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Goodwill and other intangible assets impairment charges totaled $11,833 during the year ended December 31, 2001. In addition to the
charge of $11,727 described below, this amount included a goodwill impairment charge of $106 related to the remaining net book value
of goodwill associated with the prior acquisitions of MICOM Communications, Corp. and Dimension Enterprises, Inc. (“Dimension”).
As part of Nortel Networks work plan to streamline its business, the decision was made to exit all technologies and consulting services
related to these prior acquisitions. The results related to these prior acquisitions were not material to the business, results of operations
and financial condition of Nortel Networks.
Nortel Networks, as part of its review of financial results during the year ended December 31, 2001, performed an assessment of the
carrying values of intangible assets recorded in connection with its various acquisitions. The assessment during that period was
performed in light of the then significant negative industry and economic trends impacting Nortel Networks operations and expected
future growth rates, and the adjustment of technology valuations. The conclusion of the assessment was that the decline in market
conditions within the telecommunications industry was significant and other than temporary. As a result, Nortel Networks recorded a
$11,727 impairment of goodwill and other intangible assets based on the amount by which the carrying amount of these assets exceeded
their fair value. The impairment was primarily related to the goodwill within Enterprise Networks, Optical Networks and Other and was
associated with the acquisitions of Alteon, the 980 NPLC business, Xros, Qtera Corporation, Photonic Technologies, Inc. (“Photonic”),
EPiCON, Inc. (“EPiCON”) and Clarify Inc. (“Clarify”).
Fair value was determined based on discounted future cash flows for the businesses that had separately distinguishable goodwill and
intangible asset balances and whose operations had not yet been fully integrated into Nortel Networks. The cash flow periods used were
five years, the discount rate used was 20 percent and the terminal values were estimated based upon terminal growth rates ranging from 5
to 11 percent reflecting management’s best estimates at the time. The discount rate was based upon Nortel Networks weighted-average
cost of capital as adjusted for the risks associated with the operations.
8.
I
ncome taxes
As of December 31, 2003, Nortel Networks net deferred tax assets, excluding discontinued operations, were $3,575, reflecting temporary
differences between the financial reporting and tax treatment of certain current assets and liabilities and non-current assets and liabilities,
in addition to the tax benefit of net operating and capital loss carryforwards and tax credit carryforwards.
In accordance with SFAS No. 109, “Accounting for Income Taxes” (“SFAS 109”), Nortel Networks reviews all available positive and
negative evidence to evaluate the recoverability of the deferred tax assets. This includes a review of such evidence as the carryforward
periods of the significant tax assets, Nortel Networks history of generating taxable income in its material tax jurisdictions and Nortel
Networks cumulative consolidated loss position.
Based on this review, Nortel Networks concluded that the valuation allowance as of December 31, 2003 was appropriate. Further, Nortel
Networks determined that it was more likely than not that the remaining deferred tax assets would be realized. If market conditions
deteriorate or future results of operations are less than expected, an additional tax valuation allowance may be required for all or a portion
of Nortel Networks deferred tax assets.
Nortel Networks is subject to ongoing examinations by certain taxation authorities of the jurisdictions in which it operates. Nortel
Networks regularly assesses the status of these examinations and the potential for adverse outcomes to determine the adequacy of the
provision for income and other taxes. Nortel Networks believes that it has adequately provided for tax adjustments that are probable as a
result of any ongoing examination.
Nortel Networks had previously entered into Advance Pricing Arrangements (“APAs”) with the taxation authorities of the U.S. and
Canada in connection with its intercompany transfer pricing and cost sharing arrangements between Canada and the U.S. These
arrangements expired in 1999 and 2000. In 2002, Nortel Networks filed APA requests with the taxation authorities of the U.S., Canada
and the United Kingdom (“U.K.”) that are expected to apply to the taxation years beginning in 2000. The APA requests are currently
under consideration. Nortel Networks has applied the transfer pricing methodology proposed in the APA requests since 2001. As part of
the APA applications, Nortel Networks has requested that the methodology adopted in 2001 be applied retroactively to the 2000 taxation
year. If the retroactive application is accepted by the taxation authorities, it would result in an increase in taxable income in certain
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urisdictions offset by an equal decrease in taxable income in the other jurisdictions. Nortel Networks has provided for any taxes and
interest that would be due as a result of retroactive application of the APAs.