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In addition to the above, we also expect to incur capital cash costs of approximately $50 in 2005 for facility improvements related to the real
estate actions.
We anticipate cost savings from the implementation of the work plan of approximately $500 in 2005, which is expected to increase on an
annualized basis beyond 2005 as the full impact of the work plan is realized. We expect that this work plan will primarily be funded with cash
from operations.
We expect that our consolidated revenues in 2004 will be slightly lower compared with 2003. The 2003 consolidated revenues included
revenues that were deferred from prior periods. We see growth opportunities in emerging markets such as China and India. Further, we believe
security and reliability for service provider networks are increasingly important to governments, defense interests and enterprises around the
world.
Developments in 2003 and 2004
2003 consolidated results summary
During 2003, we began to experience a period of relative industry stability following an unprecedented period of business realignment that
commenced in 2001 in response to a significant industry adjustment. In 2003, our consolidated revenues were $3,266 in the fourth quarter,
$2,344 in the third quarter, $2,285 in the second quarter and $2,298 in the first quarter. Although our revenues declined 7% in 2003 ($10,193 in
2003 compared to $11,008 in 2002), this decline represented a substantial improvement from the revenue decline of 42% experienced in 2002
compared to 2001 ($11,008 in 2002 compared to $18,900 in 2001). As well, throughout the second half of 2003, we announced several new
contracts across all of our reportable segments, but primarily in our Wireless Networks segment, as certain service provider customers began to
expand and upgrade their existing networks.
Our gross margin increased to 42.6% in 2003 compared to 35.5% in 2002, an improvement of approximately 7 percentage points. SG&A
expense declined 24% in 2003 compared to 2002 and R&D expense declined 6% in 2003 compared to 2002. The percentage declines in SG&A
and R&D expense were primarily due to actions taken to better align our expenses with the volume of business in 2003. Our R&D expense did
not decline to the same extent as our SG&A expense on a percentage basis due to our technology focus and commitment to invest in next
generation solutions. Special charges substantially declined in 2003 compared to 2002, primarily as a result of a substantial reduction in
charges associated with workforce reductions and goodwill impairment related to our restructuring work plan initiated in 2001.
Our discontinued operations contributed $184 of net earnings in 2003 compared to a net loss of $101 in 2002. The $184 of net earnings was
primarily the result of the completion of a number of transactions in 2003 associated with the wind-down activities of our discontinued
operations.
As a result of these improvements, we reported net earnings before cumulative effect of accounting changes of $446 in 2003 compared to a net
loss before cumulative effect of accounting changes of $2,994 in 2002.
Throughout 2003, we maintained our strong liquidity position. In 2003, our cash and cash equivalents, or cash, increased $207 from $3,790 at
December 31, 2002 to $3,997 at December 31, 2003. The improvement was primarily due to an increase in cash of $390 from our discontinued
operations, an increase in cash of $85 from our operating activities and favorable foreign exchange impacts of $176. These increases in cash
were partially offset by $359 of cash used in our financing activities and $85 used in our investing activities. As of December 31, 2003, our
long term debt totaled $4,010.
N
ortel Networks Audit Committee Independent Review; restatements; related matters
In May 2003, we commenced certain balance sheet reviews at the direction of certain members of former management that led to the
Comprehensive Review, which resulted in the First Restatement. See notes 3 and 23 of the accompanying consolidated financial statements
and the “Controls and Procedures” section of this report.
In connection with the Comprehensive Review, Deloitte & Touche LLP, or D&T, our independent auditors, informed the Audit Committee on
July 24, 2003 of a “reportable condition” that did not constitute a “material weakness” in our internal
41
Com
p
rehensive Review and First Restatement