Elcoteq SE Annual Report and Corporate Responsibility Report 2009

2009 annual report and corporate responsibility report ABOUT ELCOTEQ 1 ELCOTEQ IN BRIEF 3 CEO’S REVIEW 4 2009 IN BRIEF 6 MARKET REVIEW 9 VISION AND VALUES 11 STRATEGY AND FINANCIAL TARGETS

sERVICE OFFERING AND NETWORK 14 SERVICE OFFERING 17 SERVICE NETWORK 18 CONSUMER ELECTRONICS 20 SYSTEM SOLUTIONS

CORPORATE RESPONSIBILITY 24 CORPORATE RESPONSIBILITY AT ELCOTEQ 26 CORPORATE RESPONSIBILITY DEVELOPMENT AT ELCOTEQ 28 SOCIAL RESPONSIBILITY 30 ENVIRONMENTAL RESPONSIBILITY 32 KEY STAKEHOLDERS 33 GRI G3 CONTENT INDEX

fINANCIAL STATEMENTS 34 CONTENTS 36 REPORT BY THE BOARD OF DIRECTORS 42 FINANCIAL STATEMENTS 81 AUDITORS’ REPORT 82 QUARTERLY FIGURES (unaudited)

cORPORATE GOVERNANCE AND COMPANY MANAGEMENT 86 CORPORATE GOVERNANCE 92 BOARD OF DIRECTORS 94 MANAGEMENT TEAM INFORMATION FOR INVESTORS 96 INVESTOR RELATIONS (IR) v ANNUAL GENERAL MEETING vi GLOSSARY vii CONTACT INFORMATION Net sales, MEUR

4,284 4,169 4,043 3,443

1,503

2005 2006 2007 2008 2009

Operating income*, MEUR % of net sales 76.5 1.8%

43.9 1.0%

–46.1 –6.9 –39.5 –1.1% –0.2% –2.6%

2005 2006 2007 2008 2009

* Excluding restructuring expenses

Net sales by Strategic Business Units 2009, %

100% 75%

25%

Consumer Electronics System Solutions

Net sales by geographical area 2009, %

100% 47%

14%

38%

Europe Asia-Pasific Americas Elcoteq SE is the global Life Cycle Service Partner for high-tech product and service companies. Engineering, Manufacturing, Fulfillment and After Market Services are the corner stones of Elcoteq’s extensive service offering. Elcoteq has a proven track record in Elcoteq has a comprehensive, electronics manufacturing services consistent and cost-effective (EMS) and a global factory network global service network close to coupled with modern manufacturing its largest customers and the equipment and consistent systems and end markets of their products. processes.

Plant Other locations Engineering Center

Elcoteq reports two Strategic Business Units Net sales for 2009 totaled as its segments: 1,503 million euros Consumer Electronics is customers’ product life cycle partner with a comprehensive range of Employes approximately 10,000 engineering, manufacturing, fulfillment and after market services. Products include mobile phones, their persons parts and accessories, flat screenT Vs, set-top boxes and other home connectivity centres as well as emerging LED lighting products. 25 year track record with the industry leaders System Solutions offers its customers end-to-end delivery and manufacturing solutions for a wide range of complex electronic systems. Products include Operations in fifteen countries on wireless and wireline infrastructure systems and modules, enterprise network products and various other four continents industrial segment products. one Elcoteq’s service offering is tailored to meet global customers’ local needs onefour continents and in fifteen countries CEO’s Review Building the Platform for Recovery

ÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÛ Elcoteq took consistent actions to improve its profitability in 2009 and built the platform for recovery. We renewed the organization and prioritized diversifying the customer portfolio.

ear 2009 was very difficult for Elcoteq. After gradual and steady improvement in 2008, Elcoteq entered Y2009 not only with a weakened balance sheet, but also with a long-term revolving credit facility that had to be re-financed during the year. In the beginning of the year, as the world economy was about to collapse, many of our customers and suppliers had very limited visibility into their own business. Several customers were concerned about the impact of their declining volumes on us and our ability to finance their looming inventory fluctuations. As a result, our business started to diminish even faster than our customers’ underlying demand. This made it challenging to forecast the shrinking business volumes and extremely difficult to strengthen the balance sheet in a way acceptable to the existing shareholders. To adjust to the situation, Elcoteq made a difficult decision to carry out an intense restructuring plan in January. The plan included many cost-saving measures, including the streamlining of the factory network to increase capacity utilization direction as well as a considerable decrease in the headcount. The actions proceeded according to plan. As a result of the implemented restructuring actions, our fixed costs were on an annualized basis 165 million euros or 48 percent lower in the last quarter of 2009 compared to the last quarter of 2008. Despite the heavy restructuring, we managed to preserve our excellent operational performance and the global service footprint and continued to improve the quality of our oneservices for our customers. Building the Platform for Recovery

In August, we created new Strategic Business Units: Consumer Electronics and System Solutions. The organization was also simplified by removing organizational layers and overlapping roles. Acknowledging the changed environment, a greater emphasis was put on identifying new business opportunities, acquiring new customers and exploring new product segments for the company. In the course of the year, the new simplified set-up turned out to be a good basis for recovery.

Equity project progressing In January, Elcoteq commenced a project to strengthen the balance sheet, and negotiations regarding the major equity investment with the Chinese company Kaifa were started in July. However, after mutual re-assessment, they ended in September. Later on, a non-binding Letter of Intent was signed with another Asian strategic investor, Videocon. In March 2010, the negotiations were terminated. customers. The new customers include Inmarsat, Cinterion In the beginning of the present year, Elcoteq successfully and the AMS agreement with Nokia. restructured a major part of the subordinated debt, significantly strengthening the company’s balance sheet. If the Ready for growth transaction had taken place in 2009, the year-end solvency No one knows what the economy will look like a year from would have been 23.7 percent and gearing 0.7. This achieve- now. The only thing that is certain is that the markets will ment alone generates a great basis for further business keep on changing. I am proud to work with professionals development and business recovery. who are able and ready to deal with the rapid changes in the market. Our organization is now lean and flexible and it can Elcoteq – A Product Life Cycle Partner transform swiftly to changes. Over the years, we have broadened the spectrum of services Feedback shows that our customers have strong trust we offer – from the assembly of components to more in our expert knowledge. However, there was a confidence complex manufacturing and supporting services. Today we gap because of the challenges in our long-term financing. can say that Elcoteq covers the whole life cycle of products: Now we have been successful in restructuring our debt from Product Development support to After Market Services and managed to turn our cash flow positive on the annual (AMS). In 2010 Elcoteq will be strengthening its position as level. For our customers, the new organization is easier to a Life Cycle Service Partner by increasing the emphasis on approach and our existing factory network can provide the various after market services and related complex logistic full scope of services, regardless of the location. solutions. Elcoteq’s factories are optimally located for We have built the platform for a solid recovery. providing the AMS – close to customers’ end markets in low- cost locations. Zug, Switzerland, March 2010 Our recent business wins clearly indicate that we have selected the correct strategic path. Elcoteq has been Jouni Hartikainen successful in diversifying its customer base with new President and CEO customers and broadening cooperation with the existing one Elcoteq SE 3 2009 IN BRIEF ÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÛ The past year ushered in many significant changes for Elcoteq – in terms of financial development, organization and strategy.

ear 2009 was very challenging for Elcoteq. The In July, Elcoteq started negotiations regarding a major company entered the year with a weakened balance equity investment with the Chinese company Shenzhen Ysheet and apparent need to restructure the existing Kaifa Technology, but after a mutual re-assessment the nego- credit facilities. During the year, Elcoteq also faced rapidly tiations ended in September. Instead, Elcoteq signed a non- dropping sales due to the general downturn in the world binding Letter of Intent with another Asian strategic investor, economy. Videocon Industries Limited. In March 2010, the negotiations Elcoteq executed consistent and vigorous actions to with Videocon were terminated. adjust its cost base to better match the declining volumes and challenging market conditions. The restructuring plan published in January 2009 was carried out successfully. The Key figures nine eight plan consisted of several actions such as streamlining the 2009 2008 factory network, increasing capacity utilization, aligning the Net sales, MEUR 1,503.2 3,443.2 organization to support the adjusted strategy and decreasing Operating loss, MEUR* – 76.5 – 20.4 operational costs. % net sales – 5.1 – 0.6 During the year, Elcoteq closed down its factories in Arad Loss before taxes, MEUR – 117.1 – 52.9 (Romania), Richardson (USA) and St. Petersburg (Russia). The factory in Shenzhen (China) was consolidated into the Net loss, MEUR** – 105.0 – 65.9 factory in Beijing and the major part of the operations in Tallinn (Estonia) was sold to Ericsson. While carrying out the Capital employed, MEUR 308.0 468.8 restructuring plan, the company has paid special attention to Return on capital employed (ROI/ROCE), % – 18.9 – 3.1 preserving its excellent operational performance and global platform to serve customers close to their end markets. As a Cash flow, MEUR 52.9 – 99.7 result of the implemented restructuring actions, fixed costs decreased drastically towards the end of the year and were Interest-bearing net debt, MEUR 187.5 238.5 nearly 50 percent lower in the last quarter of 2009 compared Gearing 5.8 1.8 to the last quarter of 2008. Solvency ratio, % 6.3 14.2

Strengthening balance sheet Earnings per share, A shares, EUR – 3.22 – 2.02 The new business set-up gives Elcoteq a good and cost- competitive basis for future growth opportunities. In order to be better poised to grasp these opportunities, Elcoteq started Gross capital expenditures, MEUR 6.4 71.4 a process to strengthen the balance sheet by various actions. * Operating loss includes 37.0 million euros restructuring expenses in 2009 and 13.5 million euros in 2008. ** Net income for the equity holders of the parent company.

4 annual report and corporate responsibility report 2009 2009 IN BRIEF

Another integral part of the equity project was the Adjusted strategy concentrates restructuring of the company’s interest-bearing debt. As on Life Cycle Services a part of the balance sheet restructuring, the company The strategy review process resulted in adjustments to the announced in October its plan to collect irrevocable selling company’s strategic objectives. The strategic direction is commitments from the holders of its subordinated deben- evolving towards high value added (service) content busi- ture bonds. In January 2010, the company proceeded to exer- ness instead of high material content business. Focus will cise these selling commitments by issuing hybrid securities be in constantly improving profitability instead of pursuing valued at 29 million euros and using the proceeds directly to aggressive top line growth. repay outstanding debenture bonds with a nominal amount The company will concentrate on providing a full scope of 105 million euros. The transaction strengthens the balance of Life Cycle Services to customers, with special emphasis sheet significantly, clearly improving both solvency and on growing After Market Services (AMS) supported by Engi- gearing. neering, Manufacturing and Fulfillment services.T he aim is to enter new product segments, balance the customer port- New organization puts more folio and stabilize the volatility of electronics manufacturing emphasis on new sales business. The customer portfolio is expected to expand from In August, the company decided to combine two of its OEMs to various Service Providers, and the focus will be on former Business Areas, Personal Communications and products with longer life cycles. Home Communications, under one Strategic Business Unit The execution of the revised strategy has already begun. In (SBU) named Consumer Electronics. The Communications January 2010, Elcoteq signed an agreement with Nokia about Networks Business Area continued as an independent SBU providing Nokia’s customers with After Market Services for but with a new name, System Solutions. their Nokia devices. The companies also intend to explore By combining the Home Communications and Personal other opportunities for cooperation. • Communications segments under the Consumer Electronics SBU, the company can better utilize the synergies between these businesses. The aim is also to achieve further cost reductions by streamlining and simplifying the organization by removing organizational layers and overlapping roles. The new organization also puts more emphasis on new sales activities, which are now under a separate global function, New Sales and Business Development. It focuses on identifying new business opportunities, acquiring new customers and exploring new product segments for the company. 20092010

Elcoteq SE 5 MARKET REVIEW ÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÛ The market for electronics manufacturing services saw a decrease in 2009 as the exceptionally serious and sudden slowdown of the global economy hindered growth.

he estimated total assembly value of the global elec- manufacturing service (EMS) markets, such as medical and tronics market declined by roughly 15 percent at the industrial, are expected to gain a stronger foothold. annual level, dropping to 840 billion US dollars. Its T Non-traditional EMS businesses enlarge value is expected to increase again in 2010 and reach the 1,000 billion US dollar milestone in 2011. Total after market their share of the entire market service (AMS) spending is expected to grow roughly on par The combined value of EMS and original design manufac- with the overall electronics market. Computer, communica- turing (ODM), including all the electronics segments, was tion and consumer electronics continue to be the biggest roughly 250 billion US dollars in 2009, according to data from product segments, but these segments have also lost quite a Electronics Trend Publications (ETP), iSuppli, and InForum. bit of value during the year as a result of the decrease in end- EMS alone was valued at roughly 150 billion US dollars in market demand. In coming years, non-traditional electronic 2009, with a market decline of 15 percent from the previous year. Besides the overall decline in electronics equipment Total assembly value of demand, another reason for the EMS decline is that some electronics market 840 BUSD in 2009 companies adjusted their manufacturing strategy toward in-house production during 2009. In 2009, the outsourcing Electronics assembly value 840 share, i.e. EMS and ODM together, represented roughly 30 Consumer Electronics 260 percent of the global electronics assembly market, remaining on a par with the previous year. Emerging markets, such as medical, industrial, automo- tive, aerospace and defense, and alternative energy, continue System Solutions 150 to be appealing areas for EMS providers. Analysts state that Other Electronics 430 these markets are expected to represent a slightly larger proportion of the total EMS sector over the next years. Generic EMS market growth is expected to be around 8 Source: Electronic Trend Publications, Elcoteq percent on average during the next four years, based on the figures of the industry research data providers ETP, iSuppli and InForum. EMS market VALUE 2008–2013, BUSD Annual Growth, % Asia increases its importance as 196 a manufacturing location 177 10.7% 162 9.3% The trend for EMS companies to concentrate their volume 168 151 7.3% 142 6.3% manufacturing in low-cost countries is still ongoing, but this –15.9% trend is slowing because manufacturing costs have risen in these countries as well. China continues to be an important geographical area due to its low cost level, but other Asian Pacific countries such as Vietnam are also starting to compete for the lowest cost. Asia now accounts for more than 60 percent of total EMS manufacturing. * estimate In Europe, companies lean more in favor of local rather 2008 2009 2010* 2011* 2012* 2013* than global supply. Companies still favor eastern countries like Romania and Ukraine, while countries like Hungary and Source: Electronic Trend Publications, iSuppli, InForum, Elcoteq Estonia continue to be very cost competitive.

6 annual report and corporate responsibility report 2009 In North America, Mexico has retained its position as the Positive market development in low-cost manufacturing base. Brazil remains a key manu- infrastructure products facturing country for South America. Most market segments The estimated total size of the System Solutions electronics experienced an increase in revenue, with the medical and assembly market amounted to over 150 billion US dollars in communications sectors leading the way. 2009, according to analysts and Elcoteq’s internal estimates. For a few years now, the EMS market has not seen any Carrier investments for both wireless and wireline equip- truly sizeable merger or acquisition. The year was highlighted ment decreased to nearly 140 billion US dollars and close by the restructurings of many EMS companies in the light of to 90 billion US dollars respectively in 2009, according to the tighter economic environment. UBS. Investments in wireless infrastructure equipment are expected to increase slightly in 2010. Smartphones and FTVs drive the The vendor environment in the network equipment growth in consumer electronics market experienced some changes during the year. Merger The estimated total assembly value of Consumer Electronics and acquisition (M&A) activities were slow. Most of the M&A amounted to roughly 260 billion USD in 2009. The main activities in 2009 were mainly focused on the sale of Nortel’s drivers for growth continue to be smartphones and flatpanel businesses. In the market for wireless communications televisions (FTVs). network equipment, the biggest players – such as Nokia The estimated total value of electronics assembly for Siemens Networks and Alcatel-Lucent – lost their market mobile phones, PDAs, MP3 players, personal navigation positions. Their market shares decreased during the year devices and digital cameras amounted to roughly 127 billion according to industry analysts. Huawei and ZTE saw strong US dollars in 2009. Mobile phones are the single biggest growth. Huawei nearly doubled its market share from past segment in the market. According to a consensus estimate year to 20 percent outpacing Nokia Siemens Networks as the from various analyst sources, total handset production number two in wireless market. Ericsson, the market leader reached 1.1 billion units in 2009, and is estimated to increase in the segment, was able to hold on to its 30 percent market slightly in 2010. The overall revenue generated from the position. handsets market will reach 160 billion US dollars in 2010 It is estimated that LTE (i.e. long term evolution, 4G tech- according to Morgan Stanley. Smartphones are the main nology) will see initial launches in 2010. Growth expecta- driver for growth and they also generate more value per unit tions in all communication equipment segments have been than mobile phones. adjusted downward compared to previous years. The main players in the mobile handset market remain Infrastructure electronics segments did not suffer as Nokia, Samsung, LG, Motorola and Sony-Ericsson. The top five much during 2009 and it is expected that they will see a handset vendors had close to 80 percent of the total market. more positive trend. For example, according to industry In the smartphone area, the two biggest market gainers were analysts, the installed base of smart electricity meters will RIM and Apple, claiming 34 percent of the total market. see high growth rates during next years, especially in Europe The estimated total assembly value of the electronics and North America. market for TVs, set-top boxes (STB), games and DVD players amounted to roughly 132 billion US dollars in 2009 according aMS MARKET EXPECTED TO INCREASE IN THE FUTURE to ETP. The two largest business segments are clearly FTVs According to Elcoteq’s internal estimates the electronics and set-top boxes. industry AMS spending amounted to roughly 170 billion US Growth in the FTV market remained strong in 2009. China dollars in 2009 as the outsourced AMS market was valued and North America are especially strong geographical areas close to 25 billion US dollars. The AMS market declined in this market. The global market leaders are Samsung, Sharp, roughly 13 percent in 2009 due to the general economic Sony, Panasonic, Philips and LG Electronics. downturn. Based on market research institutes and Elcoteq The leading set-top box companies remain Thomson, internal estimates, the outsourced AMS market is expected Motorola, Cisco, Pace and Humax. Analysts state that about to have an annual growth of approximately 14 percent in 100 million STBs were sold in 2009 and that production is 2010. expected to increase in the next year. IP set-top boxes have The revenue stream created through different services become the single most important driver for the market. is increasing for both the service providers, such as mobile In spite of global economy worries, both the FTV and operators, and OEMs, such as mobile manufacturers. The set-top box markets are expected to grow in 2010. As analog revenue growth is ever more created through services and TV broadcasts cease in various markets during the coming the usage of the device rather than the actual selling price of years and digitalization support for High Definition develops, the gadget. In the same time, the meaning and importance the STB market is expected to reach a 7 percent CAGR during of a properly functioning device increases, thus creating the next five years. Growth in the market for FTVs is expected more and more demand for after market services.• to be even higher.

Elcoteq SE 7 VISION AND VALUES ÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÛ Elcoteq’s vision is to be the preferred global Life Cycle Services partner for high-tech product and service companies.

Vision Elcoteq’s vision and strategy For Elcoteq, being the preferred global Life Cycle Services Elcoteq has three core strategic themes: expanding the partner means that customers consider it to be a high service offering, growth with positive cash flow and opera- performing and reliable company – one that is capable of tional excellence. understanding their needs and providing them with the best global service offering in the business, from product development to after market services. Elcoteq’s vision – to be the preferred global Life Cycle Services partner for high-tech product and service companies – includes an emphasis on providing customers with more value added services rather than just aiming to have a high material content business. In 2009, Elcoteq re-evaluated its plan to implement the integrated EMS strategy in the light of the uncertain market situation and trends in the economy. Rather than increasing its dependence on materials and certain technologies requiring significant investments, the company is now Elcoteq’s vision and strategy opting to concentrate on more flexible solutions and put an emphasis on enhancing and integrating its service offering Expand Service Offering even further. The aim is to strengthen life cycle management • Service offering from product development to after services – especially after market services – and in addi- market services covering the whole lifecycle of the tion to OEMs to be able to serve operators and other service products providers. • Strengthening the service offering through a partner- Elcoteq has two main goals that are linked to its vision: ship network by means of collaboration or M&A creating superior value for its high-tech customers and arrangements driving shareholder value on par with competition and beyond. Growth with positive cash flow • Organic growth and selected acquisitions • Balancing the customer base by gaining new customers, especially from among globally operating companies • Profitable growth and spreading of risks • New segments within high technology products

Operational Excellence • Cost-efficiency: optimal resource allocation, volume fulfillment operations in cost-competitive countries, efficient sourcing and purchasing operations • Globally consistent service network with uniform procedures, machinery, systems and processes

8 annual report and corporate responsibility report 2009 VISION AND VALUES

Values:

Customer Satisfaction Ethical Conduct of Business We know our customers’ needs and respond to them quickly. Conducting business with integrity means that we take care We consistently deliver the best possible service, expertise, of the environment under our influence and always consider quality, delivery times and cost-efficiency. We keep our prom- and encourage positive developments in our social locality. ises. Our customer relationships are based on commitment, mutual trust, openness and co-evolution. Continuous Improvement Our aim is to be a world-class electronics manufacturer. Committed Personnel Recognizing the need for change and development makes us We respect our colleagues. Initiative, sharing of ideas, and continually focus on developing our personnel and discov- the give and take of responsibility form the basis for the ering new methods of improving operations and then imple- entrepreneurial spirit that is valued at Elcoteq. We strive for menting them rapidly and with full commitment. rewarding good performance. Result Orientation We are committed to our goals and to increasing the value Elcoteq’s vision and strategy of the company through profitable and successful business practices.

The preferred Life Cycle Service Partner for high-tech product and service Companies Vision

Drive shareholder value on par with competition and beyond

Create superior value to its customers by Main goals providing world class Life Cycle Services

Grow with Expand service Operational positive offering excellence

themes cash flow Strategic Strategic

Align organizational structure, talent pool and processes with the needs of the business

Elcoteq SE 9 STRATEGY & FINANCIAL TARGETS ÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÛ The cornerstones for the implementation of the adjusted strategy have not changed. They consist of a service offering that meets the needs and supports the expansion of the global customer base, profitable growth in selected market areas and continuous improvement of operational efficiency.

Strategy Growth with a positive cash flow aims to balance the Elcoteq has three core strategic themes: expanding the company’s customer base and at the same time optimize the service offering, growth with positive cash flow and opera- use of service units. Several factories were either closed or tional excellence. consolidated during 2009 as part of the restructuring plan, Expanding the service offering plays a key role especially but Elcoteq has been able to retain its global service offering in the adjusted and service-focused strategy. OEM customers capability in spite of these measures. expect their trustworthy partners to take on a larger role in Operational excellence and its continuous improvement the management of complex product structures throughout are key priorities for Elcoteq’s success. To establish a firm the entire product life cycle – both safeguarding OEMs’ intel- foundation, we must tailor and properly dimension our lectual property rights and making sure that their latest personnel expertise, organizational structures and processes innovations are not leaked to benefit grey market products. to our business needs. On the other hand, the uninterrupted usability of devices is crucial for the revenue and profit generation of operators Continuous Monitoring of Results and other service providers who bundle their subscription- A great deal of concerted effort and continuous monitoring based services with all kinds of complex devices. As the of results are necessary to make the vision a reality. In the requirements for continuous usability tighten, Elcoteq strategic management process, the Group’s objectives have targets to offer its customers a broader service offering been divided into sub-targets for the service units and func- globally. tions. Selected benchmarks are used to keep track of the real- Our target is to systematically move from high material ization of objectives. content to high value added service-focused offerings. These services will continue to consist of product development and Key Financial Targets other engineering services, manufacturing and fulfillment Elcoteq has long-term financial goals relating to its profit services and especially various configuration, customization, growth, profitability and balance sheet structure. repair and refurbishment services. Elcoteq seeks to bolster its ability to generate added value with its consistent processes, a truly global service network and top-quality service offering that minimizes the total costs of customers’ supply chains.

Key financial targets nine eight seven six five 2009 2008 2007 2006 2005 Increasing earnings per share (EPS), EUR – 3.22 – 2.02 – 3.37 0.38 1.34 Return on investment (ROI/ROCE), trailing 12 months > 20% – 18.9 – 3.1 – 19.6 9.1 17.6 Positive cash flow, MEUR 52.9 – 99.7 – 11.1 – 20.8 24.4 Gearing < 1 5.8 1.8 0.7 0.4 0.3

10 annual report and corporate responsibility report 2009 STRATEGY & FINANCIAL TARGETS

Competitive Advantages:

Concentration • On service quality

Competence • Expertise, especially in high-technology products • Skilled personnel, high-technology competence

Co-evolution • Superb customer service concentration • Confidentiality and close cooperation

Consistency • Globally consistent service network, standardized machinery, uniform systems and processes • Transferability of skills, technologies, products, assets and humancompetence resources on a global basis Cost-efficiency • 100% of volume fulfillment capacity in low-cost countries • Purchasing power

Coverage Global operations co-evolution • • Full service range from product development to after market services

Continuous Development • Continuously competitive and unique service offering consistency coveragecost-efficiency

continuousElcoteq SE 11 development SERVICE OFFERING AND NETWORK two twoStrategic Business Units SERVICE OFFERING ÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÛ Elcoteq is the global Product Life Cycle Partner for its high-tech product and service companies. Engineering, Manufacturing, Fulfillment and After Market Services are the corner stones of Elcoteq’s extensive service offering. Customers can pick the services matching with their individual needs to optimize total cost of ownership and improve their supply chain flexilibility.

Elcoteq’s Service Offering

New Product Board Introduction ENGINEERING Assembly SERVICES Joint Subsystem Research & Assembly Development Test System Development Manufacturing Life Cycle Services Engineering Recycling Pick & Pack

Final/System Repair Assembly Supply Chain Management Fulfillment Logistics AFTER MARKET Services SERVICES

Refurbishment Consulting Sourcing

lcoteq has a proven track record in electronics manu- under development delivers all the advantages of concurrent facturing services (EMS) and a global factory network engineering. Ecoupled with modern manufacturing equipment and Manufacturing services comprise all basic assembly consistent systems and processes. Thus enabling Elcoteq to services, ranging from simple printed circuit board assembly serve the high-volume consumer product and medium- to up to the assembly and testing of complete products and low-volume communication and control markets with excel- complex systems ready for end customer delivery. Elcoteq lent quality, high flexibility and prompt deliveries. consults its customer in setting up the optimal supply chain, and chooses the best logistic concept and partners, localizes Tailored to meet “Glocal” customer needs the component supply and manages the supply chain to The service requirements of Elcoteq’s customers tend to be make sure products reach its customers on time. different; some rely entirely on Elcoteq as their partner, while Elcoteq completes its service palette with After Market others use Elcoteq to cover only specific demands. Services (AMS). Customers can turn to Elcoteq to repair When designing new products, customers can pick products that have failed in the field or to refurbish products elements of Elcoteq’s Joint Research & Development or New when needed, regardless of who originally manufactured Product Introduction Services and benefit from fast times them. Elcoteq AMS services are usually provided together to market and optimized manufacturing costs right from with different kinds of logistic services and real-time the beginning. Working hand in hand while a product is still traceability.

14 annual report and corporate responsibility report 2009 Engineering Services Fulfillment Services

New Product Introduction Sourcing The New Product Introduction or NPI Service comprises Sourcing provides customers access to proven, cost-efficient various subservices enabling a smooth and secured and technically sound components that are complemented production ramp up. with identification, qualification, and management of a high variety of local and global suppliers. Joint Research & Development Elcoteq’s Joint R&D Service enables OEMs to outsource Logistics selected product design and development responsibilities. Logistics services include planning and managing inbound and outbound logistics required to provide integrated manu- Life Cycle Engineering facturing services, reverse logistics needed for after market Elcoteq offers Life Cycle Engineering for its customers to services, and special solutions for different hub concepts. maintain manufacturability and the ability to repair products during their entire life time. Supply Chain Management Supply Chain Management (SCM) services include planning, Test System Development execution, control, and monitoring of various product- and Elcoteq develops new test systems based on customers’ customer-specific supply chain and warehouse processes. specifications but also optimizes customer owned test systems to reduce testing times and to improve test Consulting coverage and tester utilization. Elcoteq advises its customers in issues such as continuous planning and adaptation to changing customs and tax regulations, cost-efficient manufacturing, material manage- Manufacturing Services ment and logistics to enable them to increase their profitability and gain more market share.

Board Assembly Pick & Pack Elcoteq offers board assembly for all kinds of electronics – Elcoteq’s Pick & Pack services cover a wide range of different customers can choose for example from state-of-the-art packing services such as box building, system configuration, surface mount and through-hole mount assembly services, software downloading and final sales packaging. combined with simple and complex manual assembly.

Subsystem Assembly After market Services The subsystem assembly service is used whenever a customer requires fully functional and tested modules and subsystems that are later used as plug-in units in more inte- Repair grated products. Elcoteq offers comprehensive Repair and Return services such as qualified soldering, accessory, component, electrical and Final/System Assembly depot repair in an industrialized repair process in which Elcoteq’s offering covers all final & system assembly ranges continuous feedback to customer is provided. from final products to complete system platforms, and from build-to-order products to configured-to-order integrated Refurbishment systems. Refurbishment Services include SWAP activities, cosmetic repairs, product and software upgrades, asset and scrap recovery and other special reworks.

Recycling Elcoteq’s recycling services prevents the waste of useful material from used products and assure an environmental friendly disposal of non-reusable and hazardous materials.

Elcoteq SE 15 SERVICE NETWORK ÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÛ A consistent and cost-effective global service network is one of Elcoteq’s key competitive advantages.

lcoteq maintains a comprehensive and consistent Americas global service network close to its largest customers PERSONNEL ON and the end markets of their products. The consistency FACTORY DEC. 31, 2009 E Mexico (Monterrey) 1,467 is a result of the fact that most of the factories have been either built by Elcoteq or customized for the company. This Mexico (Juarez) 1,134 makes it easy to transfer production flexibly from factory to Brazil (Manaus) 861 factory in line with the customer’s needs. OTHER LOCATIONS 35 All the high-volume manufacturing factories are in low- USA (Dallas) cost countries. The availability of skilled labor is good in these areas and they are also competitive in terms of cost. Elcoteq aims to improve the competitiveness of its AMERICAS, TOTAL 3,497 customers and continuously exceed their expectations. For this reason, operational excellence is a cornerstone of Elcoteq’s strategy. All of Elcoteq’s global operating procedures and business processes are ISO 9001:2000 and ISO 14001:2004 certified. •

Dallas Juarez

Monterrey

Manaus

Plant Other locations Engineering Center

16 annual report and corporate responsibility report 2009 Europe Asia-Pacific PERSONNEL ON PERSONNEL ON FACTORY DEC. 31, 2009 FACTORY DEC. 31, 2009 Hungary (Pécs) 3,596 China (Beijing) 1,406 Estonia (Tallinn) 165 China (Dongguan) 609 OTHER LOCATIONS 179 India (Bangalore) 583 Finland (Salo and Espoo) OTHER LOCATIONS 66 Sweden (Kista) China (Shenzhen) Luxembourg China (Hong Kong) Switzerland (Zug) Korea (Seoul) Russia (St.Petersburg) Japan (Tokyo) EUROPE, TOTAL 3,940 ASIA-PACIFIC, TOTAL 2,664

Salo Espoo Kista St.Petersburg Luxembourg Tallinn

Tokyo Zug Pécs Beijing Seoul

Dongguan Shenzhen Hong Kong Bangalore

Elcoteq SE 17 CONSUMER ELECTR ONICS ÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÛ Consumer Electronics provides its customers with a full range of product life cycle services for their innovative high-tech products.

n the global level, the general economic downturn The company was also successful in acquiring new continued throughout the whole year. This affected customers in the Consumer Electronics business. These new Ocustomer demand in the Consumer Electronics customers include Emporio, a special-purpose mobile phone Strategic Business Unit (SBU) as well. As a result, net manufacturer, Cinterion, a wireless module manufacturer, sales of Consumer Electronics declined to 1,127.3 million and TCL, a leading Chinese consumer electronics company. euros (2,739.5) in 2009. The fall was particularly evident in Furthermore, cooperation with several existing Consumer Consumer Electronics’ sales to its mobile phone customers. Electronics customers, including Philips, Humax and In the EMS market, the decline in customer demand also led Thomson, expanded to new geographical and product areas. to greater price competition among EMS companies. In line with its strategy of leveraging its capabilities into The operating loss of Consumer Electronics was –38,2 new product segments with growth potential, Elcoteq has million euros (15.0). Lower customer volumes had a large successfully started serving customers in selected lighting impact on the profitability of the segment. Restructuring segments. The lighting business will be undergoing signifi- costs and capacity adjustments made in the SBU to meet cant transition when new LED-based lighting products lower demand levels also had a negative effect on profit- replace conventional light sources. These new lighting ability. Excluding restructuring costs SBU’s oparating loss was product applications provide significant growth opportuni- –13.9 million euros (23.1). ties for EMS companies. The value of LED-based lighting products is estimated to reach 80 billion euros by the All consumer products under year 2020. These trends create a solid basis for developing one strategic business unit Elcoteq’s Consumer Electronics business toward serving a In August 2009, Elcoteq combined its Personal Communi- wider and more balanced business and customer portfolio. cations and Home Communications Business Areas into a Customers continue to value Elcoteq’s global footprint new SBU: Consumer Electronics. The new organizational and its comprehensive knowledge in managing complex structure will enable Elcoteq to better utilize the synergies global product supply chains. between these businesses that have similar customer needs. Thanks to the new SBU, Elcoteq can also optimize the further Prospects for 2010 development of its service offering for Consumer Electronics The estimated total assembly value of the market for mobile customers. phones and other handheld devices such as PDAs, MP3 In the Consumer Electronics SBU, Elcoteq serves players and personal navigation devices amounted to roughly customers in the smart and mobile phone business, flat 128 billion US dollars in 2009, according to ETP. Mobile screen TV and set-top box businesses as well as in emerging phones were the single biggest segment in the market. lighting businesses, including LED-based lighting products. This growth is estimated to continue in 2010. According to Elcoteq continues to develop its service offering to address Morgan Stanley, the overall revenue generated from the the evolving needs of its Consumer Electronics customers handsets market will reach 168 billion US dollars in 2010. with a special focus on increasing its service content. Smartphones are the main driver for growth and they also generate more value per unit than mobile phones. Strong development in laying ground for future growth In the Consumer Electronics SBU, 2009 was characterized by drastically lower manufacturing volumes from its high- volume mobile phone customers. However, at the same time Elcoteq made strong progress in growing its service content in the Consumer Electronics business, especially in increasing its after sales services business.

18 annual report and corporate responsibility report 2009 CONSUMER ELECTR ONICS

The estimated total assembly value of the electronics market for TVs, set-top boxes, games and DVD players amounted to roughly 132 billion US dollars in 2009, according to ETP. The two largest business segments were clearly flat panel TVs and set-top boxes. In spite of the global economy worries, both the FTV and set-top box markets are expected to continue growing in 2010 and digitalization is the main driver for this growth. In FTVs, growth is estimated to be about 15 percent and in set-top boxes about 7 percent. The main objectives for the Consumer Electronics SBU are to focus on further increasing the service content of its business and balancing its business portfolio by acquiring new customers in the targeted segments and deepening coopera- ssl tion with its existing customers. • pda

Consumer Electronics SBU: • net sales 1,127.3 million euros in 2009, 75 percent of the Group’s net sales • Customers’ product life cycle partner with a comprehensive range of engineering, manufacturing, fulfillment and after market services mp3 • Products include mobile and wireless phones, their parts and accessories, flat screenT Vs, set-top boxes and other home connectivity centers as well as emerging lighting products • Customers include Cinterion, Funai, Humax, LG Mobile, Nokia, Philips, RIM, Sony Ericsson, TCL and Thomson led Elcoteq SE 19 SYSTEM SOLUTIONS ÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÛ System Solutions offers its customers end-to-end delivery and manufacturing solutions for a wide range of complex electronic systems.

et sales of the System Solutions Strategic Business Elcoteq caters to these expanded customer expectations. Unit (SBU) declined to 375.9 million euros (703.7) The System Solutions SBU provides proven solutions from the Nin 2009. The decline was mainly due to the sale of beginning of the process to finalizing the product, all the way a major part of the operations in Tallinn to Ericsson in July through the supply chain up to the point when the product 2009. At the same time, the segment was able to improve reaches the end customer. In addition to communications its efficiency and further reduce costs to offset the volume network equipment, the unit targets new segments in power decline. Thus the operating loss was –2.0 million euros, but generation, distribution and control, security systems, smart excluding restructuring expenses the operating income was meters, M2M and traffic control.T his means that at the same positive at 9.9 million euros (7.0). time as it expands its service offering, the System Solutions Despite the decline in net sales, System Solutions was still SBU can continue utilizing its expertise, technology specific able to develop its business. In Tallinn, System Solutions has know-how and installed machinery, and the competence its been successful in utilizing manufacturing capacity and has personnel has gained in its ongoing businesses. managed to gain new customers for its specialized business operations. Recovering economy drives outsourcing Elcoteq’s plant in India also attracted new customers and The customers themselves have undergone dramatic changes expanded its operations pipeline, mainly thanks to System in the prevailing global economic environment. Today, there Solutions’ competitive service offering and proven track is greater pressure than ever before to manufacture and record in the Indian market. Furthermore, one of the SBU’s provide services in a profitable way. Furthermore, consoli- major customers successfully relocated its manufacturing of dation has increased in the EMS market and in the future, communications network equipment to central Europe and mergers and acquisitions in new areas will most likely be proceeded to ramp up its business to a significantly higher considered. level in accordance with the plan agreed with Elcoteq. During 2009, growth in the outsourcing of communications equipment was more limited than what was forecasted. New organization caters to The top key players in traditional communications network broader customer needs technology infrastructure were in-sourcing their business, The System Solutions Strategic Business Unit was formed thereby decreasing the share of business accounted for after the overall reorganization of the company in August by outsourcing. The overall market for System Solutions 2009. The new unit includes the resources of the old nevertheless showed slight growth due to government communications network business, and targets to further investments. strengthen the focus on customer business in the commu- However, the demand for outsourcing is expected to grow nication infrastructure and other infrastructure product next year if and when economic growth begins to accelerate. market. Companies that have in-sourced may not have sufficient The structure and organization of the SBU are based on capacity to manufacture higher volumes on their own and customer needs and the requirements of their complex busi- will thus require more outsourcing. This is especially the case ness environment. Nowadays, customers from all segments with mid-sized companies that have limited manufacturing require a wide range of services, starting from how to finalize capacity. their products or systems prior to market launch. They expect help with industrialization and further support with getting the components to the right location at the right time and the right price to ensure time-to-market. Thanks to Elcoteq’s long experience with the world’s leading OEM customers, System Solutions is well poised to fulfill customer demand with a full service range.

20 annual report and corporate responsibility report 2009 Prospects for 2010 System Solutions SBU: According to ETP, the estimated total size of the System Solu- • Net sales 375.9 million euros in 2009, 25 percent of the tions electronics assembly market amounted to roughly Group’s net sales 150 billion US dollars in 2009 and the biggest segment was • Products include wireless and wireline infrastructure wireless infrastructure. Carrier investments for both wireless systems and modules, enterprise network products and and wireline equipment decreased to nearly 140 billion US various other industrial segment products dollars and close to 90 billion US dollars respectively in 2009, • Globally operating customers include Huawei, Aastra, according to UBS. Investments in wireless infrastructure Ericsson, EADS, Cypress, Anda and Inmarsat equipment are expected to increase slightly in 2010. It is expected that LTE technology (i.e. long term evolution, 4G technology) will see more launches in 2010. Increasing data rates will drive future growth in the wireless market, increasing the demand for LTE. However, the growth expectations in all communication equipment segments have slowed down compared to previous year. Infrastructure electronics segments did not suffer as much during 2009 and a more positive trend is expected. For example, according to industry analysts, the installed base of smart electricity meters will see high growth rates during next years, especially in Europe and North-America. The System Solutions SBU is ready to grasp these future growth opportunities and to target new customer segments such as power, security and control systems from both the manufacturing and competition perspective. Thanks to its current technology, factory network, and competence in wireless communications and broadband, the SBU is well lte poised to succeed in these new segments. System Solutions’ main objectives are to maintain excellent customer satisfaction and grow profitably in selected segments with our new and existing customers. • 4g m2m Elcoteq SE 21 CORPORATE RESPONSIBILITY three threeareas of corporate responsibility CORPORATE RESPONSIBILITY AT ELCOTEQ ÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÛ Elcoteq’s customers require their partners to operate responsibly all over the world. Corporate responsibility at Elcoteq means a proactive approach in compliance with the principles of sustainable development on the basis of the company’s values. It encompasses economic, social and environmental responsibility and accounts for the requirements set by the company’s stakeholders and legislation.

orporate responsibility means taking responsibility for Coverage of reporting on the impacts of the company’s decisions and operations Corporate Responsibility Con both the local communities and the company’s Elcoteq has published an annual Corporate Responsibility stakeholders. Corporate responsibility covers three dimen- Report since 2004. This is the second time it is included in sions: economic, social and environmental. the Annual Report. Its inclusion reflects the trend of recent At Elcoteq, responsibility for addressing these three years – corporate responsibility is now increasingly seen as dimensions is integrated in the company’s strategy, manage- an integral part of operations. Companies are expected to ment systems and corporate governance, which is evident present annual targets, benchmarks and transparent results. in the principles and guidelines that are derived from them. This report intends to provide a general overview of corporate The company has a clear corporate responsibility policy and responsibility results and events in 2009. The 2008 Annual has established processes for its implementation. Elcoteq’s Report including also Corporate Responsibility Report was Corporate Responsibility Team operates under the Global published in March 2009. Quality organization. Elcoteq develops its corporate responsibility reporting on the basis of the Global Reporting Initiative (GRI) guidelines. Customer satisfaction survey The company continuously develops its internal procedures Customer satisfaction is one of the most important indi- to ensure the quality and reliability of information. The G3 cators of business performance and provides valuable guidelines issued by the GRI in October 2006 are applied information for setting strategic objectives and evaluating in this corporate responsibility report. The choice of indica- our success in customer relationship management. Global tors was affected by the nature of Elcoteq’s business and customer satisfaction surveys are conducted annually the aspects that are of central importance to it and to the at Elcoteq. The Elcoteq Customer Satisfaction Index (CSI) company’s stakeholders. The key indicators presented herein measures satisfaction in a quantitative manner based on were chosen by comparing Elcoteq’s indicators with the GRI customer perceptions of the quality of services that Elcoteq guidelines and the availability of information. delivers. According to the feedback from the 2009 Customer Satisfaction Survey, customers continued to rank the company high with respect to sustainability issues.

24 annual report and corporate responsibility report 2009 This section focuses on describing the company’s social and environmental management systems, the performance indicators used in them and events in 2009. Economic responsibility is covered in other sections of the Annual Report. The social responsibility section of this report applies to the entire Group; while the environmental section covers the company’s manufacturing plants. The data of the Tallinn plant is not included in the environmental section as the majority of its operations were sold in July 2009.

Data collection Elcoteq employs a corporate responsibility reporting system based on the GRI guidelines. The system is primarily used to collect information on the management of environmental matters. The reporting system enables the company to set and keep track of objectives systematically, compare operating locations and disseminate best practices. To improve its reliability, the data fed into the system is verified and closed within a certain timeframe. After this period all revisions are registered separately. The information on social responsibility is based on Elcoteq’s internal human resources reporting. The figures reported on have previously been compared with net sales. The year 2009 was challenging, not least due to the great changes in the customer portfolio and the decline in net sales. Even if the absolute figures of the corporate responsibility indicators have improved, the results are negative when considered relative to the lower net sales. The results thus do not necessarily provide an accurate picture. Furthermore, the reporting schedule was much tighter than in previous years. For this reason, we chose to report on the absolute figures for2009 .

Reliability of information The information in this report has not been independently assured. We are continuously developing our internal procedures to ensure the quality and reliability of information. •

Elcoteq SE 25 CORPORATE RESPONSIBILITY DEVELOPMENT AT

ELCOTEQ Elcoteq was accepted as a member of Kempen/SNS Environmental First Smallcap SRI Policy environmental Europe Index was launched database was taken into use Started to develop Design for Environment concept Ethical requirements 1997 were included to supplier requirements First ISO 14001 certificates were 2003 granted to Elcoteq 2001 1999 2002

First version of Elcoteq’s 2000 restricted substances list was published

Environmental requirements were included Corporate 1998 to supplier requirements Responsibility Elcoteq values Policy was launched were launched

Started to develop lead-free manufacturing capabilities

26 annual report and corporate responsibility report 2009 Global occupational health and safety guidelines were launched

OHSAS 18001 certification was granted to Bangalore plant

Internal CR audits were Elcoteq renewed its membership conducted in APAC region in Kempen/SNS Smaller SRI (Socially Responsible Investment) Europe Index

Workplace practices RoHS project started guidelines were launched for information and materials management 2009 2007 2005 2008

2006 Systematic 2004 internal CR First Corporate Responsibility Web based tool for Corporate audits were started report was published Responsibility reporting was taken into use

Supplier Code of Conduct OHSAS 18001 was launched certification was granted Internal SA8000 and to Tallinn plant OHSAS 18001 audits were conducted in cooperation with Global environmental, external partner in APAC Web based tool for material health and safety content data management policy was compiled for components and products was taken into use OHSAS 18001 certification was granted to Pécs plant Calculation of carbon footprint was piloted Multisite certification for in Tallinn plant and environmental management Espoo office system was taken into use Bi-annual support agreement with International Youth Foundation was signed Elcoteq SE 27 SOCIAL RESPONSIBILITY ÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÛ The objective of Social Responsibility at Elcoteq is to safeguard humane labor conditions and wellbeing of the personnel. In the year 2009, the focus was on developing occupational health and safety.

Occupational health and safety Code of Conduct Elcoteq seeks to provide all its employees with safe and The launch of an internal Code of Conduct was planned for healthy working conditions. The plants have taken steps to the second half of 2009. Due to changes in organization it upgrade their own occupational health and safety and are was decided to be postponed to 2010. The Code will aim at thus in different phases in their development. In 2009, the setting out the guiding principles of sustainability, integrity Bangalore plant certified its occupational health and safety and ethical conduct of business. management system according to OHSAS 18001:2007. Plants in Tallinn and Pécs have had certified OHSAS 18001 manage- Responsible supply chain ment systems for several years. In order to operate responsibly, Elcoteq must ensure that the At the group level, global occupational health and safety entire supply chain meets corporate responsibility require- guidelines were launched. The purpose of these guidelines is ments. At the end of 2008, Elcoteq published Supplier Code to describe the elements and requirements of occupational of Conduct. As part of this Code of Conduct, Elcoteq also health and safety management system as well as to provide released detailed corporate responsibility requirements for general guidelines for implementation. The persons in each suppliers. Implementation of this Code was started in 2009, plant who are responsible for health and safety at a unit level concentrating on the most important suppliers. were educated in these guidelines. Data on accidents and the resulting lost working time Product safety and liability are collected at the plants on a monthly basis. In 2009, 90 All of Elcoteq’s units comply with national and international injuries resulted in lost working time and the time lost as a laws and regulations concerning product safety and liability consequence totaled 11,990 hours. Elcoteq has not had global as well as general operating principles. In its manufacturing objectives for occupational health and safety, but it has gath- services, the company only uses components and subcon- ered data on accidents at the global level for few years. On tractors that have been approved by its customers, takes on the basis of this data, it seems that an area requiring focus is responsibility for the quality assurance of components used the severeness of injuries causing lost time. During the year in production, and both manufactures and tests the products 2010, the company aims to decrease the severity of injuries in accordance with the agreed specifications and standards. by half. Information collected during component receiving inspections is stored in Elcoteq’s global database that measures Internal Corporate Responsibility audits supplier capability. The information in this database is Elcoteq continued conducting internal Corporate Responsi- bility audits in the first half of2009 . Plants in Manaus and Beijing were audited against environmental, occupational health and safety, and social accountability standards. The Number of personnel in 2005–2009 greatest area requiring development in Manaus was occupational health and safety, but management of other issues related to labor conditions also needs improvement. In Beijing, the audit results were good and included only a few 4,207 5,688 3,732 nonconformities per audited standard. Internal CR audits 7,409 7,598 5,196 were carried out in almost all Elcoteq plants during 2008– 6,086 5,027 2009 excluding Bangalore and Juarez plants. 11,682 9,984 10,936 3,497 8,607 Americas 2,664 Asia-Pacific 3,940 Europe 2005 2006 2007 2008 2009

28 annual report and corporate responsibility report 2009 SOCIAL RESPONSIBILITY

used for optimizing quality assurance in the supply chain During 2009 Elcoteq had to respond to the exception- and identifying product quality and liability risks related to ally challenging market situation with intense restructuring components and materials. Elcoteq has a dedicated approval activities. This meant that manufacturing operations in Arad process for ensuring that products and production measure (Romania), Richardson (USA), St. Petersburg (Russia), and up to requirements. Shenzhen (China) where closed. Also most other units down- Procedures agreed on with the customer are used in scaled the amount of personnel. In July Elcoteq sold part of product testing and inspections as well as product database its Tallinn operations to Ericsson, and as a result, approxi- management. Elcoteq is responsible for the confidentiality, mately 1,200 employees where transferred to Ericsson. correctness and availability of its information on individual The Elcoteq group organization was also streamlined products and customers. and simplified to meet the market situation. Certain orga- Along with product development services, Elcoteq also nizational layers and overlapping roles were removed. As a offers the management of official authorizations in the result of this organizational change, the company conducted agreed market areas. In keeping track of official regulations, personnel reductions in its group, which affected personnel Elcoteq relies on well-known global partners. globally.

Personnel Training At the end of 2009, Elcoteq employed 10,101 (18,830) people. Elcoteq is committed to continuous development and The average number of employees on Elcoteq’s direct payroll training of its employees to ensure that they have the in 2009 was 7,348 (17,401). Of the Group’s total workforce, needed skills to meet the requirements of their jobs. Elcoteq 83 percent are blue-collar employees and the remaining 17 units with the support of group functions arrange extensive percent are white-collar employees. Of the employees, 51 training to make sure that business units have needed opera- percent are women and 49 percent are men. The Elcoteq tional skills and competences available to meet customer Management Team (EMT) comprises eight men. 81 percent requirements at all times. of plant’s management team are men and 19 percent are women. As an employer, Elcoteq neither prevents nor requires the organization of employees. Personnel representation is based on local systems. Personnel in figures in 2009 Changes in Personnel Number of employees 31. 12. 2009 10,101 Changes in demand and reorganization of business mean Male/female ratio % 49/51 that from time to time, Elcoteq has to downscale its New employees, number 761 personnel strength, either through redundancies or layoffs. In Contracts of employment terminated, number 6,843 these situations, the company always observes the periods of Personnel expenses, MEUR 126 notice and other conditions set by local legislation and collective agreements. Coverage of different bonus schemes, % 92

Level of education Distribution by age

100% 100% 1% under 20 21% Professional qualification or university degree 37% 20–29 19% Vocational education

44% High school 40% 30–39

15% Grade school 16% 40–49 1% No grade school 5% 50–59 1% over 60

Elcoteq SE 29 ENVIRONMENTAL RESPONSIBILITY ÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÛ

During 2009, the training of Elcoteq Business Processes Year 2009 was challenging for for all units was continued as planned. Emphasis on corporate level was put on developing e-learning opportunities carrying out the ambitious and supporting self-development and on-the-job-learning. environmental targets. Decline in The Elcoteq Learning Channel, containing training courses and training material as well as recommended books and sales and layoffs which affected also articles for self-study, was created to the global intranet. On average, 4.9 days of training were held per person in year the CR personnel, made realization 2009. of environmental targets difficult. Remuneration Despite of these challenges, Elcoteq’s Elcoteq complies with local legislations regarding wages in the countries where the company operates. Compensation customers continued to rank the practices in general are one important factor in ensuring company high with respect to Elcoteq is an attractive employer that is able to attract and retain a skilled and motivated personnel. Pay levels are influ- sustainability issues. enced by the role and responsibilities of the job performed, experience and competence of the employee, as well as the local market practices and regulations. Compensation and rewards are also used as tools to Environmental targets communicate targets, and ensuring the performance is Elcoteq’s environmental targets to reduce the amount of aligned to these. About 92 percent of Elcoteq employees are energy consumption by 10 percent by the year 2012 and included in some incentive or bonus scheme. The company waste by 5 percent in 2009 were set in relation to net sales. currently uses production bonuses, and different short and Decline in the sales made these targets difficult to reach in long term target based incentives. Bonuses and incentives 2009. aim at committing employees to both individual and organi- Changes in the resource structure led to a situation where zational targets, and to rewarding employees for good perfor- it was not possible to go ahead with all the planned projects mance. In 2009 Elcoteq paid out a total of 126 million euros and the set environmental targets. Therefore, identifying in wages, salaries and other personnel expenses. • the composition and volume of packaging materials and reducing their environmental impact as well as optimizing chemical usage were not realized in 2009. In 2010 Elcoteq will continue with two environmental targets: reducing energy consumption by 10 percent until 2012 and reducing the amount of waste by 5 percent compared to previous year. There will not be global programs for these targets, but manufacturing units themselves will decide on the steps needed for reaching the targets.

Carbon footprint In recent years, climate change and global warming have been leading the development actions in international organizations, national governments and companies. Preventing climate change concerns each and every company, including those in the electronics industry, even though electronics assembly is not an energy-intensive field of industry. The impacts of climate change and the actions to prevent it are at present mainly reflected in Elcoteq’s operations in the form of rising energy costs.

30 annual report and corporate responsibility report 2009 ENVIRONMENTAL RESPONSIBILITY

In 2009, the aim was to go further with the carbon foot- Air emissions are being regularly monitored at the Beijing print project and to calculate company’s total carbon foot- and Bangalore plants as required by local environmental

print and set long-term goals to reduce it. The first phase permits. Substances reported are Nitrogen Oxides (NOX) 600 of the project was completed, but the following steps were kilograms , Volatile Organic Compounds (VOC) 251.6 kilo- decided to be postponed. Preliminary results showed that grams and Tin (Sn) 11.12 kilograms. there is room for improvement especially in inbound logistics and air travel. Internal environmental data gathering was Compliance modified so that in the future it enables easy collection of All Elcoteq units comply with national and international data that is needed for the calculation of carbon footprint. legislation, regulations and generally approved principles Furthermore, company acquired videoconference equip- concerning environmental matters. The company records ments, which are in use in two plants and in three offices. deviations from the requirements of regulations, non-confor- The use of these equipments aims at reducing the environ- mances and any consequent penalties in its global environmental burden caused by air travel. mental database. No such deviations were recorded in 2009.

Environmental performance Awards received Elcoteq’s total energy consumption for 2009 totaled 278,560 Elcoteq won the SMT 2009 VISION Award in the category of GJ. Total consumption includes all electricity, heat and Contract Services for its Management of Corporate Respon- fuels used, but not the energy consumed by vehicles and sibility. The SMT VISION Awards recognize the people and transportation. Ventilation, heating, lighting and produc- products within the surface mount industry that serve as tion machinery and equipment consumed the most energy. benchmark of excellence. Elcoteq primarily uses electricity, which accounted for 79 Elcoteq’s plant in Bangalore, India received the prestigious percent of total energy consumption in 2009. ELCINA-Dun & Bradstreet award for Excellence in Quality. The Large amounts of water are not used in Elcoteq’s manu- Award winners were evaluated on 42 criteria and selected on facturing processes. Water consumption consists mainly of the basis of the total score obtained encompassing various faucet water and water used in air-conditioning systems. In aspects that make up an elaborate well-structured evalua- 2009, total water consumption was 169,040 cubic meters. tion system. Municipal water networks provided 114,525 cubic meters and In addition, Customs-Trade Partnership Against Terrorism artesian wells provided 54,515 cubic meters. (C-TPAT) certification was granted to Elcoteq’s Monterrey Elcoteq categorizes its waste as either non-hazardous or plant in Mexico. C-TPAT is the leading security certification in hazardous waste. These waste categories are then subdi- North America. • vided by processing method into three groups: recycling, incineration, and landfill. In2009 , the total amount of waste produced was 8,271 tons, 159 tons of which was hazardous waste.

Energy Consumption, 1000 Gj Water Consumption, 1000 m3 Waste Handling, % 719 9% 5% 4% 4% 2% 643 385 580 613 328 327 282 67% 75% 74% 79% 88% 279 169

24% 20% 22% 17% 10% 2005 2006 2007 2008 2009 2005 2006 2007 2008 2009 2005 2006 2007 2008 2009

Heating oil Incineration Gas Recycling District heating Landfill Electricity Elcoteq SE 31 KEY STAKEHOLDERS ÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÛ Open interaction with all stakeholders helps Elcoteq to identify and account for the expectations that they have for the company. Elcoteq’s key stakeholders include customers, personnel, component suppliers and capital markets.

layers in the global business environment are increas- expect from company’s operation and corporate responsibility ingly dependent on each other. For global companies in particular ensure that the company can rapidly meet their Plike Elcoteq, this means that the number of stake- needs and requirements. Elcoteq seeks to be cost-effective, holders has grown significantly. Stakeholders include not reliable and global partner whose quality can be counted on only customers, but also customers’ customers. Also non- and which always keeps in step with its customers. governmental organizations representing consumer interests Meeting the expectations of personnel pose challenges have become more active in the electronics industry. Growth in times when the company must undergo severe personnel in the pool of stakeholders is also evident at the other end reductions. The company seeks to manage these processes in of the supply chain. The companies and partners serving a responsible manner and ensure a good working environment component suppliers or service providers worldwide are part for the new slim organization. of the supply chain. Elcoteq must be able to ensure that they, too, operate responsibly. Membership in industry organizations Elcoteq is a member of the European Information, Commu- Stakeholder cooperation nication and Consumer Electronics Technology Industry Elcoteq seeks to continuously analyze its stakeholders in Association (EICTA) and the European Alliance for Corporate order to better meet their expectations and needs. Stake- Social Responsibility. Both organizations offer opportunities for holder cooperation is guided by Elcoteq’s policies and exchanging experiences and practices with other companies operating procedures. The company wants to treat its in the industry as well as for monitoring and influencing the stakeholders fairly and in line with their needs. Continuous business environment of the industry and the development of interaction and dialogue with stakeholders about what they legislation. • Stakeholders Expectations Interaction Corporate Guidelines Customers • Overall responsibility Regular meetings with customers and Group’s strategy, global operating • Brand protection continuous interaction, customer system, EHS policy, corporate • Understanding customer needs satisfaction surveys, agreement responsibility policy, risk management • Wide service offering, globally structures, audits, customer magazine, policy and customer requirements • Quality and continuous development exhibitions, Internet • Cost-efficiency • Confidentiality • Reliability

Personnel • Fair remuneration and incentives Performance appraisal discussions, Group’s values, strategy, global • Training and career opportunities personnel representation, internal operating system, HR policies and • Supportive working environment communications, training, personnel processes, corporate responsibility • Equal and fair treatment surveys, organizing occupational safety policy, EHS policy, SA8000 and • Job satisfaction OHSAS18001 standards • Working conditions • Continuous information flow

Capital Markets • Profitability and increasing Meetings and continuous interaction, Group’s strategy and financial shareholder value releases and reports, press conferences objectives, administrative principles, • Creditworthiness and Capital Market Days, shareholder financial policy and guidelines, • Openness meetings, Internet principles of investor communications, • Reliable, accurate and up-to-date risk management policy, legislation as information well as rules and recommedations of supervisory authorities

Suppliers • Networking Regular meetings, agreement Group’s strategy, global operating • Operational reliability structures, supplier audits, extranet system, corporate responsibility policy, • Ethical conduct of business EHS policy, supply chain management instructions, risk management policy, supplier Code of Conduct 32 annual report and corporate responsibility report 2009 GRI G3 CONTENT INDEX

Strategy and Analysis Page ECONOMIC PERFORMANCE INDICATORS Page 1.1 CEO’s statement 2–3 EC1 Economic value generated and distributed 42–83 EC2 Financial implications due to climate change 30–31 organizational profile 2.1 Name of organization inside front cover ENVIRONMENTAL PERFORMANCE INDICATORS 2.2 Primary brands, products, and services 14–21 EN3 Direct energy consumption 31 2.3 Operational structure 16–17 EN8 Water withdrawal 31 2.4 Location of headquarters 86 EN20 Air emissions 31 2.5 Countries of operation 16–17 EN22 Waste 31 2.6 Nature of ownership and legal form 70–71 Significant spills of chemicals, oil and other 2.7 Markets served 14–21 EN23 substances 31 2.8 Scale of the reporting organization 16–17 EN28 Fines and non-monetary sanctions 31 2.9 Significant changes 4–5 2.10 Awards received 31 SOCIAL PERFORMANCE INDICATORS LA1 Workforce 29 Report Profile LA4 Coverage of collective bargaining agreements 29 3.1 Reporting period 24 LA5 Operational changes 29 3.2 Previous report 24 LA7 Lost days and accidents 28 3.3 Reporting cycle 24 LA10 Average hours of training 30 3.4 Contact persons inside back cover Diversity of governance bodies and breakdown of LA13 employees 29 3.5 Process for defining report content 24 Improving product and service safety over their 3.6 Boundary of the report 25 PR1 entire life cycle 28–29 3.11 Significant changes from previous reporting periods 25 PR 3 Product and service information and labeling 28–29 3.12 GRI Content Index 33 3.13 Assurance 25 Reported Governance, Commitments and Engagement Reported 4.1 Governance structure 86–91 Partly reported 4.2 Highest governance body 86–91 Members that are independent and/or GRI application level 4.3 non‑executive members 86–91 This Corporate Responsibility data has been Mechanisms for providing recommendations or self-declared at Application level C. 4.4 direction 86–91 4.14 Stakeholder groups 32 Names of certain GRI indicators have been shortened in this content index. Identification and selection of stakeholders with 4.15 whom to engage 32

Elcoteq SE 33 Financial Statements

36 Report by the Board of Directors 47 1. Accounting principles used in the 57 12. Earnings per share 42 Consolidated statement of consolidated financial statements 13. Notes to consolidated cash flow comprehensive income 52 2. Segment reporting statement 54 3. Other operating income 58 14. Non-current assets 43 Consolidated Cash Flow Statement 4. Personnel 59 15. Shares and holdings 44 Consolidated Balance Sheet 55 5. Personnel expenses 60 16. Impact of business combinations 46 Consolidated statement of 6. Incentive plans of the consolidated financial changes in equity 7. Depreciation and amortization statements 56 8. Restructuring expenses 17. Deferred tax assets and liabilities 47 Notes to the Consolidated 9. Other operating expenses 61 18. Inventories Financial Statements four 10. Financial income and expenses 19. Accounts receivable 57 11. Income taxes 20. Other receivables quarters

61 21. Prepaid expenses and accruals 67 30. Operating leases 78 Formulas for the Calculation of 22. Assets and liabilities classified as 68 31. Related party disclosures Key Figures held for sale 69 32. Assets pledged and contingent 79 Five years in figures 23. Equity liabilities 63 24. Liabilities 70 33. Shares and shareholders 80 Board’s Proposal to the Annual 65 25. Book values and fair values of 73 34. Risk Management General Meeting financial assets and liabilities by 77 35. Events after the end of the financial 81 Auditors’ Reports categories period 82 Quarterly figures (unaudited) 66 26. Provisions 27. Other current liabilities four 28. Accrued expenses 67 29. Pension obligations Report by the Board of Directors ÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÛ January 1 – December 31, 2009

lcoteq SE’s net sales in 2009 declined about 56.3% on the Financial Year 2009 previous year and amounted to 1,503.2 million euros (3,443.2 Elcoteq’s 2009 net sales declined on the previous year and amounted Emillion euros in 2008). Operating loss totaled –76.5 million to 1,503.2 million euros (3,443.2). Operating loss was –76.5 million euros (–20.4), mainly due to increased restructuring expenses of 37.0 euros (–20.4), representing –5.1% (–0.6%) of net sales. Loss before million euros, excluding which the operating loss was –39.5 million taxes was –117.1 million euros (–52.9) and net loss was –105.0 euros (–6.9). The company has been able to offset to a great extent million euros (–65.9). Earnings per share (EPS) amounted to –3.22 the effects of the sales decline with the strong cost savings actions euros (–2.02). Earnings include 37.0 million euros (13.5) in restruc- carried out throughout the year. Cash flow after investing activities turing expenses. was clearly positive at 52.9 million euros (–99.7). Interest–bearing Net sales declined in both Consumer Electronics and System Solu- net debt decreased significantly and was 187.5 million euros (238.5). tions compared to the previous year. The decline in net sales was due Net sales declined in the fourth quarter of 2009 by about 20% on to the combined effect of the overall decline in electronics equip- the previous quarter and amounted to 265.5 million euros (331.7 ment demand and the company’s weak balance sheet. From time million euros in the third quarter of 2009). Operating loss totaled to time, the EMS business may involve temporary working capital –23.4 million euros (–11.8) and excluding restructuring expenses it fluctuations, which the electronics manufacturing service provider amounted to –2.1 million euros (1.7 in the third quarter of 2009). is expected to finance.T his lacking financing capacity prevented the Elcoteq SE’s consolidated financial statements for 2009 have company from absorbing all the business opportunities available in been prepared using IFRS recognition and measurement principles. the market. The comparative figures given in the body text of this report are Operating loss increased in 2009 from the previous year. Results the figures for the corresponding period of the previous year, unless were affected by non-recurring costs of 37.0 million euros (13.5) stated otherwise. arising from the restructuring actions implemented to mitigate the effects of lower net sales. The cost savings from restructuring actions Market Review mainly became visible in the second half of 2009 and thus could not The estimated total assembly value of the global electronics market fully offset the significant net sales decline throughout 2009. On an declined by roughly 15% at the annual level, amounting to 840 annualized basis, fixed costs were 165 million euros or 48% lower in billion US dollars in 2009. The combined value of electronic manu- the last quarter of 2009 compared to the last quarter of 2008. facturing services (EMS) and original design manufacturing (ODM), The company has continued to adjust its operations to lower including all the electronics segments, was roughly 250 billion US volumes, but it has at the same time maintained its excellent dollars in 2009, according to data from Electronics Trend Publications operational performance and global platform to serve customers (ETP), iSuppli, and InForum. EMS alone was valued at roughly 150 close to their end markets. Among the efficiency-boosting actions billion US dollars in 2009, with a market decline of approximately carried out in 2009 were the streamlining of the factory network, 15% from the previous year. The After Market Services (AMS) market increasing capacity utilization, aligning the organization to support declined roughly 13% in 2009 and was valued at 170 billion US the adjusted strategy and decreasing operational costs. The company dollars in 2009. closed production sites in St. Petersburg (Russia), in Arad (Romania), in Richardson (the United States) and in Shenzhen (China).

Net sales, meur Operating income*, meur Income before Taxes, meur % of net sales % of net sales

76.5 59.3 1.8% 1.4% 4,284 4,169 4,043 19.2 43.9 0.4% 3,443 1.0% –122.8 –52.9 –117.1 –3.0% –1.5% –7.8%

–46.1 –6.9 –39.5 –1.1% –0.2% –2.6% 1,503

2005 2006 2007 2008 2009 2005 2006 2007 2008 2009 2005 2006 2007 2008 2009

* Excluding restructuring expenses 36 financial statements 2009 The Group’s net financial expenses amounted to 40.5 million Capital Expenditures euros (32.4). The increase was mainly due to a loan receivable write- The Group’s gross capital expenditures on fixed assets in 2009 off of 13.4 million euros. amounted to 6.4 million euros (71.4), or 0.5% of net sales. Deprecia- tion was 60.1 million euros (78.9), representing 4.0% of net sales. Fourth-quarter Net Sales and Earnings Investments were primarily earmarked for production machinery Fourth-quarter net sales in 2009 declined compared to the third and test equipment. In 2009, investment activity was reduced to quarter, as expected, and amounted to 265.5 million euros (889.1 a minimum in order to increase the capacity utilization of existing million euros in the fourth quarter of 2008 and 331.7 million euros assets. In the fourth quarter, investments amounted to 1.8 million in the third quarter of 2009). Net sales were affected by the divest- euros (9.9). No new operating lease contracts were made in 2009 ment of the majority of operations in Tallinn to Ericsson at the end (and in 2008). of July 2009 and lower demand in Consumer Electronics, mainly in handsets. Deliveries in home communications products such as flat Personnel TVs and set-top boxes increased significantly from the third quarter At the end of December, the Group employed 10,101 (18,830) people: of 2009. 139 (217) in Finland and 9,963 (18,613) elsewhere. The geographical Operating loss in the fourth quarter was –23.4 million euros distribution of the workforce was as follows: Europe 3,940 (8,607), (–11.8 million euros in the fourth quarter of 2008 and –3.3 in the Asia-Pacific 2,664 (5,027) and the Americas 3,497 (5,196). The third quarter of 2009). Operating income exclusive of restructuring average number of Elcoteq employees on the company’s direct expenses in the fourth quarter was slightly negative at –2.1 million payroll in 2009 was 11,271 (17,401). euros (1.7). Restructuring expenses in the fourth quarter of 2009 Wages, salaries and other personnel expenses in 2009 amounted were related mainly to unused asset write–offs. Loss before taxes to 126.3 million euros (193.0). was –36.4 million euros (–25.2 million euros in 2008). Corporate Responsibility Financing and Cash Flow Elcoteq’s corporate responsibility includes economic, social and At the end of December 2009, Elcoteq had cash totaling 87.9 million environmental aspects. The company’s environmental management euros (201.0 million euros in the third quarter of 2009 and 95.1 system corresponds with the requirements of the ISO 14001:2004 million euros at the end of 2008). In November 2009, the company standard. All Elcoteq units operate within a multisite certificate for used 100 million euros cash to repay part of its revolving credit quality and environmental management. In 2009, Elcoteq continued facility, of which a total of 200 million euros were outstanding at the systematic group-level internal audits of environmental, social end of the third quarter of 2009. accountability as well as occupational health and safety standards. At the end of 2009, the company had a syndicated, committed Further details on Elcoteq’s corporate responsibility activities will credit facility of 100 million euros that was fully utilized. The facility be presented in the Corporate Responsibility Report, which will be matures on April 30, 2010 and the company signed a committed published as a part of the Annual Report 2009 during the week term sheet with the same bank syndicate in March 2010 for a new commencing on April 5, 2010. facility maturing at the end of June 2011. At the end of December, the Group’s interest-bearing net debt Research and Development amounted to 187.5 million euros (238.5). The solvency ratio was Elcoteq’s research and development costs in 2009 totaled approxi- 6.3% (14.2%) and gearing was 5.8 (1.8). Elcoteq had no sold accounts mately 0.9 million euros (1.8), or 0.06% of net sales. The company’s receivable at the end of December 2009 (101.1 million euros at the R&D activities cover, among other things, equipment and process end of 2008). Rolling 12-month return on capital employed (ROCE) development for production and production testing needs as well was –18.9% (–3.1%). as development related to the platforms, software, electronics, Cash flow after investing activities in 2009 was 52.9 million mechanics and testing of mobile phones. euros (–99.7) while it was –11.3 million euros negative in the fourth quarter due to an increase in working capital.

Earnings per shareS, A Shares, eur Gross Capital Expenditures, meur Return on Investment (roi/roce), % % of net sales

123.6 3.0% 116.9 2.7% 1.34 17.6 0.38

67.2 71.4 9.1 1.7% 2.1%

–2.02 –3.1 6.4 0.5% –3.37 –3.22 –19.6 –18.9 2005 2006 2007 2008 2009 2005 2006 2007 2008 2009 2005 2006 2007 2008 2009

Elcoteq SE 37 Strategic Business Units Lower customer volumes impacted the profitability of the Since the beginning of 2008, Elcoteq has had three Business Areas: segment. Significant cost reduction activities were implemented in Personal Communications, Home Communications and Communi- 2009 but those could not yet fully offset the significant sales decline. cations Networks. They have been reported as separate segments. Restructuring costs arising from capacity adjustments also had a The Personal Communications and Home Communications Busi- negative effect on profitability. ness Areas were combined during the third quarter of 2009, and However, at the same time Elcoteq made strong progress in the company now has only two Strategic Business Units (SBUs): growing its service content in the Consumer Electronics business, Consumer Electronics and System Solutions. Both SBUs are respon- especially in increasing its after sales services business. The company sible for managing and developing their existing customer relation- was also successful in acquiring new customers in the Consumer ships and applicable service offerings, while Group Operations and Electronics business. These new customers include Emporia, a Sourcing is responsible for the supply chain and production. special-purpose mobile phone manufacturer, Cinterion, a wireless Consumer Electronics covers products such as mobile and wire- module manufacturer, TCL, a leading Chinese consumer electronics less phones, their parts and accessories, set-top boxes, flat panelT Vs company, and Philips Lighting, a leading provider of solutions and and other consumer products. System Solutions covers wireless and applications for both professional and consumer markets. wireline infrastructure systems and modules, enterprise network products and various other industrial segment products. System Solutions By combining the Home Communications and Personal Commu- Net sales of the System Solutions SBU in 2009 were 375.9 million nications segments under the Consumer Electronics SBU, the euros (703.7), contributing 25% of the Group’s net sales. The company can better utilize the synergies between these businesses. segment’s operating loss was –2.0 million euros (1.6), and excluding The company also aims to reduce costs further by streamlining and restructuring costs its operating income was 9.9 million euros (7.0). simplifying the organization by removing organizational layers and Fourth–quarter net sales in 2009 amounted to 54.5 million euros overlapping roles. (205.2). The segment’s operating loss amounted to –0.1 million euros More emphasis is also put on new sales activities, which are now (–5.1). Excluding restructuring costs the operating profit was 5.6 under a separate global function, New Sales and Business Develop- million euros (0.3). ment. The function focuses on identifying new business opportuni- The decline in net sales was mainly due to the sale of the majority ties, acquiring new customers and exploring new service segments of operations in Tallinn to Ericsson in July 2009. Despite the decline for the company. in net sales, System Solutions was able to improve its efficiency and In 2009, Elcoteq’s largest customers (in alphabetical order) were further reduce costs to offset the volume decline. However, its oper- EADS, Ericsson, Funai, Huawei, Humax, Nokia Devices, Nokia Siemens ating income was negative. Networks, Philips, Research in Motion (RIM) and Sony Ericsson. During 2009, growth in the outsourcing of communications equipment underperformed forecast. The top key players in tradi- Consumer Electronics tional communications network technology infrastructure were Net sales of the Consumer Electronics SBU in 2009 were 1,127.3 in-sourcing their business, thereby decreasing the share of business million euros (2,739.5), contributing 75% of the Group’s net sales. accounted for by outsourcing. The overall market for System Solu- The segment’s operating loss was –38.2 million euros (15.0), and tions nevertheless showed slight growth. –13.9 million euros excluding restructuring costs (23.1). Fourth– System Solutions was also successful in alluring new customers. quarter net sales in 2009 amounted to 211.1 million euros (684.0). In Tallinn, the remaining manufacturing capacity has been in utiliza- The segment’s operating loss amounted to –11.2 million euros (2.7). tion and the SBU has managed to gain new customers for its special- Excluding restructuring costs the operating profit was 4.4 million ized business operations. Elcoteq’s plant in India also attracted new euros (10.8) customers and expanded its operations pipeline. Furthermore, one In the Consumer Electronics SBU, 2009 was characterized by dras- of the SBU’s major customers successfully relocated its manufac- tically lower orders from its high-volume mobile phone customers. turing of communications network equipment to central Europe and The flatT V manufacturing business acquired in Juarez, Mexico proceeded to ramp up its business to a significantly higher level in in 2008 was transformed in early 2009 from a turnkey (TV panel accordance with the plan agreed with Elcoteq. owned by Elcoteq) to a consigned material (TV panel owned by the customer) business model, which also impacted on net sales. In the Geographical Areas EMS market, the decline in customer demand and excess capacity Elcoteq has three geographical areas: Europe, Asia-Pacific and the also led to greater competition among EMS companies. Americas. Elcoteq’s net sales in 2009 were derived from these areas as follows: Europe 47% (48%), Asia-Pacific 14% (22%) and the Amer- icas 38% (30%).

Cash flow after Return on equity (ROE) investing activities Solvency ratio

4.8 14.1 52.9 26.0 26.1

24.4 –42.5 –38.4 18.1 –20.8 –11.1 14.2

6.3 –129.9 –99.7 2005 2006 2007 2008 2009 2005 2006 2007 2008 2009 2005 2006 2007 2008 2009

38 financial statements 2009 Decisions of the Annual General Meeting valued at 29 million euros and using the proceeds directly to repay Elcoteq SE’s Annual General Meeting took place on March 23, 2009, outstanding debenture bonds with a nominal amount of 105 million in Luxembourg. The Meeting confirmed the consolidated and parent euros. After redeeming the debentures of 105 million euros at a company’s income statements and balance sheets for the financial price of 25% of the nominal value, reversing the relevant deferred tax year 2008 and discharged the members of the Board of Directors and assets and recognizing the 29 million euro hybrid securities as equity the statutory auditor from liability for the financial year.T he Meeting according to IFRS, the Company’s equity increases approximately by approved the Board’s proposal that no dividend will be distributed 85 million euros. for the financial year January 1–December 31, 2008. In November, Elcoteq signed a new agreement to replace the The Meeting re-elected the following persons to the Board of revolving credit facility of 230 million euros signed five years ago.T he Directors: President Martti Ahtisaari; Mr. Eero Kasanen, Executive new credit facility was agreed with the same bank syndicate and it is Dean of Aalto University School of Economics; Mr. Heikki Horstia, for 100 million euros. The loan will mature at the end of April 2010 B.Sc.; Mr. François Pauly, General Manager of Sal. Oppenheim jr. & Cie and the company has signed in March 2010 a committed term sheet S.C.A; Mr. Antti Piippo, principal shareholder of Elcoteq SE; Mr. Henry with the same lender group to extend the 100 million euro facility Sjöman, founder-shareholder of Elcoteq SE; Mr. Juha Toivola, M.Sc.; until the end of June 2011. and Mr. Jorma Vanhanen, founder-shareholder of Elcoteq SE. Presi- dent Ahtisaari, Mr. Horstia, Mr. Kasanen, Mr. Pauly and Mr. Toivola are Restructuring Plan independent Board members, and they represent more than half of Elcoteq has reduced its manufacturing capacity through the Restruc- the Board’s members. turing Plan launched in January 2009 to adapt to the radical changes The Meeting approved the proposal of the Audit Committee in the market situation. The restructuring actions have proceeded of the Board of Directors to appoint the firm of authorized public according to the plan. The plan consists of a number of measures accountants KPMG Audit S.à.r.l under the supervision of Mr. Philippe such as closing several plants and reducing personnel globally. Meyer as the company’s auditors for the financial year ending on During the year, Elcoteq closed down its plants in Arad (Romania), December 31, 2009. The fees of the auditors will be paid as per the Richardson (USA) and St. Petersburg (Russia). The plant in Shenzhen appropriate invoice. (China) was consolidated into the plant in Beijing. Convening after the Annual General Meeting in Luxembourg, A further step in this process was taken on June 17, when Elcoteq the Board of Directors elected Mr. Antti Piippo as its Chairman and Ericsson concluded an agreement whereby Elcoteq sold the and Mr. Juha Toivola as the Deputy Chairman. Mr. Piippo was majority of the machinery, equipment and materials of its Tallinn elected Chairman of the Nomination Committee and the Working manufacturing operations to Ericsson. Cost-saving measures have Committee and Mr. Henry Sjöman, Mr. Juha Toivola and Mr. Jorma continued at other factories as well. Vanhanen as members of these committees. Mr. Toivola was elected Chairman of the Compensation Committee and the Audit Shares and Shareholders Committee and President Martti Ahtisaari, Mr. Heikki Horstia, Mr. At the end of 2009, the company had altogether 128,132,185 shares Eero Kasanen and Mr. Pauly as members of these committees. divided into 22,362,185 Series A shares and 105,770,000 Series K founders’ shares. All the series K Founders’ shares are held by the Balance Sheet Strengthening company’s three principal owners. In January, the company commenced a project to strengthen Elcoteq had 10,213 registered shareholders on December 31, its balance sheet by means of an equity investment. In July, the 2009. There were a total of 5,307,833 foreign and nominee registered company announced the signing of a conditional letter of intent shares, representing some 4.14% of the votes. for an equity increase with Shenzhen Kaifa Technology Limited, a Chinese industrial company, but after a mutual re-assessment the Incentive Schemes negotiations ended in September. In October, Elcoteq announced The company has had a share subscription plan from 2007 that that it had signed a non-binding letter of intent with Videocon allows the company to issue shares to key personnel on the basis of Industries Ltd, an Indian company. The negotiations with Videocon the set operational targets. Based on the target achievement in 2008 were terminated in March 2010. the actual number of shares issued on November 12, 2009 for this Another integral part of this balance sheet strengthening is the share subscription plan was 336,266. restructuring of the company’s interest-bearing debt. As a part of The company also has a fairly similar share subscription plan this project, Elcoteq announced in October its plan to collect irrevo- from 2009, where the potential reward is based on reaching the cable, voluntary selling commitments from the holders of its subor- targets regarding consolidated income before taxes for the first and dinated debenture bonds. In January 2010, the company proceeded second half of 2009. Based on the achieved targets, the company to exercise these selling commitments by issuing hybrid securities would issue a maximum of 1,500,000 new series A shares, of which

Gearing Employees on average

5.8 19,131 16,651 17,401 15,242

11,271

1.8 0.4 0.3 0.7 2005 2006 2007 2008 2009 2005 2006 2007 2008 2009

Elcoteq SE 39 50% would be issued during June 2010 and the remaining 50% during The EGM deleted from the company’s Articles of Association the January 2011. Based on the actual results for 2009, the targets for the right of a shareholder to request a redemption of shares in case a first and second half of 2009 have not been met and thus no shares change or changes in the ownership of the company result in a share- will be issued. holder holding more than thirty-three and one third (33 1/3) percent In October 2009, the Board of Directors amended the 2009 Share or, as the case may be, fifty (50) percent of the shares in the company. Subscription Plan. The amendments concerned the issuance of shares Finally, the EGM changed the date of the Annual General Meeting of in case of a public tender offer and, secondly, a situation where the the shareholders from 23 March to 28 April each year. The company’s company’s registered share capital value would increase at least 50% Articles of Association were reworded in order to reflect these changes during the second half of 2009. If such situations occur, a maximum voted upon at the EGM of the shareholders of the company. of 750,000 shares will be issued. Neither of these cases occurred On January 27, 2010, Elcoteq issued EUR 29 million in hybrid during the second half of 2009. securities in a private placement as a part of its previously announced balance sheet restructuring. The proceeds from the hybrid securities Changes in Elcoteq’s Management issue were used directly to repay Elcoteq’s outstanding debenture As of August 27, 2009, and as a result of the changes in the organiza- bonds with a nominal amount of 105 million euros. As a result of this tion, the Elcoteq Management Team consists of the following persons: transaction, the company estimates that it will recognize a one-time Mr. Jouni Hartikainen, President and CEO gain of approximately EUR 75 million in the first quarter of 2010.T he Mr. Sándor Hajnal, Senior Vice President, Human Resources announced restructuring will significantly improve the company’s Mr. Vesa Keränen, Senior Vice President, Consumer Electronics indebtedness and solidity. If this transaction had taken place on Mr. Markus Kivimäki, Senior Vice President, Legal Affairs (until March December 31, 2009, the company’s solvency would have been 23.7%, 31, 2010) gearing 0.7 and net debt 82.1 million euros. Mr. Tommi Pettersson, Senior Vice President, System Solutions On January 27, 2010, Elcoteq and Nokia Corporation signed an Mr. Mikko Puolakka, CFO agreement that qualifies Elcoteq as a partner to provide Nokia’s Mr. Tomi Saario, Senior Vice President, New Sales and Business customers with After Market Services for their Nokia devices. It is Development expected that Elcoteq will start these operations gradually during the Mr. Roger Taylor, Senior Vice President, Group Operations and Sourcing second quarter of 2010. The companies also intend to explore other opportunities for cooperation. Events After the Financial Year On March 1, 2010, Elcoteq commenced statutory personnel nego- In December 2009, Elcoteq decided to convene an Extraordinary tiations regarding possible temporary lay-offs or the termination of General Meeting (EGM) of shareholders to decide on actions employee contracts in the operations of Elcoteq SE Finnish Branch, supporting the execution of balance sheet restructuring and the Elcoteq Finland Oy and Elcoteq Design Center Oy on production or equity investment project. The first EGM took place on January 22, financial grounds. As a result of these negotiations the companies 2010, in Luxembourg. Since the quorum requirement (at least half of decided to make altogether seven persons redundant and temporarily the series A shares and half of the series K shares need to be present lay off seven persons on March 16, 2010. or represented in the meeting) was not met at this first meeting, the On March 4, 2010, Mr. Markus Kivimäki, member of the Elcoteq company convened a second EGM that was held on February 23, 2010. Management Team and Senior Vice President of Group Legal Affairs, The EGM held on February 23, 2010, rejected the Board’s proposals announced that he will pursue his career outside Elcoteq. Mr. Jari to decrease the share capital of the company from its current amount Hakkarainen, Legal Counsel at Elcoteq will be heading the legal func- of EUR 8,944,874 and to decrease the current par value of series A tion as of April 1, 2010. shares (EUR 0.40) and series K shares (EUR 0.04). The Board of Direc- On March 15, 2010, Elcoteq announced that Philips Lighting has tors made its proposal to the EGM prior to the recent positive develop- chosen Elcoteq as a global growth partner for its Solid-State Lighting ment in the company’s equity. In light of the stronger balance sheet, (SSL) business. Under the agreement, Elcoteq will provide Philips the EGM deemed that the size of the proposed authorization to Lighting with global manufacturing services and related sourcing and increase the share capital up to EUR 200,000,000 was too high and it supply chain management as well as product development services. is not necessary to decrease the par value of shares. Elcoteq has already started the production of SSL products at its The EGM decided to increase the authorized share capital of the factory in Dongguan, China. Production will expand to other Elcoteq company from its current amount of twenty million euros (EUR locations including Mexico and Hungary during 2010. 20,000,000) up to forty million euros (EUR 40,000,000). The EGM On March 30, 2010, Elcoteq and the lenders of its EUR 100 million authorized the Board of Directors to issue new shares and convert- revolving credit facility agreed on extending the facility from April 30, ible debt instruments within the authorized share capital of the 2010 until June 30, 2011. The parties have signed a committed term company without reserving preferential subscription rights for the sheet for the extended facility and aim at finalizing the loan docu- existing shareholders, up to an amount of twelve million euros mentation during April 2010. (EUR 12,000,000) of the authorized share capital, corresponding to a On March 30, 2010, Elcoteq and Videocon Industries Limited maximum of 30,000,000 new series A shares. The EGM also autho- (Videocon) decided after mutual re-assessment to terminate the rized the Board of Directors to issue new shares and convertible debt negotiations started in September 2009 regarding a major equity instruments within the remainder of the authorized share capital investment which would have made Videocon a major single share- of nineteen million fifty-five thousand one hundred and twenty-six holder in Elcoteq. euros (EUR 19,055,126), respecting the existing shareholders’ prefer- In addition, to enhance possibilities for further balance sheet ential subscription rights. A maximum of approximately 47,000,000 strengthening, the three founder shareholders of the company, new series A shares can be issued under this authorization. Mr. Antti Piippo, Mr. Henry Sjöman and Mr. Jorma Vanhanen, have informed the Board of Directors that they will exercise their right to convert all of their series K founders´ shares to series A shares after which the company will have only one series of shares, A shares.

40 financial statements 2009 At the same time Mr. Antti Piippo and Mr. Henry Sjöman, the First-quarter net sales are expected to be somewhat lower than founder shareholders and board members of Elcoteq as well as the fourth quarter of 2009. Company expects that the operating Mr. Juha Toivola, an independent board member of Elcoteq have income in the first half of 2010 remains negative. Based on the announced that they will not be available for re-election as Board impact of implemented cost reduction actions, the stabilization Members. Mr. Jorma Vanhanen, the third founder shareholder, of underlying business and the contribution of recently won new and all other independent board members (Mr. Martti Ahtisaari, customer contracts the Company expects the operating profit to Mr. Heikki Horstia, Mr. Eero Kasanen and Mr. François Pauly) have turn positive for the second half of 2010. Due to the restructuring of announced their availability for re-election to the Board. In addition, subordinated debt in January 2010, the net income for 2010 will be the Board will be strengthened by two independent board members clearly positive. to be proposed to the Annual General Meeting. The company’s key operational focus area for 2010 is to generate The Company continues to explore further ways to strengthen positive cash from operations by further significantly improving its balance sheet through equity and long-term financing arrange- factory utilization ratio through reduced cost base and gaining ments. Furthermore, the Company will arrange a rights issue during new customer contracts. It is the focus of the Board and operative 2010. The three founder shareholders have undertaken to support management to further strengthen the balance sheet through such balance sheet strengthening arrangements in shareholders’ equity related transactions and long-term financing arrangements. meetings. Company seeks to further reduce tied-up capital through fixed asset divestments, working capital financing arrangements and opera- Short-Term Risks and Uncertainty Factors tional improvements in inventory management. The Company operates in a working capital intensive business environment where the access to and availability of sufficient financing Board’s Dividend Proposal represents a risk factor. The Board of Directors has assessed the The Board of Directors proposes to the Annual General Meeting to be Company’s financing requirements against the business plan.T he held on April 28, 2010, that no dividend will be paid for the financial Company’s ability to implement its business plan is highly depen- year 2009. dent on the availability of financing and ability to stabilize the financing structure, including the strengthening of shareholders’ Annual General Meeting 2010 equity and to increase financial flexibility. Elcoteq’s Annual General Meeting will be held in Luxembourg on The company’s key short-term operative challenges are to April 28, 2010. A separate Shareholder Information Meeting will increase sales, proactively manage fixed costs according to sales be held before the Annual General Meeting in Helsinki, on April 20, fluctuations, significantly improve profitability as well as avoid 2010. generating excess working capital to preserve cash reserves. The Company has significant part of its purchases and sales in other currencies than euro and the inability to fully or partly hedge the March 30, 2010 foreign currency exposure can result to deviations from business Board of Directors plan. Ability to offer the right service offering to customers is a key element in keeping existing customers and winning new customers. Under the changing market conditions the failure to identify and respond to the customer requirements may prevent the Company from achieving the strategic objectives and the above operative targets.

Prospects The total assembly value of the global electronics market is expected to increase again in 2010 and reach the 1,000 billion US dollar milestone in 2011. According to industry research data providers, the EMS market is expected to grow approximately 6%and After Market Services (AMS) spending roughly 14% in 2010. The operator and OEM revenue streams are increasingly coming from various services where usage is highly dependent on well functioning devices. There- fore, the uninterrupted usage of the devices becomes more important, creating more demand for After Market Services. Within the Consumer Electronics market, handset production amounted to approximately 1.1 billion units in 2009 and is expected to increase slightly in 2010. In spite of the global economy worries, the set-top box (STB) and flatT V markets (FTV) are expected to see further growth in the coming years, STB approximately 7% annually during the next five years and FTV even higher. System Solutions’ electronics assembly market amounted to 150 billion US dollars in 2009 and is expected to increase only slightly in 2010 according to the industry research data providers.

Elcoteq SE 41 Consolidated statement of comprehensive income

Jan. 1 – Dec. 31, Jan. 1 – Dec. 31, EUR 1,000 Note 2009 2008 NET SALES 2 1,503,205 3,443,199 Change in work in progress and finished goods –44,420 –35,516 Other operating income 3 13,337 11,182

Production materials and services –1,225,529 –2,989,012

Personnel expenses 5, 6 –126,328 –192,982

Depreciation and amortization 7 –60,143 –78,921

Restructuring expenses 8 –37,049 –13,496

Other operating expenses 9 –99,620 –164,851

OPERATING LOSS –76,545 –20,399

Financial income, total 10 3,322 6,381 Financial expenses, total 10 –43,813 –38,784

Share of the losses of associated companies (net of income tax) 14 –68 –105

LOSS BEFORE TAXES –117,105 –52,908

Income taxes 11 8,139 –11,109

NET LOSS –108,966 –64,017

Other comprehensive income Effective portion of changes in fair value of cash flow hedges 3,465 –2,492 Net gain/loss on hedges of net investments in foreign operations 2,988 –4,654 Foreign currency translation differences for foreign operations 1,149 9,479 Income tax relating to components of other comprehensive income 11 –405 400 Other comprehensive income for the period, net of tax 7,197 2,733 TOTAL COMPREHENSIVE LOSS FOR THE YEAR –101,769 –61,284

LOSS FOR THE YEAR ATTRIBUTABLE TO: Owners of the parent company * –105,045 –65,872 Non-controlling interests –3,920 1,856 –108,966 –64,017 TOTAL COMPREHENSIVE LOSS ATTRIBUTABLE TO: Owners of the parent company –98,434 –64,730 Non-controlling interests –3,335 3,447 –101,769 –61,284

Earnings per share calculated on loss attributable to owners of the parent company 12

Basic and diluted earnings per share (EPS), A shares EUR –3.22 –2.02 Basic and diluted earnings per share (EPS), K founders’ shares EUR –0.32 –0.20

* Net loss reported by the company.

The notes on pages 47 to 77 are an integral part of these consolidated financial statements.

42 financial statements 2009 Consolidated Cash Flow Statement

Jan. 1 – Dec. 31, Jan. 1 – Dec. 31, EUR 1,000 Note 2009 2008 CASH FLOW FROM OPERATING ACTIVITIES Net loss –108,966 –64,017 Adjustments: Depreciation, amortization and impairments 7 60,143 78,921 Unrealized foreign exchange gains and losses 4,104 10 Other non-cash income and expenses 14,161 631 Financial income and expenses 10 35,056 39,859 Income taxes 11 –8,139 11,109 Other adjustments 17,631 5,343 Cash flow before change in working capital 13,989 71,857

Change in working capital: Change in non-interest bearing current receivables 136,328 20,798 Change in inventories 184,431 128,867 Change in non-interest bearing current liabilities –270,219 –209,864 Cash flow from operating activities before financial items and taxes 64,528 11,658

Interest and other financial expenses –23,819 –28,825 Operations-related interest income 707 1,240 Income taxes paid –1,060 –6,127 Cash flow from operating activities 40,356 –22,054

CASH FLOW FROM INVESTING ACTIVITIES Purchases of tangible and intangible assets –4,357 –61,849 Proceeds from disposal of tangible and intangible assets 16,644 7,846 Acquisitions of subsidiaries, net of cash acquired 13 253 –23,941 Repayment of loans receivable – 279 Cash flow from investing activities 12,541 –77,665

CASH FLOW FROM FINANCING ACTIVITIES Proceeds from the revolving credit facility 100,000 160,000 Loan transaction costs –3,000 – Repayment of current debt (including loans from the revolving credit facility) –153,137 –40,304 Repayment of non-current debt – –20,420 Dividends paid –2,442 –2,025 Cash flow from financing activities –58,580 97,251

CHANGE IN CASH AND CASH EQUIVALENTS –5,683 –2,469

Cash and cash equivalents on January 1 95,099 92,691 Effect of exchange rate changes on cash held –1,475 4,877

Cash and cash equivalents on December 31 87,941 95,099

The notes on pages 47 to 77 are an integral part of these consolidated financial statements.

Elcoteq SE 43 Consolidated Balance Sheet

EUR 1,000 Note Dec. 31, 2009 Dec. 31, 2008 ASSETS

Non-current assets Intangible assets Goodwill 14 21,510 21,510 Other intangible assets 14 3,882 6,134 25,392 27,644 Tangible assets Land 14 772 742 Buildings 14 33,063 37,522 Machinery and equipment 14 45,744 128,484 Advance payments and construction in progress 14 1,375 1,017 80,954 167,765 Investments Investments in associated companies 14, 15 77 1,637 Receivables from associated companies 31 87 87 Available-for-sale financial assets 25 511 513 676 2,238 Long-term receivables Deferred tax assets 14, 17 41,906 32,943 Loans receivable 0 13,408 41,906 46,352

Non-current assets, total 148,928 243,999

Current assets Inventories Raw materials 18 64,675 205,524 Work in progress 18 693 10,593 Finished goods 18 4,062 40,038 Advance payments 18 0 1 69,431 256,157 Current receivables Accounts receivable 19 155,280 306,107 Other receivables 20 24,773 17,270 Prepaid expenses and accruals 21 9,864 12,048 Current tax assets 3 851 189,919 336,276

Cash and cash equivalents 87,941 95,099

Current assets, total 347,291 687,532

Assets classified as held for sale 22 19,049 23,898

ASSETS, TOTAL 515,268 955,429

44 financial statements 2009 EUR 1,000 Note Dec. 31, 2009 Dec. 31, 2008 EQUITY AND LIABILITIES

Equity attributable to owners of the parent company Share capital * 23 13,176 13,041 Additional paid-in capital 23 225,011 225,011 Other reserves 8,224 5,163 Translation differences 6,779 3,227 Retained earnings –123,372 –58,086 Net loss for the year –105,045 –65,872

Equity attributable to owners of the parent company, total 24,772 122,484

Non-controlling interests 7,832 12,728 Total equity 32,603 135,212

Liabilities Non-current liabilities Subordinated notes 24 139,794 139,517 Medium-term notes 24 19,986 19,980 Loans from pension plans 24 – 210 Other debt 24 287 376 Deferred tax liability 17 2,496 5,253 162,563 165,336 Payments due within one year –50,015 –386 Non-current liabilities, total 112,548 164,951

Current liabilities Loans from financial institutions 24, 25 115,429 173,647 Subordinated notes 24, 25 49,925 – Loans from pension plans 24 – 210 Advances received 24 174 780 Accounts payable 24 165,207 422,892 Other current liabilities 27 8,063 11,556 Accrued expenses 28 26,454 37,278 Current tax liabilities 151 1,415 Provisions 26 4,713 7,488 Current liabilities, total 370,117 655,266

Liabilities, total 482,664 820,217

EQUITY AND LIABILITIES, TOTAL 515,268 955,429

* Share capital includes both A shares listed in Nasdaq OMX Helsinki Exchange and K founders’ shares. The notes on pages 47 to 77 are an integral part of these consolidated financial statements.

Elcoteq SE 45 Consolidated statement of changes in equity

Attributable to equity holders of the parent Additional Reserve for Non- Share paid-in Other Hedging Translation own Retained controlling Total EUR 1,000 capital capital reserves reserve reserve shares earnings Total interests equity

BALANCE AT JAN. 1, 2009 13,041 225,011 8,369 –3,139 3,227 –68 –123,958 122,484 12,728 135,212

Share issue 135 1 –135 1 1 Total comprehensive income 3,060 3,552 –105,045 –98,433 –3,335 –101,768 Share-based payments 720 720 720 Dividends –2,442 –2,442 Divestment of non-controlling interest 880 880

BALANCE AT DEC. 31, 2009 13,176 225,011 8,369 –78 6,779 –67 –228,418 24,772 7,832 32,603

BALANCE AT JAN. 1, 2008 13,041 225,011 8,369 –1,047 –7 –68 –58,717 186,584 11,307 197,891

Total comprehensive income –2,092 3,234 –65,872 –64,730 3,447 –61,283 Share-based payments 631 631 631 Dividends –2,025 –2,025

BALANCE AT DEC. 31, 2008 13,041 225,011 8,369 –3,139 3,227 –68 –123,958 122,484 12,728 135,212

The notes on pages 47 to 77 are an integral part of these consolidated financial statements.

46 financial statements 2009 Notes to the

Consolidated Finan cial Statements

1. accounting principles used in the tence of potential voting right is also taken into account in cases consolidated financial statements where instruments that entitle the company to potential voting right can feasibly be exercised currently. All intra-group transactions, receivables, payables, unrealized General Accounting Principles gains and internal margins are eliminated. Intra-group losses are not Elcoteq SE is a European Company that, as from January 1, 2008, eliminated when the loss is due to an impairment. Business combi- has been domiciled in the city of Luxembourg in the Grand Duchy nations that occurred before the date of transition to IFRS have not of Luxembourg. The company’s registered address is 19, Rue Eugène been adjusted for IFRS but instead remained measured according to Ruppert, L-2453 Luxembourg. Elcoteq is a life cycle service provider Finnish Accounting Standards (FAS) principles, applying the exemp- for high-tech product and service providers. Engineering, manufac- tion permitted by IFRS 1 First-Time Adoption of International Financial turing, fulfillment and after market services are the corner stones of Reporting Standards. In business combinations that occurred after the service offering. Elcoteq’s service network covers 15 countries in January 1, 2004 all identifiable assets and liabilities are recorded at Europe, Asia-Pacific and the Americas. fair value at the date of acquisition. The excess of the cost over the Elcoteq’s consolidated financial statements have been prepared fair value is recorded as goodwill. Non-controlling interests in the in accordance with the International Accounting Standards (IAS) and results of subsidiaries and equity are shown as separate items in the International Financial Reporting Standards (IFRS) published by the consolidated statement of comprehensive income and consolidated International Accounting Standards Board (IASB), as well as their SIC balance sheet. Non-controlling interests in accumulated losses are and IFRIC interpretations. International Financial Reporting Stan- recognized only up to the total value of the investment. dards refer to the standards, and their interpretations, approved for Associated companies are entities in which the Group has sig- application in the EU in accordance with the procedure stipulated in nificant influence but not control (generally 20–50% ownership and the EU’s regulation (EC) No. 1606/2002. In its financial statements voting right) and are accounted by using the equity method. This for 2009 and the comparative figures for 2008, Elcoteq has applied involves recognizing Elcoteq’s share of the associated company’s the standards in force at December 31, 2009. profit or loss for the year in the Group’s profit or loss. Elcoteq’s The financial statements were authorized for issue by the Board share of the associated company’s post-acquisition retained earn- of Directors on March 30, 2010. ings is reported under investments in associated companies in the The consolidated financial statements are based on historical consolidated balance sheet. If the Group’s share of the associated cost unless otherwise stated in the accounting principles. Figures company’s losses exceeds the carrying value of the investment, the in the tables of the Notes to the consolidated financial statements investment is recognized at zero value in the balance sheet and the are presented in thousands of euros (EUR 1,000) unless stated oth- losses in excess of the carrying value are not recognized unless the erwise. All financial information presented has been rounded and Group is committed to fulfilling obligations with respect to the asso- consequently the sum of individual figures may deviate from the ciated company. presented sum total. Further details on the companies consolidated in the Group’s financial statements are given in the Notes under Shares and Hold- Standards and Interpretations Applied ings. as from January 1, 2009 The Group adopted the following standards and interpretations on Foreign currency translation January 1, 2009: – IFRS 8 Operating Segments. The adoption of the standard has Functional and presentation currency impacted the presentation on segment information. The figures describing the results and financial position of each of – Revised IAS 23 Borrowing Costs. The adaptation of the standard the Group’s entities are measured by using the currency that is the causes a change in the accounting principles used in the consoli- currency of the primary business environment of the entity (“the dated financial statements. The adoption of the standard does functional currency”). The consolidated financial statements are pre- not have a material impact on the Group currently. sented in euros, which is the functional and presentation currency of – Revised IAS 1 Presentation of Financial Statements. The change the parent company. of the standard has an impact on the presentation of the State- ment of Comprehensive Income and the Statement of Changes in Foreign currency transactions Equity. Foreign currency transactions are translated into functional currency – IFRS 2 Share-based payments. The change of the standard does by using the exchange rates prevailing at the dates of the transac- not have a material impact on the Group currently. tions. Monetary items in foreign currency are translated into func- Other new interpretations or amendments to standards effective as tional currency by using the rates prevailing at the end of the report- of January 1, 2009 have not been relevant to the Group. ing period. Monetary items are cash units of currency held as well as – IFRS 1 First-Time adoption assets and liabilities to be received or paid in a fixed or determinable – IFRIC 15 Agreements for the Construction of Real Estate number of units of currency. Non-monetary items in foreign currency are translated at the rates prevailing at the transaction date. Gains Principles of Consolidation and losses resulting from foreign exchange transactions and from The consolidated financial statements include the accounts of the the translation of monetary items denominated in foreign currencies parent company, Elcoteq SE, and of each company in which the par- are recognized in the profit or loss. ent company has, directly or indirectly, over 50% of the voting rights Foreign exchange gains and losses arising from operating activi- or in which the Group otherwise has control. Control means the ties are presented above operating income. Derivative instruments power to govern the company’s business and financial principles in such as foreign currency forward contracts and foreign currency order to extract benefits from its operations. Subsidiaries acquired options are used to hedge foreign exchange items and they are mea- and established during the period are consolidated from the date sured at fair value. Foreign exchange gains and losses arising from on which Elcoteq gained control until control ceases. Subsidiaries intra-group foreign currency loans and their hedges are included in are consolidated using the purchase method of accounting. When financial income and expenses. assessing the conditions under which control may arise, the exis-

Elcoteq SE 47 Foreign operations hedges is recognized in other comprehensive income and presented The statements of comprehensive income and cash flows of foreign under the hedging reserve in equity. The amounts accumulated in subsidiaries are translated into euros each month at the average equity are reclassified to profit or loss as adjustments to personnel monthly exchange rates published by the European Central Bank. expenses as the hedged items affect profit or loss. The ineffective Their balance sheets are translated at the applicable exchange rates portion of the hedge, if any, is recognized in profit or loss under in effect at the end of the reporting period. The translation of items financial items. During 2009 no ineffective portion related to these in the statement of comprehensive income as well as in the balance hedges (0.0) has been entered under financial income or expenses. sheet at these different exchange rates gives rise to a translation dif- When hedge accounting is not applied, the fair value changes in ference, which is recognized in other comprehensive income. Transla- derivative instruments related to hedging of personnel expenses tion differences resulting from the elimination of the cost of foreign are recognized directly in profit or loss as adjustments to personnel subsidiaries and their post-acquisition items in equity are recognized expenses. in other comprehensive income and presented under translation differences in equity. Derivative financial instruments – hedge Goodwill arising on the acquisition of foreign entities, and the fair accounting not applied value adjustments made to the assets and liabilities of these entities Hedge accounting is not applied to forward contracts used to hedge at the time of acquisition, are treated as the assets and liabilities of internal funding of Group companies. The change in the spot rate of the entities concerned. Thus they are translated into euros at the these forward contracts is recognized in profit or loss as an exchange exchange rates prevailing at the end of the reporting period. Good- rate gain or loss under financial items and the impact of the interest will and fair value adjustments made before January 1, 2004 have rate differential is recognized either as an interest expense or inter- been recognized in euros. est income.

Hedges and Hedge Accounting Business Segments The Group has applied hedge accounting to the hedges of net invest- Since the beginning of 2008, Elcoteq’s segment reporting has cov- ments in foreign subsidiaries as well as to the cash flow hedges with ered three Business Areas: Personal Communications, Home Com- respect to purchases and sales as well as personnel expenses in munications and Communications Networks. During the third quar- Hungary. ter of 2009 the company changed its organization and combined When initiating hedge accounting, the Group documents the Personal Communications and Home Communications under one relationship between the hedged items and hedging instruments new segment. Elcoteq now only has two Strategic Business Units, as well as the objectives of the Group’s risk management and its SBUs, as its segments: Consumer Electronics and System Solutions. strategy for initiating hedges. The Group documents and assesses Elcoteq reports these business areas as its operating segments. the effectiveness of hedging relationships when initiating hedging and at least in connection with each of its financial statements by Revenue Recognition assessing whether the hedging instruments reverse any changes in Revenue from the sale of goods and services rendered is recognized the cash flows of the hedged item. when all material risks and benefits associated with the goods sold or services rendered are transferred to the customer and no material Hedge of net investment in foreign operation uncertainties remain as to the receipt of payment for them, associ- Since hedge accounting can be applied to foreign exchange deriva- ated costs, or the possible return of the goods by the customer. Net tives used to hedge net investments, the effective portion of the sales are reported after sales-related foreign exchange gains and changes in the fair value of the qualifying derivatives is recognized losses as well as cash discounts. in other comprehensive income. The ineffective portion of the hedge, if any, is recognized in profit or loss under financial items. When a Tangible Assets subsidiary is disposed of, either partially or totally, the accumulated Tangible assets are stated at their cost less accumulated depreciation translation differences are reclassified to profit or loss as part of the and any impairment losses. The cost of a tangible asset is capitalized gain or loss on the disposal. when the economic benefits relating to the asset are probable and when the cost can be determined reliably. In respect of borrowing Cash flow hedge accounting costs relating to qualifying assets for which the commencement Cash flow hedge accounting has been applied to those derivative date for capitalization is on or after 1 January 2009, the Group capi- instruments that are related to purchases and sales as from June 30, talizes borrowing costs, if any, directly attributable to the acquisition, 2007. Hedge accounting can be applied when the derivative instru- construction or production of a qualifying asset as part of the cost ments are designated as hedges of foreign currency denominated of that asset. Previously the Group immediately recognized all bor- items for future periods, typically the subsequent quarter. The effec- rowing costs as an expense. In the financial year 2009 the Group did tive portion of the changes in the fair value of the hedging instru- not capitalize any borrowing costs. Repair and maintenance costs are ments is recognized in other comprehensive income and presented expensed as incurred. under the hedging reserve in equity. The amounts accumulated in Straight-line depreciation is recognized on the assets over their equity are reclassified to profit or loss as adjustments to purchases estimated useful lives. In the event that the useful life of the asset and sales as the hedged items affect profit or loss. The ineffective relates substantially to a single product or project, the asset is depre- portion of the gain or loss of the hedges, if any, is recognized in ciated in relation to the actual production volumes. Depreciation is profit or loss under financial items. During 2009 no ineffective por- not recognized on land. The estimated useful lives are: tion related to these hedges (0.0) has been entered under financial income and expenses. When hedged purchases and sales are recog- Asset Class Useful life, years nized in balance sheet the hedge accounting is ceased and the fair Buildings 25 value changes in the derivative instruments related to purchases and sales are recognized directly in profit or loss as adjustments to Building components 15 purchases and sales. Machinery and equipment of the buildings 10 Hedge accounting has been applied to the hedging of the HUF- Other machinery and equipment 3–5 denominated personnel expenses of the Hungarian subsidiary as from October 15, 2008. The functional currency of the company is the euro, and thus personnel expenses in Hungarian forint involve The residual values of the assets and their useful lives are reviewed exchange rate risks. Hedge accounting can be applied when the at least at each financial year-end and, if necessary, adjusted to derivative instruments are designated as hedges of foreign currency- reflect the changes. Depreciation on tangible assets is discontinued denominated items in future periods, typically the following six when a tangible asset is classified as held for sale according to IFRS 5 months. The effective portion of the changes in the fair value of the Non-Current Assets Held for Sale and Discontinued Operations. Gains

48 financial statements 2009 and losses resulting from derecognition of the tangible assets are Impairments of non-financial assets recognized under other operating income or expenses, respectively. The Group reviews the carrying amounts of the assets other than inventories and deferred tax assets at the end of each reporting Intangible Assets period to determine whether there are any indications of impair- Goodwill arising in a business combination represents the excess ment. If any such indication exists, the recoverable amount of the of the cost of an acquisition over the fair value of the Group’s share asset is estimated. Furthermore, the recoverable amount is esti- of the identifiable net assets of the acquired entity, at the date of mated annually for goodwill and intangible assets not ready for use, acquisition. Goodwill is measured at cost less any accumulated whether indications of impairment exist or not. impairment losses. Goodwill is not amortized but tested at least For the purposes of assessing impairment, assets are divided into annually for impairment. For this purpose goodwill is allocated to the smallest possible cash-generating units that are mainly indepen- cash-generating units or, in the case of associated companies, good- dent of any other assets of the Group and for which there are sepa- will is included in the carrying amount of the company in question. rately identifiable, mainly independent, cash flows. The recoverable In the business combinations that occurred prior to January amount of an asset or a cash-generating unit is the higher of the fair 1, 2004, goodwill corresponds to the carrying value calculated in value less costs to sell or the value in use. The value in use is the esti- accordance with the previously applied accounting principles (FAS) mated future cash flow of the asset or the cash-generating unit dis- used as deemed cost. The classification of these acquisitions and counted to its net present value. The recoverable amount of financial their accounting treatment were not adjusted when preparing the assets is either their fair value or the present value of the expected Group’s IFRS opening balance sheet. future cash flows discounted at the original effective interest rate. Research costs, undertaken with the prospect of gaining new An impairment is recognized when the carrying amount of the scientific or technical knowledge and understanding, are expensed asset is higher than its recoverable amount. Impairment losses are as incurred. Development costs arising from the design of new or recognized in profit or loss immediately. Impairment losses recog- significantly improved products are capitalized as intangible assets nized in respect of cash-generating units are allocated first to reduce when development costs can be measured reliably, the product is the carrying value of goodwill allocated to the cash-generating unit technically and commercially feasible, the product is expected to in question and then to reduce the carrying amount of other assets generate future economic benefit and the Group intends to and has in the cash-generating unit on a pro rata basis. Impairment losses sufficient resources to complete development and to use or sell the are reversed if there has been a change in circumstances and the asset. Development costs previously recognized as expenses are not recoverable amount of the asset has changed after the date when capitalized later. Capitalized development expenditure is measured the impairment loss was recognized. An impairment is not reversed, at cost less accumulated amortization and impairment losses. The however, to an extent higher than the carrying amount that would assets are amortized from the time when they are ready for use on a have been determined had no impairment loss been recognized. straight-line basis. Assets that are not ready for use are tested annu- Impairment losses recognized for goodwill are never reversed. ally for impairment. Impairment losses recognized in profit or loss for an investment in An intangible asset is recognized in the balance sheet only if its an equity instrument classified as available for sale are not reversed cost can be reliably determined and it is probable that the asset is through profit or loss. expected to generate economic benefits to the Group. Patents, trade- marks and licenses with a finite useful life are recognized in the bal- Inventories ance sheet at cost less accumulated amortization and impairment Inventories are measured at their purchase and manufacturing losses. They are amortized on a straight-line basis in profit or loss cost or, if lower, at their net realizable value. Net realizable value is over their known or estimated useful lives. the estimated selling price less the estimated costs of completion With the exception of goodwill, the Group does not have intan- and the estimated costs necessary to make the sale. Elcoteq uses a gible assets with indefinite useful lives. Intangible assets are amor- weighted average cost formula, which is almost equivalent to the tized over the following periods: FIFO principle (first-in first-out) due to the rapid turnover of the products. Asset Class Useful life, years The cost of finished goods and work in progress consists of materials, personnel expenses, subcontracting expenses, other variable Development costs 2–5 expenses, and allocated production overhead. Value adjustments are Computer software 3–5 recognized for obsolete and slow-moving items. Other intangible assets 5–10 Financial Assets Amortization methods, useful lives and residual values are reviewed The Group’s financial assets are classified into the following catego- at each financial year-end and adjusted if appropriate. ries: financial assets at fair value through profit or loss, available-for- sale financial assets as well as loans and receivables. These assets are Non-Current Assets Classified as Held for Sale classified on the basis of their purpose of use on the settlement date A non-current asset (a disposal group) is classified as held for sale at initial recognition. if it is expected to be recovered primarily through sale rather than The Group derecognizes a financial asset when the contractual through continuing use. Immediately before classification as held for rights to the cash flows from the asset expire, or it transfers the sale, the assets, or components of a disposal group, are remeasured rights to receive the contractual cash flows on the financial asset in a in accordance with the Group’s accounting policies. Subsequently transaction in which substantially all the risks and rewards of owner- the assets, or a disposal group, are generally measured at the lower ship of the financial asset are transferred. Any interest in transferred of their carrying amount and fair value less costs to sell and are no financial assets that is created or retained by the Group is recognized longer depreciated or amortized after the classification as held for as a separate asset or liability. sale. Any impairment loss on a disposal group first is allocated to goodwill, and then to remaining assets and liabilities on pro rata Financial Assets at Fair Value through Profit or Loss basis except for some items. Impairment losses on initial classifica- In Elcoteq this category includes the derivative instruments that do tion as held for sale and subsequent gains or losses on remeasure- not meet the conditions for hedge accounting as well as other liquid ment are recognized in profit or loss. Assets and liabilities associated investments (included in cash equivalents). Gains and losses, both with the assets classified as held for sale at the end of the reporting realized and unrealized, that arise from the fair value changes are period are shown separately in the balance sheet in compliance with recognized in profit or loss for the period during which they arose. IFRS 5 Non-Current Assets Held for Sale and Discontinued Operations. The accounting principles applied to those derivative instruments that meet the conditions for hedge accounting are described above under Hedge and Hedge accounting.

Elcoteq SE 49 Available-for-Sale Financial Assets rental expenses under other operating expenses and the rental com- Available-for-sale financial assets consist of shares and are included mitments are shown in the Notes under Operating Leases. in non-current assets. These assets are measured at fair value. If the When a lease transfers substantially all the risks and rewards fair value cannot be reliably determined, the assets are measured at incidental to ownership to the Group, the contract is treated as a cost. finance lease. Upon initial recognition the leased asset is measured at an amount equal to the lower of its fair value and the present Loans and Receivables value of the minimum lease payments. Subsequently the asset is Loans and receivables are non-derivative financial assets with fixed accounted for in accordance with the accounting policy applicable to or determinable payments that are not quoted in an active mar- that asset. Minimum lease payments made under finance leases are ket. They are classified in the balance sheet under either current or apportioned between the finance expense and the reduction of the non-current receivables as appropriate and in the latter case if they outstanding lease liability. The Group had no production equipment mature after more than 12 months after the end of the reporting under finance lease on December 31, 2009 or December 31, 2008, period. Elcoteq’s loans and receivables comprise trade receivables nor any other significant finance leases. and other receivables. An arrangement that does not take the legal form of a lease, but Under current receivables, accounts receivable are recognized which in accordance with IFRIC 4 does in fact contain a lease falling initially at fair value and are subsequently measured at amortized under IAS 17, will be treated in accordance with IAS 17. cost less any writedowns. The Group recognizes an impairment loss on accounts receivable when there is objective evidence that the Employee Benefits Group will not be able to collect the total amounts due. A debtor’s significant financial difficulties, the probability of bankruptcy, pay- Pension Obligations ment negligence, or significant delays in payments constitute evi- Pension plans are classified as either defined benefit plans or defined dence of an impairment loss to accounts receivable. If the amount of contribution plans. A defined contribution plan is a post-employ- the impairment loss decreases in a later period, the recognized loss is ment benefit plan under which an entity pays fixed contributions reversed in profit or loss. into a separate entity (a fund) and will have no legal or constructive The Group’s accounts receivable contains realized cash flow from obligation to pay further contributions if the fund does not hold the sold accounts receivable. The company retains the credit risk sufficient assets to pay all employee benefits relating to employee related to these sold accounts receivables. The expenses arising from service in the current and prior periods. A defined benefit plan is a the sale of accounts receivable are recognized under other financial post-employment benefit plan other than a defined contribution expenses. During 2009 the Group ceased to have such programs plan. The contributions to defined contribution plans are charged to under which the Group sold accounts receivable without recourse. the profit or loss in the year to which they relate. Until termination of such programs the expenses arising from the The present value of the obligation of defined benefit plans is sale of accounts receivable without recourse were recognized under determined for each plan separately using the projected unit credit other financial expenses. method. The pension costs are recognized as an expense over the expected service lives of the employees based on the calculations Cash and Cash Equivalents made by qualified actuaries. When calculating the present value of Cash and cash equivalents consist of cash in hand, bank accounts, the pension obligation, the discount rate used is the market yield and other liquid investments that are readily convertible to a known of high-quality corporate bonds or the interest rates of government amount of cash and are subject to an insignificant risk of changes in securities. value. Items classified as cash and cash equivalents have an original Actuarial gains and losses are recognized as an expense over the maximum maturity of three months from the date of acquisition. expected average remaining service lives of the employees to the extent that they exceed the higher of the following: 10% of the pen- Financial Liabilities sion obligation or 10% of the fair value of the plan assets. The Group’s financial liabilities are divided into two categories: financial liabilities carried at amortized cost and financial liabilities at Share-Based Payments fair value through profit or loss. The Group derecognizes a financial liability when its contractual obligations are discharged or cancelled Share subscription plan or expire. The Group has applied IFRS 2 Share-Based Payments to its share subscription plan. Under this plan, the fair value of a share is determined Financial Liabilities Carried at Amortized Cost on the basis of the share price on the day when the persons were The Group’s non-derivative financial liabilities are recognized initially confirmed as participants in the plan. Costs related to the share sub- at fair value, less transaction costs incurred. Subsequently these scription plan are expensed in the periods during which the plan’s financial liabilities are measured at amortized cost over their term to targets apply. maturity using the effective interest rate method. Share option schemes Financial Liabilities at Fair Value through Profit or Loss The Group has also applied IFRS 2 to all its option schemes. Option In Elcoteq this category includes those derivative instruments that rights are measured at their fair value on the date they were granted do not meet the conditions for hedge accounting. They are measured and their cost is expensed on a straight-line basis during the vest- at their fair value. Gains and losses, both realized and unrealized, ing period. The expense determined on the grant date is based on that arise from the fair value changes are recognized in profit or loss the Group’s estimate of the number of options expected to vest at for the period during which they arose. the end of the vesting period. The fair value is determined using the The accounting principles applied to the derivative instruments Black-Scholes option pricing model. The Group updates its estimate that meet the conditions for hedge accounting are described above of the final number of options at each end of the reporting period. under Hedges and Hedge Accounting. Changes in these estimates are recognized in profit or loss. When option rights are exercised, cash payments received as a result of Leases share subscriptions (adjusted for any transaction costs) are recog- Leases are divided into operating and finance leases as follows: nized under share capital (par value) and additional paid-in capital. When a lease does not transfer substantially all the risks and rewards incidental to ownership to the Group, the contract is treated Government grants as an operating lease. Machinery acquired with operating leases Various public agencies provide financial assistance in many coun- is not included in the Group’s non-current assets. Payments made tries, primarily for certain types of research and development costs. under operating leases are recognized on a straight-line basis as This type of financial assistance is recognized under other operating income.

50 financial statements 2009 In some countries, financial assistance is available for invest- Changes in these estimates may significantly affect the fair values ments. Such government grants are allocated to the related non-cur- of the assets in the present and future periods. Further information rent assets and the assistance received is recognized as a reduction on the estimates and the principles used to test for impairment of of the cost. goodwill is presented in the notes under Depreciation, Amortization and Impairments. Provisions Recognition of restructuring provisions requires management A provision is recognized when the Group has a present legal or con- estimations because the exact amount of the future payments relat- structive obligation as a result of past events and when it is probable ing to these obligations is not known when preparing the consoli- that an outflow of resources will be required to settle the obligation dated financial statements. and a reliable estimate of the amount of the obligation can be made. The Group’s equity investments are measured at cost since no A restructuring provision is recognized when the related construc- market price for them is available from the securities markets and tive obligation has arisen. The obligation is deemed to have arisen their fair value cannot be reliably determined in any other way. when the Group has approved a detailed and formal restructuring Deferred tax assets are recorded only up to the amount that they plan and the restructuring measures have been initiated or the can probably be used to offset taxes to be paid in future fiscal years. key points of the restructuring plan have been announced to those affected by it. Direct restructuring costs are included in the restruc- Standards and Interpretations to be Applied After 2009 turing provision. Future operating losses are not provided for. IASB has published the following new and revised IFRS standards, A warranty provision is recognized when the product under war- and interpretations, which the Group will adopt on 1 January 2010: ranty is delivered to the customer. The amount of the provision is Revised IFRS 3 Business combinations (effective for annual based on the estimated average expenses resulting from product periods beginning on or after 1 July 2009). The revised standard defects during the warranty period. maintains the requirement to apply the acquisition method to business combinations, but with some significant changes such as Income Taxes expensing of transaction costs. In addition, all payments to purchase Tax expenses in the profit and loss includes taxes on the taxable a business are to be recorded at fair value on the acquisition date, income of the companies for the period, tax adjustments for previ- with some contingent payments subsequently remeasured at fair ous financial periods and the change in deferred taxes. Taxes are value through profit or loss. Goodwill may be calculated based on based on the taxable income of the consolidated entities and are the parent’s share of net assets or it may include goodwill related to calculated in accordance with the local tax regulations of each coun- the minority interest. The revised standard may have impact on the try. Other direct taxes consist of e.g. various types of profit-based Group. and other cost based local taxes. Income tax is recognized in profit or The adoption of the following other revised standards and inter- loss, except to the extent that it relates to items recognized in other pretations do not have a material effect on the Group’s reporting: comprehensive income or directly in equity. In this case the tax is – Revised IAS 27 Consolidated and separate financial statements also recognized in other comprehensive income or directly in equity, (effective for annual periods beginning on or after 1 July 2009). respectively. – Amendment to IAS 39 Financial instruments: Recognition and Deferred tax liabilities or deferred tax assets are recognized for measurement – Designation of items as hedged items (effective temporary differences between the tax bases of assets and liabilities for annual periods beginning on or after 1 July 2009). and their carrying amounts for financial reporting purposes in the – IFRIC 17 Distributions of Non-cash Assets to Owners (effective for consolidated financial statements. A deferred tax asset is recognized annual periods beginning on or after 1 July 2009). for unused tax losses and deductible temporary differences and tax – IFRIC 18 Transfers of assets from customers (effective for annual liabilities related to non-distributed retained earnings in Elcoteq’s periods beginning on or after 1 July 2009). Estonian subsidiary. A deferred tax asset is recorded only if it is prob- – Amendment to IFRS 2 Share-based Payment – Intra-group able that the loss in question can be used to offset taxable income cash-settled share-based payment transaction (effective as of 1 in future fiscal years. Deferred tax liabilities are recognized in full. January 2009). The amended standard is still subject to endorse- Deferred tax assets and liabilities are measured using each country’s ment by the European Union. statutory tax rate for the following fiscal periods.

Dividends Dividends proposed by the Board of Directors are recognized in the financial statements for the year in which they are approved by Elcoteq’s Annual General Meeting.

Management Estimates and Judgements The preparation of the consolidated financial statements in con- formity with IFRS requires management to make judgements, estimates and assumptions that affect application of the Group’s accounting policies and the reported amounts of assets and liabilities, the disclosure of contingent liabilities at the end of the reporting period, and the amounts of revenue and expenses recognized during the reporting period. Although these estimates are based on the latest available information, actual results may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimates are revised and in any future periods affected. The assumptions in applying accounting policies that have the most significant effect on the amounts recognized in the consolidated financial statements relate to the following areas: impairment tests, the estimation of the restructuring expenses of action plans, the measurement of equity investments, and the recognition of deferred tax assets. Testing for impairment requires estimating the recoverable amount of the asset or the cash-generating unit in question.

Elcoteq SE 51 2. segment reporting The segment’s assets comprise of intangible and tangible assets, Since the beginning of 2008, Elcoteq has had three Business Areas: investments in associated companies, inventories, accounts receiv- Personal Communications, Home Communications and Communica- able and allocatable prepaid expenses and accruals. tions Networks. Personal Communications and Home Communica- The segment’s liabilities include accounts payable and accrued tions Business Areas were combined during the third quarter of 2009 expenses allocated to them. under a new Strategic Business Unit, Consumer Electronics. Com- munications Networks Business Area has been changed into a new Non-Allocated Items Strategic Business Unit, System Solutions. At the end of 2009 the Non-allocated expenses in the income statement consist of the Group has two Strategic Business Units (SBUs): Consumer Electron- expenses of the Group office. ics and System Solutions. Both SBUs are responsible for managing Non-allocated assets consist mainly of cash and bank receivables and developing their existing customer relationships and applicable as well as prepaid expenses and accruals not allocated to the seg- service offerings, while Group Operations and Sourcing is responsible ments. for supply chain and production. Non-allocated liabilities are mainly interest-bearing liabilities, From 2009, Elcoteq has applied IFRS 8 Operating Segments in its deferred tax liabilities and accrued expenses not allocated to the segment reporting. The comparative information of 2008 has been segments. changed to correspond the new reporting structure. Investments in associated companies that cannot be allocated to The presented segment information is based on the information the segments are entered under non-allocated assets. provided to the Group’s management. Strategic Business Units Accounting Principles Strategic Business Unit Consumer Electronics covers products such There are no sales between the segments. as mobile and wireless phones, their parts and accessories, set-top The items shown for the segments are those that are either boxes, flat panel TVs and other consumer products as well as related directly attributable to the segments or that can be reasonably allo- after market services. cated to them. Strategic Business Unit System Solutions covers wireless and The segment’s interest income and interest expenses are reported wireline infrastructure systems and modules, enterprise network as net financial charges. products and various other industrial segment products as well as Income taxes are not allocated to the segments. related after market services.

Consumer Total reportable STRATEGIC BUSINESS UNITS IN 2009, MEUR Electronics System Solutions segments Non-Allocated Group total Net sales 1,127.3 375.9 1,503.2 – 1,503.2 Depreciation and amortization –48.5 –9.8 –58.3 –1.9 –60.1 Operating income/loss –38.2 –2.0 –40.2 –36.3 –76.5 Restructuring expenses* –24.3 –11.9 –36.2 –0.8 –37.0 Financial charges –21.4 –8.8 –30.2 –10.3 –40.5 Share of associated companies’ results – –0.1 –0.1 0.0 –0.1 Income before taxes –59.6 –10.8 –70.4 –46.7 –117.1

Assets** 273.4 93.6 367.0 148.3 515.3 Investments in associated companies*** – 0.1 0.1 0.0 0.1 Capital expenditures 3.9 1.6 5.5 0.9 6.4

Liabilities 116.1 65.4 181.6 301.1 482.7

* A total of 28.0 million euros in restructuring expenses with no cash flow effect have been recognized, of which 19.5 million euros are included in the restructuring expenses of the Consumer Electronics Strategic Business Unit, 8.5 million euros in the restructuring expenses of the System Solutions Strategic Business Unit and 0.1 million euros in the restructuring expenses of the Group’s non-allocated costs. ** The assets of the segments include a total of 19.0 million euros assets classified as held for sale, of which 12.9 million are allocated to the Consumer Electronics Strategic Business Unit and 6.2 million to the System Solutions Strategic Business Unit. *** Included also in the segment’s assets.

52 financial statements 2009 Consumer Total reportable STRATEGIC BUSINESS UNITS IN 2008, MEUR Electronics System Solutions segments Non-Allocated Group total Net sales 2,739.5 703.7 3,443.2 – 3,443.2 Depreciation and amortization –58.7 –17.8 –76.5 –2.4 –78.9 Operating income/loss 15.0 1.6 16.6 –37.0 –20.4 Restructuring expenses* –8.1 –5.4 –13.5 – –13.5 Financial charges –19.4 –12.1 –31.4 –1.0 –32.4 Share of associated companies’ results – –0.1 –0.1 0.0 –0.1 Income before taxes –4.3 –10.5 –14.8 –38.1 –52.9

Assets** 553.4 248.3 801.7 153.7 955.4 Investments in associated companies*** – 1.6 1.6 0.0 1.6 Capital expenditures 63.4 6.7 70.1 1.3 71.4

Liabilities 324.5 133.0 457.5 362.7 820.2

Sold accounts receivable**** 36.9 64.1 101.1 – 101.1

* A total of 9.2 million euros in restructuring expenses with no cash flow effect have been recognized, of which 4.3 million euros are included in the restructuring expenses of the Consumer Electronics Strategic Business Unit and 5.0 million euros in the restructuring expenses of the System Solutions Strategic Business Unit. ** The assets of the segments include a total of 23.9 million euros assets classified as held for sale, of which 2.2 million are allocated to the ConsumerE lectronics Strategic Business Unit and 21.7 million to the System Solutions Strategic Business Unit. *** Included also in the segment’s assets. **** Not included in the segment’s assets.

Reconciliations of reportable segment revenues, profit Other material items 2009 or loss, assets and liabilities and other material items

MEUR 2009 2008 Revenues Total revenue for reportable segments 1,503.2 3,443.2 onsolidated otal reportable Other revenue – – MEUR T segments N on- A llocated C totals Consolidated revenue 1,503.2 3,443.2 Financial charges –30.2 –10.3 –40.5 Profit or loss Capital expenditures 5.5 0.9 6.4 Total profit or loss for reportable Depreciation and amortization –58.3 –1.9 –60.1 segments –70.4 –14.8 Impairment losses on intangible assets 0.0 – 0.0 Non-allocated amounts: Impairment losses on tangible assets –23.6 – –23.6 Other corporate expenses –46.7 –38.1 Impairment losses on investments in Consolidated profit before income taxes –117.1 –52.9 associated companies –1.4 – –1.4 Assets Total assets for reportable segments 367.0 801.7 Other material items 2008 Other non-allocated amounts 148.3 153.7 Consolidated total assets 515.3 955.4 Liabilities Total liabilities for reportable segments 181.6 457.5 onsolidated Other non-allocated amounts 301.1 362.7 otal reportable MEUR T segments N on- A llocated C totals Consolidated total liabilities 482.7 820.2 Financial charges –31.4 –1.0 –32.4 Capital expenditures 70.1 1.3 71.4 Depreciation and amortization –76.5 –2.4 –78.9 Impairment losses on intangible assets –0.4 – –0.4 Impairment losses on tangible assets –5.7 – –5.7

Elcoteq SE 53 Geographical Areas Consumer Electronics and System Solutions segments are managed on a worldwide basis. Elcoteq’s service network covers countries in Europe, Asia-Pacific and Americas. It includes high-volume manufacturing plants, units specializing in smaller series, as well as product development units and new product introduction (NPI) centers. All of the company’s high-volume plants are located close to the main end-markets of customers’ products and in low-cost countries: in Hungary, Estonia, China, Mexico, India and Brazil. In presenting information on the basis of geographical segments, segment revenue and non-current assets are based on the geographical location of the manufacturing unit. Net sales by countries are presented according to geographical location of the manufacturing unit under “Breakdown of net sales by country”. Group has no non- current assets in its country of domicile in Luxembourg.

GEOGRAPHICAL AREAS IN 2009, MEUR Europe Asia-Pacific Americas Non-Allocated Group total Net sales 710.4 217.7 575.1 – 1,503.2 Non-current assets 51.3 31.3 15.7 8.7 107.0

GEOGRAPHICAL AREAS IN 2008, MEUR Europe Asia-Pacific Americas Non-Allocated Group total Net sales 1,665.0 755.1 1,023.2 – 3,443.2 Non-current assets 78.8 71.2 43.9 17.1 211.1

Major customers Revenues from customer X of Consumer Electronics segment repre- other operating income sents approximately 45% (39% in 2008) and customer Y 18% (12% 3. in 2008) of the Group’s total revenues. Revenues from customer Z of Other operating income for the Group consist of the following items: System Solutions segment represents approximately 18% (12% in 2008) of the Group’s total revenues. EUR 1,000 2009 2008 Profit from sales of tangible assets 3,012 3,158 Services invoiced 5,408 5,311 BREAKDOWN OF NET SALES BY Government grants 1,175 1,125 COUNTRY, MEUR 2009 2008 Other operating income 3,742 1,588 Hungary 578.7 1,335.1 Total 13,337 11,182 Mexico 521.5 966.8 Estonia 129.4 305.1 China 125.3 698.9 India 92.5 56.2 4. personnel Brazil 50.7 39.9 Luxembourg 0.0 0.0 The Group had on average 11,271 (17,401) employees during the Other countries 5.1 41.1 year, distributed geographically as follows. 1,503.2 3,443.2 At Dec. 31 At Jan. 1 Change Average Brazil 861 790 71 797 China 2,046 4,086 –2,040 2,750 Estonia 165 1,992 –1,827 1,118 Finland 139 220 –81 168 Germany 4 4 0 4 Hong Kong 30 50 –20 39 Hungary 2,056 2,991 –935 2,492 India 583 885 –302 721 Japan 4 3 1 4 Luxembourg 5 4 1 5 Mexico 2,529 3,633 –1,104 2,892 Romania 0 301 –301 66 Russia 20 384 –364 134 Sweden 4 7 –3 5 Switzerland 8 10 –2 9 USA 35 133 –98 67 Total 8,489 15,493 –7,004 11,271

On December 31, 2009 the Group employed 10,101 people, of whom 8,489 were on Elcoteq’s payroll.

54 financial statements 2009 5. personnel expenses Share Option Plan Under the 2004 share option plan, share options 2004B may be exercised to subscribe for the shares until March 31, 2008. However, EUR 1,000 2009 2008 the share subscription period may not commence with the share Personnel Expenses options 2004B unless the trade volume weighted average quotation Wages, salaries and fringe benefits of the Elcoteq A share during any quarter of a year has been at least Wages, salaries and fringe 27 euros. No new shares could thus be subscribed for with these benefits, total 97,254 151,512 share options and option rights were accordingly cancelled. No costs Share subscription plan 720 631 were recognized for the share option plan in 2008 or 2009. Fair value changes of derivatives 1,593 –51 The company did not issue new option rights to key employees of Elcoteq Group during 2009 or 2008. The company had no outstand- Fringe benefits –506 –674 ing option plan for personnel at December 31, 2009. Total 99,060 151,418 Indirect personnel expenses Defined contribution pensions 3,529 6,029 Defined benefit pensions 360 823 Compulsory social security contributions 23,379 34,712 7. depreciation and amortization Total 27,268 41,564 Personnel expenses in the Depreciation and amortizations consist of the following: consolidated statement of EUR 1,000 2009 2008 comprehensive income 126,328 192,982 Intangible rights 927 917 Salaries and bonuses paid to key management personnel are shown Computer software 1,665 2,654 under Related Party Disclosures (note 31). Product development costs 73 876 Buildings 3,780 5,990 Machinery and equipment 53,698 68,486 Total 60,143 78,921 incentive plans 6. Impairments in 2009 and 2008 relating to restructuring plans have IFRS 2 (Share-Based Payments) has been applied to the share sub- been presented in restructuring expenses in the consolidated state- scription plan and the share option scheme. ment of comprehensive income. For more information see the note 8.

Share Subscription Plan 2007 Goodwill The Board of Directors of Elcoteq SE decided to approve an incentive Goodwill is tested for impairment annually. For testing purposes, the plan for the motivation and commitment of the Group’s key person- goodwill is allocated to cash generating units (CGU’s). nel by means of the share subscription plan. The potential reward The Group’s two Strategic Business Units (SBU’s), Consumer from the plan is based on reaching the targets set by the Board of Elelctronics and Systems Solutions represent the cash generating Directors in the summer 2008 for the Group’s consolidated result units for impairment testing purposes. The CGU’s are tested for before taxes for the full year 2008. The benificiary also has to be an impairment by comparing the carrying amounts of assets allocated employee of Elcoteq when the shares will be distributed to have to the CGU’s assets to their recoverable amounts. The recoverable a right for the shares. Based on the achieved targets the company amounts of the CGU’s are determined by using the value in use could during November 2009 issue a maximum of 1,500,000 new -method. Series A shares. Recoverable cash flow is the cash flow forecast for the following The costs of the share subscription plan are expensed in the eight years. For the first five years, cash flow is estimated annually periods in which the plan is in force. Share subscription plan 2007 and for the next three years using the values of the fifth year for generated costs of 0.7 million euros in 2009 (0.6). Of this amount, 0.0 each year. After the eight-year period, capital employed (excl. good- million euros (0.0) is shown as debt in the balance sheet at Decem- will) is released at its estimated balance sheet value at the time. ber 31, 2009. Elcoteq’s expected average annual net sales growth is 10–20% in the forecast period. Growth expectations for Consumer Electron- ics are at the same level as with the whole Group. System Solutions The terms of share subscription plan 2007: sales are expected to grow during planning period slightly faster Grant day Sep. 2, 2008 Sep. 6, 2008 Dec. 19, 2008 than the total Group but the SBU’s share of total group sales remains Maximum amount of still moderate. the shares granted 1,076,667 66,748 56,250 The Electronics Manufacturing Services (EMS) market declined Share price of grant about 16% and After Market Services (AMS) market about 13% in date, EUR 4.55 4.30 1.15 2009 due to the general economic downturn. The market research until Nov. 30, until Nov. 30, until Nov. 30, institutes estimate an annual growth of 7% for EMS and 14% for Term of force 2009 2009 2009 AMS from year 2010 onwards. The interest rate used for testing purposes is the weighted aver- Share Subscription Plan 2009 age cost of capital before taxes (WACC) which in 2009 was 16–17% In February 2009 the Board of Directors of Elcoteq SE decided a new (12–13% in 2008). share subscription plan for the Group’s key personnel. The potential Goodwill was impaired in 2008 in connection with the Group’s reward from the plan is subject to the achievement of the Group’s restructuring plan, which was launched in the first quarter of 2009 target levels for improvement of result before taxes and cash flow and included the decision to close the production plant in Richard- for the first and second half of 2009. The maximum number of new son, USA. Goodwill impairment losses are presented in the 2008 Series A shares that can be issued under the share subscription plan consolidated statement of comprehensive income as part of restruc- 2009 is 1,500,000 shares. turing expenses, in note 8. As the Group did not meet the targets of the share subscrip- Amount of goodwill is 21,510 thousand euros (21,510 thousand tion plan 2009, no shares were granted. Accordingly no costs were euros in 2008) and the whole amount is relating to the Strategic recorded for the plan. Business Unit Consumer Electronics.

Elcoteq SE 55 Sensitivity analysis 9. other operating expenses Sensitivity analysis have been carried out for the valuation of each cash generating unit by making downside scenarios. The changes Other operating expenses for the Group consist of the following made to Group’s base case projections are: items: – Sales growth lowered by 10% – EBIT profitability lowered by 10% EUR 1,000 2009 2008 – WACC increased by 15% Other personnel expenses 5,553 8,136 According to performed sensitivity analysis none of the downside Rental expenses 24,787 43,839 scenarios would cause Elcoteq’s recoverable amounts to fall short Transportation 7,273 16,243 of their carrying amounts at December 31, 2009. As a result of per- Energy expenses 7,915 12,832 formed impairment tests, there is no need for write-downs of the goodwill in any cash generating unit. Office expenses 3,571 5,121 Travel, marketing and representation expenses 5,443 8,919 Insurance expenses 2,262 2,278 External services 29,052 52,132 Restructuring expenses 8. Other operating expenses 13,765 15,350 Total 99,620 164,851 During the first quarter of 2009, Elcoteq launched a restructuring plan that applies to whole Group. Some parts of the costs relating to the plan were recognized already in 2008. The plan targets to prepare the company for the exceptionally uncertain market situation and general economic development. This plan is the next step in the Group’s drive to increase profitability, cost-efficiency and opera- 10. financial income and expenses tional excellence. The plan has contained several elements such as the closure of the plants in Arad (Romania), Richardson (USA) and EUR 1,000 2009 2008 St. Petersburg (Russia) as well as to merge the plant in Shenzhen (China) to the plant in Beijing. Processes with the target to reduce Financial income personnel at several plants globally have been carried out. In addi- Foreign exchange gains, financial tion the Group has reduced other operating costs. In August 2009 assets / liabilities at fair value through profit or loss 2,576 3,728 Elcoteq announced further organizational changes and decided to Interest income, cash and cash consolidate the Personal Communications and Home Communica- equivalents 595 2,211 tions Business Areas under Consumer Electronics Strategic Business Other financial income 150 442 Unit. The target is to better utilize the synergies between businesses and to aim for further cost reductions. Consequently personnel Financial income, total 3,322 6,381 reductions have been and will be carried out at several Elcoteq sites. Additionally Elcoteq has booked a non-cash impairment charge of Financial expenses 25,109 thousand euros from various assets at the end of 2009. Foreign exchange losses, financial assets / liabilities at fair value through profit or loss –9,326 –6,596 The Group’s restructuring expenses, 37,049 thousand euros, comprise of the following items: Interest expenses, measured at amortized cost –14,697 –21,362 EUR 1,000 2009 2008 Expenses related to sale of trade Personnel expenses 9,401 2,722 receivables –3,606 –9,184 Impairments 25,109 6,074 Impairment losses, loan receivables –13,417 – Production materials and services 1,107 3,170 Other financial expenses –2,767 –1,642 Gains on the disposals of fixed assets –1,418 – Financial expenses, total –43,813 –38,784 Other operating expenses 2,849 1,530 Restructuring expenses, total 37,049 13,496 Financial income and expenses, total –40,492 –32,403

Impairments of non-current assets: EUR 1,000 2009 2008 Goodwill – 248 Buildings 1,244 1,837 Machinery and equipment 22,396 3,871 Computer software 31 118 Investments in associated companies 1,438 – Impairments, total 25,109 6,074

Impairments of goodwill in 2008 are related to the closing of the Richardson plant. Impairments in 2009 of buildings as well as machinery and equipment are primarily due to plant closures.

56 financial statements 2009 11. income taxes

EUR 1,000 2009 2008 Income tax recognized in other comprehensive income Income taxes for the current period –161 –3,732 2009 Tax (expense) Income taxes for prior periods 904 –56 EUR 1,000 Before tax benefit Net of tax Other direct taxes * –4,828 –5,144 Cash flow hedges 3,465 –405 3,060 Change in deferred tax assets/liabilities 12,224 –2,177 Net gain / loss on hedges of net investments in foreign Income taxes, total 8,139 –11,109 operations 2,988 – 2,988 * Other direct taxes are paid based on other cost base than the income before Foreign currency translation taxes of the company. differences for foreign operations 1,149 – 1,149 Group tax income / expenses, EUR 1,000 2009 2008 7,602 –405 7,197 Loss before taxes –117,105 –52,908 Taxes calculated based on statutory tax 2008 Tax rate of each Group company 24,872 16,969 (expense) Change in tax rate – 491 EUR 1,000 Before tax benefit Net of tax Impact of non-tax-deductible expenses –6,566 –4,645 Cash flow hedges –2,492 400 –2,092 Impact of deferred tax assets left Net gain / loss on hedges of unrecorded –8,472 –24,101 net investments in foreign operations –4,654 – –4,654 Adjustments to taxes in earlier years 904 56 Foreign currency translation Impact of consolidation – 121 differences for foreign operations 9,479 – 9,479 Other items –2,599 – 2,333 400 2,733 Group tax income / expenses, total 8,139 –11,109

12. earnings per share

Formula for calculating earnings per share:

Net income attributable to the owners of the parent The weighted average number of shares outstanding during the period

2009 2008 Net loss A shares –71,005 –44,497 Net loss K shares/K founders’ shares –34,040 –21,375 Net loss attributable to the owners of the parent, EUR 1,000 –105,045 –65,872

Average number of A shares 22,071,983 22,017,819 Dilution effect of share subscription plan, A shares – 194,097 Average diluted number of A shares* 22,071,983 22,211,916

Average number of K shares/ K founder’s shares 105,770,000 105,770,000 Dilution effect of share subscription plan, K shares/K founders’s shares – – Average diluted number of K shares/K founders’ shares 105,770,000 105,770,000

Earnings per share (EPS), A shares EUR –3.22 –2.02 Earnings per share (EPS), K founders’ shares EUR –0.32 –0.20

* Due to the net loss of the year diluted EPS has not been presented in 2008.

13. notes to consolidated cash flow statement

Acquired and divested business operations: EUR 1,000 2009 2008 No new business operations were acquired or divested in 2009. Acquired business operations 253 –23,941 The total acquisition price of business operations acquired in 2008 was 23,941 thousand euros. Acquired assets and liabilities are Divested business operations – – shown by balance sheet groups in Impact of Business Combinations of the Consolidated Financial Statements. Note 16. The purchase price was adjusted in 2009, when the acquisition was finalised. This resulted in a reduction of the purchase price by 253 thousand euros.

Elcoteq SE 57 14. non-current assets

Intangible assets Advance payments and Product Intangible Intangible development Computer assets under Intangible rights costs software development Goodwill assets, total EUR 1,000 2009 2008 2009 2008 2009 2008 2009 2008 2009 2008 2009 2008 Acquisition cost, Jan. 1 9,762 10,877 9,973 9,231 41,293 40,533 96 1,178 25,610 25,597 86,737 87,417 Additions, Jan. 1–Dec. 31 272 186 – – 485 482 18 74 – – 775 743 Additions, business acquisitions, Jan. 1–Dec. 31 –93 457 – – – – – – – – –93 457 Transfers between classes, Jan. 1–Dec. 31 7 592 – 742 12 387 –57 –1,107 – – –39 614 Transfer to assets classified as held for sale – –1,942 – – – – – – – – – –1,942 Disposals, Jan. 1–Dec. 31 –83 –5 – – –222 –18 –31 –52 – – –336 –75 Translation difference –70 –402 – – –106 –92 –2 2 – 14 –177 –478 Acquisition cost, Dec. 31 9,795 9,762 9,973 9,973 41,461 41,293 25 96 25,610 25,610 86,868 86,737

Accumulated amortizations and impairment losses, Jan. 1 –6,031 –5,471 –9,901 –9,025 –39,060 –36,398 – – –4,100 –3,852 –59,092 –54,747 Accumumulated amortizations on disposals 21 – – – 123 6 – – – – 145 6 Accumulated amortizations on transfers (assets classified as held for sale) – 391 – – – – – – – – – 391 Impairments (shown in restructuring expenses) – – – – –31 –117 – – – –248 –31 –366 Translation difference 60 –35 – – 108 103 – – – – 167 69 Amortizations, Jan. 1–Dec. 31 –927 –917 –73 –876 –1,665 –2,654 – – – – –2,665 –4,446 Accumulated amortizations and impairment losses, Dec. 31 –6,877 –6,031 –9,973 –9,901 –40,525 –39,060 – – –4,100 –4,100 –61,476 –59,092

Book Value, Dec. 31 2,918 3,731 – 73 938 2,235 25 96 21,510 21,510 25,392 27,644

Product development costs: The Group’s research and development costs amounted to 0.9 million euros (1.8). Of this total 0.9 million euros (1.8) were expensed and no capitalizations were made (0.0 under Advance payments and Intangible assets under development). Goodwill: The writedowns made in year 2008 are reported as restructuring expenses (note 8). No writedowns were made in year 2009.

Tangible assets Advance payments and Machinery and construction in Tangible assets, Land Buildings equipment progress total EUR 1,000 2009 2008 2009 2008 2009 2008 2009 2008 2009 2008 Acquisition cost, Jan. 1 742 2,252 68,783 89,132 466,040 438,497 1,363 2,225 536,929 532,106 Additions, Jan. 1–Dec. 31 – – 620 3,226 3,858 59,579 1,306 1,998 5,784 64,803 Additions, business acquisitions, Jan. 1–Dec. 31 – – – – –160 5,395 – – –160 5,395 Transfers between classes, Jan. 1–Dec. 31 – – – 55 –210 4,077 248 –2,589 39 1,543 Disposals, Jan. 1–Dec. 31 – –30 –42 –2,213 –64,354 –35,066 –1,174 –399 –65,569 –37,708 Transfer to assets classified as held for sale – –1,305 – –20,065 – –5,564 – – – –26,934 Translation difference 30 –175 –570 –1,350 –9,903 –880 –22 127 –10,465 –2,277 Acquisition cost, Dec. 31 772 742 68,791 68,783 395,272 466,040 1,721 1,363 466,556 536,929

Accumulated depreciations and impairment losses, Jan. 1 – – –31,262 –29,417 –337,556 –302,635 –346 – –369,163 –332,051 Accumulated depreciation on disposals – – 11 1,854 55,269 28,957 – – 55,280 30,812 Accumulated depreciations on transfers (assets classified as held for sale) – – – 4,258 – 5,239 – – – 9,497 Impairments (shown in restructuring expenses) – – –1,244 –1,837 –22,396 –3,525 – –346 –23,640 –5,708 Translation difference – – 546 –131 8,853 2,894 – – 9,399 2,763 Depreciations, Jan. 1–Dec. 31 – – –3,780 –5,990 –53,698 –68,486 – – –57,478 –74,475 Accumulated depreciations and impairment losses, Dec. 31 – – –35,728 –31,262 –349,527 –337,556 –346 –346 –385,601 –369,163

Book Value, Dec. 31 772 742 33,063 37,522 45,744 128,484 1,375 1,017 80,954 167,765

Group has received government grants for investments 1.1 million euros (1.6). Such government grants are allocated to the related non-current assets and the assistance received is recognized as a reduction of the cost in proportion of amortizations and depreciations or recognized as deferred income in accrued expenses.

58 financial statements 2009 Investments and non- Investments Non-current receivables current receivables Investments in Receivables from associated associated Available-for-sale Deferred tax companies companies financial assets assets Loans receivables EUR 1,000 2009 2008 2009 2008 2009 2008 2009 2008 2009 2008 Book Value, Jan. 1 1,637 1,656 87 87 513 502 32,943 33,530 13,408 271 Additions, Jan. 1–Dec. 31 – – – – – – 11,561 2,302 8 13,417 Disposals, Jan. 1–Dec. 31 – – – – – – –2,598 –2,889 –13,417 –280 Share of the losses of associated companies, Jan. 1–Dec. 31 –68 –105 – – – – – – – – Impairments (shown in restructuring expenses) –1,437 – – – – – – – – – Translation difference –55 86 – – –2 12 – – 1 –

Book Value, Dec. 31 77 1,637 87 87 511 513 41,906 32,943 0 13,408

Associated companies: The Group’s information on its associated companies is not complete. However, the associated companies belonging to the Group have no significant impact on its result. Available-for-sale financial assets: In the absence of a market price for the above Available-for-sale financial assets, the fair value cannot be reliably determined and for this reason they are valued at aquisition cost.

15. shares and holdings Consolidated Parent company Share Capital ownership, % ownership, % Group companies Elcoteq Lohja Oy, Lohja, Finland EUR 50,000 100 100 Elcoteq Finland Oy, Lohja, Finland EUR 50,000 100 100 AS Elcoteq Tallinn, Tallinn, Estonia EEK 20,500,000 100 100 Dongguan Elcoteq Electronics Co. Ltd., Dongguan, China CNY 213,041,100 70 70 Elcoteq Asia Ltd, Hong Kong, China HKD 8,600,000 100 100 Elcoteq Inc., Dallas, USA USD 161,781,000 100 – Elcoteq Holding Inc., Dallas, USA USD 15,701,480 100 100 Elcoteq JSC, St. Petersburg, Russia RUB 165,409,426.50 100 100 Espoo Holding GmbH, Munich, Germany EUR 6,442,270.34 100 100 Elcoteq Hungary Ltd., Pécs, Hungary EUR 4,100,000 100 100 Finn Utcai Ingatlan Kft, Pécs, Hungary EUR 10,000 100 100 Szilva Utcai Ingatlan Kft, Pécs, Hungary EUR 5,010,000 100 100 Elcoteq Japan Co. Ltd, Tokyo, Japan JPY 10,000,000 100 100 Elcoteq S.A. de C.V., Monterrey, Mexico USD 50,000 100 – Elcoteq Sweden Ab, Stockholm, Sweden SEK 200,000 100 100 Elcoteq Design Center Oy, Salo, Finland EUR 3,008,000 100 100 Beijing Elcoteq Electronics Co. Ltd., Beijing, China CNY 429,334,365 89.6 89.6 Elcoteq Electronics India Pvt. Ltd, Bangalore, India INR 1,774,931,000 100 100 Elcoteq Network S.A, Luxembourg EUR 531,000 100 100 Elcoteq Juarez SA de CV, Juárez, Mexico USD 4,374.35 100 – PCE Mexicana SA de CV, Juárez, Mexico USD 453,284.97 100 – Elcoteq da Amazonia Ltda, Manaus, Brazil USD 3,200,000 100 100 Elcoteq Romania Srl, Arad, Romania RON 4,145,443.20 100 100 Kiinteistöosakeyhtiö Salon Joensuunkatu 13, Salo, Finland EUR 201,000 100 100

Consolidated Parent company Consolidated book Share Capital ownership, % ownership, % value EUR 1,000 Associated companies Nilistit Oy, Helsinki, Finland EUR 161,460.41 33 – 8 ISIS Surface Mounting, Inc., California, USA USD 120,000.00 20 – 69 77

Availabe-for-sale financial assets held by the parent company 98

Availabe-for-sale financial assets held by subsidiaries 413

Available for sale financial assets, total 511

Elcoteq SE 59 16. impact of business combinations of the Assets and liabilities acquired in business combinations in: consolidated financial statements 2008 2008 EUR 1,000 Fair Value Book Value Non-current assets Elcoteq SE signed on September 4, 2008 an agreement to purchase Philips’ flat panel TV (FTV) assembly operations in Juarez, Mexico. Intangible assets 364 – The deal includes a long-term cooperation agreement with Philips to Tangible assets 5,235 5,235 provide manufacturing services to Philips for its Latin American FTV Current assets business and its Philips Business Services business in the Americas. Inventories 15,181 15,181 The deal includes also a long term cooperation agreement with Funai Current receivables 7,021 7,021 Electric Co., Ltd to provide manufacturing services to Funai’s FTV business in North America. Cash and equivalents 406 406 The acquisition includes certain fixed assets and inventories Assets, total 28,207 27,842 of Philips’ Juarez manufacturing operation and will be used in the Liabilities manufacturing of products to be supplied to Philips. The assets and Current liabilities 5,033 5,033 liabilities were acquired at fair value. The impact of acquisition to Acquisition cost 23,174 – the group’s net profit in 2008, had the agreement been signed at the beginning of 2008, cannot be reliably determined. Acquisition cost Acquisition price paid in cash 24,094 – include 0.5 million euros legal service fees. Cash and equivalents of acquired The assets and liabilities acquired in business combinations are subsidiary –406 – valued at their fair values. Impact on cash flow 23,688 – The final acquisition price was confirmed in 2009. Purchase price allocation and the values of the acquired the assets and liabilities are The acquisition in 2008 was made in US dollars. The acquisition cost as follows: was translated into euros using the exchange rate of the acquisition date. The acquisition price paid in cash was translated into euros using the payment date’s rate of the acquisition. 17. deferred tax assets and liabilities, EUR 1,000

Items recognised in Items other Acquisitions/ recognised in comprehensive Translation divestments of 2009 Jan. 1 profit or loss income differences subsidiaries Dec. 31 Deferred tax assets Confirmed tax losses 25,261 10,549 – – – 35,810 Depreciation differences 6,129 –2,080 – –71 – 3,979 Defined benefit pension plans 10 354 – – – 364 Impacts of Group consolidation and eliminations 21 –21 – – – – Other temporary differences for assets 1,522 634 –374 –30 – 1,753 32,943 9,436 –374 –101 – 41,906

Deferred tax liabilities Depreciation differences 1,630 –215 – – – 1,415 Other temporary differences for liabilities 3,622 –2,574 31 – – 1,080 5,253 –2,789 31 – – 2,496

2008 Deferred tax assets Confirmed tax losses 25,857 –596 – – – 25,261 Depreciation differences 4,237 1,465 – 427 – 6,129 Defined benefit pension plans – 10 – – – 10 Impacts of Group consolidation and eliminations 57 –36 – – – 21 Other temporary differences for assets 3,379 –2,151 400 –106 – 1,522 33,530 –1,308 400 321 – 32,943

Deferred tax liabilities Depreciation differences 1,613 79 – –62 – 1,630 Defined benefit pension plans 71 –71 – – – – Other temporary differences for liabilities 2,794 862 – 4 –37 3,622 4,479 869 – –58 –37 5,253

35.8 million euros of the deferred tax assets are based on losses carried forward of loss making companies. The deferred tax assets have been recognized when it is probable that the companies will make profit on taxation on coming years and can consequently utilise deferred tax assets in the future. The Group’s unrecognized deferred tax assets totalled 51.8 million euros (56.5) and they related mainly to tax assets accrued from losses in subsidiaries. None of the unrecognized deferred tax assets will expire before year 2018.

60 financial statements 2009 18. inventories 21. pRepaid expenses and accruals

Value adjustments of inventories amounted to about 15.3 million Prepaid expenses and accruals of the Group consist of the following euros (20.3), of which amount 14.2 million euros (17.1) are included items: in the production materials and services in the consolidated state- EUR 1,000 2009 2008 ment of comprehensive income and 1.1 million euros (3.2) are Accrued exchange rate differences of included in restructuring expenses in the consolidated statement of forwards 1,377 2,088 comprehensive income. Advance payment 2,622 1,806 Arrangement fee of loans 2,400 – Estimated additional purchase price/ securitization – 1,477 accounts receivable 19. Hedges related to personnel expenses 194 – Elcoteq’s accounts receivable of 155.3 million euros (306.1) at bal- Prepaid rent 451 964 ance sheet date include cash received from sold accounts receivable Prepaid tax receivable 77 10 totaling 12.8 million euros. Accounts receivables are sold within the Withholding taxes 515 441 limits of Elcoteq’s sale of accounts receivables facility in Brazil. The Other items 2,228 5,262 company retains the credit risk related to these sold accounts receiv- Total 9,864 12,048 ables. At the balance sheet date the Group did not have any sold accounts receivables without recourse (101.1 million euros). Securi- tization program has been terminated at the end of 2009. Expenses related to the sale of accounts receivables have been recognized assets and liabilities classified as held under other financial expenses. 22. Elcoteq’s credit risk is low as biggest volume customers have a for sale good credit rating. Assets classified as held for sale amounting to 19,049 thousand Accounts receivable: Aging analysis euros relate to real estates on sale. The company did not have liabilities classified as held for sale at the end of the reporting period. EUR 1,000 2009 2008 Not due 125,254 258,924 Due 1–30 days 23,872 45,209 23. equity 31–90 days 3,847 1,060 91–180 days 1,332 661 The parent company’s share capital consists of the following classes of shares over 180 days 975 253 2009 Shares EUR 1,000 Total 155,280 306,107 Series A (1 vote per share) 22,362,185 8,945 No impairment losses are expected on receivables that have not Series K (1 vote per share) 105,770,000 4,231 fallen due. No accounts receivable have been renegotiated in 2009 Total 128,132,185 13,176 nor in 2008. 2008 Shares EUR 1,000 EUR 1,000 2009 2008 Series A (1 vote per share) 22,025,919 8,810 Impairment 2,057 478 Series K (1 vote per share) 105,770,000 4,231 Total 127,795,919 13,041 Impairment losses are recognized when there is objective evidence that the accounts receivable due cannot be collected in full. The company redeemed a total of 8,100 of its Series A shares in 2007 and a total of 1,401 of its Series A shares remained in the possession of the company in 2009. Shares are still in possession of the company. 20. other receivables

Other receivables of the Group consist of the following items: EUR 1,000 2009 2008 Value added taxes 20,165 16,077 Other items 4,608 1,193 Total 24,773 17,270

Elcoteq SE 61 Reconciliation of numbers of shares Number of shares Holding of own outstanding Dec. 31, 2008 Change* Dec. 31,2009 shares Dec. 31,2009 Number of shares, A shares 22,025,919 336,266 22,362,185 –9,501 22,352,684 Number of K founders’ shares 105,770,000 – 105,770,000 – 105,770,000 127,795,919 336,266 128,132,185 –9,501 128,122,684

Share capital (EUR 1,000) 13,176 Additional paid-in capital (EUR 1,000) 225,011 Total (EUR 1,000) 238,187

* The company issued 336,266 new A shares to its key employees in November 2009 according to its 2007 Share Subscription plan.

Number of shares Holding of own outstanding Dec. 31, 2007 Change** Dec. 31,2008 shares Dec. 31,2008 Number of shares, A shares 22,025,919 – 22,025,919 –8,100 22,017,819 Number of shares, K shares 10,577,000 –10,577,000 – – – Number of K founders’ shares – 105,770,000 105,770,000 – 105,770,000 32,602,919 95,193,000 127,795,919 –8,100 127,787,819

Share capital (EUR 1,000) 13,041 Additional paid-in capital (EUR 1,000) 225,011 Total (EUR 1,000) 238,053

** In the transfer of the company’s domicile January 1, 2008 K shares were converted into K founders’ shares and their number increased ten-fold while at the same time reducing their par value to one-tenth of the par value of the A shares.

Share capital is the parent company’s share capital consisting of the capital of A shares and K shares.

Additional paid-in capital is the excess of the value between the nominal value of share capital and the paid-in capital.

Other reserves comprise of the parts of equity that are required to be transferred into restricted capital according to local legistation of the Group companies.

Hedging reserve comprises the effective portion of the cumulative net change in the fair value of cash flow hedging instruments related to hedged transactions that have not yet occured.

Translation reserve comprises all foreign currency differences arising from the translation of the financial statements of foreign operations, as well as from the translations of liabilities that hedge the company’s net investment in a foreign subsidiary.

Reserve for own shares, the reserve for the company’s own shares comprises the cost of the company’s shares held by the Group. At December 31, 2009 the Group held 9,501 pieces of the parent company shares (2008: 8,100 pieces).

62 financial statements 2009 24. liabilities In March 2006 Elcoteq SE issued 30 million euros in subordinated notes. These notes run until March 7, 2011 and carry a fixed coupon of 5.55%. The notes are unsecured. The notes are measured at amor- EUR 1,000 2009 2008 tized cost using the effective interest rate method. Non-current liabilities Interest-bearing Loans from Pension Plans Subordinated notes 89,868 139,517 The Group drew TEL (Employees’ Pensions Act) pension plan loan in Medium-term notes 19,986 19,980 1999 that is repayable in equal instalments. The loan ran until June 1, 2009 and had fixed interest rate of 3.85%. The loan has been repaid Other debt 197 201 in June 2009. Total 110,051 159,698 Commercial Paper Program Non-interest-bearing Elcoteq SE operates a 200 million euros commercial paper program Deferred tax liability 2,496 5,253 in Finland, which was not used during the period. At year-end there were no outstanding issues from the program (0.0). Non-interest-bearing, total 2,496 5,253 Loans from Financial Institutions Non-current liabilities, total 112,548 164,951 The Group has bilateral uncommitted loan limits from Financial Insti- tutions in China. The withdrawals from these limits are short-term EUR 1,000 2009 2008 and the interest rates are linked to short market rates. Current liabilities Revolving Lines of Credit Interest-bearing The Group signed a 6-month revolving credit facility of 100 million Loans from financial institutions 115,429 173,647 euros with a bank syndicate in November 2009 with maturity in Subordinated notes 49,925 – April 2010. Reason for the short term facility is to get additional time Loan from pension plans – 210 for finalizing capital strengthening project. Loans under this facility are secured and committed. On the balance sheet date 100.0 million Interest-bearing, total 165,354 173,857 euros was in use from the facility with a remaining maturity of under one month. Non-interest-bearing The Group has signed on March 30, 2010 a term sheet with the Accounts payable 165,207 422,892 same bank syndicate about a new facility wich matures at the end of Accrued expenses 26,454 37,278 June 2011. Advances received 174 780 Gearing Other current liabilities 8,063 11,556 The Group aims to ensure the availability of a broad range of suf- Tax liabilities based on taxable ficient and cost-effective funding alternatives under various market income in year 151 1,415 conditions. The Group monitors its capital structure by examining Provisions 4,713 7,488 the ratio of interest-bearing net debt to total equity (gearing). Inter- Non-interest-bearing, total 204,762 481,409 est-bearing net debt is calculated as the difference between interest- bearing debt and cash and cash equivalents. Current liabilities, total 370,117 655,266 The Group aims to keep the ratio below 1. Gearing was: Interest-bearing liabilities 275,405 333,555 EUR 1,000 Dec. 31, 2009 Dec. 31, 2008 Non-interest-bearing liabilities 207,259 486,662 Interest-bearing debt 275,405 333,555 Liabilities, total 482,664 820,217 Cash and cash equivalents 87,941 95,099 Interest-bearing net debt 187,465 238,456 The loans include covenants, which the company has met during the accounting period. Equity 32,603 135,212

Medium-term notes In May 2005 Elcoteq SE issued 20 million euros in private placement Gearing 5.8 1.8 notes. These notes run from May 25, 2005 to May 25, 2012 and carry a coupon of six-month Euribor with 0.83% margin. The notes are The main reason for the change in gearing has been the year 2009 unsecured. The bond is measured at amortized cost using the effec- result. tive interest rate method.

Subordinated notes In December 2004 Elcoteq SE issued 50 million euros and in May 2005 10 million euros in subordinated notes. These notes run until December 22, 2011. The notes carry a fixed coupon of 5.00% until December 22, 2009. After this, the interest rate will be the three- month Euribor with a 3.5% margin and the company has the right to redeem the notes prematurely at six-month intervals. The notes are unsecured. The notes are measured at amortized cost using the effective interest rate method. In September 2005 Elcoteq SE issued 50 million euros in subordinated notes. These notes run until September 28, 2010 and carry a coupon of three-month Euribor with 2.4% margin. The notes are unsecured. The notes are measured at amortized cost using the effective interest rate method.

Elcoteq SE 63 Liquidity risk Dec. 31, 2009 EUR 1,000 2010 2011 2012 2013 Loans from pension plans and interest expenses – – – – Medium-term notes, nominal value and interest expenses Floating rate –369 –369 –20,184 – Subordinated notes, nominal value and interest expenses Fixed coupon –1,666 –31,666 – – Floating rate –53,748 –62,561 – – Short-term loans from financial institutions and interest expenses –103,163 – – – Accounts payable –165,207 – – – TOTAL –324,154 –94,596 –20,184 – Derivative contracts Transaction risk Positive cash flow 255,306 – – – Negative cash flow –255,341 – – – Translation risk Positive cash flow – – – – Negative cash flow – – – – Financial risk Positive cash flow 110,606 – – – Negative cash flow –110,845 – – – Derivative contracts, interest rate and foreign exchange swaps Nominal value and interest income – – – – Nominal value and interest expense – – – – TOTAL –324,428 –94,596 –20,184 –

Liquidity risk Dec. 31, 2008 EUR 1,000 2009 2010 2011 2012 Loans from pension plans and interest expenses –214 – – – Medium-term notes, nominal value and interest expenses Floating rate –993 –993 –993 –20,495 Subordinated notes, nominal value and interest expenses Fixed coupon –4,666 –4,666 –94,666 – Floating rate –2,764 –52,075 – – Short-term loans from financial institutions and interests expenses –174,627 – – – Accounts payable –422,892 – – – TOTAL –606,156 –57,734 –95,659 –20,495 Derivative contracts Transaction risk Positive cash flow 186,120 – – – Negative cash flow –189,883 – – – Translation risk Positive cash flow 20,243 – – – Negative cash flow –21,062 – – – Financial risk Positive cash flow 171,589 – – – Negative cash flow –174,664 – – – Derivative contracts, interest rate and foreign exchange swaps Nominal value and interest income 1,545 – – – Nominal value and interest expense –1,347 – – – TOTAL –613,615 –57,734 –95,659 –20,495

The book value of the medium-term notes was about 20.0 million euros and of the subordinated notes 139.8 (139.5) million euros at December 31, 2009. The company has the right to redeem 60 million euros subordinated notes maturing 2011 prematurely at six-month intervals from December 22, 2009 onwards.

64 financial statements 2009 25. book values and fair values of financial assets and liabilities by categories

Financial assets and Financial EUR 1,000 liabilities at Available- liabilities fair value Loans and for-sale measured at Dec. 31, 2009 Hedge through other financial amortized Balance sheet Note accounting profit or loss receivables assets cost Book values Fair value Non-current assets Other financial assets 14 – – – 511 – 511 511

Current assets Accounts receivable 19 – – 155,280 – – 155,280 155,280 Other receivables 20, 32 – – 3,081 – – 3,081 3,081 Cash and cash equivalents – – 87,859 – – 87,859 87,859 Derivative contracts 32 506 1,116 – – – 1,622 1,622

Book value by categories 506 1,116 246,221 511 – 248,354 248,354

Non-current liabilities Subordinated notes 24 – – – – –89,869 –89,869 –39,165 Medium term notes 24 – – – – –19,986 –19,986 –19,986 Other debt 24 – – – – –197 –197 –197

Current liabilities Loans from financial institutions 24 – – – – –115,429 –115,429 –115,429 Subordinated notes 24 – – – – –49,925 –49,925 –21,758 Other current liabilities 24 – – – – –90 –90 –90 Derivative contracts 32 –579 –1,317 – – – –1,896 –1,896 Accounts payable 24 – – – – –165,207 –165,207 –165,207

Book value by categories –579 –1,317 – – –440,702 –442,598 –363,728

Financial assets and Financial EUR 1,000 liabilities at Available- liabilities fair value for-sale measured at Dec. 31, 2008 Hedge through Loans and financial amortized Balance sheet Note accounting profit or loss receivables assets cost Book values Fair value Non-current assets Other financial assets 14 – – 13,408 513 – 13,921 13,921

Current assets Accounts receivable 19 – – 306,107 – – 306,107 306,107 Other receivables 21, 32 – – 2,241 – – 2,241 2,241 Cash and cash equivalents – – 95,099 – – 95,099 95,099 Derivative contracts 32 372 2,040 – – – 2,411 2,411

Book value by categories 372 2,040 416,855 513 – 419,779 419,779

Non-current liabilities Subordinated notes 24 – – – – –139,517 –139,517 –139,517 Medium-term notes 24 – – – – –19,980 –19,980 –19,980 Other debt 24 – – – – –201 –201 –201

Current liabilities Loans from financial institutions 24 – – – – –173,647 –173,647 –173,647 Other current liabilities 24 – – – – –176 –176 –176 Loans from pension plans 24 – – – – –210 –210 –210 Derivative contracts 32 –4,389 –5,154 – – – –9,543 –9,543 Accounts payable 24 – – – – –422,892 –422,892 –422,892

Book value by categories –4,389 –5,154 – – –756,623 –766,166 –766,166

As far as company is aware, the Medium-term notes listed above have not been used for any aftermarket transactions and therefore their fair value cannot be reliably determined. The Medium-term notes have been valued at amortised cost using the effective interest rate method.

Elcoteq SE 65 Fair value hierarchy for financial assets and liabilities measured at fair value Fair value EUR 1,000 Dec. 31, 2009 Level 1 Level 2 Level 3 Financial assets at fair value through profit and loss Currency forward contracts 1,622 – 1,622 – From which Hedge accounting applied, transaction risk 506 – 506 – Other financial assets 511 – – 511 Total 2,639 – 2,128 511

Financial liabilities at fair value through profit and loss Currency forward contracts –1,896 – –1,896 – From which Hedge accounting applied, transaction risk –579 – –579 – Total –2,475 – –2,475 –

The fair values of the financial assets and liabilities are based on: Level 1: The quoted prices at the functioning markets for the fully identical assets and liabilities. Level 2: Other prices than prices included in Level 1. The prices can be verified either directly (prices) or indirectly (derived from prices) for the assets and liabilities in question. Level 3: The prices, which are not based on the verified market information. The fair value is based on the Management assessment and the established assessment models.

26. pRovisions

EUR 1,000 Restructuring provisions Warranty provisions Total Balance at January 1, 2009 5,137 2,351 7,488 Provisions made during the year 1,684 1,723 3,407 Provisions used during the year –4,761 – –4,761 Provisions reversed during the year –376 –1,045 –1,421 Balance at December 31, 2009 1,684 3,029 4,713

Restructuring provisions in 2008 and 2009 are primarily related to restructuring program of Elcoteq Group announced in January 2009 and organizational changes and cost reduction announced in August 2009. Warranty provisions relate to the Group’s product warranties that the company had not yet been invoiced for at December 31.

27. other current liabilities 28. accrued expenses

The Group’s other liabilities consist of the following items: The Group’s accrued expenses consist of the following items: EUR 1,000 2009 2008 EUR 1,000 2009 2008 Value added taxes 4,689 6,373 Deferred income 1,051 1,580 Other items 3,374 5,183 Exchange rate accruals on forward contracts 1,896 9,129 Total 8,063 11,556 Interest 1,505 1,884 Transportation expenses 930 2,140 Wages and salaries 5,874 9,230 Vacation pay 1,907 3,306 Hedges related to personnel expences – 740 Other indirect personnel expenses 2,910 3,239 Labor rental costs 981 879 Utility expenses 643 530 Accrued fees 1,336 – Other items 7,420 4,621 Total 26,454 37,278

66 financial statements 2009 29. pension obligations 30. operating leases

The pension coverage of most employees in the Group’s companies The Group has leased production equipment under operating leases. is arranged through defined contribution pensions. The most impor- In 2009 no new operating leases were made (0.0). The lease pay- tant defined benefit pension plan relates to the supplementary ments are fixed for the duration of the lease term. pensions payable to senior executives in the parent company. The supplementary pension benefits for top management apply to the The future annual lease payments under operating leases for produc- President and CEO and to certain members of the Board of Directors, tion equipment are as follows: who are entitled to retire on reaching 60 years of age instead of the Dec. 31, Dec. 31, usual age of 65 years. EUR 1,000 2009 2008 Under 1 year 1,244 7,706 Actuarial estimates used to calculate pension liabilities: 1–5 years – 1,308 % 2009 2008 Over 5 years – – Discount rate on Dec. 31 5.00 5.75 Total 1,244 9,014 Expected rate of return on plan assets 4.50 4.50 Rate of salary increase 4.00 4.00 Operating lease expenses for machinery amounted to 9.8 million Rate of inflation 2.00 2.00 euros for the year ended December 31, 2009 and 20.7 million euros Terminated employment contracts 0.00 0.00 for the year ended December 31, 2008.

Expenses from defined benefit pension plans in the consolidated The future annual lease payments under operating leases related to statement of comprehensive income (minus indicates a decrease in real estates and other lease agreements are as follows: costs): Dec. 31, Dec. 31, EUR 1,000 2009 2008 EUR 1,000 2009 2008 Under 1 year 7,533 10,053 Service cost 271 286 1–5 years 5,648 7,187 Interest cost 113 174 Over 5 years – – Income from pension funds –67 –115 Total 13,181 17,240 Effect of settlement – 395 Actuarial gains (–) / losses (+) 43 83 The Group had no significant finance leases at the end of 2009. Total 360 823

Pension liabilities in the balance sheet: EUR 1,000 2009 2008 2007 2006 2005 Funded defined benefit obligations 2,365 1,702 3,267 2,964 2,731 Fair value of plan assets –1,618 –1,235 –2,629 –2,290 –1,971 Unrecognized actuarial gains (+) / losses (–) –702 –822 –911 –770 –687 Effect of settlement – 395 – – – Net liability (+) / asset (–) in the balance sheet 45 40 –273 –96 73

In year 2009 pension liabilities in the balance sheet are presented in Note 24 Liabilities, Other debt.

Change in fair value of plan assets: EUR 1,000 2009 2008 Fair values of plan assets Jan. 1 1,235 2,629 Expected return on plan assets 67 115 Payment to pension fund 355 510 Effect of settlement – –1,576 Actuarial gains (+) / losses (–) –39 –443 Fair value of plan assets Dec. 31 1,618 1,235

The fair value of the plan assets cannot be specified because the assets are the responsibility of an insurance company and belong to the insurance company’s assets.

Change in pension liability/asset: EUR 1,000 2009 2008 Obligation Jan. 1 40 –273 Net costs of pension fund 360 823 Payments to pension fund –355 –510 Obligation Dec. 31 45 40

Elcoteq SE 67 31. Related party disclosures Disclosures related to associated companies: EUR 1,000 2009 2008 Related party is related to an entity if: Goods and services sold to associated a) directly, or indirectly through one or more intermediaries, the companies – – party Accounts receivable on Dec. 31 87 87 – controls, is controlled by, or is under common control with, the entity The pricing of goods and services with associated companies is based – has an interest in the entity that gives it significant influence on market prices. over the entity or – has joint control over the entity The Group’s subsidiaries are listed under shares and holdings in b) the party is an associate of the entity note 15. c) the party is a joint venture in which the entity is a venturer d) the party is a member of the key management personnel of the Board’s Shareholdings on Dec. 31, 2009 entity or its parent K founders’ Change from e) the party is a close member of the family of any individual Name A Shares Shares 2008 referred to in (a) or (d): Antti Piippo 1,633,549 54,110,000 27,727 f) the party is an entity that is controlled, jointly controlled or significantly influenced by, or for which significant voting power Jorma Vanhanen 647,344 25,830,000 27,727 in such entity resides with, directly or indirectly, any individual Henry Sjöman 632,344 25,830,000 27,727 referred to in (d) or (e); or Juha Toivola 57,469 – 27,727 g) the party is a post-employment benefit plan for the benefit of Martti Ahtisaari 55,219 – 27,727 employees of the entity, or of any entity that is a related party of Eero Kasanen 52,619 – 27,727 the entity. Heikki Horstia 50,969 – 27,727 Salaries and share-based payments cost to management *: François Pauly 39,484 – 27,727 EUR 1,000 2009 2008 To parent company President and CEO Share Ownership of the Elcoteq Management Team on Dec. 31, 2009 Jouni Hartikainen Name Number of Shares, A Shares Salaries and other short-term benefits 750 674 Jouni Hartikainen 62,132 Share-based payments 84 25 Vesa Keränen 15,232 To parent company Deputy CEO Jukka Markus Kivimäki 15,000 Jäämaa** Mikko Puolakka 15,000 Salaries and other short-term Tommi Pettersson 13,000 benefits – 315 Sándor Hajnal 4,000 Share-based payments – – Roger Taylor 3,000 To other Elcoteq Management Team members*** Tomi Saario 500 Salaries and other short-term benefits 1,279 1,032 Share-based payments 177 50 * Includes costs of share options and share subscription plans recognized in the consolidated statement of comprehensive income. ** Elcoteq employee until of September 4, 2008. *** Sándor Hajnal and Tomi Saario have been EMT members since August 1, 2009.

Fees paid for work for the Board of Directors: EUR 1,000 2009 2008 Antti Piippo, Chairman of the Board 600 627 Juha Toivola, Deputy Chairman of the Board 180 180 Martti Ahtisaari, member of the Board 60 60 Heikki Horstia, member of the Board 60 60 Eero Kasanen, member of the Board 60 60 Henry Sjöman, member of the Board 60 60 Jorma Vanhanen, member of the Board 60 60 François Pauly, member of the Board 60 60 Salaries, share subscription and Fees, total 3,430 3,263

Two members of the Board of Directors has employment relationship with the company and paid salaries was 0.4 million euros (0.4) in 2009. In addition to statutory pension cover, the President and CEO and some members of the Board of Directors are entitled to retire on reaching 60 years of age by virtue of supplementary pension plans. Total of 0.4 million euros (0.9) was paid for these plans in 2009. The CEO’s notice period is six months. In the event that the CEO’s employment contract is terminated by the company without proper cause, the CEO will be paid severance compensation equivalent to 12 months’ monetary salary.

68 financial statements 2009 32. assets pledged and contingent liabilities

EUR 1,000 2009 2008 Business mortgages 100,000 – Pledged other receivable 3,000 – Pledged cash and cash equivalents 56,158 – Pledged accounts receivable – 26,901 Pledged loan receivables 81 764 On behalf of others Guarantees 1,008 1,008 Lease commitments Operating leases, production machinery (excl. VAT) 1,244 9,014 Operating leases, real-estate (excl. VAT) 12,262 15,386 Operating leases, others (excl. VAT) 919 1,854 Derivative contracts Currency forward contracts, transaction risk, hedge accounting not applied Nominal value, open 43,222 118,315 Nominal value, closed 130,136 – Fair value 38 –224 Currency forward contracts, transaction risk, hedge accounting applied Nominal value, open 70,632 69,389 Nominal value, closed 11,400 – Fair value –74 –3,539 Currency option contracts, transaction risk, hedge accounting applied, bought options Nominal value – 17,000 Fair value – 341 Currency forward contracts, translation risk Nominal value – 20,243 Fair value – –819 Currency forward contracts, financial risk Nominal value 110,689 172,329 Fair value –239 –3,116 Interest rate and foreign exchange swap contracts Nominal value – 1,500 Fair value – 225

The derivative contracts are measured using the market prices and the exchange reference rates of the European Central Bank on the balance sheet date. Group has pledged part of its assets for syndicated credit facility and for arbitration. Assets pledged for syndicated credit facility are in the free use of the company. Assets pledged for arbitration can be freely used by the company immediately after it has terminated the contract with the service provider.

Elcoteq SE 69 33. Shares and shareholders Share subscription plan 2009 The company has an incentive plan for the motivation and Share series and share capital commitment of the company’s key personnel by means of a Elcoteq SE has two classes of shares, Series A and Series share subscription plan. K founders’ shares. Series A shares (ticker symbol ELQAV) The potential reward from the plan is based on reaching are quoted on the Nasdaq OMX Helsinki Exchange and are the targets set by the Board of Directors for the Group’s included in the book-entry system maintained by Euroclear consolidated income before taxes for the first and second Finland Ltd. All the Series K founders’ shares are held by Mr. half of year 2009. Based on the achieved targets the company Antti Piippo, Mr. Henry Sjöman and Mr. Jorma Vanhanen, who would issue a maximum of 1,500,000 new series A shares of were the sole owners of the company before its initial public which 50 percent would be issued during July 2010 and the offering and whose holdings of the Series K founders’ shares remaining 50 percent during January 2011. The new series have not changed since. Elcoteq’s Articles of Association A shares, if any, will be issued according to and under the stipulate that the number of Series K founders’ shares cannot authorization granted to the Board of Directors in the compa- be increased. All of the shares carry one vote at general ny’s Articles of Association. Based on the actual results for shareholders’ meetings. Elcoteq shares confer financial rights 2009, the targets for the first and second half of 2009 have in proportion to their par value. The par value of Series K not been met and thus no shares will be issued. founders’ shares and the financial rights they confer are one In October 2009, the Board of Directors approved an tenth of the par value of the Series A shares and the financial amendment to the plan in order to enhance the commit- rights they confer. ment of key personnel in a possible situation where a change At the end of 2009, Elcoteq’s share capital consisted of of control takes place in the company, for example as a result altogether 128,132,185 shares divided into 22,362,185 Series of its equity project. A shares and 105,770,000 Series K founders’ shares. The par There are two main amendments which reflect the value of each Series A share is 0.40 euros and the par value of possible changes during the second half of year 2009. The Series K founders’ shares is 0.04 euros. The company’s regis- first concerns the issuance of shares in case of a public tered share capital on December 31, 2009 totaled 8,944,874 tender offer and the second concerns a situation where euros. Elcoteq SE held 9,501 of its own Series A shares at the the company’s share capital value would increase at least end of 2009. 50 percent. If such cases would have occurred, maximum The company issued 336,266 new A shares to its key 750,000 shares would have been issued either in full or in employees in November 2009 according to its 2007 Share advance based on the targets as set forth in the Plan. Neither Subscription Plan as described below. of these cases occurred during the second half of year 2009. The amendment reflects also a possible public tender offer Share information, December 31, 2009 for Company’s shares in the year 2010, when the granted • Number of Series A shares 22,362,185 Shares for year 2009 to be issued could have been advanced • Ticker symbol ELQAV by the Board of Directors in order to enable the granted • Number of Series K founders’ shares 105,770,000 Shares to participate to the public tender offer. Since the targets for 2009 were not met, no shares will be issued. Board authorizations According to Elcoteq’s Articles of Association, which came Share subscription plan 2007 into force on January 1, 2008, the Board of Directors is autho- The company has had another fairly similar share subscrip- rized to increase the issued share capital in whole or in part, tion plan for the motivation and commitment of the compa- from time to time, through issues of Series A shares within ny’s key personnel dating from 2007. the limits of the authorized capital (the maximum capital is The actual number of shares issued was based on the 20,000,000.00 euros, including the issued capital). In connec- improvement of the profit before taxes of the full financial tion with such increases of capital, the Series A shares shall year 2008. Elcoteq announced in February 11, 2009 that be issued for compensation in cash or, subject to applicable according to the plan and on the basis of the 2008 results, provision of law, in kind at a price at an amount which shall the company will be issuing 480,000 new Series A shares at not be less than the par value and may include such issue the most. Due to the restructuring and changes in personnel, premium as the Board of Directors shall decide. the actual number of shares issued on November 12, 2009 The Board of Directors used this authorization to decide for the implementation of 2007 Share Subscription Plan was on the share issue for the implementation of 2007 Share 336,266. Subscription Plan. The terms and conditions of all Elcoteq’s incentive plans are provided on the company’s website at www.elcoteq.com. Shareholder agreements The Board of Directors is unaware of any shareholder agree- Shareholding of the CEO and ments concerning the ownership of the company shares or the Board members the use of voting rights. At the end of 2009, the members of the company’s Board of Directors owned a total of 3,168,997 Series A shares and 105,770,000 Series K shares, which represented 85.02 percent of the total number of shares registered on December 31, 2009, and 85.02 percent of the votes outstanding.

70 financial statements 2009 The following tables describing the company’s shareholders by type and size of holdings treat all shareholder register entries as independent holdings. Holdings belonging to the same control group or sphere of influence have not been combined.

Distribution of Shares, December 31, 2009 Number of shares Number of holders % of total shares % of total votes 1–100 2,909 0.15 0.15 101–1,000 5,156 1.79 1.79 1,001–10,000 1,935 4.57 4.57 10,001–100,000 199 3.76 3.76 100,001– 14 89.72 89.72

Figures include nominee-registered shareholders. Each nominee is treated as one shareholder.

Shareholders by Type, December 31, 2009 % of % of Number of shares total shares total votes Households 120,919,444 94.37 94.37 Foreign* 5,307,833 4.14 4.14 Companies 1,776,437 1.39 1.39 Public entitites 21,851 0.02 0.02 Financial and insurance institutions 7,630 0.01 0.01 Non-profit organizations 97,790 0.08 0.08

* includes nominee-registered shareholders.

Major Shareholders, December 31, 2009 A Shares K Shares ownership, % % of votes 1. Piippo, Antti Olavi 1,633,549 54,110,000 21.61 43.50 2. Vanhanen, Jorma Kalevi 647,344 25,830,000 9.91 20.66 3. Sjöman, Henry Edvard 632,344 25,830,000 9.86 20.65 4. Honkala, Kari Untamo 208,600 0.64 0.16 5. Patojoki, Mikko Atte Juhani 200,000 0.61 0.16 6. Inkinen, Seija Irene 194,444 0.60 0.15 7. Juntunen, Jarmo Jaakko Johannes 153,547 0.47 0.12 8. Etola, Erkki 150,000 0.46 0.12 9. Waltari, Tuomo Johannes 120,200 0.37 0.09 10. Inkinen, Antti 115,000 0.35 0.09 Total 4,055,028 105,770,000 44.88 85.7

A monthly updated list of Elcoteq’s 100 largest shareholders is available on the company’s website at www.elcoteq.com.

At December 31, 2009, Mr. Jouni Hartikainen, Elcoteq’s Free float President and CEO, held 62,132 Elcoteq Series A shares, which At December 31, 2009, Elcoteq’s free float (the number of represent 0.05 percent of the registered shares and 0.05 Series A shares not held by its three principal owners) totaled percent of the votes outstanding. 19,448,948 shares, or 86.97 percent of all Series A shares and The share and option holdings of Elcoteq’s Board of Direc- 59.05 percent of the total share capital. Nominee-registered tors and Elcoteq Management Team are presented on pages and foreign-registered shares accounted for 27.29 percent of 88 and 91. A listing of Elcoteq insiders’ share and option hold- the free float. ings is available on the company’s website at www.elcoteq. com> Investors. Dividend policy The principle underlying Elcoteq’s dividend policy is to Shareholders distribute a dividend corresponding to approximately half Elcoteq had 10,213 registered shareholders at the end of of its net profit for the year, taking into account the Group’s 2009. There were a total of 5,307,833 nominee-registered or profitability, financial structure and growth prospects. In foreign-registered Series A shares, representing some 4.14 2009, no dividend was distributed. percent of the total number of shares and 4.14 percent of the votes outstanding.

Elcoteq SE 71 Performance and Trading of the Series A Shares Market capitalization 2009 2008 2005–2009, MEUR Highest price, EUR 1.88 7.36 Lowest price, EUR 0.80 1.02 623 Average price, EUR 1.07 3.87 Closing price, EUR 0.91 1.21 Trading volume, MEUR 24.0 56.4 Trading volume, shares 22,927,785 13,975,766 308

134 40 30 Market Capitalization, MEUR 2005 2006 2007 2008 2009 2009 2008 Series A Shares 20.0 26.7 Series K Shares 9.6 12.8 Total 29.7 39.5

The market capitalization is calculated by multiplying all Elcoteq’s A shares and one tenth of the total number of K founders’ shares by the closing quotation of the year.

Trading Price and Trading Volumes of Elcoteq’s A Share in 2005–2009 shares EUR

15,000 15

10,000 10

5,000 5

0 0 2005 2006 2007 2008 2009

Monthly trading volume of Elcoteq’s A Shares, 1, 000 shares Closing price of Elcoteq’s A Shares, EUR oMX Helsinki Index oMX Helsinki Information Technology Index

72 financial statements 2009 34. Risk Management The risk assessments and their updates are usually carried out by the management teams of Elcoteq’s units. Risk management is based on the risk management policy The objective of the work is to identify the risks as broadly endorsed by Elcoteq’s Board of Directors and comprises an as possible in the various areas of the Group’s business integral part of the planning and implementation of the operations. In the case of each identified risk, the units assess Group’s strategy. Elcoteq seeks to manage risks in a compre- the probability of the identified risk materializing and its hensive and forward-looking manner and to limit any nega- impact on the unit’s activities. They draft plans for the major tive effects should these risks materialize. risks in order to ensure continuity should these risks materialize. Risks are prioritized to enable the units to focus on Targets of Risk Management those issues that need the most attention from a business Elcoteq defines a risk as an external or internal uncertainty standpoint. factor that could hinder the implementation of the Group’s The Group’s risk management function has an internal strategy, its business activities and the achievement of its audit system to measure and monitor the level of risk goals. A risk can also be considered to be a factor that endan- management in its various units. In 2009, internal audits gers the Group’s property or employees. Risks are classified as were executed in the plants in Beijing, Juarez and Monterrey. strategic, operational, casualty, and financial risks. An internal audit of the Group’s risk management initi- The purpose of risk management is to support the Group’s ated in 2008 was finished in January 2009. strategy and goals, and to ensure the continuity of its busi- In 2009, an insurance company assessed risks at the ness operations. The main tasks of risk management are to Chinese, Hungarian and Mexican plants. The insurance identify the most significant risks to Elcoteq’s business activi- company will carry out further risk assessments at Elcoteq ties, to assess the likelihood and importance of these risks, to units in 2010. prepare appropriate action plans to limit risks, and to report on the level of risk management, the measures it requires Strategic and Operational Risks and its development projects. Elcoteq’s key strategic and operational risks are listed below. The risks and measures taken to prepare for them are Risk Management Principles described using examples. Elcoteq’s risk management policy requires risk management Customer Dependency: loss of a significant customer or a to be an integral part of the business processes of all Elcoteq sudden decrease in business volumes by one or several signif- units and all levels of the organization. Risk management icant customers could substantially reduce net sales and responsibilities coincide with normal business responsibili- weaken the Group’s profits and financial position. Expanding ties. Under this risk management policy, Elcoteq’s business and balancing the customer base comprises a key element units regularly identify and assess the risks associated with of Elcoteq’s strategy. Actions taken to achieve this include their own activities, draw up appropriate development and combining new sales and business development under a action plans, and provide reports on them in accordance with global, dedicated function, concentrating sales efforts on Elcoteq’s organizational structure. obtaining new customers, and acquisitions. The purpose of Elcoteq’s risk management function is New Services and Business Models: failure to develop the to support and evaluate the risk management work of the new services or business models required to meet demand, Group’s different units, and to report key risks to the Group’s or failure to offer these profitably, could hamper implemen- top management. The risk management function is also tation of the strategy and weaken profits. responsible for insurance coverage and the coordination Having identified its customers’ needs, Elcoteq has set of insurance policies. Elcoteq’s risk management function expansion of its service offering as one of its main strategic reports to the CFO. themes. Examples of this have been the offering of various Elcoteq has also prepared separate risk management tailored after market, fulfillment and engineering services. guidelines for certain areas that supplement its overall risk Competitive Situation: the Group’s business operations management policies. These areas include treasury opera- and its profits could suffer if the Group were unable to tions, insurance, corporate security, and environmental counter the challenges posed by intensifying competition or management. respond successfully to changes in the competitive environ- The Audit Committee of the Board of Directors oversees ment or in demand. Examples of such changes are the entry the quality, adequacy and effectiveness of risk management, of new competitors, and changes in legislation or customers’ and reports to the Board on risk management. strategies. Elcoteq is preparing for this risk by emphasizing opera- Risk Assessment tional excellence. This will help the Group in safeguarding its Elcoteq’s manufacturing plants, strategic business units and competitiveness and flexibility in all areas of its operations. Group functions assess the risks in their areas twice a year Operational excellence is supported by a scorecard system, following the guidelines provided by the risk management in which targets are set for financial, customer, process and function. Previously made risk assessments are reviewed personnel development at all organization levels. and revised. Development plans focus in particular on the Materials Management: material costs are the largest risks that have the greatest bearing on the strategy and its items in the Group’s cost structure, and therefore efficient implementation. order and supply chain management is vitally important for the profitability of the Group’s business operations.

Elcoteq SE 73 Elcoteq manages the risks associated with materials Financial Risks using sophisticated information systems, uniform processes, The objectives of Elcoteq’s treasury function are to ensure the purchasing approval rights, supplier and supply chain availability of a broad range of sufficient and cost-effective management (including inventories), and also through agree- funding alternatives under various market conditions, to help ment structures with component suppliers and customers. the Group’s business units identify and manage the credit Effective management of working capital is vital for the and foreign exchange risks related to the Group’s business, Group’s cash flow. and to hedge against significant financial exposures in line Retaining Key Employees: the Group’s business capabili- with Elcoteq’s treasury policy. Financial market operations ties could be considerably jeopardized if the company is not and loan arrangements are mainly handled centrally through able to recruit, develop and retain competent employees. the Group’s Treasury function. The funding needs of Group Elcoteq has various job rotation, incentive and commit- companies are generally met through internal loan limits ment schemes, with which it wants to improve the motiva- that are decided by the parent company’s Board of Directors. tion of its employees and safeguard the Group’s position as a competitive employer. Foreign Exchange Risks Credit Risks: credit loss resulting from accounts receivable A significant portion of the Group’s current assets and or the materials for which the customer is responsible could liabilities are denominated in currencies other than the euro. significantly weaken the Group’s profits. Therefore foreign exchange fluctuations can have a major The Group seeks to limit credit risks associated with its impact on Elcoteq’s financial performance.T his transaction commercial activities through short payment terms as well risk is hedged through product pricing that incorporates as collaterals that protect Elcoteq’s position, should the cred- exchange rates and through derivative contracts that cover itworthiness of a customer make this necessary. Credit limits the Group’s net foreign exchange exposure. are decided either by Elcoteq’s Management Team or the Transaction risk mainly relates to the US dollar (USD). credit committee that reports to it, in accordance with the During 2009 the foreign exchange position of the Group credit policy and sales process. especially related to USD changed essentially and foreign Conducting Business in Emerging Markets: legisla- exchange risk was directed mainly to sales instead of tive, political or financial developments in the economies purchases compared to previous years. In addition to compo- of emerging markets could have a negative impact on the nent and manufacturing costs, Elcoteq’s pricing model also Group’s assets and Elcoteq establishes operations in devel- considers the foreign exchange rates prevailing at the time oping countries only after careful consideration and continu- of pricing, which forms the basis for hedges in line with fore- ously monitors economic and political developments in these casted production volumes. Prices are usually agreed for the countries. upcoming three months and therefore no long-term items Acquisitions and Divestments: unsuccessful valuation of are included in the Group’s transaction exposure. Approxi- an acquisition, or unsuccessful integration of an acquired mately 85–95% of Elcoteq’s foreign exchange position related company into Elcoteq, could result in financial losses or to purchases and sales, which is based on volume forecasts, is hinder implementation of the Group’s strategy. hedged at the time prices are agreed, using forward contracts Elcoteq reduces the potential risk associated with acquisi- or currency options with a maximum term of six months. tions by performing a thorough due diligence analysis before The level of hedges is monitored and updated throughout the acquisition takes place, using the services of outside the pricing period. However, inaccuracy in forecasting the experts when needed. One of the risks involved in acquisi- currency position hinders the hedging activity. Transaction tions is the successful integration of the acquired functions risk arises also from the personnel expenses in Hungary. The into the Group’s business operations. The Group seeks to hedging ratio related to personnel expenses in Hungary reduce this risk with integration working groups set for each is about 50% at the time of original hedging. The ratio is project. gradually raised as the actual transaction date approaches. Foreign exchange regulations may hinder hedging activities Casualty Risks in certain countries. Furthermore, the banks have limited In anticipation of possible unforeseen casualty risks, Elcoteq Elcoteq’s possibility to execute efficient hedging activities has continuous global insurance programs covering aspects due to financial situation of the Group. of its operations including personnel, property, business interruption, third-party liability, criminal action and transportation. Elcoteq has prepared risk management and security guidelines in order to prevent and minimize casualty risks. In addition, Elcoteq also provides annual risk management training to personnel. The adequacy of the Group’s insurance cover is reviewed and maintained continuously in line with changing needs.

74 financial statements 2009 Foreign Exchange Exposure, Transaction Risk Dec. 31, 2009 Dec. 31, 2008 Net flow in Forecasted Net flow in Forecasted EUR million balance sheet net flow Hedging Total net risk balance sheet net flow Hedging Total net risk USD 28.3 –23.0 –7.2 –1.9 –49.3 –68.1 96.7 –20.7 EUR –1.2 0.0 0.2 –1.0 –3.8 5.4 –5.3 –3.7 JPY –0.3 0.0 1.2 0.8 –16.4 –2.0 10.5 –8.0 HUF –2.2 –18.7 10.2 –10.7 –1.0 –86.6 35.5 –52.0 Other 1.0 0.0 0.0 1.0 –5.3 0.6 3.7 –1.0

Net foreign exchange risks have been taken into account in the Group level figures in the table presented here when the currency used is not the entity’s functional currency. Transaction risk includes also the estimated amounts of hedged personnel expenses and related hedges.

Sensitivity Analysis, Transaction Risk Effect Weakening of the currency, 10% Strengthening of the currency, 10% EUR million Dec. 31, 2009 Dec. 31, 2008 Dec. 31, 2009 Dec. 31, 2008 Other Statement of Other Statement of Other Statement of Other Statement of comprehensive comprehensive comprehensive comprehensive comprehensive comprehensive comprehensive comprehensive income income income income income income income income USD –1.4 –1.9 –2.8 2.3 1.7 2.3 3.4 –2.8 EUR – 0.1 – 0.8 – –0.1 – –1.0 JPY – –0.1 –0.0 0.7 – 0.1 0.0 –0.9 HUF 0.7 0.0 –0.0 0.1 –0.8 –0.0 0.0 –0.1 Other – –0.1 –0.0 0.2 – 0.1 0.1 –0.1

The effect has been calculated from the net risk of each currency without forecasted net flow.

The foreign exchange risk associated with Group compa- On December 31, 2009 the Group’s interest-bearing net nies’ equity-linked net investments denominated in curren- debt totaled 187.5 (238.5) million euros. The Group’s cash cies other than the euro, i.e. the translation risk, arises from reserves totaled 87.9 (95.1) million euros and interest-bearing fluctuations in the calculated euro values of these amounts. debt 275.4 (333.6) million euros. Of the interest-bearing debt, The translation risk at the end of 2009 related mainly to the the nominal value of subordinated notes amounted to 140 Chinese yuan (CNY), Indian rupee (INR) and Russian ruble (140) million euros at the end of 2009. (RUB). These risks were not hedged at the balance sheet date. The Group’s main financing source is the syndicated credit Approximately 80% of the Group’s ownership holdings in facility totaling 100 million euros maturing April 30, 2010. these companies are targeted to be hedged but due to finan- The facility was in full use at year end. The Group has signed cial situation of the Group the hedging target could not be on March 30, 2010 a term sheet with the same bank syndi- met. The calculated +/–10% effect of fluctuation on currency cate about a new facility wich matures at the end of June rates would have positive effect of 4.5 million euros (6.7) or 2011. The Group’s Securitization program was terminated at negative effect of 3.6 million euros (5.5) to Other comprehen- the end of year 2009, but the Group has ongoing projects to sive income (OCI). set-up new sale of accounts receivable programs. The Group Internal funding of Group companies is primarily handled also has an uncommitted Finnish commercial paper program in their functional currency. The parent company hedges the of 200 million euros. There were no outstanding issues from foreign exchange risk with derivative contracts. The target the program at year end (0.0). for hedging level is about 100%; however, during 2009 the More detailed information on page 64 (Liquidity Risk). Russian ruble was not hedged. The calculated +/–10% effect of fluctuation on currency differences would be a gain of 1.6 Interest Rate Risk million euros (2.8) or a loss of 1.3 million euros (2.3). The Group follows its interest exposure by monitoring in particular the interest payment flow risk.T he strategic idea is Liquidity and Refinancing Risks to balance fixed and floating interest rates portfolios. Liquidity risk is measured through reports based on the On December 31, 2009 the average interest rate of the Group’s cash flow forecasts.T he Group endeavors to safe- loan portfolio was 4.8% (5.0%) with an average interest rate guard its liquidity position under varying market condi- re-fixing time of approximately 4 (10) months. Altogether tions through sufficient cash reserves and credit limit 94.4% (95.9%), or 260.0 (320.2) million euros, of the loan arrangements. portfolio was denominated in euros.

Elcoteq SE 75 No derivative contracts were used to hedge the interest In order to minimize counterparty risks in funding opera- rate risk during the period. Rental payments on the Group’s tions, Elcoteq enters into derivative contracts only with cred- operating leases for production equipment are based like- itworthy banks. Liquid funds are invested in bank certificates wise on long-term market interest rates. Approximately of deposit, but also to commercial papers within the coun- 30 (90) million euros of the Group’s total interest-bearing terparty limits approved by the parent company’s Board of debt, which at December 31, 2009 amounted to 275.4 Directors. (333.6) million euros, has been agreed to carry a long-term fixed coupon.T he remaining 245.4 (243.6) million euros are floating rate current or non-current loans, to which a market interest rate change of one percentage point would have an approximately 2.0 (2.1) million euro positive or negative effect on annual interest expenses.

Credit and Counterparty Risks Primary responsibility for credit risks associated with the Group’s commercial activities lies with the business areas. Customers are given internal credit ratings. The credit committee, which operates under the Group’s Management Team, decides on significant credit limits. In order to minimize credit risk, the Group seeks to obtain adequate collateral, if the need for it is indicated by the creditworthiness of a customer. The maximum amount of the credit risk is the book value of accounts receivable.

Risk Management Risk Area Risk Management Tool Main Responsibility (Support)

Strategic risks, such as Strategy, business plans Group management (strategic business units) • Customer dependency • New services and business models • Acquisitions and divestments • Competition • Market development

Operational risks, such as • Political risks Risk management policy Strategic business units (risk management function) • Product liability and R&D risks Risk management policy Strategic Business units (legal affairs) • Technology risks Risk management policy Group operations • Personnel risks HR policy HR function (strategic business units) • Environmental risks EHS policy, environmental management systems CR function (Group operations) • Materials management Sourcing policy Group sourcing • Credit risks Treasury policy Strategic business units (treasury function)

Casualty risks, such as Risk management policy and guidelines, Risk Management function insurance policies • Data security risks Security and data security policy Information management (security function) • Product liability and security Risk management policy Strategic business units (risk management function) • Occupational health and safety EHS policy, occupational health and safety CR function (Group operations) guidelines • Property damage risks Risk management policy Risk management function (Group operations)

Financial risks, such as Treasury policy Treasury function (strategic business units) • Foreign exchange risks • Credit risks • Liquidity risks

76 financial statements 2009 35. events after the end of the On January 27, 2010, Elcoteq issued EUR 29 million in financial period hybrid securities in a private placement as a part of its previously announced balance sheet restructuring. The proceeds In December 2009, Elcoteq decided to convene an Extraor- from the hybrid securities issue were used directly to repay dinary General Meeting (EGM) of shareholders to decide on Elcoteq’s outstanding debenture bonds with a nominal actions supporting the execution of balance sheet restruc- amount of 105 million euros. As a result of this transaction, turing and the equity investment project. The first EGM took the company estimates that it will recognize a one-time gain place on January 22, 2010, in Luxembourg. Since the quorum of approximately EUR 75 million in the first quarter of 2010. requirement (at least half of the series A shares and half of The announced restructuring will significantly improve the the series K shares need to be present or represented in the company’s indebtedness and solidity. If this transaction had meeting) was not met at this first meeting, the company taken place on December 31, 2009, the company’s solvency convened a second EGM that was held on February 23, 2010. would have been 23.7%, gearing 0.7 and net debt 82.1 The EGM held on February 23, 2010, rejected the Board’s million euros. proposals to decrease the share capital of the company from On March 30, 2010, Elcoteq and the lenders of its EUR 100 its current amount of EUR 8,944,874 and to decrease the million revolving credit facility agreed on extending the facility current par value of series A shares (EUR 0.40) and series K from April 30, 2010 until June 30, 2011. The parties have shares (EUR 0.04). The Board of Directors made its proposal signed a committed term sheet for the extended facility and to the EGM prior to the recent positive development in the aim at finalizing the loan documentation during April 2010. company’s equity. In light of the stronger balance sheet, the In addition, to enhance possibilities for further balance EGM deemed that the size of the proposed authorization to sheet strengthening, the three founder shareholders of increase the share capital up to EUR 200,000,000 was too high the company, Mr. Antti Piippo, Mr. Henry Sjöman and Mr. and it is not necessary to decrease the par value of shares. Jorma Vanhanen, have informed the Board of Directors that The EGM decided to increase the authorized share they will exercise their right to convert all of their series K capital of the company from its current amount of twenty founders´ shares to series A shares after which the company million euros (EUR 20,000,000) up to forty million euros will have only one series of shares, A shares. (EUR 40,000,000). The EGM authorized the Board of Direc- At the same time Mr. Antti Piippo and Mr. Henry Sjöman, tors to issue new shares and convertible debt instruments the founder shareholders and board members of Elcoteq within the authorized share capital of the company without as well as Mr. Juha Toivola, an independent board member reserving preferential subscription rights for the existing of Elcoteq have announced that they will not be available shareholders, up to an amount of twelve million euros (EUR for re-election as Board Members. Mr. Jorma Vanhanen, the 12,000,000) of the authorized share capital, corresponding to third founder shareholder, and all other independent board a maximum of 30,000,000 new series A shares. The EGM also members (Mr. Martti Ahtisaari, Mr. Heikki Horstia, Mr. Eero authorized the Board of Directors to issue new shares and Kasanen and Mr. François Pauly) have announced their avail- convertible debt instruments within the remainder of the ability for re-election to the Board. In addition, the Board will authorized share capital of nineteen million fifty-five thou- be strengthened by two independent board members to be sand one hundred and twenty-six euros (EUR 19,055,126), proposed to the Annual General Meeting. respecting the existing shareholders’ preferential subscrip- The Company continues to explore further ways to tion rights. A maximum of approximately 47,000,000 new strengthen its balance sheet through equity and long-term series A shares can be issued under this authorization. financing arrangements. Furthermore, the Company will The EGM deleted from the company’s Articles of Associa- arrange a rights issue during 2010. The three founder share- tion the right of a shareholder to request a redemption of holders have undertaken to support such balance sheet shares in case a change or changes in the ownership of the strengthening arrangements in shareholders’ meetings. company result in a shareholder holding more than thirty- three and one third (33 1/3) percent or, as the case may be, fifty (50) percent of the shares in the company. Finally, the EGM changed the date of the Annual General Meeting of the shareholders from 23 March to 28 April each year. The company’s Articles of Association were reworded in order to reflect these changes voted upon at the EGM of the shareholders of the company.

Elcoteq SE 77 Formulas for the Calculation of Key Figures

Net income × 100 Return on equity (ROE) = Total equity, average of opening and closing balances

(Income before taxes + interest and other financial expenses + income from discontinued operations before taxes and financial expenses) × 100 Return on investments (ROI/ROCE) = Total assets – non-interest bearing liabilities, average of opening and closing balances

(Income before taxes + interest and other financial expenses + income from discontinued operations before taxes and financial expenses) × 100 Return on investment (ROI/ROCE) for trailing 12 months = Total assets – non-interest-bearing liabilities, average of opening and closing balances

Current assets + assets classified as held for sale Current ratio = Current liabilities + liabilities classified as held for sale

Total equity × 100 Solvency = Total assets – advance payments received

Interest-bearing liabilities – cash and equivalents Gearing = Total equity

Equity attributable to equity holders of the parent company Equity per share (2005–2007) = Adjusted average number of shares outstanding end of the period

Equity attributable to equity holders of the parent company Equity per share = Adjusted average number of A shares outstanding end of the period + (Adjusted average number of K founders’ shares outstanding end of the period/10)

Net income attributable to equity holders of the parent, A shares Earnings per share, A shares (EPS) = Adjusted average number of A shares outstanding during the period

Net income attributable to equity holders of the parent, A shares Earnings per share, diluted, A shares (EPS = Adjusted average number of A shares outstanding during the period + effect of dilution on the number of shares

Net income attributable to equity holders of the parent, K shares Earnings per share, K shares (EPS) = (2005–2007) Adjusted average number of K shares outstanding during the period

Net income attributable to equity holders of the parent, K founders’ shares Earnings per share, K founders’ shares (EPS) = Adjusted average number of K founders’ shares outstanding during the period

Dividends paid for the fiscal year Dividend per share = Adjusted number of shares outstanding at the end of the period

Dividend per share × 100 Payout ratio = Earnings per share

Dividend per share × 100 Dividend yield = Average share price at the end of the period

Average share price at the end of the period P/E-ratio = Earnings per share

Operating income before depreciation and amortization (EBITDA) = Operating income/loss + Depreciation and impairments

78 financial statements 2009 Five years in figures

2009 2008 2007 2006 2005 OPERATIONS Net sales MEUR 1,503.2 3,443.2 4,042.9 4,284.3 4,169.0 of which outside Finland % 97.9 95.2 93.9 89.7 81.4 Gross capital expenditures (does not include operating leases) MEUR 6.4 71.4 67.2 116.9 123.6 Employees, average 11,271 17,401 19,131 16,651 15,242

PROFITABILITY Operating income before depreciation and amortization (EBITDA) MEUR –16.4 58.5 –16.6 126.6 155.0 Operating income MEUR –76.5 –20.4 –96.3 43.9 76.5 % of net sales % –5.1 –0.6 –2.4 1.0 1.8 Income before taxes MEUR –117.1 –52.9 –122.8 19.2 59.3 % of net sales % –7.8 –1.5 –3.0 0.4 1.4 Net income MEUR –105.0 –65.9 –108.4 12.1 41.3 % of net sales % –7.0 –1.9 –2.7 0.3 1.0 Return on equity (ROE) % –129.9 –38.4 –42.5 4.8 14.1 Return on investment (ROCE/ROI) % –18.9 –3.1 –19.6 9.1 17.6

FINANCIAL RATIOS Current ratio 1.0 1.1 1.1 1.2 1.2 Solvency % 6.3 14.2 18.1 26.1 26.0 Gearing 5.8 1.8 0.7 0.4 0.3 Interest-bearing liabilities MEUR 275.4 333.6 237.2 210.3 191.7 Interest-bearing net debt MEUR 187.5 238.5 144.5 128.0 90.3

PER SHARE DATA Earnings per share A shares (EPS) EUR –3.22 –2.02 –3.37 0.38 1.34 Earnings per share K shares (EPS) EUR – – –3.37 0.38 1.34 Earnings per share K founders’ shares (EPS)** EUR –0.32 –0.20 – – – Diluted earnings per share, A shares (EPS) EUR – – –3.37 0.37 1.28 Shareholders’ equity per share EUR 0.75 3.76 5.72 9.31 9.55 Share price at the end of the year EUR 0.91 1.21 4.06 9.78 20.15 Dividend per share * EUR 0.00 0.00 0.00 0.20 0.66 Payout ratio * % 0.0 0.0 0.0 52.3 49.7 Dividend yield * % 0.0 0.0 0.0 2.0 3.3 P/E ratio –0.3 –0.6 –1.2 25.7 15.0

Adjusted weighted average number of shares in issue during the period A shares 22,071,983 22,017,819 21,601,081 20,761,611 20,187,705 K founders’ shares** 105,770,000 105,770,000 10,577,000 10,577,000 10,577,000

Adjusted number of shares in issue at the end of the period A shares 22,352,684 22,017,819 22,017,819 20,962,327 20,526,577 K founders’ shares 105,770,000 105,770,000 10,577,000 10,577,000 10,577,000

* The dividend in 2009 is the proposal of the Board of Directors to the Annual General Meeting. ** In the transfer of domicile the company K shares were converted into K founders’ shares and their number increased ten-fold while at the same time reducing their par value to one-tenth of the par value of the A shares.

Financial ratios for 2009 assuming that the January 27, 2010 transactions (repayment of the debenture loans and receipt of the hybrid loans) had taken place on Dec. 31, 2009 2009 *** The December 31, 2009 balance sheet is adjusted by using the following assumptions: Solvency*** % 23.7 – In January 2010 Debenture loans were repurchased with balance sheet Gearing*** 0.7 values of 105.3 million euros. The after tax income is included in equity. Interest-bearing liabilities*** MEUR 170.1 – the Hybrid securities of EUR 28,7 million, issued in January 2010, is included in equity. Interest-bearing net debt*** MEUR 82.1

Elcoteq SE 79 Board’s Proposal to the Annual General Meeting

The Board will propose to the Annual General Meeting that the parent company will not distribute dividend on the financial year.

Espoo, March 30, 2010

Antti Piippo Martti Ahtisaari Heikki Horstia Eero Kasanen Chairman of the Board

François Pauly Henry Sjöman Juha Toivola Jorma Vanhanen

Jouni Hartikainen President and CEO

80 financial statements 2009 Auditors’ Reports To the shareholders of Elcoteq SE

Report on the consolidated Opinion financial statements In our opinion, the consolidated financial statements give a Following our appointment by the General Meeting of the true and fair view of the consolidated financial position of Shareholders dated March 23, 2009, we have audited the Elcoteq SE as of December 31, 2009, and of its consolidated consolidated financial statements of Elcoteq SE, which financial performance and its consolidated cash flows for the comprise the consolidated balance sheet as at December year then ended in accordance with International Financial 31, 2009 and the consolidated statements of comprehensive Reporting Standards as adopted by the European Union. income, changes in equity and cash flows for the year then ended, and a summary of significant accounting policies and Report on other legal and regulatory requirements other explanatory notes. The consolidated management report, which is the responsibility of the Board of Directors, is consistent with the consoli- Board of Directors’ responsibility for the dated financial statements. consolidated financial statements The Board of Directors is responsible for the preparation Luxembourg, March 31, 2010 and fair presentation of these consolidated financial statements in accordance with International Financial Reporting KPMG Audit S.à r.l. Standards as adopted by the European Union. This respon- Réviseurs d’Entreprises sibility includes: designing, implementing and maintaining Philippe Meyer internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances.

Responsibility of the Réviseur d’Entreprises Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with International Stan- dards on Auditing as adopted by the Institut des Réviseurs d’Entreprises. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements.T he procedures selected depend on the judgement of the Réviseur d’Entreprises, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the Révi- seur d’Entreprises considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appro- priateness of accounting policies used and the reasonable- ness of accounting estimates made by the Board of Directors, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Elcoteq SE 81 Quarterly figures (unaudited)

INCOME STATEMENT, MEUR Q4/2009 Q3/2009 Q2/2009 Q1/2009 Q4/2008 Q3/2008 Q2/2008 Q1/2008 NET SALES 265.5 331.7 436.0 470.0 889.1 740.5 904.8 908.7 Change in work in progress and finished goods –9.9 –8.2 –4.4 –21.9 –23.9 –4.4 –10.1 2.9 Other operating income 4.2 5.5 1.4 2.3 2.2 4.4 3.1 1.6

Operating expenses –250.2 –317.2 –428.0 –456.1 –842.6 –719.7 –878.9 –905.6 Restructuring expenses –21.3 –1.7 –0.4 –13.6 –13.5 – – –

Depreciation and impairments –11.7 –13.5 –16.0 –18.9 –23.2 –20.5 –18.2 –17.1

OPERATING INCOME –23.4 –3.3 –11.5 –38.3 –11.8 0.3 0.6 –9.5 % of net sales –8.8 –1.0 –2.6 –8.2 –1.3 0.0 0.1 –1.0

Financial income and expenses –12.9 –4.1 –11.9 –11.5 –13.3 –7.0 –6.1 –6.0 Share of profits and losses of associates 0.0 –0.1 0.0 0.0 0.0 –0.1 – –

INCOME BEFORE TAXES –36.4 –7.5 –23.4 –49.9 –25.2 –6.8 –5.5 –15.4

Income taxes 2.2 0.7 1.5 3.7 –4.0 –4.0 –7.3 4.2 NET INCOME FOR THE PERIOD –34.2 –6.8 –21.8 –46.1 –29.2 –10.7 –12.8 –11.3

ATTRIBUTABLE TO: Equity holders of the parent company –31.3 –6.3 –21.8 –45.6 –29.1 –11.5 –13.7 –11.6 Minority interests –2.9 –0.5 0.0 –0.5 –0.1 0.8 0.9 0.3 –34.2 –6.8 –21.8 –46.1 –29.2 –10.7 –12.8 –11.3

BALANCE SHEET, MEUR Q4/2009 Q3/2009 Q2/2009 Q1/2009 Q4/2008 Q3/2008 Q2/2008 Q1/2008 ASSETS Non-current assets Intangible assets 25.4 25.9 26.6 27.4 27.6 28.4 28.5 29.5 Tangible assets 81.0 110.3 129.8 149.7 167.8 190.0 184.0 182.0 Investments 0.7 2.1 2.2 2.3 2.2 2.2 2.1 2.1 Long-term receivables 41.9 46.8 45.8 53.0 46.4 49.2 48.5 47.3 Non-current assets, total 148.9 185.1 204.3 232.4 244.0 269.8 263.2 260.9 Current assets Inventories 69.4 101.1 113.7 174.2 256.2 358.2 322.5 321.7 Current receivables 189.9 193.4 221.4 221.9 336.3 326.4 320.0 271.7 Cash and equivalents 87.9 201.0 154.8 98.0 95.1 59.5 50.5 91.9 Current assets, total 347.3 495.5 489.8 494.1 687.5 744.0 692.9 685.3 Assets classified as held for sale 19.0 21.0 41.0 20.7 23.9 28.7 30.5 30.2 ASSETS, TOTAL 515.3 701.6 735.1 747.1 955.4 1,042.6 986.6 976.4

SHAREHOLDERS’ EQUITY AND LIABILITIES Equity attributable to equity holders of the parent company Share capital 13.2 13.0 13.0 13.0 13.0 13.0 13.0 13.0 Other shareholders’ equity 11.6 43.5 48.7 64.5 109.4 139.7 152.4 162.8 Equity attributable to equity holders of the parent company, total 24.8 56.6 61.8 77.5 122.5 152.8 165.4 175.9 Minority interests 7.8 11.1 12.0 12.8 12.7 13.4 12.5 11.3 Total equity 32.6 67.7 73.7 90.3 135.2 166.2 177.9 187.2 Long-term liabilities Long-term loans 109.8 110.1 159.6 158.9 159.3 159.4 159.3 159.4 Other long-term debt 2.8 2.8 5.7 6.7 5.6 5.5 5.2 5.0 Long-term liabilities, total 112.5 113.0 165.2 165.6 165.0 164.9 164.5 164.4 Current liabilities Current loans 165.4 263.8 210.7 225.4 173.9 187.2 111.2 75.7 Other current liabilities 200.0 250.2 279.0 257.4 473.9 519.9 526.8 544.7 Provisions 4.7 6.9 5.7 8.4 7.5 4.4 4.8 3.7 Current liabilities, total 370.1 520.9 495.4 491.2 655.3 711.5 642.8 624.1 Liabilities classified as held for sale 0.0 0.0 0.8 – – – 1.4 0.7

SHAREHOLDERS’ EQUITY AND LIABILITIES, TOTAL 515.3 701.6 735.1 747.1 955.4 1,042.6 986.6 976.4

82 financial statements 2009 Q4/2009 Q3/2009 Q2/2009 Q1/2009 Q4/2008 Q3/2008 Q2/2008 Q1/2008 Personnel on average during the period 8,882 9,877 11,693 14,446 17,050 17,304 17,543 17,894 Gross capital expenditures, MEUR 1.8 1.1 1.5 2.0 9.9 17.2 16.6 27.7 ROI/ROCE from 12 preceding months, % –18.9 –14.4 –14.4 –11.3 –3.1 –5.6 –6.2 –10.7 Earnings per share (EPS), A-shares, EUR –0.96 –0.19 –0.67 –1.40 –0.89 –0.35 –0.42 –0.35 Solvency, % 6.3 9.7 10.0 12.1 14.2 15.9 18.0 19.2

CONSOLIDATED CASH FLOW STATEMENT, MEUR Q4/2009 Q3/2009 Q2/2009 Q1/2009 Q4/2008 Q3/2008 Q2/2008 Q1/2008 Cash flow before change in working capital 20.5 7.0 –6.4 –7.1 21.5 32.8 16.2 1.3 Change in working capital –25.8 34.1 81.1 –38.8 46.6 –65.2 –66.3 24.7 Financial items and taxes –9.5 –5.0 –3.9 –5.8 –13.0 –7.6 –5.6 –7.5 Cash flow from operating activities –14.8 36.1 70.7 –51.7 55.2 –39.9 –55.8 18.4

Purchases of non-current assets –0.8 –1.1 –0.4 –2.1 –4.4 –12.8 –24.6 –20.0 Acquisitions 0.3 – – – –8.4 –15.5 – – Disposals of non-current assets 3.9 7.8 1.8 3.1 4.1 1.5 1.8 0.5

Cash flow before financing activities –11.3 42.7 72.2 –50.7 46.6 –66.7 –78.5 –1.1

Change in current debt –100.5 5.2 –12.2 51.4 8.9 72.2 36.3 2.4

Repayment of long-term debt – – – – –20.2 – –0.2 – Dividends paid –2.4 – – – –1.0 –1.0 – – Cash flow from financing activities –103.0 5.2 –12.2 51.4 –12.3 71.1 36.1 2.4

Change in cash and equivalents –114.3 48.0 59.9 0.7 34.2 4.4 –42.4 1.3

Cash and equivalents at the beginning of the period 201.0 154.8 98.0 95.1 59.5 50.5 91.9 92.7 Cash and cash equivalents classified as held for sale – – – – – – 0.2 –0.2 Effect of exchange rate changes on cash held 1.1 –1.7 –3.1 2.2 1.4 4.6 0.9 –1.9

Cash and equivalents at the end of period 87.9 201.0 154.8 98.0 95.1 59.5 50.5 91.9

STRATEGIC BUSINESS UNITS, MEUR Q4/2009 Q3/2009 Q2/2009 Q1/2009 Q4/2008 Q3/2008 Q2/2008 Q1/2008 Net sales Consumer Electronics 211.1 243.5 328.1 344.6 684.0 564.2 721.5 769.8 System Solutions 54.5 88.2 107.9 125.3 205.2 176.3 183.3 139.0 Net sales, total 265.5 331.7 436.0 470.0 889.1 740.5 904.8 908.7

Operating income Consumer Electronics –11.2 –2.3 –4.6 –20.1 2.7 1.0 6.5 4.8 System Solutions –0.1 6.9 1.5 –10.3 –5.1 7.6 3.3 –4.2 Group’s non-allocated expenses/income General & Administrative expenses –12.1 –7.6 –8.2 –7.2 –9.5 –8.3 –9.2 –10.1 Other expenses 0.0 –0.3 –0.1 –0.7 0.2 –0.1 – – Operating income, total –23.4 –3.3 –11.5 –38.3 –11.8 0.3 0.6 –9.5

Restructuring expenses recognized in segment’s operating income Consumer Electronics –15.6 –1.5 0.0 –7.2 –8.1 – – – System Solutions –5.7 0.0 –0.4 –5.8 –5.4 – – – Group’s non-allocated expenses/income 0.0 –0.2 0.0 –0.6 – – – – Restructuring expenses, total –21.3 –1.7 –0.4 –13.6 –13.5 – – –

Financial income and expenses –12.9 –4.1 –11.9 –11.5 –13.3 –7.0 –6.1 –6.0 Share of profits and losses of associates 0.0 –0.1 0.0 0.0 0.0 –0.1 – – Income before taxes –36.4 –7.5 –23.4 –49.9 –25.2 –6.8 –5.5 –15.4

Elcoteq SE 83 CORPORATE GOVERNANCE five fiveRules of Procedure CORPORATE GOVER NANCE ÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÛ Elcoteq SE is a European Company that is domiciled in Luxembourg. Elcoteq applies primarily the laws of Luxembourg, the company’s Articles of Association and the rules of procedure of the company’s Board of Directors and its committees in its corporate governance and management.

lcoteq’s Series A shares are quoted on the Nasdaq OMX The task of the Group’s management is to manage the Helsinki. Therefore Elcoteq complies, in addition to the Group in accordance with the strategy endorsed by the Board Elaws of Luxembourg, with the Finnish Corporate Gover- of Directors. Its main responsibilities include developing and nance Code 2008 as well as the insider guidelines and the executing the company’s strategy, monitoring and ensuring stock exchange rules of the Nasdaq OMX Helsinki and appli- the company’s financial performance, steering and super- cable Finnish securities market legislation, standards and vising the company’s operations, developing and maintaining recommendations. the company’s internal operating procedures and guidelines and also its reporting and monitoring systems, and ensuring General Meetings that the company’s activities comply with legal regulations. The general meeting of shareholders is the supreme deci- The Management Team meets at least once a month. Its sion-making body at Elcoteq and the forum in which its members report to the President and CEO. shareholders exercise their voting rights. Shareholder meet- In August 2009, Elcoteq announced that it had changed ings consider the matters stipulated by legislation and the its organization by combining two former Business Areas, company’s Articles of Association. The language in the meet- Home Communications and Personal Communications, ings is English. under a new Strategic Business Unit (SBU) named Consumer The Annual General Meeting is held each year on April 28 Electronics. Communications Networks continued as an inde- in the city of Luxembourg at the time and in the venue speci- pendent SBU, but the name changed to System Solutions. fied by the Board of Directors in the invitation to the Meeting. Both SBUs are responsible for managing and developing their If the said date falls on a national holiday or bank holiday in existing customer relationships and applicable service offer- Luxembourg or Finland, the Annual General Meeting will be ings, while New Sales and Business Development serves both held on the second following day. SBUs. Group Operations is responsible for sourcing, supply chain and production. Group Administration In addition to the general meeting of shareholders, the prin- The Board of Directors cipal responsibility for the company’s administration and Responsibility for the management of the company and the operations lies with the Board of Directors and the President appropriate organization of its operations lies with the Board and CEO. The Board is responsible for the proper organization of Directors, which comprises at least four and at most ten of the company, and the strategy formulated by the Manage- members who are elected by a General Meeting. ment Team is endorsed by the Board of Directors. The Presi- The Board of Directors applies Rules of Procedure, which dent and CEO is responsible for day-to-day operations. He is stipulate for example the following matters: supported in his work by the Management Team. • composition and constitution of the Board of Directors As of April 2010, the Elcoteq Management Team consists • conduct and number of meetings of the President and CEO, the CFO, the Senior Vice President • information on the company to be regularly submitted to of Group Operations, the Senior Vice President of New Sales the Board & Business Development, the Senior Vice President of Human • matters requiring regular consideration at Board meetings, Resources and the Presidents responsible for the two Stra- and tegic Business Units. • assessment of the Board’s performance.

86 annual report and corporate responsibility report 2009 CORPORATE GOVER NANCE

The Board’s Rules of Procedure stipulate that a majority of • decides the appointment and remuneration of the Presi- the Board members must be independent of the company dent and CEO and other top management and at least two of this majority must be independent of the • decides the bonus and remuneration schemes applied to company’s principal shareholders. Five of the eight Board the company’s management and personnel members elected by the Annual General Meeting (AGM) • considers and approves the annual and interim financial in 2009 are independent of the company and its principal statements shareholders. • supervises risk management in the Group and compliance The term of office of the Board members expires at the with its procedures close of the first AGM following their election. After the • supervises compliance with legislation and regulations close of the Annual General Meeting, the new Board elects a and compliance with the company’s corporate governance chairman and a deputy chairman from among its members guidelines and decides on the establishment of its committees and their • decides donations to good causes, and members. • presents proposals to general meetings. According to the Rules of Procedure, the Board of Directors The Board of Directors has eight members during the term assesses its own activities and performance annually and of office ending at the2010 Annual General Meeting. Since develops its activities based on the results of this assessment. the Annual General Meeting in 2009, the Chairman of the The Board convenes regularly and at least six times during Board has been Mr. Antti Piippo and the Deputy Chairman Mr. its term of office in accordance with a prearranged schedule, Juha Toivola. and holds extraordinary meetings at the request of a Board The Board of Directors met 24 times during 2009. The member or the company’s CEO. The Board is convened by attendance of its members at these meetings averaged 88 its chairman. The Board of Directors constitutes a quorum percent. when more than half of its members are present, either in person or represented by another Board member. Decisions The Board’s Committees are made with a simple majority of votes. In the event of a The Board of Directors has four committees: a Working tied vote, the chairman’s vote is decisive. The Board’s meet- Committee, Audit Committee, Compensation Committee ings are also attended by the President and CEO to present and Nomination Committee. The Board can also establish matters, and additionally executives and other persons when other committees for specific purposes. expert advisers are required. The tasks of each committee are stipulated in their own In addition to the matters stipulated in the applicable rules of procedure which are approved by the Board of Direc- legislation and Elcoteq’s Articles of Association, the Board of tors. The committees report on their work to the Board at the Directors also: Board meetings. • decides the Group’s strategy and supervises its implementation Working Committee • evaluates and approves projects related to the company’s The Working Committee prepares matters for the Board development and decides on the establishment or discon- related to the company’s business operations, strategy and tinuation of the Group’s subsidiaries business development. The Working Committee consists of • approves the Group’s business plan and budget and moni- at least three members and a chairman, who convenes the tors their implementation committee. • decides acquisitions and significant investments and During the 2009–2010 period, the Working Committee monitors their implementation was chaired by Mr. Antti Piippo, and the members were Mr. • decides significant Group-level financing arrangements Henry Sjöman, Mr. Juha Toivola and Mr. Jorma Vanhanen. The and the granting of collateral and guarantees Committee met 28 times during 2009. • decides the Group’s administration and organization

Elcoteq SE 87 Audit Committee The Annual General Meeting in 2009 decided to pay an The Audit Committee supervises and prepares for the Board additional monthly fee of 45,000 euros to the full-time matters related to financial reporting, external auditing, the Chairman of the Board and an additional monthly fee of internal audit and risk management. It also supervises and 10,000 euros to the Deputy Chairman of the Board. The sala- enhances these functions in the company. The Committee ries, fees and fringe benefits paid to the Board of Directors consists of at least three independent Board members, who for their Board work in 2009 totaled approximately 1,140,000 must have sufficient financial expertise for the task.T he euros. Committee meets regularly and at least four times during its In addition to the statutory pension cover, additional term of office.T he Committee is in regular contact with the pension arrangements allow some of the Board members to company’s auditors. retire at the age of 60. The members of the company’s Board During the 2009–2010 period the Audit Committee was of Directors do not participate in Elcoteq’s share subscription chaired by Mr. Juha Toivola, and its other members were Mr. plans. Martti Ahtisaari, Mr. Heikki Horstia, Mr. Eero Kasanen and Mr. François Pauly. The Committee met five times during2009 . Board’s Fees Approved by the Annual General Meeting on March 23, 2009 Compensation Committee Chairman 60,000 euros/year + 45,000 euros/month The Compensation Committee prepares for the Board Deputy Chairman 60,000 euros/year + 10,000 euros/month matters related to the remuneration, performance-based Other members 60,000 euros/year compensation, benefits and perquisites policies applied to Board member Henry Sjöman has employment relation- the company’s management and the remuneration policy of ship to Elcoteq Network S.A. and his monthly salary is 18,386 the company. The Committee consists of at least three inde- euros. Board member Jorma Vanhanen has employment rela- pendent Board members. The Committee meets during its tionship to Elcoteq SE, Finnish Branch and his monthly salary term of office as necessary and is convened by its chairman. is 17,500 euros. During the 2009–2010 period the Compensation Committee was chaired by Mr. Juha Toivola, and its other The President and CEO members were Mr. Martti Ahtisaari, Mr. Heikki Horstia, Eero The Board of Directors appoints a President who is respon- Kasanen and Mr. François Pauly. The Committee met six sible for overall management of the company as required by times during 2009. legislation and in accordance with the instructions and stipu- lations of the Board of Directors. Nomination Committee Since January 1, 2004, the President and CEO of the The Nomination Committee prepares matters related to company has been Mr. Jouni Hartikainen, M.Sc. (Eng.). the nomination and remuneration of the Board members, and seeks suitable individuals for nomination to the Board. President and CEO ’s Remuneration The Committee consists of at least three members and is The President and CEO’s monthly salary is 87,356 Swiss francs, convened as necessary by its chairman. i.e. approximately 57,852 euros, and he also receives the usual During the 2009–2010 period the Nomination Committee fringe benefits. In addition to his monthly salary, the Presi- was chaired by Mr. Antti Piippo, and its other members were dent and CEO receives a performance-based bonus in accor- Mr. Henry Sjöman, Mr. Juha Toivola and Mr. Jorma Vanhanen. dance with the incentive scheme in force to a maximum The Committee met three times during 2009. amount of 50% of his basic annual salary. The salary, other short-term benefits and share-based payments paid to the Fees Paid to the Board of Directors President and CEO in 2009 totaled some 834,000 euros. As decided by the Annual General Meeting held in the spring In addition to the statutory pension cover, additional of 2009, the Board members are each paid an annual fee for pension arrangements allow the President and CEO to retire their Board work amounting to 60,000 euros, 60 percent at the age of 60. of which is paid in cash and 40 percent in shares. In 2009, The CEO’s notice period is six months. In the event with respect to the latter payment, the Elcoteq shares were that the CEO’s employment contract is terminated by the acquired between April 30, and May 15, 2009 within the company without proper cause, the CEO will be paid sever- limits set by the rules governing insider trading. The acquired ance compensation equivalent to 12 months’ monetary salary. shares may not be surrendered before the following Annual General Meeting unless the individual’s membership of the Board ends earlier.

88 annual report and corporate responsibility report 2009 Management Remuneration The company also has a fairly similar share subscription and Incentive Schemes plan from 2009, where the potential reward is based on The Board of Directors decides on the fees and remuneration reaching the targets regarding consolidated income before schemes applicable to the members of the Management taxes for the first and second half of year2009 . Based on the Team based on a proposal by the Compensation Committee. achieved targets the company would issue a maximum of The level and competitiveness of the salaries is reviewed on 1,500,000 new series A shares of which 50 percent would be the basis of comparison data obtained from international issued during June 2010 and the remaining 50 percent during evaluation systems. January 2011. Based on the actual results for 2009, the targets The company operates a bonus system under which a part for the first and second half of2009 have not been met and of the bonus is based on achievement of the Group’s finan- thus no shares will be issued. cial targets and a part on achievement of each director’s indi- In October 2009, the Board of Directors amended the vidual targets. The Board of Directors determines the criteria 2009 Share Subscription Plan. The amendments concerned for the financial targets based on a proposal by the Compen- the issuance of shares in case of a public tender offer and sation Committee. Individual targets are determined during secondly, a situation where the company’s registered share performance appraisal discussions. The maximum amount capital value would increase at least 50 percent during the to be paid to members of the Management Team for 2009 is second half of 2009. If such situations occur, a maximum of 50% of their basic annual salaries. 750,000 shares will be issued. Neither of the cases occurred Due to the importance of the project to strengthen the during the second half of the year 2009. balance sheet the Board of Directors has set up a specific Further information on the incentive schemes is given incentive scheme for the members of Management Team. under Shares and Shareholders on page 70 and on company’s Subject to the completion of a transaction or series of trans- website. Further information on the share holdings of the actions the Management Team members will be paid a Management Team is given on page 95. bonus corresponding to 3 to 6 month’s salary. Furthermore, the Management Team members may be entitled to an Internal Control AND RISK MANAGEMENT additional achievement bonus, subject to being employed RELATED TO FINANCIAL REPORTING by the company for a period of no less than 6 months after Internal control is a fundamental element of the Company’s the closing and fully depending on the development of governance and management systems. Internal control the shareholder value as a result of the said transaction or covers all processes, policies and organizational structures in transactions. Elcoteq and helps the management and the Board to ensure The company had a share subscription plan from 2007 that the Company can execute its strategy effectively based that allowed the company to issue shares to key personnel on reliable financial reporting and in compliance with all on the basis of the improvement of the profit before taxes for applicable laws and regulations. the full financial year2008 . According to the plan, the actual number of new series A shares transferred to the personnel Financial reporting on November 12, 2009 was 336,266. The financial reporting inE lcoteq is carried out in a harmon- ised way in all Group Companies using a common Enterprise Resource Planning (ERP) system and a uniform chart of accounts. A common consolidation tool is used as basis for the internal and external financial reporting.

Salaries and Share-Based Payments to the Management Team, EUR 1,000 Salaries and Salaries and other other Share-Base Share-Base Short-Term Short-Term Payments* Payments* Benefits 2009 Benefits 2008 2009 2008 Total 2009 Total 2008 President and CEO 750 674 84 25 834 699 Other Management Team members** 1,279 1,032 177 50 1,456 1,082 * Includes costs of stock options and share incentive plans. ** The number of other Management Team members was 5–8 persons in 2008 and 6–8 persons in 2009.

Elcoteq SE 89 The international financial reporting standards (IFRS) are Risk Management applied in all group companies for preparing the financial Elcoteq’s risk management is an integral part of the internal statements. The key policies and instructions regarding control. Risk management aims at supporting the achieve- the financial reporting are incorporated in the Elcoteq ment of strategic and operational goals and ensures the Accounting Policy and are applied in all group companies. continuity of business operations. Elcoteq seeks to manage Group Control is responsible for ensuring that the accounting risks in a comprehensive and forward-looking manner and to policy is consistently followed throughout the company and limit any negative effects should any risks materialize. it is reflecting the latest accounting regulations. The Audit Committee of the Board of Directors oversees The Board and the President and CEO have the respon- the quality, adequacy and effectiveness of risk management, sibility to set up the internal control systems for financial and reports to the Board on risk management. Board decides reporting. The Board has authorized the Audit Committee about the risk taking tolerance. The purpose of Elcoteq’s risk of the Board of Directors of Elcoteq to oversee the internal management function is to support and evaluate the risk control and financial reporting process.T he CFO and Group management work of the Group’s different units, and to Control are responsible for implementing and supporting the report key risks to the Group’s Management Team. Elcoteq’s group wide financial management and control of operations. risk management function reports to the CFO. Internal control systems for financial reporting are Elcoteq’s risk management consists of a Group-wide risk supported also by the Internal Audit function of Elcoteq. The assessment process. Each function reports its main risks and Internal Audit function is described below in the Internal risk management action plans to Group Management Team Audit section. twice per year. The action plan implementation is monitored Business Units, Strategic Business Units and Group func- on regular basis by the Group Management Team. Key risks tions are responsible for the accuracy and correctness of are also addressed in the strategic planning process. the reported financial information.T he Group Control and Elcoteq’s most important strategic, operative and financial the CFO prepare the reports and analyse the performance risks can be found in the Risk Management section. in relation to the financial targets and past performance on all organizational levels. The Audit Committee reviews the Internal Audit interim reports and annual financial statements in detail and The Internal Audit function assists the Audit Committee the Board approves the financial statements and any forward of the Board of Directors in assessing and assuring the looking statements included in external reports. adequacy and effectiveness of Elcoteq’s internal controls The business performance of Elcoteq is reported by the and risk management. Elcoteq has outsourced its internal Group Control daily on customer level and the full financial audit to KPMG Oy Ab Risk Advisory Services. The internal performance monthly on group, strategic business unit, audit is coordinated by Elcoteq’s risk management function. customer and factory level. Forecasts for the following 12 The internal audit reports administratively to the CFO but months are drawn up monthly. The results and forecasts in matters related to the internal audit directly to the Audit include an income statement, a balance sheet and key finan- Committee of the Board of Directors. The Audit Committee cial indicators. The Group Management Team reviews the also decides annually the areas that the internal audit will financial performance on monthly basis and decides upon focus on. The internal audit function is independent of the any corrective actions. The company monitors fulfilment of company’s external auditors. its strategic goals in quarterly strategy meetings. The meet- Elcoteq performs numerous audits with KPMG Oy Ab Risk ings review the key indicators that describe the business Advisory Service each year to establish, among other things, plan targets. Elcoteq updates its business plan once a year the functionality of certain preselected processes and the for a three-year period. Annual and long-term targets are adequacy and efficacy of controls in various units. In2009 , approved by the Board. KPMG executed internal audits in seven different business functions. The most important observations resulting from the audits are reported in detail to the management of each unit in question and a summary of the audits is submitted to the Audit Committee.

90 annual report and corporate responsibility report 2009 Insider Matters The Insider Rules endorsed by the Board of Directors and adopted by the company on March 1, 2000 fully comply with and exceed the requirements of the guidelines recommended by the Nasdaq OMX Helsinki and are updated accordingly. The Insider Rules are available to all the company’s employees through the company’s intranet. Under the company’s Insider Rules, insiders may engage in trading in the company’s shares only at times when the market has the fullest possible knowledge of matters that could influence the share value. For this reason, Elcoteq’s permanent insiders are not permitted to trade in the company’s shares during the time between the closing of its reporting period and the date of the results publication. As from the beginning of 2006, the company has maintained a public insider register that comprises the members of the Board of Directors, the President and CEO, the members of the Management Team, the auditor and other separately specified members of the company’s management. Individuals who by virtue of their duties regularly receive information regarded as insider information are included in the company’s nonpublic insider register. Elcoteq also maintains project-specific insider registers. The insider registers are maintained by Elcoteq’s legal affairs department, which also updates the information on Elcoteq’s insiders in the register maintained by Euroclear Finland Ltd. The company’s public insider register can be viewed on the company’s website. The legislation of both Finland and Luxembourg is applied in insider supervision. The Finnish Financial Supervisory Authority supervises compliance with legislation and regulations on project-specific insider registers, while supervision of the public and company specific insider register is handled by CSSF (Commission de Surveillance du Secteur Financier).

The Auditor According to the company’s Articles of Association, the company shall have one or more statutory auditors. The Annual General Meeting appoints the auditor. The term of office ceases at the close of the first Annual General Meeting following his election. Elcoteq SE’s auditors are the firm of authorized public accountants KPMG Audit S.à.r.l, under the supervision of Prin- cipal Auditor Philippe Meyer. In 2009, the auditing associa- tions belonging to the KPMG Group were paid approximately 520,000 euros in auditing fees and approximately 420,000 euros for other consultation assignments. Other consultation assignments mainly consisted of consultation related to the business development projects, taxation consulting and internal auditing. •

Elcoteq SE 91 BOARD OF DIRECTO RS

Martti Ahtisaari, born Heikki Horstia, born 1950, Eero Kasanen, born 1952, François Pauly, born 1964, 1937, Teacher Training Course B.Sc. (Econ.) DBA, Professor Graduate from ESCP-E.A.P. Graduate, University of Oulu Paris, Oxford, Berlin Independent member of Executive Dean of Aalto Independent member of Elcoteq’s Board of Directors University Scool of General Manager of Sal. Elcoteq’s Board of Directors since 1991; member of the Economics Oppenheim jr. & Cie S.C.A since 2000; member of the Audit and Compensation Independent member of Independent member of Audit and Compensation Committees Elcoteq’s Board of Directors Elcoteq’s Board of Directors Committees Work experience: Mr. Horstia since 2001; member of the since 2008; member of the Work experience: has worked for Wärtsilä Audit and Compensation Audit and Compensation Mr. Ahtisaari forged a Corporation as Vice Presi- Committees Committees prestigious career as a dent, Group Treasurer. He Work experience: Professor Work experience: Mr. Pauly diplomat working for both has previously worked at at the Helsinki School of has long experience on inter- Finland’s Ministry for Foreign the Bank of Helsinki in 1972– Economics since 1989 national financial markets Affairs and for the United 1976. He has had a career in and has held different Nations. the financial management Other key posts: Dr. Kasanen management positions at of industrial enterprises is a board member of several Mr. Ahtisaari was President Dexia Banking Group, both (Teollisuuden Voima Oy, Oy companies, for example of Finland between 1994 in Luxembourg and Italy. Lohja Ab, Metra Corporation) Kaleva Mutual Insur- and 2000. After leaving since 1976, and has occupied ance Company. He is also Other key posts: Mr. Pauly office he has held posts in management and board chairman of the boards of is Chairman of the Board at various international organi- positions in the electronics directors of the Helsinki Pharma w/Health Manage- zations and trusts. In 2008, industry since 1983. School of Economics Holding ment Company S.A. and a Mr. Ahtisaari was awarded Ltd and Itella Corporation. board member of several with the Nobel peace prize. companies: La Luxembour- He also holds honorary geoise, Cobepa, BIP Invest- doctorates from a number of ment Partners and Manage- universities. ment & Capitali S.p.A. Other key posts: Chairman of the board of Crisis Management Initiative, Board’s Shareholdings on December 31, 2009 Chairman of the supervisory Name A Shares K founders’ shares Change from 2008 board of the Finnish National Antti Piippo 1,633,549 54,110,000 +27,727 Opera Foundation Henry Sjöman 632,344 25,830,000 +27,727 Jorma Vanhanen 647,344 25,830,000 +27,727 Martti Ahtisaari 55,219 – +27,727 Heikki Horstia 50,969 – +27,727 Eero Kasanen 52,619 – +27,727 François Pauly 39,484 – +27,727 Juha Toivola 57,469 – +27,727 Up-to-date information on the public insiders’ shareholdings is available at www.elcoteq.com>Investors.

92 annual report and corporate responsibility report 2009 BOARD OF DIRECTO RS

Antti Piippo, born 1947, B.Sc. Henry Sjöman, born 1950, Juha Toivola, born 1947, Jorma Vanhanen, born (Eng.), D.Sc. (Tech) h.c. B.Sc. (Eng.) Master of Arts 1959, M.Sc. (Eng.) Founder and principal share- Founder-shareholder of Independent member of Founder-shareholder of holder of Elcoteq Elcoteq Elcoteq’s Board of Directors Elcoteq since 1997; Deputy Chairman Chairman of Elcoteq’s Board Member of Elcoteq’s Board Member of Elcoteq’s Board of the Board in 1997–2001 of Directors in 1991–2001 of Directors since 1991; of Directors since 1991; and again since 2003; and Chairman of the Board member of the Working and member of the Working and Chairman of the Board in of Directors again since 2003. Nomination Committees Nomination Committees 2001–2003. Chairman of the Chairman of the Working Work experience: Audit and Compensation Work experience: and Nomination Committees Mr. Sjöman has worked in Committees, member of the Mr. Vanhanen has held Work experience: Mr. Piippo the electronics industry since Working and Nomination various management has held management 1974 and has held various Committees. positions at Elcoteq and its positions in the electronics management positions at predecessors since 1985. Work experience: industry since 1971, first at Elcoteq and its predecessors Mr. Toivola has over 30 years Aspo Oy (1971–1984) and since 1984. of experience from both then at Oy Lohja Ab (1984– Finnish and international 1991). He was head of the industrial corporations electronics divisions of both and the insurance sector. companies. Between 1971 and 1995 Other key posts: Supervisory Mr. Toivola worked for board member of Varma Fiskars Corporation, and Mutual Pension Insurance between 1996 and 2001 Company and chairman he was Managing Director of the board of Piippo Oy, of Industrial Insurance Gallery Kalhama & Piippo Company Ltd and Deputy Contemporary Oy and Nordic Managing Director of the Solutions Oy. Boardmember Sampo Group. in Bossa Kulttuuriravintola Other key posts: Mr. Toivola Oy and Member of the Board is a board member or board and Trustees, Savonlinna chairman of several compa- Opera Festival Patron’s nies. He is also a member of Association. the Association of Finland’s Board Professionals.

Elcoteq SE 93 MANAGEMENT TEA M

Jouni Hartikainen, born Sándor Hajnal, born 1956, Vesa Keränen, born 1970, Tommi Pettersson, born 1961, M.Sc. (Eng.) M.Sc. (Human Resources M.Sc. (Eng.) 1968, M.Sc. (Electrical Management) Engineering) President and CEO President, Consumer Senior Vice President, Electronics Strategic Busi- President, System Solutions Joined Elcoteq in 2000; Human Resources ness Unit Strategic Business Unit member of the Management Team since 2000 and Presi- Joined Elcoteq in 2007; Joined Elcoteq in 1997; Has worked at Elcoteq dent and CEO since 2004 member of the Management member of the Management since 2005; member of the Team since August 2009 Team since 2001 Management Team since Area of responsibility: Devel- January 2008 oping and implementing the Areas of responsibility: Areas of responsibility: strategy, day-to-day opera- Group human resources and Consumer Electronics Stra- Areas of responsibility: tion of the company administration tegic Business Unit System Solutions Strategic Business Unit Work experience: Mr. Work experience: Prior to Work experience: Mr. Hartikainen has previously his current role, Mr. Hajnal Keränen has worked in Work experience: Prior to his worked at Elcoteq as the was Vice President, Human various business develop- current role, Mr. Pettersson head of Personal Commu- Resources since 2008 and ment and strategy planning was in charge of Communi- nications business area, before that he was Director positions at Elcoteq since cations Networks business the geographical area Asia- of HR Development at 1997. Prior to his current area and prior to that, he was Pacific, the Communications Elcoteq since 2007. He has position, Mr. Keränen was in Vice President for Strategic Networks business area and also worked for Elcoteq’s charge of sales and business Account Management in the global sales and customer Pécs plant as HR Manager development, as well as the Communications Networks service. Before joining in 1998−2001. His other Terminal Products and Home business area. Mr. Pettersson Elcoteq, Mr. Hartikainen work experience includes Communications business has been working for Elcoteq held several positions at senior HR and management areas. Before joining Elcoteq, since February 2005 as Tecnomen Corporation. He functions with DHL, Eagle Mr. Keränen held positions in Account Director for certain has also worked several years Ottawa, Flextronics, Pécs- various international compa- strategic customers. Before in Canada and Malaysia. Baranya Transit Employment nies in Finland and Germany. joining Elcoteq he has held Company and the Hungarian several sales and marketing Key posts: Board member National Labor Center. and senior management of the Federation of Finnish positions in software and Technology Industries electronics design compa- (Teknologiateollisuus ry) nies such as Mobile Innova- tion Finland Oy, Synopsys Inc and Smartech Oy.

94 annual report and corporate responsibility report 2009 MANAGEMENT TEA M as of April 1, 2010

Mikko Puolakka, born Tomi Saario, born 1971, Roger Taylor, born 1960 1969, M.Sc. (Econ.) M.Sc (Eng.) Senior Vice President, Group Chief Financial Officer (CFO) Senior Vice President, Operations New Sales and Business Joined Elcoteq in 2001; Joined Elcoteq in October Development member of the Management 2008, when he was Team since August 2007 Joined Elcoteq in November appointed to the Manage- 2008; member of the ment Team Areas of responsibility: busi- Management Team since ness control & accounting, Areas of responsibility: August 2009 treasury, communications, Group operations investor relations, corporate Areas of responsibility: Work experience: Mr. Taylor responsibility, corporate rela- New Sales and Business has wide experience in tions and risk management Development, Pre-Sales and management of manufac- Product Marketing, Business Work experience: Prior to turing and supply chain Intelligence his current role, Mr. Puolakka operations within commu- worked as Controller of Work experience: Prior to nication technology OEMs Elcoteq’s geographical area his current role, Mr. Saario such as Nokia and Motorola. Europe. Before this he was was Vice President, Group He has also gained interna- Controller of the Industrial Strategy and M&A as of tional experience in manage- Electronics and Communi- November 2008. Before ment of production and cations Networks business joining Elcoteq, Mr. Saario supply functions in Hong areas and Elcoteq’s Swiss has worked in several Kong and the USA. Prior to and German production international management his current position, Mr. units. Before joining Elcoteq, positions in telecommunica- Taylor worked as an indepen- Mr. Puolakka worked in Trea- tions and software industry dent consultant in numerous sury, Business Unit Finance companies in Europe and overseas assignments for and Operations Controlling in the Middle-East & Africa EMS companies. for Huhtamäki Corporation region since 1995. in Finland, Switzerland and Poland. Share Ownership of the Elcoteq Management Team on December 31, 2009 Name Number of Shares Jouni Hartikainen 62,132 Sándor Hajnal 4,000 Vesa Keränen 15,232 Markus Kivimäki 15,000 Tommi Pettersson 13,000 Mikko Puolakka 15,000 Tomi Saario 500 Roger Taylor 3,000 Up-to-date information on the public insiders’ shareholdings is available at www.elcoteq.com>Investors.

Elcoteq SE 95 INVESTOR RELATIONS ÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÚÛ Elcoteq’s IR function aims to enable the capital markets to form a true and fair view of the company. IR seeks to increase awareness of Elcoteq and thereby enhance interest in the company as an investment.

lcoteq arranges press conferences for analysts, investors, previously stated forecasts. For this reason Elcoteq does not financiers and financial journalists on the publication include precise figures on net sales and profits in its forecasts, Eof its interim and full-year results. One may also partici- preferring instead to provide a mainly verbal description of pate by teleconferencing. Conferences can be viewed as its prospects in its financial statements bulletins and interim real-time webcasts or recordings on the company’s website. reports. The company may also arrange Capital Market Days for investors, analysts and financiers. Recordings of press conference Changes of address webcasts and the material presented at these events are Shareholders are kindly asked to notify any changes of available on the company’s website. address either to the bank holding their book-entry account The company regularly meets Finnish and foreign analysts or to Euroclear Finland Ltd, if the book-entry account is regis- and investors and takes part in various investor seminars. tered there. The main themes of these meetings are Elcoteq’s strategy, financial performance and prospects, based on published Annual Summary 2009 information. Elcoteq’s releases, interim reports and financial statements Private investors are invited to meet representatives of the bulletin from the year 2009 can be found on the company’s company’s management at the Annual General Meeting in website at www.elcoteq.com. Luxembourg or in the shareholder information meeting in Helsinki, Finland. Investor Relations Contacts

Silent period Mikko Puolakka Elcoteq observes a silent period from the closing of its CFO interim or annual accounts to the date on which its results Tel. +358 10 413 11 are published. During this period Elcoteq’s representatives do E-mail: [email protected] not meet investors or comment on the company’s results. Satu Jaatinen Prospects Communications Manager Elcoteq operates in an industry where business volumes can Tel. +358 010 413 2092 vary considerably even in the short term. Further on, these E-mail: [email protected] changes may have a substantial effect on the company’s

Financial reporting in 2010

January 2010 February 2010 March 2010 April 2010 May 2010 June 2010 July 2010 August 2010 September 2010 October 2010 November 2010 December 2010

January 22 February 1– March 24 Financial Statements Annual Report, week April 1–May 18 July 1–20 October 1–26 First Extraordinary Silent Period Bulletin for 2009, commencing on Silent Period Silent period Silent Period General Meeting March 31, April 5 (week 14) February 23 at 9.00 a.m. (EET) Interim Report Interim Report Interim Report Second Extraordinary April 28 January−March, January−June, January−September, General Meeting Annual General May 19, July 21, October 27, Meeting at 9.00 a.m. (EET) at 9.00 a.m. (EET) at 9.00 a.m. (EET)

= Extraordinary General Meeting = Annual General Meeting = Silent Period = Report

Elcoteq’s annual reports, corporate responsibility reports, interim reports and releases are published both in English and Finnish. They are available on the company’s website at www.elcoteq.com, where you can also order Elcoteq’s publications.

96 annual report and corporate responsibility report 2009 INVESTOR RELATIONS ANNUAL GENERAL MEETING

lcoteq SE’s Annual General Meeting (AGM) 2010 will be Shareholders wishing to attend the information meeting held in Luxembourg on Wednesday, April 28, 2010, at are requested to notify the company no later than on April 14, E12:00 pm CET (13:00 pm EET). 2010. The Meeting will be held at Elcoteq’s premises at 19 Rue Eugène Ruppert, L-2453 Luxembourg. Enrollment Shareholders who are in the company’s shareholder Shareholders wishing to attend the AGM and/or the Share- register maintained by Euroclear Finland Ltd. on April 16, 2010 holder information meeting shall notify the company at shall have the right to participate in the AGM. latest on the dates and times set forth above either: Shareholders wishing to attend the AGM are requested to • On the company’s website at www.elcoteq.com notify the company no later than at 16:00 CET (17:00 EET) on • In writing to Elcoteq SE, Finnish Branch, AGM, P.O. Box 8, April 20, 2010. Registration by mail and powers of attorney, if FI-02631 Espoo, Finland any, should arrive at the below address before the notifica- • By fax at +358 10 413 1804, or tion period expires. • By telephone at +358 10 413 2081 between 8.00 and 10.00 am CET (9.00 and 11.00 am EET) and between 12.00 am Shareholder information meeting and 3.00 pm CET (1.00 and 4.00 pm EET); or Company will arrange an information meeting for the share- • In the Shareholder information meeting (AGM only). holders on Tuesday, April 20, 2010 at 15:00 EET, at Nordic I All shareholders registering to participate in the cabinet of the Hotel Scandic Continental (Mannerheimintie meeting(s) are requested to provide their name, address and 46, Helsinki, Finland). The language of the shareholder infor- telephone number, as well as to indicate whether they will mation meeting is Finnish. participate in the AGM in Luxembourg and/or the Share- In the shareholder information meeting Elcoteq’s manage- holder information meeting in Helsinki. ment will present the company’s development in 2009, the Additional information on the Annual General Meeting strategies for the future and the most important matters on can be found on the company’s website at www.elcoteq.com. the agenda of the AGM. Shareholders will have the possibility to ask questions from the members of the Board of Directors Dividend Proposal and the company management in the meeting. In addition, The Board of Directors proposes to the Annual General the shareholders who do not wish to attend to the AGM held Meeting that no dividend will be distributed for the financial in Luxembourg will have the possibility to authorize indepen- year 2009. dent representative to attend and vote on their behalf in the AGM.

January 2010 February 2010 March 2010 April 2010 May 2010 June 2010 July 2010 August 2010 September 2010 October 2010 November 2010 December 2010

= Extraordinary General Meeting = Annual General Meeting = Silent Period = Report Glossary

AMS After Market Services

BOX BUILD Business model in which an EMS company delivers finished products in consumer packages directly to the customers’ distribution channel.

EMS Electronics Manufacturing Services. An EMS company provides services to original equipment manufacturers (OEMs) with OEMs’ own brands.

GRI Global Reporting Initiative – voluntary international reporting guidelines for the development of consistent reporting practices in corporate social responsibility.

ODM Original Design Manufacturing. In Elcoteq’s service offering the term ODM refers to all the services covering the entire value chain of customers’ products – from product development to aftermarket services.

OEM Original Equipment Manufacturer which is the brand owner

OHSAS 18001 Occupational Health and Safety Management System

NPI New Product Introduction. The purpose of the NPI process is to ensure cost-efficient manufacturing and rapid product launch. This phase includes testing for production lines and manufacturing prototypes.

PCBA Printed Circuit Board Assembly Contact Information

ELCOTEQ SE 19, Rue Eugène Ruppert L-2453 Luxemburg Tel. +352 248 331 Trade registry number: B 134554

ELCOTEQ SE, Finnish Branch P.O.Box 8 Sinimäentie 8B FI-02631 Espoo, Finland Tel. +358 10 41 311 Business ID: 2146811-2

E-mails [email protected] [email protected]

www.elcoteq.com

Other Addresses Contact information of all Elcoteq sites is available at www.elcoteq.com. Contact information can also be obtained by e-mail: [email protected].

Contents: Elcoteq SE Layout: Kreab Gavin Anderson Translation: Nesenta Oy Photographs: Urs Blumer, Jere Hietala, Sarri Kukkonen and Jessica Theis Printing: Erweko Painotuote Oy, 2010

441 032 Printed matter PEFC/02-31-120 E lcoteq S E reportannual corporate and report 2009 s pon s ibility re