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Nortel Rattles Nerves

Just as things were looking up, Nortel Networks Corp. (NYSE/Toronto: NT) has announced another restatement.

Last night, Nortel reported it has delayed its 10-K filing with the SEC, saying it would probably have to restate the unaudited earnings it reported for 2003. This comes on the heels of the company's November restatements, which tweaked results for the years 2000 through 2002 and for the first two quarters of 2003 (see Nortel Delays Earnings Report, Nortel Keeps to Profit Path, and Nortel Refiles Results).

Nortel shares were down $0.61 (9%) to $6.27 in morning trading.

Details are scarce, but it appears Nortel will restate its 2003 earnings and might have to redo some of the numbers already restated last November. A Nortel statement said the company was "re-examining the establishment, timing of, support for and release to income of certain accruals and provisions in prior periods."

"We're disappointed, but we're quite committed to ensuring we get this correct," a company spokeswoman says.

The news douses excitement over Nortel's newly found profitability. The company had reported a blowout fourth quarter, with revenues up 12 percent, to $2.83 billion, and net income of $499 million, capping the company's first profitable year since 1997 (see Nortel Scores in Q4).

The newest restatement is embarrassing, but analysts say it shouldn't trigger the worst-case scenario: the calling in of $3.6 billion in debt.

"I don't think it's going to result in any bond acceleration or anything -- that would be the main issue," says Stephen Koffler, analyst with Wachovia Securities Inc. "Since it doesn't relate to revenues -- it only relates to earnings from accruals -- I don't think the bondholders will do anything."

"This should not affect Nortel's liquidity nor lead to default of $3.6B in long term debt, but could lead to termination of credit lines," writes Steve Levy, analyst with Lehman Brothers, in a note today. "To be clear, today's press release does not make any comments about this expected restatement not impacting future cash balances -- this language was in prior press releases when the company restated results in late 2003."

The debt in question consists of $1.8 billion of convertible debt securities and $1.8 billion in notes held by subsidiary Nortel Networks Ltd. The danger appears to be that the debt maturity could be accelerated if the 10-K filing is delayed more than 90 days beyond March 30, in which case Nortel would have to "seek alternative financing sources" to cover payments, according to the press release.

— Craig Matsumoto, Senior Editor, Light Reading

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joe_average 12/5/2012 | 2:16:36 AM
re: Nortel Rattles Nerves As NT goes through yet another confidence-shattering experience, one has to wonder about the root cause.

Who was the CFO during the time period where all these accounting mistakes or irregularities occurred?

Who is now the head of the company?

The answer to both questions is Dunn. The same Dunn that is pulling in US$850k of salary + a gizillion options.

So a few more questions for which I *don't* have answers for:
1. How can the most inept executive get promoted to the CEO position?
2. Why isn't Dunn out there apologizing for the mistake and taking personal responsibility?
3. What does this situation say about Nortel and the character and ability of its CEO?

Very, very sad state of affairs.

materialgirl 12/5/2012 | 2:16:34 AM
re: Nortel Rattles Nerves Anyone who believes what NT has to say gets what they deserve. This company reported their "blow out" Q4 with UNAUDITED numbers, in a quarter after a "little" $950M accounting problem was found. If anyone bought those Q4 numbers, they clearly do not understand accounting at all. No one ever reports UNAUDITED Q4 numbers. If you ever see that again, run for the hills.

That is not the only fast and loose feature of NT's version of the truth. I am still trying to figure out their "VoIP" story. They lack a core IP router, having to do a hasty joint venture with AVCI to get the VZ business, so it appears. They say they lead the market in "VoIP", when their main switch line, the Passport, appears to be ATM based. "Voice over packet" is technically a correct description for such a solution, but "VoIP" specifically is not. I therefore cannot figure out what they are really up to at all.

The best treatment for this bunch is to just ignore them.
wilecoyote 12/5/2012 | 2:16:30 AM
re: Nortel Rattles Nerves So what will they do for an encore: bomb the Baldwin's house?

dodo 12/5/2012 | 2:16:28 AM
re: Nortel Rattles Nerves Nortel Back
to the Bad
Old Ways
By Scott Moritz
TheStreet.com Senior Writer
3/11/2004 2:58 PM EST
URL: http://www.thestreet.com/tech/...

For all its presumed progress, Nortel (NT:NYSE) hasn't forgotten how to infuriate investors.


What's worse than having to restate three years' worth of financial reports? Maybe having to restate the restatements just a few months later, as Nortel said Thursday it might have to do.

Adding to the problem, the company says it might be late with its annual report, missing federal deadlines and violating agreements with its lenders. And though some investors who have driven the stock up sharply this year were willing to give Nortel the benefit of the doubt, all the bumbling with the books up in Brampton, Ontario, may have caught the attention of the Securities and Exchange Commission.

"If there wasn't an SEC investigation before today, there almost certainly will be one now," says John Gavin, president of SEC Insight, a Plymouth, Minn., research shop.

A SEC representative declined to comment. A Nortel spokeswoman declined to comment on whether the SEC was investigating, but said that the company has informed all the proper regulatory agencies.

Gavin says that in October his firm asked the SEC for Nortel documents under the Freedom of Information Act. That request was rejected based on a so-called law-enforcement-related exemption, says Gavin. Typically in the past, the SEC has used the law-enforcement exemption when it has been involved in some sort of investigation, he says.

Nortel shares fell more than 11% at one point in early trading Thursday, but they had mostly recovered by early afternoon on heavy volume. And though the accounting screw-ups are a Nortel problem, Wall Street was quick to lash fellow gear pears like Ericsson (ERICY:Nasdaq) , Corning (GLW:NYSE) , JDS Uniphase (JDSU:Nasdaq) and Lucent (LU:NYSE) .

The redoubled attempts at accountability at Nortel could undercut the confidence investors had gained as the company started talking about turning the corner on its massive restructuring and guiding for stronger sales growth.

The company's press release Wednesday evening pointed to the timing of accruals and provisions as the focus of the internal audit. To analysts and investors, this suggests that, unlike accounting misdeeds of Lucent and Qwest (Q:NYSE) , any problem could stem not from phony sales but whether Nortel booked revenue on the correct schedule.

Unlike many products that are booked as a sale the moment they are delivered, telecom equipment has to be shipped, installed and certified before the proceeds can be recognized. This process can take months if large network systems are involved and that usually requires gear suppliers to spread the revenue over several quarters independent from when the actual payments arrive.

"Assuming the cash is real and this isn't Parmalat, this could prove to be an opportunity," says Paul O'Neil with Knight Bain Seath & Holbrook, a Canadian pension fund that holds Nortel stock.

"If it comes out that they were being conservative, then what will the Street say? Shame on you?" says O'Neil.

But SEC sleuth Gavin isn't quite as confident. Though there's no indication whether the SEC would be looking into something as big as accounting fraud or as minor as some junior officer's insider trading, Gavin says any probe should give investors some pause. After all, the audit committee now wants to re-examine the work it just completed a few months ago.

To say it's a case of Nortel being too conservative with the books "requires a leap of faith that the audit committee's behavior doesn't seem to allow," says Gavin.
Machavelli 12/5/2012 | 2:16:24 AM
re: Nortel Rattles Nerves I am not surprised. Frank Dunn is as incomptent as Kenneth Lay is crooked.

1. How can the most inept executive get promoted to the CEO position?
>>>> No-one else wanted the job.

2. Why isn't Dunn out there apologizing for the mistake and taking personal responsibility?
>>>> This guy is a "Bean Counter" and has the personality to match. Even as a "Bean Counter" he failed miserably: He was the CFO when the discrepancies that caused the first restatement of results occured.

3. What does this situation say about Nortel and the character and ability of its CEO?
>>>>> I have never heard Frank Dunn make a projection about Nortel that goes beyond the current quarter. This contrasts greatly with Jean Monty (former CEO of Bell Canada and Nortel) who would give his 10 year vision and direction for the company.

This idiot (Frank Dunn) was still laying off people after Nortel finally had a good quarter. This does not inspire confidence in the employees nor shareholders.

"M"
litemyfiber 12/5/2012 | 2:16:22 AM
re: Nortel Rattles Nerves Bomb the Baldwin's house! Not a bad idea!!!

I'm sure Bush wouldn't mind. Surely there's some way we can blame them for 911 too, and we all know what bad people they are. They even spank their women, especially that Basinger gal!!! Oh the humanity...
litemyfiber 12/5/2012 | 2:16:21 AM
re: Nortel Rattles Nerves hystericalgirl;
Fortunately we've got some late clarification on your VoIP issue. Nortel has released a statement that they are mortified that you are still trying to figure out their story. Therefore they will restate their VoIP strategy just for you. Since you are correct that they don't even have a core IP router, they will remarket the Passport as a "Pure IP" device with value added ATM capabilities. Until such time as that marketing material is available VoIP will be construed to mean "Voice over Itsy-Bitsy Packets" otherwise known to the rest of the world as cells. Please don't tell anybody, and please don't ignore me!!!
Belzebutt 12/5/2012 | 2:16:17 AM
re: Nortel Rattles Nerves They say they lead the market in "VoIP", when their main switch line, the Passport, appears to be ATM based. "Voice over packet" is technically a correct description for such a solution, but "VoIP" specifically is not. I therefore cannot figure out what they are really up to at all.

Look into it a little bit more, and you'll see that Passport has POS cards. That should tell you something. Yes, it does do VoIP, not just VoATM. Heck, it can also do VoIPoATM if that's what you want. Voice over Packet encompasses the two.
dljvjbsl 12/5/2012 | 2:16:14 AM
re: Nortel Rattles Nerves
I am still trying to figure out their "VoIP" story. They lack a core IP router, having to do a hasty joint venture with AVCI to get the VZ business, so it appears.


I'm still trying to figure out what core IP routing has to do with VoIP. VoIP is all about the periphery of the entwork. That is where the important services and the money are.

Roth for reasons that always baffled me equated Internet services with optical networking. Nortel shareholders and employees know how dumb that idea is. I would hope that Dunn has more sense than to get into IP routing. It has next to nothing to do wtih Nortel's market.
materialgirl 12/5/2012 | 2:16:10 AM
re: Nortel Rattles Nerves Dear dljvjbsl:
"I'm still trying to figure out what core IP routing has to do with VoIP. VoIP is all about the periphery of the entwork. That is where the important services and the money are."

Don't you believe that the total cost of transit would be lower if VoIP traffic travelled IP all the way through the core? If not, what else should be there and why would that be cheaper?
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