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instruments are considered investment grade. Included in equity securities are developed and emerging market stocks of companies at a
variety of capitalization levels. The securities are predominantly publicly traded. The amount of employer and related-party securities
that the defined benefit plans may hold is governed by the statutory limitations of the jurisdictions of the applicable plans. Included in
equity securities of the defined benefit plans are common shares of Nortel Networks Corporation with an aggregate market value of $13
(0.2 percent of total plan assets) and $3 (0.1 percent of total plan assets) as of December 31, 2003 and 2002, respectively.
As a policy, assets within the defined benefit plans are reviewed to the target allocations at least on a quarterly basis and adjustments
made as appropriate. The plans commission periodic asset and liability studies to determine the optimal allocation of the portfolio’s
assets. These studies consider a variety of the plan characteristics, including membership, benefits, and liquidity needs, and utilize mean-
variance analysis of historic and projected investment returns to develop a range of acceptable asset mixes among a variety of asset
classes.
To develop the expected long-term rate of return on assets assumption, Nortel Networks considered the weighted-average historical
returns and the future expectations for returns for each asset class.
Nortel Networks made cash contributions of approximately $140 in 2004 to the defined benefit plans, which excluded $78 of deferred
contributions for 2004 which were made in 2003, and approximately $30 in 2004 to the post-retirement benefit plans.
Under the terms of the Balanced Program, Investor Program and Traditional Program, eligible employees may contribute a portion of
their compensation to an investment plan. Based on the specific program that the employee is enrolled in, Nortel Networks matches a
percentage of the employee’s contributions up to a certain limit. The cost of these investment plans was $73, $89 and $139 for the years
ended December 31, 2003, 2002 and 2001, respectively.
Under the terms of the Balanced Program and Flexible Benefits Plan, Nortel Networks contributes a fixed percentage of employees’
eligible earnings to a defined contribution plan arrangement. The cost of these plan arrangements was $17, $21 and $30 for the years
ended December 31, 2003, 2002 and 2001, respectively.
10.
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uisitions
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ortel Networks German
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and Nortel Networks France
On October 19, 2002, Nortel Networks, through various subsidiaries, entered into a number of put option and call option agreements as
well as a share exchange agreement with European Aeronautic Defence and Space Company EADS N.V. (“EADS”), its partner at that
time in three European joint ventures. The written options were marked to fair value through the consolidated statements of operations at
each period end until they were exercised. At December 31, 2002, Nortel Networks estimated the fair value of the written options to be
approximately $81, which was included within other accrued liabilities, and the corresponding loss was recorded in other income
(expense) — net during the year ended December 31, 2002. A further mark to fair value adjustment and loss of $18 was recorded during
the year ended December 31, 2003. The purchased options and the share exchange were initially recorded at fair value and were assessed
for impairment throughout their term until they were exercised or expired. The estimated fair values of the options were based on an
estimate of the current fair values of the respective joint ventures using an option-pricing model that is dependent on the assumptions
used concerning the amount of volatility and the discount rates that reflect varying degrees of risk.
On July 1, 2003, EADS exercised its put option to sell its minority interest of 45 percent in Nortel Networks France S.A.S. (“NNF”) to
Nortel Networks. On July 18, 2003, Nortel Networks exercised its call option and share exchange rights to acquire the minority interest
held by EADS of 42 percent in Nortel Networks Germany GmbH & Co. KG (“NNG”) and to sell Nortel Networks equity interest of
41 percent in EADS Telecom S.A.S., formerly EADS Defence and Security Networks S.A.S (“EADS Telecom”) to EADS. The
transactions were completed on September 18, 2003.
During the three months ended September 30, 2003, Nortel Networks recorded the acquisitions of the minority interests of NNF and
NNG based on preliminary valuation estimates totaling $241. The purchase price of $241 included $58 of cash, an in-kind component of
approximately $82 representing the return of a loan note that was owed to Nortel Networks by EADS Telecom and the remaining shares
of EADS Telecom held by Nortel Networks. The allocation of the purchase price resulted in the elimination of $23 of minority interest,
settlement of a net liability of $94 related to the