Nortel provides latest update; now expects to file its 2003, 1Q04, and 2Q04 results in November and its Q3 results in December

October 27, 2004

7 Min Read

TORONTO -- Nortel NetworksCorporation (NYSE:NT)(TSX:NT) and its principal operating subsidiary,Nortel Networks Limited ("NNL"), today provided a status update pursuantto the alternative information guidelines of the Ontario SecuritiesCommission. These guidelines contemplate that the Company and NNL willnormally provide bi-weekly updates on their affairs until such time asthey are current with their filing obligations under Canadian securitieslaws.

Status of Restatements and Audit Committee IndependentReview, Filing of Financial Statements and Third Quarter 2004 Results

The Company and NNL continue to dedicate significantresources to the process to complete their financial statements as soonas practicable. As previously announced, the Company and NNL continue towork on the restatement of their financial results for each fiscalquarter in 2003 and for the years 2002 and 2001, and the preparation oftheir financial statements for the year 2003 and the first and secondquarters of 2004.

The independent review by the Nortel Networks Audit Committeeis continuing and nearing completion. The Audit Committee's continuingobjective is to arrive at a full understanding of the facts andcircumstances that gave rise to the Company's and NNL's restatementsbefore the financial statements are finalized and filed.

Despite the significant work completed to date, the Companyand NNL will not be in a position to file financial statements by theend of October 2004 as previously announced. The Company now expectsthat it and NNL will file, in mid November 2004, financial statementsfor the year 2003 and the first and second quarters of 2004, and relatedperiodic reports.

"This delay in our timeline for completing the restatementprocess was a very difficult decision. Our first accountability is tounquestionable quality of this restatement for our shareholders,customers and employees," said Bill Owens, president and chief executiveofficer, Nortel Networks. "I was not satisfied given the enormousdetails and complexity involved that we would be able to meet ourOctober deadline. Although this delay is disappointing, we have madegreat progress toward completion, have continued to devote massiveresources to the restatement effort and are confident that we are veryclose to the end of this critical chapter. Seeing that closure is closeat hand leads us to be confident about moving forward with ourbusiness."

As a result of the delay mentioned above, the Company and NNLdo not expect to file financial statements for the third quarter of2004, and related periodic reports, by the required deadlines inNovember 2004 in compliance with certain U.S. and Canadian securitiesregulations. The Company and NNL will therefore each be filing with theUnited States Securities and Exchange Commission (the "SEC") a Form12b-25 Notification of Late Filing relating to the delay in filing theirquarterly reports on Form 10-Q for the third quarter of 2004.

The Company expects that it and NNL will announce limitedpreliminary unaudited financial results for the third quarter of 2004 bythe end of November 2004 and file their financial statements and relatedperiodic reports for the third quarter of 2004 in mid December 2004. TheCompany expects that it and NNL will file, as soon as practicable afterthe filing of the third quarter 2004 financial statements, any requiredamendments to periodic reports for prior periods.

The Company's expectation as to timing of events is subjectto change. Specifically, the completion of the Company's work and therelated audits and reviews of financial statements by the Company's andNNL's independent auditors is dependent upon the timing of thecompletion and results of the independent review being undertaken by theNortel Networks Audit Committee.

Based on the Company's work to date, and subject to thelimitations described below, the principal estimated impacts of therestatements and revisions identified to date to the Company's resultsreflect the following:

  • Revenue adjustments identified to date reflect increasesto previously announced annual revenues of approximately 7 percent in 2001, 1 percent in 2002 and 3 percent in 2003. Revenue adjustments in 2003 and prior periods primarily relate to timing issues (for example, revenue that should have been deferred to a later period or recognized in an earlier period);

  • As previously announced, a reduction of approximately 50 percent in previously announced net earnings for 2003; these amounts will largely be reported in prior periods, resulting in a reduction in previously reported net losses for such periods including 2002 and 2001;

  • Approximately two-thirds of the reduction in 2003 netearnings identified to date impacts the first half of 2003 (down from three-quarters previously announced), with the remaining approximately one-third reduction impacting the second half of 2003;

  • The net income reductions are expected to impact theCompany's continuing operations and discontinued operations on an approximately equal basis (compared to the previous estimate of a substantial impact to continuing operations); and

  • As previously announced, no material impact to theCompany's cash balance as at December 31, 2003.

As previously indicated, the Company's work to date withrespect to the restatements and revisions and the principal estimatedimpacts mentioned above are subject to a number of importantlimitations,including:

  • These principal impacts are estimated impacts which havebeen identified by the Company based on the work done to date and are not projections of the final impacts. As such, these principal estimated impacts continue to be preliminary and subject to change;

  • The ongoing work of the Nortel Networks Audit Committee independent review;

  • The ongoing work to be done by the Company related to the restatements and revisions;

  • The previously disclosed material weaknesses in theCompany's internal controls over financial reporting; and

  • The review or audit of the Nortel Networks financial statements by the Company's independent auditors.

Nortel Networks Limited

The financial results of NNL are consolidated into theCompany's results. NNL's financial statements for the applicable periodswill also be restated upon the related restatements of the Company'sfinancial statements. NNL's preferred shares are publicly traded inCanada.

Update on Certain Potential Impacts

Debt Securities

As previously announced, as a result of the delay in thefiling of the 2003 Form 10-K and Quarterly Reports on Form 10-Q for thefirst and second quarter of 2004 (together, the "Reports"), the Companyand NNL are not in compliance with their obligations to deliver theirSEC filings to the trustees under their public debt indentures.Notwithstanding the Company's and NNL's expectation that the Reportswill be filed in mid November 2004, upon the delay in filing financialstatements for the third quarter of 2004, and the related QuarterlyReports on Form 10-Q, to a date past November 24, 2004, the Company andNNL will not be in compliance with their obligations under theindentures. While a notice of default could have been given at any timeafter March 30, 2004, neither the Company or NNL has received a noticeas of October 26, 2004.

EDC Support Facility

As the filing of the Reports are expected to occur afterOctober 31, 2004, and the filing of the third quarter 2004 QuarterlyReports on Form 10-Q after November 24, 2004, Export Development Canada("EDC") will have the right, on such dates, unless EDC has granted afurther waiver in relation to the delayed filings and certain otherbreaches related to the restatements, to terminate the EDCperformance-related support facility and exercise certain rights againstcollateral or require NNL to cash collaterize all existing support.While NNL expects to seek a new waiver from EDC, there can be noassurance that NNL will receive a new waiver or as to the terms of anysuch waiver.

Other Matters

Annual Shareholders' Meeting

As previously announced, the Company was granted an order bythe Ontario Superior Court of Justice extending the time for calling theCompany's 2004 Annual Shareholders' Meeting (the "Meeting") to a datenot later than December 31, 2004 or such later date as the Court mayfurther permit. As a result of the above, the Company intends to seek anorder extending the time for calling the Meeting to no later than March31, 2005. The Company intends to hold the Meeting as soon as practicableafter its 2003 audited financial statements are completed and availablefor mailing to shareholders.

With the exception of the matters noted above, the Companyand NNL have reported that there have been no material developments inthe matters reported in their status updates of June 2, 2004, June 29,2004, July 13, 2004, July 27, 2004, August 10, 2004, August 19, 2004,September 2, 2004, September 16, 2004, September 30, 2004 and October14, 2004.

Nortel Networks Ltd.

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