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Nortel Networks 10-Q 2009
Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended September 30, 2009

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period From                     to

Commission File Number: 001-07260

 

 

Nortel Networks Corporation

(Exact name of registrant as specified in its charter)

 

 

 

Canada   98-0535482

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

195 The West Mall

Toronto, Ontario, Canada

  M9C 5K1
(Address of Principal Executive Offices)   (Zip Code)

Registrant’s Telephone Number Including Area Code (905) 863-7000

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer  x    Accelerated filer  ¨    Non-accelerated filer  ¨    Smaller reporting company  ¨
      (Do not check if a smaller reporting company)   

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of October 30, 2009.

498,206,366 shares of common stock without nominal or par value

 

 

 


Table of Contents

TABLE OF CONTENTS

 

          PAGE
     PART I     
     FINANCIAL INFORMATION     

ITEM 1.

   Condensed Consolidated Financial Statements (unaudited)    1

ITEM 2.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   79

ITEM 3.

   Quantitative and Qualitative Disclosures About Market Risk    147

ITEM 4.

   Controls and Procedures    148
   PART II   
   OTHER INFORMATION   

ITEM 1.

   Legal Proceedings    150

ITEM 1A.

   Risk Factors    151

ITEM 2.

   Unregistered Sales of Equity Securities and Use of Proceeds    151

ITEM 5(b).

   Other Information    151

ITEM 6.

   Exhibits    152

SIGNATURES

   153

All dollar amounts in this document are in United States Dollars unless otherwise stated.

NORTEL, NORTEL (Logo), NORTEL NETWORKS, the Globemark, NT, NORTEL GOVERNMENT SOLUTIONS and PASSPORT are trademarks of Nortel Networks.

MOODY’S is a trademark of Moody’s Investors Service, Inc.

NYSE is a trademark of the New York Stock Exchange, Inc.

S&P and STANDARD & POOR’S are trademarks of The McGraw-Hill Companies, Inc.

All other trademarks are the property of their respective owners.


Table of Contents

PART 1

FINANCIAL INFORMATION

 

ITEM 1. Condensed Consolidated Financial Statements (unaudited)

NORTEL NETWORKS CORPORATION

(Under Creditor Protection Proceedings as of January 14, 2009—note 2)

Condensed Consolidated Statements of Operations (unaudited)

(Millions of U.S. Dollars, except per share amounts)

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
         2009             2008             2009             2008      

Revenues:

        

Products

   $ 962      $ 1,443      $ 3,060      $ 5,113   

Services

     83        152        234        439   
                                

Total revenues

     1,045        1,595        3,294        5,552   
                                

Cost of revenues:

        

Products

     548        923        1,785        3,067   

Services

     27        62        81        175   
                                

Total cost of revenues

     575        985        1,866        3,242   
                                

Gross profit

     470        610        1,428        2,310   

Selling, general and administrative expense

     155        272        540        919   

Research and development expense

     184        269        608        905   

Amortization of intangible assets

     3        (7     9        16   

Goodwill impairment

     —          661        —          661   

Special charges

     —          41        —          166   

Loss (gain) on sales of businesses and sales and impairments of assets

     15        (6     (1     (10

Other operating expense—net (note 6)

     46        15        46        33   
                                

Operating earnings (loss)

     67        (635     226        (380

Other income (expense)—net (note 6)

     60        (14     13        (11

Interest and dividend income

     —          27        —          95   

Interest expense (contractual interest expense for three and nine months ended September 30, 2009 was $79 and $236, respectively)

        

Long-term debt

     (75     (78     (224     (225

Other

     —          (3     (1     (12
                                

Earnings (loss) from continuing operations before reorganization items, income taxes and equity in net earnings of associated companies and Equity Investees

     52        (703     14        (533

Reorganization items—net (note 5)

     (223     —          (284     —     
                                

Loss from continuing operations before income taxes, and equity in net loss of associated companies and Equity Investees

     (171     (703     (270     (533

Income tax expense

     (10     (2,133     (47     (2,234
                                

Loss from continuing operations before equity in net loss of associated companies and Equity Investees

     (181     (2,836     (317     (2,767

Equity in net loss of associated companies—net of tax

     (1     —          (1     2   

Equity in net loss of Equity Investees (note 22)

     (159     —          (448     —     
                                

Net loss from continuing operations

   $ (341   $ (2,836   $ (766   $ (2,765

Net loss from discontinued operations—net of tax

     (164     (556     (488     (745
                                

Net loss

   $ (505   $ (3,392   $ (1,254   $ (3,510

Income attributable to noncontrolling interests

     (3     (21     (35     (154
                                

Net loss attributable to Nortel Networks Corporation

   $ (508   $ (3,413   $ (1,289   $ (3,664
                                

Basic and diluted loss per common share—continuing operations

   $ (0.69   $ (5.73   $ (1.61   $ (5.86
                                

Basic and diluted loss per common share—discontinued operations

   $ (0.33   $ (1.12   $ (0.98   $ (1.50
                                

Total basic and diluted loss per common share

   $ (1.02   $ (6.85   $ (2.59   $ (7.36
                                

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

 

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NORTEL NETWORKS CORPORATION

(Under Creditor Protection Proceedings as of January 14, 2009—note 2)

Condensed Consolidated Balance Sheets (unaudited)

(Millions of U.S. Dollars, except share amounts)

 

     September 30,
2009
    December 31,
2008
 
ASSETS     

Current assets

    

Cash and cash equivalents

   $ 1,818      $ 2,397   

Short-term investments

     6        65   

Restricted cash and cash equivalents

     118        36   

Accounts receivable—net

     901        2,154   

Inventories—net

     350        1,477   

Deferred income taxes—net

     12        44   

Other current assets

     373        455   

Assets held for sale (note 8)

     208        —     

Assets of discontinued operations (note 4)

     727        —     
                

Total current assets

     4,513        6,628   

Investments

     139        127   

Plant and equipment—net

     786        1,272   

Goodwill

     10        180   

Intangible assets—net

     54        143   

Deferred income taxes—net

     13        12   

Other assets

     190        475   
                

Total assets

   $ 5,705      $ 8,837   
                
LIABILITIES AND SHAREHOLDERS’ DEFICIT     

Current liabilities

    

Trade and other accounts payable

   $ 300      $ 1,001   

Payroll and benefit-related liabilities

     167        453   

Contractual liabilities

     96        213   

Restructuring liabilities

     9        146   

Other accrued liabilities (note 6)

     743        2,674   

Long-term debt due within one year

     —          19   

Liabilities held for sale (note 8)

     398        —     

Liabilities of discontinued operations (note 4)

     613        —     
                

Total current liabilities

     2,326        4,506   

Long-term liabilities

    

Long-term debt

     41        4,501   

Investment in net liabilities of Equity Investees (note 22)

     476        —     

Deferred income taxes—net

     7        11   

Other liabilities (note 6)

     475        2,948   
                

Total long-term liabilities

     999        7,460   

Liabilities subject to compromise (note 20)

     6,921        —     
                

Total liabilities

     10,246        11,966   
                

Guarantees, commitments, contingencies and subsequent events (notes 2, 14, 16, 23 and 24, respectively)

    
SHAREHOLDERS’ DEFICIT     

Common shares, without par value—Authorized shares: unlimited; Issued and outstanding shares: 497,946,541 and 497,893,086 as of September 30, 2009 and December 31, 2008, respectively

     35,597        35,593   

Additional paid-in capital

     3,644        3,547   

Accumulated deficit

     (43,652     (42,362

Accumulated other comprehensive loss

     (931     (729
                

Total Nortel Networks Corporation shareholders’ deficit

     (5,342     (3,951

Noncontrolling interests

     801        822   
                

Total shareholders’ deficit

     (4,541     (3,129
                

Total liabilities and shareholders’ deficit

   $ 5,705      $ 8,837   
                

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

 

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NORTEL NETWORKS CORPORATION

(Under Creditor Protection Proceedings as of January 14, 2009—note 2)

Condensed Consolidated Statements of Cash Flows (unaudited)

(Millions of U.S. Dollars)

 

     Nine Months Ended
September 30,
 
     2009     2008  

Cash flows from (used in) operating activities

    

Net loss attributable to Nortel Networks Corporation

   $ (1,289   $ (3,664

Net loss from discontinued operations—net of tax

     488      $ 745   

Adjustments to reconcile net loss from continuing operations to net cash from (used in) operating activities, net of effects from acquisitions and divestitures of businesses:

    

Amortization and depreciation

     157        220   

Goodwill impairment

     —          661   

Non-cash portion of cost reduction activities

     18        13   

Equity in net loss (earnings) of associated companies—net of tax

     1        (2

Equity in net loss of Equity Investees (note 22)

     448        —     

Share-based compensation expense

     86        64   

Deferred income taxes

     22        2,113   

Pension and other accruals

     157        85   

Loss on sales of businesses and impairments of assets—net

     1        10   

Income attributable to noncontrolling interests—net of tax

     35        154   

Reorganization items—non cash

     265        —     

Other—net

     (529     (424

Change in operating assets and liabilities

     379        (460
                

Net cash from (used in) operating activities—continuing operations

     239        (485

Net cash from (used in) operating activities—discontinued operations

     (18     7   
                

Net cash from (used in) operating activities

     221        (478
                

Cash flows from (used in) investing activities

    

Expenditures for plant and equipment

     (32     (104

Proceeds on disposals of plant and equipment

     87        —     

Change in restricted cash and cash equivalents

     (82     23   

Increase in short and long-term investments

     —          (362

Decrease in short and long-term investments

     40        —     

Acquisitions of investments and businesses—net of cash acquired

     (1     (73

Proceeds from the sales of investments and businesses and assets—net

     6        (26
                

Net cash from (used in) investing activities—continuing operations

     18        (542

Net cash from (used in) investing activities—discontinued operations

     13        (52
                

Net cash from (used in) investing activities

     31        (594
                

Cash flows from (used in) financing activities

    

Dividends paid, including paid by subsidiaries to noncontrolling interests

     (6     (30

Capital repayment to noncontrolling interests

     (29     —     

Increase in notes payable

     36        116   

Decrease in notes payable

     (76     (107

Proceeds from issuance of long-term debt

     —          668   

Repayments of long-term debt

     —          (675

Debt issuance costs

     —          (13

Repayments of capital leases

     (7     (16
                

Net cash used in financing activities—continuing operations

     (82     (57

Net cash used in financing activities—discontinued operations

     (1     (1
                

Net cash used in financing activities

     (83     (58
                

Effect of foreign exchange rate changes on cash and cash equivalents

     51        (98
                

Net cash from (used in) continuing operations

     226        (1,182

Net cash from discontinued operations

     (6     (46
                

Net increase (decrease) in cash and cash equivalents

     220        (1,228

Cash and cash equivalents at beginning of the period

     2,397        3,532   

Less cash and cash equivalents of Equity Investees

     (761     —     
                

Adjusted cash and cash equivalents at beginning of the period

     1,636        3,532   

Cash and cash equivalents at end of the period

     1,856        2,304   

Less cash and cash equivalents of discontinued operations at end of the period

     (38     (31
                

Cash and cash equivalents of continuing operations at end of the period

   $ 1,818      $ 2,273   
                

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

 

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NORTEL NETWORKS CORPORATION

(Under Creditor Protection Proceedings as of January 14, 2009—note 2)

Notes to Condensed Consolidated Financial Statements (unaudited)

(Millions of U.S. Dollars, except per share amounts, unless otherwise stated)

1. Basis of presentation

Nortel Networks Corporation

Nortel Networks Corporation (“Nortel” or “NNC”) is a global supplier of end-to-end networking products and solutions serving both service providers and enterprise customers. Nortel’s technologies span access and core networks and support multimedia and business-critical applications. Nortel’s networking solutions consist of hardware, software and services. Nortel designs, develops, engineers, markets, sells, licenses, installs, services and supports these networking solutions worldwide.

Nortel Networks Limited (“NNL”) is Nortel’s principal direct operating subsidiary and its results are consolidated into Nortel’s results. Nortel holds all of NNL’s outstanding common shares but none of its outstanding preferred shares. NNL’s preferred shares are reported in noncontrolling interests in the condensed consolidated balance sheets and any dividends which may be paid on preferred shares are reported in income attributable to noncontrolling interests in the condensed statements of operations.

Consolidated Financial Statements

The financial statements as at December 31, 2008 and for the three and nine months ended September 30, 2008 have been presented on a consolidated basis to include Nortel and all of its majority owned and controlled subsidiaries. After consideration of the guidance available in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 810 “Consolidation” (“ASC 810”) and FASB ASC 852 “Reorganizations” (“ASC 852”), the financial statements as of September 30, 2009 and for the three and nine months ended September 30, 2009 have been presented on a basis that consolidates subsidiaries consistent with the basis of accounting applied in 2008 and prior except that, as disclosed further below, certain of Nortel’s subsidiaries in Europe, the Middle East and Africa (“EMEA”), Nortel Networks UK Ltd. (“NNUK”), Nortel Networks S.A. (“NNSA”) and Nortel Networks (Ireland) Limited (collectively, “EMEA Subsidiaries”) and the subsidiaries that the EMEA Subsidiaries control have been accounted for under the equity method from January 14, 2009 (“Petition Date”).

ASC 852, which is applicable to companies that have filed petitions under applicable bankruptcy code provisions and as a result of the Creditor Protection Proceedings is applicable to Nortel, generally does not change the manner in which financial statements are prepared. However, it does require that the financial statements for periods subsequent to the filing of an applicable bankruptcy petition distinguish transactions and events that are directly associated with a reorganization from the ongoing operations of the business. For this reason, Nortel’s revenues, expenses, realized gains and losses, and provisions for losses that can be directly associated with the Creditor Protection Proceedings (as defined in note 2) must be reported separately as reorganization items in the statements of operations beginning in the quarter ended March 31, 2009. The balance sheets must distinguish pre-petition liabilities subject to compromise from both those pre-petition liabilities that are not subject to compromise and from post-petition liabilities. Liabilities that may be affected by a plan of reorganization must be reported at the amounts expected to be allowed, even if they may be settled for lesser amounts. In addition, reorganization items must be disclosed separately in the statements of cash flows. Nortel adopted ASC 852 effective on January 14, 2009 and has segregated those items outlined above for all reporting periods subsequent to such date.

As further described in note 2, beginning on the Petition Date Nortel and certain of its subsidiaries in Canada, the United States (“U.S.”), and in certain EMEA countries filed for creditor protection under the relevant jurisdictions of Canada, the U.S., the United Kingdom (“U.K.”) and subsequently in Israel. Nortel continues to

 

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exercise control over its subsidiaries located in Canada, the U.S., Central American and Latin American (“CALA”) and Asia (other than entities in Australia and New Zealand which are wholly-owned subsidiaries of NNUK and therefore are included in the Equity Investees, as defined below), and these condensed financial statements are prepared on a consolidated basis with respect to those subsidiaries. Based on its review of the applicable accounting guidance, Nortel has determined that it did not exercise all of the elements of control over the EMEA Subsidiaries once they filed for creditor protection and, in accordance with ASC 810, was required to deconsolidate the EMEA Subsidiaries, as well as those entities the EMEA Subsidiaries control (collectively, the “Equity Investees”). However, as described further in note 22, Nortel continues to exercise significant influence over the operating and financial policies of the Equity Investees. As a result, Nortel has accounted for its interests in the Equity Investees under the equity method in accordance with FASB ASC 323 “Investments—Equity Method and Joint Ventures” (“ASC 323”) since the Petition Date. On the Petition Date, the Equity Investees were in a net liability position. As the carrying values of the Equity Investees’ net liabilities were not considered to have differed materially from their estimated fair values and due to Nortel and its consolidated subsidiaries’ continuing involvement with the Equity Investees, including NNL’s guarantee of the U.K. pension liability (see note 2), Nortel concluded that the initial carrying value of the investment in these condensed consolidated financial statements should reflect the Equity Investees’ net liabilities and no gain or loss was recognized on deconsolidation.

In its quarterly reports for the periods ended March 31, 2009 and June 30, 2009, Nortel had presented condensed combined and consolidated financial statements, which combined the financial position, results of operations and cash flows of the Equity Investees on a line-by-line basis. Based on its ongoing review of the applicable accounting guidance and after discussions with staff of the U.S. Securities and Exchange Commission (“SEC”), Nortel concluded that the presentation of the Equity Investees under the equity method was more appropriate and will reflect results of the Equity Investees using the equity method for the periods ended March 31, 2009 and June 30, 2009 when these periods are presented on a comparative basis in future filings. This change in presentation is not expected to affect the reported amount of net earnings (loss) for these periods, but will affect the financial statement presentation as the financial position and results of operations of the Equity Investees will be presented net on a single line in the balance sheet and statement of operations, respectively.

Basis of Presentation and Going Concern Issues

The unaudited condensed consolidated financial statements do not include all information and notes required by U.S. Generally Accepted Accounting Principles (“U.S. GAAP”) in the preparation of annual consolidated financial statements. The accounting policies used in the preparation of the unaudited condensed consolidated financial statements are the same as those described in Nortel’s audited consolidated financial statements prepared in accordance with U.S. GAAP for the year ended December 31, 2008, except as discussed above and in notes 3 and 5. The condensed consolidated balance sheet as of December 31, 2008 is derived from the December 31, 2008 audited consolidated financial statements. Although Nortel is headquartered in Canada, the unaudited condensed consolidated financial statements are expressed in U.S. Dollars as the greater part of Nortel’s financial results and net assets are denominated in U.S. Dollars.

Nortel makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the unaudited condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates. Estimates are used when accounting for items and matters such as revenue recognition and accruals for losses on contracts, allowances for uncollectible accounts receivable, inventory provisions, product warranties, estimated useful lives of intangible assets and plant and equipment,

asset valuations, impairment assessments, employee benefits including pensions, taxes and related valuation allowances and provisions, restructuring and other provisions, share-based compensation, contingencies and pre-petition liabilities.

Nortel believes all adjustments necessary for a fair statement of the results for the periods presented have been made and all such adjustments were of a normal recurring nature unless otherwise disclosed. The financial

 

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results for the three and nine months ended September 30, 2009 are not necessarily indicative of financial results for the full year or for any other quarter. The unaudited condensed consolidated financial statements should be read in conjunction with Nortel’s Annual Report on Form 10-K for the year ended December 31, 2008 filed with the SEC and Canadian securities regulatory authorities (“2008 Annual Report”).

The commencement of the Creditor Protection Proceedings raises substantial doubt as to whether Nortel will be able to continue as a going concern. The unaudited condensed consolidated financial statements have been prepared using the same U.S. GAAP and the rules and regulations of the SEC as applied by Nortel prior to the Creditor Protection Proceedings, except as disclosed above and in notes 3 and 5. While the Debtors (as defined in note 2) have filed for and been granted creditor protection, the unaudited condensed consolidated financial statements continue to be prepared using the going concern basis, which assumes that Nortel will be able to realize its assets and discharge its liabilities in the normal course of business for the foreseeable future. During the Creditor Protection Proceedings, and until the completion of any proposed divestitures or a decision to cease operations in certain countries is made, the businesses of the Debtors continue to operate under the jurisdictions and orders of the applicable courts and in accordance with applicable legislation. Nortel has continued to operate the businesses by renewing and seeking to grow business with existing customers, competing for new customers, continuing significant research and development (“R&D”) investments, and ensuring the ongoing supply of goods and services through the supply chain in an effort to maintain or improve customer service and loyalty levels. Nortel has also continued its focus on cost containment and cost reduction initiatives during this time. It is Nortel’s intention to continue to operate its businesses in this manner to maintain and maximize the value of its businesses until they are sold. However, it is not possible to predict the outcome of the Creditor Protection Proceedings and, as such, the realization of assets and discharge of liabilities are each subject to significant uncertainty. If the going concern basis is not appropriate, adjustments will be necessary to the carrying amounts and/or classification of Nortel’s assets and liabilities. Further, a court approved plan in connection with the Creditor Protection Proceedings could materially change the carrying amounts and classifications reported in the unaudited condensed consolidated financial statements.

The unaudited condensed consolidated financial statements do not purport to reflect or provide for the consequences of the Creditor Protection Proceedings. In particular, such unaudited condensed consolidated financial statements do not purport to show: (a) as to assets, their realizable value on a liquidation basis or their availability to satisfy liabilities; (b) as to pre-petition liabilities, all amounts that may be allowed for claims or contingencies, or the status and priority thereof, or the amounts at which they may ultimately be settled; (c) as to shareholders’ accounts, the effect of any changes that may be made in Nortel’s capitalization; or (d) as to operations, the effect of any changes that may be made in Nortel’s business.

Comparative figures

Certain 2008 figures in the unaudited condensed consolidated financial statements have been reclassified to conform to Nortel’s current presentation.

Recent accounting pronouncements

 

  (i) In December 2008, the FASB issued FSP FAS 132(R)-1, “Employers’ Disclosures about Postretirement Benefit Plan Assets”, which is now codified as FASB ASC 715-20 “Defined Benefit Plans—General” (“ASC 715-20”). ASC 715-20 requires more information about how investment allocation decisions are made, more information about major categories of plan assets, including concentrations of risk and fair-value measurements, and the fair-value techniques and inputs used to measure plan assets. ASC 715-20 is effective for fiscal years ending after December 15, 2009 and will be applied prospectively. Nortel plans to adopt the provisions of ASC 715-20 on December 31, 2009 and is currently assessing the impact of adoption of ASC 715-20.

 

  (ii)

In June 2009, the FASB issued SFAS No. 166, “Accounting for Transfers of Financial Assets” (“SFAS 166”). SFAS 166 revises FASB ASC 860 “Transfers and Servicing” (“ASC 860”). The revised ASC

 

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860 will require more information about transfers of financial assets, including securitization transactions, and where entities have continuing exposure to the risks related to transferred financial assets. SFAS 166 is effective for interim and annual reporting periods ending after November 15, 2009 and will be applied prospectively. Nortel plans to adopt the provisions of SFAS 166 on January 1, 2010 and is currently assessing the impact of adoption of SFAS 166.

 

  (iii) In June 2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No.46(R)” (“SFAS 167”). SFAS 167 revises FASB ASC 810-25 “Variable Interest Entities” (“ASC 810-25”), and changes how a reporting entity determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The determination of whether a reporting entity is required to consolidate another entity is based on, among other things, the other entity’s purpose and design and the reporting entity’s ability to direct the activities of the other entity that most significantly impacts the other entity’s economic performance. Revised ASC 810-25 is effective for interim and annual periods after November 15, 2009 and will be applied prospectively. Nortel plans to adopt the provisions of revised ASC 810-25 on January 1, 2010 and is currently assessing the impact of adoption of revised ASC 810-25.

 

  (iv) In October 2009, the FASB issued Accounting Standards Update (“ASU”) No. 2009-13, “Multiple-Deliverable Revenue Arrangements a consensus of the FASB Emerging Issues Task Force”, (“ASU 2009-13”). ASU 2009-13 addresses the accounting for multiple-deliverable arrangements and requires that the overall arrangement consideration be allocated to each deliverable in a revenue arrangement based on an estimated selling price when vendor specific objective evidence or third-party evidence of fair value is not available. This guidance also eliminates the residual method of allocation and requires that arrangement consideration be allocated to all deliverables using the relative selling price method. This will result in more revenue arrangements being separated into separate units of accounting. ASU 2009-13 is effective for fiscal years beginning on or after June 15, 2010. Companies can elect to apply this guidance (1) prospectively to new or materially modified arrangements after the effective date or (2) retrospectively for all periods presented. Nortel is currently assessing the impact of adoption of ASU 2009-13 and does not currently plan to early adopt.

 

  (v) In October 2009, the FASB issued ASU No. 2009-14, “Certain Revenue Arrangements That Include Software Elements”, (“ASU 2009-14”). ASU 2009-14 changes the accounting model for revenue arrangements that include both tangible products and software elements. Tangible products containing both software and non-software components that function together to deliver the product’s essential functionality will no longer be within the scope of ASC 985-605 “Software Revenue Recognition” (“ASC 985-605”). The entire product (including the software and non-software deliverables) will therefore be accounted for under accounting literature found in ASC 605. ASU 2009-14 is effective for fiscal years beginning on or after June 15, 2010. Companies can elect to apply this guidance (1) prospectively to new or materially modified arrangements after the effective date or (2) retrospectively for all periods presented. Nortel is currently assessing the impact of adoption of ASU 2009-14 and does not currently plan to early adopt.

2. Creditor protection proceedings

On January 14, 2009, after extensive consideration of all other alternatives, with the unanimous authorization of the Board of Directors after thorough consultation with advisors, Nortel initiated creditor protection proceedings under the respective restructuring regimes of Canada, the U.S. and the U.K. Nortel’s affiliates based in Asia, including LG-Nortel Co. Ltd. (“LGN”), in the CALA region and the Nortel Government Solutions (“NGS”) business, are not currently included in these proceedings.

At this point in the Creditor Protection Proceedings, Nortel is focused on maximizing value for its stakeholders. On June 19, 2009 Nortel announced that it was advancing in discussions with external parties to sell its businesses.

 

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On June 19, 2009, Nortel also announced a stalking horse asset sale agreement with Nokia Siemens Networks B.V. (“NSN”) for the planned sale of substantially all of its Code Division Multiple Access (“CDMA”) business and Long Term Evolution (“LTE”) Access assets. On July 24, 2009, in accordance with court approved procedures, Nortel concluded a successful auction for these assets and executed a formal asset sale agreement for the sale of substantially all of its CDMA business and LTE Access assets with Telefonaktiebolaget LM Ericsson (“Ericsson”), who emerged as the successful bidder with a purchase price of $1,130, subject to certain post-closing purchase price adjustments. At a joint hearing on July 28, 2009, Nortel obtained U.S. Court and Canadian Court (as defined below) approval for the sale to Ericsson. On November 13, 2009, we announced that following satisfaction of all closing conditions, the sale was concluded. See “Significant Business Divestitures” in this note 2 for further details.

On July 20, 2009, Nortel announced a stalking horse and other sale agreements with Avaya Inc. (“Avaya”) for the planned sale of substantially all of the assets of the Enterprise Solutions (“ES”) business globally, including the shares of NGS and DiamondWare, Ltd. for a purchase price of $475. On September 14, 2009, in accordance with court approved procedures, Nortel concluded a successful auction for the sale of these assets with Avaya, who emerged as the successful bidder agreeing to pay $900 in cash, with an additional pool of $15 reserved for an employee retention program. At a joint hearing on September 16, 2009, Nortel obtained U.S. Court and Canadian Court approval of the sale to Avaya. The sale is also subject to court approvals in France and Israel as well as regulatory approvals, other customary closing conditions and certain post-closing purchase price adjustments. See “Significant Business Divestitures” in this note 2 for further details.

On September 21, 2009, Nortel announced that it plans to sell, by “open auction”, the assets of its Wireless Networks (“WN”) business associated with the development of Next Generation Packet Core network components (“Packet Core Assets”). On October 25, 2009, in accordance with court approved procedures, Nortel entered into an agreement with Hitachi, Ltd. (“Hitachi”) for the sale of its Packet Core Assets for a purchase price of $10. On October 28, 2009, Nortel obtained U.S. Court and Canadian Court approval of the sale to Hitachi. The sale is also subject regulatory approvals, other customary closing conditions and certain post-closing purchase price adjustments. See “Significant Business Divestitures” in this note 2 for further details.

On September 30, 2009, Nortel announced that it plans to sell by “open auction” substantially all of its global Global System for Mobile communications (“GSM”)/GSM for Railways (“GSM-R”) business. On October 15, 2009, the Canadian Court and U.S. Court approved an order establishing bidding procedures that will allow qualified bidders to submit offers for the GSM/GSM-R business. Subject to receipt of qualified bids, an auction is tentatively scheduled for November 20, 2009. Any sale would be subject to approvals by the U.S. and Canadian courts and certain court appointed administrators in EMEA, as well as regulatory approvals, other customary closing conditions and certain post-closing purchase price adjustments. See “Significant Business Divestitures” in this note 2 for further details.

On October 7, 2009, Nortel announced a stalking horse and other sale agreements with Ciena Corp. (Ciena) for the planned sale of substantially all the assets of its Optical Networking and Carrier Ethernet businesses globally for a purchase price of $390 in cash and 10 million shares of Ciena common stock. On October 15, 2009 the Canadian Court and U.S. Court approved an order establishing bidding procedures that will allow qualified bidders to submit offers for the Optical Networking and Carrier Ethernet businesses. On November 13, 2009, Nortel announced that in light of ongoing discussions with interested parties, it has extended the auction originally scheduled to commence on that day. Qualified bidders are now required to submit offers by November 17, 2009. The sale is subject to various court approvals in the U.S., Canada and Israel and the approval of certain court appointed administrators in EMEA, as well as regulatory approvals, other customary closing conditions and certain post-closing purchase price adjustments. See “Significant Business Divestitures” in this note 2 for further details.

Nortel continues to advance in its discussions with external parties to sell its other businesses, including the CVAS (as defined below) business. To provide maximum flexibility Nortel has also taken appropriate steps to

 

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complete the move to organizational standalone businesses. Nortel will assess other restructuring alternatives for these businesses in the event it is unable to maximize value through sales.

On August 10, 2009, Nortel announced that it was at a natural transition point resulting in a number of leadership changes and a new organizational structure designed to work towards the completion of the sales of its businesses and other restructuring activities. Effective August 10, 2009, President and Chief Executive Officer (“CEO”) Mike Zafirovski stepped down. Also effective August 10, 2009, the Boards of Directors of NNC and NNL were reduced from nine to three members: John A. MacNaughton, Jalynn H. Bennett and David I. Richardson, with Mr. Richardson serving as Chair. These individuals also serve as members of NNC’s and NNL’s audit committees.

In connection with these changes, Nortel obtained Canadian Court approval for the Canadian Monitor (as defined below) to take on an enhanced role with respect to the oversight of the business, sales processes, claims processes and other restructuring activities under the CCAA Proceedings (as defined below). Further, Nortel is in the process of identifying a principal officer for the U.S. Debtors (as defined below) who will work in conjunction with the U.S. Creditors’ Committee (as defined below), Bondholder Group (as defined below), and the Canadian Monitor, which appointment will be subject to the approval of the U.S. Court (as defined below).

Nortel has also established a streamlined structure that is enabling it to effectively continue to serve its customers, and also facilitate the sales of its businesses and integration processes with acquiring companies as well as continue with its restructuring activities. Nortel’s business units currently report to the Chief Restructuring Officer (“CRO”), Pavi Binning. The mergers and acquisitions teams continue their work under the Chief Strategy Officer, George Riedel. Nortel Business Services (“NBS”) continues to be led by Joe Flanagan and continues to serve the transitional operations needs of Nortel’s businesses as they are sold to ensure customer and network service levels are maintained throughout the sale and integration processes. A core Corporate Group has been established that is primarily responsible for the management of ongoing restructuring activities during the sales process as well as post business dispositions. This group is led by John Doolittle, Senior Vice President Finance and Corporate Services (formerly Nortel’s Treasurer). These leaders report to the NNC and NNL Boards of Directors, the Canadian Monitor and will also report to the proposed U.S. principal officer.

CCAA Proceedings

On January 14, 2009 (“Petition Date”), Nortel, NNL and certain other Canadian subsidiaries (“Canadian Debtors”) obtained an initial order from the Ontario Superior Court of Justice (“Canadian Court”) for creditor protection for 30 days, pursuant to the provisions of the Companies’ Creditors Arrangement Act (“CCAA”), which has since been extended to December 18, 2009 and is subject to further extension by the Canadian Court (“CCAA Proceedings”). There is no guarantee that the Canadian Debtors will be able to obtain court orders or approvals with respect to motions the Canadian Debtors may file from time to time to extend further the applicable stays of actions and proceedings against them. Pursuant to the initial order, the Canadian Debtors received approval to continue to undertake various actions in the normal course in order to maintain stable and continuing operations during the CCAA Proceedings.

Under the terms of the initial order, Ernst & Young Inc. was named as the court-appointed monitor under the CCAA Proceedings (“Canadian Monitor”). The Canadian Monitor has reported and will continue to report to the Canadian Court from time to time on the Canadian Debtors’ financial and operational position and any other matters that may be relevant to the CCAA Proceedings. In addition, the Canadian Monitor may advise and, to the extent required, assist the Canadian Debtors on matters relating to the Creditor Protection Proceedings. On August 14, 2009, the Canadian Court approved an order that permits the Canadian Monitor to take on an enhanced role with respect to the oversight of the business, sales processes, claims processes and other restructuring activities under the CCAA Proceedings.

As a consequence of the CCAA Proceedings, generally, all actions to enforce or otherwise effect payment or repayment of liabilities of any Canadian Debtor preceding the Petition Date and substantially all pending claims

 

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and litigation against the Canadian Debtors and their officers and directors have been stayed until December 18, 2009, or such further date as may be ordered by the Canadian Court. In addition, the CCAA Proceedings have been recognized by the United States Bankruptcy Court for the District of Delaware (“U.S. Court”) as “foreign proceedings” pursuant to the provisions of Chapter 15 of the U.S. Bankruptcy Code, giving effect in the U.S. to the stay granted by the Canadian Court. A cross-border court-to-court protocol (as amended) has also been approved by the U.S. Court and the Canadian Court. This protocol provides the U.S. Court and the Canadian Court with a framework for the coordination of the administration of the Chapter 11 Proceedings (as defined below) and the CCAA Proceedings on matters of concern to both courts.

In connection with the Creditor Protection Proceedings (as defined below), the Canadian Debtors have granted a charge against some or all of Nortel’s assets and any proceeds from and sales thereof, as follows and in the following priority:

 

   

First, the administration charge, in an amount not to exceed CAD$5 in favor of the Canadian Monitor and its counsel and counsel to the Canadian Debtors against all of the property of the Canadian Debtors, to secure payment of professional fees and disbursements before and after the Petition Date;

 

   

Second, a charge, ranking pari passu with the aforementioned administration charge, in favor of Goldman, Sachs & Co. (“Goldman”), on the proceeds of any sale of NNL’s interest in LGN, as security for the full amount of fees and expenses payable to Goldman pursuant the terms of its agreement with NNL to act as financial advisor to NNL in connection with such sale;

 

   

Third, the Carling facility charges, in favor of Nortel Networks Inc. (“NNI”) as security for amounts owed by NNL and Nortel Networks Technology Corporation (“NNTC”) to NNI with respect to a post-Petition Date intercompany revolving loan agreement (“NNI Loan Agreement”), against the fee simple interest of NNTC and the leasehold interest of NNL in the real property located at 3500 Carling Avenue, Labs 1-10, Ottawa, Ontario, such charge not to exceed the amount of any such loan plus related interest and fees;

 

   

Fourth, a charge in favor of NNI against all of the property of the Canadian Debtors as security for a contingent payment of up to $26 payable by NNL to NNI in the event it is determined that payments made by NNI for certain corporate overhead and research and development services provided by NNL to the U.S. Debtors from the Petition Date to September 30, 2009 exceed the amount actually due for such services;

 

   

Fifth, the directors’ charge, against all property of the Canadian Debtors in an amount not exceeding CAD$90, as security for their obligation to indemnify their respective directors and officers for all claims that may be made against them relating to any failure of the Canadian Debtors to comply with certain statutory payment and remittance obligations arising during the CCAA Proceedings, and legal fees and expenses of their counsel in connection with the CCAA Proceedings;

 

   

Sixth, in addition to the Carling facility charges, a charge on the property of each of the Canadian Debtors, in favor of NNI as security for each Canadian Debtors’ obligations under the NNI Loan Agreement (subject to the requirement that such charge shall only be enforceable pending further order of the Canadian Court);

 

   

Seventh, the intercompany charge, in favor of any U.S. Debtor (as defined below) that has made or may make a post-Petition Date intercompany loan or other transfer (including of goods or services) to one or more of the Canadian Debtors (including amounts owed by NNL to NNI on the Petition Date under a certain intercompany loan agreement) against the property of the Canadian Debtor that receives such loan or transfer, to secure payments or repayments relating thereto, such charge not to exceed the amount of any such loan or transferred goods or services, plus related interest and fees. The intercompany charge also covers amounts owing in respect of post-Petition Date trade with the EMEA Debtors and any amounts advanced by Nortel to NNTC following the Petition Date; and

 

   

Eighth, a charge, ranking pari passu with the aforementioned intercompany charge, in favor of NNUK against all of the property of the Canadian Debtors as security for two $10 payments payable by NNL

 

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to NNUK out of the allocation of sale proceeds NNL actually receives from future material asset sales, so long as NNL’s post-adjustment allocation for each such sale is at least $30 and certain liquidity conditions are satisfied.

Chapter 11 Proceedings

Also on the Petition Date, NNI, Nortel Networks Capital Corporation (“NNCC”) and certain other of Nortel’s U.S. subsidiaries (“U.S. Debtors”), other than Nortel Networks (CALA) Inc. (“NNCI”), filed voluntary petitions under Chapter 11 with the U.S. Court (“Chapter 11 Proceedings”). The U.S. Debtors received approval from the U.S. Court for a number of motions enabling them to continue to operate their businesses generally in the ordinary course. Among other things, the U.S. Debtors received approval to continue paying employee wages and certain benefits in the ordinary course; to generally continue their cash management system, including approval of a revolving loan agreement between NNI as lender and NNL as borrower with an initial advance to NNL of $75, to support NNL’s ongoing working capital and general corporate funding requirements; and to continue honoring customer obligations and paying suppliers for goods and services received on or after the Petition Date. On July 14, 2009, NNCI, a U.S. based subsidiary that operates in the CALA region, also filed a voluntary petition for relief under Chapter 11 in the U.S. Court and thereby became one of the U.S. Debtors subject to the Chapter 11 Proceedings, although the petition date for NNCI is July 14, 2009. On July 17, 2009, the U.S. Court entered an order of joint administration that provided for the joint administration of NNCI’s case with the pre-existing cases of the other U.S. Debtors.

As required under the U.S. Bankruptcy Code, on January 22, 2009, the United States Trustee for the District of Delaware appointed an official committee of unsecured creditors, which currently includes The Bank of New York Mellon, Flextronics Corporation, Airvana, Inc., Pension Benefit Guaranty Corporation and Law Debenture Trust Company of New York (“U.S. Creditors’ Committee”). The U.S. Creditors’ Committee has the right to be heard on all matters that come before the U.S. Court with respect to the U.S. Debtors. There can be no assurance that the U.S. Creditors’ Committee will support the U.S. Debtors’ positions on matters to be presented to the U.S. Court. In addition, a group purporting to hold substantial amounts of Nortel’s publicly traded debt has organized (“Bondholder Group”). Nortel’s management and the Canadian Monitor have met with the Bondholder Group and its advisors to provide status updates and share information with them that has been shared with other major stakeholders. Disagreements between the Debtors and the U.S. Creditors’ Committee and the Bondholder Group could protract and negatively impact the Creditor Protection Proceedings (as defined below), and the Debtors’ ability to operate.

As a consequence of the commencement of the Chapter 11 Proceedings, generally, all actions to enforce or otherwise effect payment or repayment of liabilities of any U.S. Debtor preceding the Petition Date and substantially all pending claims and litigation against the U.S. Debtors have been automatically stayed for the pendency of the Chapter 11 Proceedings (absent any court order lifting the stay). In addition, the U.S. Debtors applied for and obtained an order in the Canadian Court recognizing the Chapter 11 Proceedings in the U.S. as “foreign proceedings” in Canada and giving effect, in Canada, to the automatic stay under the U.S. Bankruptcy Code.

Administration Proceedings

Also on the Petition Date, certain of Nortel’s EMEA subsidiaries (“EMEA Debtors”) made consequential filings and each obtained an administration order from the High Court of England and Wales (“English Court”) under the Insolvency Act 1986 (“U.K. Administration Proceedings”). The filings were made by the EMEA Debtors under the provisions of the European Union’s Council Regulation (“EC”) No 1346/2000 on Insolvency Proceedings (“EC Regulation”) and on the basis that each EMEA Debtor’s center of main interests was in England. Under the terms of the orders, a representative of Ernst & Young LLP (in the U.K.) and a representative of Ernst & Young Chartered Accountants (in Ireland) were appointed as joint administrators with respect to the EMEA Debtor in Ireland, and representatives of Ernst & Young LLP were appointed as joint administrators for

 

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the other EMEA Debtors (collectively, “U.K. Administrators”) to manage each of the EMEA Debtors’ affairs, business and property under the jurisdiction of the English Court and in accordance with the applicable provisions of the Insolvency Act 1986. The Insolvency Act 1986 provides for a moratorium during which creditors may not, without leave of the English Court or consent of the U.K. Administrators, wind up the company, enforce security, or commence or progress legal proceedings. All of Nortel’s operating EMEA subsidiaries except those in the following countries are included in the U.K. Administration Proceedings: Nigeria, Russia, Ukraine, Israel, Norway, Switzerland, South Africa and Turkey.

Certain of Nortel’s Israeli subsidiaries (“Israeli Debtors”) have commenced separate creditor protection proceedings in Israel (“Israeli Administration Proceedings”). On January 19, 2009, an Israeli court (“Israeli Court”) appointed administrators over the Israeli Debtors (“Israeli Administrators”). The orders of the Israeli Court provide for a stay in respect of the Israeli Debtors whose creditors are prevented from taking steps against the companies or their assets and which, subject to further orders of the Israeli Court, remains in effect during the Israeli Administration Proceedings. The period for the Israeli Administration Proceedings currently extends to November 19, 2009. A scheme of arrangement has been proposed and is expected to be considered by the Israeli Court on November 19, 2009. Under Israeli law, the Israeli Administration Proceedings are required to end with either a scheme of arrangement, which returns the company to solvency, or a liquidation. The scheme of arrangement which has been proposed is intended to return the company to solvency.

The U.K. Administration Proceedings in relation to NNUK have been recognized by the U.S. Court as “foreign main proceedings” pursuant to the provisions of Chapter 15 of the U.S. Bankruptcy Code, giving effect in the U.S. to the moratorium provided by the Insolvency Act 1986.

On May 28, 2009, at the request of the U.K. Administrators of NNSA, the Commercial Court of Versailles, France (“French Court”) ordered the commencement of secondary proceedings in respect of NNSA (“French Secondary Proceedings”). The secondary proceedings consist of liquidation proceedings during which NNSA continued to operate as a going concern for an initial period of three months. On August 20, 2009, the French Court extended the secondary proceedings until November 28, 2009. In accordance with the EC Regulation, the U.K. Administration Proceedings remain the main proceedings in respect of NNSA although a French administrator (“French Administrator”) and a French liquidator (“French Liquidator”) have been appointed and are in charge of the day-to-day affairs and continuing business of NNSA in France. On October 1, 2009, pursuant to a motion filed by the U.K. Administrators, the French Court approved an order to: (i) suspend the liquidation operations relating to the sale of the assets and/or businesses of NNSA for a renewable period of two months; (ii) authorize the continuation of the business of NNSA so long as the liquidation operations are suspended; and (iii) maintain the powers of the French Administrator and French Liquidator during the suspension period, except with respect to the sale of assets and/or businesses of NNSA.

The Canadian Debtors, U.S. Debtors, EMEA Debtors and Israeli Debtors are together referred to as the Debtors; the CCAA Proceedings, the Chapter 11 Proceedings, the U.K. Administration Proceeding, the Israeli Administration Proceedings and the French Secondary Proceedings are together referred to as the Creditor Protection Proceedings.

Significant Business Divestitures

CDMA and LTE Access Assets

On June 19, 2009, Nortel announced that it, as well as its principal operating subsidiary, NNL, and certain of Nortel’s other subsidiaries, including NNI, had entered into a stalking horse asset sale agreement with NSN for the planned sale of substantially all of its CDMA business and LTE Access assets for $650, subject to purchase price adjustments under certain circumstances. This sale required a court-approved bidding process, known as a “stalking horse” or 363 Sale under Chapter 11 that allowed other qualified bidders to submit higher or otherwise better offers. Bidding procedures were approved by the U.S. Court and Canadian Court in late June. Competing

 

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bids were required to be submitted by July 21, 2009 and an auction with the qualified bidders was held on July 24, 2009. Ericsson emerged as the successful bidder for the sale of substantially all of its CDMA business and LTE Access assets for a purchase price of $1,130, subject to certain post-closing purchase price adjustments. Nortel obtained U.S. Court and Canadian Court approvals for the sale to Ericsson on July 28, 2009. As part of this agreement, a minimum of 2,500 Nortel employees were expected to receive offers of employment from Ericsson. On November 13, 2009, Nortel announced that following satisfaction of all closing conditions, the sale had concluded. Under the terms of the sale, Nortel will provide transitional services to Ericsson, and Ericsson will provide products and services to Nortel in support of those CDMA customers remaining with Nortel. The related CDMA business and LTE Access assets and liabilities have been classified as held for sale beginning as of June 30, 2009. The related CDMA business and LTE Access financial results of operations have not been classified as discontinued operations as they did not meet the definition of a component of an entity under U.S. GAAP. In connection with this transaction, NNL and NNI paid an aggregate break-up fee of $19.5 plus $3 in expense reimbursements to NSN.

Enterprise Solutions Business

On July 20, 2009, Nortel announced that it, NNL, and certain of Nortel’s other subsidiaries, including NNI and NNUK, had entered into a stalking horse asset and share sale agreement with Avaya for its North American, CALA and Asian ES business, and an asset sale agreement with Avaya for the EMEA portion of its ES business for a purchase price of $475 subject to purchase price adjustments under certain circumstances. These agreements include the planned sale of substantially all of the assets of the ES business globally as well as the shares of NGS and DiamondWare, Ltd. This sale required a court-approved “stalking horse” sale process under Chapter 11 that allowed other qualified bidders to submit higher or otherwise better offers. Bidding procedures were approved by the U.S. Court and Canadian Court on August 4, 2009. Competing bids were required to be submitted by September 4, 2009 and an auction with the qualified bidders commenced on September 11, 2009. On September 14, 2009, Avaya emerged as the successful bidder for the sale of substantially all of the assets of the ES business globally as well as the shares of NGS and DiamondWare, Ltd. for a purchase price of $900 in cash, with an additional pool of $15 reserved for an employee retention program, subject to certain purchase price adjustments. Nortel obtained U.S. Court and Canadian Court approvals for the sale to Avaya on September 16, 2009.

Except in relation to NNSA, the U.K. Administrators have the authority, without further court approval, to enter into the EMEA asset sale agreement on behalf of each of the EMEA Debtors. In some EMEA jurisdictions, this transaction is subject to compliance with information and consultation obligations with employee representatives prior to finalization of the terms of the sale.

In addition to the processes and approvals outlined above, consummation of the transaction is subject to the satisfaction of regulatory and other conditions and the receipt of various approvals, including governmental approvals in Canada and the United States and the approval of the courts in France and Israel. The sale is expected to close late in the fourth quarter 2009, subject to receipt of all required approvals.

These related ES business, which includes DiamondWare Ltd., and NGS assets and liabilities have been classified as assets held for sale beginning September 30, 2009. The related ES business and NGS financial results of operations have been classified as discontinued operations for all periods presented. For further information about discontinued operations see note 4.

LGN Joint Venture

On May 27, 2009, NNC announced that NNL has decided to seek a buyer for its majority stake (50% plus 1 share) in LGN, the Korean joint venture with LG Electronics, Inc. (“LGE”). Nortel’s affiliates based in Asia including LGN have not filed for creditor protection; however, pursuant to the ongoing Creditor Protection Proceedings, NNL filed a motion with the Canadian Court and received approval of a proposed sale process that

 

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has been agreed with LGE and the appointment of Goldman to assist with the proposed divestiture. Any proposed sale that results from the sale process will require the consent of LGE under the terms of the joint venture agreement, and further approval of the Canadian Court.

Nortel Netas

On July 30, 2009, Nortel Networks International Finance & Holdings B. V. (“NNIF”), an EMEA Debtor, announced that it is evaluating its strategic options including a possible disposal of its 53.13% stake in Nortel Networks Netas Telekomunikasyon A.S. (“Netas”), a publicly traded Turkish company, as part of the ongoing restructuring of Nortel.

Packet Core Assets

On September 21, 2009, NNC announced that it plans to sell, by “open auction”, the Packet Core Assets of its WN business. The Packet Core Assets consist of software to support the transfer of data over existing wireless networks and the next generation of wireless communications technology including relevant non-patent intellectual property, equipment and other related tangible assets, as well as a non-exclusive license of certain relevant patents and other intellectual property. The Packet Core Assets exclude legacy packet core components for its GSM and Universal Mobile Telecommunications System (“UMTS”) businesses. On October 25, 2009, in accordance with court approved procedures, our principal operating subsidiary, NNL, and NNI, entered into an agreement with Hitachi for the sale of Nortel’s Packet Core Assets for a purchase price of $10, subject to certain post-closing purchase price adjustments. On October 28, 2009, Nortel obtained U.S. Court and Canadian Court approval of the sale to Hitachi. The sale is also subject to regulatory approvals and other customary closing conditions.

The related Packet Core Assets assets and liabilities have been classified as held for sale beginning September 30, 2009. The related Packet Core Assets financial results of operations have not been classified as discontinued operations as they did not meet the definition of a component of an entity under U.S. GAAP.

GSM/GSM-R Business

On September 30, 2009, NNC announced that it plans to sell by “open auction” substantially all of its global GSM/GSM-R business. In connection with this proposed sale, NNL also expects to transfer specified patents predominantly used in the GSM business and grant non-exclusive licenses of other relevant patents. On October 15, 2009, the Canadian Court and U.S. Court approved an order establishing bidding procedures that will allow qualified bidders to submit offers for the GSM/GSM-R business. Bids are required to be submitted by November 16, 2009 and the French Court ruled, on October 22, 2009, that bids for the GSM/GSM-R assets of NNSA must be submitted to the French Administrator and the French Liquidator by November 18, 2009. Any sale would be subject to approval of the U.S. Court and Canadian Court.

Except in relation to NNSA, the U.K. Administrators have the authority, without further court approval, to enter into an EMEA asset sale agreement on behalf of each of the relevant EMEA Debtors. The sale of any GSM/GSM-R assets currently held by NNSA, a French subsidiary, will be subject to the approval of the French Court. In some EMEA jurisdictions, this transaction will be subject to compliance with information and consultation obligations with employee representatives prior to finalization of the terms of the sale. In addition to the processes and approvals outlined above, consummation of a GSM/GSM-R transaction will be subject to the satisfaction of certain regulatory approvals and customary closing conditions.

The related GSM/GSM-R business assets and liabilities will be classified as held for sale beginning in the fourth quarter of 2009. Nortel has begun the process of identifying the individual assets and liabilities that are expected to be included as part of the sale transaction.

 

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Optical Networking and Carrier Ethernet Businesses

On October 7, 2009, NNC announced that it, NNL, and certain of its other subsidiaries, including NNI and NNUK, had entered into a stalking horse asset sale agreement with Ciena for its North American, CALA and Asian Optical Networking and Carrier Ethernet businesses, and an asset sale agreement with Ciena for the EMEA portion of its Optical Networking and Carrier Ethernet businesses for a purchase price of $390 in cash, subject to purchase price adjustments under certain circumstances, and 10 million shares of Ciena common stock. These agreements include the planned sale of substantially all the assets of Nortel’s Optical Networking and Carrier Ethernet businesses globally. This sale required a court-approved “stalking horse” sale process under Chapter 11 that allowed other qualified bidders to submit higher or otherwise better offers. Bidding procedures were approved by the U.S. Court and Canadian Court on October 15, 2009. On November 13, 2009, Nortel announced that in light of ongoing discussions with interested parties, it has extended the auction originally scheduled to commence on that day. Qualified bidders are now required to submit offers by November 17, 2009. Any sale would be subject to approval of the U.S. Court and Canadian Court.

The U.K. Administrators have the authority, without further court approval, to enter into the EMEA asset sale agreement on behalf of each of the EMEA Debtors. In some EMEA jurisdictions, this transaction is subject to compliance with information and consultation obligations with employee representatives prior to finalization of the terms of the sale.

In addition to the processes and approvals outlined above, consummation of the transaction is subject to the satisfaction of regulatory and other conditions and the receipt of various approvals, including governmental approvals in Canada and the United States and the approval of the court in Israel.

The related Optical Networking and Carrier Ethernet business assets and liabilities will be classified as held for sale beginning in the fourth quarter of 2009. Nortel has begun the process of identifying the individual assets and liabilities that are expected to be included as part of the sale transaction.

Further Divestitures

The Creditor Protection Proceedings may result in additional sales or divestitures, but Nortel can provide no assurance that it will be able to complete any sale or divestiture on acceptable terms or at all. On February 18, 2009, the U.S. Court approved procedures for the sale or abandonment by the U.S. Debtors of assets with a de minimis value. The Canadian Debtors can generally take similar actions with the approval of the Canadian Monitor. In France, the French Administrator and French Liquidator have the ability to deal with assets of de minimis value in a similar way under statute. There is no formal concept of “abandonment of assets with a de minimis value” in the U.K. Administration Proceedings, although the U.K. Administrators will ordinarily not take any steps to deal with assets where there is no benefit to creditors in them doing so. As Nortel continues to advance in discussions to sell its other businesses, it will consult with the Canadian Monitor, the U.K. Administrators, the U.S. Creditors’ Committee, the Bondholder Group and other stakeholders as appropriate (including the French Administrator, the French Liquidator and the Israeli Administrators as necessary), and any proposed divestiture may be subject to the approval of affected stakeholders and the relevant courts. There can be no assurance that any further proposed sale or divestiture will be developed, confirmed or approved, where required, by any of the relevant courts or affected stakeholders.

Jurisdictional Analysis

Nortel is currently undergoing an in-depth analysis to assess the strategic and economic value of several of its subsidiaries, in particular those that are incurring losses and require financial assistance or support in order to carry on business. In light of this analysis, Nortel has started making decisions to cease operations in certain countries that are no longer considered strategic or material to its business or where such losses cannot be supported or justified on an ongoing basis.

Business Operations

During the Creditor Protection Proceedings, and until the completion of any proposed divestitures or a decision to cease operations in certain countries is made, the businesses of the Debtors continue to operate under

 

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the jurisdictions and orders of the applicable courts and in accordance with applicable legislation. Nortel has continued to engage with its existing customer base in an effort to maintain delivery of products and services, minimize interruptions as a result of the Creditor Protection Proceedings and Nortel’s divestiture efforts and resolve any interruptions in a timely manner. At the beginning of the proceedings, Nortel established a senior procurement team, along with appropriate advisors, to address supplier issues and concerns as they arose to ensure ongoing supply of goods and services and minimize any disruption in its global supply chain. This procedure continues to function effectively and any supply chain issues are being dealt with on a timely basis.

Contracts

Under the U.S. Bankruptcy Code, the U.S. Debtors may assume, assume and assign, or reject certain executory contracts including unexpired leases, subject to the approval of the U.S. Court and certain other conditions. Pursuant to the initial order of the Canadian Court, the Canadian Debtors are permitted to repudiate any arrangement or agreement, including real property leases. Any reference to any such agreements or instruments and to termination rights or a quantification of Nortel’s obligations under any such agreements or instruments is qualified by any overriding rejection, repudiation or other rights the Debtors may have as a result of or in connection with the Creditor Protection Proceedings. The administration orders granted by the English Court do not give any similar unilateral rights to the U.K. Administrators. The U.K. Administrators and in the case of NNSA, the French Administrator and the French Liquidator decide in each case whether an EMEA Debtor should continue to perform under an existing contract on the basis of whether it is in the interests of that administration to do so. Claims may arise as a result of a Debtor rejecting, repudiating or no longer continuing to perform under any contract or arrangement, which claims would usually be unsecured. Since the Petition Date, the Debtors have assumed and rejected or repudiated various contracts, including real property leases and commercial agreements. The Debtors will continue to review other contracts throughout the Creditor Protection Proceedings.

Creditor Protection Proceeding Claims

On August 4, 2009, the U.S. Court approved the establishment of a claims process in the U.S. for claims that arose prior to the Petition Date. Under this claims process, proof of claims, except in relation to NNCI, had to be received by the U.S. Claims Agent, Epiq Bankruptcy Solutions, LLC, by no later than 4:00 p.m. (Eastern Time) on September 30, 2009.

On July 30, 2009, we announced that the Canadian Court approved the establishment of a claims process in Canada in connection with the CCAA Proceedings. Under this claims process, subject to certain exceptions, proof of claims for claims arising prior to the Petition Date had to be received by the Canadian Monitor, Ernst & Young Inc., by no later than September 30, 2009. This claims notification deadline does not apply to certain claims, including most inter-company claims as between the Canadian Debtors themselves or as between any of the Canadian Debtors and their direct or indirect subsidiaries and affiliates (other than joint ventures), compensation claims by current or former employees or directors of any of the Canadian Debtors, and claims of current or former directors or officers for indemnification and/or contribution, for which claims notification deadlines have yet to be set by the Canadian Court. Proof of claims for claims arising on or after the Petition Date as a result of the restructuring, termination, repudiation or disclaimer of any lease, contract or other agreement or obligation must be received by the Canadian Monitor by the later of September 30, 2009 and 30 days after a proof of claims package has been sent by the Canadian Monitor to the person in respect of such claim.

In relation to NNSA, claims had to be submitted to the French Administrator and the French Liquidator no later than August 12, 2009 with respect to French creditors and October 12, 2009 with respect to foreign creditors. In relation to the Israeli Debtors, the Israeli Court determined that claims had to be submitted to the Israeli Administrators by no later than July 26, 2009. Other than as set forth above with respect to NNSA, no outside date for the submission of claims has been established in connection with U.K. Administration Proceedings.

 

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The unaudited condensed consolidated financial statements for the quarterly period ended September 30, 2009 do not include the effects of any current or future claims relating to the Creditor Protection Proceedings. Certain claims filed may have priority over those of the Debtors’ unsecured creditors. Currently, it is not possible to determine the extent of claims filed and to be filed, whether such claims will be disputed and whether they will be subject to discharge or disallowance in the Creditor Protection Proceedings. It is also not possible at this time to determine whether to establish any additional liabilities in respect of claims. The Debtors are reviewing all claims filed and are beginning the claims reconciliation process. Differences between claim amounts identified by the Debtors and claims filed by creditors will be investigated and resolved in connection with the claims reconciliation process or, if necessary, the relevant court will make the final determination as to the amount, nature and validity of claims. The aggregate amount of claims will likely exceed the amount that ultimately will be allowed by the relevant courts. Certain claims may be duplicative (particularly given the multiple jurisdictions involved in the Creditor Protection Proceedings), based on contingencies that have not occurred, or may be otherwise overstated, and would therefore be invalid. The determination of how liabilities will ultimately be settled and treated cannot be made until each of the relevant courts approve a plan and in light of the number of creditors of the Debtors, the claims resolution process may take considerable time to complete. See note 20 for additional information about claims.

Interim Funding and Settlement Agreement

Historically, Nortel has deployed its cash through a variety of intercompany borrowing and transfer pricing arrangements to allow it to operate on a global basis and to allocate profits and losses, and certain costs, among the corporate group. In particular, the Canadian Debtors have continued to allocate profits and losses, and certain costs, among the corporate group through transfer pricing agreement payments (“TPA Payments”). Other than one $30 payment made by NNI to NNL in respect of amounts that Nortel believes are owed in connection with the transfer pricing agreement, TPA Payments had been suspended since the Petition Date. However, the Canadian Debtors and the U.S. Debtors with the support of the U.S. Creditors’ Committee and the Bondholder Group, as well as the EMEA Debtors (other than NNSA), entered into an Interim Funding and Settlement Agreement (“IFSA”) dated June 9, 2009 under which NNI paid $157 to NNL, in four installments during the period ended September 30, 2009 in full and final settlement of TPA Payments for the period from the Petition Date to September 30, 2009. A portion of this funding may be repayable by NNL to NNI in certain circumstances. The IFSA was approved by the U.S. Court and Canadian Court on June 29, 2009 and on June 23, 2009, the English Court confirmed that the U.K. Administrators were at liberty to enter into the IFSA on behalf of each of the EMEA Debtors (except for NNSA which was authorized to enter into the IFSA by the French Court on July 7, 2009). NNSA acceded to the IFSA on September 11, 2009. Further arrangements will be necessary in order to address TPA Payments, or other funding issues, for periods post-September 30, 2009 and NNL’s future liquidity needs and there can be no assurance that the Canadian Debtors will be able to arrange additional funding sufficient to fund future operations. Negotiations between NNL and the U.S. Debtors for reimbursement of a portion of these costs for the fourth quarter of 2009 are on-going. In addition, the Debtors and other Nortel entities are engaged in discussions in order to address NNL’s liquidity needs for periods subsequent to December 31, 2009.

APAC Debt Restructuring Agreement

As a consequence of the Creditor Protection Proceedings, certain amounts of intercompany payables to certain Nortel subsidiaries (“APAC Agreement Subsidiaries”) in the Asia-Pacific (“APAC”) region as of the Petition Date became impaired. To enable the APAC Agreement Subsidiaries to continue their respective business operations and to facilitate any potential divestitures, the Debtors (other than NNSA) entered into an Asia Restructuring Agreement (“APAC Agreement”). Under the APAC Agreement, the APAC Agreement Subsidiaries will pay a portion of certain of the APAC Agreement Subsidiaries’ net intercompany debt outstanding as of the Petition Date (“Pre-Petition Intercompany Debt”) and the Canadian Debtors, the U.S. Debtors and the EMEA Debtors (including NNSA to the extent it elects to participate in the APAC Agreement) will initially receive approximately $15, $18 and $15, respectively, in aggregate. A further portion of the

 

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Pre-Petition Intercompany Debt will be repayable in monthly amounts but only to the extent of such APAC Agreement Subsidiary’s net cash balance, and subject to certain reserves and provisions. The remainder of each APAC Agreement Subsidiary’s Pre-Petition Intercompany Debt will be subordinated and postponed to the prior payment in full of such APAC Agreement Subsidiary’s liabilities and obligations. Implementation of the APAC Agreement is subject to receipt of approvals (court and/or administrator) in the U.S., Canada and EMEA, as well as receipt of certain regulatory approvals in certain APAC jurisdictions.

Export Development Canada Support Facility; Other Contracts and Debt Instruments

Effective January 14, 2009, NNL entered into an agreement with Export Development Canada (“EDC”) (“Short-Term Support Agreement”) to permit continued access by NNL to the EDC support facility (“EDC Support Facility”), for an interim period to February 13, 2009, for up to $30 of support based on its then-estimated requirements over the period. The EDC Support Facility provides for the issuance of support in the form of guarantee bonds or guarantee type documents issued to financial institutions that issue letters of credit or guarantee, performance or surety bonds, or other instruments in support of Nortel’s contract performance. EDC subsequently agreed to extend this interim period to May 1, 2009. Under an amending agreement dated April 24, 2009, this interim period was further extended to July 30, 2009. On June 18, 2009, NNL and EDC entered into a further amendment to the Short-Term Support Agreement and a cash collateral agreement (“Cash Collateral Agreement”). Pursuant to the current Short-Term Support Agreement as amended, continued access by NNL to the EDC Support Facility is at the sole discretion of EDC. NNL has provided cash collateral of $6.5 for all outstanding post-petition support in accordance with the terms of the Cash Collateral Agreement, and the charge that was previously granted by the Canadian Court over certain of Nortel’s assets in favor of EDC is no longer in force or effect. On July 28, 2009, NNL and EDC entered into a further amendment to the Short-Term Support Agreement to extend the interim period to October 30, 2009. Subsequently, under an amending agreement dated October 28, 2009, the interim period was further extended to December 18, 2009.

Nortel’s filings under Chapter 11 and the CCAA constituted events of default or otherwise triggered repayment obligations under the instruments governing substantially all of the indebtedness issued or guaranteed by NNC, NNL, NNI and NNCC. In addition, Nortel may not be in compliance with certain other covenants under indentures, the EDC Support Facility and other debt or lease instruments, and the obligations under those agreements may have been accelerated. Nortel believes that any efforts to enforce such payment obligations against the U.S. Debtors are stayed as a result of the Chapter 11 Proceedings. Although the CCAA does not provide an automatic stay, the Canadian Court has granted a stay to the Canadian Debtors that currently extends to December 18, 2009. Pursuant to the U.K. Administration Proceedings, a moratorium has commenced during which creditors may not, without leave of the English Court or consent of the U.K. Administrators, enforce security, or commence or progress legal proceedings. The Israeli Administration Proceedings also provide for a stay which remains in effect during the pendency of such proceedings.

The Creditor Protection Proceedings may have also constituted events of default under other contracts and leases of the Debtors. In addition, the Debtors may not be in compliance with various covenants under other contracts and leases. Depending on the jurisdiction, actions taken by counterparties or lessors based on such events of default and other breaches may be unenforceable as a result of the Creditor Protection Proceedings.

In addition, the Creditor Protection Proceedings may have caused, directly or indirectly, defaults or events of default under the debt instruments and/or contracts and leases of certain of Nortel’s non-Debtor entities. These events of default (or defaults that become events of default) could give counterparties the right to accelerate the maturity of this debt or terminate such contracts or leases.

Flextronics

On January 14, 2009, Nortel announced that NNL had entered into an amendment to arrangements (“Amending Agreement”) with a major supplier, Flextronics Telecom Systems, Ltd. (“Flextronics”). Under the

 

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terms of the amendment, NNL agreed to commitments to purchase $120 of existing inventory by July 1, 2009 and to make quarterly purchases of other inventory, and to terms relating to payment and pricing. Flextronics had notified Nortel of its intention to terminate certain other arrangements upon 180 days’ notice (in July 2009) pursuant to the exercise by Flextronics of its contractual termination rights, while the other arrangements between the parties will continue in accordance with their terms. Following subsequent negotiations, Nortel has resolved all ongoing disputes and issues relating to the interpretation of the Amending Agreement and has confirmed, among other things, its obligation to purchase inventory in accordance with existing plans of record of $25. In addition, one of the supplier agreements with Flextronics was not terminated on July 12, 2009, as originally referenced in the Amending Agreement, but instead has been extended to December 2009, with a further extension for certain products to July 2010.

Directors’ and Officers’ Compensation and Indemnification

The Canadian Court has ordered the Canadian Debtors to indemnify their respective directors and officers for all claims that may be made against them relating to any failure of the Canadian Debtors to comply with certain statutory payment and remittance obligations arising during the CCAA Proceedings. The Canadian Court has also granted a charge against all property of the Canadian Debtors, in the aggregate amount not exceeding CAD$90, as security for such indemnities and related legal fees and expenses.

In addition, in conjunction with the Creditor Protection Proceedings, NNC established a directors’ and officers’ trust (“D&O Trust”) in the amount of approximately CAD$12. The purpose of the D&O Trust is to provide a trust fund for the payment of liability claims (including defense costs) that may be asserted against individuals who serve as directors and officers of NNC, or as directors and officers of other entities at NNC’s request (such as subsidiaries and joint venture entities), by reason of that association with NNC or other entity, to the extent that such claims are not paid or satisfied out of insurance maintained by NNC and NNC is unable to indemnify the individual. Such liability claims would include claims for unpaid statutory payment or remittance obligations of NNC or such other entities for which such directors and officers have personal statutory liability but will not include claims for which NNC is prohibited by applicable law from providing indemnification to such directors or officers. The D&O Trust also may be drawn upon to maintain directors’ and officers’ insurance coverage in the event NNC fails or refuses to do so. The D&O Trust will remain in place until the later of December 31, 2015 or three years after all known actual or potential claims have been satisfied or resolved, at which time any remaining trust funds will revert to NNC.

As part of the relief sought in the CCAA Proceedings, Nortel requested entitlement to pay the directors their compensation in cash on a current basis, notwithstanding the terms of, or elections under the Deferred Compensation Plans, during the period in which the directors continue as directors in the CCAA Proceedings. On the Petition Date, the Canadian Court granted an order providing that Nortel’s directors are entitled to receive remuneration in cash on a then-current basis at then-current compensation levels less an overall $25 thousand reduction. Subsequently, as a result of additional roles and responsibilities assumed by the three remaining directors, the annual cash retainer was increased to $225 thousand and the annual Board Chair retainer was increased to $100 thousand, effective August 11, 2009. The annual Audit Committee Chair retainer of $15 thousand did not change.

Workforce Reductions; Employee Compensation Program Changes

On February 25, 2009, Nortel announced a workforce reduction plan. Under this plan, Nortel intends to reduce its global workforce by approximately 5,000 net positions. Nortel has commenced and will continue to implement these reductions, in accordance with local country legal requirements. During the nine months ended September 30, 2009, Nortel undertook additional workforce reduction activities. Given the Creditor Protection Proceedings, Nortel has discontinued all remaining activities under its previously announced restructuring plans as of the Petition Date. For further information, refer to notes 10 and 11. In addition, Nortel has taken and expects to take further, ongoing workforce and other cost reduction actions as it works through the Creditor Protection Proceedings.

 

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Nortel also announced on February 25, 2009 several changes to its employee compensation programs. Upon the recommendation of management, its Board of Directors approved no payment of bonuses under the Nortel Networks Limited Annual Incentive Plan (“AIP”) for 2008. Nortel has continued its AIP in 2009 for all eligible full- and part-time employees. The AIP has been modified to permit quarterly rather than annual award determinations and payouts, if any. This has provided a more immediate incentive for employees upon the achievement of critical shorter-term objectives. Where required, Nortel has obtained court approvals for retention and incentive compensation plans for certain key eligible employees deemed essential to the business during the Creditor Protection Proceedings and Nortel has since implemented such plans. See “Key Executive Incentive Plan and Key Employee Retention Plan” in the Executive and Director Compensation section of Nortel’s 2008 Annual Report for further information with respect to our current key employee incentive and retention programs for employees in North America, CALA and Asia. On March 20, 2009, Nortel obtained Canadian Court approval to terminate the Nortel Networks Corporation Change in Control Plan. For further information on this plan, see “CIC Plan” in the Executive and Director Compensation section of Nortel’s 2008 Annual Report.

On February 27, 2009, Nortel obtained Canadian Court approval to terminate its equity-based compensation plans (the Nortel 2005 Stock Incentive Plan, As Amended and Restated (“2005 SIP”), the Nortel Networks Corporation 1986 Stock Option Plan, As Amended and Restated (“1986 Plan”) and the Nortel Networks Corporation 2000 Stock Option Plan (“2000 Plan”)) and certain equity plans assumed in prior acquisitions, including all outstanding equity under these plans (stock options, stock appreciation rights (“SARs”), restricted stock units (“RSUs”) and performance stock units (“PSUs”)), whether vested or unvested. Nortel sought this approval given the decreased value of Nortel Networks common shares (“NNC common shares”) and the administrative and associated costs of maintaining the plans to Nortel as well as the plan participants. See note 20, “Share-based compensation plans”, to the audited financial statements that accompany Nortel’s 2008 Annual Report and note 19 in this report, for additional information about Nortel’s share-based compensation plans.

Condensed Combined Debtors Financial Statements

The financial statements contained within this note have been prepared in accordance with the guidance of ASC 852 and represent the unaudited condensed combined financial statements of the Debtors that are included in the condensed consolidated financial statements as at and for the three and nine months ended September 30, 2009. Such statements include separate columnar presentations for the Canadian Debtors, U.S. Debtors and EMEA Debtors to provide information that may be useful to the users of these financial statements on the entities in each of the jurisdictions where creditor protection filings have been made. The condensed combined statements of operations exclude the Debtors’ interests in the results of operations of non-Debtor subsidiaries.

The EMEA Debtors include substantially all of the Nortel subsidiaries that comprise the Equity Investees. As described in note 1, the Equity Investees have been deconsolidated as of the Petition Date and accounted for under the equity method of accounting in the condensed consolidated financial statements. However these condensed combined financial results combine the results of the EMEA Debtors, given Nortel’s continuing significant influence over the EMEA Debtors and the impact the Creditor Protection Proceedings have on all Debtors, including the EMEA Debtors, and to provide information that may be useful to the users of these financial statements on the financial position, results of operations and cash flows of all of the Debtors.

For the purposes of the condensed combined debtor financial statements and other disclosures contained below, the presentation for the EMEA Debtors includes the Israeli Debtors.

Intercompany Transactions

Intercompany transactions and balances amongst the Debtors are included in each of the individual Debtor’s balance sheet, statement of operations and cash flow columns and have been eliminated in combination. Intercompany transactions and balances with Nortel’s non-Debtor subsidiaries and affiliates have not been eliminated in the Debtors’ financial statements.

 

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Guarantees

Included in the accompanying Canadian Debtors’ financial statement columns is an accrual of approximately $673 representing NNL’s best estimate of the probable claim against NNL for the guarantee of the EMEA Debtors’ unfunded pension liability (“Pension Guarantee”). NNL has irrevocably and unconditionally guaranteed NNUK’s punctual performance under the U.K. Defined Benefit Pension Plan funding agreement. Although some guarantee exposures are redundant to liabilities elsewhere in the Debtors’ financial statements, the Canadian Debtors have recorded this accrual in accordance with ASC 852.

In addition, an accrual of $3,935 has been made in the U.S. Debtors financial statement columns for NNI’s guarantee of the NNC and NNL outstanding long-term debt arrangements. NNI has guaranteed the NNC and NNL issuances of the July 2006 Notes, the Convertible Notes and the 2016 Fixed Rate Notes issued May 2008 (each as defined in note 25). In addition, NNL has recognized $150 arising from a guarantee of long-term debt of NNCC. Collectively, these guarantees are the “Debt Guarantees”. Although some guarantee exposures are redundant to liabilities recorded elsewhere in the Debtors’ financial statements, Nortel has recorded this accrual in accordance with ASC 852.

The Pension Guarantee and Debt Guarantees have been recorded as liabilities subject to compromise and the related change included as part of reorganization expenses in the respective financial statement columns and have been eliminated on combination to reflect the presentation adopted in the condensed consolidated financial statements. To the extent that information available in the future indicates a difference from the recognized amounts, the provision will be adjusted.

Contractual Interest Expense on Outstanding Long-Term Debt

During the three and nine months ended September 30, 2009, Nortel has continued to accrue for interest expense of $71 and $211, respectively, in its normal course of operations related to debt issued by NNC or NNL in Canada based on the expectation that it will be a permitted claim under the Creditor Protection Proceedings. However, in accordance with ASC 852, interest expense in the U.S. incurred post-Petition Date is not recognized, as a result interest payable on debt issued by the U.S. Debtors, including NNI, has not been accrued. During the pendency of the Creditor Protection Proceedings Nortel generally has not and does not expect to make payments to satisfy any of the interest obligations of the Debtors.

Foreign Currency Denominated Liabilities

ASC 852 requires pre-petition liabilities of the Debtors that are subject to compromise to be reported at the claim amounts expected to be allowed, even if they may be settled for lesser amounts. For foreign currency denominated liabilities, the CCAA requires allowable claims to be denominated at the exchange rate in effect as of the Petition Date unless otherwise provided a court-approved plan. A court-approved plan would be subject to creditor approval prior to the Canadian Court’s approval. Given the impact that fixing exchange rates may have on the amounts ultimately settled, Nortel believes there is uncertainty as to whether a plan which fixes the applicable exchange rate at the Petition Date would be approved. Accordingly, in Canada, foreign currency denominated balances, including Nortel’s U.S. dollar denominated debt, will not be accounted for using the Petition Date exchange rate but rather will continue to be accounted for in accordance with FASB ASC 830 “Foreign Currency Matters (“ASC 830”). Foreign currency denominated pre-petition liabilities in the U.S. Debtors and the EMEA Debtors have generally been fixed at the exchange rate in effect on the Petition Date in accordance with local laws.

Cash Restrictions

As a result of the Creditor Protection Proceedings, cash is generally available to fund operations in particular jurisdictions, but generally is not available to be freely transferred between jurisdictions, regions, or outside joint ventures, other than for normal course intercompany trade and pursuant to specific agreements approved by the U.S. Court and Canadian Court and/or the U.K. Administrators, as applicable.

 

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CONDENSED COMBINED STATEMENT OF OPERATIONS (unaudited)

(Millions of U.S. Dollars)

 

     Three months ended September 30, 2009  
     Canada     U.S.     EMEA     Eliminations     Total  

Product revenues:

          

Third party

   $ 84      $ 662      $ 124      $ —        $ 870   

Non-Debtor subsidiaries

     —          19        29        —          48   

Inter-Debtor

     58        60        29        (147     —     

Service revenues (Third party)

     11        92        41        —          144   
                                        

Total revenues

     153        833        223        (147     1,062   

Product cost of revenues:

          

Third party

     51        324        121        —          496   

Non-Debtor subsidiaries

     9        21        24        —          54   

Inter-Debtor

     59        63        25        (147     —     

Service cost of revenues (Third party)

     5        48        26        —          79   
                                        

Total cost of revenues

     124        456        196        (147     629   
                                        

Gross profit

     29        377        27        —          433   
                                        

Selling, general and administrative expense

     (20     18        55        1        54   

Research and development expense

     119        61        31        —          211   

Other charges

     32        11        —          —          43   

Loss on sales of businesses and sales and impairments of assets

     8        5        1        —          14   
                                        

Operating earnings (loss)

     (110     282        (60     (1     111   

Other income (expense)—net

     104        (23     —          (5     76   

Interest expense

          

Long-term debt

     (70     (3     —          —          (73

Other

     (3     —          —          3        —     
                                        

Earnings (loss) from continuing operations before reorganization items, income taxes and equity in net earnings of debtor companies

     (79     256        (60     (3     114   

Reorganization items—net

     (45     (205     (28     22        (256
                                        

Earnings (loss) from continuing operations before income taxes and equity in net earnings of debtor companies

     (124     51        (88     19        (142

Income tax benefit (expense)

     (2     (1     1        —          (2
                                        

Earnings (loss) from continuing operations before equity in net earnings of debtor companies

     (126     50        (87     19        (144

Equity in net loss of debtor companies—net of tax

     (54     (1     —          54        (1
                                        

Net income (loss) from continuing operations attributable to Debtors, including noncontrolling interests

     (180     49        (87     73        (145

Loss from discontinued operations—net of tax

     (104     (38     (23     —          (165
                                        

Net earnings (loss) attributable to Debtors

   $ (284   $ 11      $ (110   $ 73      $ (310
                                        

 

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CONDENSED COMBINED STATEMENT OF OPERATIONS (unaudited)

(Millions of U.S. Dollars)

 

     Nine months ended September 30, 2009  
     Canada     U.S.     EMEA     Eliminations     Total  

Product revenues:

          

Third party

   $ 284      $ 1,728      $ 457      $ —        $ 2,469   

Non-Debtor subsidiaries

     94        95        92        —          281   

Inter-Debtor

     549        194        54        (797     —     

Service revenues (Third party)

     26        257        132        —          415   
                                        

Total revenues

     953        2,274        735        (797     3,165   

Product cost of revenues:

          

Third party

     146        877        386        —          1,409   

Non-Debtor subsidiaries

     35        94        78        —          207   

Inter-Debtor

     248        541        28        (817     —     

Service cost of revenues (Third party)

     14        142        88        —          244   
                                        

Total cost of revenues

     443        1,654        580        (817     1,860   
                                        

Gross profit

     510        620        155        20        1,305   
                                        

Selling, general and administrative expense

     92        336        270        (29     669   

Research and development expense

     346        235        77        —          658   

Other charges

     31        10        —          —          41   

(Gain) loss on sales of businesses and sales and impairments of assets

     (4     6        1        —          3   

Other operating expense (income)—net

     (1     (1     —          —          (2
                                        

Operating earnings (loss)

     46        34        (193     49        (64

Other income (expense)—net

     10        121        (133     (67     (69

Interest expense

          

Long-term debt

     (209     (8     (1     —          (218

Other

     (7     (1     —          7        (1
                                        

Earnings (loss) from continuing operations before reorganization items, income taxes and equity in net earnings of debtor companies

     (160     146        (327     (11     (352

Reorganization items—net

     (792     (4,159     (82     4,657        (376
                                        

Loss from continuing operations before income taxes and equity in net earnings of debtor companies

     (952     (4,013     (409     4,646        (728

Income tax expense

     —          (14     (35     —          (49
                                        

Loss from continuing operations before equity in net earnings of debtor companies

     (952     (4,027     (444     4,646        (777

Equity in net loss of debtor companies—net of tax

     (5,409     —          —          5,383        (26
                                        

Net loss from continuing operations attributable to Debtors, including noncontrolling interests

     (6,361     (4,027     (444     10,029        (803

Loss from discontinued operations—net of tax

     (263     (85     (52     —          (400
                                        

Net loss attributable to Debtors

   $ (6,624   $ (4,112   $ (496   $ 10,029      $ (1,203
                                        

 

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CONDENSED COMBINED BALANCE SHEET (unaudited)

(Millions of U.S. Dollars)

 

     September 30, 2009  
     Canada     U.S.     EMEA     Eliminations     Total  
ASSETS           

Current assets

          

Cash and cash equivalents

   $ 186      $ 772      $ 706      $ —        $ 1,664   

Short-term investments

     —          6        —          —          6   

Restricted cash and cash equivalents

     60        49        38        —          147   

Accounts receivable—net:

          

Third parties

     40        421        190        —          651   

Non-Debtor subsidiaries

     486        167        71        —          724   

Debtor subsidiaries

     528        565        35        (1,128     —     

Inventories—net

     30        150        407        —          587   

Other current assets

     129        133        69        (20     311   

Assets held for sale

     36        167        —          —          203   

Assets of discontinued operations

     53        309        166        —          528   
                                        

Total current assets

     1,548        2,739        1,682        (1,148     4,821   

Investments

     3        41        —          —          44   

Investments in Non-Debtor / Debtor subsidiaries

     (16,789     506        232        17,443        1,392   

Plant and equipment—net

     413        238        132        —          783   

Intangible assets—net

     —          —          9        —          9   

Deferred income taxes—net

     —          —          2        —          2   

Other assets

     119        53        50        —          222   
                                        

Total assets

   $ (14,706   $ 3,577      $ 2,107      $ 16,295      $ 7,273   
                                        
LIABILITIES AND SHAREHOLDERS’ DEFICIT           

Current liabilities not subject to compromise:

          

Trade and other accounts payable

   $ 18      $ 56      $ 24      $ —        $ 98   

Trade and other accounts payable to non-Debtor subsidiaries

     136        —          2          138   

Trade and other accounts payable to Debtor subsidiaries

     147        104        27        (278     —     

Payroll and benefit-related liabilities

     56        77        33        —          166   

Contractual liabilities

     2        6        16        —          24   

Restructuring liabilities

     —          4        52        —          56   

Other accrued liabilities

     119        335        517        (1     970   

Liabilities held for sale

     21        377        —          —          398   

Liabilities of discontinued operations

     123        346        197        —          666   
                                        

Total current liabilities

     622        1,305        868        (279     2,516   

Long-term liabilities

          

Deferred income taxes—net

     —          —          2        —          2   

Other liabilities

     166        129        125        —          420   
                                        

Total long-term liabilities

     166        129        127        —          422   

Liabilities subject to compromise

     7,723        5,972        1,823        (6,127     9,391   
                                        

Total liabilities

     8,511        7,406        2,818        (6,406     12,329   
                                        
SHAREHOLDERS’ DEFICIT           

Total shareholders’ deficit of Debtors

     (23,762     (3,829     (711     22,701        (5,601

Noncontrolling interests in Debtors

     545        —          —          —          545   
                                        

Total shareholders’ deficit

     (23,217     (3,829     (711     22,701        (5,056
                                        

Total liabilities and shareholders’ deficit

   $ (14,706   $ 3,577      $ 2,107      $ 16,295      $ 7,273   
                                        

 

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CONDENSED COMBINED STATEMENT OF CASH FLOWS (unaudited)

(Millions of U.S. Dollars)

 

    Nine months ended September 30, 2009  
    Canada     U.S.     EMEA     Eliminations     Total  

Cash flows from (used in) operating activities

         

Net loss

  $ (6,624   $ (4,112   $ (496   $ 10,029      $ (1,203

Net loss from discontinued operations

    263        85        52        —          400   

Adjustments to reconcile net loss from continuing operations to net cash from (used in) operating activities:

         

Reorganization items—net

    782        4,166        72        (4,657     363   

Other adjustments (a)

    5,476        (79     416        (5,372     441   
                                       

Net cash from (used in) operating activities—continuing operations

    (103     60        44        —          1   

Net cash from (used in) operating activities—discontinued operations

    —          2        1        —          3   
                                       

Net cash from (used in) operating activities

    (103     62        45        —          4   
                                       

Cash flows from (used in) investing activities

         

Expenditures for plant and equipment

    (9     (9     (3     —          (21

Proceeds on disposal of plant and equipment

    86        —          —          —          86   

Change in restricted cash and cash equivalents

    (30     (49     (34     —          (113

Decrease in short and long-term investments

    —          40        —          —          40   

Acquisitions of investments and businesses—net

    —          1        —          —          1   

Proceeds from the sales of investments and businesses—net

    36        8        3          47   
                                       

Net cash from (used in) investing activities—continuing operations

    83        (9     (34     —          40   

Net cash from (used in) investing activities—discontinued operations

    —          (2     (1     —          (3
                                       

Net cash from (used in) investing activities

    83        (11     (35     —          37   
                                       

Cash flows from (used in) financing activities

         

Increase in notes payable

    —          —          1        —          1   

Decrease in notes payable

    —          —          (7     —          (7

Repayments of capital lease obligations

    —          (6     (5     —          (11
                                       

Net cash from (used in) financing activities—continuing operations

    —          (6     (11     —          (17

Net cash from (used in) financing activities—discontinued operations

    —          —          —          —          —     
                                       

Net cash from (used in) financing activities

    —          (6     (11     —          (17
                                       

Effect of foreign exchange rate changes on cash and cash equivalents

    15        —          51        —          66   
                                       

Net cash from (used in) continuing operations

    (5     45        50        —          90   

Net cash from (used in) discontinued operations

    —          —          —          —          —     
                                       

Net increase (decrease) in cash and cash equivalents

    (5     45        50        —          90   

Cash and cash equivalents at beginning of the period

    191        727        656        —          1,574   
                                       

Cash and cash equivalents at end of the period

    186        772        706        —          1,664   

Less cash and cash equivalents of discontinued operations at end of the period

    —          —          —          —          —     
                                       

Cash and cash equivalents of continuing operations at end of the period

  $ 186      $ 772      $ 706      $ —        $ 1,664   
                                       

 

(a) The operating section of the condensed combined statement of cash flows has been presented on a summarized basis and, as a result, Other adjustments represents all adjustments to reconcile net loss to net cash from (used in) operating activities, with the exception of Reorganization items—net.

 

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3. Accounting changes

(a) Noncontrolling Interests

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements—An Amendment of ARB 51” which is now codified as part of ASC 810. ASC 810 establishes accounting and reporting standards for the treatment of noncontrolling interests in a subsidiary. Noncontrolling interests in a subsidiary will be reported as a component of equity in the consolidated financial statements and any retained noncontrolling equity investment upon deconsolidation of a subsidiary is initially measured at fair value. ASC 810 is effective for fiscal years beginning after December 15, 2008. Nortel adopted the provisions of ASC 810 on January 1, 2009. The adoption of ASC 810 has resulted in the retrospective reclassification of noncontrolling interests (formerly referred to as minority interests) to shareholders’ deficit and related changes to the presentation of noncontrolling interests in the condensed consolidated statements of operations. For the nine months ended September 30, 2009, the adoption of ASC 810 did not impact the calculation of noncontrolling interests. These changes in measurement and presentation have not impacted the calculation of earnings (loss) per share.

(b) Fair Value Measurements

In September 2006, the FASB issued ASC 820, which establishes a single definition of fair value, a framework for measuring fair value and requires expanded disclosures about fair value measurements. Nortel partially adopted the provisions of ASC 820 effective January 1, 2008. The effective date for ASC 820 as it relates to fair value measurements for non-financial assets and liabilities that are not measured at fair value on a recurring basis was deferred to fiscal years beginning after December 15, 2008 in accordance with ASC 820. Nortel adopted the deferred portion of ASC 820 on January 1, 2009. The adoption of the deferred portion of ASC 820 did not have a material impact on Nortel’s results of operations and financial condition.

(c) Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans—An Amendment of FASB Statements No. 87, 88, 106, and 132(R)

Effective for fiscal years ending after December 15, 2008, SFAS No. 158, “Employer’s Accounting for Defined Benefit Pension and Other Postretirement Plans”, which is now codified as part of FASB ASC 715 “Compensation-Retirement Benefits” (“ASC 715”). ASC 715 requires Nortel to measure the funded status of its plans as of the date of its year end statement of financial position, being December 31. Nortel had historically measured the funded status of its significant plans on September 30. ASC 715 provided two approaches for an employer to transition to a fiscal year end measurement date. Nortel adopted the second approach, whereby Nortel continues to use the measurements determined for the December 31, 2007 fiscal year end reporting to estimate the effects of the transition. Under this approach, the net periodic benefit cost for the period between the earlier measurement date, being September 30, 2007 and the end of the fiscal year that the measurement date provisions are applied, being December 31, 2008 (exclusive of any curtailment or settlement gain or loss), are allocated proportionately between amounts to be recognized as an adjustment to opening accumulated deficit in 2008 and the net periodic benefit cost for the fiscal year ended December 31, 2008. The adoption resulted in an increase in accumulated deficit of $33, net of taxes, and an increase in accumulated other comprehensive income of $5, net of taxes, as of January 1, 2008.

For additional information on Nortel’s pension and post-retirement plans, see note 13.

(d) Disclosures about Derivative Instruments and Hedging Activities—An Amendment of FASB Statement 133

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities—An Amendment of FASB Statement 133”, which is now codified as part of FASB ASC 815 “Derivatives and Hedging” (“ASC 815”). ASC 815 requires expanded and enhanced disclosure for derivative instruments, including those used in hedging activities. ASC 815 is effective for fiscal years and interim periods

 

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beginning after November 15, 2008. Nortel adopted the provisions of ASC 815 on January 1, 2009. Nortel has provided the additional information required by ASC 815 in note 15.

(e) Determination of the Useful Life of Intangible Assets

In April 2008, the FASB issued FSP FAS 142-3, “Determination of the Useful Life of Intangible Assets”, which is now codified as part of FASB ASC 350-30 “General Intangibles Other than Goodwill” (“ASC 350-30”). ASC 350-30 provides guidance with respect to estimating the useful lives of recognized intangible assets and requires additional disclosure related to the renewal or extension of the terms of recognized intangible assets. ASC 350-30 is effective for fiscal years and interim periods beginning after December 15, 2008. Nortel adopted the provisions of ASC 350-30 on January 1, 2009. The adoption of ASC 350-30 did not have a material impact on Nortel’s results of operations, financial condition and disclosures.

(f) Collaborative Arrangements

In September 2007, the FASB Emerging Issues Task Force (“EITF”) reached a consensus on EITF Issue No. 07-1, “Collaborative Arrangements”, which is now codified as FASB ASC 808 “Collaborative Arrangements” (“ASC 808”). ASC 808 addresses the accounting for arrangements in which two companies work together to achieve a common commercial objective, without forming a separate legal entity. The nature and purpose of a company’s collaborative arrangements are required to be disclosed, along with the accounting policies applied and the classification and amounts for significant financial activities related to the arrangements. Nortel adopted the provisions of ASC 808 on January 1, 2009. The adoption of ASC 808 did not have a material impact on Nortel’s results of operations and financial condition.

(g) Determining Whether an Instrument is Indexed to an Entity’s Own Stock

In June 2008, the EITF reached a consensus on EITF Issue No. 07-5, “Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock”, which is now codified as part of FASB ASC 815-40 “Contracts in Entity’s Own Equity” (“ASC 815-40”). ASC 815-40 addresses the determination of whether an equity linked financial instrument (or embedded feature) that has all of the characteristics of a derivative under other authoritative U.S. GAAP accounting literature is indexed to an entity’s own stock and would thus meet the first part of a scope exception from classification and recognition as a derivative instrument. Nortel adopted the provisions of ASC 815-40 on January 1, 2009. The adoption of ASC 815-40 did not have a material impact on Nortel’s results of operations and financial condition.

(h) Determining Fair Value when the Volume and Level of Activity for the Asset or Liability have Significantly Decreased and Identifying Transactions that are not Orderly

In April 2009, FASB issued FSP FAS 157-4, “Determining Fair Value when the Volume and Level of Activity for the Asset or Liability have Significantly Decreased and Identifying Transactions that are not Orderly”, which is now codified as part of ASC 820. ASC 820 provides additional guidance on determining fair value for a financial asset when the volume or level of activity for that asset or liability has significantly decreased and also assists in identifying circumstances that indicate a transaction is not orderly. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary. ASC 820 is effective for interim and annual reporting periods ending after June 15, 2009 and will be applied prospectively. Nortel adopted the provisions of ASC 820 on June 30, 2009. The adoption of ASC 820 did not have a material impact on Nortel’s results of operations and financial condition.

(i) Recognition and Presentation of Other Than Temporary Impairments

In April 2009, the FASB issued FSP FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other Than Temporary Impairments” which is now codified as part of FASB ASC 320 “Investments—Debt and Equity

 

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Securities” (“ASC 320”). ASC 320 provides guidance on determining whether the holder of an investment in a debt or equity security for which changes in fair value are not regularly recognized in earnings (such as securities classified as held-to-maturity or available-for-sale) should recognize a loss in earnings when the investment is impaired. ASC 320 is effective for interim and annual reporting periods ending after June 15, 2009. Nortel adopted the provisions of ASC 320 on June 30, 2009. The adoption of ASC 320 did not have a material impact on Nortel’s results of operations and financial condition.

(j) Disclosures about Certain Financial Assets

In April 2009, the FASB issued FSP FAS 107-1 and APB 28-1, “Disclosures about Certain Financial Assets: An Amendment of FASB Statement No. 107”, which is now codified as FASB ASC 825 “Financial Instruments” (“ASC 825”). ASC 825 requires interim and annual disclosures of fair value measurements for all financial instruments within the scope of that Statement. It also reiterates qualitative disclosure requirements in FASB ASC 820 “Fair Value Measurements and Disclosures” (“ASC 820”). Nortel adopted the provisions of ASC 825 on June 30, 2009. The adoption of ASC 825 did not have a material impact on Nortel’s results of operations and financial condition.

(k) Subsequent Events

In June 2009, the FASB issued SFAS No. 165, “Subsequent Events”, which is now codified as FASB ASC 855 “Subsequent Events” (“ASC 855”). ASC 855 requires management to evaluate subsequent events through the date the financial statements are either issued or available to be issued, depending on the company’s expectation of whether it will widely distribute its financial statements to its shareholders and other financial statement users. Companies are required to disclose the date through which subsequent events have been evaluated. ASC 855 is effective for interim or annual financial periods ending after June 15, 2009. Nortel adopted the provisions of ASC 855 on June 30, 2009. The adoption of ASC 855 did not have a material impact on Nortel’s results of operations and financial condition.

(l) FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles

In July 2009, the FASB issued SFAS No. 168, “FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles”, which is now codified as FASB ASC 105 “Generally Accepted Accounting Principles” (“ASC 105”). ASC 105 establishes the FASB Accounting Standards Codification as the single source of authoritative U.S. GAAP recognized by the FASB to be applied to nongovernmental entities. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative U.S. GAAP for SEC registrants. ASC 105 is effective for financial statements issued for interim and annual periods after September 15, 2009. Nortel adopted the provisions of ASC 105 on September 30, 2009. The adoption of ASC 105 did not have a material impact on Nortel’s results of operations and financial condition.

4. Discontinued Operations

As discussed in note 2, on July 20, 2009, Nortel announced that it, NNL, and certain of Nortel’s other subsidiaries, including NNI and NNUK, had entered into a stalking horse asset and share sale agreement with Avaya for its North American, CALA and Asian ES business, and an asset sale agreement with Avaya for the EMEA portion of its ES business for a purchase price of $475 subject to purchase price adjustments under certain circumstances. These agreements include the planned sale of substantially all of the assets of the ES business globally as well as the shares of NGS and DiamondWare, Ltd. This sale required a court-approved “stalking horse” sale process under Chapter 11 that allowed other qualified bidders to submit higher or otherwise better offers. Bidding procedures were approved by the U.S. Court and Canadian Court on August 4, 2009. Competing bids were required to be submitted by September 4, 2009 and an auction with the qualified bidders commenced on September 11, 2009. On September 14, 2009, Avaya emerged as the successful bidder for a purchase price of $900

 

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in cash, with an additional pool of $15 reserved for an employee retention program, subject to certain purchase price adjustments. At a joint hearing on September 16, 2009, Nortel obtained U.S. Court and Canadian Court approval of the sale to Avaya. The sale is also subject to court approvals in France and Israel as well as regulatory approvals, other customary closing conditions.

As part of the transaction with Avaya, Nortel has agreed to undertake certain activities to assist the buyer with the transition of the business from Nortel’s infrastructure to that of the buyer. As a result of this agreement, Nortel expects to generate certain direct and indirect cash flows that are associated with the disposed component for a period of time that is not currently expected to exceed one year. The operations and cashflows of the Enterprise business meet the definition of a component as prescribed by ASC 360-10-35. A component of an entity that is being disposed of should be shown as discontinued operations where the cash flows associated with the component will be eliminated and the entity will not have any significant continuing involvement, as defined in the applicable accounting guidance, with the component post-disposition. Nortel has evaluated the nature and significance of these cash flows arising from transition services Nortel expects to provide to Avaya and has determined that they do not preclude the recognition and presentation of this business component as discontinued operations for the periods presented.

The following table summarizes certain financial information of the ES business, which includes DiamondWare Ltd., and the NGS business, for the presented periods:

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
         2009             2008             2009             2008      

Operations

        

Total revenues

   $ 353      $ 724      $ 1,065      $ 2,147   
                                

Loss from discontinued operations before income taxes

   $ (164   $ (560   $ (488   $ (753

Income tax benefit (expense)

     —          4        —          8   
                                

Net loss from discontinued operations before disposal—net of taxes

   $ (164   $ (556   $ (488   $ (745
                                

These operating results for the three and nine months ended September 30, 2009 exclude the ES business results of our Equity Investees. The net loss from discontinued operations before disposal above is entirely attributable to NNC. The sale is expected to close prior to December 31, 2009, subject to the receipt of all required approvals. Any gain or loss on disposal will be recognized at that time.

 

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The assets and liabilities related to the operations of the ES business, which includes DiamondWare Ltd., and the NGS business, as at September 30, 2009 are as follows:

 

     September 30,
2009

Assets

  

Cash and cash equivalents

   $ 38

Accounts receivable—net

     219

Inventories—net

     149

Other current assets

     55

Plant and equipment—net

     73

Goodwill

     122

Intangible assets—net

     50

Other long-term assets

     21
      

Assets of discontinued operations

   $ 727
      

Liabilities

  

Trade and other accounts payable

   $ 27

Employee related liabilities

     92

Contractual liabilities

     13

Restructuring liabilities

     1

Other current liabilities

     279

Long-term debt

     28

Other long-term liabilities

     28

Liabilities subject to compromise

     145
      

Liabilities of discontinued operations

   $ 613
      

Of these assets and liabilities, Nortel currently estimates that the following items would, at September 30, 2009, have been acquired or assumed by Avaya pursuant to the terms of the asset and share sale agreement:

 

     September 30,
2009

Assets

  

Cash

   $ 38

Accounts receivable—net

     69

Inventories—net

     149

Plant and equipment—net

     72

Other

     215
      

Assets held for sale

   $ 543
      

Liabilities

  

Trade and other accounts payable

   $ 5

Employee-related liabilities

     92

Contractual liabilities

     13

Other current liabilities

     226

Other long-term liabilities

     54
      

Liabilities held for sale

   $ 390
      

 

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5. Reorganization Items—net

Reorganization items represent the direct and incremental costs related to the Creditor Protection Proceedings such as revenues, expenses such as professional fees directly related to the Creditor Protection Proceedings, realized gains and losses, and provisions for losses resulting from the reorganization and restructuring of the business. Reorganization items consisted of the following:

 

     Three Months
Ended

September 30,
2009
    Nine Months
Ended

September 30,
2009
 

Professional fees (a)

   $ (42   $ (76

Interest income (b)

     4        12   

Lease repudiation (c)

     45        62   

Key Executive Incentive Plan/Key Employee Retention Plan (d)

     (5     (21

Penalties (e)

     (1     (21

Pension adjustment (f)

     (214     (214

Other (g)

     (10     (26
                

Total reorganization items—net

   $ (223   $ (284
                

 

(a) Includes financial, legal, real estate and valuation services directly associated with the Creditor Protection Proceedings.
(b) Reflects interest earned due to the preservation of cash as a result of the Creditor Protection Proceedings.
(c) Nortel has rejected a number of leases, resulting in the recognition of non-cash gains and losses. Nortel may reject additional leases or other contracts in the future, which may result in recognition of material gains and losses.
(d) Relates to retention and incentive plans for certain key eligible employees deemed essential to the business during the Creditor Protection Proceedings.
(e) Relates to liquidated damages on early termination of contracts.
(f) Includes the net impact of the settlement of the U.S. Retirement Income Plan and related PBGC (as defined in note 13) claim.
(g) Includes other miscellaneous items directly related to the Creditor Protection Proceedings, such as loss on disposal of certain assets, and revocation of a government grant.

Nortel paid $67 relating to reorganization items in the nine months ended September 30, 2009, attributable to $66 paid for professional fees and $11 paid for Key Executive Incentive/Key Employee Retention Plans partially offset by $10 received in interest income.

6. Condensed consolidated financial statement details

The following tables provide details of selected items presented in the condensed consolidated statements of operations and cash flows, and the condensed consolidated balance sheets. For further information with respect to the accounting policies used in the preparation of the condensed consolidated financial statement details below, refer to the 2008 Annual Report and notes 1 and 3 of this report.

Condensed consolidated statements of operations

Other operating expense—net:

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2009     2008     2009     2008  

Royalty license income—net

   $ (2   $ (2   $ (3   $ (6

Litigation charges—net

     1        —          1        11   

Other—net

     47        17        48        28   
                                

Other operating expense—net

   $ 46      $ 15      $ 46      $ 33   
                                

 

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Other income (expense)—net

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2009     2008     2009     2008  

Loss on sale and write downs of investments

   $ (3   $ (4   $ (4   $ (6

Currency exchange gain (loss)—net

     61        (7     22        8   

Other—net

     2        (3     (5     (13
                                

Other income (expense)—net

   $ 60      $ (14   $ 13      $ (11
                                

Condensed consolidated balance sheets

Short-term investments:

Short-term investments as of September 30, 2009 consisted of an investment having an original cost of $362 in the Reserve Primary Fund (“Fund”), a money market fund investment that was originally classified as cash and cash equivalents. Due to financial market conditions during the third quarter of 2008, which resulted in the suspension of trading in the Fund’s securities, an impairment of $11 was recorded during 2008 to reflect the decline in the net asset and deemed fair value of the Fund. Further, the Fund made redemptions on October 31, 2008, December 3, 2008, February 20, 2009 and April 17, 2009 of $184, $102, $24 and $16, respectively.

On February 26, 2009, the Fund announced it would set aside $3,500, or 5.28 cents per share, in a special reserve that may be used to satisfy anticipated cost and expenses of the Fund, including legal and accounting fees, pending or threatened claims against the Fund, its officers and trustees, and claims for indemnification and other claims that could be made against the Fund’s assets. Fund distributions will be made pro rata from the Fund’s assets up to 91.72 cents per share unless the board of trustees determines to increase the special reserve. Nortel’s pro rata share of the remainder of the announced per share distribution of 91.72 cents is $26. As of September 30, 2009, Nortel has classified $6 of its investments in short-term investments and the remainder of $19 as long-term investments. On October 2, 2009, the Fund made a final redemption payment of $7 and all remaining investments in the Fund have been classified as long-term investment given that the timing of future redemptions is unknown and subject to the outcome of ongoing litigation involving the Fund.

Accounts receivable—net:

 

     September 30,
2009
    December 31,
2008
 

Trade receivables

   $ 823      $ 1,930   

Notes receivable

     3        3   

Contracts in process

     85        257   
                
     911        2,190   

Less: provisions for doubtful accounts

     (10     (36
                

Accounts receivable—net

   $ 901      $ 2,154   
                

Inventories—net:

 

     September 30,
2009
    December 31,
2008
 

Raw materials

   $ 196      $ 249   

Work in process

     3        4   

Finished goods

     388        721   

Deferred costs

     208        1,130   
                
     795        2,104   

Less: provision for inventories

     (394     (481
                

Inventories and long-term deferred costs—net

     401        1,623   

Less: long-term deferred costs (a)

     (51     (146
                

Inventories—net

   $ 350      $ 1,477   
                

 

(a) Long-term portion of deferred costs is included in other assets.

 

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Other current assets:

 

     September 30,
2009
   December 31,
2008

Prepaid expenses

   $ 89    $ 98

Income taxes recoverable

     53      107

Current investments

     28      21

Other

     203      229
             

Other current assets

   $ 373    $ 455
             

Investments:

Investments included, in part, $75 and $73 as of September 30, 2009 and December 31, 2008, respectively, related to long-term investment assets held in an employee benefit trust in Canada, and restricted as to their use in operations by Nortel.

Plant and equipment—net:

 

     September 30,
2009
    December 31,
2008
 

Cost:

    

Land

   $ —        $ 31   

Buildings

     742        991   

Machinery and equipment

     1,125        1,761   

Assets under capital lease

     152        193   

Sale lease-back assets

     73        90   
                
     2,092        3,066   
                

Less accumulated depreciation:

    

Buildings

     (295     (369

Machinery and equipment

     (909     (1,307

Assets under capital lease

     (82     (98

Sale lease-back assets

     (20     (20
                
     (1,306     (1,794
                

Plant and equipment—net

   $ 786      $ 1,272   
                

Nortel entered into an agreement of purchase and sale dated as of April 27, 2009, with The City of Calgary, Alberta, for the sale of its facility in Calgary for a purchase price of CAD$97 and the sale was completed on June 15, 2009. A net gain of $28 was recognized for the quarter ended June 30, 2009.

Intangible assets—net:

 

     September 30,
2009
    December 31,
2008
 

Cost

   $ 194      $ 294   

Less: accumulated amortization

     (140     (151
                

Intangible assets—net

   $ 54      $ 143   
                

 

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Other assets:

 

     September 30,
2009
   December 31,
2008

Long-term deferred costs

   $ 51    $ 146

Long-term inventories

     20      22

Debt issuance costs

     52      61

Derivative assets

     —        126

Financial assets

     48      41

Other

     19      79
             

Other assets

   $ 190    $ 475
             

Other accrued liabilities:

 

     September 30,
2009
   December 31,
2008

Outsourcing and selling, general and administrative related provisions

   $ 87    $ 246

Customer deposits

     7      10

Product-related provisions

     36      225

Warranty provisions (note 14)

     88      186

Deferred revenue

     263      972

Advance billings in excess of revenues recognized to date on contracts (a)

     94      751

Miscellaneous taxes

     13      29

Income taxes payable

     13      65

Deferred income taxes

     11      13

Tax uncertainties (note 12)

     40      15

Interest payable

     —        112

Other

     91      50
             

Other accrued liabilities

   $ 743    $ 2,674
             

 

(a) Includes amounts that may be recognized beyond one year due to the duration of certain contracts.

Other liabilities:

 

     September 30,
2009
   December 31,
2008

Pension benefit liabilities

   $ 19    $ 1,557

Post-employment and post-retirement benefit liabilities

     204      670

Restructuring liabilities (notes 10 and 11)

     10      161

Deferred revenue

     90      271

Tax uncertainties

     98      92

Derivative liabilities

     —        62

Other long-term provisions

     54      135
             

Other liabilities

   $ 475    $ 2,948
             

 

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Condensed consolidated statements of cash flows

Change in operating assets and liabilities—net:

 

     Nine Months Ended
September 30,
 
     2009     2008  

Accounts receivable—net

   $ 424      $ 518   

Inventories—net

     120        (113

Deferred costs

     149        333   

Income taxes

     (13     —     

Accounts payable

     12        (100

Payroll, accrued and contractual liabilities

     90        (303

Deferred revenue

     (150     61   

Advance billings in excess of revenues recognized to date on contracts

     (117     (668

Restructuring liabilities

     (32     (94

Other

     (104     (94
                

Change in operating assets and liabilities—net

   $ 379      $ (460
                

Interest, taxes and net reorganization items paid:

 

     Nine Months Ended
September 30,
     2009    2008

Cash interest paid

   $ 14    $ 265

Cash taxes paid

   $ 17    $ 96

Net payment for reorganization items (note 5)

   $ 67    $ —  

7. Goodwill

The following table outlines goodwill by reportable segment:

 

     LGN (a)

Balance—as of December 31, 2008

   $ 9

Change:

  

Additions

     —  

Disposals

     —  

Foreign exchange

     1

Other

     —  

Impairment

     —  
      

Balance—as of September 30, 2009

   $ 10
      

 

(a) Amount was previously included in the Other business unit. See note 9.

Goodwill Impairment Testing Policy

Nortel tests goodwill for possible impairment on an annual basis as of October 1 of each year and at any other time if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount.

 

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Circumstances that could trigger an impairment test between annual tests include, but are not limited to:

 

   

a significant adverse change in the business climate or legal factors;

 

   

an adverse action or assessment by a regulator;

 

   

unanticipated competition;

 

   

loss of key personnel;

 

   

the likelihood that a reporting unit or a significant portion of a reporting unit will be sold or disposed of;

 

   

a change in reportable segments;

 

   

results of testing for recoverability of a significant asset group within a reporting unit; and

 

   

recognition of a goodwill impairment loss in the financial statements of a subsidiary that is a component of a reporting unit.

The impairment test for goodwill is a two-step process. Step one consists of a comparison of the fair value of a reporting unit with its carrying amount, including the goodwill allocated to the reporting unit. Nortel determines the fair value of its reporting units using an income approach; specifically, based on a Discounted Cash Flow (“DCF”) Model. A market approach may also be used to evaluate the reasonableness of the fair value determined under the DCF Model, but results of the market approach are not given any specific weighting in the final determination of fair value. Both approaches involve significant management judgment and as a result, estimates of value determined under the approaches are subject to change in relation to evolving market conditions and Nortel’s business environment.

If the carrying amount of a reporting unit exceeds its fair value, step two of the goodwill impairment test requires the fair value of the reporting unit be allocated to the underlying assets and liabilities of that reporting unit, whether or not previously recognized, resulting in the determination of an implied fair value of goodwill. If the carrying amount of the reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss equal to the excess is recorded in net earnings (loss).

The fair value of each reporting unit is determined using discounted cash flows or other evidence of fair value if applicable. When circumstances warrant, a multiple of earnings before interest, taxes, depreciation and amortization (“EBITDA”) of each reporting unit is calculated and compared to market participants to corroborate the results of the calculated fair value (“EBITDA Multiple Model”). The following are the significant assumptions involved in the application of each valuation approach:

 

   

DCF Model: assumptions regarding revenue growth rates, gross margin percentages, projected working capital needs, selling, general and administrative expense (“SG&A”), R&D expense, capital expenditures, discount rates, terminal growth rates, and estimated selling price of assets expected to be disposed of by sale. To determine fair value, Nortel discounts the expected cash flows of each reporting unit. The discount rate used represents the estimated weighted average cost of capital, which reflects the overall level of inherent risk involved in its reporting unit operations and the rate of return an outside investor would expect to earn. To estimate cash flows beyond the final year of its model, Nortel uses a terminal value approach. Under this approach, Nortel uses the estimated cash flows in the final year of its models and applies a perpetuity growth assumption and discount by a perpetuity discount factor to determine the terminal value. Nortel incorporates the present value of the resulting terminal value into its estimate of fair value. When strategic plans call for the sale of all or an important part of a reporting unit, Nortel estimates proceeds from the expected sale using external information, such as third party bids, adjusted to reflect current circumstances, including market conditions.

 

   

EBITDA Multiple Model: assumptions regarding estimates of EBITDA growth and the selection of comparable companies to determine an appropriate multiple.

 

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Interim Goodwill Assessment

At March 31, 2009, in accordance with the provisions of FASB ASC 350 “Intangibles—Goodwill and Other” (“ASC 350”), Nortel concluded that events had occurred and circumstances had changed that required it to perform an interim period goodwill impairment test for the reporting unit in its Other segment, NGS. Given the nature of the business operations and the decline in the economic outlook, management decided to place significant weighting on the results of the DCF model in establishing the fair value of this reporting unit. The decision was based on a lack of direct comparable companies. The results from step one of the two-step goodwill impairment test indicated that the estimated fair value of NGS was less than the carrying value of its net assets and as such Nortel performed step two of the impairment test for this reporting unit.

In step two of the impairment test, Nortel was required to measure the potential impairment loss by allocating the estimated fair value of the reporting unit, as determined in step one, to the reporting unit’s recognized and unrecognized assets and liabilities, with the residual amount representing the implied fair value of goodwill and, to the extent the implied fair value of goodwill was less than the carrying value, an impairment loss was recognized. As such, the step two test required Nortel to perform a theoretical purchase price allocation for NGS to determine the implied fair value of goodwill as of the evaluation date. In accordance with the guidance in ASC 350, Nortel completed a preliminary assessment of the expected impact of the step two tests using reasonable estimates for the theoretical purchase price allocation and recorded a preliminary goodwill impairment charge of approximately $48. Nortel finalized the goodwill assessment during the second quarter of 2009 and as a result recorded no additional goodwill impairment charge. In July 2009, the assets of NGS, including its goodwill, were reclassified as assets of discontinued operations.

Goodwill impairment losses of $661 and $481 related to the MEN segment and the businesses included in discontinued operations, respectively, were recorded during the three and nine months periods ended September 30, 2008.

Related Analyses

Nortel performed a recoverability test of its long-lived assets in accordance with ASC 360-10-35. Similar to the prior quarter, to perform the impairment test, Nortel compared the projected cash flows from operations for each business unit and for NNC as a whole, as well as the projected cash flows from dispositions, with the respective carrying values and determined that no impairment existed.

8. Assets and liabilities held for sale

The following table sets forth assets and liabilities classified as held for sale at September 30, 2009:

 

     Land
and Buildings
   CDMA/LTE    Packet
Core
   Total

Assets

           

Cash

   $ —      $ —      $ —      $ —  

Accounts receivable—net

     —        36      —        36

Inventories—net

     —        105      —        105

Plant and equipment—net

     23      42      2      67

Other

     —        —        —        —  
                           

Assets held for sale

   $ 23    $ 183    $ 2    $ 208
                           

Liabilities

           

Trade and other accounts payable

   $ —      $ 38    $ —      $ 38

Employee-related liabilities

     —        20      —        20

Contractual liabilities

     —        11      —        11

Other current liabilities

     —        307      —        307

Other long-term liabilities

     21      1      —        22
                           

Liabilities held for sale

   $ 21    $ 377    $ —      $ 398
                           

 

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On June 19, 2009, Nortel announced that it, as well as its principal operating subsidiary, NNL, and certain of Nortel’s other subsidiaries, including NNI, had entered into a stalking horse asset sale agreement with NSN for the planned sale of substantially all of its CDMA business and LTE Access assets for $650, subject to purchase price adjustments under certain circumstances. This sale required a court-approved bidding process, known as a “stalking horse” or 363 Sale under Chapter 11 that allowed other qualified bidders to submit higher or otherwise better offers. Bidding procedures were approved by the U.S. Court and Canadian Court in late June. Competing bids were required to be submitted by July 21, 2009 and an auction with the qualified bidders was held on July 24, 2009. Ericsson emerged as the successful bidder for a purchase price of $1,130, subject to certain post-closing purchase price adjustments. Nortel obtained U.S. Court and Canadian Court approvals for the sale to Ericsson on July 28, 2009. On November 13, 2009, Nortel announced that following satisfaction of all closing conditions, the sale had concluded. The related CDMA business and LTE Access assets and liabilities have been classified as held for sale beginning as of June 30, 2009. Nortel determined that the fair value less estimated costs to sell exceeded the carrying value of the CDMA business and LTE Access assets and liabilities and therefore no impairment was recorded on the reclassification of these assets to held for sale.

The related CDMA business and LTE Access financial results of operations have not been classified as discontinued operations in these condensed consolidated financial statements as they did not meet the definition of a component of an entity. The sale was successfully concluded on November 13, 2009. Accordingly, the gain on disposal of the CDMA business and LTE Access assets will be recognized in the fourth quarter of fiscal 2009.

Also included in assets and liabilities held for sale as at September 30, 2009 are the Packet Core Assets asset and liabilities and certain land and buildings. See note 4 for details on assets and liabilities of the ES business, which includes DiamondWare Ltd., and the NGS business, which are also held for sale as at September 30, 2009.

Included in land and buildings is vacant land whose carrying amount was reduced to $8 on reclassification of this asset to held for sale. Nortel has recorded an impairment charge of $6 during the quarter to reduce the carrying value of the land to the estimated fair value less costs to sell. Nortel has recognized a total of $18 in impairment losses related to this asset during the nine months ended September 30, 2009. The impairment losses are included in loss/gain on sales of businesses and sales and impairments of assets.

9. Segment information

Segment descriptions

Effective January 1, 2009, Nortel decentralized several corporate functions and transitioned to a vertically integrated business unit structure. Enterprise customers are served by a business unit responsible for product and portfolio development, R&D, marketing and sales, partner and channel management, strategic business development and associated functions. Service provider customers are served by three business units with full responsibility for all products, services, applications, portfolio, business and market development, marketing and R&D functions: WN, Carrier VoIP and Application Solutions (“CVAS”) and Metro Ethernet Networks (“MEN”).

Our Global Services (“GS”) business unit, formerly a reportable business segment, has been decentralized and transitioned to the other reportable segments as of the first quarter of 2009. In addition, commencing with the first quarter of 2009, we began to report LGN as a separate reportable segment. Prior to that time, the results of LGN were reported across all of our reportable segments. Also commencing with the first quarter of 2009, services results are reported across all reportable segments (WN, CVAS, MEN and LGN). Further to our announcement in the fourth quarter of 2008, we have decentralized our Carrier Sales and Global Operations teams as of July 1, 2009. Commencing with the third quarter of 2009 we are reporting our CVAS business unit as a separate reportable segment. Prior to that time, the results of CVAS were included in the WN reportable segment, which prior to third quarter of 2009 was called the Carrier Networks (“CN”) reportable segment. Prior to the quarter ended September 30, 2009, the ES business was a reportable segment and the results of NGS were

 

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included in Other. As discussed above, Nortel has entered into sale agreements with Avaya for the planned sale of substantially all of the assets of the ES business globally, including the shares of NGS and DiamondWare, Ltd. These assets and liabilities have been classified as assets held for sale and the related ES and NGS financial results of operations have been classified as discontinued operations as at September 30, 2009.

As of September 30, 2009, Nortel’s four reportable segments were: WN, CVAS, MEN and LGN:

 

   

The WN segment provides wireline and wireless networks and related services that help service providers and cable operators supply mobile voice, data and multimedia communications services for individuals and enterprises using cellular telephones, personal digital assistants, laptops, soft-clients, and other wireless computing and communications devices. As of September 30, 2009, WN includes CDMA solutions business and GSM and UMTS solutions.

 

   

The CVAS segment offers circuit- and packet-based voice switching products that provide local, toll, long distance and international gateway capabilities for local and long distance telephone companies, wireless service providers, cable operators and other service providers.

 

   

The MEN segment solutions are designed to deliver carrier-grade Ethernet transport capabilities focused on meeting customer needs for higher performance and lower cost, with a portfolio that includes optical networking, Carrier Ethernet switching, and multiservice switching products and related services. MEN includes the optical networking solutions business and the data networking and security solutions business.

 

   

The LGN segment provides telecommunications equipment and network solutions, spanning wired and wireless technologies, to both service providers as well as enterprise customers in both the domestic Korean market and internationally. LGN’s Carrier Network business unit (“LGN Carrier”) offers advanced CDMA and UMTS solutions to wireless service providers and also includes the Ethernet Fiber Access product line based on next-generation WDM-PON technology. LGN’s Enterprise Solutions business unit (“LGN Enterprise”) offers a broad and diverse portfolio of voice, data, multimedia, unified communication systems and devices for business communication solutions.

Comparative periods have been recast to conform to the current segment presentation.

Other miscellaneous business activities and corporate functions do not meet the quantitative criteria to be disclosed separately as reportable segments and have been reported in “Other”. Costs associated with shared services, such as general corporate functions, that are managed on a common basis are allocated to Nortel’s reportable segments based on usage determined generally by headcount. A portion of other general and miscellaneous corporate costs and expenses are allocated based on a fixed charge established annually. Costs not allocated to the reportable segments include employee share-based compensation, differences between actual and budgeted employee benefit costs, interest attributable to Nortel’s long-term debt and other non-operational activities, and are included in “Other”.

Nortel’s Chief Restructuring Officer (“CRO”) has been identified as the Chief Operating Decision Maker in assessing the performance of and allocating resources to Nortel’s operating segments. The primary financial measure used by the CRO is Management Operating Margin (“Management OM”). Management OM is not a recognized measure under U.S. GAAP. It is a measure defined as total revenues, less total cost of revenues, SG&A and R&D expense relating to both our consolidated entities and the Equity Investees. The financial information for Nortel’s business segments includes the results of the Equity Investees as if they were consolidated, which is consistent with the way we manage our business segments. However, as discussed in note 2, under U.S. GAAP, the Equity Investees are accounted for under the equity method of accounting as of the Petition Date. Therefore, in order to reconcile the financial information for the reportable segments shown in the tables below to the consolidated financial information, the “Equity in net loss of Equity Investees” in the following table must be removed.

 

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Segments

The following tables set forth information by segment for the three and nine months ended:

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
         2009             2008             2009             2008      

Segment revenues

        

WN

   $ 663      $ 805      $ 1,988      $ 2,614   

CVAS

     208        182        540        605   

MEN

     295        398        988        1,255   

LGN

     103        211        490        1,072