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any relevant series of debt securities provide notice of this non-compliance and we or NNL, as applicable, fail to file and deliver the relevant
Report within 90 days after the notice is provided, then the trustee under the indenture or the holders will have the right to accelerate the
maturity of the relevant series of debt securities. While such notice could have been given any time after March 30, 2004, neither we nor NNL
has received a notice as of the date of this report. If the required percentage of holders under one series of debt securities were to give such a
notice and, after the 90 day cure period expired, were to accelerate the maturity of such series of debt securities, then the principal amount of
each other series of debt securities could, upon 10 days notice, be accelerated without the lapse of an additional 90 day cure period. If an
acceleration of our debt securities were to occur, we may be unable to meet our payment obligations. Based on publicly available information,
we have reason to believe that more than 25% of the outstanding principal amount of the $150 of 7.875% notes due June 2026 issued by a
subsidiary of NNL and guaranteed by us are held by one holder, or a group of related holders. Other than with respect to that series of debt
securities, based on such publicly available information, neither we nor NNL are aware of any holder, or group of related holders, that holds at
least 25% of the outstanding principal amount of any relevant series of debt securities. However, based on such publicly available information,
we have reason to believe that there is sufficient concentration among holders of the $150 of 7.40% notes due June 2006 issued by NNL that
the acquisition of a relatively small additional amount of these notes by certain holders could result in a holder or a group of related holders
holding 25% or more of the outstanding principal amount of these notes. See “Liquidity and capital resources”.
As a result of the delayed filing of our Reports and the Related Breaches, we were also required to seek waivers from EDC under the EDC
Support Facility. Our continuing delays in filing certain of our Reports will require us to seek an additional waiver from EDC. EDC may not
grant an additional waiver and the terms of such a waiver may be unfavorable. If we do not obtain an additional waiver from EDC, EDC would
have the right to terminate the EDC Support Facility, require cash collateral, or exercise its rights against the collateral pledged under the
related security agreements. In addition, the Related Breaches will continue beyond the filing of the Reports. Accordingly, EDC has the right
(absent a further waiver of the Related Breaches) to terminate or suspend the EDC Support Facility notwithstanding the filing of the Reports.
While NNL is seeking a permanent waiver from EDC in connection with the Related Breaches, there can be no assurance that NNL will
receive such waiver, or any waiver or as to the terms of any such waiver.
Any future delay in the filing of our periodic reports with the SEC would similarly result in a breach of our public debt indentures and require
us to seek additional waivers from EDC under the EDC Support Facility, which could reduce our access to the EDC Support Facility and may
adversely affect our liquidity.
Our credit ratings have been downgraded, we are currently unable to access our shelf registration statement filed with the SEC and
NNL terminated the Five Year Facilities, each of which may adversely affect our liquidity.
On April 28, 2004, S&P downgraded its ratings of NNL, including its long-term corporate credit rating from “B” to “B-” and its preferred
share rating from “CCC” to “CCC-”. At the same time, it revised its outlook to developing from negative. Moody’s current long-term debt
rating for NNL is “B3” and its preferred share rating is “Caa3”. On April 28, 2004, Moody’s changed its outlook to potential downgrade from
uncertain. These ratings are below investment grade. Our credit ratings could be lowered or rating agencies could issue adverse commentaries
in the future, which could have a material adverse effect on our business, results of operations, financial condition and liquidity. These ratings
and our current credit condition affect, among other things, our ability to raise debt, access the commercial paper market (which is currently
closed to us), engage in alternative financing arrangements, and affect our ability, and the cost, to securitize receivables, obtain customer bid,
performance-related and other bonds and contracts, access the EDC Support Facility and/or enter into normal course derivative or hedging
transactions and also affect the price of our stock.
As a result of a ratings downgrade in 2002, security agreements became effective under which substantially all of NNL’s assets located in the
U.S. and Canada and those of most of our U.S. and Canadian subsidiaries, including the shares of certain of NNL’s U.S. and Canadian
subsidiaries, were pledged. In addition, certain of NNL’s wholly owned subsidiaries have guaranteed NNL’s obligations under the EDC
Support Facility and NNL’s and Nortel Networks outstanding debt securities. These agreements will continue to secure the EDC Support
Facility and our and NNL’s outstanding public debt until the EDC Support Facility expires, alternative collateral is provided, alternative
arrangements are made, or NNL’s public debt ratings return to at least BBB (stable outlook) by S&P and Baa2 (stable outlook) by Moody’s.
The continued existence of these security arrangements may adversely affect our ability to incur additional debt or obtain alternative financing
arrangements. In addition, EDC is not obligated to make any support available under the EDC Support Facility if NNL’s senior long-term
rating by Moody’s is downgraded to less than B3 or if its debt rating by S&P is downgraded to less than B-.
In addition, in April 2004, NNL terminated the Five Year Facilities. Absent this termination, the banks would have been permitted, upon
30 days notice, to terminate their commitments under the Five Year Facilities as a result of NNL’s failure to file the NNL 2003 Annual Report
on Form 10-K by April 29, 2004. Although the Five Year Facilities were undrawn at termination, this termination may adversely affect our
liquidity.
Further, the delayed filing of the Reports has resulted in our inability to use, in its current form, the remaining approximately $800 of capacity
under our shelf registration statement filed with the SEC for various types of securities. As a result, our ability to access the capital markets is
constrained, which may adversely affect our liquidity.
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