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restatement (effected in December 2003) of our consolidated financial statements for the years ended December 31, 2002, 2001 and 2000 and
for the quarters ended March 31, 2003 and June 30, 2003, or the First Restatement. In late October 2003, the Audit Committees of our and
NNL’s Boards of Directors, or the Audit Committee, initiated an independent review of the facts and circumstances leading to the First
Restatement, or the Independent Review, and engaged the law firm now known as Wilmer Cutler Pickering Hale & Dorr LLP, or WCPHD, to
advise it in connection with the Independent Review. The Audit Committee sought to gain a full understanding of the events that caused
significant excess liabilities to be maintained on the balance sheet that needed to be restated, and to recommend that our Board of Directors
adopt, and direct management to implement, necessary remedial measures to address personnel, controls, compliance and discipline. 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 our and NNL’s Boards of Directors has
adopted these recommendations in their entirety and directed our management to develop a detailed plan and timetable for their
implementation, and will monitor their implementation.
As the Independent Review progressed, the Audit Committee directed new corporate management to examine in depth the concerns identified
by WCPHD regarding provisioning activity and to review certain provision releases. That examination, and other errors identified by
management, led to the restatement (effected today) of our financial statements for the years ended December 31, 2002 and 2001 and the
quarters ended March 31, 2003 and 2002, June 30, 2003 and 2002 and September 30, 2003 and 2002, or the Second Restatement, and our
revision of previously announced unaudited results for the year ended December 31, 2003. The need for the Second Restatement resulted in
delays in filing our and NNL’s 2003 Annual Reports on Form 10-K, or the 2003 Annual Reports, and Quarterly Reports on Form 10-Q for the
first, second and third quarters of 2004, or the 2004 Quarterly Reports, beyond the SEC’s required filing dates in 2004. We refer to the 2003
Annual Reports and the 2004 Quarterly Reports together as the Reports.
Over the course of the Second Restatement process, management identified certain accounting practices that it determined should be adjusted
as part of the Second Restatement. In particular, management identified certain errors related to revenue recognition and undertook a process of
revenue reviews. As described in more detail in the “Controls and Procedures” section of this report, in light of the resulting adjustments to
revenues previously reported in relevant periods, the Audit Committee has determined to review the facts and circumstances leading to the
restatement of these 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 seek a full understanding of the historic
events that required the revenues for these specific transactions to be restated and will consider any appropriate additional remedial measures,
including those involving internal controls and processes. The Audit Committee has engaged WCPHD to advise it in connection with this
review. See “Risk factors/forward looking statements.”
Over the course of the Second Restatement, we and our independent auditors identified a number of material weaknesses in our internal control
over financial reporting. Further, in connection with the Independent Review, we terminated for cause our former president and chief executive
officer, former chief financial officer and former controller in April 2004 and seven additional senior finance employees with significant
responsibilities for our financial reporting as a whole or for their respective business units and geographic areas in August 2004. We are subject
to significant pending civil litigation and ongoing regulatory and criminal investigations in the U.S. and Canada, which could require us to pay
substantial judgments, settlements, fines or other penalties.
We are currently in a challenging transitional period in connection with the completion of our restatement activity and as we implement the
new strategic plan. We believe that our strategic plan will enable us to build on our market leadership in developing the converged networks of
the future and improve business efficiency and operating cost performance in an increasingly competitive market.
H
ow we measure performance
Each reportable segment is allocated resources and assets based on whether projected customer demand would support additional investment.
We make adjustments to reduce resources and assets within a reportable segment in response to market conditions or where opportunities for
improved efficiencies present themselves.
Our president and chief executive officer, or CEO, has been identified as the chief operating decision maker in assessing the performance of
the segments and the allocation of resources to the segments. Each reportable segment is managed separately with each segment manager
reporting directly to the CEO. The CEO relies on the information derived directly from our management reporting system. In 2003, we
reported that the primary financial measure used by the former chief operating decision maker in assessing performance and allocating
resources to the segments was contribution margin, a measure that was comprised of gross profit less selling, general and administrative
expense, or SG&A. In April 2004, our and NNL’s boards of directors appointed a new CEO. Commencing in the second quarter of 2004, the
primary financial measure used by our CEO in assessing performance and allocating resources to the segments is management earnings
(loss) before income taxes, or Management EBT, a measure that includes contribution margin, R&D expense, interest expense, other income
(expense) — net, minority interest — net of tax and equity in net loss of associated companies — net of tax. As a result of the change in the
primary financial measure used to assess the performance of our segments during the period in which the
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