Nortel Networks Corporation | Reliant FORM 10-K guide

NORTEL NETWORKS CORPORATION

Consolidated Statements of Operations for the years ended December 31

(millions of U.S. dollars, except per share amounts)		2003		2002		2001
			As restated *		As restated *

Revenues	$	10,193	$	11,008	$	18,900
Cost of revenues		5,852		7,103		14,612


Gross profit		4,341		3,905		4,288
Selling, general and administrative expense		1,939		2,553		6,111
Research and development expense		1,960		2,083		3,116
In-process research and development expense		–		–		15
Amortization of intangibles
Acquired technology and other		101		157		806
Goodwill		–		–		4,058
Deferred stock option compensation		16		110		248
Special charges
Goodwill impairment		–		595		11,426
Other special charges		284		1,500		3,390
(Gain) loss on sale of businesses and assets		(4)		(21)		138


Operating earnings (loss)		45		(3,072)		(25,020)
Other income (expense) — net		445		(5)		(506)
Interest expense
Long-term debt		(181)		(220)		(208)
Other		(28)		(52)		(103)

Earnings (loss) from continuing operations before income taxes, minority interests and equity in net loss of associated
companies		281		(3,349)		(25,837)
Income tax benefit (expense)		80		468		2,751

		361		(2,881)		(23,086)
Minority interests — net of tax		(63)		5		(34)
Equity in net loss of associated companies — net of tax		(36)		(17)		(150)


Net earnings (loss) from continuing operations		262		(2,893)		(23,270)
Net earnings (loss) from discontinued operations — net of tax		184		(101)		(2,467)


Net earnings (loss) before cumulative effect of accounting changes		446		(2,994)		(25,737)
Cumulative effect of accounting changes — net of tax		(12)		–		15


Net earnings (loss)	$	434	$	(2,994)	$	(25,722)


Basic earnings (loss) per common share
— from continuing operations	$	0.06	$	(0.75)	$	(7.30)
— from discontinued operations		0.04		(0.03)		(0.78)


Basic earnings (loss) per common share	$	0.10	$	(0.78)	$	(8.08)


Diluted earnings (loss) per common share
— from continuing operations	$	0.06	$	(0.75)	$	(7.30)
— from discontinued operations		0.04		(0.03)		(0.78)


Diluted earnings (loss) per common share	$	0.10	$	(0.78)	$	(8.08)


Dividends declared per common share	$	–	$	–	$	0.0375

* See note 3

The accompanying notes are an integral part of these consolidated financial statements

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Reliant FORM 10-K manual Nortel Networks Corporation

Contents

For the transition period from Washington, D.CAnnual report pursuant to or 15d Securities Exchange Act Explanatory Note Table of Contents Item 9A Item 1. Business Overview Part Business environment Developments in 2003Page 2003 Strategic planOther business developments Network components Networking solutionsNetworking solutions Networking Products Wireless Networks Core networking Network accessProduct development Customers Markets Competition Circuit and packet voice solutionsEnterprise Networks Data networking and security solutions Wireline Networks Circuit and packet voice solutions Markets Optical Networks Product development Markets Backlog Sales and distribution Sources and availability of materials Product standards, certification and regulations Strategic alliances, acquisitions and minority investments Seasonality Intellectual property Research and development Employee relations Financial information by geographic area Environmental matters Risk factors Working capital Geographic Locations Item 2. PropertiesType of Site Number of Sites Owned Leased Item 3. Legal Proceedings Page Page Environmental matters High Low Item 4. Submission of Matters to a Vote of Security Holders Dividends DividendsCanadian tax matters Sales of unregistered securities Item 6. Selected Financial Data Unaudited 2003 2002 2001 2000 Total Revenues and cost of revenues adjustments Other adjustments Business overview Accounting changes and recent accounting pronouncements Our segments Business overviewOur business Our business environment How we measure performance Our strategic plan and outlook Comprehensive Review and First Restatement Consolidated results summary Years ended December 31, 2002 Independent ReviewSecond Restatement Revenues and cost of revenues Other Foreign exchangeIntercompany balances Special charges Dis operations First, second and third quartersReclassifications Page Revenues and cost of revenues Intercompany balances EDC Support Facility Revenue Independent ReviewPersonnel actions Debt securities Credit facilities and security agreements Stock-based compensation plans Shelf registration statementCredit ratings Regulatory actions and pending litigation Shareholder rights plan Evolution of our supply chain strategyOther business developments Real estate Ownership adjustment in our French and German operationsCustomer financing commitments Sale of Entrust shares Geographic revenues Results of operations continuing operationsCustomer financing arrangements Segment revenues 2004 2003 vs2002 vs Wireless Networks revenues 2002 vs Enterprise Networks revenues 2002 vs Wireline Networks revenues Optical Networks revenues 2002 vs For the years ended December 2003 vs 2002 vs 2001 Wireless NetworksGross profit and gross margin Segment gross profit and gross margin Optical Networks Wireline NetworksEnterprise Networks For the years ended December 2003 vs 2002 vs 2001 $ Change Selling, general and administrative expenseSegment selling, general and administrative expense Operating expenses Research and development expense Segment research and development expense Deferred stock option compensation Segment contribution marginSegment Management EBT Amortization of intangibles Special charges Page Other income expense net Gain loss on sale of businesses and assets Net earnings loss from continuing operations Results of operations dis operationsInterest expense Income tax benefit expense 2003 2002 Liquidity and capital resourcesCash flows Page Uses of liquidity Obligations under special charges Contractual cash obligationsPurchase obligations Outsourcing contracts Other long-term liabilities reflected on the balance sheets JDS purchase arrangementCustomer financing Pension, post-retirement and post-employment obligations Credit facilities Joint ventures/minority interestsDis operations Sources of liquidity Shelf registration statement and base shelf prospectus Bid, performance related and other bonds Off-balance sheet arrangementsCredit ratings Other indemnifications or guarantees Revenue recognition Application of critical accounting estimates Provisions for doubtful accounts Provisions for inventory Tax asset valuation Income taxes Goodwill valuation Tax contingencies Pension and post-retirement benefits Change in Assumption Special charges Accounting changes Accounting changes and recent accounting pronouncementsOther contingencies Recent accounting pronouncements Market risk Equity price risk Risks relating to our restatements and related matters Legal proceedingsRisk factors/forward looking statements Page Operations, financial condition and liquidity Page Page Page Page Risks relating to our business Page Page Page Page 104 Page Page Page Page Page Page Page Index to Consolidated Financial Statements Report of Independent Registered Chartered Accountants Nortel Networks Corporation Assets Consolidated Balance Sheets as of December Total comprehensive income loss for the year Cash flows from used in operating activities Principles of consolidation Nortel Networks CorporationSignificant accounting policies Basis of presentation Revenue recognition Translation of foreign currencies Research and development Restricted cash and cash equivalents Income taxesEarnings loss per common share Cash and cash equivalents Plant and equipment Receivables salesInvestments Goodwill Long-lived assets held and used Derivative financial instruments Warranty costsIntangible assets Pension, post-retirement and post-employment benefits Stock-based compensation 2003 2002 2001 2003 2002 2001 Black-Scholes weighted-average assumptionsWeighted-average stock option fair value per option granted Recent accounting pronouncements Comparative figures Second Restatement RestatementFirst Restatement Page Page 121 Total restatement adjustments 289 183 314 272 Page Revenues and cost of revenues Revenues Cost of revenues 2002 2001 Revenue recognition adjustmentsOther adjustments Application of SAB 101 or SOP Foreign exchange Other revenue recognition adjustmentsPresentation errors Reseller transactions Goodwill impairment 980 Nplc business acquisition Other errorsFunctional currency designation Intercompany transaction designation Other Goodwill impairment other acquisitionsOther special charges Research and development expense Selling, general and administrative expense2002 2001 Other adjustments Cost of revenues Reclassifications Other income expense netInterest expense Income taxes and minority interests Decrease to net loss on disposal of operations net of tax Dis operations Balance sheet Other adjustments Accounting changes GuaranteesConsolidated Balance Sheet as of December 31 Consolidation of variable interest entities Asset retirement obligationsPage Accounting for goodwill and other intangible assets Determining whether an arrangement contains a leasePensions and other post-retirement benefits Stock-based compensation 23,270 Consolidated statements of operations Derivative financial instrumentsConsolidated financial statement details Other current assets Consolidated balance sheetsAccounts receivable net Inventories net Other accrued liabilities Wireless Enterprise WirelineGoodwill Intangible assets net Change in operating assets and liabilities Interest and taxes paid recoveredOther liabilities Minority interests in subsidiary companies Segment information General description Receivables sales Contribution margin SegmentsProduct revenues 2003 2002 2001 Revenues Long-lived assets Geographic information Year ended December 31 Special charges During December 2003 Lease costs a Accrued Costs Payments Adjustments Balance as Incurred MadeJanuary Year ended December 31 Income taxes 2003 2002 2001 Credits b Total Employee benefit plansNet Operating Capital Tax Losses Page Change in plan assets 2003 2002 Change in benefit obligation Defined benefit plans 20032002 2003 2002 2001 Pension expenseAllocation of net pension expense 2003 2002 Target Actual 2003 2002 2001 Post-retirement benefit costPage Compensation Other acquisitionsNet tangible Deferred Closing date Purchase Acquisition Price Goodwill Technology High speed module operations Service commerce operationsDivestitures Sale of Arris Group, Inc. investment Long-term debt Sale of ClarifyClosures Long-term debt, credit and support facilities Credit facilities Foreign currency risk Support facilityFinancial instruments and hedging activities Risk management Cross currency coupon swap contracts Equity price riskFair value 2003 2002 Interest rate swap contracts Fair Credit riskOther derivatives Receivables sales Intellectual property indemnification obligations GuaranteesBusiness sale and business combination agreements Third party debt agreements Lease agreements Bid, performance related and other bonds Other indemnification agreementsProduct warranties Commitments Venture capital financing Customer financing Leases Contracts Charges Income Purchase commitmentsOperating leases and other commitments Operating Outsourcing Capital stock Common shares Restricted cash and cash equivalents Prepaid forward purchase contracts Earnings loss per common share Preferred sharesDividends Shareholder rights plan Stock-based compensation plans Stock options Accumulated other comprehensive loss Maximum Options Restricted stock unit plan Employee stock purchase plans Directors’ deferred share compensation plans Dis operations 2003 2002 2001 Cash flows from used in dis operations Activity Activity Contingencies Related party transactionsPage Page Environmental matters Subsequent events EDC Support Facility Credit facilities and security agreements Stock exchanges Directory and operator services businessDebt securities Stock-based compensation plans Evolution of Nortel Networks supply chain strategy Supplemental consolidating financial information Nortel Non Nortel Non 612 450 15,364 380 Supplemental Consolidating Balance Sheets as of December 31 182 240 413 388 262 16,961 Nortel Non Networks 818 592 487 525 768 572 111 648 206 Quarterly Financial Data Unaudited Report of Independent Registered Chartered Accountants Beginning To costs End Schedule ConsolidatedAdditions Charged Item 9A. Controls and Procedures 114 Scope of the Independent Review Summary of Findings of the Independent Review Page Page Page Governing Principles for Remedial Measures Page Page Page Page Additional Background Page Second Restatement Independent Review Second Restatement Process Page Fixed or determinable fees-An increase of $133 million Page Principal Adjustments Page Page Revenue Independent Review Remedial Measures Page Name Age Position with the Company Page Page Page Name and age Office and position currently held Appointment Year Subsequent appointment Code of ethics and other corporate governance matters Beneficial ownership reporting complianceAudit committee financial expert Audit committee Summary compensation table Item 11. Executive Compensation Salary Bonus Long Term Compensation Name Principal PositionYear Annual Compensation 147 148 149 150 Option grants in 2004 Annual cash incentive awards Realized $ Exercisable CommonValue of Unexercised In-the-Money 152 Exercisable Unexercisable Dunn Debon Spradley Bolouri DeRoma Maturation or Payout Threshold# Target# Maximum# #12 Long-term incentive plans awards in last two fiscal years Retirement plans Page Total Earnings Certain employment arrangements Page Compensation of directors Security ownership of directors and management Compensation committee interlocks and insider participation Title of Class of Security Name of Beneficial Owner 163 Plan category Equity compensation plan information Indebtedness of management Item 13. Certain Relationships and Related Transactions January 1 Item 14. Principal Accountant Fees and ServicesTable of Indebtedness of Directors and Executive Officers Audit Fees All Other Fees Audit-Related FeesTax Fees Reports on Form 8-K Page Page Page Number Description Exhibit IndexExhibit Number Description Number Description Number Description Number Description Number Description Subsidiary of Nortel Networks Limited Report of Independent Registered Public Accounting Firm 182 183 184 Nortel Networks S.A Nortel Networks S.A Use of estimates Research and development Cash and cash equivalents Plant and equipment Financial instruments State sponsored pension plans 192 Restatement Restated Second Pooling PreviouslyInterest Reported Interest Pooled Reported Accruals Net increase decrease of cost of revenues Accruals and provisionsNet increase decrease to net loss 2002 2001 Increase decrease of cost of revenues Net increase decrease of research and development Other expensesRelated party transactions 2002 2001 Increase decrease of research and development Plant and equipment Residual profit sharingRelated party revenues and cost of revenues Related party out of balances Interest on long- term debt Costs of revenues, research and development expense Consolidated Balance Sheets as of December 31 Guarantees Consolidation of variable interest entities Asset retirement obligations Accounting for goodwill and other intangible assets Determining whether an arrangement contains a leaseStock-based compensation Derivative financial instruments 204 Networks WirelessWireline Optical Investment at cost net Long-term debt Segment information General description Major customers Contract Geographic informationLong-lived assets 2003 2002 2001 External revenues Expected sublease revenue on leases Income taxes Matra Nortel Communication Distribution Acquisitions and divestitures AcquisitionsNorthern Telecom France Nortel Networks France Other profit sharing agreements Financing transactions RoyaltiesSale of investment Share pledge Financial instruments Joint ventures/minority interests/disposed business Leases Contracts Shareholders’ equity Plan a Outstanding Weighted Options Nortel Networks Company Savings Plan Security agreements Page Signatures Directors