Ericsson Nikola Tesla d.d. — Management Reports 2010

Feb 21, 2011

Ericsson Nikola Tesla d.d.

Report on the Company's business situation and comments on the financial results for the year ending Dec 31, 2010.

Highlights:

• Orders booked MHRK: 1,311.3
• Sales revenues: 1,218.9
• Gross margin: 16.9%
• Operating profit excluding write off of receivables: MHRK 111.3
• Operating loss: MHRK 15.2
• Net profit excluding write off of receivables: MHRK 150.5
• Net profit: MHRK 24
• Cash flow from operating activities: MHRK 366.4
• Proposed dividend HRK 20 ordinary and HRK 170 extraordinary dividend per share

In the evaluation of the Company's performance, Gordana Kovačević, the president of Ericsson Nikola Tesla underlined the following:

"During 2010 the ICT industry could not avoid the unfavorable trends present in the wider economy, and the impact of this was manifested in a slower than anticipated realization of planned activities and strategic targets. This was especially evident in a slow down of capital investments by telecom operators, decreased government investments into infrastructure projects within the ICT segment and decreased budget volumes of our business partners and other customers. A 5% year–over-year decline in Orders during 2010 reflects a decrease in volumes from our domestic market, compensated by extended business activities in our export markets, primarily in Belarus and Bosnia & Herzegovina, as well as exports to Ericsson through R&D and other services. A 13% decline in Sales during 2010 further reflects the timing of Orders booked and the impact of industry component shortages and Ericsson supply chain bottlenecks.

Despite the challenging environment in which we operated, we managed to maintain a good market position, continued to support our customers in modernization of their networks and in the introduction of new technologies and progressed with investments into new strategic projects and market segments. At the same time, we are able to report improved performance in terms of underlying

profitability of operations and cash flow from operating activities and have further improved the strength of our Balance Sheet.

As previously announced, the company has written off MHRK 126.5 in respect of Customer Financing balances in Kazakhstan. Even after this write off, the company achieved a Net profit of MHRK 24 during 2010 and the underlying Net Profit (excluding this write off) of MHRK 150.5 represents an increase of 17% year-over-year and a Return On Sales ("ROS") of 12.3%. Further, with the accelerated collection of MHRK 150 from the remaining part of the Kazakhstan receivables, Cash and Cash equivalents at Dec 31, 2010 increased to MHRK 674.

Throughout 2010, we responded to the challenging business conditions and increasingly strong competition by adapting the organization for new market and technology requirements, as well as to new organization models and responsibilities within the wider Ericsson organization. Ericsson Nikola Tesla belongs to Region Western & Central Europe within the global Ericsson group but also retains responsibility within other Ericsson regions, as well as for those segments of business and products which result from development and activities within the Company. The new organization encourages new and innovative ways of working with a common goal to be closer than ever before to our customers, grow business volumes in existing and new segments and drive improved profitability and cash flow" underlined Gordana Kovačević.

Financial summary:

• Orders booked decreased by 5% year-over-year and totaled MHRK 1,311.3, while sales revenues decreased 13% to MHRK 1,218.9. The overall sales result reflects a decline in our domestic and regional markets, partially offset by growth in the CIS markets and activities with Ericsson.
• Domestic market accounts for 27.9%, export to other countries 35.6% and export to Ericsson market 36.5% of total sales revenues.
• Sales revenues can be further analyzed by business segments as follows: Network infrastructure including network rollout services MHRK 779 (64% of total Sales revenues), Professional services MHRK 394 (32% of total Sales revenues) and Multimedia solutions MHRK 46 (4% of total Sales revenues).

• Gross margin of 16.9% has considerably improved year-over-year (2009:13.3%), reflecting favorable product mix, timing and volume of investments in development projects and the positive impact of the company's continued focus on operational and cost efficiency.

• Distribution and administrative expenses of MHRK 91 reduced by 17% year-over-year.

• Operating profit excluding the write off of Kazakhstan receivables amounts to MHRK 111.3 and has increased MHRK 45.6 or 69% when compared to 2009. This result reflects the net impact of higher gross margin (as explained above), reduced distribution and administrative expenses and additional restructuring costs of 14 MHRK in respect of early retirement.
• Net finance income totaled MHRK 41.2 (2009: MHRK 61.1). The lower level of finance income reflects declining interest rates and a lower release of impairment reserves into finance income (amortization of discount).
• Despite the write off of Kazakhstan receivables and the decreased net finance income, the company achieved a net profit of MHRK 24. Excluding the write off, the result shows a net profit of MHRK 150.5 (17% increase year-over-year) which represents a net income return on sales (ROS) of 12.3% (2009: 9.2%).
• Cash flow from operating activities totaled MHRK 366.4 (2009: 284) reflecting the ongoing focus on working capital improvements and includes MHRK 150 collected in respect of Kazakhstan receivables.
• The company has a strong balance sheet with total assets of MHRK 1,425.2 and an equity ratio of 75%. The total of cash and cash equivalents and financial assets increased to MHRK 737.2 compared with MHRK 535.8 at the end of 2009. This represents an increase of 38%.
• Major transactions with related parties were as follows: sales of products and services MHRK 445.1 (2009: MHRK 436.4), purchase of products and services MHRK 418 (2009 MHRK 532.3).
• Balances outstanding with related parties on Dec.31, 2010 were as follows: receivables totaled MHRK 75.4 (end 2009: MHRK 58.9), payables MHRK 94.8 (end 2009: MHRK 67.8).
• Disclosure on customer financing risks:

Following the write off of Kazakhstan receivables, the collection of MHRK 150 of remaining Kazakhstan receivables and collection of other outstanding loans and receivables during 2010, the company's credit risk is significantly reduced. As of Dec 31, 2010 balances outstanding in respect of Customer loans and receivables totaled MHRK 452.7 (2009: MHRK 808.5).

Business situation on major markets:

Domestic market Sales totaled MHRK 339.7, a year-over–year decrease of 29.5%. This is reflective of the negative macroeconomic trends in Croatia that resulted in reduced levels of investments by operators, a special tax imposed on mobile network services, regulatory issues, and increasingly strong price pressure by our customers. As noted, previously there was also an impact of industry component shortages and Ericsson supply chain bottlenecks.

The cooperation with Croatian Telecom (HT) mainly covers the building of the backbone networks, broadband internet access, transmission systems and transformation of the wireline voice network into a new generation network based on IMS (IP Multimedia Subsystem) architecture. During Q4 Ericsson Nikola Tesla and HT successfully demonstrated the first LTE network trial in the region with some attractive services supported by this state-of-the-art technology in the mobile communications world (mobile reporter, mobile multiplayer gaming and IPTV based transmission of HD and 3D TV content via a mobile network). LTE technology enables the spreading of fast Internet access to areas that so far, have not been covered by mobile broadband access. It also enables data transmission at the rate of 100 Mbit/s in download that is several times higher than currently applied in the commercial mobile network in Croatia. When fully implemented, an LTE network provides considerably higher transmission rates than 100 Mbit/s, however, the currently available user terminal equipment cannot support such high rates.

Activities with Vipnet during 2010 covered the extension and modernization of 2G and 3G infrastructure and further cooperation in core network and transmission systems and the introduction of new technology solutions. After the successful demonstration of a wireless data transmission at the rate of 42 Mbit/s in the first half of 2010, the given rates became commercially available to users, at first in Osijek, and afterwards in other Croatian towns. In a cooperation with Ericsson Nikola Tesla, Vipnet also managed to provide its users with the new HD sound technology enabling considerable improvement of voice quality in the 3G network.

The successful cooperation with Tele2 in extending and modernizing 2G and 3G infrastructure, with a special attention to the mobile Internet, was confirmed by extension of a frame agreement on delivery of solutions and services in Q1, 2010. Our agreement on managed services was also extended in Q4.

The major focus in the ICT segment for Industry and society was on upgrading the national ICT primary healthcare system, realization of Cadastre and Land Database joint information system and the modernization of Croatian Railways (HŽ) infrastructure. The Company's EMH (Ericsson Mobile Health) product aimed at remote patient medical monitoring is ready for commercial operation and activities have started within the Ericsson organization for placing the product to the market.

In export markets (except for Ericsson market) sales totaled MHRK 434.4, a decrease of 12.3% yearover-year.

In the regional markets (Bosnia & Herzegovina, Montenegro and Kosovo) sales revenues decreased by 23.9% and totaled MHRK 201.7. This decrease primarily reflects timing of project realization. Orders booked in Bosnia & Herzegovina and Montenegro increased year-over-year by 18% and 15%, respectively. In Kosovo however, Orders booked decreased as a result of reduced investments by operators.

With BH Telecom, the company signed a two year contract on support and maintenance service delivery for the total BH Telecom network. In addition, several important contracts were signed on extension and modernization of 2G and 3G networks, as well as on BH Telecom core network upgrading to the latest release. In Q4, the company signed agreements on upgrading activities in the wireline network of BH Telecom by implementation of the new generation fixed node and integration of the system for network management.

In the beginning of 2010, Montenegro operator, Crnogorski Telekom, and Ericsson Nikola Tesla signed a frame agreement to define the cooperation over the next four years in the segment of modern SW solutions for mobile systems. In addition, the delivery of support services for fixed and mobile network, was agreed. During the year, supplementary contracts for the fixed network modernization (PSTN centralization and ADSL network extension), 2G and 3G mobile network extension, including the HSPA+ solution realization, as well as the supervision system modernization and new functionalities of charging system in real time were signed. Besides, the company agreed the construction of geographically redundant center for mobile network (Disaster Recovery Site Solution).

The company also continued cooperation with Kosovo mobile operator Ipko that started with the integration of the total GSM network. New activities cover the HW and SW support service delivery for the next three years.

Sales to CIS markets show an improvement of 1.1% year-over-year and totaled MHRK 232.7. This reflects excellent results in the Belarus market Total orders booked also increased by 14% year-overyear.

Besides the cooperation with the leading Belarus mobile operator Velcom, on the extension and modernization of 2G network, the increased volumes also reflect a contract signed with Beltelekom in the segment of Internet technology (delivery of the equipment for the internet infrastructure capacity extension).

On the markets of the Russian Federation, Moldova, Georgia, Kazakhstan and Uzbekistan the company signed new contracts covering solutions in fixed network, delivery of microwave solutions in the broadband network and broadband access nodes as well as agreements on IP oriented solutions for business users.

In the Ericsson market sales revenues totaled MHRK 444.8, which represents a year-over-year increase of 5.1%.

The Research and Development Center completed the development of the new generation of mobile network servers (MSC R 14.1) with Ericsson Nikola Tesla employees contributing significantly with successful trials put into operation with several global operators. The new responsibility for the product lines of servers aimed for fixed networks (TSS) was successfully defined. This enables the company to play a considerable role and contribute to the network transformation, globally. The new responsibilities for verification and maintenance of the integrated telecom platform (IS), and verification and integration for the broadband network access product (GPON) were obtained. Preparations for extension of operations in development of the system for the radio network platform (CPP) were initiated.

Service delivery center experts were engaged in numerous projects, such as: IMS Deutsche Telekom NGF (largest IMS project in the Region Western and Central Europe, which covers the full migration of DT fixed network from PSTN to IMS), LTE project for Vodafone Germany and Vodafone Great Britain, T-Mobile Hungary 3G Audit and Optimization project, Telecom Austria IPTV delivery as well as a transport network managed service project for Mobistar Belgium.

Business outlook 2011

The Telecom market shows a tendency of core network transformation towards the next generation network with introduction of IMS architecture, as well as with the strong development and implementation of mobile broadband networks and next generation of optic access networks. Transformation of the current network will enable further development, deliver and growth of advanced services (such as IPTV, positioning services, etc), with requirements for advanced convergent billing and charging services and complex network management systems.

Mobile technology broadband access will continue the intensive development primarily due to the growth in number of smart phones and tablets but also due to M2M networking trends. Significant growth of mobile network traffic will demand further extension of HSPA and introduction of LTE technology. By implementation of broadband access based on HSPA+ (42 Mbit/s) and LTE trial network, Croatia joined in this segment the most developed countries in the world, where already

today convergence of fixed and mobile network and achievements of the 4G mobile communication networks are present.

Regardless of the currently decreased budgets for ICT, the implementation of ICT technology should also continue in non-operator segment, both in business systems and government administration.

We expect the demands by end users and competitive environment will result in operator investments in broadband access, new applications and contents. Ericsson Nikola Tesla is well positioned to support customer demands with new technological solutions.

In the ICT segment for Industry and Society we shall continue with the development and upgrading of infrastructure systems as well as with activities aimed at capitalizing on investments already made in the e-systems segment.

Other information

Ericsson Nikola Tesla major shareholders (as at Dec 31, 2010)

	No. of shares	% of share capital
Telefonaktiebolaget LM Ericsson	653,473	49.07
Hypo Alpe-Adria-Bank d.d. / Raiffeisen Mandatory Pension Fund	119,991	9.01
Zagrebačka banka d.d. / custodian client account for Unicredit Bank Austria AG	41,106	3.09
Societe Generale-Splitska banka d.d. / Erste Plavi Mandatory Pension Fund	35,132	2.64
Hypo Alpe-Adria-Bank d.d. / PBZ Croatia osiguranje Mandatory Pension Fund	30,615	2.30
Societe Generale-Splitska banka d.d. / AZ Mandatory Pension Fund	19,562	1.47
PBZ d.d. / custodian client account	15,344	1.15
PBZ d.d. / State Street client account	14,580	1,09
Ericsson Nikola Tesla d.d.	9,288	0.70
Societe Generale-Splitska banka d.d.	8,062	0.61
Other shareholders	384,497	28.87

2010 share price information:

Highest (HRK)	Lowest (HRK)	Closing (HRK)	Market cap. (in MHRK)
1,777	1,181	1,361	1,812.4

Ericsson Nikola Tesla d.d. Krapinska 45 Zagreb

OIB: 84214771175 Tax No.: 03272699

Pursuant to the Articles 407 to 410 of the Capital Market Law (Official Gazette 88/08 and 146/08) the Managing Director of the joint stock company Ericsson Nikola Tesla d.d. Zagreb, Krapinska 45 gives the following:

Statement of the Management Board responsibility

The accompanying financial statements have been prepared in compliance with the International Financial Reporting Standards (IFRS). The financial statements also comply with the provisions of the Croatian Financial Accounting Law valid as of the date of these financial statements.

Unaudited financial statements for the period 1 Jan 2010 to 31 Dec 2010 present a true and fair view of the financial position of the Company and of its financial performance and its cash flows in compliance with applicable accounting standards.

Managing Director:

Gordana Kovačević, MSc

PRESS info Feb 21, 2011

For additional information, please contact:

Snježana Bahtijari Orhideja Gjenero Company Communication Director Investor Relations Manager Ericsson Nikola Tesla d.d. Ericsson Nikola Tesla d.d. Krapinska 45 Krapinska 45 HR-10 002 Zagreb HR-10 002 Zagreb Phone: + 385 1 365 4556 Phone: +385 1 365 4431 Mobile: +385 91 365 4556 Mobile: +385 91 365 4431 Fax: +385 1 365 3156 Fax: +385 1 365 3156 E-mail: snjezana.bahtijari@ericsson.com E-mail: orhideja.gjenero@ericsson.com

E-mail: odnosi.investitori@ericsson.com

For more information about Ericsson Nikola Tesla's business performance, please visit: http://www.ericsson.com/hr

Communication Ericsson Nikola Tesla

BALANCE SHEET ERICSSON NIKOLA TESLA

as at 31.12.2010

HRK
Item	AOP number	31.12.2009.	31.12.2010
1	2	3	4
ASSETS
A) RECEIVABLES FOR REGISTERED UNPAID CAPITAL	001
B) NON-CURRENT ASSETS	002	442.014.048	153.025.109
I. Intangible assets	003	4.425.099	4.813.753
II. Property, plant and equipment	004	146.351.342	128.643.277
III. Financial assets	005	6.922.684	7.121.093
IV. Receivables	006	272.019.817	3.282.193
V. Deferred tax assets	007	12.295.106	9.164.793
C) CURRENT ASSETS	008	1.109.057.245	1.265.628.347
I. Inventories	009	24.058.674	44.773.808
II. Receivables	010	549.190.329	483.674.671
III. Financial assets	011	120.873.271	63.254.351
IV. Cash and cash equivalents	012	414.934.971	673.925.517
D) PREPAYMENTS AND ACCRUED INCOME	013	1.371.321	6.507.627
E) LOSS ABOVE CAPITAL	014
F) TOTAL ASSETS	015	1.552.442.614	1.425.161.083
G) OFF-BALANCE SHEET ITEMS	016	249.208.566	221.374.495
EQUITY AND LIABILITIES
A) EQUITY	017	1.200.223.076	1.071.024.008
I. Share capital	018	133.165.000	133.165.000
II. Capital reserves	019
III. Reserves from profit	020	37.379.326	37.379.326
IV. Revaluation reserve	021
V. Retained earnings	022	901.231.661	876.418.064
VI. Accumulated losses	023
VII. Profit for the year	024	128.447.089	24.061.618
VIII. Loss for the year	025
IX. Minority interests	026
B) PROVISIONS	027
C) NON-CURRENT LIABILITIES	028	10.091.486	8.237.488
D) CURRENT LIABILITIES	029	194.828.340	207.995.873
E) ACCRUED CHARGES AND DEFERRED REVENUE	030	147.299.712	137.903.714
F) TOTAL EQUITY AND LIABILITIES	031	1.552.442.614	1.425.161.083
G) OFF-BALANCE SHEET ITEMS	032	249.208.566	221.374.495

INCOME STATEMENT ERICSSON NIKOLA TESLA

for the period 31.12.2010

1.1.2010 to

HRK

			2009	2010
		Cumulative	Quarter	Cumulative	Quarter
1	2	3	4	5	6
I. OPERATING INCOME	035	1.417.334.995	395.728.791	1.234.273.637	381.783.301
1. Sales revenues	036	1.400.010.685	391.440.791	1.218.862.863	373.893.554
2. Revenues from sale of own products and services	037
3. Other operating income	038	17.324.310	4.288.000	15.410.774	7.889.747
II. OPERATING EXPENSES	039	1.351.654.382	360.998.939	1.249.522.585	355.935.844
1. Decrease in inventories of finished goods and work in progress	040	27.159.208	18.664.883
2. Increase in inventories of finished goods and work in progress	041			-21.817.303	-22.640.179
3. Raw material and consumables used	042	789.988.610	194.882.723	636.144.426	256.149.318
4. Staff costs	043	404.688.453	91.961.081	401.858.746	96.112.645
5. Depreciation and amortisation expense	044	64.786.320	16.453.047	56.831.071	14.235.924
6. Other costs	045	37.238.835	18.896.396	30.559.882	7.622.297
7. Impairment losses	046	21.900.223	16.682.779	139.849.426	4.455.839
8. Provisions	047
9. Other operating expenses	048	5.892.733	3.458.030	6.096.337	0
III. FINANCIAL INCOME	049	61.893.994	16.096.316	41.407.843	22.877.803
1. Interest, foreign exchange gains, dividends and other income from	050
related parties
2. Interest, foreign exchange gains, dividends and other income	051	45.479.985	15.358.486	31.127.537	20.693.872
from non-related and other entities
3. Income from associates and ownership interests	052
4. Unrealised gains	053
5. Other financial income	054	16.414.009	737.830	10.280.306	2.183.931
IV. FINANCIAL EXPENSES	055	757.528	3.656.953	191.793	38.107
1. Interest, foreign exchange losses and other expenses with related parties	056
2. Interest, foreign exchange losses and other expenses with non-related and other entities	057	757.528	14.980	191.793	38.107
3. Unrealised losses	058
4. Other financial expenses	059		3.641.973
V. EXTRAORDINARY - OTHER INCOME	060
VI. EXTRAORDINARY- OTHER EXPENSES	061
VII. TOTAL INCOME	062	1.479.228.989	411.825.107	1.275.681.480	404.661.104
VIII. TOTAL EXPENSES	063	1.352.411.910	364.655.892	1.249.714.378	355.973.951
IX. PROFIT BEFORE TAX	064	126.817.079	47.169.215	25.967.102	48.687.153
X. LOSS BEFORE TAX	065	0
XI. INCOME TAX EXPENSE	066	1.630.010	1.630.010	1.905.484	1.905.484
XII. PROFIT FOR THE PERIOD	067	128.447.089	48.799.225	24.061.618	46.781.669
XIII. LOSS FOR THE PERIOD	068

CASH FLOW STATEMENT ERICSSON NIKOLA TESLA

in the period

1.1.2010 to 31.12.2010

			HRK
		31.12.2009	31.12.2010
1	2	3	4
CASH FLOW FROM OPERATING ACTIVITIES
1. Profit before tax	073	126.817.079	25.967.102
2. Depreciation and amortisation	074	64.786.320	56.831.071
3. Increase in liabilities	075
4. Decrease in receivables	076	99.312.000	189.204.000
5. Decrease in inventories	077	28.800.000
6. Other increase in cash flow	078		126.424.000
I. Total increase in operating cash flow	079	319.715.399	398.426.173
1. Decrease in liabilities	080	10.653.000	11.048.000
2. Increase in receivables	081
3. Increase in inventories	082		21.022.000
4. Other decrease in cash flow	083	25.014.977
II. Total decrease in operating cash flow	084	35.667.977	32.070.000
A1) NET INCREASE IN OPERATING CASH FLOW	085	284.047.422	366.356.173
A2) NET DECREASE IN OPERATING CASH FLOW	086
CASH FLOW FROM INVESTING ACTIVITIES
1. Proceeds from sale of property, plant and equipment	087	151.061	43.300
2. Net disposal of financial assets	088		61.645.000
3. Interest received	089	37.922.000	25.369.000
4. Dividend received	090
5. Other cash flow from investing activities	091	522.000	0
III. Total cash flow from investing activities	092	38.595.061	87.057.300
1. Purchases of property, plant and equipment and intangible assets	093	46.094.848	39.735.969
2. Purchase of financial instruments	094	77.473.000	0
3. Other cash flow used in investing activities	095		198.000
IV. Total cash flow used in investing activities	096	123.567.848	39.933.969
B1) NET INCREASE IN CASH FLOW FROM INVESTING ACTIVITIES	097		47.123.331
B2) NET DECREASE IN CASH FLOW USED IN INVESTING ACTIVITIES	098	84.972.787	0
CASH FLOW FROM FINANCING ACTIVITIES
1. Proceeds from issuance of financial instruments	099
2. Proceeds from loans	100
3. Other cash flow from financing activities	101	2.908.000	5.272.042
V. Total cash flow from financing activities	102	2.908.000	5.272.042
1. Repayment of interest-bearing borrowings	103	2.213.000	1.601.000
2. Dividend paid	104	91.757.960	158.160.000
3. Repayment of finance lease	105
4. Repurchase of treasury shares	106	11.380.000	0
5. Other cash flow used in financing activities	107
VI. Total cash flow used in financing activities	108	105.350.960	159.761.000
C1) NET INCREASE IN CASH FLOW FROM FINANCING ACTIVITIES	109
C2) NET DECREASE IN CASH FLOW FROM FINANCING ACTIVITIES	110	102.442.960	154.488.958
Total increase in cash flow	111	96.631.675	258.990.546
Total decrease in cash flow	112
Cash and cash equivalents at the beginning of the period	113	318.303.296	414.934.971
Increase in cash and cash equivalents	114	96.631.675	258.990.546
Decrease in cash and cash equivalents	115
Cash and cash equivalents at the end of the period	116	414.934.971	673.925.517

STATEMENT OF CHANGES IN EQUITY ERICSSON NIKOLA TESLA

from 1.1.2010 to 31.12.2010

				HRK
Item	AOP number	Opening balance	Increase	Decrease	Closing balance
1	2
1. Share capital	117	133.165.000			133.165.000
2. Capital reserves	118				0
3. Reserves from profit	119	37.379.326			37.379.326
4. Retained earnings	120	901.231.661	134.757.036	159.570.633	876.418.064
5. Profit for the period	121	128.447.089	24.061.618	128.447.089	24.061.618
6. Revaluation of property, plant and equipment	122				0
7. Revaluation of intangible assets	123				0
8. Revaluation of financial assets available for sale	124				0
9. Other revaluations	125				0
10. Currency translation differences from investment in a foreign operation	126				0
11. Current and deferred taxes	127				0
12. Cash flow hedge	128				0
13. Changes in accounting policy	129				0
14. Prior year adjustment	130				0
15. Other changes in equity	131				0
16. Total increase / decrease in equity	132	1.200.223.076	158.818.654	288.017.722	1.071.024.008
16a. Parent company share in subsidiary	133
16b. Minority interest	134