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Reliant FORM 10-K manual

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communications and related accounting entries over multiple fiscal periods. In addition, the review of accruals and provisions and the application of accounting literature to certain matters in the Second Restatement, including revenue recognition, foreign exchange, special charges and discontinued operations, was complicated by the passage of time, lack of availability of supporting records and the turnover of finance personnel. As a result of this complexity, estimates and assumptions that impact both the quantum of the various recorded adjustments and the fiscal period to which they were attributed were required in the determination of certain of the Second Restatement adjustments. Nortel Networks believes the procedures followed in determining such estimates were appropriate and reasonable using the best available information.

The following tables present the impact of the Second Restatement adjustments on Nortel Networks previously reported consolidated statements of operations and a summary of the adjustments from the Second Restatement for the years ended December 31, 2002 and 2001. The Second Restatement adjustments related primarily to the following items, each of which reflect a number of related adjustments that have been aggregated for disclosure purposes, and are described in the paragraphs following the tables below:

•Revenues and cost of revenues;

•Foreign exchange;

•Intercompany balances;

•Special charges;

•Other;

•Reclassifications; and

•Discontinued operations.

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Reliant FORM 10-K manual

Contents

Securities Exchange Act Washington, D.CAnnual report pursuant to or 15d For the transition period fromExplanatory Note Table of Contents Item 9A Part Item 1. Business OverviewDevelopments in 2003 Business environmentPage 2003 Strategic planOther business developments Networking Networking solutionsNetworking solutions Network componentsWireless Networks ProductsCore networking Network accessProduct development Markets CustomersCompetition Circuit and packet voice solutionsEnterprise Networks Data networking and security solutions Wireline Networks Circuit and packet voice solutions Markets Optical Networks Product development Markets Sales and distribution BacklogProduct standards, certification and regulations Sources and availability of materialsSeasonality Strategic alliances, acquisitions and minority investmentsResearch and development Intellectual propertyEmployee relations Environmental matters Financial information by geographic areaWorking capital Risk factorsNumber of Sites Owned Leased Item 2. PropertiesType of Site Geographic LocationsItem 3. Legal Proceedings Page Page Environmental matters Item 4. Submission of Matters to a Vote of Security Holders High LowSales of unregistered securities DividendsCanadian tax matters DividendsItem 6. Selected Financial Data Unaudited 2003 2002 2001 2000 Revenues and cost of revenues adjustments TotalOther 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 Consolidated results summary Comprehensive Review and First RestatementYears ended December 31, 2002 Independent ReviewSecond Restatement Revenues and cost of revenues Special charges Foreign exchangeIntercompany balances OtherDis operations First, second and third quartersReclassifications Page Revenues and cost of revenues Intercompany balances EDC Support Facility Revenue Independent ReviewPersonnel actions Credit facilities and security agreements Debt securitiesRegulatory actions and pending litigation Shelf registration statementCredit ratings Stock-based compensation plansShareholder rights plan Evolution of our supply chain strategyOther business developments Sale of Entrust shares Ownership adjustment in our French and German operationsCustomer financing commitments Real estateSegment revenues Results of operations continuing operationsCustomer financing arrangements Geographic revenues2004 2003 vs2002 vs Wireless Networks revenues 2002 vs Enterprise Networks revenues 2002 vs Wireline Networks revenues Optical Networks revenues 2002 vs Segment gross profit and gross margin Wireless NetworksGross profit and gross margin For the years ended December 2003 vs 2002 vs 2001Optical Networks Wireline NetworksEnterprise Networks Operating expenses Selling, general and administrative expenseSegment selling, general and administrative expense For the years ended December 2003 vs 2002 vs 2001 $ ChangeResearch and development expense Segment research and development expense Amortization of intangibles Segment contribution marginSegment Management EBT Deferred stock option compensationSpecial charges Page Gain loss on sale of businesses and assets Other income expense netIncome tax benefit expense Results of operations dis operationsInterest expense Net earnings loss from continuing operations2003 2002 Liquidity and capital resourcesCash flows Page Uses of liquidity Outsourcing contracts Contractual cash obligationsPurchase obligations Obligations under special chargesPension, post-retirement and post-employment obligations JDS purchase arrangementCustomer financing Other long-term liabilities reflected on the balance sheetsSources of liquidity Joint ventures/minority interestsDis operations Credit facilitiesShelf registration statement and base shelf prospectus Bid, performance related and other bonds Off-balance sheet arrangementsCredit ratings Other indemnifications or guarantees Application of critical accounting estimates Revenue recognitionProvisions for doubtful accounts Provisions for inventory Income taxes Tax asset valuationTax contingencies Goodwill valuationPension and post-retirement benefits Special charges Change in AssumptionAccounting 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 Consolidated Balance Sheets as of December AssetsTotal comprehensive income loss for the year Cash flows from used in operating activities Basis of presentation Nortel Networks CorporationSignificant accounting policies Principles of consolidationTranslation of foreign currencies Revenue recognitionResearch and development Cash and cash equivalents Income taxesEarnings loss per common share Restricted cash and cash equivalentsPlant and equipment Receivables salesInvestments Long-lived assets held and used GoodwillPension, post-retirement and post-employment benefits Warranty costsIntangible assets Derivative financial instrumentsStock-based compensation 2003 2002 2001 2003 2002 2001 Black-Scholes weighted-average assumptionsWeighted-average stock option fair value per option granted Comparative figures Recent accounting pronouncementsSecond Restatement RestatementFirst Restatement Page Page 121 Total restatement adjustments 289 183 314 272 Page Revenues and cost of revenues Application of SAB 101 or SOP Revenue recognition adjustmentsOther adjustments Revenues Cost of revenues 2002 2001Reseller transactions Other revenue recognition adjustmentsPresentation errors Foreign exchangeIntercompany transaction designation Other errorsFunctional currency designation Goodwill impairment 980 Nplc business acquisitionOther Goodwill impairment other acquisitionsOther special charges Cost of revenues Selling, general and administrative expense2002 2001 Other adjustments Research and development expenseIncome taxes and minority interests Other income expense netInterest expense ReclassificationsDis operations Decrease to net loss on disposal of operations net of taxOther adjustments Balance sheetAccounting changes GuaranteesConsolidated Balance Sheet as of December 31 Asset retirement obligations Consolidation of variable interest entitiesPage Stock-based compensation Determining whether an arrangement contains a leasePensions and other post-retirement benefits Accounting for goodwill and other intangible assets23,270 Consolidated statements of operations Derivative financial instrumentsConsolidated financial statement details Inventories net Consolidated balance sheetsAccounts receivable net Other current assetsIntangible assets net Wireless Enterprise WirelineGoodwill Other accrued liabilitiesMinority interests in subsidiary companies Interest and taxes paid recoveredOther liabilities Change in operating assets and liabilitiesReceivables sales Segment information General description2003 2002 2001 Revenues SegmentsProduct revenues Contribution marginGeographic information Long-lived assetsSpecial charges Year ended December 31During 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 2003 2002 Change in benefit obligation Change in plan assetsDefined benefit plans 20032002 2003 2002 2001 Pension expenseAllocation of net pension expense 2003 2002 2001 Post-retirement benefit cost 2003 2002 Target ActualPage Acquisition Price Goodwill Technology Other acquisitionsNet tangible Deferred Closing date Purchase CompensationSale of Arris Group, Inc. investment Service commerce operationsDivestitures High speed module operationsLong-term debt, credit and support facilities Sale of ClarifyClosures Long-term debtCredit facilities Risk management Support facilityFinancial instruments and hedging activities Foreign currency risk2003 2002 Interest rate swap contracts Equity price riskFair value Cross currency coupon swap contractsReceivables sales Credit riskOther derivatives FairIntellectual property indemnification obligations GuaranteesBusiness sale and business combination agreements Lease agreements Third party debt agreementsCommitments Other indemnification agreementsProduct warranties Bid, performance related and other bondsCustomer financing Venture capital financingOperating Outsourcing Purchase commitmentsOperating leases and other commitments Leases Contracts Charges IncomeRestricted cash and cash equivalents Capital stock Common sharesPrepaid forward purchase contracts Shareholder rights plan Preferred sharesDividends Earnings loss per common shareAccumulated other comprehensive loss Stock-based compensation plans Stock optionsMaximum Restricted stock unit plan OptionsDirectors’ deferred share compensation plans Employee stock purchase plansDis operations Activity 2003 2002 2001 Cash flows from used in dis operationsActivity Related party transactions ContingenciesPage Page Environmental matters Subsequent events EDC Support Facility Credit facilities and security agreements Stock-based compensation plans Directory and operator services businessDebt securities Stock exchangesEvolution 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 Charged Schedule ConsolidatedAdditions Beginning To costs EndItem 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 Year Name and age Office and position currently held AppointmentSubsequent appointment Audit committee Beneficial ownership reporting complianceAudit committee financial expert Code of ethics and other corporate governance mattersItem 11. Executive Compensation Summary compensation tableAnnual Compensation Long Term Compensation Name Principal PositionYear Salary Bonus147 148 149 150 Annual cash incentive awards Option grants in 2004In-the-Money CommonValue of Unexercised Realized $ Exercisable152 Dunn Debon Spradley Bolouri DeRoma Exercisable UnexercisableLong-term incentive plans awards in last two fiscal years Maturation or Payout Threshold# Target# Maximum# #12Retirement plans Page Total Earnings Certain employment arrangements Page Compensation of directors Compensation committee interlocks and insider participation Security ownership of directors and managementName of Beneficial Owner Title of Class of Security163 Equity compensation plan information Plan categoryItem 13. Certain Relationships and Related Transactions Indebtedness of managementAudit Fees Item 14. Principal Accountant Fees and ServicesTable of Indebtedness of Directors and Executive Officers January 1All 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 State sponsored pension plans Financial instruments192 Restatement Reported Second Pooling PreviouslyInterest RestatedAccruals Interest Pooled Reported2002 2001 Increase decrease of cost of revenues Accruals and provisionsNet increase decrease to net loss Net increase decrease of cost of revenues2002 2001 Increase decrease of research and development Other expensesRelated party transactions Net increase decrease of research and developmentRelated party out of balances Residual profit sharingRelated party revenues and cost of revenues Plant and equipmentCosts of revenues, research and development expense Interest on long- term debtGuarantees Consolidated Balance Sheets as of December 31Asset retirement obligations Consolidation of variable interest entitiesAccounting for goodwill and other intangible assets Determining whether an arrangement contains a leaseStock-based compensation Derivative financial instruments 204 Investment at cost net WirelessWireline Optical NetworksLong-term debt Segment information General description Major customers 2003 2002 2001 External revenues Geographic informationLong-lived assets ContractExpected sublease revenue on leases Income taxes Nortel Networks France Acquisitions and divestitures AcquisitionsNorthern Telecom France Matra Nortel Communication DistributionOther profit sharing agreements Financing transactions RoyaltiesSale of investment Financial instruments Share pledgeJoint ventures/minority interests/disposed business Shareholders’ equity Leases ContractsPlan a Outstanding Weighted Options Nortel Networks Company Savings Plan Security agreements Page Signatures Directors