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volution of our supply chain strategy
Over the last five years, we have divested most of our manufacturing activities to Electronic Manufacturing Services, or EMS, suppliers. On
June 29, 2004, we announced an agreement with Flextronics regarding the divestiture of substantially all of our remaining manufacturing
operations, including product integration, testing and repair operations carried out in our 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 to purchase similar operations at our Monkstown, Northern Ireland and
Chateaudun, France Systems Houses, subject to the completion of the required information and consultation process.
Under the terms of the agreement and offer, Flextronics will also acquire our global repair services, as well as certain design assets in Ottawa,
Canada and Monkstown related to hardware and embedded software design, and related product verification for certain established optical
products.
We have entered into a four year supply agreement with Flextronics for manufacturing services (whereby Flextronics will manage
approximately $2,500 of our annual cost of sales) and a three year supply agreement for design services. The transfer of the optical design
operations and related assets in Ottawa and Monkstown closed in the fourth quarter of 2004. The portions of the transaction related to the
manufacturing activities in Montreal and Calgary are expected to close in the first and second quarters of 2005, respectively. The balance of the
transaction is expected to close on separate dates occurring during the first half of 2005. These transactions are subject to customary conditions
and regulatory approvals.
The successful completion of the agreement and offer with Flextronics will result in the transfer of approximately 2,500 of our employees to
Flextronics. We expect to receive cash proceeds ranging from approximately $675 to $725, which will be allocated to each separate closing
and, with respect to each closing, will be paid on an installment basis up to nine months thereafter. Such payments will be subject to a number
of adjustments, including from potential post-closing date asset valuations and potential post-closing indemnity payments. Flextronics also has
the ability in certain cases to exercise rights to sell back to us certain inventory and equipment after the expiration of a specified period (of up
to fifteen months) following each respective closing date. We do not expect such rights to be exercised with respect to any material amount of
inventory and/or equipment. The cash proceeds estimate is comprised of approximately $475 to $525 for inventory and equipment and $200
for intangible assets. The cash proceeds would be partially offset by related estimated transaction costs (including transition, potential
severance, and information technology implementation and real estate costs) of approximately $200.
We also announced that we plan to create Solutions Operations Centers in Calgary and Montreal and, pending the completion of information
and consultation processes in Europe, in Monkstown and Chateaudun. These centers are expected to have overall responsibility for the strategic
management and control of our various supply chains, including all customer interfaces, customer service, order management, quality
assurance, product cost management, new product introduction, and network solutions integration, testing and fulfillment.
We believe that the use of an outsourced manufacturing model has enabled us to benefit from leading manufacturing technologies, leverage
existing resources from around the world, lower our cost of sales, quickly adjust to fluctuations in market demand and decrease our investment
in plant, equipment and inventories. We continue to retain in-house all strategic management and overall control responsibilities associated
with our various supply chains, including all customer interfaces, customer service, order management, quality assurance, product cost-
management, new product introduction, and network solutions integration, testing and fulfillment.
Other business developments
At our Annual and Special Shareholders’ Meeting on April 24, 2003, our shareholders approved the reconfirmation and amendment of our
shareholder rights plan which will expire at the Annual Meeting of Shareholders to be held in 2006 unless it is reconfirmed at that time. Under
the shareholder rights plan, one right for each Nortel Networks Corporation common share outstanding may be issued. These rights become
exercisable upon the occurrence of certain events associated with an unsolicited takeover bid.
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