April 28, 2004 Toronto, Ontario -- Nortel Networks Corp. today announced certain management changes and an update on a number of matters, including the status of the independent review being conducted by the Nortel Networks Audit Committee; planned restatements and revisions to 2003 and prior year financial results; the delay in the availability of financial results for the first quarter of 2004; and certain potential impacts.
Management changes
As previously announced, the Nortel Networks Audit Committee has been undertaking an independent review of the circumstances leading to the restatement of Nortel Networks financial statements for 2000, 2001, and 2002, and the first and second quarters of 2003. This independent review is ongoing. In that connection, the boards of directors of Nortel Networks Corp. and Nortel Networks Ltd., the Company's principal operating subsidiary (NNL), today announced the following senior management changes, effective immediately:
William Owens has been appointed president and chief executive officer of the Company and NNL. Owens replaces Frank Dunn who has been terminated for cause. Owens has been a director of the Company and NNL since February 2002. Until this appointment, he served as the chairman and CEO of Teledesic LLC, a satellite communications company, since June 2003 and was vice chairman and co-CEO from August 1999 to June 2003. Previously, he was president, chief operating officer, and vice chairman of Science Applications International Corp. (SAIC), one of the largest employee-owned high-technology companies in the United States. Prior to joining SAIC, Owens was vice chairman of the United States Joint Chiefs of Staff and the second-ranking military officer in the United States. Owens served as Commander of the U.S. Sixth Fleet during Operation Desert Storm.
The appointments of William Kerr as chief financial officer and MaryAnne Pahapill as controller have been made permanent. These appointments had been made on an interim basis on March 15, 2004. Kerr, a chartered accountant, originally joined Nortel Networks in 1994 as controller. Before leaving Nortel Networks in 2001, he held a number of senior positions in the Company's Finance organization, including senior vice president, finance and treasurer and senior vice-president, corporate business development. Since joining Nortel Networks in 1999, Pahapill, a chartered accountant, has held a number of positions in the Company's Finance organization including assistant controller and, most recently, assistant treasurer.
Former chief financial officer, Douglas Beatty, and former controller, Michael Gollogly, both of whom had been placed on paid leave of absence by Nortel Networks on March 15, 2004, have been terminated for cause.
In addition, the boards of directors of the Company and NNL announced that four individuals who were senior line of business finance executives of Nortel Networks during the periods under review have been placed on paid leave of absence pending further progress of the independent review.
"The Board of Directors believes that the actions announced today are about accountability for our financial reporting and are in the best interests of the Company and all of its stakeholders, including our investors, customers, and employees," contends Lynton (Red) Wilson, chairman of the board, Nortel Networks. "These actions are an important step in the process of restoring confidence in the Company's leadership and financial reporting."
"I am fully committed to doing all that is necessary to maintain the business momentum and leadership position of this Company," adds Owens. "I also want to express my unqualified support for the approximately 35,300 outstanding employees who are the lifeblood of this Company. As an organization, we remain committed to our business strategy of technology and solutions leadership in helping our customers transform their networks to drive revenue growth and improved productivity. And importantly, I want to see this Company meet the highest standards of integrity and transparency in its financial reporting."
Independent review, status of restatements and revisions to financial results
The independent review has been focused on management's practices regarding accruals and provisions. The Nortel Networks Audit Committee has determined to extend the time period being covered by the independent review to include all of 2003.
While the Nortel Networks Audit Committee has not yet determined the full extent of the adjustments that will be required, it has determined that Nortel Networks previously announced unaudited results for the year ended December 31, 2003 will need to be revised. It has also determined that Nortel Networks will need to restate the financial results reported in each of its quarterly periods of 2003 and for earlier periods including 2002 and 2001.
Based on the Company's work to date with respect to the planned restatements and subject to the limitations described below, Nortel Networks preliminary partial estimates to date of the principal impacts of the restatements and revisions are as follows:
• A reduction of approximately 50% 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;
• A reported net loss for the first half of 2003 compared to the previously announced net earnings for that period;
• No material impact to prior period revenues; and
• No material impact to the Company's cash balance as at December 31, 2003.
The Company's work to date with respect to the planned restatements and revisions is subject to a number of important limitations, including:
• The ongoing work of the Nortel Networks Audit Committee independent review, including with respect to the second half of 2003;
• The significant work to be done by the Company, including with respect to the second half of 2003, accounting documentation and reporting systems issues and the impact of accounting for certain matters, including foreign exchange;
• The previously disclosed material weaknesses in the Company's internal controls over financial reporting; and
• The audit of the Nortel Networks financial statements by the Company's independent auditors.
In light of the foregoing, the Company has not finalized its financial statements as at December 31, 2003. Until the Company finalizes its financial statements, subsequent events or information may result in adjustments to certain estimates used in the preparation of the Company's year-end and/or quarter-end financial statements. At this time, the Company cannot estimate the impact of any such adjustments on its results of operations or financial position.
The Nortel Networks Audit Committee will take the necessary time so that its review of the issues is thorough and that appropriate corrective actions are implemented. The Audit Committee is striving to complete its work as soon as practicable. Following completion of the independent review, the Company will work to complete its full year 2003 and interim 2004 financial statements and the restated financial statements and to facilitate the completion of the related audits as soon as practicable.
Nortel Networks will continue to cooperate with the regulatory authorities in connection with their previously announced investigations.
Availability of Q1 2004 financial results
As a result of the above, Nortel Networks is not in a position at this time to announce preliminary financial results for the first quarter of 2004. The Company can report, on a preliminary unaudited basis, that its cash balance as at March 31, 2004 was approximately $3.6 billion, down from approximately $4.0 billion as at December 31, 2003. The reduction was primarily due to payments made in the first quarter of 2004 under the Nortel Networks employee incentive compensation plans as well as cash outlays for restructuring and a real estate transaction.