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On May 17, 2004, NNC announced that the OSC had issued a temporary order that prohibits all trading by directors, officers and certain
current and former employees in the securities of Nortel Networks and NNC, which temporary order was replaced with a final order
issued on May 31, 2004. The final order remains in effect until two full business days following the receipt by the OSC of all filings
required to be made by Nortel Networks and NNC pursuant to Ontario securities laws.
On June 29, 2004, NNC announced that it did not expect to timely file financial statements for the second quarter of 2004 and related
periodic reports in accordance with U.S. and Canadian securities laws.
On August 16, 2004, NNC received a letter from the Integrated Market Enforcement Team of the Royal Canadian Mounted Police
(“RCMP”) advising NNC that the RCMP would be commencing a criminal investigation into NNC’s financial accounting situation.
On August 19, 2004, NNC announced a new streamlined organizational structure, effective October 1, 2004, that involved, among other
things, combining the businesses of NNC’s four segments into two business organizations: (i) Carrier Networks and Global Operations,
and (ii) Enterprise Networks. Further, a focused workforce reduction of approximately 3,250 employees was announced. In addition, the
Audit Committee anticipated that there would be work done, in addition to that portion of the inquiry which affects Nortel Networks and
NNC’s ability to finalize their 2003 audited financial statements, in connection with its Independent Review, on remedial measures,
internal controls and improvements to processes.
On October 27, 2004, NNC announced that Nortel Networks and NNC did not expect to file their third quarter 2004 financial statements,
and the related periodic reports, by the required deadlines in November 2004 in compliance with certain U.S. and Canadian securities
regulations.
Subsequent to the March 10, 2004 announcement, numerous class action complaints, including ERISA class action complaints, have
been filed against Nortel Networks and NNC in the U.S. and Canada. In addition, a derivative action complaint has been filed against
NNC. Nortel Networks and NNC are subject to significant pending civil litigation which, if decided against Nortel Networks and NNC,
could result in substantial damages or other penalties which, in turn, could have a material adverse effect on the business, results of
operations, financial condition and liquidity of Nortel Networks.
In January 2005, the Audit Committee reported the findings of the Independent Review, together with its recommendations for governing
principles for remedial measures that were developed for the Audit Committee by WCPHD. Each of NNC and Nortel Networks’ Boards
of Directors has adopted those recommendations in their entirety and directed management to develop a detailed plan and timetable for
their implementation, and will monitor their implementation.
Also in January 2005, the Audit Committee determined to review the facts and circumstances leading to the restatement of certain
revenues for specific transactions identified in the Second Restatement. This review will have a particular emphasis on the underlying
conduct that led to the initial recognition of these revenues. The Audit Committee will develop any appropriate additional remedial
measures, and has engaged WCPHD to advise it in connection with such review.
Securit
y
a
g
reements
On April 28 2004, Nortel Networks notified the lenders under the Five Year Facilities that it was terminating the Five Year Facilities. As
a result of the termination of the Five Year Facilities, certain foreign security agreements entered into by Nortel Networks and various of
its subsidiaries, including the pledges by Nortel Networks and NNIF&H B.V. of their shares in Nortel Networks S.A, also terminated in
accordance with their terms.
Stock-based com
p
ensation
p
lans
As a result of Nortel Networks March 10, 2004 announcement, as described above under “Nortel Networks Audit Committee
Independent Review; restatements; related matters”, Nortel Networks suspended as of March 10, 2004: the purchase of Nortel Networks
Corporation common shares under the ESPPs; the exercise of outstanding options granted under the 2000 Plan or 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 Nortel Networks in connection with mergers and acquisitions; and the purchase of units in a Nortel Networks stock fund or
purchase of Nortel Networks Corporation common shares under Nortel Networks defined contribution and investments plans, until such
time that Nortel Networks is in compliance with U.S. and Canadian regulatory securities filing requirements.
Evolution of Nortel Networks su
pp
l
y
chain strate
gy
On June 29, 2004, Nortel Networks announced an agreement with Flextronics International Ltd. (“Flextronics”), regarding the divestiture
of substantially all of Nortel Networks remaining manufacturing operations, including product integration, testing and repair operations
carried out in Nortel Networks Systems Houses in Calgary and Montreal, Canada and Campinas, Brazil, as well as certain activities
related to these locations, including the management of the supply chain, related suppliers, and third-party logistics. In Europe,
Flextronics has made an offer