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In connection with the delay in filing our 2003 Annual Reports, as of March 10, 2004, we suspended the purchase of our common shares under
the stock purchase plans for eligible employees in eligible countries that facilitate the acquisition of our common shares; the exercise of
outstanding options granted under the 2000 Plan or the 1986 Plan, or the grant of any additional options under those plans, or the exercise of
outstanding options granted under employee stock option plans previously assumed by us in connection with mergers and acquisitions; and the
purchase of units in Nortel Networks stock fund or purchase of our common shares under our defined contribution and investments plans until
such time as, at the earliest, we are in compliance with U.S. and Canadian regulatory securities filing requirements. On May 31, 2004, the OSC
issued a final order prohibiting all trading by our directors, officers and certain current and former employees in our securities and those of
NNL. This order will remain in effect until two full business days following the receipt by the OSC of all filings required to be made by us and
NNL pursuant to Ontario securities law. Accordingly, our ability to provide employees with the opportunity to participate in our stock option
plans, restricted stock unit plans and employee investment and share purchase plans has been adversely affected and certain employees have
not been able to trade in our securities. The current suspension of these programs and OSC trading order, and any future suspension or OSC
order, may have a material adverse effect on our ability to hire, assimilate in a timely manner and retain qualified personnel.
In addition, in 2004 we terminated for cause our former president and chief executive officer, former chief financial officer, former controller
and seven additional individuals with significant responsibilities for financial reporting. In August and September 2004, as part of our new
strategic plan, we announced an anticipated workforce reduction of approximately 3,250 employees. Approximately 64% of employee actions
related to the focused workforce reduction were completed by the end of 2004, including approximately 55% that were notified of termination
or acceptance of voluntary retirement, with the remainder comprised of voluntary attrition of employees that were not replaced. The remainder
of employee actions are expected to be completed by June 30, 2005. In addition, in 2001, 2002 and 2003, we implemented a company-wide
restructuring plan, which included a reduction of approximately two-thirds of our workforce over the three-year period.
We may find it more difficult to attract or retain qualified employees because of our recent significant workforce reductions, business
performance, management changes, restatement activities and resulting negative publicity and the resulting impacts on our incentive programs
and incentive compensation plans. If we have not properly sized our workforce and retained those employees with the appropriate skills, our
ability to compete effectively may be adversely affected. We are also more dependent on those employees we have retained, as many have
taken on increased responsibilities due to workforce reductions. If we are not successful in attracting, recruiting or retaining qualified
employees, including members of senior management, we may not have the personnel necessary to achieve our business objectives, including
the implementation of our remedial measures.
Ongoing SEC review may require us to amend our public disclosures further.
We have received comments on our periodic filings from the staff of the SEC’s Division of Corporation Finance. As part of this comment
process, we may receive further comments from the staff of the SEC relating to this Annual Report on Form 10-K and our other periodic
filings. As a result, we may be required by the SEC to amend this Form 10-K or other reports filed with the SEC in order to make adjustments
or additional disclosures. However, we do not believe that it will be feasible to amend our 2002 Form 10-K/A or 2003 Form 10-Qs due to,
among other factors, the identified material weaknesses in our internal control over financial reporting, the significant turnover in our finance
personnel, changes in accounting systems, documentation weaknesses, a likely inability to obtain third party corroboration in certain cases due
to the substantial industry adjustment in recent years and the passage of time generally. Amendments to our prior filings would be required for
us to be in full compliance with our Exchange Act reporting obligations.
R
isks relating to our business
We continue to restructure our business to respond to industry and market conditions. The assumptions underlying our restructuring
efforts may prove to be inaccurate and we may have to restructure our business again in the future.
We continue to restructure our business to realign resources and achieve desired cost savings in an increasingly competitive market. Our new
strategic plan includes an anticipated further workforce reduction of approximately 3,250 employees. We have based our restructuring efforts
on certain assumptions regarding the cost structure of our business. Our current assumptions may or may not be correct and as a result, we may
determine that further restructuring in the future will be needed. Our restructuring efforts may not be sufficient for us to achieve improved
results and meet the changes in industry and market conditions, including increased competition. In particular, we face increased competition
from low cost competitors such as Huawei Technologies Co., Ltd. and ZTE Corporation. We must manage the potentially higher growth areas
of our business, as well as the non-core areas, in order for us to achieve improved results.
We have made, and will continue to make, judgments as to whether we should further reduce our workforce or exit, or dispose of, certain
businesses. These workforce reductions may impair our ability to achieve our current or future business objectives. Costs incurred in
connection with restructuring efforts may be higher than estimated. Any decision by management to further limit investment or exit, or dispose
of, businesses may result in the recording of additional charges.
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