Nortel Files 2003 Statements

Nortel files its 2003 financial statements; appoints Susan Shepherd as chief ethics and compliance officer

January 11, 2005

8 Min Read

TORONTO -- Nortel Networks Corporation announced that today it has completed filing its audited financial statements for the year 2003 prepared in accordance with United States and Canadian generally accepted accounting principles, and related Annual Report on Form 10-K and corresponding Canadian filings (the "2003 Annual Reports"). The 2003 Annual Reports reflect the restatement of the years ended 2001 and 2002, and the revision of previously announced results for the year ended 2003. Annexed to this press release is certain selected financial information.

"With the completion of our restatements we have a solid foundation on which to move forward with our business," said Bill Owens, president and chief executive officer. "I want to thank all our employees and partners, who have tirelessly dedicated their time and efforts. The restatement has been a monumental task, both complex and demanding. I also want to thank our customers for their consistent support that has allowed us to maintain our business and strong financial position during this time and continue our expansion in critical markets. We are well-positioned for the future with an extensive global presence."

"We have a number of important initiatives we expect to announce in the near future including those focusing on Asia and China, and those associated with converged, solutions-oriented networks," continued Owens. "We also expect to make announcements regarding our progress in important new areas of business such as security and Federal solutions. We are committed to continued innovation leadership through our strong investment in R&D. We are focused on cash, cost and revenue to ensure our business model better serves our targeted operating performance. I am pleased with our cash performance in Q4, 2004 and we enter 2005 in a strong position."

Audit Committee Independent Review

Included in the 2003 Annual Reports and also annexed to this press release are the summary findings and recommendations of the independent review initiated by the Nortel Audit Committee in October 2003. The independent review examined the facts and circumstances leading to the earlier restatement of the Company's and Nortel Networks Limited's financial results for 2002, 2001 and 2000 and the first two fiscal quarters of 2003 (which independent review was later extended to cover the balance of 2003). The Audit Committee initiated this review to gain a full understanding of the events that caused significant excess liabilities being carried on the Company's balance sheet that needed to be restated and to recommend to the Board of Directors the adoption of necessary remedial measures to address personnel, internal control, compliance and discipline issues. In carrying out this task, the Audit Committee was assisted by the law firm of Wilmer Cutler Pickering Hale and Dorr LLP and the forensic accounting firm of Huron Consulting Services LLC.

As discussed in the accompanying summary, the independent review has resulted in extensive recommendations by the Audit Committee for remedial measures that are intended to prevent the recurrence of the inappropriate accounting conduct that gave rise to the restatement, to rebuild the Company's finance environment based on principles of transparency and integrity, and to ensure sound financial reporting and comprehensive disclosure. The Board of Directors has adopted these recommendations in their entirety and instructed management to develop a detailed plan and timetable for their implementation, which will be monitored by the Board.

"My fellow board members and our Nortel management team have been dedicated to the long term best interests of the Company and its shareholders and to conducting our activities with the utmost transparency and integrity," said L.R. Wilson, chairman, Board of Directors. "While this has been a challenging period, the outcome of the independent review is a set of comprehensive recommendations that will leave the Company stronger and better served in the future."

In light of the substantial revenue adjustments required to be made in the restatement due to accounting errors related to revenue recognition, the Audit Committee has determined to review the facts and circumstances leading to the restatement of this revenue for specific identified transactions. The review will have a particular emphasis on the underlying conduct that led to the initial recognition of these revenues. The Audit Committee wants a full understanding of the historic events that required the revenue for these specific transactions to be restated and to develop any additional remedial measures, including those involving internal controls and processes. Wilmer Cutler Pickering Hale and Dorr LLP will be assisting the Audit Committee with this review.

As a matter of corporate leadership and integrity, twelve senior executives of Nortel's core executive leadership team have voluntarily undertaken to pay to the Company over a three year period the amount of their Return to Profitability bonuses awarded in 2003 (net of tax withheld at source) aggregating the equivalent of approximately US$8.6 million, and to disclaim any potential award of the remaining two installments of the 2003 Restricted Stock Unit Plan, in each case regardless of whether the profitability metrics for these bonuses or awards were met on a restated basis. While none of these executives was found to have been directly involved in the inappropriate provisioning conduct, these members of the core executive team share the Board's deep disappointment over the circumstances that led to the restatement.

"These voluntary actions reflect the strength of character and quality of leadership of Nortel's core executive team," said Owens. "These actions are a tangible demonstration of senior management's commitment to Nortel."

Further, the Board has cancelled the remaining two installments for all eligible employees under the 2003 Restricted Stock Unit Plan.

Chief Ethics and Compliance Officer Appointed

Susan E. Shepard has been appointed to the recently created position of Chief Ethics and Compliance Officer reporting to the chairman of the Board and the president and chief executive officer effective February 21, 2005. Over the course of her career, Ms. Shepard has served in a number of positions specifically related to ethics and compliance. Ms. Shepard has been a Commissioner for the New York State Ethics Commission since May 2003. In addition, prior to becoming engaged in private practice in 1997, Ms. Shepard was Commissioner of Investigation for New York City (1990 to 1994), Chief Counsel to the New York State Commission of Investigation (1986 to 1990), and an Assistant United States Attorney for the Eastern District of New York (1976 to1986).

Board Renewal

Board renewal has been an important focus throughout 2003 and 2004. Following a search initiated in 2003, Nortel's Board of Directors was strengthened by two additions in the first half of 2004, Dr. Manfred Bischoff and the Hon. John Manley, each of whom will be standing for election as Directors at Nortel's upcoming Annual Shareholders' Meeting in 2005 (the "Meeting").

"The regular rotation of directors provides an appropriate balance of renewal with continuity and orderly succession," said L.R. Wilson, chairman, Board of Directors. "Given we were unable to hold a shareholders' meeting in 2004, the Board felt it essential that the process be accelerated at the upcoming Meeting. Accordingly, after discussions with the Board, five directors, including myself, all initially elected to the Board between 1991 and 1997, have decided not to stand for re-election."

In addition to Mr. Wilson, the four other retiring directors are L. Yves Fortier, Sherwood Smith, Jr., Guylaine Saucier and the Hon. James Blanchard.

The Board of Directors has appointed two additional directors to the Board of Nortel Networks Corporation; Richard McCormick, the former Chairman and Chief Executive Officer of U S WEST; and Harry Pearce, the retired Chairman of Hughes Electronics Corporation and retired Vice Chairman of General Motors.

"I have had the privilege of serving on the boards of a number of public companies and I have never seen a board - or more specifically a Chairman - more committed to doing the right thing for a company and its shareholders," said Owens. "On behalf of the Company, I want to thank Red Wilson and Messrs. Fortier, Smith and Blanchard and Mrs. Saucier for their decisive actions in stewarding Nortel through this very challenging period. On behalf of Nortel, I also want to welcome Messrs. McCormick and Pearce. The caliber of these individuals and their breadth of experience will be great assets in building on the fine work of their predecessors."

In addition to the appointment of Messrs. McCormick and Pearce, John MacNaughton, who will be retiring later this month as the President and Chief Executive Officer of the Canada Pension Plan Investment Board, will be nominated for election to the Board at the Meeting.

The Board of Directors expects to nominate additional candidates in the proxy circular for the next Meeting.

Nortel Networks Limited; 2004 Quarterly Filings

The Company expects that its principal operating subsidiary, Nortel Networks Limited ("NNL"), will file shortly its audited financial statements for the year 2003 prepared in accordance with United States and Canadian generally accepted accounting principles, and related Annual Report on Form 10-K and corresponding Canadian filing. Mr. McCormick and Mr. Pearce have also been appointed to the NNL Board of Directors, effective upon the completion of these filings.

Further, the Company expects that it and NNL will file their unaudited financial statements for the first and second quarters of 2004, and related periodic reports, before the end of January 2005 and follow as soon as practicable thereafter with the filing of their unaudited financial statements for the third quarter of 2004 and related periodic reports.

Nortel Networks Ltd.

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