Form 20-F
Table of Contents

As filed with the Securities and Exchange Commission on March 28, 2003


 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

Form 20-F

 

¨   REGISTRATION STATEMENT PURSUANT TO SECTION 12(B) OR 12(G) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

 

x   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002

 

OR

 

¨   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSACTION PERIOD FROM                             TO                             

 

 


 

Commission file number 0–12033

 

 

TELEFONAKTIEBOLAGET LM ERICSSON (publ)

(Exact Name of Registrant as Specified in Its Charter)

 

LM ERICSSON TELEPHONE COMPANY

(Translation of Registrant’s Name Into English)

 

Kingdom of Sweden

(Jurisdiction of Incorporation or Organization)

 

Telefonplan, SE-126 25 Stockholm, Sweden

(Address of Principal Executive Offices)

 

Securities registered or to be registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Name of each Exchange on which registered

American Depositary Shares

 

Nasdaq Stock Market

 

Securities registered pursuant to Section 12(g) of the Act:

 

Title of each class

B Shares

STIBOR—1.5 percent Convertible Subordinated Debentures due June 30, 2003

 

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:

None

 


 

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the Annual Report:

 

B shares (SEK 1.0 nominal value)

  

15,318,040,038

A shares (SEK 1.0 nominal value)

  

656,218,640

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     

Yes    x         No    ¨

 

Indicate by check mark which financial statement item the registrant has elected to follow.      

Item 17    x    Item 18    ¨

 


 


Table of Contents

 

Table of Contents

Presentation of information

  

3

Forward-looking statements

  

4

PART I

  

5

Item 1:

 

Identity of Directors, Senior Management and Advisers

  

5

Item 2:

 

Offer Statistics and Expected Timetable

  

5

Item 3:

 

Key Information

  

6

Item 4:

 

Information on the Company

  

15

Item 5:

 

Operating and Financial Review and Prospects

  

26

Item 6:

 

Directors, Senior Management and Employees

  

47

Item 7:

 

Major Shareholders and Related Party Transactions

  

52

Item 8:

 

Financial Information

  

54

Item 9:

 

The Offer and Listing

  

54

Item 10:

 

Additional Information

  

59

Item 11:

 

Quantitative and Qualitative Disclosures about Market Risk

  

67

Item 12:

 

Description of Securities Other than Equity Securities

  

73

PART II

  

73

Item 13:

 

Defaults, Dividend Arrearages and Delinquencies

  

73

Item 14:

 

Material Modifications to the Rights of Security Holders and Use of Proceeds

  

73

Item 15:

 

Controls and Procedures

  

73

Item 16:

 

Reserved

  

73

PART III

  

74

Item 17:

 

Financial Statements

  

74

Item 18:

 

Financial statements

  

74

Item 19:

 

Exhibits

  

74

 

 

 


Table of Contents

 

Presentation of Information

 

In this Annual Report on Form 20-F, unless otherwise indicated, all financial information presented has been prepared in accordance with generally accepted accounting principles in Sweden (Swedish GAAP). In addition, net income (loss) for the years ended December 31, 2000, 2001 and 2002, and shareholders’ equity as of December 31, 2000, 2001 and 2002, have been reconciled to U.S. GAAP.

 

Effective January 1, 2002, Swedish GAAP requires consolidation of companies in which the majority of the residual or ownership risks are retained. As a result, we have restated our consolidated financial statements as of and for each of the years ended December 31, 1998, 1999, 2000 and 2001 to consolidate certain finance companies in which we have minority holdings which were previously accounted for under the equity method. The restatement was already made in our 2001 Annual Report on Form 20-F.

 

Both amounts stated in Swedish kronor (SEK) and derived from U.S. dollars (USD) and amounts stated in USD and derived from SEK, unless otherwise indicated, have been converted at a fixed rate, solely for convenience, as indicated herein. These conversions should not be construed as a representation by us that the SEK amounts actually represent such USD amounts, or vice versa, or that a conversion could be made at the rate indicated, or any other rate, or at all.We present our financial statements in SEK.

 

Certain amounts and percentages have been rounded and accordingly may not total.

 

We obtained some of the information presented in this Annual Report on Form 20-F regarding market share and industry information relating to our business from market research reports, analyst reports and other publicly available information. While we have no reason to believe that this information is not reliable, we cannot guarantee the accuracy or completeness of the information and we have not independently verified it.

 

Reference in this Annual Report on Form 20-F to the “Company”, “Ericsson”, “we”, “our” or “us” mean Telefonaktiebolaget LM Ericsson (publ) and its consolidated subsidiaries.

 

3


Table of Contents

 

Forward-looking Statements

 

This Annual Report includes “forward-looking statements” and includes assumptions about future market conditions, operations and results.

 

The words “believe”, “expect”, “anticipate”, “intend”, “may”, “plan” and similar expressions are intended to identify these statements. Forward-looking statements appear in a number of places including, without limitation, and Item 5 “Operating and Financial Review and Prospects”, Item 3D “Risk Factors” and Item 4 “Information on the Company”, 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’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;

 

    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’ 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 Item 3D “Risk Factors”, Item 4 “Information on the Company” and Item 5 “Operating and Financial Review and Prospects”. 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.

 

4


Table of Contents

 

PART 1

 

Item 1:    Identity of Directors, Senior Management and Advisers

 

Not applicable

 

Item 2:    Offer Statistics and Expected Timetable

 

Not applicable

 

5


Table of Contents

 

Item 3:    Key Information

 

ITEM 3A:    SELECTED FINANCIAL DATA

 

The following tables set forth selected financial data for each of the years in the five-year period ended December 31, 2002, which has been derived from our audited consolidated financial statements, prepared under Swedish GAAP. For a reconciliation to US GAAP of net income (loss) and consolidated stockholders’ equity, and a discussion of the significant differences between US GAAP and Swedish GAAP affecting our consolidated financial statements, see Item 17, Note 29 to our consolidated financial statements. The following data should be read in conjunction with “Item 5: Operating and Financial Review and Prospects” and our consolidated financial statements and other financial information included elsewhere in this Annual Report on Form 20-F. All per share data has been adjusted for a 4:1 stock split in 2000, and a 1:1 stock issue in 2002.

 

Swedish GAAP

 

    

As of and for the Year Ended December 31,


 

SEK million, unless otherwise stated


  

1998 1)


  

1999 1)


  

2000 1)


  

2001 1)


  

2002


 

Net sales

  

184,438

  

215,403

  

273,569

  

231,839

  

145,773

 

Operating income

  

19,163

  

17,469

  

30,828

  

–27,380

  

–21,299

 

Income (loss) before taxes

  

18,210

  

16,386

  

28,692

  

–30,309

  

–23,323

 

Net income (loss)

  

13,041

  

12,130

  

21,018

  

–21,264

  

–19,013

 

    
  
  
  
  

Year-end position

                          

Total assets

  

172,658

  

211,412

  

263,282

  

257,521

  

208,267

 

Net Assets 2)

  

65,295

  

71,492

  

94,587

  

72,240

  

76,076

 

Working capital 3)

  

53,434

  

70,426

  

97,261

  

104,998

  

73,694

 

Tangible assets

  

22,746

  

24,974

  

23,104

  

16,641

  

9,964

 

Stockholders’ equity

  

63,112

  

69,176

  

91,686

  

68,587

  

73,607

 

Minority interests

  

2,183

  

2,316

  

2,901

  

3,653

  

2,469

 

Interest-bearing provisions and liabilities

  

31,639

  

52,901

  

59,427

  

89,879

  

60,617

 

    
  
  
  
  

Other information

                          

Earnings per share, basic, SEK 4) 5) 6)

  

1.21

  

1.12

  

1.93

  

–1.94

  

–1.51

 

Earnings per share, diluted, SEK 4) 5 ) 7)

  

1.20

  

1.11

  

1.91

  

–1.94

  

–1.51

 

Cash dividends per share, SEK 4) 5) 8)

  

0.36

  

0.36

  

0.36

  

0

  

0

  9)

Cash dividens per share, USD 4) 5) 8)

  

0.04

  

0.04

  

0.04

  

0

  

0

  9)

Stockholders’ equity (SEK per share) 10)

  

8.09

  

8.84

  

11.59

  

8.67

  

4.65

 

Number of shares (in millions)

                          

—outstanding, at end of period

  

7,805

  

7,829

  

7,909

  

7,909

  

15,820

 

—average, basic 4) 5)

  

10,801

  

10,824

  

10,896

  

10,950

  

12,573

 

—average, diluted 4) 5)

  

11,060

  

11,060

  

11,100

  

11,072

  

12,684

 

    
  
  
  
  


1)   Restated for changed accounting principles in Sweden 2002 regarding consolidation of companies according to new RR1.
2)   Net assets is defined as total assets less provisions and liabilities.
3)   Working capital is defined as current assets less current non-interest-bearing provisions and liabilities.
4)   1998–1999 adjusted for 4-for-1 stock split in 2000.
5)   1998–2001 adjusted for stock dividend element of stock issue in 2002.
6)   Earnings (loss) per share, basic, are calculated by dividing net income (loss) by average number of shares outstanding, basic.
7)   Earnings (loss) per share, diluted, are calculated by dividing net income (loss) by average number of shares outstanding, diluted. Potential ordinare shares are not considered when their conversion to ordinary shares would increase earnings per share.
8)   Cash dividends per share are those declared out of earnings for the year as recommended by our board of directors and approved by the annual general meeting of shareholders held in March or April of the following year. The cash dividends per share have been converted to U.S. dollars at the rates on the respective payment dates of each year.
9)   For 2002, proposed by the Board of Directors.
10)   Stockholders’ equity (SEK per share) is defined as Stockholders’ equity divided by the number of shares outstanding, at end of period.

 

6


Table of Contents

U.S. GAAP

 

    

As of and for the Year Ended December 31,


SEK million, unless otherwise stated


  

1998 1)


  

1999 1)


  

2000 1)


  

2001 1) 2)


  

2002 1) 2)


Net sales

  

184,438

  

215,403

  

273,569

  

231,839

  

145,773

Operating income (loss)

  

22,672

  

21,903

  

35,350

  

–32,833

  

–23,254

Net income (loss), after cumulative effect of accounting change 3)

  

15,539

  

15,239

  

23,393

  

–24,403

  

–19,918

Earnings (loss) per share, after cumulative effect

                        

of accounting change, basic (SEK per share) 3) 4) 5) 6)

  

1.44

  

1.41

  

2.15

  

–2.23

  

–1.58

Earnings (loss) per share, after cumulative effect

                        

of accounting change, diluted (SEK per share) 3) 4) 5) 7)

  

1.42

  

1.39

  

2.12

  

–2.23

  

–1.58

Total assets

  

184,298

  

235,950

  

291,013

  

282,207

  

226,480

Stockholders’ equity

  

70,318

  

85,616

  

109,217

  

77,801

  

83,203

Capital stock

  

4,878

  

4,893

  

7,910

  

8,066

  

15,974

Number of shares (in millions):

                        

—average, basic 4) 5)

  

10,801

  

10,824

  

10,896

  

10,950

  

12,573

—average, diluted 4) 5)

  

11,060

  

11,060

  

11,017

  

11,057

  

12,684


1)   Upon adaption of SFAS142 on January 1, 2002, Ericsson ceased amortization of all goodwill for US GAAP reporting purposes. Amortization expense on goodwill on a US GAAP basis for the years ended December 31, 2001, 2000, 1999 and 1998 was SEK 1,123 million, SEK 761 million, SEK 684 million and SEK 337 million, respectively.
2)   Effective October 1, 2001, Sony Ericsson Mobile Communications assumed substantially all of the operations of the Phones segment. As of this date, 50 percent of the results of the Sony Ericsson joint venture are reported under “Share in earnings of joint ventures and associated companies” pursuant to equity accounting principles. Retained Phones operations are reported under “Other operations”.
3)   There were no discontinuing operations during 1998–2002.
4)   1998–1999 adjusted for 4-for-1 stock split in 2000.
5)   1998–2001 adjusted for stock dividend element of stock issue in 2002.
6)   Earnings (loss) per share, basic, are calculated by dividing net income (loss), after cumulative effect of accounting change, by average number of shares outstanding, basic.
7)   Diluted earnings (loss) per share are calculated by dividing net income (loss), after cumulative effect of accounting change, 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. Shares issuable upon conversion of convertible debentures or exercise of options are treated as dilutive only when their conversion to ordinary shares would decrease earnings per share. In 2001 and 2002, diluted weighted average shares outstanding excludes the incremental effect of all options and convertible debentures, as the impact would be anti-dilutive.

 

7


Table of Contents

 

Exchange rates

 

The following tables provide information with respect to the exchange rate for SEK per USD 1.00, based on the noon buying rate for cable transfers in SEK as certified for customs purposes by the Federal Reserve Bank of New York. On March 21, 2003, the noon buying rate for SEK was USD 1.00=SEK 8.7030. The average is computed using the noon buying rate on the last business day of each month during the period indicated.

 

Year ended December 31


  

Average


1998

  

7.9658

1999

  

8.3007

2000

  

9.2251

2001

  

10.4328

2002

  

9.6571

 

Month


  

High


    

Low


September

  

9.450

    

  9.1930

October

  

9.3850

    

9.1885

November

  

9.1690

    

8.9708

December

  

9.0750

    

8.6950

January

  

8.7920

    

8.4750

February

  

8.5650

    

8.4100

 

We describe the effects of exchange rate fluctuations on our business in the Item 11 “Quantitative and Qualitative Disclosures about Market Risk”.

 

ITEM 3B:    CAPITALIZATION AND INDEBTEDNESS

 

Not applicable.

 

ITEM 3C:    REASON FOR THE OFFER AND USE OF PROCEEDS

 

Not applicable.

 

8


Table of Contents

 

ITEM 3D:    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

 

 

9


Table of Contents

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 Item 11 “Quantitative and Qualitative Disclosures about Market Risk”.

 

As reflected in that section, our customer finance arrangements make us vulnerable to adverse changes in our customers’ 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 “Efficiency Program”, 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 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 Item 11 “Quantitative and Qualitative Disclosures about Market Risk”.

 

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’s) and BB (Standard & Poor’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 Item 11 “Quantitative and Qualitative Disclosures about Market Risk”.

 

Our commercial paper and other short term debt is currently rated B (Standard & Poor’s) and Not Prime (Moody’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,

 

10


Table of Contents

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 Industrivärden 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 Industrivärden 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 Industrivärden 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 andtherefore 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.

 

11


Table of Contents

 

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’ capacity during periods of significant demand could have a material adverse effect on our business, results of operations or financial condition.

 

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 a lawsuit in which plaintiff alleges that we have infringed one of its U.S. patents through our sales of certain GSM and TDMA products in the United States. 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’s decision is wrong. The Court has not yet ruled. Should the Court render a final judgement against us, we will appeal. If we do not prevail, we may have to expend significant resources to pay damages.

 

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 property rights, if at all. We rely upon a combination of trade

 

12


Table of Contents

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’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’ businesses, profitability and financial condition, as 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 Item 11 “Quantitative and Qualitative Disclosures about Market Risk”.

 

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.

 

 

13


Table of Contents

 

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’ 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.

 

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 see Item 11 “Quantitative and Qualitative Disclosures about Market Risk”.

 

14


Table of Contents

 

Item 4:    Information on the Company

 

ITEM 4A:    HISTORY AND DEVELOPMENT OF THE COMPANY

 

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 Allmänna 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 Stockholmsbörsen (the Stockholm Stock Exchange). Our B shares are also quoted on the exchanges in Düsseldorf, Frankfurt, Hamburg and London. Our ADSs are quoted on NASDAQ. Our registered office is located at Telefonvägen 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.

 

Acquisitions and Divestitures

 

In addition to the establishment of the Sony Ericsson joint venture, a number of acquisitions and divestitures have affected our results of operations and financial position over the last three years. The following table highlights the most significant of these transactions:

 

Acquisitions

 

(SEK billion)


    

Acquisition Value


Businesses acquired

      

2000

 

      Microwave Power Devices Inc. (USA)

    

0.9

 

Divestitures

 

(SEK billion)


    

Capital Gain


    

Cash

Receipt Net


Businesses divested

             

2002

       

Ericsson Microelectronics AB

    

0,1

    

2.3

2001

       

Enterprise Distribution

    

0.0

    

3.4

2000

       

Energy Systems

    

4.5

    

5.9

Shares divested

             

2001

       

Shares in Juniper Networks

    

5.5

    

5.5

2000

       

Shares in Juniper Networks

    

15.4

    

15.4

Real estate divested

             

2001

       

Italy, Sweden and United Kingdom

    

1.3

    

4.7

2000

       

Sweden

    

1.5

    

5.2

 

In connection with our restructuring plans, we have identified certain non-core assets which we may divest. We have no current plans for material acquisitions.

 

For a discription of our principal capital expenditures since the beginning of our last three financial years, see Item 5 “Operating and Financial Review and Prospects”, “Liquidity and Capital Resources”.

 

ITEM 4B:    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.

 

 

15


Table of Contents

 

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’s leading mobile network operators and many of the world’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.

 

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’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 Item 5 “Operating and Financial Review and Prospects”.

 

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.

 

16


Table of Contents

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’s wireless network operators.

 

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’ 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’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.

 

17


Table of Contents

 

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 “2.5G” services and can be described as follows:

 

    GPRS is an enhancement of GSM networks. GPRS introduces packet-switched data transmission and enables “always on” 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 “always-on” 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 “backhaul” 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’ 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’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.

 

18


Table of Contents

 

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—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’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.

 

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’ 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’s ENGINE multi-service network solution.

 

19


Table of Contents

 

Our proprietary ENGINE solution is the world’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’ 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.

 

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’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 “Sony”, “Ericsson” and “Sony Ericsson”. Substantially all current products are marketed under the “Sony Ericsson” brand.

 

20


Table of Contents

 

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’s largest manufacturers. Based on technology initially developed by us in the early 1990’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.

 

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.

 

21


Table of Contents

 

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 Item 3D “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.”

 

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, Telefónica, 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, Telefónica 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.

 

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’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 forafter-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 parton 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.

 

22


Table of Contents

 

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 Item 3D “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.” 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 Item 4B “Business Overview”, 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 which we own 60 percent. This venture combines our mobile IP expertise with Juniper’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’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 Industrivärden 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.

 

23


Table of Contents

 

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.

 

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 a lawsuit (Harris Corp.) where the plaintiff alleges that we have infringed one of their U.S. patents through our sales of certain GSM and TDMA products in the United States. 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’s decision is wrong. The Court has not yet ruled. Should the Court render a final judgment against us, we will appeal. While we are confident that we ultimately will prevail in this lawsuit, there can be no assurances thereof. If we do not prevail, we may have to expend significant resources to pay damages.

 

In March 17, 2003, we announced a settlement with InterDigitalCommunicatuions Corporation (Interdigital), along with its subsidiary, InterDigital Technology Corporation (ITC), relating to patent infringement claims. Under the settlement agreement, ITC has granted a non-exclusive, world wide, royalty-bearing license covering all of ITC’s patents for GSM, TDMA (D-AMPS), GPRS, EDGE and PDC, in exchange for which Ericsson and Sony Ericsson have agreed to pay ITC a fixed amount of approximately USD 34 million for sales through December 2002, in addition to an annual fee of USD 6 million for sales of infrastructure equipment during the period of 2003–2006 and royalty payments on each licensed mobile phone product sold during the same period.

 

Like several hundreds of other companies, asbestos claims are brought against Ericsson in the U.S. The claims are related to the Anaconda Wire & Cable business within Ericsson’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. 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 communications 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.

 

24


Table of Contents

 

ITEM 4C:    ORGANIZATIONAL STRUCTURE

 

For a listing of our significant subsidiaries, please see Note 9 to our consolidated financial statements.

 

ITEM 4D:    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.

 

           

Owned/

    

Size

Property


  

Products


    

Leased


    

sq. meters


Sweden, Nynäshamn

  

Mobile Systems

    

Leased

    

14,000

Sweden, Kista

  

Mobile Systems

    

Leased

    

5,300

Sweden, Kalmar

  

Power Modules

    

Leased

    

14,000

Sweden, Kumla

  

Mobile Systems

    

Leased

    

40,000

Sweden, Gävle

  

Mobile Systems Assembly

    

Leased

    

96,000

Sweden, Skellefteå

  

Network Material

    

Leased

    

1,500

Sweden, Mölndal

  

Sensor and Network production

    

Leased

    

16,000

Sweden, Borås

  

MINI-LINK

    

Leased

    

33,200

Sweden, Katrineholm

  

Mobile Systems, Switching systems

    

Leased

    

17,000

Sweden, Hudiksvall

  

Cables

    

Leased

    

50,000

Sweden, Falun

  

Cables

    

Leased

    

40,000

US, Lynchburg

  

Mobile Systems

    

Owned

    

8,400

US, San Diego

  

Mobile Systems

    

Leased

    

2,000

US, Hauppange

  

Power Amplifiers

    

Owned

    

4,000

Spain, Bilbao

  

Data Modules

    

Owned

    

6,600

Brazil, Sao Jose dos Campos

  

Mobile Systems Assembly

    

Owned

    

22,100

China, Shanghai

  

Power Modules

    

Leased

    

2,000

China, Nanjing

  

Mobile Systems, Switching systems

    

Owned

    

7,200

China, Chongqing

  

MINI-LINK

    

Leased

    

500

 

 

25


Table of Contents

 

Item 5:    Operating and Financial Review and Prospects

 

The following review of our operating results, financial position and prospects should be read in conjunction with our audited consolidated financial statements, and the notes thereto, as of and for each of the three years ended December 31, 2000, 2001 and 2002, included elsewhere in this Annual Report. Our consolidated financial statements have been prepared in accordance with Swedish GAAP. For a reconciliation of net income (loss) and stockholders’ equity to U.S. GAAP, and a discussion of the significant differences between U.S. GAAP and Swedish GAAP affecting our financial statements, see Note 29 to the Financial Statements.

 

BOARD OF DIRECTORS’ REPORT

 

Below follows Board of Directors’ Report prepared according to statutory requirements per Swedish GAAP.

 

STRATEGY AND GOALS

 

Ericsson’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 worldwide 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’s business is.

 

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’ 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

 

26


Table of Contents

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

  

74

  

97

  

–24

%

North America

  

23

  

25

  

–8

%

Latin America

  

13

  

32

  

–59

%

Asia Pacific

  

36

  

56

  

–36

%

    
  
  

Total

  

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’ 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’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’s and Standard & Poor’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.

 

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.

 

27


Table of Contents

 

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

 

    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’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

  

–4.9

    

3.2

    

–8.1

Phones

  

–1.3

    

–14.6

    

13.3

Other operations and Unallocated

  

–6.3

    

–6.8

    

0.5

Financial net

  

–1.5

    

–1.8

    

0.3

Minority interests

  

–0.5

    

–1.1

    

0.6

    
    
    

Total

  

–14.5

    

–21.1

    

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.

 

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’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 “hot spots”, 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.

 

28


Table of Contents

 

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’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’s and Standard and Poor’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).

 

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’ 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

 

29


Table of Contents

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.

 

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’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).

 

30


Table of Contents

 

Performance-based compensation

 

A substantial part of executive remuneration is performance-based. A part of an executive’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.

 

Environmental issues

 

Ericsson’s ranking among companies in the communications technology industry in Dow Jones’ 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’s financial risk exposure.

 

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’ 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

 

    

As of December 31,


(million)


  

2001


    

2002


Class A

  

656

    

656

Class B

  

7,253

    

15,164

    
    

Total

  

7,909

    

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.

 

31


Table of Contents

 

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.

 

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’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’ 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.

 

32


Table of Contents

 

ITEM 5A:    RESULTS OF OPERATIONS

 

Our Segments

 

We report orders, net sales and operating income for two of our three primary areas of business: Systems and Other operations. As a result of the establishment of the Sony Ericsson joint venture, beginning on October 1, 2001, however, we no longer report orders and net sales for the Phones segment, as the results are accounted for according to the equity method. Within the Systems segment, orders booked and net sales for Mobile Systems and Multi-Service Networks are reported separately, although there is a high degree of integration for research and development, customer service and sales organization, implementation and support services. For additional information regarding our segments, see Item 5 “Board of Directors’ Report”.

 

The following table sets forth net sales for each of our business segments:

 

    

As per December 31,


(SEK billion)


  

2000


    

2001


    

2002


Systems

  

194.7

    

187.8

    

132.0

of which Mobile Systems

  

158.1

    

154.3

    

120.3

of which Multi-Service Networks

  

36.7

    

33.4

    

11.7

Phones 1)

  

56.3

    

23.6

    

—  

Other operations

  

35.9

    

30.8

    

23.5

Less: inter-segment sales

  

–13.4

    

–10.3

    

–9.7

    
    
    

Total

  

273.6

    

231.8

    

145.8

    
    
    

1)   Effective October 1, 2001, substantially all our handset operations were transferred to Sony Ericsson Mobile Communications and, as of such date, are accounted for pursuant to the equity method. The handset operations retained are included in Other operations 2001. In 2002, the remaining part of the handset operations were transferred to SEMC.

 

The following table sets forth adjusted operating income/(loss) for each of our business segments: 1)

 

    

As per December 31,


(SEK billion)


  

2000


    

2001


    

2002


Systems

  

32.6

    

2.9

    

–4.9

Phones

  

–15.6

    

–17.0

    

–1.3

Other operations

  

1.2

    

–2.3

    

–4.7

Unallocated

  

–1.8

    

–1.7

    

–1.5

    
    
    

Total

  

16.4

    

–18.2

    

–12.5

    
    
    

1)   Operating income/(loss) adjusted to exclude the effects of certain gains and losses which affect comparability of periods: in 2000, excluding net capital gains of SEK 21.3 billion, a pension refund benefit of SEK 1.1 billion and restructuring charges of SEK 8 billion; in 2001, excluding net capital gains of SEK 5.8 billion and restructuring provisions of SEK 15 billion; in 2002, excluding capitalization of development expenses, net of SEK 3.2 billion and restructuring provisions of SEK 12 billion.

 

The following table sets forth the distribution of our net sales by geographical segment and the change in net sales from the prior period:

 

      
    
    

As per December 31,


 

(SEK billion and percent)


    

2000


    

2001


    

(%) 1)


      

2002


    

(%) 1)


 

Europe, Middle East & Africa

    

137.9

    

107.0

    

–22

%

    

74.1

    

–31

%

Asia Pacific

    

56.3

    

59.0

    

5

%

    

35.9

    

–39

%

Latin America

    

44.1

    

34.5

    

–22

%

    

12.7

    

–63

%

North America

    

35.2

    

31.4

    

–11

%

    

23.1

    

–26

%

      
    
    

    
    

Total

    

273.6

    

231.8

    

–15

%

    

145.8

    

–37

%

      
    
    

    
    


1)   Indicates percentage change from year ended December 31, 2000 to 2001, and December 31, 2001 to 2002, respectively.

 

All geographic markets areas were affected by the de-consolidation of handset sales from fourth quarter 2001 and onwards. Excluding Phones’ sales transferred to the Sony Ericsson joint venture for the full year, the reduction in sales for 2002 was 31 percent compared to 2001.

 

During 2002, we recorded SEK 74.1 billion of net sales, or 51 percent of total, from Europe, Middle East and Africa, our largest geographic market area, a decrease of 31 percent from SEK 107.0 billion in 2001. The decrease is primarily in our Systems segment as a result of continuing lowered capital expenditure by operators in this region due to slowing growth of subscribers and credit market constraints.

 

Our second largest geographic market area is Asia Pacific, with net sales of SEK 35.9 billion, or 25 percent of total sales, during 2002. Net sales to Asia Pacific decreased by 39 percent from SEK 59.0 billion in 2001. The aggressive network build-out in China during 2001 became more moderate in 2002.

 

Net sales to Latin America decreased by 63 percent from SEK 34.5 billion in 2001 to SEK 12.7 billion in SEK. This decrease was due to poor financial conditions in Latin America, which has restricted the ability of operators in the region to fund capital expenditure.

 

Net sales to North America decreased by 26 percent from SEK 31.4 billion in 2001 to SEK 23.1 billion in 2002. This decrease in North America can be attributed largely to the deconsolidation of Phones.

 

Years ended December 31, 2001 and 2002

 

Net Sales

 

Consolidated

 

Consolidated net sales decreased by SEK 86 billion, or 37 percent, to SEK 145.8 billion in 2002 from SEK 231.8 billion in 2001. Excluding parts of Phones transferred to the Sony Ericsson joint venture, sales for comparable units were SEK 210.8 billion in 2001. The greatest contributors to this decrease were lower sales volumes in all segments, and price reductions due to competitive pressures.

 

33


Table of Contents

 

Systems

 

Net sales decreased by 30 percent to SEK 132.0 billion in 2002 from SEK 187.8 billion in 2001. All regions except North America had significant reductions of sales: Latin America 61 percent due to the macro-economic conditions in the region and the planned shift from TDMA to GSM being stalled; Europe, Middle East and Africa (EMEA) 25 percent due mainly to financial restrictions on operators’ capital expenditures and that third generation investments did not yet pick up momentum; and in Asia Pacific 34 percent, mainly attributable to China’s investments in 2001, which created excess capacity, and a decline in PDC technology in Japan that was not offset by corresponding WCDMA volumes. In North America the reduction was 1 percent, as the shift from TDMA to GSM generated good demand.

 

Phones

 

Since the transfer of the Phones segment to Sony Ericsson Mobile Communications, on October 1, 2001, net sales is not reported for this segment.

 

Other Operations

 

Net sales decreased 26 percent to SEK 23.5 billion in 2002 from SEK 30.8 billion in 2001. The decrease was primarily attributable to lower net sales for our Microelectronics and Network Technologies (Cable) businesses, partially offset by the remaining handset manufacturing operations in China, which were transferred into Other Operations upon the formation of Sony Ericsson Mobile Communications. Microelectronics was sold in the third quarter and remaining handset manufacturing operations in China de-consolidated in the fourth quarter, as a result of the sale of parts of our interest in these operations to Sony Ericsson Mobile Communications.

 

Cost of Sales

 

Cost of sales decreased by 40 percent to SEK 104.2 billion in 2002 compared with SEK 173.9 billion in 2001. This decrease was due primarily to lower overall sales volumes. Restructuring costs of SEK 5.6 billion and SEK 8.3 billion, respectively, were included in Cost of Sales. Gross margin, excluding restructuring costs, increased from 28.6 percent in 2001 to 32.3 percent in 2002, across all segments. This increase is primarily attributed to the effects of the restructuring programs and the de-consolidation of Phones.

 

Key Operating Expenses

 

Operating expenses in 2002 were SEK 62.4 billion compared to SEK 93.0 billion in 2001. The reduction of SEK 30.6 billion is largely an effect of the restructuring programs in 2001 and 2002 and the effects of transfer of Phones operations to Sony Ericsson Mobile Communications, consolidated according to the equity method as from October 1, 2001. Restructuring costs of SEK 6.3 billion and SEK 6.7 billion respectively were included in 2002 and 2001. During 2002, a reduction of SEK 3.2 billion of operating expenses is related to capitalization of development expenses per new Swedish GAAP (RR15).

 

Research and Development and Other Technical Expenses

 

Research and development and other technical expenses, decreased by SEK 13.8 billion, or 32 percent, to SEK 29.3 billion in 2002 compared with SEK 43.1 billion in 2001. This decrease is related to the restructuring programs and the de-consolidation of Phones.

 

Selling and Administrative Expenses

 

Selling expenses, excluding restructuring costs, decreased by SEK 10.4 billion, or 34 percent, to SEK 20.4 billion in 2002 compared with SEK 30.8 billion in 2001. Administrative expenses, excluding restructuring costs decreased by SEK 2.9 billion, or 23 percent, to SEK 9.6 billion in 2002 compared with SEK 12.4 billion in 2001. As a percentage of net sales, selling expenses and administrative expenses excluding restructuring costs, increased from 13.3 percent and 5.4 percent, in 2001, to 14.0 percent and 6.6 percent, respectively, in 2002. In total, Selling and Administrative expenses decreased by SEK 13.3 billion due to the effects of the restructuring programs and the de-consolidation of Phones.

 

Other Items

 

Other Operating Revenues

 

Other operating revenues decreased to SEK 0.5 billion in 2002 compared with SEK 8.4 billion in 2001. The capital gains in 2001 related principally to the divestiture of shares of Juniper Networks.

 

Share in Earnings of Joint Ventures and Associated Companies

 

Share in earnings of joint ventures and associated companies decreased by SEK 0.5 billion to a loss in the amount of SEK 1.2 billion in 2002 compared with a loss of SEK 0.7 billion in 2001. The losses are mainly attributed to Sony Ericsson Mobile Communications losses. The Ericsson share in SEMC’s income before taxes was SEK –1.3 billion in 2002 and SEK –0.7 billion in 2001.

 

Operating Income/Loss

 

Operating loss decreased by SEK 6.1 billion, from a loss of SEK 27.4 billion in 2001 to an operating loss of SEK 21.3 billion in 2002. The decreased loss was mainly due to the increase of

 

34


Table of Contents

gross margin percent and significant decrease of operating expenses, with a major impact of the lower losses incurred in Phones and also reflecting the de-consolidation of Phones. Our operating margin decreased from negative 11.8 percent in 2001 to negative 14.6 percent in 2002.

 

Financial Income and Expenses

 

Financial income decreased to SEK 4.3 billion in 2002 compared with SEK 4.8 billion in 2001. The decrease was primarily related to reduced interest from customer financing, receivables and the impact of the negative cash flow before financing activities, which was partly offset by cash proceeds from the stock issue in September. Financial expenses where SEK 0.8 billion lower, SEK 5.8 billion in 2002 compared with SEK 6.6 billion in 2001, reflecting repayment of debt.

 

Minority Interest

 

Minority interest before taxes was SEK –0.5 billion, compared to SEK –1.2 billion in 2001.

 

Income Taxes

 

Income tax benefits decreased by SEK 4.6 billion, to a net of SEK 4.3 billion in 2002 compared with SEK 9.0 billion in 2001. The effective tax rate was 18 percent. With no 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.

 

As of December 31, 2002, we had aggregate net tax loss carry-forwards of SEK 13.6 billion, primarily in Sweden, SEK 10.3 billion of which will not expire until 2008 or later.

 

Net Income/Loss

 

As a result principally of the above factors, net loss decreased by SEK 2.3 billion, from a net loss of SEK 21.3 billion in 2001 to a net loss of SEK 19.0 billion in 2002. Foreign currency exchange rate changes had an overall impact on the net loss of SEK 1.7 billion for 2002 compared to SEK 1.3 billion in 2001. Diluted earnings per share were SEK –1.51 in 2002 as compared to SEK –1.94 in 2001.

 

Years ended December 31, 2000 and 2001

 

Net Sales

 

Consolidated

 

Consolidated net sales decreased by SEK 41.7 billion, or 15 percent, to SEK 231.8 billion in 2001 from SEK 273.6 billion in 2000. The greatest contributors to this decrease were lower sales volumes in all segments, the fact that the Phones segment only had nine months of net sales activity before substantially all of the handset operations, significantly downsized through restructuring activities, were transferred to Sony Ericsson Mobile Communications on October 1, 2001, and price reductions due to competitive pressures.

 

Systems

 

Net sales decreased by 4 percent to SEK 187.8 billion in 2001 from SEK 194.7 billion in 2000. Strong sales early in 2001 were attributable to orders booked at the end of 2000, but 2001 order bookings were adversely affected by significant capital expenditure reductions by operators, primarily in Western Europe and Latin America. Sales in Mobile Systems in 2001 decreased by 2 percent compared to 2000, principally attributable to significant declines in Western Europe and Latin America, which were only partially offset by increased sales in Asia Pacific and Eastern Europe. Sales in Multi-Service Networks decreased by 9 percent compared to 2000, primarily due to lower levels of capital expenditures by operators in Western Europe and Latin America. While we generated good order growth for our ENGINE migratory solution, with over 70 contracts signed since 1999, this was not sufficient to offset the broader downward trend for traditional circuit switching equipment.

 

Phones

 

Net sales decreased by 58 percent to SEK 23.6 billion in 2001 from SEK 56.3 billion in 2000. Part of this decrease reflects the fact that the Phones segment only had nine months of net sales activity before substantially all of the handset operations, significantly downsized through restructuring activities, were transferred to Sony Ericsson Mobile Communications on October 1, 2001. Net sales for the first nine months of 2001 decreased 45 percent to SEK 23.6 billion from SEK 42.5 billion for the first nine months of 2000. This decrease was the result of a severe decline in sales volume of handsets, as well as price reductions on uncompetitive products.

 

Other Operations

 

Net sales decreased 14 percent to SEK 30.8 billion in 2001 from SEK 35.9 billion in 2000. The decrease is primarily attributable to lower net sales for our Microelectronics and Network Technologies (Cable) businesses, partially offset by the remaining handset manufacturing operations in China, which were transferred into Other Operations upon the formation of Sony Ericsson Mobile Communications.

 

Cost of Sales

 

Cost of sales decreased by 4 percent to SEK 173.9 billion in 2001 compared with SEK 180.4 billion in 2000 (of which restructuring costs SEK 8.3 billion and SEK 11.7 billion respectively). This decrease was due primarily to lower overall sales volumes. Gross margin decreased from 34.1 percent in 2000 to 25.0 percent in 2001 across all segments. This decrease can be primarily attributed to fixed costs in manufacturing and implementation which could not be reduced in response to lower sales quickly enough to avoid excess capacity. In our Systems segment, products with somewhat lower margins comprised a larger proportion of our net sales during the current period. Inventory write-downs and high warranty costs due to product quality problems in the Phones segment at the

 

35


Table of Contents

beginning of 2001 further contributed to the decline in gross margin. Provisions relating to our Efficiency Program and “Back-to-Profit” programs of SEK 8.3 billion were recorded to cost of sales in 2001. In 2000, we recorded provisions of SEK 7.5 billion in our Phones segment to cost of sales relating to our “Back-to-Profit” program and the outsourcing of the manufacturing of phones to Flextronics, in addition to other restructuring costs taken as incurred of SEK 4.2 billion.

 

Key Operating Expenses

 

Research and Development and Other Technical Expenses

 

Research and development and other technical expenses increased by SEK 4.7 billion, or 11 percent, to SEK 46.6 billion in 2001 (of which restructuring costs SEK 3.5 billion) compared with SEK 41.9 billion in 2000 (of which restructuring costs SEK 0.6 billion). This increase was primarily due to provisions of SEK 3.5 billion recorded in connection with our Efficiency Program, as well as investments in the 3G wireless systems, IP solutions and Mobile Internet applications. As a percentage of net sales, research and development expenses increased from 15.3 percent in 2000 to 20.1 percent in 2001 including restructuring costs.

 

Selling and Administrative Expenses

 

Selling expenses decreased by SEK 2.8 billion, or 13 percent, to SEK 32.4 billion in 2001 (of which restructuring costs SEK 1.5 billion) compared with SEK 35.2 billion in 2000 (of which restructuring costs SEK 0.3 billion). The decrease was primarily in the Phones segment, which had lower selling expenses for the first nine months of 2001 as compared to 2000 and no selling expense during the fourth quarter after substantially all of our handset business was transferred to Sony Ericsson Mobile Communications. This decrease was partially offset by provisions of SEK 1.5 billion taken in connection with the Efficiency Program during 2001. Administrative expenses increased by SEK 0.7 billion, or 5 percent, to SEK 14.0 billion in 2001 (of which restructuring costs SEK 1.4 billion) compared with SEK 13.3 billion in 2000 (of which restructuring costs SEK 0.1 billion). The increase can be primarily attributed to the recognition of a SEK 1.4 billion charge during 2001 to establish a provision in connection with our Efficiency Program. Administrative expenses decreased in our Phones segment in 2001 as compared to 2000, and increased to a lesser degree in our Systems segment over the same period. As a percentage of net sales, selling expenses and administrative expenses increased from 12.9 percent and 4.9 percent, in 2000, to 14.0 percent and 6.0 percent, respectively, in 2001, including restructuring costs.

 

Other Items

 

Other Operating Revenues

 

Other operating revenues decreased by SEK 19.6 billion to SEK 8.4 billion in 2001 compared with SEK 28.0 billion in 2000. This decrease was mainly due to capital gains, which were SEK 25.2 billion in 2000 and SEK 6.0 billion in 2001. The capital gains in 2000 related principally to the divestiture of shares of Juniper Networks, our Energy business and real estate, and in 2001, were mainly attributable to the divestiture of our remaining shares of Juniper Networks.

 

Share in Earnings of Joint Ventures and Associated Companies

 

Share in earnings of joint ventures and associated companies decreased by SEK 0.8 billion to a loss in the amount of SEK 0.7 billion in 2001 compared with earnings of SEK 0.1 billion in 2000. From October 2001, substantially all of the handset operations, dramatically downsized through restructuring activities, were transferred to Sony Ericsson Mobile Communications. Net sales in the fourth quarter were lower than expected due to a much lower market demand and pricing pressure, and the joint venture incurred a loss of which our share was SEK 0.7 billion.

 

Operating Income/Loss

 

Operating income decreased by SEK 58.2 billion, from SEK 30.8 billion in 2000 to an operating loss of SEK 27.4 billion in 2001. This decrease was driven by lower net sales, lower gross margins in both our Systems and Phones segments and charges in connection with additional provisions of SEK 15.0 billion for the restructuring and efficiency programs. In addition, capital gains in 2001 were significantly less than those recognized in 2000 in relation to the divestiture of shares of Juniper Networks.

 

Our operating margin decreased from 11.3 percent in 2000 to negative 11.8 percent in 2001.

 

Financial Income and Expenses

 

Financial income increased by SEK 1.1 billion, or 30 percent, to SEK 4.8 billion in 2001 compared with SEK 3.7 billion in 2000. The increase was primarily related to increases in our cash position attributable primarily to decreases in net working capital and higher cash flows from financing. Financial expenses also increased by SEK 1.7 billion, or 35 percent, to SEK 6.6 billion in 2001 compared with SEK 4.9 billion in 2000, reflecting incremental interest expense relating to bonds of SEK 28.2 billion issued during 2001 to refinance short-term borrowings and extend the debt maturity profile.

 

Minority Interest

 

Minority interest before taxes was SEK –1.2 billion, compared to SEK –0.9 billion in 2000.

 

 

36


Table of Contents

 

Income Taxes

 

Income taxes decreased by SEK 16.7 billion, to a net income tax benefit of SEK 9.0 billion in 2001 compared with an income tax expense of SEK 7.7 billion in 2000. Our effective tax rate was 30 percent, consistent with historical effective tax rates, in contrast to 2000, when our effective rate was 27 percent as a result of non-taxable capital gains.

 

As of December 31, 2001, we had aggregate net tax loss carry-forwards of SEK 27.6 billion, primarily in Sweden, SEK 26.0 billion of which will not expire until 2007 or later.

 

Net Income/Loss

 

As a result principally of the above factors, net income decreased by SEK 42.3 billion, from SEK 21.0 billion in 2000 to a net loss of SEK 21.3 billion in 2001. Foreign currency exchange rate changes had an overall impact of SEK 1.3 billion both years on the net profit/loss. Diluted earnings per share were SEK –2.69 in 2001 as compared to SEK 2.65 in 2000.

 

Foreign Exchange Rates

 

Our business and results of operations are affected by fluctuations in exchange rates, particularly between the Swedish krona, our reporting currency, and other currencies such as the Euro, the U.S. dollar, the Japanese yen and the UK pound sterling. Foreign currency denominated assets and liabilities, together with firm and probable purchase and sales commitments, give rise to foreign exchange exposure. We account for most of our revenues in foreign currencies and a significant percentage of our expenses in Swedish krona. As a result, in general, appreciation of the Swedish kronor relative to another currency has an adverse effect on our net sales and operating profit, while the depreciation of the Swedish kronor has a positive effect.

 

Average depreciation and appreciation (–) per year of the Swedish kronor against our major foreign trade currencies:

 

Currency


  

2000


      

2001


      

2002


 

Euro

  

–4.1

%

    

9.5

%

    

–1.0

%

U.S. Dollar

  

10.9

%

    

12.6

%

    

–5.8

%

U.K. Pound Sterling

  

3.7

%

    

7.2

%

    

–1.9

%

Japanese Yen

  

16.6

%

    

0.0

%

    

–8.7

%

 

Exchange rates against SEK used in the consolidation:

 

Average rates


  

2000


  

2001


  

2002


Euro

  

8.4868

  

9.2554

  

9.1497

U.S. Dollar

  

9.1716

  

10.3604

  

9.7238

U.K. Pound Sterling

  

13.9239

  

14.9312

  

14.5835

Japanese Yen

  

85.0845

  

85.2798

  

77.6205

 

Closing rates


  

2000


  

2001


  

2002


Euro

  

8.8374

  

9.3676

  

9.1506

U.S. Dollar

  

9.4990

  

10.6281

  

8.7780

U.K. Pound Sterling

  

14.1659

  

15.3810

  

14.0821

Japanese Yen

  

82.6250

  

80.9210

  

73.5450

 

In addition to the impact of exchange rate fluctuations on our operating results discussed above, Ericsson’s income statement and balance sheet are also affected by the translation into Swedish kronor for financial reporting purposes of the net assets of our foreign subsidiaries that are denominated in currencies other than Swedish kronor.

 

We hedge some foreign exchange exposures in accordance with a policy established by the board of directors. For a discussion of foreign exchange exposures and instruments we use in connection with our hedging activities, see Item 11 “Quantitative and Qualitative Disclosures about Market Risk”.

 

ITEM 5B:    LIQUIDITY AND CAPITAL RESOURCES

 

Capital expenditures

 

Due to the reduced business volume, capital expenditures in tangible fixed assets were reduced year by year from SEK 12.6 billion in year 2000 to SEK 8.7 billion in 2001 and SEK 2.7 billion in 2002.

 

From year 2002, certain development expenses amounting to SEK 3.4 billion were capitalized according to new Swedish GAAP. Only prospective application was allowed.

 

Funding

 

Cash Flow Summary

 

    

Year ended December 31,


(SEK billion)


  

2000


  

2001


  

2002


Cash flow from Operating activities

  

–14,1

  

1,4

  

–10,1

Cash flow from Investing activities

  

14,5

  

5,3

  

3,0

    
  
  

Cash flow before Financing activities

  

0,4

  

6,7

  

–7,1

Changes in Short-term debt

  

4,9

  

3,3

  

–17,2

Changes in Long-term debt

  

1,6

  

26,8

  

–5,5

Issue of convertible debenture

  

1,1

         

Stock Issue

       

0,2

  

28,9

Sale of stock options and convertible debentures

  

2,0

         

Repurchase of own stock

  

–0,4

  

–0,2

    

Dividends

  

–4,2

  

–4,3

  

–0,6

    
  
  

Cash flow from Financing activities

  

5,0

  

25,8

  

5,6

Effect of exchange rate changes

  

0,4

  

0,7

  

–1,2

    
  
  

Net change in Cash and cash equivalents

  

5,8

  

33,2

  

–2,7

    
  
  

 

 

 

 

37


Table of Contents

 

Contractual Obligations and Commercial Commitments

 

(SEK billion)


  

Less than 1 year


  

1–3 years


  

4–5 years


  

5 years and more


  

Total


Note and bond loans

  

6.4

  

25.6

  

3.2

  

4.2

  

39.4

Liabilities to financial institutions (including financial lease obligations)

  

2.6

  

2.8

  

—  

  

0.3

  

5.7

Convertible debentures 1)

  

4.5

  

—  

  

—  

  

—  

  

4.5

Operating leases

  

3.3

  

5.1

  

3.8

  

7.6

  

19.8

    
  
  
  
  

Total

  

16.8

  

33.5

  

7.0

  

12.1

  

69.4

    
  
  
  
  

1)   Subordinated in right of payment to all of our other outstanding debt.

 

During the year, short-term and long-term interest bearing debt was reduced by SEK 12.2 billion and SEK 17.9 billion respectively, offset by proceeds from the stock issue of SEK 28.9 billion. At year end, interest-bearing debt was SEK 60.6 billion, including SEK 2.4 billion of short-term debt and SEK 58.2 billion of long-term debt, including current maturities of long-term debt, of which SEK 11 billion were pension liabilities and SEK 47.2 billion were largely related to convertible debentures and borrowings under our EMTN program. The long-term portion of these borrowings were SEK 36 billion with the following maturity:

 

(SEK billion)


  

Other


  

EMTN


  

Total


2004

  

2.8

  

5.9

  

8.7

2005

  

—  

  

1.3

  

1.3

2006

  

—  

  

18.4

  

18.4

2007

  

—  

  

—  

  

0.0

2008

  

—  

  

3.2

  

3.2

2009

  

0.3

  

4.2

  

4.5

    
  
  

Total

  

3.1

  

33.0

  

36.1

    
  
  

 

Other commercial commitments of significance are our guarantees for off-balance sheet customer financing. Since the underlying loans often are repaid prior to maturity or assumed by banks, in which case such guarantees are released prior to their stated terms, the effective guarantee periods are short- to medium-term. Due to dissolvement of off balance sheet credit portfolios during the year, these commitments were sharply reduced during 2002 from SEK 12.8 billion to SEK 1.5 billion.

 

We also have committed to some customers to provide future credits. Such commitments not yet drawn amounted to SEK 31.2 billion at the end of 2001 and were reduced to SEK 14.0 billion by the end of 2002. Credit commitments are conditional on the award of corresponding commercial contracts.

 

Other Commercial Commitments

 

(SEK billion)


    

Less than 1 year


  

1–3 years


  

Total


Financing commitments

    

3.0

  

11.0

  

14.0

Existing financial guarantees

    

1.1

  

0.4

  

1.5

 

In accordance with standard industry practice, we enter into bid and performance bonds related to long-term contracts for the supply of telecommunications equipment and services. Potential payments due under these bonds are related to our performance under applicable contracts. We have not had to make any significant payments under theses types of bonds in the past and we currently do not anticipate that we will be required to make such payments under the bonds currently outstanding.

 

For additional information on our liquidity and capital resources please see Item 11 “Quantitative and Qualitative Disclosures about Market Risk”, “Funding and Liquidity Risk”. For additional information on our off-balance sheet arrangements please see Item 11 “Quantitative and Qualitative Disclosures about Market Risk”, “Customer Finance Risk”.

 

Critical accounting policies

 

Please see also Item 17 “Accounting Principles” and Note 29 to the Financial Statements.

 

The discussion and analysis of our results of operations and financial condition are based on our consolidated financial statements, which have been prepared in accordance with Swedish GAAP. The preparation of these financial statements requires management to apply accounting methods and policies that are based on difficult, complex or subjective judgments by management or on estimates based on past experience and assumptions determined to be reasonable and realistic based on the related circumstances. The application of these estimates and assumptions affects the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the balance sheet date and the reported amounts of net sales and expenses during the reporting period. Actual results may differ from these estimates under different assumptions or conditions. We have summarized below our accounting policies that require more subjective judgment of our management in making assumptions or estimates regarding the effects of matters that are inherently uncertain.

 

Revenue Recognition

 

Our revenue recognition policies are determined in accordance with both Swedish GAAP and US GAAP. On a global basis, we offer a comprehensive portfolio of telecommunications and data communications systems and services covering a range of technologies. Our activities range from design, manufacture, installation and integration of complete network system to the delivery of spare parts. We are required to use judgment in how to apply our revenue recognition policies based on the solutions being provided to our customers, the nature and sophistication of the technology involved and the geographical location of the customer. Specific contractual performance and acceptance criteria and judgments in the areas of customer acceptance, installation and collectibility impact the timing and amounts of revenue recognized.

 

We apply the percentage-of-completion method or

 

 

 

38


Table of Contents

completed-contract method to the accounting for large and complex construction-type contracts. These contracts involve the supply of bespoke network systems to meet specific customer specifications and can require an extended period of time to complete. We prepare estimates of total contract costs and of our progress towards completion using estimates and judgments that take into account our historical experience, the advancement of the technology involved and other factors that are determined to be relevant. We assess inherent uncertainties that include system performance and implementation delays that might result from events both within and outside of our control. We are required to estimate the overall margin at completion on these contracts, as well as evaluate the amount of possible losses, based on estimates that could vary over time, taking into account factors such as changes in contractual terms and technical problems that might be encountered over the life of a contract. Changes in these estimates and unforeseen conditions that arise over the contract terms could result in a different pattern of revenue recognition and may affect future earnings.

 

Valuation of Receivables and Exposures Related to Customer Financing

 

We provide financing to certain customers in connection with significant sales of network infrastructure equipment. Financing may include funding for the direct purchase of our products and services, for network installation, and for working capital purposes. We are required to assess the collectibility of our receivables for purposes of initial revenue recognition, as well as to record receivables at anticipated realizable value. In instances where we have sold receivables with recourse or where we have exposure related to guarantees for customer financing, we have reported the extent of our exposure as contingent liabilities. Based on our assessment of the risks relating to these contingent liabilities, we accrue risk provisions accordingly and contingent liabilities are reported net of such provisions. We have credit approval procedures where all major customer financing contracts are subject to approval by the Finance Committee of the board of directors. In establishing appropriate allowances against receivables, we continuously monitor the financial stability of individual counterparties and apply considerable judgment over the ultimate realization of these receivables, taking into account the ability of counterparties to meet and sustain their financial commitments based on their current and projected financial condition, and the outlook for the telecommunications industry and economy in general.

 

Inventory Obsolescence and Commitments Related to Outsourcing Arrangements

 

We state our inventories at the lower of cost or market. We record valuation allowances against our inventory that are equal to the difference between the cost of inventory and its estimated market value. We are required to make estimates about the future customer demand for our products, taking into account historical consumption patterns, order backlog, changes in technology, and projected sales based on economic conditions and growth prospects, market acceptance of current and future products. A misinterpretation of these conditions or uncertainty in the future outlook for the economy and of the telecommunications industry, or other failure to estimate correctly, could result in additional inventory losses in excess of the provisions determined to be appropriate as of the balance sheet date.

 

As a consequence of increased outsourcing of production to third parties, valuation allowances against inventory are now partly being replaced by allowances for supplier compensation when we fail minimum committed purchase volumes. We place orders based on estimates about future customer demand, taking account of the factors listed above. Any misjudgment relating to these factors could result in additional losses in excess of the provisions determined to be appropriate as of the balance sheet date.

 

Customer Warranties

 

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 Sony Ericsson Mobile Communications, provisions have also decreased. During the year, provisions from previous years, of SEK 490 million, were dissolved excess provisions.

 

Actual costs may differ from the amounts covered by the allowances and therefore may affect future earnings.

 

Deferred taxes

 

Deferred taxes are recognized for temporary differences which arise between the taxable value of assets and liabilities as well as for unutilized tax losses carry-forwards to the extent that it is probable that future taxable profits will be available against which the unused tax losses can be utilized. 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 carry-forwards are related to countries with long or indefinite periods of utilization, mainly Sweden.

 

Uncertainly in the future outlook for the economy and of the telecommunications industry, or other failure to estimate accurately, could result in lower taxable income in the future.

 

As a consequence the actual utilization of deferred tax assets may differ from expected utilization and therefore may affect future earnings.

 

39


Table of Contents

 

Changes in Financial Reporting and Accounting Policies

 

Swedish GAAP

 

There were no changes in Swedish GAAP or in our accounting policies during 2000 and 2001. In 2002, we have implemented the following new accounting standards:

 

RR1:00—Consolidated financial statements

 

RR1:00 is an update of RR1:96. The main changes in RR1:00 compared to RR1:96 are related to consolidation of companies with a controlling interest.

 

RR15—Intangible assets

 

RR15 prescribes the accounting for and disclosure of intangible assets. The standard applies, among other things, to research and development activities. As from 2002 certain expenses for development are capitalized as intangible assets. Only prospective application is allowed.

 

RR16—Provisions, contingent liabilities and contingent assets

 

The objective of the standard is to ensure that appropriate recognition criteria and measurement bases are applied to provisions, contingent liabilities and contingent assets, and that sufficient information is disclosed in the notes to the financial statements to enable users to understand their nature, timing and amount.

 

RR17—Impairment of assets

 

RR17 prescribes the accounting and disclosure for impairment of assets. The standard requires that the recoverable amount of an asset shall be estimated whenever there is an indication that the asset may be impaired. RR17 requires an impairment loss to be recognized whenever the carrying amount of an asset exceeds its recoverable value.

 

RR18—Earnings per share

 

This standard has the objective to prescribe principles for the determination and presentation of earnings per share.

 

RR19—Discontinuing operations

 

The standard addresses presentation and disclosure relating to discontinuing operations. The objectives of RR19 are to establish a basis for segregating information about a major operation that an enterprise is discontinuing from information about its continuing operations and to specify minimum disclosure about a discontinuing operation.

 

RR20—Interim financial reporting

 

This standard prescribes the minimum content of an interim financial report.

 

RR21—Borrowing costs

 

The standard describes the accounting treatment for borrowing costs. The standard generally requires borrowing costs be expensed immediately.

 

RR23—Related party disclosures

 

This standard shall be applied in dealing with related parties and transactions between a reporting enterprise and its related parties. The requirements of this standard apply to the financial statements of each reporting enterprise.

 

The implementation of RR1:00, RR15, RR16, RR17 and RR19 was optional during 2001 and mandatory no later than 2002. RR21 and RR23 are mandatory from 2002. RR22 is mandatory from 2003. A retrospective restatement is required for each of these recommendations, except for RR15, which does not permit restatement.

 

With the exception of RR1:00 and RR15, the adoption of these standards did not have a material impact on our consolidated financial statements.

 

Under RR1:00, beginning in 2002, certain finance companies, in which we are deemed to have a controlling interest, are consolidated. The principal effect of this change is to record loans extended pursuant to customer finance arrangements and external loans to finance these loans on our balance sheet instead of recording them as contingent liabilities. In the 2001 Annual Report on Form 20-F, as filed with the SEC on August 13, 2002, prior years were restated to reflect this change.

 

Under RR15, beginning in 2002, certain development costs are capitalized and subsequently amortized after a project has reached a certain degree of technical feasibility. As a result, we expect that during the next few years reported results from operations will increase, as amounts being capitalized are expected to exceed the related annual amortization. Under US GAAP, we already capitalize certain development costs, as reflected in Note 29 to our audited consolidated financial statements.

 

In 2003, we will implement the following new accounting standards:

 

RR22—Presentation of financial statements

 

The objective of this standard is to prescribe the basis for presentation of general purpose financial statements, in order to ensure comparability both with the company’s own financial statements of previous periods and with the financial statements of other companies.

 

RR24—Investment property

 

This standard prescribes the accounting treatment for investment property and related disclosure requirements. The adoption of RR24 is not expected have a material impact on the business, results of operations, and financial position of the Company.

 

40


Table of Contents

 

RR25—Segment reporting

 

The objective of this standard is to establish principles for reporting financial information by segment for to help users of financial statements to better understand different types of products and services a company produces and in which geographical areas it operates. The effect of implementing RR25 is not expected to have a material effect on the presentation of segment information.

 

RR26—Events after the balance sheet date

 

This statement prescribes when a company should adjust its financial statements for events after the balance sheet date and the disclosures that a company should give about the date when the statements were authorized for issue and about events after the balance sheet date. The effect of implementing RR26 is not expected to have a material effect on the business, results of operations, and financial position of the Company.

 

RR27—Financial instruments. Disclosure and presentation

 

The objective of this standard is to enhance financial statement user’s understanding of the significance of on-balance-sheet and off-balance-sheet financial instruments to a company’s business, results of operations, and financial position. The standard prescribes certain requirements for presentation of on-balance-sheet (recognized) and off-balance-sheet (unrecognized) financial instruments The effect of implementing RR27 is not expected to have material impact on the business, results of operations, and financial position of the Company.

 

RR28—Accounting for Government Grants

 

This standard applies for financial reporting and disclosure of government grants and other forms of government assistance. The effect of implementing RR28 is not expected to have material impact on the business, results of operations, and financial position of the Company.

 

In 2004, we will implement the following new accounting standard:

 

RR29—Employee benefits

 

This standard describes the accounting treatment and disclosure of employee benefits. The standard requires a company to recognize (a) a liability when an employee has provided service in exchange for employee benefits to be paid in the future and (b) an expense when the company consumes the economic benefit arising from service provided by an employee in exchange for employee benefits. The effects of this standard as of January 1, 2004, are not yet fully evaluated by the company. 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. Pension benefits, costs and liabilities will increase, however, as benefits will be calculated including expected future salary increases. The net effect of the accounting change at adoption will be charged to stockholder’s equity.

 

US GAAP

 

In 2002 we have adopted the following new standards:

 

SFAS 141 and 142

 

In June 2001, the Financial Accounting Standards Board (FASB or the “Board”) issued Statement of Financial Accounting Standards No. 141 (SFAS141), “Business Combinations”, and No. 142 (SFAS142), “Goodwill and Other Intangible Assets”, collectively referred to as the “Standards”. SFAS141 supersedes Accounting Principles Board Opinion (APB) No. 16, “Business Combinations”. The provisions of SFAS141 (i) require that the purchase method of accounting be used for all business combinations initiated after June 30, 2001, (ii) provide specific criteria for the initial recognition and measurement of intangible assets apart from goodwill, and (iii) require that unamortized negative goodwill be written off immediately as an extraordinary gain instead of being deferred and amortized. SFAS 141 also requires that upon adoption of SFAS142 the Company reclassify the carrying amounts of certain intangible assets into or out of goodwill, based on certain criteria. SFAS142 supersedes APB17, “Intangible Assets”, and is effective for fiscal years beginning after December 15, 2001. SFAS142 primarily addresses the accounting for goodwill and intangible assets subsequent to their initial recognition. The provisions of SFAS142 (i) prohibit the amortization of goodwill and indefinite-lived intangible assets, (ii) require that goodwill and indefinite-lived intangibles assets be tested annually for impairment (and in interim periods if certain events occur indicating that the carrying value of goodwill and/or indefinite-lived intangible assets may be impaired), (iii) require that reporting units be identified for the purpose of assessing potential future impairments of goodwill, and (iv) remove the forty-year limitation on the amortization period of intangible assets that have finite lives.

 

The provisions of the Standards also apply to equity-method investments made both before and after June 30, 2001. SFAS141 requires that the unamortized deferred credit related to an excess over cost arising from an investment that was accounted for using the equity method (equity-method negative goodwill), and that was acquired before July 1, 2001, must be written-off immediately and recognized as the cumulative effect of a change in accounting principle. Equity-method negative goodwill arising from equity investments made after June 30, 2001 must be written-off immediately and recorded as an extraordinary gain, instead of being deferred and amortized. SFAS142 prohibits amortization of the excess of cost over the underlying equity in the net assets of an equity method investee that is recognized as goodwill.

 

The Company has determined that it does not have any intangible assets that have an indefinite life. The Company

 

41


Table of Contents

does not have any negative goodwill balances that will be written off upon adoption of SFAS141.

 

The adoption of SFAS141 did not have an impact on the business, results of operations, and financial position of the Company.

 

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.

 

SFAS 144

 

In October 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”. SFAS No. 144 provides guidance on accounting for the impairment or disposal of long-lived assets. The objectives of the statement are to address issues relating to the implementation of SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of”, and to develop a model for long-lived assets to be disposed of by sale, whether previously held and used or newly acquired. SFAS No. 144 is effective for financial statements issued for fiscal years beginning after December 15, 2001. The Company is required to adopt the provisions of SFAS 144 effective from January 1, 2002 at which date the Company adopted this standard. The adoption had no material impact on the business, results of operations, and financial position of the Company.

 

In 2003, we will implement the following new standards:

 

SFAS 143

 

In August 2001, the FASB issued SFAS No. 143, “Accounting for Obligations Associated with the Retirement of Long-Lived Assets”. The provisions of SFAS No. 143 apply to all entities that incur obligations associated with the retirement of tangible long-lived assets. This statement is effective for financial statements issued for fiscal years beginning after June 15, 2002 and will become effective for the Company on January 1, 2003. The effects of this standard, if any, are not yet evaluated by the company.

 

SFAS 145

 

On April 30, 2002, the FASB issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections”. Among other amendments and revisions, SFAS No. 145 eliminates the requirement that gains and losses from the extinguishment of debt be aggregated and, if material, classified as an extraordinary item, net of the related income tax effect, unless such gains and losses meet the criteria in paragraph 20 of Accounting Principles Board Opinion No. 30, “Reporting the Results of Operations—Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions”. Generally, SFAS145 is effective for transactions occurring after May 15, 2002. SFAS 145 did not have a material impact on the Company’s consolidated financial position or results of operations.

 

SFAS 146

 

In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities”. SFAS146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). SFAS146 requires that a liability for a cost associated with an exit or disposal activity be recognized and measured initially at fair value only when the liability is incurred. The provisions of SFAS146 are effective for exit or disposal activities that are initiated after December 31, 2002, with early application encouraged. The effects of this standard, if any, have not yet been evaluated by the company.

 

SFAS 147

 

In October 2002, the FASB issued SFAS No. 147, “ Acquisitions of Certain Financial Institutions”. SFAS 147 addresses all acquisitions of financial institutions and is not expected to have material impact on the business, results of operations, and financial position of the Company. The standard is effective for all acquisitions from 1 October, 2001. The adoption of this standard is not expected to have any impact on the business, results of operations, and financial position of the Company.

 

SFAS 148

 

In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure an amendment of FASB Statement No. 123”. This Statement amends FASB Statement No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for an entity that voluntarily changes to the fair value based method of accounting for stock-based employee compensation. It also amends the disclosure provisions of that Statement to require prominent disclosure about the effects on reported net income of an entity’s accounting policy decisions with respect to stock-based employee compensation. Finally, this Statement amends APB Opinion No. 28, Interim Financial Reporting, to require disclosure about those effects in interim financial information. The Company has no current plan to change the fair value method of accounting for stock-based compensation under SFAS123 and does not therefor intend to apply the transition provisions of SFAS148.

 

42


Table of Contents

 

EITF 00-21

 

In January 2003, the Emerging Issues Task Force (EITF) issued EITF 00-21, “Accounting for Revenue Arrangements with Multiple Deliverables”. EITF 00-21 addresses the issues of (1) how to determine whether an arrangement involving multiple deliverables contains more than one unit of accounting; and (2) how arrangement consideration should be measured and allocated to the separate units of accounting in the arrangement. EITF 00-21 does not change otherwise applicable revenue recognition criteria. EITF 00-21 is effective for revenue arrangements entered into in fiscal periods beginning after June 15, 2003. The Company is in the process of assessing the impact of adopting EITF 00-21.

 

FIN 45

 

In November 2002, the FASB issued FASB Interpretation No. 45 (FIN45), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” FIN45 requires a liability to be recognized at the time a company issues a guarantee for the fair value of the obligations assumed under certain guarantee agreements. The provisions for initial recognition and measurement of guarantee agreements are effective on a prospective basis for guarantees that are issued or modified after December 31, 2002. The Company is in the process of assessing the impact of adopting FIN45.

 

FIN 46

 

In January 2003, the FASB issued FASB Interpretation No. 46 (FIN46 or “the Interpretation”), “Consolidation of Variable Interest Entities, an interpretation of ARB51”. FIN46 addresses the consolidation of entities for which control is achieved through means other than through voting rights (“variable interest entities” or “VIE”) by clarifying the application of Accounting Research Bulletin No. 51, “Consolidated Financial Statements” to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN46 provides guidance on how to determine when and which business enterprise (the “primary beneficiary”) should consolidate the VIE. In addition, FIN46 requires that both the primary beneficiary and all other enterprises with a significant variable interest in a VIE make additional disclosures.

 

The disclosure provisions of FIN46 are effective in all financial statements initially issued after January 31, 2003. FIN46 is required to be immediately applied by all entities with a variable interest in a VIE created after January 31, 2003. A public entity with a variable interest in a VIE created before February 1, 2003 is required to apply FIN46 to that entity no later than the beginning of the first interim or annual reporting period beginning after June 15, 2003. The Company is in the process of assessing the impact of adopting FIN46.

 

ITEM 5C:    RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES

 

Research and Development

 

In order to maintain our competitiveness through the development of innovative products and technologies, we have made substantial research and development expenditures in each of the last three years. Total spending on research and development, excluding restructuring costs was SEK 41.4 billion in 2000, SEK 43.1 billion in 2001 and SEK 29.3 billion in 2002. As a percentage of net sales, research and development expenditures were 15.1 percent in 2000, 18,6 percent in 2001 and 20.1 percent in 2002.

 

The total spending on research and development was reduced by 32 percent during 2002, compared to the previous year. The significant reduction in overall research and development expenditure has focused on cost reductions affecting non-core areas and the consolidation of multiple research and development facilities. We will, however, budget a sufficient level of research and development expenditures relating to core products to maintain our competitive position.

 

Please see also Item 5 “Operating and Financial Overview and Prospects, “Board of Directors’ Report”, section “Market Environment—Products, R&D and IPR” and Item 4B “Business Overview”.

 

ITEM 5D:    TREND INFORMATION

 

Market Environment and Business Trends

 

Market Environment

 

For Market Environment, please refer to the Item 5 “Board of Directors’ Report”, sections “Market Environment” and “Financial Results”.

 

Business Trends

 

Our sales increased steadily in the ten-year period through 2000 and, except for 1999, income before taxes also increased year by year over the period. As a result of macroeconomic and industry conditions, in particular within the telecommunications industry, this trend changed dramatically in 2001, with sales decreasing by 15 percent, resulting in a loss before taxes of SEK 30.3 billion. In 2002, the downturn continued with a sales decrease of 37 percent and a loss before taxes of SEK 23.3 billion. Excluding the effects of the de-consolidation of Phones from October 1, 2001, the decline in sales was 31 percent for comparable units. The development of sales, operating income and income before taxes over the three-year period ended December 31, 2002 is illustrated below:

 

43


Table of Contents

 

    

For the years ended December 31,


(SEK billion)


  

2000


  

2001


  

2002


Net sales

  

273.6

  

231.8

  

145.8

Operating income (loss):

              

—Systems

  

32.6

  

2.9

  

–4.9

—Phones 1)

  

–15.6

  

–17.0

  

–1.3

—Other operations and unallocated costs

  

–0.6

  

–4.1

  

–4.7

—Capital gains (losses), net

  

21.3

  

5.8

  

–0.7

—Restructuring provisions

  

–8.0

  

–15.0

  

–12.0

—One-off pension refund

  

1.1

  

—  

  

—  

Total operating income (loss)

  

30.8

  

–27.4

  

–21.3

Income (loss) before taxes

  

28.7

  

–30.3

  

–23.3


1)   Effective October 1, 2001, substantially all our handset operations were transferred to Sony Ericsson Mobile Communications and, as of such date, are accounted for pursuant to the equity method.

 

In 2000, operating income in the Systems segment increased significantly, and sales of shares in Juniper Networks and the divestiture of our Energy business generated capital gains of SEK 21.3 billion. These amounts were, however, offset by an operating loss and provisions for restructuring charges in the Phones segment totaling SEK 23.6 billion, primarily caused by product launch delays, less competitive products and delivery problems related to a fire in a supplier’s factory. Income before taxes increased as a result of the significant income from the Systems segment and the aforementioned capital gains.

 

In 2001, the telecommunications industry experienced a significant decline in demand, driven by general economic conditions as well as industry specific circumstances, such as lower growth in Western Europe and the United States. In Western Europe, the growth rate in the number of mobile subscribers decreased, reflecting the already relatively high penetration of mobile handsets, and operators reduced capital expenditure on infrastructure due to their significant debt burdens largely incurred to acquire 3G licenses. In the United States, demand for TDMA equipment decreased as a result of operators’ decisions to transition to GSM. Demand for fixed telecommunications infrastructure also decreased rapidly, in particular in Latin America during the second half of the year. We implemented an Efficiency Program, principally relating to the Systems segment, with targeted cost reductions of SEK 20 billion annually beginning in 2002, for which we accrued restructuring costs of SEK 11.1 billion. The handset operations were downsized and restructured to minimize risk exposure, and we established and transferred substantially all of our handset business to the Sony Ericsson joint venture. A substantial operating loss was incurred in the Phones segment, due to excess capacity costs, lower than planned volumes sold, and lower than anticipated prices in a market characterized by significant excess capacity. In addition to the provisions recorded in 2000, we made provisions of SEK 3.9 billion in connection with the rightsizing of the handset business before transfer of the business to Sony Ericsson Mobile Communications. In Other operations, our Microelectronics and Cables businesses were adversely impacted by very low demand. Capital gains improved operating income by SEK 5.8 billion.

 

In 2002, the situation in the telecom market worsened, with a decline of over 30 percent, also this year driven by general economic conditions and industry specific circumstances. Many operators had excess capacity reflecting overinvestment in network capacity prior to 2002, while others had to postpone investments to strengthen their financial position. The rollout of third generation networks developed slower than expected, due to shortage of handsets, difficult financial situations among operators, and issues related to building permits for sites and towers in several markets. The price pressure intensified, but through cost reductions, we were able to cope with this rather well. As a result of the market decline, orders booked decreased sequentially during three quarters until the fourth quarter, which showed an improvement of 49 percent compared to the third quarter. Part of this increase, however, is related to seasonality. The implementation of the Efficiency Program continued, as outlined in 2001. Additional restructuring measures were decided at the end of the first quarter, aimed at reducing operating expenses by an additional SEK 30 billion before the end of 2003. This, plus measures to reduce cost of sales, is undertaken to ensure a break-even point as low as at SEK 120 billion of sales. The run-rate of annual operating expenses was reduced to SEK 51 billion in the fourth quarter, compared to 68 billion at the beginning of the year. Excluding the effects of the de-consolidation of Phones, the number of employees was reduced with 24 percent to 64,600 at year-end 2002 compared with 85,200 at year-end 2001.

 

Please also refer to Board of Directors’ Report, section “2002 Cost Reduction Measures” and section “Organization and employees—Restructuring program”.

 

Major Events and Factors Impacting our Business

 

We have undertaken a number of restructuring programs during 2000, 2001 and 2002 as a result of the difficult market environment and our focus on improving profitability in our Systems and Phones segments.

 

Restructuring 2000

 

In an effort to restore profitability in our Phones segment, we began to implement a restructuring program in July 2000, which we refer to as the “Back-to-Profit” program. The primary aim of the program was to concentrate our product portfolio on those products which we believed had the greatest market opportunities. We also contracted to outsource the development and manufacturing, according to our specifications, of entry-level mobile handsets, and we streamlined manufacturing by transferring high-volume production to low-cost manufacturing units. In addition, we focused our research and development expenditures on advanced mobile systems, specifically in support of GPRS and 3G products.

 

44


Table of Contents

 

The Back-to-Profit program resulted in a reduction of headcount by 11,000, of which 1,300 took place in 2000 and the remainder in 2001. Of this reduction, 2,000 employees were transferred to Flextronics under an outsourcing arrangement and the remainder of employees were made redundant. We discuss the arrangements with Flextronics in more detail under “—Flextronics Outsourcing Arrangements” below.

 

Restructuring 2001

 

Phones

 

In 2001, we extended the Back-to-Profit program in our Phones segment and recorded an additional provision of SEK 3.9 billion in preparation for the transfer of substantially all of our mobile handset business to Sony Ericsson Mobile Communications.

 

This provision related to additional downsizing, with the reduction of 4,000 employees and inventory and equipment write-offs. Overall headcount was reduced through the Back-to-Profit program from approximately 18,000 in September 2000 to approximately 6,400 in September 2001. As of October 1, 2001 substantially all of the Phones operations, including approximately 3,000 employees, were transferred to Sony Ericsson Mobile Communications. The downsized operations reduced our operating loss, and our 50 percent share of the joint venture’s losses for the fourth quarter was SEK –0.7 billion, compared to the much larger losses incurred before the Back-to-Profit program. Some operations relating to mobile platforms, Bluetooth and manufacturing in China were retained.

 

Systems, Other operations and unallocated costs

 

In the second quarter of 2001, we launched the “Efficiency Program” in order to mitigate the adverse effects of sharply declining orders. The Efficiency Program included initiatives to streamline sales and administrative operations, reduce our employee headcount, centralize control over internal information technology functions, and consolidate our research and development facilities. We established provisions of SEK 11.1 billion in 2001 in relation to the Efficiency Program.

 

As of December 31, 2001, the Efficiency Program had resulted in 10,600 employee reductions and the engagement of 8,000 fewer external consultants and temporary workers.

 

The Efficiency Program was implemented substantially according to plan during 2001 and, based on estimated cost reductions, we believe that the measures adopted resulted in annual cost savings of approximately SEK 20 billion.

 

Flextronics Outsourcing Arrangements

 

In May 2001, we entered into an agreement with Flextronics to outsource the manufacturing of our mobile handsets. The terms of this agreement provided that we would sell certain fixed assets and inventory, and transfer certain employees, to Flextronics. The inventory, which consisted principally of components used in the manufacture of mobile handsets, was sold for an aggregate purchase price of SEK 8 billion, of which SEK 1 billion was immediately payable and SEK 7 billion was paid gradually as the inventory was consumed. The agreement also provided for minimum purchase commitments of handsets and required us to compensate Flextronics in the event that these minimum commitments were not met. In addition, we sold certain other assets to Flextronics for a purchase price of SEK 1 billion, which was immediately payable.

 

As a result of these transactions, we reclassified approximately SEK 8 billion of inventory and SEK 1 billion of fixed assets to other receivables in our second quarter 2001. Our full year 2001 cash flow statement benefited from cash payments received from Flextronics of SEK 6 billion, of which SEK 2 billion was paid in each of the second, third and fourth quarters of 2001. The outstanding balance in other receivables of SEK 2 billion at December 31, 2001, related to inventory not yet consumed by Flextronics. Moreover, pursuant to the agreement, we acquired finished handsets from Flextronics and carried these items in our inventory accounts until they were sold. This arrangement ceased on October 1, 2001, at which time Flextronics entered into a similar outsourcing arrangement with Sony Ericsson Mobile Communications AB.

 

Restructuring 2002

 

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, a number of measures have been 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 will reduce 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. This will reduce operating expenses.

 

As a result, the annual run-rate in operating expenses was reduced from SEK 68 billion at the beginning of the year to SEK 51 billion in the fourth quarter. The program is well on track to

 

45


Table of Contents

 

reach the target level of SEK 38 billion. In 2002, the remaining provisions made in 2001 have largely been reversed to cover actual costs. At the end of this year, SEK 500 million remained and we expect that these will be dissolved during the first quarter of 2003. During the year, further restructuring activities were implemented. At year end, provisions of SEK 7 billion related to activities implemented in 2002 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.

 

Restructuring

 

(SEK billion)


  

2000


  

2001


  

2002


Restructuring charges

              

Inventory

  

5.0

  

2.6

  

0.8

Tangible fixed assets

  

1.5

  

1.5

  

0.3

Employee redundancy 1)

  

3.7

  

7.5

  

10.6

Other

  

2.5

  

3.4

  

0.3

    
  
  

Total

  

12.7

  

15.0

  

12.0

    
  
  

Of which:

              

Cost of sales

  

11.7

  

8.3

  

5.6

Research and development and other technical expenses

  

0.6

  

3.5

  

4.1

Selling expenses

  

0.3

  

1.5

  

1.5

Administrative expenses

  

0.1

  

1.4

  

0.7

Other operating revenue

  

—  

  

0.2

  

0.1

    
  
  

Total

  

12.7

  

15.0

  

12.0

    
  
  

Restructuring provisions

              

Opening balance

  

0

  

3.4

  

7.1

Provisions made

  

8.0

  

15.0

  

7.2

Provisions utilized

  

–4.6

  

–11.3

  

–6.6

Adjustments

  

0

  

0

  

–0.2

    
  
  

Closing balance

  

3.4

  

7.1

  

7.5

    
  
  

Restructuring cost in P/L

              

Provisions made

  

8.0

  

15.0

  

7.2

Direct charges

  

4.7

  

0

  

4.8

    
  
  

Total

  

12.7

  

15.0

  

12.0

    
  
  

1)   Approximately 5,000 employees were affected due to restructuring in 2000. 10,600 and 13,000 will be affected due to restructuring in 2001 and 2002 respectively.

 

Please see also Board of Director’s Report and Five Year Summary.

 

 

 

 

46


Table of Contents

 

Item 6:    Directors, Senior Management and Employees

 

ITEM 6A:    DIRECTORS AND SENIOR MANAGEMENT

 

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 Item 6C “Board Practices”.

 

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


    

Member since


    

Age


    

Position


    

B shares


    

Convertible

debentures

1997/2003 (in SEK) 2)


    

Options 3)


Michael Treschow

    

2002

    

59

    

Chairman

    

770,000

    

—  

    

—  

Tom Hedelius 1)

    

1991

    

63

    

Deputy Chairman

    

145,232

    

—  

    

—  

Marcus Wallenberg 1)

    

1996

    

45

    

Deputy Chairman

    

704,000

    

—  

    

—  

Peter L. Bonfield

    

2002

    

57

    

Director

    

—  

    

—  

    

—  

Lena Torell

    

2002

    

57

    

Director

    

—  

    

—  

    

—  

Sverker Martin-Löf 1)

    

1993

    

59

    

Director

    

52,000

    

—  

    

—  

Eckhard Pfeiffer

    

2000

    

61

    

Director

    

3,040

    

—  

    

—  

Peter Sutherland 1)

    

1996

    

56

    

Director

    

—  

    

—  

    

—  

Göran Engström

    

1994

    

55

    

Employee Representative

    

10,275

    

99,120

    

1,200

Jan Hedlund

    

1994

    

57

    

Employee Representative

    

875

    

75,520

    

—  

Per Lindh

    

1995

    

46

    

Employee Representative

    

—  

    

—  

    

—  

Monica Bergström

    

1998

    

42

    

Deputy Employee Representative

    

407

    

75,520

    

—  

Christer Binning

    

1994

    

57

    

Deputy Employee Representative

    

1,418

    

145,347

    

—  

Åke Svenmarck

    

2000

    

60

    

Deputy Employee Representative

    

—  

    

—  

    

—  


1)   Mr. Hedelius and Mr. Martin-Löf are also directors of AB Industrivärden and Mr. Wallenberg and Mr. Sutherland are also directors of Investor AB. Investor AB and AB Industrivärden 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.

 

 

47


Table of Contents

 

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.

 

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 Industrivärden, 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-Löf, 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 Industrivärden 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.

 

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.

 

Göran Engström, 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 Bergström, Deputy Director (since 1998)

 

Employee representative.

 

Christer Binning, Deputy Director (since 1994)

 

Employee representative.

 

Åke 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.

 

48


Table of Contents

 

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


  

Appointed year


    

Age


  

Position


  

A shares


  

B shares


  

Convertible

debentures

1997/2003

(in SEK) 1)


  

Options 2)


Kurt Hellström

  

1999

    

59

  

President

& Chief Executive Officer

  

—  

  

45,384

  

145,347

  

1,256,040

Sten Fornell

  

2000

    

54

  

Executive Vice President

& Chief Financial Officer

  

—  

  

352,216

  

—  

  

830,920

Per-Arne Sandström

  

2001

    

55

  

Executive Vice President

& Chief Operating Officer

  

—  

  

105,830

  

145,347

  

878,324

Ragnar Bäck

  

2000

    

58

  

Executive Vice President

  

—  

  

49,128

  

145,347

  

688,236

Mats Dahlin

  

1998

    

48

  

Executive Vice President

  

—  

  

30,941

  

—  

  

835,432

Gerhard Weise

  

2001

    

55

  

Executive Vice President

  

—  

  

54,992

  

145,347

  

686,388

Carl Olof Blomqvist

  

1999

    

52

  

Senior Vice President

  

6,080

  

9,546

  

—  

  

638,816

Henry Sténson

  

2002

    

47

  

Senior Vice President

  

—  

  

10,000

  

—  

  

452,000

Torbjörn Nilsson

  

1998

    

50

  

Senior Vice President

  

—  

  

49,399

  

145,347

  

820,600

Britt Reigo

  

1988

    

60

  

Senior Vice President

  

—  

  

12,000

  

145,347

  

728,224

Jan Uddenfeldt

  

1998

    

52

  

Senior Vice President

  

—  

  

12,570

  

—  

  

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 Hellström

 

President (since July, 1999) and Chief Executive Officer (since January, 2001). Prior to assuming this position, Mr. Hellström 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 Sandström

 

Executive Vice President (since March 2001) and Chief Operating Officer (since September 2001). Prior to assuming this position, Mr. Sandström was the Head of Market Area North America.

 

Ragnar Bäck

 

Executive Vice President (since March 2000). Head of Market Area Asia Pacific (since November 2001). Prior to assuming this position, Mr. Bäck 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 Mannheimer Swartling law firm.

 

Henry Sténson

 

Senior Vice President (since May 2002). Corporate Function Communications. Prior to assuming this position, Mr. Sténson was the Head of SAS Group Communication, SAS AB.

 

Torbjörn 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.

 

49


Table of Contents

 

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.

 

ITEM 6B:    COMPENSATION OF DIRECTORS AND OFFICERS

 

Please refer to Item 17, Notes to the Financial Statements, Note 26.

 

ITEM 6C:    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-Löf, 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’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’ 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 Göran Engström. 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’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 Dahlbäck, Investor, Anders Ek, Robur, Anders Nyrén, Industrivärden 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’ 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.

 

See also Item 5 “Operating and Financial Review and Prospects”, “Board of Directors’ Report”.

 

50


Table of Contents

 

Auditors

 

Statutory auditors

 

Carl-Eric Bohlin

 

Authorized Public Accountant, PricewaterhouseCoopers AB

 

Olof Herolf

 

Authorized Public Accountant, PricewaterhouseCoopers AB

 

Thomas Thiel

 

Authorized Public Accountant

 

Deputy auditors

 

Bo Hjalmarsson

 

Authorized Public Accountant, PricewaterhouseCoopers AB

 

Jeanette Skoglund

 

Authorized Public Accountant, PricewaterhouseCoopers AB

 

Stefan Holmström

 

Authorized Public Accountant

 

ITEM 6D:    EMPLOYEES

 

Please refer to Item 17, Notes to the Financial Statements, Note 26 and Item 5 “Operating and Financial Review and Prospects”, “Board of Directors’ Report”, section “Employees”.

 

ITEM 6E:    SHARE OWNERSHIP

 

Please refer to Item 17, Notes to the Financial Statements, Note 26 and Item 6A “Directors and Senior Management”.

 

51


Table of Contents

 

Item 7:    Major Shareholders and Related Party Transactions

 

ITEM 7A:    MAJOR SHAREHOLDERS

 

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.

 

Currently, one A share has one-thousand times the voting power of one B share.

 

      

Year end, 2002


      

Year end, 2001


 

Sweden

    

52

%

    

52

%

United States

    

23.8

%

    

25.4

%

United Kingdom

    

3.3

%

    

4.7

%

Luxembourg

    

3.3

%

    

4.5

%

Switzerland

    

2.0

%

    

3.3

%

Belgium

    

1.3

%

    

1.6

%

Germany

    

1.1

%

    

3.0

%

Other countries

    

13.2

%

    

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 group 1)


 

Number of

A-shares


  

Percentage of total

A-shares


 

Number of

B-shares


  

Percentage of total

B-shares


 

Voting rights, percent


  

Percentage of capital


Investor AB

 

256,660,096

  

39.11

 

595,587,036

  

3.89

 

38.31

  

5.34

AB Industrivärden

 

186,000,000

  

28.34

 

213,539,276

  

1.39

 

27.73

  

2.50

Svenska Handelsbankens Pensionsstiftelse

 

35,500,000

  

5.41

 

35,500,000

  

0.23

 

5.29

  

0.44

Livförsäkrings AB Skandia

 

32,962,932

  

5.02

 

253,476,027

  

1.65

 

4.95

  

1.79

Pensionskassan SHB Försäkringsförening

 

31,680,000

  

4.83

 

31,680,000

  

0.21

 

4.72

  

0.40

Gamla Livförsäkringsaktiebolaget SEB-Trygg

 

12,979,720

  

1.98

 

134,742,280

  

0.88

 

1.95

  

0.92

Stiftelsen Oktogonen

 

12,903,000

  

1.97

 

12,903,000

  

0.08

 

1.92

  

0.16

Svenska Handelsbankens Personalstiftelse

 

10,000,000

  

1.52

 

10,000,000

  

0.07

 

1.49

  

0.13

EB-stiftelsen Skandinaviska Enskilda Banken

 

7,779,200

  

1.19

 

8,679,200

  

0.06

 

1.16

  

0.10

Fjärde AP-fonden

 

2,191,000

  

0.33

 

248,824,000

  

1.62

 

0.36

  

1.57

Första AP-fonden

 

2,191,000

  

0.33

 

213,113,286

  

1.39

 

0.36

  

1.35

Tredje AP-fonden

 

1,876,900

  

0.29

 

207,501,471

  

1.35

 

0.31

  

1.31

Svenska Handelsbanken

 

1,462,000

  

0.22

 

9,451,920

  

0.06

 

0.22

  

0.07

SEB fonder

 

551,274

  

0.08

 

245,061,196

  

1.60

 

0.12

  

1.54

Astoria i Linköping AB

 

720,000

  

0.11

 

3,286,612

  

0.02

 

0.11

  

0.03

Foreign ownership 2)

 

6,482,117

  

0.99

 

6,142,074,502

  

40.10

 

1.88

  

38.49

Others

 

54,279,401

  

8.27

 

6,952,620,232

  

45.39

 

9.12

  

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

 

 

 

52


Table of Contents

 

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

  

2002


  

2001


  

2000


(percent of voting rights)


  

A shares


  

B shares


  

A shares


  

B shares


  

A shares


  

B shares


Investor AB

  

39.11

  

3.93

  

39.11

  

1.74

  

22.48

  

1.74

AB Industrivärden

  

28.34

  

1.41

  

28.34

  

0.04

  

28.34

  

0.00

Wallenberg-stiftelser

  

—  

  

—  

  

—  

  

—  

  

16.64

  

0.00

Svenska Handelsbankens Pensionsstiftelse

  

5.41

  

0.23

  

5.41

  

0.00

  

5.49

  

0.08

Livförsäkrings AB Skandia

  

5.02

  

1.67

  

5.02

  

1.20

  

5.02

  

0.61

Pensionskassan SHB Försäkringsförening

  

4.83

  

0.21

  

4.83

  

0.00

  

4.83

  

0.00

Gamla Livförsäkringsaktiebolaget SEB-Trygg

  

1.98

  

0.89

  

1.84

  

0.75

  

1.84

  

0.72

Oktogonen, Stiftelsen

  

1.97

  

0.09

  

1.91

  

0.00

  

1.91

  

0.00

Svenska Handelsbankens Personalstiftelse

  

1.52

  

0.07

  

1.52

  

0.00

  

1.52

  

0.00

SEB-stiftelsen Skandinaviska Enskilda Banken

  

1.19

  

0.06

  

1.32

  

0.00

  

1.71

  

0.00

Fjärde AP-fonden

  

0.33

  

1.64

  

0.33

  

1.39

  

1.34

  

4.04

Första AP-fonden

  

0.33

  

1.41

  

0.33

  

1.07

  

—  

  

—  

Tredje AP-fonden

  

0.29

  

1.37

  

0.65

  

0.84

  

—  

  

—  

Svenska Handelsbanken

  

0.22

  

0.06

  

—  

  

—  

  

—  

  

—  

Astoria i Linköping AB

  

0.11

  

0.02

  

—  

  

—  

  

—  

  

—  

SEB fonder

  

0.08

  

1.62

  

—  

  

—  

  

—  

  

—  

SHB Fonder

  

—  

  

—  

  

0.61

  

1.10

  

0.62

  

0.65

Wallanders och Hedelius’ stiftelse

  

—  

  

—  

  

0.49

  

0.00

  

0.49

  

0.00

Andra AP-fonden

  

—  

  

—  

  

0.33

  

1.10

  

—  

  

—  

Foreign ownership

  

0.99

  

40.51

  

0.96

  

53.29

  

1.28

  

59.07

Others

  

8.27

  

44.83

  

6.97

  

37.48

  

6.49

  

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:

 

      

Number of A shares


    

Number of B shares


    

Voting rights, percent


Officers and directors as a group (25 persons)

    

6,080

    

2,372,125

    

Insignificant

 

ITEM 7B:    RELATED PARTY TRANSACTIONS

 

Please refer to Item 17, Notes to the Financial Statements, Note 27.

 

ITEM 7C:    INTERESTS OF EXPERTS AND COUNSEL

 

Not applicable.

 

53


Table of Contents

Item 8:    Financial Information

 

ITEM 8A:    CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION

 

Audited financial statements for the three years ended December 31, 2002, are included in “Item 17: Financial Statements”.

 

See also Item 17 “Notes to the Financial Statements”, “Note 1”, Item 4B “Business Overview”, “Legal Proceedings” and Item 10B “Memorandum and Articles of Association”, “Dividend Policy”.

 

ITEM 8B:    SIGNIFICANT CHANGES

 

On February 6, 2003, Ericsson’s Board of Directors appointed Carl-Henric Svanberg new CEO and President of Ericsson. He will take office at Ericsson’s Annual General Meeting on April 8, 2003. Carl-Henric Svanberg is presently CEO for the international lock group AssaAbloy. Ericsson’s CEO and President Kurt Hellström will stay with the company until year-end in order to secure a successful hand over.

 

On February 17, 2003, Moody’s lowered Ericsson’s long-term credit rating from Ba2 to B1. This will increase interest expenses on borrowings with rating-related rates by approximately SEK 110 million per year.

 

On February 26, 2003, Ericsson’s Board of Directors proposed that the Annual General Meeting in accordance with previous decisions that the Company transfers its own stock in order to cover certain payments that occur in relation to the Company’s global stock incentive program 2001 for employees.

 

On March 4, 2003, Ericsson’s Board of Directors decided to propose a continued stock purchase plan in order to encourage an increased shareholding among the employees.

 

On March 17, 2003, Ericsson and InterDigital Communications Corporation (InterDigital), along with its subsidiary, InterDigital Technology Corporation (ITC), reached a settlement in a patent infringement suit.

 

On March 17, 2003, a new executive team was announced, effective from April 8, 2003. The new CEO, Carl-Henric Svanberg, the current COO Per-Arne Sandström and a newly appointed CFO, Karl-Henrik Sundström will form a new Executive Management Team. Per-Arne Sandström is appointed First Executive Vice President.

 

The current CFO, Sten Fornell, will leave the Company at the end of the year and will be advising the new executive management in financial matters during the remainder of the year.

 

Please see also Item 5 “Operating and Financial Review and Prospects”, “Board of Directors’ Report”, section “Post-closing Events”.

 

54


Table of Contents

 

Item 9:    The Offer and Listing

 

ITEM 9A:    OFFER AND LISTING DETAILS

 

Host market and the Principal trading market Nasdaq ADS Prices

 

The tables below state the high and low sales prices quoted for our ADSs on Nasdaq for the last five years. The Nasdaq quotations represent prices between dealers, not including retail mark-ups, markdowns or commissions, and do not necessarily represent actual transactions.

 

Stockholmsbörsen (Stockholm Stock Exchange) Share prices

 

The tables below state the high and low sales prices for our A and B shares as reported by Stockholmsbörsen for the last five years. The equity securities listed on the A-list of Stockholmsbörsen’s Official Price List of Shares currently comprise the shares of 80 companies. Trading on the exchange generally continues until 5:30 p.m. each business day. In addition to official trading on the exchange, there is also trading off the exchange during official trading hours and also after 5:30 p.m. Trading on the exchange tends to involve a higher percentage of retail clients, while trading off the exchange often involves larger Swedish institutions, banks arbitrating between the Swedish market and foreign markets, and foreign buyers and sellers purchasing shares from or selling shares to Swedish institutions.

 

The exchange publishes a daily Official Price List of Shares which includes the volume of recorded transactions in each listed stock, together with the prices of the highest and lowest recorded trades of the day. The Official Price List of Shares reflects price and volume information for trades completed by the members.

 

Annual high and low market prices

 

The annual high and low market prices, currency and Stock on these markets were as follows:

 

    

NASDAQ


    

STOCKHOLMSBÖRSEN


    

USD per ADS


    

SEK per A share


    

SEK per B share


Period


  

High


  

Low


    

High


  

Low


    

High


  

Low


1998 1)

  

61.59

  

27.08

    

40.44

  

24.56

    

48.39

  

21.67

1999 1)

  

122.43

  

37.01

    

104.00

  

34.67

    

103.28

  

31.78

2000

  

190.04

  

74.92

    

169.72

  

75.83

    

166.83

  

72.94

2001

  

97.50

  

22.03

    

91.00

  

23.98

    

88.11

  

23.18

2002

  

43.33

  

3.40

    

42.89

  

3.80

    

44.78

  

2.96

 

From October 18, 2002, one ADS represents 10 class B shares. Previous periods are restated. On October 18, 2002, the Board of Directors of Ericsson authorized a 1:10 change in the ratio of its American Depositary Shares (ADSS) as they relate to its Class B shares. This means that each ADR represents 10 Series B shares. The change was made in order to compl28

y with the listing requirements of the Nasdaq National Market and it became effective on October 23, 2002. Share market prices prior to August 8, 2002, have been adjusted for the stock dividend element of the stock issue.

1)    1998–1999 adjusted for 4:1 stock split.

 

55


Table of Contents

 

Quarterly high and low market prices

 

The table below states for each quarter of 2001 and 2002 high and low sales prices, currency and Stock.

 

    

NASDAQ


    

STOCKHOLMSBÖRSEN


    

USD per ADS 1)


    

SEK per A share


    

SEK per B share


Period


  

High


  

Low


    

High


  

Low


    

High


  

Low


2001

                                 

First Quarter

  

97.50

  

36.11

    

91.00

  

41.89

    

88.11

  

39.36

Second Quarter

  

54.89

  

34.31

    

54.56

  

35.00

    

55.61

  

34.95

Third Quarter

  

41.53

  

22.03

    

43.92

  

22.79

    

44.78

  

23.18

Fourth Quarter

  

45.07

  

23.26

    

46.67

  

24.71

    

48.39

  

24.84

2002

                                 

First Quarter

  

44.33

  

27.52

    

42.89

  

28.82

    

44.78

  

29.54

Second Quarter

  

30.55

  

9.32

    

30.81

  

9.47

    

31.42

  

9.03

Third Quarter

  

13.51

  

3.40

    

13.31

  

3.80

    

12.86

  

2.96

Fourth Quarter

  

11.29

  

3.70

    

12.50

  

4.06

    

10.40

  

3.30

 

Share market prices prior to August 8, 2002, have been adjusted for the stock dividend element of the stock issue.

  1)   1 ADS = 10 class B shares

 

Monthly high and low market prices

 

The table below states high and low sales prices, currency and Stock for the last year (January 2002 to February 2003).

 

    

NASDAQ


    

STOCKHOLMSBÖRSEN


    

USD per ADS 1)


    

SEK per A share


    

SEK per B share


Month


  

High


  

Low


    

High


  

Low


    

High


  

Low


January 2002

  

43.33

  

28.67

    

42.89

  

30.20

    

44.78

  

30.69

February 2002

  

32.43

  

27.52

    

33.77

  

28.82

    

34.74

  

29.54

March 2002

  

35.61

  

29.39

    

35.69

  

29.05

    

36.83

  

30.19

April 2002

  

30.55

  

16.11

    

30.81

  

16.06

    

31.42

  

16.32

May 2002

  

19.21

  

15.46

    

19.22

  

15.24

    

19.72

  

15.17

June 2002

  

16.47

  

9.32

    

16.13

  

9.47

    

16.18

  

9.03

July 2002

  

13.51

  

5.20

    

12.01

  

5.97

    

12.86

  

5.20

August 2002

  

7.62

  

3.54

    

10.30

  

6.04

    

9.15

  

4.70

September 2002

  

7.50

  

3.40

    

8.45

  

3.80

    

7.20

  

2.96

October 2002

  

8.25

  

3.70

    

9.75

  

4.06

    

7.70

  

3.30

November 2002

  

11.29

  

7.59

    

12.50

  

8.90

    

10.40

  

6.80

December 2002

  

10.24

  

6.61

    

11.70

  

8.40

    

9.40

  

6.00

January 2003

  

10.24

  

7.20

    

11.10

  

8.30

    

9.10

  

6.00

February 2003

  

7.75

  

6.33

    

8.95

  

6.90

    

7.00

  

5.30

 

Share market prices prior to August 8, 2002, have been adjusted for the stock dividend element of the stock issue.

  1)   1 ADS = 10 class B shares

 

The total market value of our shares decreased by about 79 percent in 2002 to approximately SEK 98 billion. The Stockholmsbörsen 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 price decreased by about 10 percent during the first two months of 2003.

 

For share price trend, please refer to the Item 9 “The Offer and Listing”, “Markets”.

 

ITEM 9B:    PLAN OF DISTRIBUTION

 

Not applicable

 

 

56


Table of Contents

 

ITEM 9C:    MARKETS

 

Stock exchange trading

 

Ericsson’s Series A and Series B shares are traded on Stockholm Stock Exchange (OM Stockholmsbörsen and the Series B shares are also traded on the exchanges in Düsseldorf, 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 (Düsseldorf, Frankfurt and Hamburg) and the “Swiss Exchange”. On December 20, 2002, we de-listed from the “Swiss Exchange”, and on February 17, 2003, we de-listed from Euronext. De-listing has 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 Stockholmsbörsen, 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.

 

LOGO

 

Share price trend

 

The total market value of our shares decreased by about 79 percent in 2002 to approximately SEK to 98 billion. The Stockholmsbörsen 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’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.

 

57


Table of Contents

 

Share data

 

      

2002


    

2001


    

2000


    

1999


    

1998


Earnings per share, diluted (SEK) 2) 3)

    

–1.51

    

–1.49

    

1.91

    

1.11

    

1.20

P/E ratio, B shares

    

—  

    

—  

    

40

    

89

    

29

Dividend (SEK) 1)

    

0

    

0

    

0.36

    

0.36

    

0.36

      
    
    
    
    

Share prices on Stockholmsbörsen (SEK)

                                  

A at last day of trading

    

8.60

    

42.25

    

88.17

    

104.00

    

37.56

B at last day of trading

    

6.10

    

41.53

    

78.00

    

98.94

    

34.67

B high for year

    

44.78

    

88.11

    

166.83

    

103.28

    

48.39

B low for year

    

2.96

    

23.18

    

72.94

    

31.78

    

21.67

      
    
    
    
    

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

 

                 

Number of shares


    

Capital stock


1998

 

January 1

           

974,496,059

    

2,436,240,148

1998

 

Stock dividend

    

1:1

    

975,097,150

    

2,437,742,875

1998

 

Conversions

           

1,759,181

    

4,397,952

1999

 

Conversions

           

5,786,131

    

14,465,328

2000

 

Stock dividend

           

—  

    

2,941,658,410

2000

 

Split

    

4:1

    

5,883,316,821

    

—  

2000

 

Conversions

           

69,880,270

    

75,830,899

2001

 

Conversions

           

168,395

    

168,395

2001

 

New issue

           

155,000,000

    

155,000,000

2002

 

Conversions

           

560

    

560

2002

 

Stock issue

           

7,908,754,111

    

7,908,754,111

2002

 

December 31

           

15,974,258,678

    

15,974,258,678

 

ITEM 9D:    SELLING SHAREHOLDERS

 

Not applicable

 

ITEM 9E:    DILUTION

 

Not applicable

 

ITEM 9F:    EXPENSES OF THE ISSUE

 

Not applicable

 

58


Table of Contents

 

Item 10:    Additional Information

 

ITEM 10A:    SHARE CAPITAL

 

Not applicable

 

ITEM 10B:    MEMORANDUM AND ARTICLES OF ASSOCIATION

 

Telefonaktiebolaget LM Ericsson is entered under no. 556016–0680 in the Company Register kept by the Swedish Patent & Registration Office. Our company’s objects and purposes are described in §2 of the Articles of Association.

 

Our Articles of Association do not stipulate anything regarding a) directors power to vote on a proposal, arrangement, or contract in which the director is materially interested, b) our directors’ power to vote compensation to themselves, c) our directors’ borrowing powers, d) retirements rules for our directors or e) the number of shares required for a director’s qualification. Applicable provisions are found in the Swedish Companies Act, as referred to in “Certain Powers of Directors and the President” below.

 

There are no age limit requirements for directors and they are not required to own any shares in the company.

 

Share Capital Increases and Preferential Rights of Shareholders

 

Our shares are divided into three series: A shares, B shares and C shares; however, no C shares are currently outstanding. Under the Swedish Companies Act of 1975 (the “Swedish Companies Act”), shareholders must approve each issue of additional shares either by deciding on the share issue at a shareholders’ meeting, or by a shareholders’ approval of a decision on a share issue by the board, or by giving an authorization to the board to decide about a share issue. If we decide to issue new A shares and B shares by means of a cash issue, A and B shareholders (except for Ericsson and its subsidiaries, in the event they hold shares in Ericsson) have a primary preferential right to subscribe for new shares of the same type in relation to the number of shares previously held by them. Shares not subscribed for through a preferential right shall be offered to all shareholders for subscription on a pro rata basis. If we decide to issue by means of a cash issue new shares of only one series, all shareholders, regardless of whether their shares are series A or series B, are entitled to a preferential right to subscribe for new shares in proportion to the number of shares previously held by them. Shareholders may vote to waive shareholders’ preferential rights at a general meeting.

 

Election of our Board of Directors

 

Our board of directors must consist of a minimum of five directors and a maximum of twelve directors, with no more than six deputies. Directors shall be elected each year at the annual general meeting for the period up to and inclusive of the following annual general meeting. A director may serve any number of consecutive terms. In addition, under Swedish law, employees have the right to appoint three directors (and their deputies).

 

Certain Powers of Directors and the President

 

The board of directors is ultimately responsible for the organization of the company and the management of the company’s operations. The president is charged with the day-to-day management of the company in accordance with any guidelines and instructions provided by the board of directors. The president has borrowing powers only to the extent such borrowing is part of the day-to-day management of the company and in accordance with any guidelines and instructions provided by the board of directors.

 

According to the Swedish Companies Act, a member of the board of directors and the president may not take part in matters regarding agreements between the individual concerned and the company, between the company and third parties where the individual concerned has a material interest in the matter which may conflict with the interests of the company, or agreements between the company and a legal entity which the individual concerned may represent, either individually or together with any other person.

 

The general meeting of shareholders decides on compensation for the directors. Typically the general meeting decides on an aggregate amount which is to be distributed among the directors as determined by the board.

 

Dividends

 

Our A and B shareholders have the same rights to dividends.

 

Under Swedish law, only a general meeting of shareholders may authorize the payment of dividends in an amount decided at such meeting, which may not exceed the amount recommended by the board of directors (except in certain limited circumstances), and may only be paid from funds legally available for that purpose. Under Swedish law, no interim dividends may be paid in respect of any fiscal period for which audited financial statements of the company have not yet been adopted by the annual general meeting of shareholders. The market practice in Sweden, which we currently follow, is for dividends to be paid annually. Under the Swedish Companies Act, dividends to shareholders may not exceed an amount equal to (1) the amount reported in the adopted balance sheet and, in respect of parent companies which must prepare consolidated financial statements, the consolidated balance sheet for the most recent financial year, as the company’s or group’s net profits for the year, profit brought forward and non-restricted reserves less (2) the sum of losses brought forward; sums which, pursuant to law or the articles of association, shall be allocated to restricted shareholders’ equity or in respect of parent companies, sums which, according to the annual reports

 

59


Table of Contents

for companies within the group, shall be transferred to restricted shareholders’ equity from non-restricted shareholders’ equity within the group; sums which, pursuant to the articles of association shall otherwise be utilized for purposes other than distribution to shareholders. Dividends may not be declared to the extent that payment thereof would contradict generally accepted business practices in light of a company’s capital structure, liquidity or financial position.

 

The company’s shares are registered in the computerized book-entry share registration system administered by VPC. The rights attached to shares eligible for dividends accrue to those persons whose names are recorded in the register of shareholders on a particular day. The dividends are then sent to a specified account as directed by the person registered with VPC, or to the address of that person. The relevant record date must, in most circumstances, be specified in the resolution declaring a dividend or resolving upon a capital increase or any similar matter in which shareholders have preferential rights.

 

Where the registered holder is a nominee, the nominee receives, for the account of the beneficial owner, dividends and, on issues of shares with preferential rights for the shareholders, shares, as well as rights. Dividends are remitted in a single payment to the nominee who is responsible for the distribution of such dividends to the beneficial owner. A similar procedure is adopted for share issues. Specific authority to act as a nominee must be obtained from VPC. VPC is required to keep a register with regard to any holding on behalf of a single beneficial owner in excess of 500 shares in any one company. This list must reveal the names of the beneficial owner and must be open to public inspection.

 

Voting

 

In a general meeting of Ericsson, each A share shall carry one vote and each B share one-thousandth of one vote. In all other respects, our A and B shareholders have the same rights.

 

We are required to publish notices to attend annual general meetings and extraordinary general meetings regarding changes in our articles of association no earlier than six weeks and no later than four weeks prior to the general meeting. Notices to attend other types of extraordinary general meetings must be published no earlier than six weeks and no later than two weeks prior to the general meeting.

 

A shareholder may attend and vote at the meeting in person or by proxy. Proxies are not valid for longer than a year from the date of issuance. Any shareholder wishing to attend a general meeting must notify us no later than 4:00 p.m. (Sweden time) on the day specified in the notice. We are required to accept all notifications of attendance at least five days prior to the meeting (not counting Sundays and certain Swedish holidays). A person designated in the register as a nominee (including the depositary of the ADSs) is not entitled to vote at a general meeting, nor is a beneficial owner whose share is registered in the name of a nominee (including the depositary of the ADSs) unless the beneficial owner first arranges to have such owner’s own name entered in the register of shareholders maintained by VPC no later than the designated record date.

 

Under the Swedish Companies Act, resolutions are passed by a simple majority of votes cast at the meeting with the chairman of the meeting having a decisive vote (except in respect of elections), unless otherwise required by law or a company’s articles of association. Under the Swedish Companies Act, certain resolutions require special quorums and majorities, including, but not limited to, the following:

 

  A   a resolution to amend the articles of association requires a majority of two-thirds of the votes cast as well as two-thirds of the shares present or represented at the meeting, except in those circumstances described in B – D below;

 

  B   a resolution to amend the articles of association which reduces any shareholder’s rights to profits or assets, restricts the transferability of shares or alters the legal relationship between shares, normally requires the unanimous approval of the shareholders present at the meeting and who hold nine- tenths of all outstanding shares;

 

  C   a resolution to amend the articles of association for the purpose of limiting the number of shares with which a shareholder may vote at a general meeting or requiring the retention of a larger amount of the net profit than required by the Swedish Companies Act or amending shareholders’ rights in a liquidation or dissolution, normally requires the approval of shareholders representing a two-thirds of the votes cast and nine-tenths of the shares present or represented at the meeting;

 

  D   a resolution of the kind referred to under B or C above may, however, be taken with a lower supermajority requirement if the amendments referred to therein will only adversely affect specific shares or classes of shares. In such cases, the requirement under A above will apply together with the following separate supermajority: (a) where a class of shares is adversely affected, approval of the owners of one-half of all shares of such class and who hold nine-tenths of the shares of such class present or represented at the meeting, or (b) where the shares adversely affected do not constitute a class of shares, the unanimous approval of all such affected outstanding shares present at the meeting and who hold nine-tenths of all outstanding shares adversely affected;

 

  E   a resolution to issue, approve or authorize the issuance for cash of new shares or convertible debt instruments or debt instruments with the right to subscribe for new shares with a deviation from the preferential right for existing shareholders requires a two-thirds majority of votes cast at the meeting as well as two-thirds of the shares present or represented at the meeting;

 

  F  

a resolution to redeem any or all of the outstanding share capital requires a two-thirds majority of votes cast at the meeting as well as two-thirds of the shares present or represented at the meeting. Certain circumstances, however, require the unanimous approval of the shareholders present at

 

60


Table of Contents
 

the meeting, with nine-tenths of all outstanding shares present or represented at the meeting; and

 

  G   a resolution to approve a merger requires a two-thirds majority of the votes cast at the meeting and two-thirds of the shares present or represented at the meeting.

 

At a general meeting of shareholders, a shareholder or proxy for one or more shareholders may cast full number of votes represented by the holder’s shares.

 

Purchase of Own Shares

 

A public Swedish limited liability company whose shares are traded on a securities exchange, an authorized market place or another regulated market place is entitled to purchase its own shares under certain conditions. A purchase by us of our own shares may take place only if (a) the purchase has been decided upon by a general meeting of shareholders or the board has been authorized by a general meeting of shareholders by a two thirds majority of votes cast at the meeting as well as two-thirds of the shares present or represented at the meeting, (b) the purchase is effected on a securities exchange or in some other regulated market either in the European Economic Association (EEA) or outside the EEA (in the latter case with the approval of the Swedish Financial Supervisory Authority the “SFSA”) or pursuant to an offer to all shareholders or holders of a specific class of shares, (c) the funds used in connection with such purchase could legally have been distributed as a dividend, and (d) we and our subsidiaries do not hold or, as a result of purchase, will not hold in excess of 10 percent of all our outstanding shares. As of December 31, 2002 we held an aggregate of 154,360,278 repurchased B shares.

 

Investment Restrictions

 

There are no limitations imposed by Swedish law or by our Articles of Association in respect of the rights of non-residents or foreign persons to purchase, own or sell securities issued by us.

 

As a general rule, Swedish securities may be freely sold to and owned by non-residents or foreign persons; however, on account of our defense-related contracts with the Swedish government and certain defense contractors, we are subject to defense industry licensing requirements in Sweden. The licenses granted by the governmental authorities in Sweden in relation to the defense industry provide that the production of defense equipment may be carried on as long as Swedish legal entities or persons hold the ultimate control of the parent company. In this context, control relates to the holding of the majority of the voting power of the outstanding shares. We are currently controlled by Swedish legal entities and persons and we must report any change, which could result in a change from Swedish control to foreign control. Further, our president and at least 50 percent of the members of our board of directors and their deputies must be Swedish citizens domiciled in Sweden. If we do not comply with the requirements under our licenses, the governmental authorities may reconsider our licenses or their terms. Furthermore, there are certain flagging and ownership examination rules that apply, irrespective of nationality.

 

Pursuant to recommendations concerning the disclosure of acquisition and transfer of shares issued by Näringslivets Börskommitté (the “Swedish Industry and Commerce Stock Exchange Committee”), any seller or purchaser of securities including shares of stock, convertible debt instruments, warrants, non-standardized options and futures of a Swedish company listed on Stockholmsbörsen, must report to Stockholmsbörsen and to the Company transactions in which the purchaser or seller acquires or disposes of 5 percent of any subsequent percentage that is a multiple of five, up to and including 90 percent of either the voting rights of all shares or the total number of shares in the Company. These changes in ownership should also be reported to an established news agency and to a nationally published newspaper in Sweden no later than 9:00 a.m. on the next day on which trading is conducted on Stockholmsbörsen. In addition, according to the Swedish Financial Instruments Trading Act, if a natural person or legal person who acquires or disposes of shareholdings in a Swedish company that has its shares listed on a stock exchange situated or operating within one or more EEA countries and, as a result of such acquisition or disposition, holds voting rights equal to, in excess of or less than one of the thresholds of 10 percent, 20 percent, 33 percent, 50 percent or 66 percent, the person is required to notify the company in writing at the same time it notifies the stock exchange or, if the shares are not listed in Sweden, the SFSA within seven calendar days of the acquisition or disposition. In addition, the Act on Reporting Obligations Regarding Certain Holdings of Financial Instruments requires, among other things, that certain individuals who own shares representing 10 percent or more of the share capital or the voting rights in a publicly traded company report such ownership to the SFSA which keeps a public register based on the information contained in such reports, and also to report any changes in such ownership.

 

If shares of a Swedish limited liability company are held in the name of a nominee, the nominee must issue a public report to the VPC every six months, listing all beneficial holders of more than 500 of the shares.

 

61


Table of Contents

 

ITEM 10C:    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.

 

ITEM 10D:    EXCHANGE CONTROLS

 

There is no Swedish legislation affecting a) the import or export of capital or b) the remittance of dividends, interest or other payments to nonresident holders of our securities except that, subject to the provisions in any tax treaty, dividends are subject to withholding tax.

 

The defense industry is subject to licensing requirements in Sweden. The licenses granted by the governmental authorities in Sweden in relation to the defense industry provide that the production of defense equipment may be carried on as long as Swedish legal entities or persons hold the ultimate control of the parent company. In this context, control relates to the holding of the majority of the voting power of the outstanding shares. Such control of the parent company is now held by Swedish legal entities and persons and the Company must report any change, which could result in a change from Swedish control to foreign control. Further, the president of the Company and at least 50 percent of the members of the board of directors and their deputies must be Swedish citizens domiciled in Sweden. In case of non-compliance with the requirements under a license, the governmental authorities may reconsider the license or its terms.

 

ITEM 10E:    TAXATION

 

General

 

The taxation discussion set forth below does not purport to be a complete analysis or listing of all potential tax effects relevant to the acquisition, ownership of B shares, ADSs or convertible debentures. The statements of United States and Swedish tax laws set forth below are based on the laws in force as of the date of this report and may be subject to any changes in United States or Swedish law, and in any double taxation convention or treaty between the United States and Sweden, occurring after that date, which changes may then have retroactive effect.

 

Specific tax provisions may apply for certain categories of tax payers. Your tax treatment if you are a holder of B shares, ADSs or convertible debentures depends in part on your particular situation. If you are a holder of B shares, ADSs or convertible debentures, you should therefore consult a tax advisor as to the tax consequences relating to your particular circumstances resulting from the ownership of B shares, ADSs, or convertible debentures.

 

The tax consequences to holders of ADSs, as discussed below, apply equally to holders of B shares.

 

Certain Swedish Tax Considerations

 

This section describes the material Swedish income and net wealth tax consequences for a holder of ADSs, B shares or convertible debentures who is not considered to be a Swedish resident for Swedish tax purposes. This section applies to you only if you are a holder of portfolio investments representing less than 10 percent of capital and votes and is not applicable if the ADSs, B shares or convertible debentures pertain to a permanent establishment or fixed base of business in Sweden.

 

Taxation on Capital Gains

 

Generally, non-residents of Sweden are not liable for Swedish capital gains taxation with respect to the sale of ADSs, B shares or convertible debentures. However, under Swedish tax law, capital gains from the sale of Swedish B shares and certain other securities by private individuals may be taxed in Sweden at a rate of 30 percent if they have been residents of Sweden or have lived permanently in Sweden at any time during the year of the sale or the 10 calendar years preceding the year of the sale (absent treaty provisions to the contrary). The provision is applicable on ADSs, B shares and convertible debentures.

 

This provision may, however, be limited by tax treaties that Sweden has concluded with other countries. Under the tax treaty between Sweden and the United States (the “U.S. Tax Treaty”), this provision applies for ten years from the date the individual became a non-resident of Sweden.

 

Taxation on Dividends

 

A Swedish dividend withholding tax at a rate of 30 percent is imposed on dividends paid by a Swedish corporation, such as us, to non-residents of Sweden. The same withholding tax applies to certain other payments made by a Swedish corporation, including payments as a result of redemption of shares and repurchase of stock through an offer directed to its shareholders. Exemption from the withholding tax or a lower tax rate may apply by virtue of a tax treaty. Under the U.S. Tax Treaty, the withholding tax on dividends paid on portfolio investments to eligible U.S. holders is reduced to 15 percent.

 

Under all Swedish tax treaties, except the tax treaty with Switzerland, withholding tax at the applicable treaty rate should be withheld by the payer of the dividends. With regard to dividends paid from shares in corporations registered with

 

62


Table of Contents

the VPC (such as our shares), a reduced rate of dividend withholding tax under a tax treaty is generally applied at the source by the VPC or, if the shares are registered with a nominee, the nominee, as long as the person entitled to the dividend is registered as a non-resident and sufficient information regarding the tax residency of the beneficial owner is available to the VPC or the nominee.

 

In those cases where Swedish withholding tax is withheld at the rate of 30 percent and the person who received the dividends is entitled to a reduced rate of withholding tax under a tax treaty, a refund may be claimed from the Swedish tax authorities before the end of the fifth calendar year following the distribution.

 

Taxation on Interest

 

No Swedish withholding tax is payable on interest paid to nonresidents of Sweden.

 

Net Wealth Taxation

 

The ADSs, B shares and convertible debentures are not subject to Swedish net wealth taxation in the hands of a holder that is not resident in Sweden for tax purposes.

 

You should consult your own tax advisors regarding the Swedish and other tax consequences of your ownership of ADSs, B shares and convertible debentures.

 

Certain United States Federal Income Tax Consequences

 

The following discussion is a summary of the material United States federal income tax consequences relevant to the ownership and disposition of ADSs or B shares or convertible debentures. This discussion is based on the tax laws of the United States (including the Internal Revenue Code of 1986, as amended, its legislative history, existing and proposed regulations thereunder, published rulings and court decisions) as in effect on the date hereof, all of which are subject to change, possibly with retroactive effect. The discussion is not a full discussion of all tax considerations that may be relevant to the ownership and disposition of ADSs or B shares or convertible debentures. The discussion applies only if you will hold the ADSs and/or the B shares and/or convertible debentures as capital assets and you use the USD as your functional currency. It does not deal with the tax treatment of investors subject to special rules, such as grantor trusts, real estate investment trusts, regulated investment companies, banks, brokers or dealers in securities, traders in securities or currencies that elect to use a mark-to-market method of recording for their securities holdings, financial institutions, insurance companies, tax-exempt entities, investors liable for alternative minimum tax, holders (either actually or constructively) of 10 percent or more of our B shares, persons holding ADSs and/or B shares or convertible debentures as part of a hedging, straddle, conversion or constructive sale transaction and persons who are resident or ordinarily resident in Sweden. In addition, investors holding ADSs and/or B shares and/or convertible debentures indirectly through partnerships are subject to special rules not discussed below. You should consult your own tax advisers about the United States federal, state, local and foreign tax consequences to you of the ownership and disposition of the ADSs or B shares or convertible debentures.

 

The discussion below applies to you only if you are a beneficial owner of ADSs and/or B shares and/or convertible debentures not resident in Sweden for purposes of the U.S. Tax Treaty and you are, for United States federal income tax purposes, (1) a citizen or resident of the United States, (2) a corporation or any other entity treated as a corporation that is organized in or under the laws of the United States or its political subdivisions, (3) a trust if all of the trust’s substantial decisions are subject to the control of one or more United States persons and the primary supervision of the trust is subject to a United States court or if a valid election is in effect with respect to the trust to be taxed as a United States person, or (4) an estate the income of which is subject to United States federal income taxation regardless of its source.

 

The discussion below assumes that the representations contained in the deposit agreement are true and that the obligations in the deposit agreement and any related agreement will be complied with in accordance with the terms. If you hold ADSs, you will be treated as the holder of the underlying B shares represented by those ADSs for United States federal income tax purposes.

 

Taxation of ADSs or B shares

 

Dividends

 

Subject to the passive foreign investment company rules discussed below, the gross amount of dividends paid (before reduction for any Swedish withholding taxes) with respect to the ADSs or B shares generally will be included in your gross income as ordinary income from foreign sources to the extent paid out of our current or accumulated earnings and profits (as determined for United States federal income tax purposes). Distributions in excess of earnings and profits will be treated as a non-taxable return of capital to the extent of your adjusted tax basis in the ADSs or B shares and thereafter as capital gain. The dividends will not be eligible for the dividends received deduction available to corporations in respect of dividends received from other U.S. corporations. The amount of any dividend paid in SEK will be the U.S. dollar value of the dividend payment based on the exchange rate in effect on the date of receipt by you, in the case of B shares or by the depositary, in the case of ADSs, whether or not the payment is converted into USD at that time. Your tax basis in the SEK received will equal such USD amount. Gain or loss, if any, recognized on a subsequent sale or conversion of the SEK will be U.S. source ordinary income or loss.

 

Subject to certain limitations, you will generally be entitled to receive credit against your United States federal income tax liability (or a deduction against your United States federal

 

63


Table of Contents

taxable income) with respect to any Swedish tax withheld in accordance with the U.S. Tax Treaty and paid over to Sweden. If a refund of the tax withheld is available to you under the laws of Sweden or under the U.S. Tax Treaty, the amount of tax withheld that is refundable will not be eligible for such credit against your United States federal income tax liability (and will not be eligible for the deduction against your United States federal taxable income). For foreign tax credit limitation purposes, the dividend will be income from sources without the United States, and generally will be treated as “passive income” (or, in the case of certain holders, “financial services income”).

 

Sale or Exchange of ADSs or B shares

 

Subject to the passive foreign investment company rules discussed below, you generally will recognize capital gain or loss on the sale or other disposition of the ADSs or B shares equal to the difference between the USD value of the amount realized and your adjusted tax basis (determined in USD) in the ADSs or B shares. Such gain or loss will be capital gain or loss and will generally be treated as arising from U.S. sources for foreign tax credit limitation purposes.

 

The amount realized on a disposition of ADSs or B shares generally will be the amount of cash you receive for the ADSs or B shares (which, in the case of payment in a non-U.S. currency, will equal the USD value of the payment received determined on (a) the date of receipt of payment if you are a cash basis taxpayer and (b) the date of disposition if you are an accrual basis taxpayer). If the ADSs or B shares are treated as traded on an “established securities market,” if you are a cash basis taxpayer (or, if you are an accrual basis taxpayer, if you so elect) you will determine the USD value of the amount realized by translating the amount received at the spot rate of exchange on the settlement date of the sale.

 

You will have a tax basis in any foreign currency received equal to the USD amount realized. Any gain or loss you realize on a subsequent conversion of foreign currency will be U.S. source ordinary income or loss.

 

Taxation of convertible debentures

 

Interest Payments

 

In general, the gross amount of interest paid on convertible debentures will be included in your gross income as ordinary income from foreign sources. If you use the cash method of accounting for United States federal income tax purposes and receive a payment of interest in SEK, you will be required to include in income the USD value of the SEK (determined on the date such payment is received) regardless of whether the payment is in fact converted to USD at that time, and such USD value will be the U.S. Holder’s tax basis in such SEK.

 

If you use the accrual method of accounting for United States federal income tax purposes, or are otherwise required to accrue interest prior to receipt, you will be required to include in income the USD value of the amount of interest income (including market discount and reduced by amortizable bond premium to the extent applicable) that has accrued and is otherwise required to be taken into account with respect to a debenture during an accrual period. The USD value of such accrued income will be determined by translating such income at the average rate of exchange for the accrual period or, with respect to an accrual period that spans two taxable years, at the average rate for the partial period within the taxable year. You may elect, however, to translate such accrued interest income using the rate of exchange on the last day of the accrual period or, with respect to an accrual period that spans two taxable years, using the rate of exchange on the last day of the taxable year. If the last day of an accrual period is within five business days of the date of receipt of the accrued interest, you may translate such interest using the rate of exchange on the date of receipt. The above election will apply to other obligations held by you and may not be changed without the consent of the U.S. Internal Revenue Service (the “IRS”). You will recognize exchange gain or loss (which will be treated as ordinary income or loss) with respect to accrued interest income on the date such income is received. The amount of ordinary income or loss recognized will equal the difference, if any, between the USD value of SEK received (determined on the date such payment is received) in respect of such accrual period and the USD value of interest income that has accrued during such accrual period (as determined above).

 

Amortizable Bond Premium

 

Generally, if you purchase a debenture for an amount that is in excess of the sum of all amounts payable on the debenture after its acquisition date (other than payments of stated interest), you will be considered to have purchased the debenture with amortizable bond premium. You may elect to amortize such premium (or if it results in a smaller amortizable bond premium attributable to the period of earlier call date, with reference to the amount payable on earlier call date) using a constant yield method over the remaining term of the debenture and may offset interest income otherwise required to be included in respect of the debenture with respect to an accrual period by the bond premium allocable to the accrual period. If the bond premium allocable to the accrual period exceeds the interest allocable to the accrual period, you may deduct such excess amount to the extent of the amount by which your total interest inclusions on the debenture in prior accrual periods exceed the total amount treat by you as a bond premium deduction on the debenture in prior accrual periods. Any remainder would generally be carried over to subsequent periods. Any election to amortize bond premium with respect to any debenture (or other general debt obligations) applies to all taxable debt obligations held by you at the beginning of the first taxable year to which the election applies and to all debt obligations thereafter acquired in all subsequent tax years and may not be revoked without the consent of the IRS.

 

64


Table of Contents

 

Market Discount

 

A debenture will be treated as purchased at a market discount if the amount for which you purchased the debenture is less than the debenture’s stated redemption price at maturity, subject to a certain “de minimis” rule.

 

Any gain recognized on the maturity or disposition of a debenture purchased at market discount will be treated as ordinary income to the extent that such gain does not exceed the accrued market discount on such debenture. Alternatively, you may elect to include market discount in income currently over the life of the debenture. Such election shall apply to all debt instruments with market discount acquired by you on or after the first day of the first year to which the election applies and may not be revoked without the consent of the IRS.

 

Purchase, Sale, Exchange and Retirement

 

If you purchase a debenture with previously owned SEK, you will recognize ordinary income or loss in an amount equal to the difference, if any, between your tax basis in the SEK and the USD fair market value of the SEK used to purchase the debenture, determined on the date of purchase.

 

Generally, upon the sale, exchange or retirement of a debenture, you will recognize taxable gain or loss equal to the difference between the amount realized on the sale, exchange or retirement and your adjusted tax basis in the debenture. Subject to the foreign currency rules and the passive foreign investment company rules discussed below, such gain or loss generally will be capital gain or loss (except to the extent of any accrued market discount not previously included in your income) and will be long-term capital gain or loss if at the time of sale, exchange or retirement the debenture has been held by you for more than one year. To the extent the amount realized represents accrued but unpaid interest, however, such amounts must be taken into account as interest income. If you receive SEK on such a sale, exchange or retirement, the amount realized will be based on the USD value of the SEK on the date the payment is received or the debenture is disposed of (or deemed disposed of). Your adjusted tax basis in a debenture will equal the cost of such debenture, increased by the amounts of any market discount previously included in income by you with respect to such debenture and reduced by any amortized acquisition or other premium and any principal payments received by you (in each case generally determined based on the USD value of SEK on the date of such purchase or adjustment).

 

Gain or loss realized upon the sale, exchange or retirement of a debenture that is attributable to fluctuations in currency exchange rates will be ordinary income or loss which will not be treated as interest income or expense. Gain or loss attributable to fluctuations in exchange rates relating to the principal amount will equal the difference between the USD value of the SEK principal amount of the debenture, determined on the date such payment is received or such debenture is disposed of, and the USD value of the SEK principal amount, determined on the date you acquired such debenture. Such foreign currency gain or loss will be recognized only to the extent of the total gain or loss realized by you on the sale, exchange or retirement of the debenture.

 

Conversion

 

The conversion of convertible debentures will not be a taxable transaction for United States federal income tax purposes except to the extent of any cash or other consideration received for fractional shares or accrued interest. Upon conversion, your basis in B shares or ADSs received will equal the basis of the convertible debentures allocable to the B shares or ADSs received and the holding period of B shares or ADSs received will include the holding period of the convertible debentures.

 

Under certain circumstances, adjustment in the conversion ratio or the lack thereof may cause a deemed distribution to you. You should consult your own tax advisors regarding any such deemed distribution.

 

Passive Foreign Investment Company Status

 

A non-U.S. corporation is a passive foreign investment company (a “PFIC”) in any taxable year in which, after taking into account the income and assets of certain subsidiaries, either (a) at least 75 percent of its gross income is passive income or (b) at least 50 percent of the quarterly average value of its assets is attributable to assets that produce or are held to produce passive income. Based on the market value of our shares, the composition of our assets and income and our operations, we believe we were not a PFIC during the year 2002. However, whether or not we will be considered a PFIC will depend on the nature and source of our income and the value of our assets, as determined from time to time. If we are treated as a PFIC, we will not provide information necessary for the “qualified electing fund” election as the term is defined in the relative provisions of the Code. You should consult your own tax advisors about the consequences of our classification as a PFIC.

 

If we were a PFIC, for any taxable year in which you held ADSs or B shares, you would be subject to special rules with respect to:

 

    any gain realized on the sale or other disposition of ADSs or B shares; and

 

    any “excess distribution” made to you (generally, any distributions to you in respect of ADSs or B shares during a single taxable year that are greater than 125 percent of the average annual distributions received by you in respect of ADSs or B shares during the three preceding taxable years or, if shorter, your holding period for ADSs or B shares). Under these rules:

 

    the gain or excess distribution would be allocated ratably over your holding period for ADSs or B shares;

 

    the amount allocated to the taxable year in which the gain or excess distribution was realized and any year before we became a PFIC would be taxable as ordinary income;

 

   

the amount allocated to each prior year, other than the current year and any taxable year prior to the first taxable

 

65


Table of Contents

year in which we were a PFIC, would be subject to tax at the highest applicable marginal tax rate in effect for each such year; and

 

    an interest charge would be imposed to cover the deemed benefit for the deferred payment of the tax attributable to each year prior to the taxable year.

 

As an alternative to the special rules described above, holders of “marketable stock” in a PFIC may elect mark-to-market treatment with respect to their ADSs or B shares. ADSs or B shares will not be considered marketable stock unless the B shares are regularly traded on a qualified exchange or other market. If the mark-to-market election is available and you elect mark-to-market treatment you will, in general, include as ordinary income each year an amount equal to the increase in value of your ADSs or B shares for that year (measured at the close of your taxable year) and will generally be allowed a deduction for any decrease in the value of your B shares for the year, but only to the extent of previously included mark-to-market income.

 

If you own ADSs or B shares during any year in which we are a PFIC, you are required to make an annual return on IRS Form 8621 regarding distributions received with respect to B shares and any gain realized on the disposition of your ADSs or B shares.

 

Under certain constructive ownership rules, convertible debentures may be treated as B shares for purposes of applying the PFIC rules. Holders of convertible debentures are strongly urged to consult their own advisors in this regard.

 

Information reporting and backup withholding

 

In general, information reporting requirements may apply to (i) dividends paid in respect of ADSs or B shares and the proceeds received on the sale or exchange of the ADSs or B shares within the United States or by a broker with certain United States connections, and (ii) payments of interest or principal in respect of the convertible debentures and the proceeds received on the sale or exchange of convertible debentures within the United States or by a broker with certain United States connections. Backup withholding, currently at a rate of 30 percent for 2003, 29 percent in 2004–2005, 28 percent in 2006–2010, and 31 percent thereafter, may apply to payments to you of dividends paid in respect of ADSs or B shares or payments to you of interest or principal in respect of the convertible debentures, or the proceeds of a sale or other disposition of ADSs or B shares or convertible debentures if you fail to provide an accurate taxpayer identification number (certified on IRS Form W–9) or, upon request, to certify that you are not subject to backup withholding, or otherwise to comply with the applicable requirements of backup withholding. The amount of any backup withholding from a payment to you will be allowed as a credit against your United States federal income tax liability and a refund of any excess amount withheld under the backup withholding rules may be obtained by filing the appropriate claim for refund with the IRS and furnishing any required information.

 

ITEM 10F:    DIVIDENDS AND PAYING AGENTS

 

Not applicable

 

ITEM 10G:    STATEMENT BY EXPERTS

 

Not applicable

 

ITEM 10H:    DOCUMENTS ON DISPLAY

 

We file annual reports and other information with the SEC pursuant to the rules and regulations of the SEC that apply to foreign private issuers. You may read and copy any of these reports at the SEC’s public reference facilities at 450 Fifth Street, N.W., Washington D.C. 20549 or obtain them by mail upon payment of prescribed rates. Please call the SEC at 1–800–SEC–0330 for further information. Copies may also be obtained from the SEC website at http://www.sec.gov. or from the Ericsson website at http://www.ericsson.com. Information about Ericsson is also available on the same website.

 

Information included in our website does not form part of this document.

 

ITEM 10I:    SUBSIDIARY INFORMATION

 

Not applicable

 

66


Table of Contents

 

Item 11:    Quantitative and Qualitative Disclosures about Market Risk

 

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’s financial assets and liabilities and issue policies governing our consolidated companies.

 

The Corporate Treasury function’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’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’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’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

 

    

December 31,


(SEK billion)


  

2001


    

2002


Type of instrument

           

Net foreign exchange risk in external currency derivatives

  

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.

 

67


Table of Contents

 

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’ 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

 

    

December 31,


(SEK million)


  

2001


  

2002


Type of instrument

         

Forward rate agreements and interest rate forwards

  

354.1

  

77.4

Interest rate swaps

  

1,381.2

  

1,082.7

Interest rate futures

  

22.1

  

115.9

    
  

Net risk