CREDIT RISK Credit risk is divided into two categories: customer finance risk and financial credit risk. Customer Finance Risk In common with industry practice, some of our customers request that we arrange or provide financing for them as a condition of obtaining or bidding for contracts in infrastructure projects. Customer finance arrangements may include financing provided in connection with the sale of our systems and services, funding for other costs incurred by our customers that are associated with network installation and integration of our products or, on an exceptional basis, financing for working capital purposes. Our credit approval process requires that the Finance Committee of the Board of Directors approve all commitments in excess of USD 25 million to extend financing support to customers. Our customer finance arrangements are comprised of direct lending by us to our customers or financial guarantees issued by us in respect of lending to our customers by third party sources. In most of our customer finance arrangements, we maintain security interests, normally in the form of pledges of equipment and/or pledges of shares. Restructuring efforts for cases of troubled debt may lead to temporary holdings of such equity interests. We seek to limit our customer financing exposure, both in amount and duration of the credits given. To achieve this, our strategy is to engage banks and other financial institutions as early as possible in our customer finance discussions. Initially, we may have to guarantee such arrangements but our aim is to subsequently transfer all risk to the financial markets. Our customers generally request that we commit to customer finance early in the process of negotiating a sale. We consider customer finance as an alternative to be offered selectively to our customers in the event that third party funding sources are unavailable. By (cid:210)credit commitments(cid:211) included in this report, we mean unutilized undertakings by Ericsson to make funds available directly or indirectly (through a third party against an Ericsson guarantee) under a legally binding credit agreement. The terms of our commitments vary. In some cases, incremental commitments become available to the customer as they sign additional contracts with us. In other cases, the availability of commitments is conditional to the customer meeting certain future operational or financial requirements. Accounting for customer finance On-balance sheet credits are receivables due directly to us from customers, which are recorded as assets on the balance sheet, at their net book value i.e. offset by risk provisions for potentially uncollectible amounts. Off-balance sheet credits relate to credits, funded by a third- party and with an Ericsson guarantee (covering a part or the entire outstanding funded amount). Any recourse to us under guarantees or other similar commitments for the credit risk relating to third-party financing are reported as contingent liabilities, net, after deductions of any risk provisions made. Provisions made for these outstanding amounts are recorded as liabilities on the balance sheet. As of January 1, 2002, according to new Swedish GAAP, we consolidate certain finance companies previously accounted for under the equity method. Certain off-balance sheet credits thereby became on-balance credits. The consolidated financial statements for 2000 and 2001 have been restated. Outstanding customer finance credits As of December 31, 2002, our total outstanding risk exposure relating to customer finance credits was SEK 21.8 billion. Loans amounted to SEK 21.1 billion, of which SEK 0.8 billion was guaranteed by third parties. In addition, SEK 1.5 billion was in the form of off-balance sheet credits guaranteed by us. As of that date, we also had unutilized commitments of SEK 14.0 billion. The outstanding customer loans and financial guarantees relate to infrastructure projects in different geographic markets and to a large number of customers. As of December 31, 2002, of a total of 176 customer loans originated by or guaranteed by us, the six largest customer finance arrangements represented 63 percent of the total credit exposure. 52 E R I C S S O N — A N N U A L R E P O R T 2 0 0 2 T R E A S U R Y A N D C U S T O M E R F I N A N C E — F I N A N C I A L R I S K M A N A G E M E N T The table below summarizes our outstanding customer finance credits as of December 31, 2000, 2001 and 2002. Outstanding customer finance credits (SEK billion) On-balance sheet credits1) Off-balance sheet credits2) Total credits Less third-party risk coverage3) Ericsson risk exposure On-balance sheet credits, net book value4) As of December 31, 2002 2001 18.7 12.8 31.5 — 4.7 26.8 21.1 1.5 22.6 —0.8 21.8 2000 21.6 5.1 26.7 — 6.6 20.1 18.1 14.8 14.0 1) The increase in on-balance credits by SEK 2.4 billion to SEK 21.1 billion mainly reflects that credits previously recorded as off-balance have been acquired. The major part of this increase, the Mobilcom credit, has been transferred to a France Telecom bond risk as of March 3, 2003. 2) During 2002, off-balance sheet financing decreased significantly by SEK 11.3 billion to SEK 1.5 billion. This decrease is mainly the result of releases of Ericsson as guarantor under credit facilities and cancellations of off-balance arrangements, including a credit portfolio set up in 2001. The credit portfolio enabled Ericsson to sell a number of credit receivables to a group of banks, funding the portfolio against a first loss Ericsson guarantee. Ericsson is no longer exposed to put arrangements with any form of triggers with financial institutions. 3) Third-party risk coverage represents credit risk of our on-balance sheet credits borne by third-party financial institutions. These are cases where financial institutions and/or the Swedish Export Credits Guarantee Board (EKN) cover some risk by issuing financial guarantees. 4) On-balance sheet credits, net book value is adjusted by risk provisions. Outstanding exposure by region Of our total outstanding customer finance credit exposure as of December 31, 2002, 52 percent related to Latin America (Mexico and Brazil represent 20 percent respectively of the total global exposure), 25 percent to Western Europe, 13 percent to Central and Eastern Europe/Middle East/Africa, 7 percent to Asia/Pacific and 3 percent to North America. We have a significant presence in emerging markets. Customers in these markets frequently request financial support from us as a result of unavailability of financing from local financial markets or cross-border financing sources. Banks are generally reluctant to bear the risk that political events could prevent customers in these markets from fulfilling their payment obligations. These political risks are partially mitigated by obtaining risk coverage for our financing arrangements from various export credit agencies, regional development banks and institutions such as the World Bank Group, including the Multilateral Investment Guarantee Agency (MIGA) and the International Finance Corporation (IFC). The rate of investment in telecommunications in Latin America has declined as a result of the slow-down in regional economy. We do not intend to take on significant additional credit risk exposure in this region and instead we will focus on collecting outstanding amounts under existing facilities. Outstanding exposure by technology As of December 31, 2002, 23 percent of our total outstanding customer finance was in respect of 3G networks and the remainder was in respect of 2.5G and 2G networks. Credit losses We made risk provisions for customer credits of SEK 3.1 billion in 2002 and SEK 2.5 billion in 2001. The level of provision is determined for each credit based on an assessment of the risk exposure, taking into account commercial and political risk factors. The provisions for all credits and financial guarantees are reviewed on a regular basis. In 2002 and 2001, we incurred credit losses of SEK 1.7 billion and SEK 1.3 billion respectively. No losses were incurred in years 1999 and 2000. Commitments to provide customer finance The following table sets forth our unutilized commitments to provide customer finance as of the dates indicated. (SEK billion) Finance commitments As of December 31, 2002 2001 31.2 14.0 2000 18.2 As of December 31, 2002, 83 percent of our total committed customer finance was in respect of 3G networks and the reminder was in respect of 2.5G and 2G networks. The following table sets forth as of December 31, 2002, how scheduled draw-downs are expected to reduce outstanding financing commitments. Draw-downs under existing financing commitments are estimated to amount to SEK 3 billion during 2003. This is mainly due to delayed deployment of the 3G projects supported by Ericsson financing. (SEK billion) Less than 1 year 1— 3 years 4— 5 5 years years and more Total Financing commitments1) 3.0 11.0 0.0 0.0 14.0 1) Financing commitments refer to credit arrangements with Ericsson or a third- party as lender. Financial Credit Risk Financial instruments carry an element of risk in that counterparts may be unable to fulfill their obligations. Ericsson Treasury Services mitigates these risks by investing excess liquidity primarily in government bonds and treasury bills, commercial papers and corporate bonds, with short-term ratings of at least A-2/P-2 and long-term ratings of at least A. No credit losses were incurred during 2002. E R I C S S O N — A N N U A L R E P O R T 2 0 0 2 53 T R E A S U R Y A N D C U S T O M E R F I N A N C E — F I N A N C I A L R I S K M A N A G E M E N T External investments through Ericsson Treasury Services (SEK billion) Security Treasury Bills Cash and Bank Deposits Commercial Paper Floating Rate Notes Mortgage CP Corporate Bonds Treasury Bonds Mortgage Bonds Total As of December 31, 2002 2001 19.3 11.7 11.1 1.9 0.0 1.0 2.9 0.2 48.1 23.9 11.5 14.5 5.3 1.2 1.4 1.5 0.0 59.3 Ericsson Treasury Services(cid:213) exposure in derivative instruments is, for operational and risk management purposes, valued at market daily and expressed as a liability to, or receivable from, each counterpart. Netting contracts (ISDA agreements) are in force for all counterparts, substantially reducing the risk. COUNTRY RISK Country risk measures Swedish companies(cid:213) risk in relation to all foreign receivables and guarantees, equity investments plus retained earnings in foreign subsidiaries and associated companies and lending from the internal bank to foreign subsidiaries. The country risk measures risk on a gross basis and cannot be compared with consolidated balance sheet items. Total risk by geographical area (SEK billion and percent) Total risk Geographical Area Europe, Middle East & Africa North America Latin America Asia Pacific Total As of December 31, 2002 2001 139 97 45% 18% 22% 15% 49% 16% 22% 13% 100% 100% Tax, currency and other legal and economic restrictions in certain countries can affect our ability to transfer funds within the group and to provide funding to certain subsidiaries. However, the impact of such restrictions is currently very limited. FUNDING AND LIQUIDITY RISK We maintain 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. We define liquidity as cash and short-term investments up to twelve months. Under US GAAP, liquidity is defined as cash and short-term investments up to three months. During 2002, liquidity decreased by SEK 2.7 billion to SEK 66.2 billion and net liquidity, after deduction of short-term interest bearing financial liabilities, increased by SEK 9.5 billion to SEK 52.7 54 E R I C S S O N — A N N U A L R E P O R T 2 0 0 2 billion, mainly due to the SEK 29 billion of net proceeds from the rights issue in September. We finance our operations externally principally by borrowing directly in the Swedish and international bank and debt capital markets. Funding programs and long-term committed credit facilities, available and utilized (SEK billion) Euro Medium Term Note program (USD 5,000m)1) 2) US Commercial Paper program (USD 1,000m)1) Euro Commercial Paper program (USD 1,500m)1) Swedish Commercial Paper program (SEK 5,000m)1) Long-term Committed Credit Facilities (USD 1,000m) Long-term Committed Credit Facilities (USD 600m)2) Total year-end 2002 Total year-end 2001 As of December 31, 2002 Utilized Available Amount 43.9 34.8 8.8 13.2 5.0 8.7 5.3 84.9 101.7 0 0 0 0 0 34.8 46.1 9.1 8.8 13.2 5.0 8.7 5.3 50.1 55.6 1) (cid:210)Amount(cid:211) reflect terms of facilities. However, our access to commercial paper and bond markets may be effectively limited due to our credit ratings and market conditions. 2) USD 600 million (SEK 5.3 billion) of long-term committed credit facilities and two issuances of notes of EUR 2 billion and GBP 226 million (SEK 21.5 billion in total) issued under our Euro Medium Term Note program have interest rates linked to our credit rating. Our aggregate outstanding interest bearing liabilities were SEK 60.6 billion as of December 31, 2002. Long-term interest bearing debt was SEK 58.2 billion, comprising long-term debt of SEK 47.2 billion (including current maturities of long-term debt of SEK 11.1 billion), with an average maturity of three years, and provisions for pensions and similar commitments of SEK 11.0 billion. Long-term debt consisted mainly of borrowings under our Euro Medium Term Note program. Short-term interest bearing liabilities were SEK 2.4 billion with average maturity of three months. Short-term borrowing consisted primarily of bank overdrafts, bank loans and other short-term financial loans. We have a USD 5.0 billion Euro Medium Term Note program of which USD 4.0 billion was utilized at December 31, 2002. Issuances under this program are denominated in EUR, USD, SEK and GBP and have an average maturity of three years. The rating downgrades since January 2002 caused an estimated increase in funding costs of approximately SEK 550 million per year relating to two issuances of notes of EUR 2 billion and GBP 226 million (SEK 21.5 billion in total) under the program. No new long-term debt was issued under the program during 2002. Of the USD 1.6 billion (SEK 14.0 billion) long-term committed credit facilities available to us as of December 31, 2002, our USD 600 million long-term committed credit facility has interest rates linked to our credit rating as well as certain financial covenants, which we need to comply with in T R E A S U R Y A N D C U S T O M E R F I N A N C E — F I N A N C I A L R I S K M A N A G E M E N T order to draw-down funds under the facility. Pursuant to these covenants, prior to any draw-down, our net debt may not exceed USD 4.5 billion and our payment readiness must be at least USD 3.0 billion. Additionally, after June 30, 2004, our net debt to EBITDA may not exceed 3 to 1. The nine downgrades occurring since beginning of 2002 have triggered additional annual commitment fees of SEK 17 million per year relating to our undrawn USD 600 million facility. This facility was amended in June 2002 to replace certain financial covenants linked to our credit rating with other financial covenants. According to the amended terms, a subsequent downgrade from current rating levels will not result in any additional increase in costs. In October 2001, we entered into a EUR 400 million (approximately SEK 3.6 billion) long-term committed credit facility, but in February 2002, this facility became unavailable to us after Moody(cid:213)s lowered our credit rating from Baa1 to Baa2 and it is not included in our total long-term committed facilities. Our short-term borrowing requirements typically peak in the middle of each quarter. Historically, we have relied on our commercial paper programs in the Swedish, European and U.S. markets to satisfy short-term liquidity needs. As of December 31, 2002, our total programs amounted to the equivalent of SEK 27 billion. However, our access to liquidity under these programs is now limited. Our access to funding has decreased and may continue to decrease or become more expensive as a result of our operational and financial performance and market conditions. Currently and in the near term we anticipate using our cash position to satisfy short-term liquidity requirements. In December 2001, we entered into a one-year financial lease agreement of USD 744 million (SEK 6.5 billion). The entity owning these assets was acquired in December 2002 by the Parent Company. We have a securitization program amounting to USD 250 million with Eureka Securitization plc, under which we sell trade receivables in the U.S., UK, Dutch and German markets at an effective cost of one month LIBOR + 150 BP on a fully drawn basis. The program is settled on a weekly basis with new receivables sold to replace those collected during the week. Eureka Securitization plc is externally managed and funded in the commercial paper market. As of December 31, 2002, the program was not utilized. The program is currently under review following the Moody(cid:213)s rating downgrade of Ericsson from Ba2 to B1 in February 2003. Our long-term objective is to have a payment readiness of between 7 and 10 percent of net sales to adapt to changes in liquidity requirements. Payment readiness is an internal measure, defined as net liquidity plus long-term unused credit facilities (excluding undrawn committed facilities where we are not able to meet borrowing conditions) expressed as percentage of net sales. During periods of increased uncertainty, the payment readiness target may be significantly higher. As of December 31, 2002, payment readiness had increased to SEK 67.1 billion, corresponding to 46 percent of net sales, compared to SEK 65.5 billion, corresponding to 28 percent of net sales, as of December 31, 2001. The increase in percent is largely an effect of lower net sales. The net proceeds of SEK 29 billion from the rights issue in September had a positive effect on payment readiness. To support the long-term payment readiness objective, our policy stipulates that the greater part of borrowings should be long-term or covered by long-term credit facilities. After the downgrade in February 2003, by Moody(cid:213)s, our long-term credit rating is currently B1 (Moody(cid:213)s) and BB (Standard & Poor(cid:213)s), both with negative outlook. The current ratings by Moody(cid:213)s and Standard & Poor(cid:213)s are considered to be below investment grade. Since the beginning of 2002, our long-term credit ratings have been downgraded nine times: Credit rating Date January 1, 2002 February 18 May 16 June 17 July 22 July 26 August 1 September 12 November 7 February 17, 2003 Moody(cid:213)s Standard & Poor(cid:213)s Baa1 Baa2 Baa3 Ba1 Ba2 B1 BBB+ BBB+ BBB— BB+ BB+ On June 17, 2002, Moody(cid:213)s lowered our short-term credit rating from P-2 to P-3, and on July 26, 2002, Moody(cid:213)s(cid:226) lowered our short-term credit rating from P-3 to NP. On May 16, 2002, Standard & Poor(cid:213)s lowered our short-term credit rating from A-2 to A-3, and on August 1, 2002, Standard & Poor(cid:213)s lowered our short-term credit rating from A-3 to B. Given the current market conditions in the telecommunications industry and the uncertainty of the outlook for the industry, it is possible that we may suffer additional downgrades. If our credit rating further deteriorates, we will incur additional interest expenses. A downgrade from current rating to B2 by Moody(cid:213)s or BB— by Standard & Poor(cid:213)s would have an aggregate impact on our annual funding costs of SEK 55 million solely in respect of notes outstanding under our Euro Medium Term Note program. If we are unable to comply with financial ratio covenants, we may need to repay or refinance the related debt and/or other debt which contains cross default provisions. This may have a materially adverse impact on our financial condition. E R I C S S O N — A N N U A L R E P O R T 2 0 0 2 55 Lead market development through constant innovation and the development of standards Innovation and creativity are important elements of our corporate culture. We have a long tradition of developing innovative communication technologies, including technologies which help to establish industry standards. For example, we were leaders in the early shift from analogue to digital mobile telephony, a critical stage of development for the growth in wireless communications, and we have pioneered the development of industry-wide technology standards such as WCDMA, GPRS and Bluetooth. We will continue to support innovation through our commitment to research and development. In particular, we will continue to devote significant resources to developing end-to-end communication solutions to support the rapid expansion and integration of the Internet and multi-media services. Our goal is to build our business by developing and implementing solutions that will drive network traffic and thereby enable our customers to succeed. Further develop our long-standing customer relationships with network operators We have strong relationships with the world(cid:213)s leading mobile network operators and many of the world(cid:213)s leading fixed-line operators. We believe we have a long-standing reputation for reliable, innovative and cost-effective systems and services. As the telecommunications industry consolidates into fewer, larger network operators, we believe our position in the industry and our strong customer relationships will be significant competitive advantages for us. We will work with network operators to tailor products, solutions and services to meet their evolving needs, such as developing solutions for integrating mobile and fixed telecommunications systems and providing expanded network management services. We believe that our ability to offer end-to-end solutions — systems, applications, services and core handset technology — together with our in- depth knowledge of customer requirements, make us well positioned to assist network operators to optimize their products and services. I N F O R M A T I O N O N T H E C O M P A N Y Information on the Company HISTORY AND DEVELOPMENT Telefonaktiebolaget LM Ericsson (publ) is a limited liability company organized under the Swedish Companies Act. We were incorporated on August 18, 1918, as a result of a merger between AB LM Ericsson & Co. and Stockholms Allm(cid:138)nna Telefon AB. Our origins date back to a manufacturing business for communications equipment founded in Stockholm in 1876. Our A and B shares are quoted on Stockholmsb(cid:154)rsen (the Stockholm Exchange). Our B shares are also quoted on the exchanges in D(cid:159)sseldorf, Frankfurt, Hamburg and London. Our ADSs are quoted on NASDAQ. Our registered office is located at Telefonv(cid:138)gen 30, S-126 25 Stockholm, Sweden, telephone +46 8 719 00 00. Our agent in the United States is Ericsson Inc., Vice President, Legal Affairs, 740 East Campbell Road, Richardson, Texas 75081. Our web site is www.ericsson.com. This web site address is not an active hyperlink to our web site. Information on our web site does not form part of this document. BUSINESS OVERVIEW We are an international leader in the development and supply of advanced systems and services for mobile and fixed line communications to network operators. Our broad range of telecommunication and data communication products includes end-to-end solutions, systems and services that enable mobile and fixed-line networks to transmit voice, data and multi- media communication with reliability, efficiency and speed. Through our joint venture Sony Ericsson Mobile Communications we offer a range of mobile handsets, including handsets supporting multi-media applications, and other personal communication devices. We also offer a variety of other systems and services to other equipment and handset suppliers related to our core expertise in telecommunications technologies. BUSINESS STRATEGY AND LONG-TERM GOALS Our primary business objective is to strengthen our position as a leading provider of communication systems and services in combination with recovery of our financial performance. Our strategy for achieving this objective calls for us to: ¥ Lead market development through constant innovation and the development of standards; ¥ Further develop our long-standing customer relationships with network operators and expand our business through increased focus on value added services; ¥ Exploit our position as a global market leader; and ¥ Continue to control costs and further enhance efficiency. 56 E R I C S S O N — A N N U A L R E P O R T 2 0 0 2 Exploit our position as a global market leader We provide products and services to over 500 operators in over 140 countries. We have significant sales in each of the largest geographic markets for telecommunications and are a supplier of wireless communication equipment to the world(cid:213)s 10 largest mobile network operators. Our expertise and experience in all major mobile communication standards and proven track record for quality and innovation have allowed us to develop our business on a global basis. We are utilizing our strong international presence and core competence in mobile communications to expand into growth areas such as network management services. We also aim to use our global reach to develop alliances with suppliers and manufacturers in order to increase our combined effectiveness. We believe that our global presence and breadth of product offerings are competitive advantages as our customers increasingly seek to provide telecommunications services globally. Continue to control costs and further enhance efficiency We continuously monitor and adjust our product portfolio to focus on innovative products that can be produced by us on a cost-effective basis and sold profitably. We work with suppliers and manufacturers to exploit our economies of scale to secure low-cost, high-quality components and produce our product line more cost-effectively. We have implemented efficiency programs resulting in increased standardization of internal processes and support systems, which will allow us to quickly adapt to market conditions and customer needs. We also have introduced procedures to better evaluate and reward employees based on performance. In addition, we focus on developing and maintaining high levels of competence in our employees to secure our leading market position and to stay in the forefront of technology development. Please see also (cid:210)Board of Directors(cid:213) Report, Strategy and Goals(cid:211). BUSINESS SEGMENTS In the first quarter of 2002, we merged our operations for mobile systems and multi-service networks to further exploit the synergies between the two and to respond to increased demand for integrated networks with common service platforms and transport networks. We now conduct our business in three business segments: ¥ Systems; ¥ Phones (through our 50/50 joint venture with Sony); and ¥ Other Operations. I N F O R M A T I O N O N T H E C O M P A N Y Systems We offer a complete portfolio of solutions to operators for both mobile systems and wireline multi-service networks. Our solutions include a comprehensive portfolio of telecommunication and data communication products supported by a full range of implementation and network management services. We sell our systems and services to over 500 operators worldwide. We work closely with our customers to understand their businesses and their technology needs and design tailored solutions to help them reach their strategic objectives. Mobile Systems — Industry and Technology We provide mobile systems solutions to network operators that enable reliable, efficient and cost effective wireless networking. Wireless networking refers to communications networks that allow end-users to receive voice and data communications using mobile handsets or other wireless devices. Wireless communications networks are often grouped by the technology upon which they are based: ¥ First generation of wireless communication, or 1G, refers to analog radio and analog and/or digital circuit switching technologies mainly for mobile voice communications. Circuit switching technology establishes a connection on demand and holds it open, regardless of whether data is sent; ¥ Second generation wireless communication, or 2G, refers to digital radio and digital circuit switching technologies that enable networks to carry voice communications and limited data transmissions. The majority of wireless communications networks are currently based on 2G wireless technologies. Many 2G networks have been enhanced with packet-switched transmission capabilities for more efficient data communication. A packet-based network is one in which data is sent in small chunks, called packets. There is no fixed path from the sender to the receiver, so each packet must identify the source and destination. This is often referred to as 2.5G; and ¥ Third generation wireless communication, or 3G, refers to digital wireless communication networks based on packet- switched network technology that enables voice, high-speed data and multi-media communications. Each generation of wireless technology is associated with different international technology standards for wireless communications networks. Transitioning from one generation to the next, such as from 2G to 3G, requires network operators and mobile handset manufacturers to adopt new and emerging technology standards. We believe that the migration from basic voice services to mobile multi-media services is the primary technological shift facing today(cid:213)s wireless network operators. E R I C S S O N — A N N U A L R E P O R T 2 0 0 2 57 I N F O R M A T I O N O N T H E C O M P A N Y The most widely deployed standards today are largely comprised of 2G technologies and can be summarized as follows: ¥ Global System for Mobile communications, or GSM, is used throughout the world and is the most widely deployed standard. GSM is a 2G wireless technology that uses time slots within a specified radio frequency channel to distinguish one call from another. ¥ Code Division Multiple Access, or CDMA (also known as cdmaOne), is used in both the Americas and increasingly in Asia. CDMA is a 2G wireless technology that uses coding technology to distinguish one call from another, with all calls in a specific cell transmitted over the entire range of radio frequencies assigned to the network operator. ¥ Time Division Multiple Access, or TDMA, is used primarily in North and South America. TDMA is a 2G wireless standard that, like GSM, uses time slots within a radio frequency channel to separate users(cid:213) conversations. ¥ Personal Digital Cellular, or PDC, is a digital wireless standard based on TDMA technology used only in Japan. The standards for 3G networks are as follows: ¥ Wideband Code Division Multiple Access, or WCDMA, is a 3G wireless technology that combines wideband (5 MHz (megahertz)) and CDMA-based radio access. ¥ Universal Mobile Telecommunications System, or UMTS, is often used synonymously with WCDMA. UMTS is the term used for the combination of the WCDMA radio standard and advanced switching technologies when used in the 2.1 GHz (gigahertz) band, as is the case in Europe. UMTS includes WCDMA radio access technologies and core network specifications that are based on the GSM standard. ¥ Enhanced Data Rates for Global Evolution, or EDGE, is used to give 3G capabilities to networks based on the GSM standard and TDMA technology. ¥ CDMA2000 1XEV/DO is used for CDMA networks that are evolving to 3G standard for voice and high-speed data mobility. As described above, several technology standards have been deployed to enable the 2G mobile communication networks that are in operation today. The path of migration from a 2G network to a 3G network varies depending on the technology used by the existing 2G network. As a result, in order to provide tailored solutions to a wide range of today(cid:213)s network operators, infrastructure providers must have a fundamental understanding of all existing and emerging standards. The network components for 3G networks are similar to GSM/GPRS networks with the addition of multi-service network nodes that are capable of more efficiently transmitting both circuit and packet-switched traffic. The 3G networks to be introduced by GSM network operators will use the same GSM/GPRS core network components to take advantage of previous investments in their existing network in evolving from 2G to 3G. 58 E R I C S S O N — A N N U A L R E P O R T 2 0 0 2 In addition, due to the complexity and costs of implementing a 3G network, many network operators are upgrading their networks to intermediate technologies, such as GPRS and CDMA2000 1X. Such intermediate technologies are often referred to as (cid:210)2.5G(cid:211) services and can be described as follows: ¥ GPRS is an enhancement of GSM networks. GPRS introduces packet-switched data transmission and enables (cid:210)always on(cid:211) mobility. The implementation of GPRS requires software upgrades to an existing GSM network and the addition of packet-switching nodes. ¥ CDMA2000 1X is a successor to the CDMA standard that enables higher-speed wireless networks for data, voice and multi-media communication. Ultimately, networks using CDMA2000 1X will need to be further upgraded in order to provide capacity levels equivalent to CDMA/EDGE. 2.5G allows operators to migrate end-users to premium services without the need for major network reconstruction. This migration, however, will represent a fundamental change in the way services are managed and billed by network operators. Due to 2.5G packet-switched data and (cid:210)always-on(cid:211) functionality, network operators may charge end-users for the type and amount of data they send and receive rather than the time they are connected to the network. The transition to a charge-for- data business model is a crucial step in the evolution of network operators, as successful migration of network operators to 3G systems in the future is expected to require the adoption of a similar business model. Thus, if migration to 2.5G with new business models becomes successful, market demand and some network preparations will already be in place for 3G migration. Mobile Systems — Our Solutions We believe we are the leading supplier of mobile telecommunication systems, including 2G, 2.5G and 3G. Our expertise in all major 2G standards and our role in developing 3G standards allow us to offer mobile telecommunications systems that incorporate each of the major 2G, 2.5G and 3G mobile technology standards. As a result, we are able to offer tailored solutions to a network operator regardless of the existing standard used in its network. Our systems offering includes cell site equipment, radio base stations, base station controllers and radio network controllers, mobile switching centers, service application nodes and other nodes for billing and operations support. A node is an element of a network, which can be programmed for switching, routing, generating billing records and other functions. Sales of our mobile telecommunications systems consist primarily of radio base stations, base station controllers and switching centers. Radio base stations provide access and interconnection between mobile handsets and the mobile network. Base station controllers manage the traffic between the radio base stations and mobile switching centers, which are the nodes between the radio system and the public-switched telephone network. Base station controllers, in conjunction with mobile switching centers, effect call handovers between radio base stations as subscribers move between cell sites while engaged in a voice call or data transmission. We offer a complete portfolio of radio base stations ranging from small pico cells (i.e., small cells in a mobile network that boost capacity and coverage within buildings) to high capacity macro cell applications. Our mobile switching center and base station controller are built from a common switching platform, allowing them to be configured into multi-functional nodes. This reduces the initial cost of circuit switching for smaller networks while providing the flexibility to easily expand capacity in the future. Another central feature of all our 2G GSM radio base stations and base station controllers is their ability to be upgraded on a cost-effective basis to enable 2.5G GPRS and 3G EDGE transmissions. Like our radio base station products, our mobile switching center products have industry-leading scalability and capacity. Our GSM radio base stations represent more than one third of all GSM radio base stations in service globally. We also offer a full line of transmission systems using either wireless or optical technologies. These systems are the transmission links between the nodes of a mobile network. We offer microwave radio links that can be used to (cid:210)backhaul(cid:211) the traffic between radio base stations and base station controllers as well as between base station controllers and mobile switching centers. Wireless backhauling (i.e., transporting data and voice from a network access point to a central switching point in mobile systems) with microwave radio links reduces the need for the operator to lease transmission capacity from wireline operators resulting in significant cost savings for the wireless operator. Our MINI-LINK is one of the market leaders for such backhaul applications, with thousands of links deployed. A new generation of MINI-LINK systems is now being introduced with an expanded capacity to support the increased traffic demands of Mobile Internet and 3G, as well as to serve the market for fixed wireless broadband access. By offering comprehensive upgrade paths for migrating to high speed/high-capacity networks, we allow maximum use of existing equipment and previous investments, thereby improving network operators(cid:213) capital investment returns. We believe that this approach is of central importance today because most network operators are capital constrained at present. We believe that our ability to meet the diverse technology needs of our customers with high value-added solutions has been instrumental in our being chosen as a provider of wireless communication equipment to the world(cid:213)s 10 largest mobile network operators. We believe that these operators account for more than 50 percent of all subscribers in the world and we expect their share to increase with continued industry consolidation. I N F O R M A T I O N O N T H E C O M P A N Y Our mobile telecommunications systems offering extends beyond assisting network operators in optimizing and upgrading network functionality. We also offer a suite of Mobile Internet products, services and applications that enable network operators, Internet Service Providers and content providers to develop commercial opportunities presented by new systems. Our products and applications enable services such as messaging, personalization services, information services, entertainment services, location-based services and m- commerce. For example, we are actively developing the next generation of messaging services called Multimedia Messaging (MMS). We have also established Ericsson Mobility World, a global network of regional centers and global and local web- based facilities. This open industry-wide initiative is a growing global network of more than 100,000 registered technology professionals from a diverse base of companies, working in partnership toward successfully implementing the Mobile Internet. Multi-Service Networks (cid:209) Industry and Technology The last decade has seen a dramatic increase in the volume of data that is being transmitted through wireline networks. The development of the Internet and network connectivity, in addition to increasing amounts of multi-media, data and voice transmissions, have placed severe strains on the capacity limitations of existing wireline networks. Modern networks must also be able to reliably connect voice calls in real time while transmitting irregular, and often very large, bursts of data. Many network operators currently manage multiple networks to accommodate voice, data, video and Internet transmissions. Multiple networks, however, are expensive to maintain and costly to upgrade. Wireline network operators are moving from single-service networks toward new multi-service networks that have the ability to simultaneously handle multiple services, such as voice, text and images. Offering these services requires wireline operators to migrate from existing circuit-switched networks to packet-switched networks. Circuit switched voice services, however, are the primary revenue generator for today(cid:213)s wireline network operators and a key area for continued profitability. As a result, network operators are required to strike a careful balance between making short-term investments in circuit- switched products to protect current revenues and long-term investments in packet-switching technology to prepare for the future. In addition, due to the difficult economic climate and volatile financial market conditions, many network operators have been forced to reduce capital expenditure budgets and implement cost-reduction measures without compromising new and existing business ventures. E R I C S S O N — A N N U A L R E P O R T 2 0 0 2 59 I N F O R M A T I O N O N T H E C O M P A N Y Multi-Service Networks — Our Solutions We offer multi-service networking solutions to fixed-line operators. We have a long history in wireline networking with an installed base of access and transit lines equivalent to 160 million lines out of approximately 1.5 billion lines globally. We supply wireline operators with systems solutions that allow them to start to upgrade their legacy networks to efficiently handle a mix of voice, data, video and Internet traffic. Our solutions for multi-service networking include systems and services for circuit switching, next generation (packet- switched) networking and broadband (i.e., a channel with more than two megabits per second of bandwidth). These solutions enable network operators to start to replace multiple networks with a unified multi-service network capable of handling all of these services. The primary systems and services we offer for multi-service networking are our AXE solution and our ENGINE solution. Our circuit-switched solutions are based on our AXE product range, which is our open architecture communication platform and the basis for our wireline and mobile systems. AXE is one of the most widely used switching systems in the industry today. AXE systems have been deployed in 135 countries, connecting more than 500 million wireline and mobile subscribers. Our AXE products include local switching centers that interconnect individual access lines from homes and businesses to the telephone network and transit switching centers that interconnect local switching centers for calls between subscribers connected to different local switches. By establishing a transit-switching layer, operators are able to minimize the number of trunks or inter-switch connections between switching centers and optimize the traffic routes within their network. Our AXE solutions are tailored to meet specific needs for different types of operators, from local dial tone providers to long distance providers. A full range of software-based supplementary subscriber services (such as Centrex, our business services package, call forwarding and caller ID) are available for additional revenue streams. These service capabilities are continuously enhanced and expanded to ensure that the operators using AXE are able to offer the latest and most competitive subscriber features to their customers. Our AXE-based circuit switching solutions are designed to safeguard operators(cid:213) current profitability, while helping them prepare for the future through continuous enhancements. The latest AXE switch is a first step in a migration to a packet-based multi-service network. Investments in AXE support a transition to Ericsson(cid:213)s ENGINE multi-service network solution. Our proprietary ENGINE solution is the world(cid:213)s leading solution for upgrading narrowband networks to packet switched networks. ENGINE enables networks to migrate from a traditional circuit-based network to a packet-based network. This migration to a packet-based network is a necessary step in order to combine broadband Internet, voice and data traffic into one multi-service network rather than three separate networks. We attribute part of the success of our ENGINE solution to our pragmatic approach to migration and network evolution. We recognize that, for most operators, building an entirely new network is prohibitively expensive. By offering solutions that provide flexible paths for network migration and evolution, we satisfy the objective of the network operator to offer multiple services on a cost-effective basis. Offering this flexibility and scalability is fundamental to the success of our ENGINE solution. Services We have the ability to offer a comprehensive range of services to support network operators. These services include advisory services, integration services and management services. Our services organization has technical knowledge to support fixed networks, data (IP and ATM) and all major mobile network technologies. We believe that services play an important role in our business. Network operators are focusing increasingly on reducing operating expenditures by optimizing the operation and maintenance of their existing networks. This trend has been reinforced by current constraints on the ability of many network operators(cid:213) capital expenditure. As a result, an increasing number of network operators are outsourcing network design, operations and maintenance activities. Our comprehensive portfolio of services can be customized or sold in packages to meet the needs of existing and new network operators. We have established the following broad categories of service areas. Advisory services We provide consulting services to network operators for business planning and development, design and optimization of networks and the introduction of new services and management solutions. Our global competence development program is designed to provide network operators with training and education in order to improve staff competency and develop skills in new product areas. 60 E R I C S S O N — A N N U A L R E P O R T 2 0 0 2 Integration services We provide services designed to make it possible for network operators to implement new technologies and applications in a swift and cost-effective manner. This area is comprised of solutions for the roll-out of new networks, integration of end- user applications or migration from one network standard to another such as from 2G to 3G through network implementation and integration, site acquisition and civil works activities. Management services Our portfolio of management services is designed to assist network operators to provide uninterrupted service and operate their networks efficiently. It also includes solutions for managing service levels by providing customers with technical assistance, system maintenance and repair and return. We also have the ability to assume full responsibility over network operations and we have signed over 30 contracts to operate networks on behalf of network operators. Phones Sony Ericsson Mobile Communications In October 2001, we formed Sony Ericsson Mobile Communications as a 50/50 joint venture with Sony Corporation. We retained the intellectual property relating to our core handset technology. In association with the Sony Ericsson joint venture, we can provide a full range of mobile handsets, including multi-mode devices that combine different radio technologies, enabling subscribers to roam between networks and facilitating easy migration from 2G to 3G. Our 50 percent ownership interest in Sony Ericsson also allows us to monitor the requirements and preferences of the end-user market for mobile handsets, which we see as an important driver for our mobile systems business and supports our ability to provide end-to-end systems to our customers. We believe that as data-enabled GPRS and 3G handsets begin to penetrate the marketplace, product design along with the availability of games, music and other applications will take on an increasingly important role in the end-user marketplace. Our partnership with Sony allows us to combine our knowledge of advanced mobile telecommunications technologies with Sony(cid:213)s multi-media operations and its expertise in developing, designing and branding household consumer electronic devices, such as the Walkman and Playstation. We entered into licensing arrangements to provide platform technology to the joint venture. The Sony Ericsson joint venture markets a full range of advanced multi-media mobile handsets under the brand names (cid:210)Sony(cid:211), (cid:210)Ericsson(cid:211) and (cid:210)Sony Ericsson(cid:211). By 2003, the joint venture will market all mobile handsets under the (cid:210)Sony Ericsson(cid:211) brand, except for smaller volumes of phase out models. I N F O R M A T I O N O N T H E C O M P A N Y Other Operations This segment principally consists of technology licensing, business innovation and enterprise systems, which we consider part of our core operations and defense systems and network technologies, which we consider non-core activities. It is our current intention to divest certain non-core activities such as network technologies (cables). Technology Licensing Mobile Platforms Our Mobile Platforms group offers GSM 2G/GPRS/2.5G and WCDMA/EDGE 3G technology platforms to manufacturers of mobile handsets and other wireless devices on the open market. These platform technologies are based on our global leadership in standardization and our comprehensive intellectual property portfolio. Ericsson technology platforms include complete component specifications, printed circuit board layouts and software. We also offer support and service in customizing these platforms. By licensing our platforms, manufacturers can launch new products with limited research and development investments and can produce differentiation such as applications, industrial design, distribution and branding. We currently provide mobile platform products to several mobile phone suppliers, including the Sony Ericsson joint venture, among others. Ericsson Technology Licensing Ericsson Technology Licensing provides Bluetooth solutions tailored for the mass-market to many of the world(cid:213)s largest manufacturers. Based on technology initially developed by us in the early 1990(cid:213)s, Bluetooth is a global low-power, low-cost technology standard that enables stationary and mobile devices to communicate wirelessly at short ranges. Our application- oriented solutions incorporate the creation, development, licensing and delivery of Bluetooth intellectual property. Our Technology Licensing group provides a complete portfolio of products and services including baseband, radio and software, all supported by development tools, qualification, training and consulting. We helped found the Bluetooth Special Interest Group (SIG) and were the first company to put Bluetooth consumer products into mass production. Business Innovation Our Business Innovation group develops ideas that could lead to future core businesses. Working with both internal and external project teams, our Business Innovations group seeks to develop ideas that are in line with our core business and that demonstrate strong potential for profitability. E R I C S S O N — A N N U A L R E P O R T 2 0 0 2 61 I N F O R M A T I O N O N T H E C O M P A N Y Enterprise Systems Our Enterprise Systems group provides mobile communications systems and services that enable businesses, government entities and educational institutions to have seamless access to applications and services across multiple locations. We focus on providing mobile solutions such as wireless local area networks (WLAN), and mobile Intranet solutions such as our Mobile Organizer and Virtual Office products. We also provide business applications such as our Contact Center product and unified messaging services. We sell our enterprise systems via indirect distribution channels to network operators, systems integrators, value-added resellers and distributors. Microelectronics In September 2002, we sold the major part of our microelectronics business to Infineon. We will continue to purchase components from Infineon, and we will continue to operate a component factory on behalf of Infineon for two years. In the first quarter of 2003, we sold also the optoelectronics part of these operations to Northlight Optronics AB. Defense Systems Our Defense Systems group supplies advanced airborne, ground-based and marine radar systems. Versions of Ericsson defense systems are operational in Sweden and more than 20 other countries. Network Technologies (Cables) Our Network Technologies group is a leading network specialist providing a full-range of solutions that integrate copper and optical cables and power networks. We organize our group into four business areas: Fiber Networks, Interconnect, Fusion Splicing, and Energy. Our primary markets include Scandinavia, China, the United States, Brazil, the United Kingdom and Thailand. A large portion of net sales from our Network Technologies group is attributable to intersegment sales. SUPPLIERS We purchase customized and standardized equipment and components from a core group of global providers of electronics manufacturing services including Flextronics, Solectron and Sanmina-SCI. We also purchase equipment or components from numerous local and regional suppliers. We are not dependent on any one supplier for the provision of standardized equipment or components. We generally place purchase orders for our standardized equipment requirements pursuant to global supply agreements, which we have negotiated with our primary suppliers. Payment terms are generally 45—60 days. The Sony Ericsson Mobile Communications joint venture has outsourced the majority of production of mobile handsets to Flextronics but also uses other contract manufacturers. A number of our suppliers design and manufacture highly specialized and customized components for our networks. Although we work closely with our suppliers to avoid shortages and ensure alternative sources of supply, we may not have immediate access to alternative sources of supply for highly specialized components, see (cid:210)Risk Factors — Risks Associated with our Business — If our outside suppliers fail to deliver satisfactory components and manufacturing services on time, our financial results could be negatively impacted.(cid:211) We work closely with our suppliers and consult with them regularly at the executive, management and operational levels with regard to our production requirements and design specifications. We believe that this strategy has allowed us to foster strong relationships with quality suppliers. CUSTOMERS We supply mobile systems to most major wireless network operators, for example, in Europe to Hutchison, KPN, Orange, T-Mobile, Telecom Italia Mobile, Telef(cid:151)nica, and Vodafone; in North America to AT&T Wireless and Cingular; and in Asia Pacific to China Mobile, China Unicom, NTT DoCoMo, SingTel and Telstra. We provide our multi-service network systems to large wireline operators around the world including BT (British Telecom), China Telecom, Telef(cid:151)nica and Telmex, among others. In 2002, approximately 50 percent of our net sales were attributable to our ten largest customers and approximately 65 percent to our 20 largest customers. SALES, MARKETING AND SUPPORT We use a direct sales force to market and sell our systems and services to customers in over 140 countries. We divide our sales and marketing operations into three primary market areas: ¥ Europe, Middle East and Africa; ¥ North, South and Central America; and ¥ Asia Pacific. 62 E R I C S S O N — A N N U A L R E P O R T 2 0 0 2 These primary markets are further subdivided into a total of 35 market units, with each typically representing a single country or a group of countries depending on the extent of our business activities in that region. The majority of these market units operate locally through subsidiaries that are present in those countries. We use our local knowledge to help our customers move into new markets and our global scale to enable them to achieve greater efficiencies and access to recognized world-class resources wherever they operate. In addition to our market units, we also operate global customer units that provide focused sales and marketing activities targeted at our large multinational customers. Our market and global customer units are responsible for every stage of the sales cycle, including identifying opportunities, tailoring our solutions to the needs of individual customer, and integrating our products into the customer(cid:213)s network environment. The market and global customer units rely on the expertise of primary business units in tailoring and integrating our products for delivery to customers. As of December 31, 2002 these business units are: ¥ Systems: Mobile Systems (WCDMA/EDGE/GSM/GPRS/TDMA and PDC), Multi-Service Networks and Data Backbone; ¥ Mobile Systems: CDMA; ¥ Global Services; and ¥ Transmission and Transport Networks. The market and global customer units are also responsible for after-sales support and rely in particular on the Global Services business unit in fulfilling this function. Frequently, a market unit and customer unit will work together in providing products, solutions and services to our large customers. Our market and global customer units focus on offering systems and services related to mobile systems and wireline multi-service networks. Businesses in our Other operations segment market their systems and services through internal sales and marketing functions. Often these internal sales and marketing teams work with our market and global customer units in approaching certain markets or large customers with whom we have a relationship. RESEARCH AND DEVELOPMENT We believe that our future success depends to a large part on our continuing ability to deliver systems and services based on advanced technologies. Accordingly, while we have already rationalized significantly among our research and development activities and our currently planned cost reduction measures involve further reductions in research and development spending, we remain committed to continue to make significant investments in research and development that is core to our future business, in particular in 3G technology. As of December 31, 2002, we had over 20,000 employees actively engaged in research and development. During 2002, our research and development expenses was SEK 29.3 billion, or 20 percent of net sales. I N F O R M A T I O N O N T H E C O M P A N Y Our research activities are focused on technologies and standards that are three to 10 years away from implementation. We are currently conducting innovative research in areas such as all IP-based networks, multi-carrier power amplifiers and in systems beyond 3G technologies. We are also continuing to conduct research into advanced 3G technologies based on WCDMA. Our product development teams usually work with technologies that are less than three years away from commercialization and focus on developing products rather than the underlying technologies themselves. Our product pipeline currently includes end-to-end solutions for all 3G technologies, such as WCDMA, CDMA2000 and EDGE. In addition, it includes products and enablers for Mobile Internet, broadband and fixed-line solutions. INTELLECTUAL PROPERTY AND LICENSING As of December 31, 2002, we held over 12,000 patents worldwide. In addition, we hold numerous trademarks all over the world. We believe that patent and trademark protection is an integral part of our business and complements the technological expertise, innovative talent and marketing capabilities of our employees. See (cid:210)Risk Factors-Risks Associated with our Business. Our business and results of operations will be harmed if we are found to have infringed intellectual property rights of third parties, or if we are unable to protect our intellectual property rights from challenges or unauthorized third party use.(cid:211) By entering into cross-license agreements and acquiring licenses when appropriate, we seek to minimize our exposure to other patent holders. Through many years of involvement in the development of new mobile technologies, we have built up a considerable portfolio of essential intellectual property rights relating to advanced mobile telecommunications technologies. We hold a substantial number of essential patents related to WCDMA, and numerous essential patents related to other 3G standards, including CDMA2000 and EDGE. We also hold important patents for many other areas including ATM, WAP, WLAN, mobile platforms and Bluetooth. Our intellectual property rights are valuable business assets and we license these rights to some other infrastructure suppliers, but also to a number of handset manufacturers and wireless applications developers, in return of royalty payments. JOINT VENTURES, COOPERATION ARRANGEMENTS AND VENTURE CAPITAL In addition to our joint venture with Sony, which we describe in (cid:210)Information about the Company(cid:211), we are engaged in joint ventures, cooperation arrangements and venture capital initiatives with a number of industry participants. Ericsson Juniper Networks Mobile IP In November of 2000, we formed a company with Juniper Networks, named Ericsson Juniper Networks Mobile IP, of E R I C S S O N — A N N U A L R E P O R T 2 0 0 2 63 I N F O R M A T I O N O N T H E C O M P A N Y which we own 60 percent. This venture combines our mobile IP expertise with Juniper(cid:213)s experience in IP routing systems to facilitate the interaction between mobile voice networks and IP data networks. The joint venture provides Mobile Internet routing products to customers including Internet Service Provider(cid:213)s and wireless network operators building GPRS and 3G networks. Symbian We also participate in the development of the EPOC wireless operating system through approximately 19 percent ownership interest in Symbian. Symbian was established as a private company in June 1998 and is jointly owned by Ericsson, Nokia, Matsushita (Panasonic), Motorola, Psion, Sony Ericsson and Siemens. Symbian is a software licensing company that supplies the Symbian Operating System for data-enabled mobile handsets. Our involvement in Symbian helps to promote and develop this advanced, open operating system, which we believe will be instrumental in facilitating the growth of the Mobile Internet. Venture Capital In order to support the development of Mobile Internet applications, systems and services, we continue to participate in a number venture capital investments. We make direct investments through our operating subsidiaries in companies that are strategic to our core businesses. We also make direct investments in smaller start-up companies through our Business Innovation group. In addition to direct investments, we have also formed joint ventures to facilitate and support our venture capital activities. For example, Ericsson Venture Partners was formed in 2000 together with Investor AB, AB Industriv(cid:138)rden and Merrill Lynch. The venture focuses on investments in the communications industry in Europe, the Americas and the Middle East with particular emphasis on the Mobile Internet market. PARENT COMPANY OPERATIONS The business of our parent company, Telefonaktiebolaget LM Ericsson, consists mainly of corporate management and holding company functions. Parent company operations also include internal banking and customer credit management activities performed by Ericsson Treasury Services AB and Ericsson Credit AB. As of December 31, 2002, our parent company had branch and representative offices in 16 countries and had approximately 1,300 employees. MATERIAL CONTRACTS Effective October 1, 2001, we formed Sony Ericsson Mobile Communications AB as a 50/50 joint venture with Sony Corporation. Ericsson and Sony each contributed SEK 2.8 billion in cash to the capital of the joint venture. Pursuant to two Master Purchase Agreements, one relating to the transfer of the Ericsson handset business and one relating to the transfer of the Sony handset business, and related agreements, both partners sold substantially all of their respective handset businesses to the joint venture. We retained ownership of our intellectual property rights for mobile phone platform technology, which is licensed to the joint venture and other handset manufacturers. LEGAL PROCEEDINGS We are party to a variety of legal proceedings arising in the ordinary course of business involving allegations of breach of contract, improper delivery of goods or services, product liability, infringement of intellectual property rights and other matters. We are subject to claims that mobile handsets and other telecommunications devices that generate electromagnetic fields expose users to health risks. At present, a substantial number of scientific studies conducted by various independent research bodies have indicated that electromagnetic fields, at levels within the limits prescribed by public health authority safety standards and recommendations, cause no adverse effect to human health. Like other companies operating in the telecommunications industry, because our products comprise complex technology, we experience litigation regarding patent and other intellectual property rights. Third parties have asserted, and in the future may assert, claims against us alleging that we infringe their intellectual property rights. If we do not succeed in any such litigation, we could be required to expend significant resources to pay damages, develop non-infringing products/technology or to obtain licenses to the products/technology which is the subject of such litigation. However, we cannot be certain that any such licenses, if available at all, will be available to us on commercially reasonable terms. Also, defending these claims may be expensive and divert the efforts of our management and technical personnel. In particular, we are currently party to two unrelated lawsuits where plaintiffs (Harris Corp. and InterDigital Communications Corp.) allege that we have infringed one or more of their U.S. patents through our sales of certain GSM and TDMA products in the United States. In the Harris lawsuit, the jury found on October 30, 2002, that we had willfully infringed the one patent-in-suit and that the patent is valid. We believe that the jury(cid:213)s decision is wrong. The Court has not yet ruled. Should the Court render a final judgment against us, we will appeal. The InterDigital lawsuit is scheduled for trial starting on May 15, 2003. While we are confident that we ultimately will prevail in each of these two lawsuits, there can be no assurances thereof. If we do not prevail, we may have to expend significant resources to pay damages and we could be enjoined in the United States from selling any products found to infringe unless we either modify those products or obtain licenses to the patents found to be valid and infringed. In the U.S, asbestos claims are brought against Ericsson as it is for several hundreds of other companies. The claims are 64 E R I C S S O N — A N N U A L R E P O R T 2 0 0 2 related to the Anaconda Wire & Cable business within Ericsson(cid:213)s joint venture with Atlantic Richfield formed in 1980. This business was later merged fully into Ericsson and in 1988 sold to Alcatel. Anaconda manufactured cables for the US Navy during 1946—51 that contained small amounts of asbestos, well below the applicable safety limits. The liability for the navy cables has remained with Ericsson and we have been targeted with lawsuits since 1983. Since then, Ericsson has successfully defended all asbestos lawsuits and we have settled none. We have insurance coverage for those lawsuits, however no payments from this coverage have been made to claimants. COMPETITORS In our Mobile Systems and Multi-Service Networks segments, we compete with large and established communication equipment manufacturers. Although competition varies depending on the products and services, our most significant competitors in wireless communication include Alcatel, Lucent, Motorola, Nokia, Nortel and Siemens. With respect to wireline communication equipment, the competition is less concentrated and includes, among others, Alcatel, Cisco, Lucent, Nortel and Siemens. We also compete with numerous local and regional manufacturers and providers of communication equipment and services. We expect the communication equipment market to continue to undergo consolidation, which should strengthen the surviving companies but decrease the number of competitors. In our view, financial strength will be a significant factor in this process. We believe the most important competitive factors in this industry include existing customer relationships, the ability to cost-effectively upgrade or migrate the installed base, technological innovation, product design, compatibility of products with industry standards, and the ability to attract and retain the key personnel necessary to develop successful products. In our Other operations segment, our competitors vary widely depending on the product or service being offered. We face significant competition with regard to substantially all of these products and services. I N F O R M A T I O N O N T H E C O M P A N Y ORGANIZATIONAL STRUCTURE For a listing of our significant subsidiaries, please see Note 9 to our consolidated financial statements. PROPERTY, PLANT AND EQUIPMENT As of December 31, 2002, no land, buildings, machinery and equipment were pledged as collateral for outstanding indebtedness. During 2000 and 2001, we also disposed of the majority of the real properties we owned. We believe that our principal properties are suitable for our present needs, but, due to restructuring and reduced headcount, we currently have certain amounts of excess space, which we are working to reduce. We have set forth below information regarding our manufacturing facilities. Property Products Owned/ Leased Size sq. meters Sweden, Nyn(cid:138)shamn Sweden, Kista Sweden, Kalmar Sweden, Kumla Sweden, G(cid:138)vle Sweden, Skellefte(cid:140) Sweden, M(cid:154)lndal Sweden, Bor(cid:140)s Sweden, Katrineholm Sweden, Hudiksvall Sweden, Falun US, Lynchburg US, San Diego US, Hauppange Spain, Bilbao Brazil, Sao Jose dos Campos China, Shanghai China, Nanjing China, Chongqing Leased Leased Leased Leased Leased Leased Leased Mobile Systems Mobile Systems Power Modules Mobile Systems Mobile Systems Assembly Network Material Leased Sensor and Network Leased production MINI-LINK Mobile Systems, Switching systems Cables Cables Mobile Systems Mobile Systems Power Amplifiers Data Modules Mobile Systems Assembly Power Modules Mobile Systems, Switching systems MINI-LINK Leased Leased Owned Leased Owned Owned Owned Leased Owned Leased 14,000 5,300 14,000 40,000 96,000 1,500 16,000 33,200 17,000 50,000 40,000 8,400 2,000 4,000 6,600 22,100 2,000 7,200 500 E R I C S S O N — A N N U A L R E P O R T 2 0 0 2 65 S E G M E N T S A N D A R E A S ORDERS BOOKED BY SEGMENT BY QUARTER Year to date (SEK million) 0103 0106 0109 0112 0203 0206 0209 0212 20011) 2002 Systems of which Mobile Systems of which Multi-Service Networks Other operations Less: Intersegment orders Total Change Systems of which Mobile Systems of which Multi-Service Networks Other operations Less: Intersegment orders Total 62,822 54,731 8,091 9,011 — 2,524 113,779 98,568 15,211 15,211 — 5,249 149,085 129,932 19,153 19,983 —7,231 183,281 161,433 21,848 27,411 — 8,925 37,701 35,008 2,693 6,268 — 2,076 68,898 63,253 5,645 12,575 — 4,315 86,836 79,440 7,396 18,025 —7,173 115,341 106,036 9,305 22,716 — 9,706 69,309 123,741 161,837 201,767 41,893 77,158 97,688 128,351 0203 — 40% — 36% — 67% — 30% — — 40% 0206 — 39% — 36% — 63% —17% — — 38% 0209 — 42% — 39% — 61% —10% — — 40% 0212 — 37% — 34% — 57% —17% — — 36% Isolated quarters (SEK million) Q1 Q2 20011) Q3 Q4 Q1 Q2 2002 Q3 Q4 Systems of which Mobile Systems of which Multi-Service Networks Other operations Less: Intersegment orders Total Change Systems of which Mobile Systems of which Multi-Service Networks Other operations Less: Intersegment orders Total 62,822 54,731 8,091 9,011 — 2,524 50,957 43,837 7,120 6,200 — 2,725 35,306 31,364 3,942 4,772 —1,982 34,196 31,501 2,695 7,428 —1,694 37,701 35,008 2,693 6,268 — 2,076 31,197 28,245 2,952 6,307 — 2,239 17,938 16,187 1,751 5,450 — 2,858 28,505 26,596 1,909 4,691 — 2,533 69,309 54,432 38,096 39,930 41,893 35,265 20,530 30,663 Q1 Q2 — 40% — 36% — 67% — 30% — — 40% — 39% — 36% — 59% 2% — — 35% Q3 — 49% — 48% — 56% 14% — — 46% Q4 —17% —16% — 29% — 37% — — 23% 1) 2001 adjusted to reflect parts of Phones transferred to Sony Ericsson Mobile Communications. 66 E R I C S S O N — A N N U A L R E P O R T 2 0 0 2 NET SALES BY SEGMENT BY QUARTER Year to date (SEK million) 0103 0106 0109 0112 0203 0206 0209 0212 20011) 2002 S E G M E N T S A N D A R E A S Systems of which Mobile Systems of which Multi-Service Networks Other operations Less: Intersegment sales Total Change Systems of which Mobile Systems of which Multi-Service Networks Other operations Less: Intersegment sales Total 44,367 37,046 7,321 8,025 — 2,632 95,429 80,167 15,262 15,534 — 5,668 138,576 117,503 21,073 21,542 —7,819 188,697 161,554 27,143 31,762 — 9,622 33,323 30,036 3,287 5,706 — 2,063 68,104 61,834 6,270 11,733 — 4,326 98,716 90,066 8,650 17,509 —7,201 131,955 120,256 11,699 23,533 — 9,715 49,760 105,295 152,299 210,837 36,966 75,511 109,024 145,773 0203 — 25% —19% — 55% — 29% — — 26% 0206 — 29% — 23% — 59% — 24% — — 28% 0209 — 29% — 23% — 59% —19% — — 28% 0212 — 30% — 26% — 57% — 26% — — 31% Isolated quarters (SEK million) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 20011) 2002 Systems of which Mobile Systems of which Multi-Service Networks Other operations Less: Intersegment sales Total Change Systems of which Mobile Systems of which Multi-Service Networks Other operations Less: Intersegment sales Total 44,367 37,046 7,321 8,025 — 2,632 51,062 43,121 7,941 7,509 — 3,036 43,147 37,336 5,811 6,008 — 2,151 50,121 44,051 6,070 10,220 —1,803 33,323 30,036 3,287 5,706 — 2,063 34,781 31,798 2,983 6,027 — 2,263 30,612 28,232 2,380 5,776 — 2,875 33,239 30,190 3,049 6,024 — 2,514 49,760 55,535 47,004 58,538 36,966 38,545 33,513 36,749 Q1 — 25% —19% — 55% — 29% — — 26% Q2 — 32% — 26% — 62% — 20% — — 31% Q3 — 29% — 24% — 59% — 4% — — 29% Q4 — 34% — 31% — 50% — 41% — — 37% 1) 2001 adjusted to reflect parts of Phones transferred to Sony Ericsson Mobile Communications. E R I C S S O N — A N N U A L R E P O R T 2 0 0 2 67 S E G M E N T S A N D A R E A S ADJUSTED OPERATING INCOME AND OPERATING MARGIN BY SEGMENT BY QUARTER Year to date (SEK million) 0103 0106 0109 0112 0203 0206 0209 0212 20011) 2002 1,966 — 5,512 — 603 — 256 2,215 — 9,964 — 243 — 673 2,861 —13,947 —1,863 — 983 3,239 —14,649 — 5,111 —1,659 — 2,799 — —1,343 — 305 — 3,495 — 442 — 2,318 —700 — 4,604 — 992 — 3,477 —1,109 — 4,907 —1,331 — 4,715 —1,542 — 4,405 — 8,665 —13,932 —18,180 — 4,447 — 6,955 —10,182 —12,495 Systems Phones Other operations Unallocated2) Total Items affecting comparability: — Non—operational capital gains/losses, net — Capital gain Juniper Networks — Restructuring costs, net — Capitalization of development exp., net Total As percentage of Net Sales Systems Phones3) Other operations Total 42 5,453 — — 5,495 3 5,453 —15,000 — 168 5,453 —15,000 — 347 5,453 —15,000 — — 9,544 — 9,379 — 9,200 20011) 0103 4% — — 8% — 9% 0106 2% — — 2% — 8% 0109 2% — — 9% — 9% 0112 2% — —16% — 9% 20011) 102 — — 1,005 1,107 0203 — 8% — — 24% —12% Isolated quarters (SEK million) Q1 Q2 Q3 Q4 Q1 Systems Phones Other operations Unallocated2) Total Items affecting comparability: — Non—operational capital gains/losses, net — Capital gain Juniper Networks — Restructuring costs, net — Capitalization of development exp., net Total As percentage of Net Sales Systems Phones3) Other operations Total 1) 2001 figures are restated for: 1,966 — 5,512 — 603 — 256 249 — 4,452 360 — 417 646 — 3,983 —1,620 — 310 — 4,405 — 4,260 — 5,267 378 —702 — 3,248 — 676 — 4,248 42 5,453 — — 5,495 — 39 — —15,000 — —15,039 165 — — — 165 Q1 4% — — 8% — 9% 20011) Q2 0% — 5% — 8% Q3 1% — — 27% —11% 179 — — — 179 Q4 1% — — 32% —7% — 2,799 — —1,343 — 305 — 4,447 102 — — 1,005 1,107 Q1 — 8% — — 24% —12% 99 — —1,482 1,915 217 — — 5,691 2,556 — 42 — —11,962 3,200 532 — 2,918 — 8,804 2002 0209 — 5% — — 20% — 9% 0212 — 4% — — 20% — 9% 2002 Q3 Q4 —1,109 — 550 —1,159 — 409 — 303 — 339 —1,238 — 433 0206 — 5% — — 20% — 9% Q2 — 696 — 442 — 975 — 395 — 2,508 — 3,227 — 2,313 — 3 — —1,482 910 118 — — 4,209 641 — 575 — 3,450 2002 Q3 — 4% — — 20% —10% Q2 — 2% — —16% —7% — 259 — — 6,271 644 — 5,886 Q4 —1% — — 21% — 6% — Changed accounting principles in Sweden 2002 regarding consolidation of companies according to new RR01. — Results with parts of Phones transferred to the joint venture Sony Ericsson Mobile Communications, accounted for under the equity method reported under Share in earnings of joint ventures and associated companies 2001 2) (cid:210)Unallocated(cid:211) consists mainly of costs for corporate staffs and non—operational capital gains/losses 3) Calculation not applicable 68 E R I C S S O N — A N N U A L R E P O R T 2 0 0 2 ORDERS BOOKED BY MARKET AREA BY QUARTER Year to date (SEK million) 0103 0106 0109 0112 0203 0206 0209 0212 20011) 2002 S E G M E N T S A N D A R E A S Europe, Middle East and Africa2) North America Latin America Asia Pacific Total 2) Of which Sweden 2) Of which EU Change Europe, Middle East and Africa2) North America Latin America Asia Pacific Total 2) Of which Sweden 2) Of which EU 37,329 6,191 11,581 14,208 59,083 10,473 20,847 33,338 81,096 14,830 24,731 41,180 92,702 24,635 31,083 53,347 19,493 7,003 4,846 10,551 37,184 12,837 8,195 18,942 46,738 17,310 9,612 24,028 65,448 22,877 9,575 30,451 69,309 123,741 161,837 201,767 41,893 77,158 97,688 128,351 1,827 25,289 4,665 40,610 5,654 50,814 8,675 57,057 2,437 8,877 4,943 21,316 6,289 25,160 7,620 34,003 0203 0206 — 48% 13% — 58% — 26% — 40% 33% — 65% — 37% 23% — 61% — 43% — 38% 6% — 48% 0209 — 42% 17% — 61% — 42% — 40% 11% — 50% 0212 — 29% —7% — 69% — 43% — 36% —12% — 40% Isolated quarters (SEK million) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2001 1) 2002 Europe, Middle East and Africa2) North America Latin America Asia Pacific Total 2) Of which Sweden 2) Of which EU Change Europe, Middle East and Africa2) North America Latin America Asia Pacific Total 2) Of which Sweden 2) Of which EU 37,329 6,191 11,581 14,208 21,754 4,282 9,266 19,130 22,013 4,357 3,884 7,842 11,606 9,805 6,352 12,167 19,493 7,003 4,846 10,551 17,691 5,834 3,349 8,391 9,554 4,473 1,417 5,086 18,710 5,567 — 37 6,423 69,309 54,432 38,096 39,930 41,893 35,265 20,530 30,663 1,827 25,289 2,838 15,321 989 10,204 3,021 6,243 2,437 8,877 2,506 12,439 1,346 3,844 1,331 8,843 Q1 Q2 Q3 Q4 — 48% 13% — 58% — 26% — 40% 33% — 65% —19% 36% — 64% — 56% — 35% —12% —19% — 57% 3% — 64% — 35% — 46% 36% — 62% 61% — 43% —101% — 47% — 23% — 56% 42% 1) 2001 adjusted to reflect parts of Phones transferred to Sony Ericsson Mobile Communications. E R I C S S O N — A N N U A L R E P O R T 2 0 0 2 69 S E G M E N T S A N D A R E A S NET SALES BY MARKET AREA BY QUARTER Year to date (SEK million) 0103 0106 0109 0112 0203 0206 0209 0212 20011) 2002 Europe, Middle East and Africa2) North America Latin America Asia Pacific Total 2) Of which Sweden 2) Of which EU Change Europe, Middle East and Africa2) North America Latin America Asia Pacific Total 2) Of which Sweden 2) Of which EU 23,357 5,528 7,707 13,168 48,575 11,077 16,716 28,927 69,642 16,984 22,408 43,265 97,133 25,190 32,096 56,418 17,606 4,072 4,311 10,977 36,666 10,135 7,416 21,294 53,438 16,516 10,282 28,788 74,124 23,068 12,676 35,905 49,760 105,295 152,299 210,837 36,966 75,511 109,024 145,773 1,492 14,901 3,135 30,568 4,397 43,626 6,656 59,206 1,974 10,867 4,559 21,935 6,235 31,128 8,303 43,396 0203 — 25% — 26% — 44% —17% — 26% 32% — 27% 0206 — 25% — 9% — 56% — 26% — 28% 45% — 28% 0209 — 23% — 3% — 54% — 33% — 28% 42% — 29% 0212 — 24% — 8% — 61% — 36% — 31% 25% — 27% Isolated quarters (SEK million) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 20011) 2002 Europe, Middle East and Africa2) North America Latin America Asia Pacific Total 2) Of which Sweden 2) Of which EU Change Europe, Middle East and Africa2) North America Latin America Asia Pacific Total 2) Of which Sweden 2) Of which EU 23,357 5,528 7,707 13,168 25,218 5,549 9,009 15,759 21,067 5,907 5,692 14,338 27,491 8,206 9,688 13,153 17,606 4,072 4,311 10,977 19,060 6,063 3,105 10,317 16,772 6,381 2,866 7,494 20,686 6,552 2,394 7,117 49,760 55,535 47,004 58,538 36,966 38,545 33,513 36,749 1,492 14,901 1,643 15,667 1,262 13,058 2,259 15,580 1,974 10,867 2,585 11,068 1,676 9,193 2,068 12,268 Q1 Q2 — 25% — 26% — 44% —17% — 26% 32% — 27% — 24% 9% — 66% — 35% — 31% 57% — 29% Q3 — 20% 8% — 50% — 48% — 29% 33% — 30% Q4 — 25% — 20% —75% — 46% — 37% — 8% — 21% 1) 2001 adjusted to reflect parts of Phones transferred to Sony Ericsson Mobile Communications. 70 E R I C S S O N — A N N U A L R E P O R T 2 0 0 2 EXTERNAL ORDERS BOOKED BY MARKET AREA AND SEGMENT Year to date 2002 (SEK million) Europe, Middle East & Africa North America Latin America Asia Pacific Total Share of Total EXTERNAL NET SALES BY MARKET AREA AND SEGMENT Year to date 2002 (SEK million) Europe, Middle East & Africa North America Latin America Asia Pacific Total Share of Total TOP 10 MARKETS IN ORDERS AND SALES S E G M E N T S A N D A R E A S Systems Other Total 54,510 22,164 8,919 28,583 10,938 713 656 1,868 65,448 22,877 9,575 30,451 Share of Total 51% 18% 7% 24% 114,176 14,175 128,351 100% 89% 11% 100% Systems Other Total 62,724 22,444 11,803 33,871 11,400 624 873 2,034 74,124 23,068 12,676 35,905 Share of Total 51% 16% 9% 24% 130,842 14,931 145,773 100% 90% 10% 100% Year to date Orders United States China Italy Saudi Arabia Sweden United Kingdom Spain Japan India Russia Share of total orders 17% 8% 8% 6% 6% 4% 3% 3% 3% 2% Sales United States China Italy Sweden Japan United Kingdom Saudi Arabia Spain Mexico India Share of total sales 15% 9% 7% 6% 4% 4% 4% 3% 3% 2% NUMBER OF EMPLOYEES BY SEGMENT BY QUARTER Year to date (SEK million) 0103 0106 0109 0112 0203 0206 0209 0212 20011) 2002 Systems Phones Other operations1) Unallocated Total 75,897 12,299 18,623 440 77,448 5,675 16,284 414 72,111 4,277 16,167 394 68,525 — 16,286 387 66,301 — 15,315 396 61,392 — 14,383 446 57,808 — 13,509 406 51,390 — 12,846 385 107,259 99,821 92,949 85,198 82,012 76,221 71,723 64,621 Total excluding Phones 94,960 94,146 88,672 85,198 82,012 76,221 71,723 64,621 Change excluding Phones Systems Other operations Unallocated Total 0203 0206 0209 —13% —18% —10% —14% — 21% —12% 8% —19% — 20% —16% 3% —19% 0212 — 25% — 21% —1% — 24% 1) Includes Bluetooth, Mobile Platforms and selected parts of Phones not transferred to Sony Ericsson Mobile Communications. E R I C S S O N — A N N U A L R E P O R T 2 0 0 2 71 D I R E C T O R S , S E N I O R M A N A G E M E N T A N D A U D I T O R S D I R E C T O R S , S E N I O R M A N A G E M E N T A N D A U D I T O R S Directors, Senior Management and Auditors Board of Directors Our Board of Directors consists of eight directors elected by the shareholders at the Annual General Meeting on March 27, 2002, and three employee representatives, each with a deputy, appointed by the respective trade union. We have three Board of Directors committees and, in addition, a nomination committee comprised of the Chairman of the Board of Directors and representatives of our primary shareholders. The committees are described below under the heading (cid:210)Board Procedures and Committees(cid:211). The members of our Board, the year of their respective original election, their age, position, and their respective holdings of shares, convertible debentures and options as of December 31, 2002, are as follows: Name Michael Treschow Tom Hedelius1) Marcus Wallenberg1) Peter L. Bonfield Lena Torell Sverker Martin-L(cid:154)f1) Eckhard Pfeiffer Peter Sutherland1) G(cid:154)ran Engstr(cid:154)m Jan Hedlund Per Lindh Monica Bergstr(cid:154)m Christer Binning (cid:129)ke Svenmarck Member since 2002 1991 1996 2002 2002 1993 2000 1996 1994 1994 1995 1998 1994 2000 Age Position B shares (in SEK) 2) Options 3) Convertible debentures 1997/2003 59 63 45 57 57 59 61 56 55 57 46 42 57 60 Chairman Deputy Chairman Deputy Chairman Director Director Director Director Director Employee Representative Employee Representative Employee Representative Deputy Employee Representative Deputy Employee Representative Deputy Employee Representative 770,000 145,232 704,000 — — 52,000 3,040 — 10,275 875 — 407 1,418 — — — — — — — — — 99,120 75,520 — 75,520 145,347 — — — — — — — — — 1,200 — — — — — 1) Mr. Hedelius and Mr. Martin-L(cid:154)f are also directors of AB Industriv(cid:138)rden and Mr. Wallenberg and Mr. Sutherland are also directors of Investor AB. Investor AB and AB Industriv(cid:138)rden are our two largest shareholders, based on voting rights. 2) Conversion rate SEK 41.70. 3) Number of B shares assuming full exercise of options under applicable plan. 72 E R I C S S O N — A N N U A L R E P O R T 2 0 0 2 72 E R I C S S O N — A N N U A L R E P O R T 2 0 0 2 D I R E C T O R S , S E N I O R M A N A G E M E N T A N D A U D I T O R S Michael Treschow, Chairman (since 2002) Chairman of the Board of Directors. Chairman of the Finance and Nomination Committees. Member of the Remuneration Committee. Member of the Board of Directors of Electrolux AB and Atlas Copco AB. Deputy Chairman of the Federation of Swedish Enterprise. Peter Sutherland, Director (since 1996) Chairman of the Remuneration Committee. Honorary Doctor. Chairman of the Board of Directors of Goldman Sachs International and British Petroleum. Member of the Board of Directors of Investor AB, Royal Bank of Scotland Group, and the Foundation of the World Economic Forum. Lena Torell, Director (since 2002) Member of the Remuneration Committee. Doctor of Physics. Professor. President of the Royal Swedish Academy of Science. Member of the Board of Directors of Imego AB, Universeum AB and the European Council of Applied Sciences and Engineering. G(cid:154)ran Engstr(cid:154)m, Director (since 1994) Member of the Finance Committee. Employee representative. Jan Hedlund, Director (since 1994) Member of the Audit Committee. Employee representative. Per Lindh, Director (since 1995) Member of the Remuneration Committee. Employee representative. Monica Bergstr(cid:154)m, Deputy Director (since 1998) Employee representative. Christer Binning, Deputy Director (since 1994) Employee representative. (cid:129)ke Svenmarck, Deputy Director (since 2000) Employee representative. No director currently holds a management position at Ericsson. No director has been elected pursuant to an arrangement or understanding with any major shareholder, customer, supplier or other person. No director has a family relationship with any other director or executive officer. Tom Hedelius, Director (since 1991) Deputy Chairman of the Board of Directors and member of the Finance Committee. Honorary Chairman of Svenska Handelsbanken AB. Honorary Doctor of Economics. Chairman of the Board of Directors of AB Industriv(cid:138)rden, Bergman & Beving AB, Svenska Le Carbone AB and the Foundation of Anders Sandrew. Deputy Chairman of Addtech Lagercrantz Group AB and the Jan Wallander and Tom Hedelius Foundation. Member of the Board of Directors of Volvo AB and Svenska Cellulosa Aktiebolaget SCA. Tom Hedelius has announced that he declined re-election to our Board of Directors as from the Annual General Meeting in 2003. Marcus Wallenberg, Director (since 1996) Deputy Chairman of the Board of Directors and member of the Finance Committee. President and Chief Executive Officer of Investor AB. Deputy Chairman of Saab AB and SE-Banken AB. Member of the Board of Directors of, among others, AstraZeneca PLC, Investor AB, Scania AB, Stora Enso Oy and the Knut and Alice Wallenberg Foundation. Sir Peter L. Bonfield ,CBE, Director (since 2002) Member of the Audit Committee. Member of the Board of Directors of AstraZeneca PLC, Mentor Graphics Inc., and TSMC Ltd. Vice President of the British Quality Foundation. Member of the International Advisory Group of Salomon Smith Barney. Fellow of the Royal Academy of Engineering. Sverker Martin-L(cid:154)f, Director (since 1993) Chairman of the Audit Committee. Chairman of the Board of Directors of Svenska Cellulosa Aktiebolaget, SCA and Skanska AB. Member of the Board of Directors of Boliden AB, Svenska Handelsbanken AB, AB Industriv(cid:138)rden and the Confederation of Swedish Enterprises. Eckhard Pfeiffer, Director (since 2000) Member of the Audit Committee. Chairman of the Board of Directors of Intershop Communications. Member of the Board of Directors of General Motors Corporation, Hughes Electronics Corporation, IFCO Systems, Syntek Capital and Biogen Inc. Member of the Advisory Board of Deutsche Bank. E R I C S S O N — A N N U A L R E P O R T 2 0 0 2 73 D I R E C T O R S , S E N I O R M A N A G E M E N T A N D A U D I T O R S Corporate Management The table below discloses the senior members of our corporate management, the year of appointment to their current position or hire date, as applicable, their age, position and holdings of shares, convertible debentures and options as of December 31, 2002: Name Kurt Hellstr(cid:154)m Sten Fornell Per-Arne Sandstr(cid:154)m Ragnar B(cid:138)ck Mats Dahlin Gerhard Weise Carl Olof Blomqvist Henry St(cid:142)nson Torbj(cid:154)rn Nilsson Britt Reigo Jan Uddenfeldt Appointed year Age Position A shares B shares (in SEK) 1) Options2) Convertible debentures 1997/2003 1999 2000 2001 2000 1998 2001 1999 2002 1998 1988 1998 59 54 55 58 48 55 52 47 50 60 52 President & Chief Executive Officer Executive Vice President & Chief Financial Officer Executive Vice President & Chief Operating Officer Executive Vice President Executive Vice President Executive Vice President Senior Vice President Senior Vice President Senior Vice President Senior Vice President Senior Vice President — — — — — — 6,080 — — — — 45,384 145,347 1,256,040 352,216 — 830,920 105,830 145,347 878,324 49,128 30,941 54,992 9,546 10,000 49,399 12,000 12,570 145,347 — 145,347 — — 145,347 145,347 — 688,236 835,432 686,388 638,816 452,000 820,600 728,224 781,672 1) Number of B shares assuming conversion of debentures at SEK 41.70 per B share. 2) Aggregate number of B shares assuming full exercise of options under applicable plan. Our President, Chief Executive Officer and Executive Vice Presidents are appointed by our Board of Directors. The Chief Executive Officer, the Chief Operating Officer, the Chief Financial Officer, the other Executive Vice Presidents and the Heads of Corporate Functions (including the Chief Financial Officer) comprise the corporate management. All members and the year of appointment are as follows: Kurt Hellstr(cid:154)m President (since July, 1999) and Chief Executive Officer (since January, 2001). Prior to assuming this position, Mr. Hellstr(cid:154)m was the Head of Market Area Asia Pacific. Sten Fornell Executive Vice President and Chief Financial Officer (since January 2000). Head of Corporate Function Finance. Prior to assuming this position, Mr. Fornell was the Chief Financial Officer of Division Mobile Systems. Per-Arne Sandstr(cid:154)m Executive Vice President (since March 2001) and Chief Operating Officer (since September 2001). Prior to assuming this position, Mr. Sandstr(cid:154)m was the Head of Market Area North America. Ragnar B(cid:138)ck Executive Vice President (since March 2000). Head of Market Area Asia Pacific (since November 2001). Prior to assuming this position, Mr. B(cid:138)ck was the Head of Market Area Western Europe. Mats Dahlin Executive Vice President (since October 1998). Head of Market Area Europe, Middle East and Africa (since November 2001). Prior to assuming this position, Mr. Dahlin was the Head of Division Mobile Systems. Gerhard Weise Executive Vice President (since May 2001). Head of Market Area Americas. Prior to assuming this position, Mr. Weise was the Head of Market Area Latin America. Carl Olof Blomqvist Senior Vice President and General Counsel (since May 1999). Corporate Function Legal Affairs. Prior to assuming this position, Mr. Blomqvist was a partner of the Mannheimer Swartling law firm. Henry St(cid:142)nson Senior Vice President (since May 2002). Corporate Function Communications. Prior to assuming this position, Mr. St(cid:142)nson was the Head of SAS Group Communication, SAS AB. Torbj(cid:154)rn Nilsson Senior Vice President (since October 1998). Corporate Function Marketing and Strategic Business Development. Prior to assuming this position, Mr. Nilsson was the Head of Strategic Business Development, Mobile Systems. Britt Reigo Senior Vice President (since January 1988). Corporate Function People and Culture. Prior to assuming this position, Mrs. Reigo was the Director of Inflight Services, SAS AB. 74 E R I C S S O N — A N N U A L R E P O R T 2 0 0 2 D I R E C T O R S , S E N I O R M A N A G E M E N T A N D A U D I T O R S Jan Uddenfeldt Senior Vice President (since October 1998). Corporate Function Technology. Prior to assuming this position, Mr. Uddenfeldt was the Head of Technology and worldwide R&D Operations, Mobile Systems. Carl-Henrik Svanberg As of April 8, 2003, Carl-Henric Svanberg will be appointed President and Chief Executive Officer of Ericsson. Prior to assuming this position, Mr. Svanberg has since 1994 been the President and Chief Executive Officer of the Assa Abloy Group. No member of the corporate management has a family relationship with any Director or corporate management member. No member of corporate management has any principal business activities other than those listed above, and no member of corporate management has been appointed on account of any arrangement or understanding with any major shareholder, customer, supplier or other person. BOARD PRACTICES The Board designates, through a work procedure, how various responsibilities will be distributed among the Board and its committees and between the Board and the President. This work procedure is revised and adopted by the Board at least once a year. The Board has generally authorized each committee to decide on certain issues and may also provide extended authorization to a committee to decide on specific matters. The Audit Committee consists of four directors appointed by the Board. The present members are Sverker Martin-L(cid:154)f, Chairman of the committee, Sir Peter L. Bonfield, Eckhard Pfeiffer and Jan Hedlund. The Audit Committee is primarily responsible for reviewing annual and interim financial statements, overseeing the audit process, including audit fees, resolving matters arising during the course of audits and coordinating internal audit functions. Pursuant to the Board(cid:213)s work procedure, the Audit Committee reviews the audited financial statements with management and the independent auditors, including the conformity with generally accepted accounting principles. The Audit Committee also reviews with management the reasonableness of significant estimates and judgments made in preparing the financial statements, as well as the quality of the disclosures in the financial statements. In addition, the Audit Committee reviews the auditors(cid:213) independence from management and the company, including the impact of non- audit-related services provided to the company. The Finance Committee consists of four directors appointed by the Board. The present members are Michael Treschow, Chairman of the committee, Tom Hedelius, Marcus Wallenberg and G(cid:154)ran Engstr(cid:154)m. The Finance Committee is primarily responsible for handling matters regarding acquisitions and divestments, capital contributions to companies inside and outside the Ericsson group, raising of loans, issuances of guarantees and similar undertakings and approvals of financing support to customers in excess of USD 25 million, as well as continuously monitoring the group(cid:213)s financial risk exposure. The Remuneration Committee consists of four directors appointed by the Board. The present members are Peter Sutherland, Chairman of the committee, Lena Torell, Michael Treschow and Per Lindh. The Remuneration Committee is primarily responsible for reviewing and preparing proposals of salary and other remuneration, including retirement compensation, to the President, Executive Vice Presidents, and other officers reporting directly to the President or the Chief Operating Officer. These proposals are then presented to the Board for resolution. In addition, the committee is responsible for strategies and general guidelines with respect to employee compensation, including incentive plans and retirement compensation. The Nomination Committee consists of Michael Treschow, Chairman of the committee, and the following sharholder representatives: Claes Dahlb(cid:138)ck, Investor, Anders Ek, Robur, Anders Nyr(cid:142)n, Industriv(cid:138)rden and Lars Otterbeck, Alecta. The main task of the committee is to nominate individuals for election to the Board of Directors. The Nomination Committee also prepares proposals concerning directors(cid:213) fees, which are presented at the Annual General Meeting for resolution, and presented in Note 26. The Nomination Committee will propose for resolution by the Annual General Meeting 2003 that the Chairman receives an additional temporary remuneration of SEK 5.5 million for each of the years 2002 and 2003. Auditors Statutory auditors Carl-Eric Bohlin Authorized Public Accountant, PricewaterhouseCoopers Olof Herolf Authorized Public Accountant, PricewaterhouseCoopers Thomas Thiel Authorized Public Accountant Deputy auditors Bo Hjalmarsson Authorized Public Accountant, PricewaterhouseCoopers Jeanette Skoglund Authorized Public Accountant, PricewaterhouseCoopers Stefan Holmstr(cid:154)m Authorized Public Accountant E R I C S S O N — A N N U A L R E P O R T 2 0 0 2 75 F I V E - Y E A R S U M M A R Y Five-year Summary SEK million Net sales Operating income Financial net Income before taxes Net income Year-end position Total assets Net Assets Working capital Capital employed Tangible assets Stockholders(cid:213) equity Minority interests Interest-bearing provisions and liabilities Other information Earnings per share, diluted, SEK2) 4) 6) — in accordance with US GAAP, diluted2) 4) 6) Cash dividends per share, SEK2) 4) Stockholders(cid:213) equity (SEK per share) Number of shares (in millions) — outstanding, at end of period — average, basic2) 4) — average, diluted2) 4) Additions to tangible assets Depreciation on tangible assets R&D and other technical expenses3) — as percentage of net sales3) Ratios Return on equity Retrun on capital employed Equity ratio Debt-equity ratio Current ratio Capital turnover Inventory turnover Accounts receivable turnover Return on sales Payment readiness — as percentage of net sales Net debt Statistical data, year-end Orders booked, net Backlog of orders Number of employees — Worldwide — Of which in Sweden 2002 20015) 20005) 19995) 19985) 145,773 — 21,299 —1,536 — 23,323 —19,013 208,267 76,076 73,694 136,693 9,964 73,607 2,469 60,617 —1.51 —1.58 01) 4.65 15,820 12,573 12,684 2,738 5,514 33,455 23.0% — 26.7% —11.4% 36.5% 0.8 1.7 1.0 5.1 3.1 —11.7% 67,152 46.1% — 5,597 128,351 63,228 64,621 30,421 231,839 — 27,380 —1,774 — 30,309 — 21,264 257,521 72,240 104,998 162,119 16,641 68,587 3,653 89,879 —1.94 — 2.27 0 8.67 7,909 10,950 11,072 8,726 6,486 46,640 20.1% — 26.5% —14.3% 28.1% 1.2 1.7 1.5 4.8 3.4 — 9.7% 60,239 26.0% 20,955 221,477 87,414 85,198 37,328 273,569 30,828 —1,189 28,692 21,018 263,282 94,587 97,261 154,014 23,104 91,686 2,901 59,427 1.91 2.12 0.36 11.59 7,909 10,896 11,100 12,643 10,040 41,921 15.3% 26.1% 24.8% 35.9% 0.6 1.6 2.0 5.0 3.8 12.6% 23,567 8.6% 23,657 215,403 17,469 — 557 16,386 12,130 211,412 71,492 70,426 124,393 24,974 69,176 2,316 52,901 1.11 1.39 0.36 8.84 7,829 10,824 11,060 9,227 6,548 33,123 15.4% 18.3% 18.1% 33.8% 0.7 1.6 1.9 4.8 3.5 9.3% 24,389 11.3% 22,932 184,438 19,163 —127 18,210 13,041 172,658 65,295 53,434 96,934 22,746 63,112 2,183 31,639 1.20 1.42 0.36 8.09 7,805 10,801 11,060 9,016 5,567 28,027 15.2% 22.5% 24.1% 37.8% 0.5 1.6 2.0 4.2 3.6 11.8% 11,703 6.3% 12,949 292,344 101,215 105,129 42,431 223,828 83,976 103,290 44,040 187,415 78,990 103,667 44,979 1) For 2002, proposed by the Board of Directors. 2) 1998—1999 adjusted for 4-for-1 stock split. 3) 1998—2000 adjusted to exclude research and development costs regarding customer orders included in cost of sales. 4) 1998—2001 adjusted for stock dividend element of stock issue. 5) Restated for changed accounting principles in Sweden 2002 regarding consolidation of companies according to new RR1. 6) Potential ordinary shares are not considered when their conversion to ordinary shares would increase earnings per share. 76 E R I C S S O N — A N N U A L R E P O R T 2 0 0 2 F I V E - Y E A R S U M M A R Y Working capital Current assets less current non-interest-bearing provisions and liabilities. Capital employed Capital employed is defined as total assets less non-interest- 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 29 to the Financial Statements. Equity ratio Defined as the total of stockholders(cid:213) 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(cid:213) equity and minority interest in equity of consolidated subsidiaries. Current ratio Current assets divided by the sum of current provisions and liabilities. Cash dividends per share Defined as dividends paid divided by average number of shares, basic. Capital turnover Net sales divided by average capital employed. Stockholders(cid:213) equity (SEK per share) Defined as Stockholders(cid:213) equity divided by the number of shares outstanding. Return on equity Defined as net income expressed as a percentage of average adjusted stockholders(cid:213) equity (based on the amounts at January 1 and December 31). 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). Inventory turnover Cost of sales divided by average inventory. Accounts receivable turnover Net sales divided by average accounts receivable. Return on sales Operating income plus Financial income divided by net sales. Payment readiness Defined as cash and short-term investments less short-term borrowings plus long-term unused credit commitments. Payment readiness is also shown as a percentage of net sales. Net debt Defined as total interest bearing liabilities less cash and short- term investments. E R I C S S O N — A N N U A L R E P O R T 2 0 0 2 77 R I S K F A C T O R S Risk Factors You should carefully consider all the information in this Annual Report and, in particular, the risks outlined below. RISKS ASSOCIATED WITH OUR BUSINESS An extended downturn in the telecommunications industry will continue to negatively impact our business and results of operations. We operate globally in the telecommunications markets and are subject to conditions particular to the markets for telecommunications infrastructure, equipment and services. As 2001, 2002 was a challenging year for the telecommunications industry. We reported a SEK 19.0 billion net loss in 2002. The beginning of 2003 has shown no signs of improvement and the near term market outlook still remains uncertain. The development in the telecommunications industry effects our ability to achieve our financial goal of returning to profit at some point in 2003. Currently, the timing and strength of recovery of the markets in which we operate is highly unpredictable. If the telecommunications markets continue to show slow or negative growth, our business will continue to be negatively impacted. We are subject to the impact of economic conditions in areas in which we operate. Current conditions in many of the large economies in which we operate and the global economy remain very uncertain. As a result, it is difficult to estimate the global and regional economic development. Currently our business is negatively affected by the unfavorable conditions in Latin America. The future direction of the overall local and global economies, including changes in fiscal, monetary and regulatory policies worldwide may have a significant impact on our overall performance. Many of our customers have reduced and are continuing to reduce capital expenditure and, as a result, demand for our systems and network roll-out services have declined and may continue to decline. Many of our current and potential customers are network operators with high levels of indebtedness and, in some cases, emerging or weak revenue streams. Adverse economic conditions, network over-capacity due to excess build-out, lack of funding for telecom development and overspending on license fees have forced network operators to undertake restructuring and cost-cutting initiatives. In light of market conditions, many of our customers delayed delivery of orders previously placed and implemented drastic reductions in capital expenditure in 2002 as compared to 2001 and even more so in comparison with 2000, and may continue to further reduce capital expenditure. As a result, demand for our systems and network roll-out services has declined. If the demand for our systems and services weakens further or remains weak on account of the financial condition of our customers, market and industry conditions or otherwise, this is likely to have a material adverse effect on our business, results of operations and financial condition. We may experience greater variability in our operating results than in the past and may have increased difficulty in accurately predicting future operating results. Our business is subject to a wide variety of factors that impact our quarterly and annual operating results from period to period. The current economic slowdown in certain regions and uncertainties in the telecommunications market may continue to negatively impact the timing of network capacity build- outs, including the introduction of new technologies such as 3G. As a result, our operating results may fluctuate significantly from period to period and possibly more than they have historically. In addition, uncertainties arising from these factors, in particular during difficult economic conditions, make preparing estimates of our future operating results even more difficult than usual and may lead us to revise our estimates and/or strategies more frequently than in the past. As a result, any of these factors could have a material adverse impact on our operations such that the results of operations for any period will not necessarily be indicative of results to be expected in future periods. We may be adversely affected by the significant changes that we expect in the wireless telecommunications industry. In particular, the 3G technologies, WCDMA, EDGE and CDMA2000, may not become commercially successful, which could be detrimental to our competitive and financial position. The wireless telecommunications industry is undergoing significant changes. These include the continuation of digital upgrades in existing analog wireless systems, evolving industry standards, ongoing improvements in the capacity and quality of digital technology, the integration of wireless and wireline services, shorter development cycles for new services, evolution to 3G standards and changes in end-user needs and preferences. In general, this causes uncertainty over future demand for our systems, products and services and the prices that we will be able to charge for these systems, products and services. A selected number of service providers have introduced new 3G services and serveral others have announced that they intend to introduce 3G services in the future. We expect that 3G services will combine the attributes of faster speed, greater data capability, better portability and greater functionality. WCDMA is a 3G technology developed by us and others, which enables wideband digital radio communications. WCDMA has been 78 E R I C S S O N — A N N U A L R E P O R T 2 0 0 2 selected for the third generation of mobile telephone systems in Europe, Japan and, to a lesser extent, the United States and other markets. EDGE and CDMA2000 are technologies developed to increase the capacity of and transmission speed of existing 2G networks to 3G standards. However, there are competing technological standards and several options within each standard, and there could be vendor- proprietary variations and rapid technological innovation in connection with 3G roll-outs in various locations around the world. Moreover, other technologies, such as wireless local area networks, could provide additional competition for some services. If any or all of these alternative 3G technologies were to become commercially successful, we may not be able to shift our technology focus quickly or efficiently enough to successfully compete. Technological changes can also affect the price we are able to obtain for systems and services. Accordingly, there can be no assurances that technological changes will not materially adversely affect us. We engage in customer finance, which exposes us to certain credit and other risks regarding our customers. Some of these customers do not yet have established revenue streams. For a discussion of our customer finance arrangements, see (cid:210)Treasury and Customer Finance — Financial Risk Management, Credit Risk(cid:211). As reflected in that section, our customer finance arrangements make us vulnerable to adverse changes in our customers(cid:213) businesses and expose us to credit risks. The risks may be significant, particularly in relation to network operators with limited experience or no proven track record. While we evaluate our customer credits on a regular basis, defaults on our customer financing could occur for reasons beyond our control and could result in restructuring of the financing arrangements or credit losses. Such an event could have a material adverse effect on our business, results of operations or financial condition. Failure to successfully implement our cost reduction measures may adversely affect our financial results. During 2002, we announced the implementation of significant further cost reduction measures in connection with our first quarter results. Together with the savings under the (cid:210)Efficiency Program(cid:211), adopted in 2001, we expect all these measures to have the effect of decreasing our annual level of operating expenses by approximately SEK 50 billion, as compared to the beginning of 2001, when fully implemented by the end of 2003. These anticipated cost savings are based on our estimates, however, and may not materialize. In addition, our cost reduction measures are based on current conditions and do not take into effect future cost increases that may result from changes in our industry or operations, including new business developments, wage and price increases or other factors. Our failure to successfully implement these planned cost-reduction R I S K F A C T O R S measures or the potential that these efforts may not generate the level of cost savings we expect going forward, could negatively impact our financial results as well as our ongoing operations. Our financial instruments contain rating triggers, financial ratios and other covenants that may affect our access to and cost of funds. For a discussion of debt facilities that are impacted by changes in our credit rating or our compliance with financial ratios or other covenants see (cid:210)Treasury and Customer Finance — Financial Risk Management, Funding and Liquidity Risk(cid:211). As reflected in that section, our long-term credit rating was downgraded several times during 2002, thereby limiting our access to funding and increasing our funding costs. Our current long-term credit rating, February 2003, is B1 (Moody(cid:213)s) and BB (Standard & Poor(cid:213)s). If we are unable to avoid further downgrading or comply with these financial ratio or other covenants, we may need to repay or refinance the related debt and/or other debt which contains cross-default provisions. We cannot assure you that we in such a situation would be able to refinance our indebtedness or obtain additional funding. Our access to short term funding has decreased and may continue to decrease or become more expensive as a result of or operational and financial conditions and market conditions. For a discussion of our access to short term funding see (cid:210)Treasury and Customer Finance — Financial Risk Management, Funding and Liquidity Risk(cid:211). Our commercial paper and other short term debt is currently rated B (Standard & Poor(cid:213)s) and Not Prime (Moody(cid:213)s). Our credit rating and the number of large commercial paper issuers whose recent credit downgrades have placed them in this market may restrict our access to short-term credit. At the end of 2002, we had no outstanding commercial paper and we cannot assure you that we will have access to the commercial paper market in the future. Our business has substantial cash requirements and we may require additional sources of funds if our current sources are unavailable or insufficient to satisfy these requirements, and we cannot assure you that these additional sources of funds will be available or available on reasonable terms. We have substantial cash requirements in connection with our operations, research and development, capital expenditure, cost reduction measures, customer financing programs and debt service obligations. If the cash we generate from our operations or that we can access under our credit facilities or from other sources is not available when needed or is insufficient to satisfy our requirements, we may require additional sources of funds. We cannot assure you that any required additional sources of funds would be available or available on reasonable terms, E R I C S S O N — A N N U A L R E P O R T 2 0 0 2 79 R I S K F A C T O R S particularly in light of our existing debt levels and credit ratings. If we do not generate sufficient amounts of capital to support our operations, service our debt, continue our research and development and customer financing programs or we do not generate sufficient amounts of capital at the times and on the terms required by us, our business will likely be adversely affected. Our A shareholders have voting control over the company. Under our current capital structure, each A share has a thousand times the voting power of each B share. Accordingly, as of December 31, 2002, our A shareholders held 4.1 percent of our capital stock and 97.7 percent of our voting rights. Of our two largest shareholders, based on voting rights, Investor AB held 5.3 percent of our capital stock and 38.3 percent of our voting rights and AB Industriv(cid:138)rden held 2.5 percent of our capital stock and 27.7 percent of our voting rights as of December 31, 2002. As a result, our A shareholders, and in particular Investor AB and AB Industriv(cid:138)rden, have the ability to exert significant influence over certain actions requiring shareholder approval, including the election of directors and appointment of officers, and may have the ability to influence our policy. As such, decisions made by Investor AB or AB Industriv(cid:138)rden may influence our business, results of operations and financial condition. The telecommunications market is undergoing consolidation, which increases our dependence on key customers. Many significant participants in the telecommunications market are merging and consolidating as a result of competitive pressures, and we expect this trend to continue. This consolidation process will likely decrease the number of potential significant customers for our systems and services. For the year ended December 2002, our ten largest customers accounted for almost 50 percent of our net sales and our 20 largest customers accounted for approximately 75 percent of our net sales. Fewer significant customers will increase our reliance on key customers and, due to the increased size of these companies, may negatively impact our bargaining position and profit margins. The loss of, or a reduced role with, a key customer due to industry consolidation could negatively impact our business, results of operations and financial condition. We are dependent on developing new products, which are complex and may not be successful in the market. Product life cycles in our industry can be short and therefore we expend considerable resources in product development and are actively engaged in designing new products and solutions and updating our existing products and solutions. Introducing new products requires significant management time and a high level of financial and other commitments to research and development and may not always result in success. Many of our products incorporate advanced technologies, such as 3G technologies, that are untested or are undergoing testing. Our development of new products may also require us to license third-party technologies and successfully integrate such technologies with our products, which may add to the already large cost of bringing a new product to market. We are also actively engaged in the development of technology standards, such as WCDMA, EDGE, CDMA2000 and Bluetooth, which we are incorporating into our products and systems. In order to be successful, those standards must be accepted by relevant standardization bodies and by the industry as a whole. Our sales and earnings may suffer if we invest in developing and marketing technologies and technology standards that do not function as expected, are not adopted in the industry or are not accepted in the marketplace within the timeframe we expect, or at all. We operate in the highly competitive telecommunications markets and our profitability will be affected if we are not able to compete effectively. The markets for our products are highly competitive in terms of pricing, product and service quality, the timing of development and introduction of new products, customer service and terms of financing. We face intense competition from significant competitors. Our competitors may implement new technologies before we do, allowing them to offer more attractively priced or enhanced products, services or solutions than we provide. Some of our competitors may have greater resources in certain business segments or geographic markets. We may also encounter increased competition from new market entrants, alternative technologies or alternative telecommunications platforms. Our operating results depend to a significant extent on our ability to compete in this market environment, in particular on our ability to adapt to changes in the markets to introduce new products to the market and to reduce the cost of new and existing products. 80 E R I C S S O N — A N N U A L R E P O R T 2 0 0 2 We have certain long-term contracts, which expose us to risks of cost overruns and extended payment terms. We currently have certain long-term contracts under which the prices are reduced during the life of the contract, according to a pre-negotiated schedule. These long-term contracts are typically awarded on a competitive bidding basis and the profit margins on these contracts may vary from the original estimates as a result of changes in estimated costs, productivity, specifications or timing. In addition, these contracts frequently include extended payment terms, which will require us to recover costs incurred in performing these contracts over the term of the contract. These contracts generally also provide for penalties and termination rights in the event of our failure to deliver on time or if our products do not perform. Should any of these contracts become unprofitable or be terminated due to any or several of these reasons, our operating results will be negatively impacted. If our outside suppliers fail to deliver satisfactory components and manufacturing services on time, our financial results could be negatively impacted. We are dependent on our suppliers to obtain timely and adequate delivery of components and manufacturing services. As part of our current business strategy, we have outsourced substantially all of our mass production manufacturing. If we are unable to identify manufacturers who are willing to contract with us on competitive terms and devote adequate resources to fulfill their obligations to us, or if we do not properly manage these relationships, our customer relationships, reputation or competitiveness may suffer. We have experienced component shortages in the past that have adversely affected our operations. Although we work closely with our suppliers to avoid shortages and to arrange for alternative sources of supply, we cannot assure you that we will not experience component shortages in the future. We also rely on a limited number of suppliers for a number of our components, as well as a core group of electronics manufacturing services (EMS) companies for the manufacture of our products, which increases our dependence on these suppliers. A reduction or interruption in component supply, a significant increase in the price of one or more components or manufacturing services or constraints on our suppliers(cid:213) capacity during periods of significant demand could have a material adverse effect on our business, results of operations or financial condition. R I S K F A C T O R S Liability claims related to and public perception of the potential health risks associated with electromagnetic fields may negatively impact our business. We are subject to claims that mobile handsets and other telecommunications devices that generate electromagnetic fields expose users to health risks. At present, a substantial number of scientific studies conducted by various independent research bodies have indicated that electromagnetic fields, at levels within the limits prescribed by public health authority safety standards and recommendations, cause no adverse effect to human health. However, any perceived risk or new scientific findings of adverse health effects of mobile communication devices and equipment could adversely affect us through a reduction in sales. Although we comply with all current safety standards and recommendations regarding electromagnetic fields, we cannot assure you that we will not become the subject of product liability claims or be held liable for such claims or be required to comply with future regulatory changes that may have an adverse effect on our business. Our business and results of operations will be harmed if we are found to have infringed intellectual property rights of third parties, or if we are unable to protect our intellectual property rights from challenges or unauthorized third party use. Like other companies operating in the telecommunications industry, because our products comprise complex technology, we experience litigation regarding patent and other intellectual property rights. Third parties have asserted, and in the future may assert, claims against us alleging that we infringe their intellectual property rights. If we do not succeed in any such litigation, we could be required to expend significant resources to pay damages, develop non-infringing products/technology or to obtain licenses to the products/technology, which is the subject of such litigation. However, we cannot be certain that any such licenses, if available at all, will be available to us on commercially reasonable terms. Also, defending these claims may be expensive and divert the efforts of our management and technical personnel. In particular, we are currently party to two unrelated lawsuits where plaintiffs allege that we have infringed one or more of their U.S. patents through our sales of certain GSM and TDMA products in the United States. While we are confident that we will prevail in each of these two lawsuits, there can be no assurances thereof. If we do not prevail, we may have to expend significant resources to pay damages and we could be enjoined in the United States from selling any products found to infringe unless we either modify those products or obtain licenses to the patents found to be valid and infringed. In addition, third parties may attempt to appropriate our confidential information and proprietary technologies and processes used in our business, which we may be unable to prevent. Existing laws of some countries in which we conduct business may offer only limited protection of our intellectual E R I C S S O N — A N N U A L R E P O R T 2 0 0 2 81 well as the orders and services network operators place with or require from suppliers of network systems and services such as us. Similarly, tariff regulation that adversely affects the pricing of new services could affect the sales of our systems and services. Environmental, health and safety and privacy regulations may increase costs and restrict operations of telecommunications companies and network operators. The indirect impact of these changes in regulation could affect our business adversely even though the specific regulations do not directly apply to us or our products. We are subject to regulatory, foreign exchange and other risks associated with international operations. We conduct business in over 140 countries around the world with the majority of our sales originating from countries in Western Europe and the Asia Pacific region. Changes in regulatory requirements, tariffs and other trade barriers, price or exchange controls or other governmental policies in the countries in which we conduct business could limit operations and make the repatriation of profits difficult. In addition, the uncertainty of the legal environment in some regions could limit our ability to enforce our rights. Our results could also be materially adversely affected by weak economic conditions in countries in which we do significant business as well as by changes in foreign currency exchange rates, which can introduce significant volatility to our rates of growth. We also have extensive operations in emerging markets such as China, Latin America, the Middle East and Africa which involves certain risks, including volatility in gross domestic product, civil disturbances, economic and governmental instability, nationalization of private assets and the imposition of exchange controls. Please see (cid:210)Treasury and Customer Finance — Financial Risk Management, Market Risk(cid:211). We are dependent upon hiring and retaining highly qualified management and other employees. Our future success depends in part on our continued ability to hire, develop, motivate and retain engineers and other qualified personnel needed to develop successful new products, support our existing product range and provide services to our customers. There can be no assurance that we will continue to be successful in attracting and retaining highly qualified employees in the future, especially in light of our prior and planned headcount reductions. R I S K F A C T O R S property rights, if at all. We rely upon a combination of trade secrets, confidentiality policies, nondisclosure and other contractual arrangements, and patent, copyright and trademark laws to protect our intellectual property rights; however, the steps we take in this regard may not be adequate to prevent or deter infringement or other misappropriation of our intellectual property, and we may not be able to detect unauthorized use or take appropriate and timely steps to enforce our intellectual property rights. If our mobile handset joint venture arrangement with Sony or other arrangements with strategic partners do not progress as planned, our business could be negatively impacted. In 2001, we formed Sony Ericsson Mobile Communications, a joint venture with Sony Corporation for the development, design, sales and distribution of mobile handsets, to which we transferred substantially all of our handset business. If this joint venture is unsuccessful on account of unsuccessful or delayed product development, limited market acceptance of new products or for any other reason, we may not be able to compete successfully or at all in the mobile handset market. For example, the delayed launch of the joint venture(cid:213)s R600 handset had a negative impact on its second quarter 2002 results. We have also entered into other strategic development arrangements with third parties, typically involving the contribution by each party of various resources including technology, research and personnel, and we may continue to do so in the future. If these arrangements do not develop as expected, whether as a result of having incorrectly assessed our needs or the capabilities of our strategic partners, our ability to work with joint venture partners or otherwise, our ability to develop new products and solutions may be constrained and this may harm our competitive position in the market. Additionally, charges relating to our portion of any losses from, or commitments to contribute additional capital to, joint ventures may adversely affect our financial condition or results of operations. Changes to the regulatory environment for telecommunications systems and services could negatively impact our business. Our industry is heavily regulated, and both our customers and we may be affected by changes in regulation of telecommunications systems and services. For example, changes in regulation that impose more stringent, time-consuming or costly planning, zoning or building approval requirements regarding the construction of base stations and other network infrastructure could adversely affect the timing and costs of new network construction or expansion and the commercial launch and ultimate commercial success of these networks. Expensive government license fees can cause network operators to incur substantial indebtedness and fundamentally affect operators(cid:213) businesses, profitability and financial condition, as 82 E R I C S S O N — A N N U A L R E P O R T 2 0 0 2 R I S K F A C T O R S Currency fluctuations may adversely affect the trading prices of our B shares and ADSs and the value of any distributions we make thereon. Because our B shares are quoted in domestic currencies on local exchanges and the ADSs are quoted in USD, fluctuations in exchange rates between the SEK and currencies in which the B shares or ADSs are quoted may affect the value of your investment. In addition, because we pay cash dividends in Swedish kronor, fluctuations in exchange rates may affect the value of distributions if your arrangements with your bank, broker or depositary, in the case of ADSs, call for distributions to you in local currencies. Please refer to (cid:210)Treasury and Customer Finance — Financial Risk Management, Market Risk(cid:211). RISKS ASSOCIATED WITH OUR SHARES Our share price has been and may continue to be volatile. Our share price has been volatile due in part to the high volatility in the securities markets generally, and in telecommunications and technology companies(cid:213) shares in particular, as well as developments from quarter to quarter which impact our financial results. Factors other than our financial results that may affect our share price include but are not limited to: ¥ market expectations of the performance and capital spending plans of network operators; ¥ the level of business activity or perceived growth in the market for telecommunications services in general; ¥ investor perception of, as well as the actual performance of, other telecommunications and technology companies; ¥ a downgrade or rumored downgrade of our credit ratings; ¥ announcements by our key customers or announcements concerning financial difficulties for customers for whom we have provided financing or with whom we have entered into material contracts; ¥ announcements by our key competitors concerning the award of large supply agreements or contracts for network roll-out; ¥ potential litigation involving ourselves or the industries in which we operate; ¥ announcements concerning the bankruptcy or other similar reorganization proceedings involving, or any investigations into the accounting practices of, other telecommunications companies; ¥ technical problems, in particular those relating to the introduction and viability of 3G; ¥ a change in end-user sentiment or their adverse view of newly introduced technology or services; ¥ announcements concerning the relative success of or timetables for 3G mobile networks, systems and services; and ¥ general market volatility. E R I C S S O N — A N N U A L R E P O R T 2 0 0 2 83 S H A R E I N F O R M A T I O N Share Information Stock exchange trading Ericsson(cid:213)s Series A and Series B shares are traded on Stockholm Stock Exchange (OM Stockholmsb(cid:154)rsen), and the Series B shares are also traded on the exchanges in D(cid:159)sseldorf, Frankfurt, Hamburg and London. On October 18, 2002, the Ericsson Board authorized the President and CEO to apply for and execute de-listing of the Ericsson B-share from Euronext (Paris), the German Stock Exchanges (D(cid:159)sseldorf, Frankfurt and Hamburg) and the (cid:210)Swiss Exchange(cid:211). On December 20, 2002, we de-listed from the (cid:210)Swiss Exchange(cid:211), and on February 17, 2003, we de-listed from Euronext. De-listing also started in Germany. In the United States, the B shares are traded on Nasdaq in the form of American Depositary Shares (ADS) evidenced by American Depositary Receipts (ADR). On October 18, 2002, the Board of Directors authorized a 1:10 change in the ratio of its American Depositary Shares (ADS) as they relate to its Series B-shares. This means that each ADR represents 10 Series B shares. The change was made in order to comply with the listing requirements of the Nasdaq National Market and it became effective on October 23, 2002. More than 54 billion shares were traded in 2002, of which about 70 (59) percent were traded on OM Stockholmsb(cid:154)rsen, 9 (14) percent on Nasdaq, and 21 (27) percent on the London Stock Exchange. As last year, trading on other exchanges amounted to about 1 percent of the total. Share price trend The total market value of our shares decreased by about 79 percent in 2002 to approximately SEK to 98 billion. The Stockholmsb(cid:154)rsen OMX index decreased by 42 percent, the NASDAQ telecom index decreased by 54 percent and the NASDAQ composite index decreased by 32 percent in 2002. The Ericsson share decreased almost 88 percent on Nasdaq. Share capital As of December 31, 2002, Ericsson(cid:213)s share capital consisted of SEK 15,974,258,678 (8,065,504,007) represented by 15,974,258,678 shares. The par value of each share is SEK 1.00. As of December 31, 2002 the shares were divided into 656,218,640 Series A shares, each carrying one vote, and 15,318,040,038 Series B shares, each carrying one-thousandth of a vote. During the year 2002, 7,908,754,111 new Series B shares were issued. During the period January 1 to January 23, 2003 no additional conversions related to the convertible debentures from 1997 were made. Share trend, Stockholmsb(cid:154)rsen 200(cid:13) 150(cid:13) 100(cid:13) 50(cid:13) 1998(cid:13) 1999(cid:13) 2000(cid:13) 2001(cid:13) 2002(cid:13) OMX index B share (SEK)(cid:13) 84 E R I C S S O N — A N N U A L R E P O R T 2 0 0 2 (cid:13) (cid:13) (cid:13) (cid:13) S H A R E I N F O R M A T I O N S H A R E I N F O R M A T I O N Share data Earnings per share, diluted (SEK)2) 3) P/E ratio, B shares Dividend (SEK)1) Share prices on Stockholmsb(cid:154)rsen (SEK) A at last day of trading B at last day of trading B high for year B low for year 1) For 2002 as proposed by the Board of Directors 2) 1998—1999 adjusted for 4-for-1 stock split 3) 1998—2001 adjusted for stock dividend element of stock issue Changes in capital stock 1998—2002 January 1 Stock dividend 1998 1998 1998 Conversions 1999 Conversions Stock dividend 2000 2000 Split 2000 Conversions 2001 Conversions 2001 New issue 2002 Conversions 2002 Stock issue 2002 December 31 2002 —1.51 — 0 8.60 6.10 44.78 2.96 2001 —1.49 — 0 42.25 41.53 88.11 23.18 2000 1.91 40 0.36 88.17 78.00 166.83 72.94 1999 1.11 89 0.36 104.00 98.94 103.28 31.78 1998 1.20 29 0.36 37.56 34.67 48.39 21.67 1:1 4:1 Number of shares Capital stock 974,496,059 975,097,150 1,759,181 5,786,131 — 5,883,316,821 69,880,270 168,395 155,000,000 560 7,908,754,111 15,974,258,678 2,436,240,148 2,437,742,875 4,397,952 14,465,328 2,941,658,410 — 75,830,899 168,395 155,000,000 560 7,908,754,111 15,974,258,678 E R I C S S O N — A N N U A L R E P O R T 2 0 0 2 85 S H A R E I N F O R M A T I O N Shareholders As of Jan 31, 2003 we had 975,654 number of shareholders registered at VPC (the Swedish Securities Register Center). According to information provided by Citibank, there were 151,811,927 ADSs outstanding as of January 31, 2003 and 4,894 registered holders of such ADSs. A significant number of the ADSs are held of record by broker nominees. The majority of ADRs are held at the beneficial shareholder level (i.e. banks, brokers and/or nominee accounts). As of January 31, 2003, this level is represented by over 377,000 accounts. According to information known to us, approximately 78 (85) percent of our A and B shares at year-end 2002, were owned by Swedish and international institutions. Sweden United States United Kingdom Luxembourg Switzerland Belgium Germany Other countries Year end, 2002 Year end, 2001 52% 23.8% 3.3% 3.3% 2.0% 1.3% 1.1% 13.2% 52% 25.4% 4.7% 4.5% 3.3% 1.6% 3.0% 7.1% The following table sets forth as of December 31, 2002, share information with respect to our largest shareholders registered at VPC the Swedish Securities Register Center, known by us, ranked by percentage of voting rights: Largest shareholders by voting rights, December 31, 2002 Identity of person or group1) Investor AB AB Industriv(cid:138)rden Svenska Handelsbankens Pensionsstiftelse Livf(cid:154)rs(cid:138)krings AB Skandia Pensionskassan SHB F(cid:154)rs(cid:138)kringsf(cid:154)rening Gamla Livf(cid:154)rs(cid:138)kringsaktiebolaget SEB-Trygg Stiftelsen Oktogonen Svenska Handelsbankens Personalstiftelse EB-stiftelsen Skandinaviska Enskilda Banken Fj(cid:138)rde AP-fonden F(cid:154)rsta AP-fonden Tredje AP-fonden Svenska Handelsbanken SEB fonder Astoria i Link(cid:154)ping AB Foreign ownership2) Others Number of A-shares 256,660,096 186,000,000 35,500,000 32,962,932 31,680,000 12,979,720 12,903,000 10,000,000 7,779,200 2,191,000 2,191,000 1,876,900 1,462,000 551,274 720,000 6,482,117 54,279,401 Percentage of total A-shares 39.11 28.34 5.41 5.02 4.83 1.98 1.97 1.52 1.19 0.33 0.33 0.29 0.22 0.08 0.11 0.99 8.27 Number of B-shares 595,587,036 213,539,276 35,500,000 253,476,027 31,680,000 134,742,280 12,903,000 10,000,000 8,679,200 248,824,000 213,113,286 207,501,471 9,451,920 245,061,196 3,286,612 6,142,074,502 6,952,620,232 Percentage of total B-shares Voting rights, Percentage of capital percent 3.89 1.39 0.23 1.65 0.21 0.88 0.08 0.07 0.06 1.62 1.39 1.35 0.06 1.60 0.02 40.10 45.39 38.31 27.73 5.29 4.95 4.72 1.95 1.92 1.49 1.16 0.36 0.36 0.31 0.22 0.12 0.11 1.88 9.12 5.34 2.50 0.44 1.79 0.40 0.92 0.16 0.13 0.10 1.57 1.35 1.31 0.07 1.54 0.03 38.49 43.86 Total 656,218,640 100.00 15,318,040,038 100.00 100.00 100.00 1) According to SIS Ägarservice AB, on December 30, 2002 2) Of which Nats Cumco as Nominee (Total amount of ADR’s listed on NASDAQ. 1 ADR = 10 B shares.) 1,500,987,451 86 E R I C S S O N — A N N U A L R E P O R T 2 0 0 2 S H A R E I N F O R M A T I O N The following table indicates the significant changes in the voting rights for class A and B shares, respectively, held by major shareholders as of December 31, 2000, 2001 and 2002. Person or group (percent of voting rights) 2002 2001 2000 A shares B shares A shares B shares A shares B shares Investor AB AB Industriv(cid:138)rden Wallenberg-stiftelser Svenska Handelsbankens Pensionsstiftelse Livf(cid:154)rs(cid:138)krings AB Skandia Pensionskassan SHB F(cid:154)rs(cid:138)kringsf(cid:154)rening Gamla Livf(cid:154)rs(cid:138)kringsaktiebolaget SEB-Trygg Oktogonen, Stiftelsen Svenska Handelsbankens Personalstiftelse SEB-stiftelsen Skandinaviska Enskilda Banken Fj(cid:138)rde AP-fonden F(cid:154)rsta AP-fonden Tredje AP-fonden Svenska Handelsbanken Astoria i Link(cid:154)ping AB SEB fonder SHB Fonder Wallanders och Hedelius’ stiftelse Andra AP-fonden Foreign ownership Others 39.11 28.34 — 5.41 5.02 4.83 1.98 1.97 1.52 1.19 0.33 0.33 0.29 0.22 0.11 0.08 — — — 0.99 8.27 3.93 1.41 — 0.23 1.67 0.21 0.89 0.09 0.07 0.06 1.64 1.41 1.37 0.06 0.02 1.62 — — — 40.51 44.83 39.11 28.34 — 5.41 5.02 4.83 1.84 1.91 1.52 1.32 0.33 0.33 0.65 — — — 0.61 0.49 0.33 0.96 6.97 1.74 0.04 — 0.00 1.20 0.00 0.75 0.00 0.00 0.00 1.39 1.07 0.84 — — — 1.10 0.00 1.10 53.29 37.48 22.48 28.34 16.64 5.49 5.02 4.83 1.84 1.91 1.52 1.71 1.34 — — — — — 0.62 0.49 — 1.28 6.49 1.74 0.00 0.00 0.08 0.61 0.00 0.72 0.00 0.00 0.00 4.04 — — — — — 0.65 0.00 — 59.07 33.09 Total 100.00 100.00 100.00 100.00 100.00 100.00 Source: SIS Ägarservice AB. We do not know of any arrangements that might result in a change of the control of the Company. As of December 31, 2002, the total number of voting securities of the Company owned by officers and directors as a group was: Officers and directors as a group (25 persons) 6,080 2,372,125 Insignificant Number of A shares Number of B shares Voting rights, percent E R I C S S O N — A N N U A L R E P O R T 2 0 0 2 87 Financial information from Ericsson ¥ Interim report January — March 2003: ¥ Interim report January — June 2003: ¥ Interim report January — September 2003: ¥ Full year report January — December 2003: April 29, 2003 July 18, 2003 October 30, 2003 January, 2004 March, 2004 ¥ Annual report and form 20-F for US Market 2003: Annual reports and financial reports can be downloaded or ordered on our web site: www.ericsson.com/investors or ordered via e-mail or post. For printed publications, contact: Pressdata AB, P.O. Box 3263, SE-103 65 Stockholm, Sweden. Phone +46 8 799 6328, email: annual.report@pressdata.se. In the US, printed copies are available from Citibank Shareholder Services, phone toll-free 1 877 881 5969, e-mail: ericsson@em.fcnbd.com Contact information: Investor Relations for Europe, Middle East, Africa and AsiaPacific: Telefonaktiebolaget LM Ericsson SE-126 25 Stockholm Sweden Telefon: +46 8 719 0000 E-mail: investor.relations@lme.ericsson.se Investor Relations for the Americas: Ericsson Inc. 100 Park Avenue, 27th floor New York, NY 10017 USA Telephone: +1 212 685 4030 E-mail: investor.relations@ericsson.com S H A R E H O L D E R I N F O R M A T I O N Shareholder Information The Annual General Meeting will be held at the Globe Arena, Globentorget, Stockholm, at 4.00 p.m. on Tuesday, April 8, 2003. Shareholders intending to participate in the Annual General Meeting must be entered as shareholders in the share register maintained by VPC AB (Swedish Securities Register Center) not later than March 28, 2003. A shareholder whose shares are registered in the name of a trustee must be temporarily entered in the share register not later than March 28, 2003, 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 P.O. Box 47021 SE-100 74 Stockholm Sweden Telephone: +46 8 775 4455 between 10 a.m. and 4 p.m., fax +46 8 775 8018, or via the company(cid:213)s web site www.ericsson.com/investors no later than 4.00 p.m. Wednesday, April 2, 2003. Proxy In order to attend and vote as proxy on behalf of a shareholder at the Meeting, a power of attorney must be presented to the Company, preferably at the above address not later than April 7, 2003. Dividend The Board of Directors and the President have decided to propose to the Annual General Meeting that no dividend is paid for year 2002. 88 E R I C S S O N — A N N U A L R E P O R T 2 0 0 2 Project management: Ericsson Corporate Financial Reporting and Analysis Design and production: Paues Media, Stockholm Production coordinator: Aralia, Stockholm Reprographics: Scarena, Stockholm Printing: Christer Persson Tryckeri AB, K(cid:154)ping, Sweden EN/LZT 108 6489 R1A ' Telefonaktiebolaget LM Ericsson 2003 ISSN 1100 - 8962 Telefonaktiebolaget LM Ericsson SE-126 25 Stockholm Printed on paper that meets international environmental standards; Munken Lynx, especially produced for Ericsson, is TCF, Totally Chlorine Free. 

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