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Nortel Networks 10-Q 2010

Documents found in this filing:

  1. 10-Q
  2. Ex-10.1
  3. Ex-31
  4. Ex-32
  5. Graphic
  6. Graphic
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 June 30, 2010

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.)

5945 Airport Road, Suite 360

Mississauga, Ontario, Canada

  L4V 1R9
(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  ¨    Accelerated filer  ¨    Non-accelerated filer  ¨   Smaller reporting company  x
      (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 August 6, 2010.

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

   61

ITEM 4.

  

Controls and Procedures

   120
  

PART II

OTHER INFORMATION

  
     

ITEM 1.

  

Legal Proceedings

   121

ITEM 1A.

  

Risk Factors

   122

ITEM 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

   123

ITEM 6.

  

Exhibits

   123

SIGNATURES

   124

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

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

MOODY’S is a trademark of Moody’s Investors Service, 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
June  30,
    Six Months Ended
June  30,
 
         2010           2009 (a)        2010     2009 (a)  

Revenues:

        

Products

   $ 116      $ 934      $ 406      $ 1,717   

Services

     29        75        101        146   
                                

Total revenues

     145        1,009        507        1,863   
                                

Cost of revenues:

        

Products

     130        517        371        992   

Services

     9        23        33        51   
                                

Total cost of revenues

     139        540        404        1,043   
                                

Gross profit

     6        469        103        820   

Selling, general and administrative expense

     135        135        301        353   

Research and development expense

     21        181        103        401   

Amortization of intangible assets

     —          (1     —          (1

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

     1        (16     3        (16

Other operating expense (income) — net (note 6)

     (96     8        (156     (3
                                

Operating earnings (loss)

     (55     162        (148     86   

Other income (expense) — net (note 6)

     (28     6        32        (40

Interest expense (contractual interest expense for the three and six months ended June 30, 2010 was $78 and $156, respectively (2009 — $77 and $157, respectively))
Long-term debt

     (75     (74     (150     (149

Other

     —          —          —          (1
                                

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

     (158     94        (266     (104

Reorganization items — net (note 5)

     (1,387     (58     (891     (66
                                

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

     (1,545     36        (1,157     (170

Income tax benefit (expense)

     41        (17     33        (13
                                

Earnings (loss) from continuing operations before equity in net loss of associated companies and Equity Investees

     (1,504     19        (1,124     (183

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

     —          1        (1     (1

Equity in net loss of Equity Investees (note 22)

     (30     (167     (50     (289
                                

Net loss from continuing operations

     (1,534     (147     (1,175     (473

Net earnings (loss) from discontinued operations — net of tax (note 4)

     35        (119     33        (294
                                

Net loss

     (1,499     (266     (1,142     (767

Income attributable to noncontrolling interests

     (5     (8     (7     (14
                                

Net loss attributable to Nortel Networks Corporation

   $ (1,504   $ (274   $ (1,149   $ (781
                                

Basic loss per common share — continuing operations

   $ (3.09   $ (0.31   $ (2.37   $ (0.98
                                

Diluted loss per common share — continuing operations

   $ (3.09   $ (0.31   $ (2.37   $ (0.98
                                

Total basic loss per common share

   $ (3.02   $ (0.55   $ (2.30   $ (1.57
                                

Total diluted loss per common share

   $ (3.02   $ (0.55   $ (2.30   $ (1.57
                                

 

(a) The 2009 results have been recast to reflect the equity method of accounting for the Equity Investees. See note 1.

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

 

1


Table of Contents

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)

 

     June 30,
2010
    December 31,
2009
 
ASSETS     

Current assets

    

Cash and cash equivalents

   $ 1,668      $ 1,998   

Short-term investments

     —          18   

Restricted cash and cash equivalents

     186        92   

Accounts receivable — net

     254        625   

Inventories — net

     53        183   

Deferred income taxes — net

     —          24   

Other current assets

     352        348   

Assets held for sale (note 8)

     232        272   

Assets of discontinued operations (note 4)

     37        148   
                

Total current assets

     2,782        3,708   

Restricted cash

     3,011        1,928   

Investments

     —          117   

Plant and equipment — net

     203        688   

Goodwill

     —          9   

Intangible assets — net

     —          51   

Deferred income taxes — net

     —          10   

Other assets

     147        177   
                

Total assets

   $ 6,143      $ 6,688   
                
LIABILITIES AND SHAREHOLDERS’ DEFICIT     

Current liabilities

    

Trade and other accounts payable

   $ 170      $ 294   

Payroll and benefit-related liabilities

     97        128   

Contractual liabilities

     83        93   

Restructuring liabilities (notes 10 and 11)

     7        4   

Other accrued liabilities (note 6)

     227        660   

Liabilities held for sale (note 8)

     —          205   

Liabilities of discontinued operations (note 4)

     38        53   
                

Total current liabilities

     622        1,437   

Long-term liabilities

    

Long-term debt

     41        41   

Investment in net liabilities of Equity Investees (note 22)

     —          534   

Deferred income taxes — net

     —          7   

Other liabilities (note 6)

     64        226   
                

Total long-term liabilities

     105        808   

Liabilities subject to compromise (note 20)

     8,589        7,358   

Liabilities subject to compromise of discontinued operations

     117        129   
                

Total liabilities

     9,433        9,732   
                

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

    
SHAREHOLDERS’ DEFICIT     

Common shares, without par value — Authorized shares: unlimited; Issued and outstanding shares: 498,206,366 as of June 30, 2010 and December 31, 2009 respectively

     35,604        35,604   

Additional paid-in capital

     3,596        3,623   

Accumulated deficit

     (43,025     (41,876

Accumulated other comprehensive loss

     (79     (1,124
                

Total Nortel Networks Corporation shareholders’ deficit

     (3,904     (3,773

Noncontrolling interests

     614        729   
                

Total shareholders’ deficit

     (3,290     (3,044
                

Total liabilities and shareholders’ deficit

   $ 6,143      $ 6,688   
                

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

 

2


Table of Contents

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)

 

     Six Months Ended
June 30,
 
     2010     2009 (a)  

Cash flows from (used in) operating activities

    

Net loss attributable to Nortel Networks Corporation

   $ (1,149   $ (781

Net (earnings) loss from discontinued operations — net of tax

     (33     294   

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

     36        101   

Non-cash portion of cost reduction activities

     —          8   

Equity in net loss of associated companies — net of tax

     1        1   

Equity in net loss of Equity Investees (note 22)

     50        289   

Share-based compensation expense

     —          73   

Deferred income taxes

     (6     7   

Pension and other accruals

     53        22   

Gain on sales of businesses and impairments of assets — net

     2        (12

Income attributable to noncontrolling interests

     7        14   

Reorganization items — non cash

     798        62   

Other — net

     392        (207

Change in operating assets and liabilities: Other (note 6)

     4        278   
                

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

     155        149   

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

     (341     (52
                

Net cash from (used in) operating activities

     (186     97   
                

Cash flows from (used in) investing activities

    

Expenditures for plant and equipment

     (7     (19

Proceeds on disposals of plant and equipment

     —          87   

Change in restricted cash and cash equivalents

     (1,178     (43

Decrease in short and long-term investments

     24        40   

Acquisitions of investments and businesses — net of cash acquired

     (2     —     

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

     970        6   
                

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

     (193     71   

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

     167        10   
                

Net cash from (used in) investing activities

     (26     81   
                

Cash flows from (used in) financing activities

    

Dividends paid, including paid by subsidiaries to noncontrolling interests

     (11     (6

Decrease in notes payable

     —          (41

Repayments of capital leases

     (3     (5
                

Net cash used in financing activities — continuing operations

     (14     (52

Net cash used in financing activities — discontinued operations

     (77     (29
                

Net cash used in financing activities

     (91     (81
                

Effect of foreign exchange rate changes on cash and cash equivalents

     (1     10   

Reduction of cash and cash equivalents of deconsolidated subsidiaries

     (26     —     
                

Net cash from (used in) continuing operations

     (79     178   

Net cash from (used in) discontinued operations

     (251     (71
                

Net increase (decrease) in cash and cash equivalents

     (330     107   

Cash and cash equivalents at beginning of the period

     1,998        2,397   

Less cash and cash equivalents of Equity Investees

     —          (761
                

Adjusted cash and cash equivalents at beginning of the period

     1,998        1,636   

Cash and cash equivalents at end of the period

     1,668        1,743   

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

     —          (301
                

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

   $ 1,668      $ 1,442   
                

 

(a) The 2009 results have been recast to reflect the equity method of accounting for the Equity Investees. See note 1.

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

 

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Table of Contents

NORTEL NETWORKS CORPORATION

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

Notes to Condensed Consolidated Financial Statements (unaudited)

1. Basis of presentation

All monetary amounts in these notes to the condensed consolidated financial statements are in millions, except per share amounts, and in United States (“U.S.”) Dollars unless otherwise stated.

Nortel Networks Corporation

Prior to Nortel’s significant business divestitures (see note 2), Nortel Networks Corporation (“Nortel” or “NNC”) was a global supplier of end-to-end networking products and solutions serving both service providers and enterprise customers. Nortel’s technologies spanned access and core networks and support multimedia and business-critical applications. Nortel’s networking solutions consisted of hardware, software and services. Nortel designed, developed, engineered, marketed, sold, licensed, installed, serviced and supported these networking solutions worldwide. As further discussed in note 2, Nortel is currently focused on the remaining work under the Creditor Protection Proceedings (as defined in note 2), including the sale of the remaining businesses, providing transitional services to the purchasers of Nortel’s businesses and ongoing restructuring matters.

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.

Basis of Presentation and Going Concern Issues

The unaudited condensed consolidated financial statements are prepared in accordance with U.S. Generally Accepted Accounting Principles (“U.S. GAAP”) and do not include all the information and notes required 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, 2009. The condensed consolidated balance sheet as of December 31, 2009 is derived from the December 31, 2009 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, 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 results for the three and six months ended June 30, 2010 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, 2009 filed with the U.S. Securities and Exchange Commission (“SEC”) and Canadian securities regulatory authorities (“2009 Annual Report”) and this Quarterly Report on Form 10-Q for the quarter ended June 30, 2010.

 

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Table of Contents

NORTEL NETWORKS CORPORATION

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

Notes to Condensed Consolidated Financial Statements (unaudited) — (Continued)

 

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 Europe, the Middle East and Africa (“EMEA”) countries filed for creditor protection under the relevant jurisdictions of Canada, the U.S., the United Kingdom (“U.K.”) and subsequently commenced separate proceedings in Israel, followed by secondary proceedings in France. 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; (d) as to operations, the effect of any future changes that may be made in Nortel’s business; or (e) as to divestiture proceeds held in escrow by NNL, the final allocation of these proceeds as between various Nortel legal entities, including entities that are not consolidated in these condensed consolidated financial statements, which will ultimately be determined either by joint agreement or through a dispute resolution proceeding (see note 2).

The ongoing Creditor Protection Proceedings and completed and any future divestitures of Nortel’s businesses and assets raise substantial doubt as to whether Nortel will be able to continue as a going concern. 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 further 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 its remaining businesses by renewing and seeking to grow its business with existing customers, competing for new customers, continuing research and development (“R&D”) investments in product portfolios until the related businesses or assets are sold, 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. 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.

Comparative Figures

Certain of Nortel’s subsidiaries in EMEA, Nortel Networks UK Ltd. (“NNUK”), Nortel Networks S.A. (“NNSA”) and Nortel Networks (Ireland) Limited (collectively, “EMEA Subsidiaries”) and their subsidiaries (collectively, the “Equity Investees”), had been accounted for under the equity method from January 14, 2009 (“Petition Date”) until May 31, 2010 at which date Nortel concluded that it no longer exercised significant influence over the operating and financial policies of the EMEA Subsidiaries due to the significance of the completed dispositions, the ongoing role and decision making authority of the U.K. Administrators, and as Nortel is not committed to provide further support to the Equity Investees. Commencing June 1, 2010, Nortel accounts for its investments in the EMEA Subsidiaries as an investment by the cost method. As a result, the financial position and results of operations of the Equity Investees are not reflected in these consolidated results after May 31, 2010.

 

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Table of Contents

NORTEL NETWORKS CORPORATION

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

Notes to Condensed Consolidated Financial Statements (unaudited) — (Continued)

 

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 SEC, Nortel concluded that the presentation of the Equity Investees under the equity method was more appropriate for these periods and had reflected the results of the Equity Investees using the equity method commencing with the quarterly report for the period ended September 30, 2009. Nortel has reflected the results of the Equity Investees using the equity method for the comparative periods ended June 30, 2009. The change in presentation to the equity method of accounting did not affect the reported amount of net earnings (loss) for those periods, but affected the financial statement presentation as the results of operations of the Equity Investees were presented on a net basis within a single line in the statements of operations and cash flows respectively. For additional information on the Equity Investees see note 22.

Certain 2009 figures in the unaudited condensed consolidated financial statements have been reclassified to conform to Nortel’s current presentation. Certain 2009 results have been recast to reflect the equity method of accounting for the Equity Investees and discontinued operations. See note 4.

Liquidation of Subsidiaries

With the completed sales of substantially all of Nortel’s businesses, Nortel is focused on maximizing proceeds and cash flows with respect to remaining assets. This includes the winding up of Nortel’s remaining operations and subsidiaries globally, which can involve orderly wind-ups as well as commencement of liquidation proceedings, as the circumstances warrant.

Events may impact when, and if, an entity is deemed to be in liquidation including local statutory requirements and court approvals. As such approvals and events occur, Nortel will evaluate whether a change in basis of accounting is appropriate, and in all such cases, Nortel will assess the carrying values of those entities’ assets when it appears likely entities will be approved for liquidation. Generally, Nortel expects that an entity deemed to be in liquidation will result in a loss of control, deconsolidation of the entity, and accounting for the entity prospectively on a cost investment basis. Nortel recorded a gain of $8 and a loss of ($74) for the three and six months ended June 30, 2010, respectively, related to the liquidation of two entities in the CALA region, which are included in reorganization items. Subsequent to June 30, 2010, events have occurred resulting in certain additional entities being placed in liquidation or pending approval to be liquidated.

Recent accounting pronouncements

 

  (i) In October 2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2009-13, “Multiple-Deliverable Revenue Arrangements”, (“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.

 

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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) — (Continued)

 

  (ii) 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 Accounting Standards Codification (“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 Nortel board of directors after thorough consultation with advisors, certain Nortel entities, including NNC and NNL, initiated creditor protection proceedings in multiple jurisdictions under the respective restructuring regimes of Canada, the U.S., the U.K., and subsequently in Israel and France.

On June 19, 2009, Nortel announced that it was advancing in discussions with external parties to sell its businesses. To date, Nortel has completed a number of divestitures including: (i) the sale of substantially all of its Code Division Multiple Access (“CDMA”) business and Long Term Evolution (“LTE”) Access assets to Telefonaktiebolaget LM Ericsson (“Ericsson”); (ii) the sale of substantially all of the assets of its Enterprise Solutions (“ES”) business globally, including the shares of Nortel Government Solutions Incorporated (“NGS”) and DiamondWare, Ltd., to Avaya Inc. (“Avaya”); (iii) the sale of the assets of its Wireless Networks (“WN”) business associated with the development of Next Generation Packet Core network components (“Packet Core Assets”) to Hitachi, Ltd. (“Hitachi”); (iv) the sale of certain portions of its Layer 4-7 data portfolio to Radware Ltd. (“Radware”); (v) the sale of substantially all of the assets of its Optical Networking and Carrier Ethernet businesses to Ciena Corp. (“Ciena”); (vi) the sale of substantially all of the assets of its Global System for Mobile communications (GSM)/GSM for Railways (“GSM-R”) business to Ericsson and Kapsch CarrierCom AG (“Kapsch”); (vii) the sale of substantially all of the assets of its Carrier VoIP and Application Solutions (“CVAS”) business to GENBAND Inc. (now known as GENBAND U.S. LLC (“GENBAND”)); and (viii) the sale of NNL’s 50% plus 1 share interest in LG-Nortel Co. Ltd. (“LGN”), its Korean joint venture with LG Electronics, Inc. (“LGE”), to Ericsson.

Since June 2009, approximately $3,176 in net proceeds have been generated through the completed sales of businesses. Substantially all proceeds received in connection with the completed sales of businesses and assets are being held in escrow until the final allocation of these proceeds as between various Nortel legal entities is ultimately determined.

While numerous milestones have been met, significant work remains under the Creditor Protection Proceedings. A Nortel business services group (“NBS”) was established in 2009 to provide global transitional services to purchasers of Nortel’s businesses, in fulfillment of contractual obligations under transition services agreements (“TSAs”) entered into in connection with the sales of Nortel’s businesses and assets. These services include maintenance of customer and network service levels during the integration process, and providing expertise and infrastructure in finance, supply chain management, information technology, R&D, human resources and real estate necessary for the orderly and successful transition of businesses to purchasers over a

 

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period of 12 to 24 months from the closing of the sales. NBS is also focused on maximizing the recovery of Nortel’s accounts receivable, inventory and real estate assets, independent of the TSAs.

A core corporate group (“Corporate Group”) was also established in 2009 and is currently focused on a number of key actions, including the sale of remaining businesses and assets as well as exploring strategic alternatives to maximize the value of Nortel’s intellectual property. The Corporate Group is also responsible for ongoing restructuring matters, including the creditor claims process, planning toward conclusion of the Creditor Protection Proceedings and any distributions to creditors. The Corporate Group also continues to provide administrative and management support to Nortel’s affiliates around the world while completing the orderly wind down of the remaining operations.

Nortel is seeking expressions of interest from potential buyers and partners regarding options that could maximize the value of its intellectual property portfolio. No decision has been made as to how to realize this value, whether through sale, licensing, some combination of the two or other alternatives. The solicitation process will be conducted in a manner similar to the court approved sales of its significant businesses and is expected to take several months.

CCAA Proceedings

On January 14, 2009 (“Petition Date”), Nortel, NNL and certain other Canadian subsidiaries (“Canadian Debtors”) obtained an initial order (“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 October 29, 2010 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.

As a consequence of the CCAA Proceedings, generally, all actions to enforce or otherwise effect payment or repayment of liabilities of any Canadian Debtor arising prior to the Petition Date and substantially all pending claims and litigation against the Canadian Debtors and their officers and directors have been stayed until October 29, 2010, or such later 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.

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

 

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approval of the NNI 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, for procedural purposes only, of NNCI’s case with the pre-existing cases of the other U.S. Debtors.

On June 21, 2010, the U.S. Debtors filed a motion seeking to terminate certain U.S. retiree and long-term disability benefits effective as of August 31, 2010. The U.S. Debtors filed a notice of withdrawal of this motion with the U.S. Bankruptcy Court on July 16, 2010. It is possible that the U.S. Debtors will seek modification or termination of some or all of these benefits at a later time.

On July 12, 2010, the U.S. Debtors filed their proposed plan of reorganization (the “Plan”) under Chapter 11 with the U.S. Court. Pursuant to the Plan, each U.S. Debtor will either be reorganized to the extent the U.S. Debtors determine it is necessary or beneficial to do so for the purpose of fulfilling its obligations under the asset sale agreements and TSAs, selling or otherwise disposing of its assets and fulfilling its obligations under the Plan, or will be liquidated. The U.S. Debtors have requested that their time to file a disclosure statement for the Plan be extended through September 3, 2010. The effectiveness of the Plan and the U.S. Debtors’ exit of the Chapter 11 Proceedings is subject to several conditions, including the filing and U.S. Court approval of a disclosure statement, obtaining the requisite number of votes in favor of the Plan from the solicited creditors of each U.S. Debtor, confirmation of the Plan by order of the U.S. Court and the satisfaction of other conditions precedent.

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. The U.K. Administration Proceedings currently extend to January 13, 2012, subject to further extension. Under the terms of the orders, joint administrators were appointed with respect to the EMEA Debtor in Ireland and for 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

 

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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.

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.

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 of proceedings” 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. Under Israeli law, the Israeli Administration Proceedings are usually ended with either a scheme of arrangement, which returns an Israeli debtor to solvency, or a liquidation. On November 24, 2009, the Israeli Court approved a scheme of arrangement for the Israeli Debtors but resolved in subsequent applications to extend the appointment of the Israeli Administrators with respect to the Israeli Debtors and provide the Israeli Administrators with the same scope of responsibilities and authorities granted to them under the stay of proceedings order.

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 French 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 French 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 February 16, 2010, the French Court approved an order to suspend the liquidation operations relating to the sale of the assets and/or businesses of NNSA until the earlier of May 31, 2010 or the filing by Kapsch with the French Court of a letter stating that its bid for the GSM/GSM-R assets of NNSA was unconditional. On March 3, 2010, Kapsch filed an irrevocable and unconditional bid for such assets with the French Administrator and the French Liquidator. On March 25, 2010, the French Court lifted the suspension of the liquidation operations and, following the approval by the French Court on March 30, 2010 of the offer submitted by Kapsch to acquire the GSM/GSM-R assets of NNSA, NNSA was authorized to continue its business operations until May 7, 2010. As of May 7, 2010, NNSA was no longer authorized to continue its business operations and the liquidation proceedings are ongoing.

The current 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 — Year to Date 2010 Developments

Optical Networking and Carrier Ethernet Businesses

On March 19, 2010, NNC announced that it, NNL, and certain of its subsidiaries, including NNI and NNUK, had completed the sale of substantially all of the assets of its Optical Networking and Carrier Ethernet

 

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businesses to Ciena and that Ciena had elected, as permitted by the terms of the sale, to replace the $239 principal amount of convertible notes with cash consideration of $244, and thus pay an all cash purchase price of approximately $774. The purchase price was decreased at closing for a working capital adjustment of approximately $62. The purchase price has been finalized and the sales proceeds were subject to a further working capital downward adjustment of $19 in the second quarter of 2010. The related Optical Networking and Carrier Ethernet businesses’ financial results of operations have not been classified as discontinued operations as they did not meet the definition of a component of an entity as required under U.S. GAAP. Nortel recognized a gain on disposal of $557 in the six months ended June 30, 2010.

GSM/GSM-R Business

On March 31, 2010, NNC announced that it had completed the sale of substantially all of the assets of its global GSM/GSM-R business to Ericsson and Kapsch for aggregate proceeds of $103. The purchase price with respect to the sale to Ericsson has been finalized and the sales proceeds were subject to a working capital downward adjustment of $6. The purchase price with respect to the sale to Kapsch is also subject to a further working capital adjustment pending finalization between the parties. The related GSM/GSM-R business financial results of operations have not been classified as discontinued operations as they did not meet the definition of a component of an entity as required under U.S.GAAP. Nortel recognized a gain on disposal of $113 in the six months ended June 30, 2010.

CVAS Business

On May 28, 2010, Nortel announced that it had completed the sale of substantially all of its assets of the CVAS business globally to GENBAND U.S. LLC for a purchase price of $282, subject to balance sheet and other adjustments currently estimated at approximately $100, resulting in net proceeds of approximately $182. The related financial results of operations of the CVAS business have not been classified as discontinued operations as they did not meet the definition of a component of an entity as required under U.S. GAAP. Nortel recognized a gain on disposal of $196 in the second quarter of 2010.

LGN Joint Venture

On April 20, 2010, Nortel announced that it had entered into a share purchase agreement with Ericsson for the sale of its 50% plus 1 share interest in LGN for $242 in cash, subject to certain purchase price adjustments. Approval of the Ontario Superior Court of Justice was obtained on May 3, 2010. On June 29, 2010, Nortel announced that NNL had completed the sale of its 50% plus 1 share interest in LGN to Ericsson. The related financial results of operations of LGN have been classified as discontinued operations retrospectively (see note 4) beginning in the second quarter of 2010 as they met the definition of a component of an entity as required under U.S. GAAP. Nortel recognized a gain on disposal of $53 in the second quarter of 2010.

Purchase Price Adjustments

With respect to the divestitures discussed above, Nortel’s sale agreements generally provide for post-closing adjustments to the stated purchase price based on the actual value of certain assets and liabilities as of the closing date relative to an estimate of those amounts at closing. Adjustments may be made for, among other things: (i) changes in net working capital; (ii) changes in amounts to be paid in respect of transferred employees, including such items as accrued compensation and vacation days, retirement benefits and severance amounts; and (iii) changes in amounts related to assets being transferred outside the United States, including purchase price

 

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reductions for assets in EMEA that are unable to be transferred due to further creditor protection proceedings and fixed purchase price reductions for assets transferred in China. In addition, some asset sale agreements include additional purchase price adjustments that depend on variations between estimated and actual inventory, net debt, standard margin and deferred profits of the businesses sold, under U.S. GAAP. None of these adjustments have materially changed, or are expected to materially change, the purchase price associated with the divestitures discussed above (other than as described above). Nortel has finalized the purchase price with respect to the sale of its CDMA business and LTE assets, and Optical Networking and Carrier Ethernet businesses.

Transition Services Agreements

Nortel has entered into TSAs in connection with certain of the completed divestitures discussed above and is contractually obligated under such TSAs to provide transition services to certain purchasers of its businesses and assets.

In connection with the sale of substantially all of its CDMA business and LTE Access assets in 2009, Nortel entered into a TSA with Ericsson pursuant to which Nortel agreed to provide certain transition services for a period of up to 24 months after closing of the transaction.

In connection with the sale of substantially all of its ES business in 2009, Nortel entered into a TSA with Avaya pursuant to which it agreed to provide certain transition services for a period of up to 18 months (up to 12 months in certain jurisdictions in EMEA) after closing of the transaction.

In connection with the sale of substantially all of its Optical Networking and Carrier Ethernet businesses, Nortel entered into a TSA with Ciena pursuant to which Nortel agreed to provide certain transition services for a period of up to 24 months (up to 12 months in certain jurisdictions in EMEA) after closing of the transaction.

In connection with the sale of substantially all of its GSM/GSM-R business, Nortel entered into a TSA with Ericsson pursuant to which Nortel agreed to provide certain transition services for a period of up to 18 months (up to 12 months in certain jurisdictions in EMEA) after closing of the transaction and a TSA with Kapsch pursuant to which Nortel agreed to provide certain transition services for a period of up to 12 months after closing of the transaction.

In connection with the sale of substantially all of its CVAS business, Nortel entered into a TSA with GENBAND pursuant to which Nortel agreed to provide certain transition services for a period of up to 18 months (up to 12 months in certain jurisdictions in EMEA) after closing of the transaction.

Further Divestitures

The Creditor Protection Proceedings may result in additional sales or divestitures; however, Nortel can provide no assurance it will be able to complete any further 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.

 

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Administrators, the U.S. Principal Officer, 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.

Divestiture Proceeds Received

As at June 30, 2010, of the approximately $3,176 in net proceeds generated through the completed sales of businesses, proceeds of approximately $3,083 had been received. These divestiture proceeds include the following approximate amounts:

 

  (a) $1,070 from the sale of substantially all of Nortel’s CDMA business and LTE Access assets;

 

  (b) $18 from the sale of Nortel’s Layer 4-7 data portfolio;

 

  (c) $10 from the sale of Nortel’s Packet Core Assets;

 

  (d) $908 from the sale of substantially all of the assets of Nortel’s ES business, including the shares of DiamondWare, Ltd. and NGS;

 

  (e) $616 from the sale of substantially all of the assets of Nortel’s Optical Networking and Carrier Ethernet businesses;

 

  (f) $67 from the sale of Nortel’s North American GSM business;

 

  (g) $21 from the sale of Nortel’s GSM business outside of North America (excluding its GSM business in CALA) and its global GSM-R business;

 

  (h) $155 from the sale of substantially all of the assets of Nortel’s CVAS business;

 

  (i) $214 from the sale of Nortel’s 50% plus 1 share interest in LGN; and

 

  (j) $4 from the sale of various Nortel business assets.

Of the $3,083 in proceeds received from divestitures as of June 30, 2010, approximately $2,797 is being held in escrow and an additional $214, reflecting proceeds from the sale of LGN, is included in restricted cash which is currently reported in NNL solely for financial reporting purposes. The ultimate determination of the final allocation of proceeds held in escrow among the various Nortel legal entities, including entities that are not consolidated in the condensed consolidated financial statements, has not yet occurred and may be materially different from the NNC classification and related amounts shown in these financial statements. The Interim Funding and Settlement Agreement (“IFSA”) and the escrow agreements for sales divestiture proceeds entered into by NNL, NNI and other Nortel legal entities provide for the processes for determining the final allocation of divestiture proceeds among such entities, either through joint agreement or, failing such agreement, other dispute resolution proceeding. Adjustments to the NNL classification and any related amounts arising from the ultimate outcome of the allocation agreement or other dispute resolution proceeding noted above will be recognized when finalized. The NNL classification and related amounts shown in these financial statements are not determinative of, and have not been accepted by any debtor estate, any party in interest in the Creditor Protection Proceedings or any court overseeing such proceedings, for purposes of deciding the final allocation of divestiture proceeds.

As at June 30, 2010, a further $239 in the aggregate was expected to be received in connection with the divestitures of substantially all of Nortel’s CDMA business and LTE Access assets, ES business, including the

 

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shares of DiamondWare, Ltd. and NGS, the assets of Nortel’s Optical Networking and Carrier Ethernet businesses, substantially all of the assets of Nortel’s global GSM/GSM-R and CVAS businesses and its 50% plus 1 share interest in LGN, subject to the satisfaction of various conditions including performance under the TSAs. As the conditions are satisfied, amounts receivable will be recognized as additional gains on sales. With the exception of further amounts received in relation to the LGN sale, such amounts, when received, will also be held in escrow until the final allocation of these proceeds as between various Nortel legal entities is ultimately determined. Subsequent to June 30, 2010, Nortel’s escrow agent has received $11 of the $239.

Business Operations

During the Creditor Protection Proceedings, and until the completion of any further proposed divestitures or a decision to cease operations in certain countries is made, the remaining businesses and operations of the Debtors continue to operate under the jurisdictions and orders of the applicable courts and in accordance with applicable legislation while Nortel continues to focus on the sale of remaining businesses and assets. 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.

Since the Petition Date, Nortel has periodically entered into agreements with other suppliers, including contract manufacturers, to address issues and concerns as they arise in order to ensure ongoing supply of goods and services and minimize any disruption in its global supply chain. In certain circumstances, some of these agreements include advance deposit or escrow obligations, or purchase commitments in order to mitigate the risk associated with supplying Nortel during the pendency of the Creditor Protection Proceedings.

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 a claims process in the U.S. for claims that arose prior to the Petition Date. Pursuant to this claims process, proofs of claim, except in relation to NNCI, had to be received by

 

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the U.S. Claims Agent, Epiq Bankruptcy Solutions, LLC (“Epiq”) by September 30, 2009 (subject to certain exceptions as provided in the order establishing the claims bar date). On December 2, 2009, the U.S. Court approved January 25, 2010 as the deadline for receipt by Epiq of proofs of claim against NNCI (subject to certain exceptions as provided in the order establishing the claims bar date).

On July 30, 2009, Nortel announced that the Canadian Court approved a claims process in Canada in connection with the CCAA Proceedings. Pursuant to this claims process, subject to certain exceptions, proofs of claim for claims arising prior to the Petition Date had to be received by the Canadian Monitor by no later than September 30, 2009. This claims bar date does not apply to certain claims, including inter-company claims as between the Canadian Debtors 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. Proofs of claim 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 had to, or must be, received by the Canadian Monitor by the later of September 30, 2009 and 30 days after a proof of claim 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 bar date for the submission of claims has been established in connection with U.K. Administration Proceedings.

The unaudited condensed consolidated financial statements for the three and six months ended June 30, 2010 generally do not include the outcome 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. The Debtors are reviewing all claims filed and have commenced the claims reconciliation process. Differences between claim amounts determined by the Debtors and claim amounts filed by creditors will be investigated and resolved pursuant to a claims resolution process approved by the relevant court or, if necessary, the relevant court will make a final determination as to the amount, nature and validity of claims. Certain claims that have been filed 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 subject to revision or disallowance. The settlement of claims cannot be finalized until the relevant creditors and courts approve a plan. 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 and Final Funding and Settlement Agreements

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, losses and certain costs among the corporate group. In particular, the Canadian Debtors have continued to allocate profits, 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

 

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Notes to Condensed Consolidated Financial Statements (unaudited) — (Continued)

 

well as the EMEA Debtors (other than NNSA), entered into an 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. Similarly, except for two shortfall payments totaling $20, the IFSA provides for a full and final settlement of any and all TPA Payments owing between certain entities and the U.S. and Canada for the period from the Petition Date through December 31, 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.

On December 23, 2009, Nortel announced it, NNL, NNI, and certain other Canadian Debtors and U.S. Debtors entered into a Final Canadian Funding and Settlement Agreement (“FCFSA”). The FCFSA provides, among other things, for the settlement of certain intercompany claims, including in respect of amounts determined to be owed by NNL to NNI under Nortel’s transfer pricing arrangements for the years 2001 through 2005. As part of the settlement, NNL has agreed to the establishment of a pre-filing claim in favor of NNI in the CCAA Proceedings in the net amount of approximately $2,063 (“FCFSA Claim”), which claim will not be subject to any offset. The FCFSA also provides that NNI will pay to NNL approximately $190, which has been received, over the course of 2010, which amount includes the contribution of NNI and certain U.S. affiliates towards certain estimated costs to be incurred by NNL, on their behalf, for the duration of the Creditor Protection Proceedings. The FCFSA also provides for the allocation of certain other anticipated costs to be incurred by the parties, including those relating to the divestiture of Nortel’s various businesses.

On January 21, 2010, Nortel obtained approvals from the Canadian Court and the U.S. Court of the FCFSA and the creation and allowance of the FCFSA Claim. In addition, Nortel obtained various other approvals from the Canadian Court and U.S. Court including authorization for NNL and NNI to enter into advance pricing agreements with the U.S. and Canadian tax authorities to resolve certain transfer pricing issues, on a retrospective basis, for the taxable years 2001 through 2005.

In addition, in consideration of a settlement payment of $37.5, the United States Internal Revenue Service (“IRS”) released all of its claims against NNI and other members of NNI’s consolidated tax group for the years 1998 through 2008. As a result of this settlement, the IRS stipulated that its claim against NNI filed in the Chapter 11 Proceedings in the amount of approximately $3,000 was reduced to the $37.5 settlement payment. This settlement was a condition of the FCFSA and was approved by the U.S. Court on January 21, 2010. NNI made the settlement payment to the IRS on February 22, 2010.

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 have 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”) to the Canadian Debtors, the U.S. Debtors and the EMEA Debtors (including NNSA). A further portion of the Pre-Petition Intercompany Debt will be repayable only to the extent of such APAC Agreement Subsidiary’s net cash balance, and subject to certain

 

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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) — (Continued)

 

reserves and provisions. All required court approvals with respect to the APAC Agreement have been obtained in the U.S. and Canada; however, implementation of the APAC Agreement for certain parties in other jurisdictions remains subject to receipt of outstanding regulatory approvals.

Other Contracts and Debt Instruments

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 October 29, 2010. 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.

Directors’ and Officers’ Compensation and Indemnification

The Canadian Court in the CCAA Proceedings has approved a charge against the property of the Canadian Debtors, to an aggregate amount not exceeding CAD$45, to indemnify directors and officers of the Canadian Debtors for claims that may be made against them relating to failure of the Canadian Debtors to comply with certain statutory payment and remittance obligations.

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.

Certain Nortel entities have not filed for bankruptcy protection (“Cascade Subsidiaries”). Under the laws of various jurisdictions in which the Cascade Subsidiaries operate, the directors, officers and agents of the Cascade Subsidiaries may be subject to personal liability. In order to protect individuals serving as directors on the boards of the Cascade Subsidiaries and to facilitate participation by the Cascade Subsidiaries in Nortel’s sales of businesses and assets, NNL and NNI have contributed to a trust (“Trust”), which will indemnify individuals

 

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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) — (Continued)

 

serving as directors on the boards and as officers or agents of the Cascade Subsidiaries and their successors, if any, for any claims resulting from their service as a director, officer or agent of a Cascade Subsidiary, subject to limited exceptions. The Trust was approved by the Canadian Court and the U.S. Court on March 31, 2010.

Workforce Reductions; Employee Compensation Program Changes

Nortel has taken and expects to take further, ongoing workforce and other cost reduction actions as it works through the Creditor Protection Proceedings. On the Petition Date, Nortel employed approximately 30,300 employees globally. Through the sales of Nortel’s businesses and cost reduction activities, including the 5,000 net reductions announced on February 25, 2009, Nortel has reduced the workforce to approximately 2,300 employees as of June 30, 2010. 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, see the “Post-Petition Date Cost Reduction Activities” note 11 of this report.

Nortel continued the Nortel Networks Limited Annual Incentive Plan (“Incentive Plan”) in 2010 for all eligible employees. The Incentive Plan permits quarterly award determinations and payouts for the business units and semi-annual award determinations and payouts for the Corporate Group and NBS.

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.

On March 4, 2010, Nortel obtained U.S. Court approval and on March 8, 2010 Nortel obtained Canadian Court approval for the Nortel Special Incentive Plan (“Special Incentive Plan”), which is designed to retain personnel at all levels of Corporate Group and NBS critical to complete Nortel’s remaining work. The Special Incentive Plan was developed in consultation with independent expert advisors taking into account the availability of more stable and competitive employment opportunities available to these employees elsewhere. The Special Incentive Plan was supported by the Canadian Monitor, U.S. Creditors’ Committee and the Bondholders Group. Representative Counsel to former Canadian employees was also advised of the Special Incentive Plan prior to its approval by the Canadian Court and U.S. Court.

Settlement Agreement with Former and Disabled Canadian Employee Representatives

On February 8, 2010, the Canadian Debtors reached an agreement on certain employment related matters regarding former Canadian Nortel employees, including Nortel’s Canadian registered pension plans and benefits for Canadian pensioners and Nortel employees on long term disability (“LTD”). Nortel entered into a settlement agreement with court-appointed representatives of its former Canadian employees, pensioners and LTD beneficiaries, Representative Counsel, the Canadian Auto Workers’ union and the Canadian Monitor (“Settlement Agreement”). The Settlement Agreement, as amended, was approved by the Canadian Court on March 31, 2010.

The Settlement Agreement provides that Nortel will continue to administer the Nortel Networks Negotiated Pension Plan and the Nortel Networks Limited Managerial and Non-Negotiated Pension Plan (“Canadian Pension Plans”) until September 30, 2010, at which time these Canadian Pension Plans will be transitioned, in accordance with the Ontario Pension Benefits Act, to a new administrator appointed by the Office of the Superintendent of Financial Services. Nortel and the Canadian Monitor will take all reasonable steps to complete the transfer of the administration of the Canadian Pension Plans to the new administrator. Nortel will continue to fund these Canadian Pension Plans consistent with the current service and special payments it had been making during the course of the CCAA Proceedings through March 31, 2010, and thereafter has and will continue to make current service payments until September 30, 2010.

 

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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) — (Continued)

 

For the remainder of 2010, Nortel will continue to pay medical and dental benefits to Nortel pensioners and survivors and Nortel LTD beneficiaries in accordance with the current benefit plan terms and conditions. Life insurance benefits will continue unchanged until December 31, 2010 and will continue to be funded consistent with 2009 funding. Further, Nortel will pay income benefits to the LTD beneficiaries and to those receiving survivor income benefits and survivor transition benefits through December 31, 2010. The employment of the LTD beneficiaries will terminate on December 31, 2010. The parties have agreed to work toward a court-approved distribution, in 2010, of the assets of Nortel’s Health and Welfare Trust, the vehicle through which Nortel generally has historically funded these benefits, with the exception of the income benefits described above, which Nortel will pay directly.

The Settlement Agreement also provides that Nortel will establish a fund of CAD$4.2 for termination payments of up to CAD$0.003 per employee to be made to eligible terminated employees as an advance against their claims under the CCAA Proceedings.

A charge in the maximum amount of CAD$57 against the Canadian Debtors’ assets has been established as security in support of the payments to be made by Nortel under the Settlement Agreement, which amount will be reduced by the amount of payments made. The Settlement Agreement also sets out the relative priority for claims to be made in respect of the deficiency in the Canadian Pension Plans and Nortel’s Health and Welfare Trust. Under the Settlement Agreement, these claims will rank as ordinary unsecured claims in the CCAA Proceedings.

A group of 39 LTD beneficiaries sought leave to appeal the Canadian Court’s approval of the Settlement Agreement to the Ontario Court of Appeal. The leave motion was denied and the motion was dismissed by the Ontario Court of Appeal on May 31, 2010.

See note 13 for further information on Nortel’s pension and employee benefits plans.

Condensed Combined Debtors Financial Statements

The financial statements contained within this note have been prepared in accordance with the guidance of FASB ASC 852 — Reorganizations (“ASC 852”) and represent the condensed combined financial statements of the Canadian Debtors and U.S. Debtors that are included in the condensed consolidated financial statements as at June 30, 2010 and December 31, 2009 and for the three and six months ended June 30, 2010 and 2009. The condensed combined statements of operations exclude the Canadian Debtors’ and U.S. Debtors’ interests in the results of operations of non-Debtor subsidiaries.

Intercompany Transactions

Intercompany transactions and balances with Nortel’s consolidated non-Debtor subsidiaries and affiliates have not been eliminated in the Canadian Debtors’ and U.S. Debtors’ financial statements.

Contractual Interest Expense on Outstanding Long-Term Debt

During the three and six months ended June 30, 2010, Nortel has continued to accrue for interest expense of $74 and $147, respectively (three and six months ended June 30, 2009 — $69 and $140, respectively), in its normal course of operations related to debt issued by NNC and NNL in Canada until Nortel obtains a claims determination order and adjudicates the claims. However, in accordance with ASC 852, interest expense in the U.S. incurred post-Petition Date is not recognized and, as a result interest payable on debt issued by the U.S.

 

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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) — (Continued)

 

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 Canadian Debtors and U.S. 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 for in a court-approved plan. The claims process approved by the Canadian Court provides that foreign currency denominated claims must be calculated by the Canadian Monitor in Canadian dollars using a January 13, 2009 exchange rate. However, the claims process order specifically recognizes the ability of the Canadian Debtors to utilize a different exchange rate in any proposed plan. Therefore, given the impact that fixing exchange rates may have on the amounts ultimately settled, 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”). To date, the Canadian Debtors have not developed any plan or proposed an alternative exchange rate and any plan would be subject to creditor approval prior to the Canadian Court’s approval. Foreign currency denominated pre-petition liabilities of the U.S. 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 and cash equivalents are generally available to fund operations in particular jurisdictions, but generally are 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/or Canadian Court, as applicable.

Certain proceeds from the divestiture sales, as discussed in note 2, are being held in escrow until the jurisdictions can determine the proceeds allocations and are not available to fund operations.

 

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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) — (Continued)

 

CONDENSED COMBINED STATEMENT OF OPERATIONS (unaudited)

(Millions of U.S. Dollars)

 

     Three Months Ended
June  30,
    Six Months Ended
June  30,
 
         2010             2009             2010             2009      

Product revenues:

        

Third party

   $ 58      $ 672      $ 283      $ 1,263   

Non-Debtor subsidiaries

     6        92        30        199   

Inter-Debtor

     —          —          —          —     

Service revenues (Third party)

     31        94        106        180   
                                

Total revenues

     95        858        419        1,642   

Product cost of revenues:

        

Third party

     81        313        275        648   

Non-Debtor subsidiaries

     6        91        31        170   

Inter-Debtor

     —          —          —          —     

Service cost of revenues (Third party)

     14        53        44        103   
                                

Total cost of revenues

     101        457        350        921   
                                

Gross profit

     (6     401        69        721   
                                

Selling, general and administrative expense

     105        113        260        432   

Research and development expense

     24        179        107        400   

Other charges

     (3     (4     1        (4

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

     —          (10     28        (11

Other operating expense (income) — net

     (84     (1     (135     (1
                                

Operating earnings (loss)

     (48     124        (192     (95

Other income (expense) — net

     (8     (49     97        (106

Interest expense

        

Long-term debt

     (74     (72     (148     (145

Other

     —          —          —          (1
                                

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

     (130     3        (243     (347

Reorganization items — net

     (549     (58     132        (619
                                

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

     (679     (55     (111     (966

Income tax benefit (expense)

     37        1        30        (6
                                

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

     (642     (54     (81     (972

Equity in net loss of associated companies — net of tax

     (41     (257     (72     (389
                                

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

     (683     (311     (153     (1,361

Net earnings (loss) from discontinued operations — net of tax

     46        (80     32        (213
                                

Net loss attributable to Debtors including noncontrolling interests

     (637     (391     (121     (1,574

Income attributable to noncontrolling interests

     (2     (2     (4     (6
                                

Net loss attributable to Debtors

   $ (639   $ (393   $ (125   $ (1,580
                                

 

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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) — (Continued)

 

CONDENSED COMBINED BALANCE SHEET (unaudited)

(Millions of U.S. Dollars)

 

     June 30, 2010     December 31, 2009  
ASSETS     

Current assets

    

Cash and cash equivalents

   $ 1,090      $ 1,132   

Short-term investments

     —          18   

Restricted cash and cash equivalents

     105        80   

Accounts receivable — net:

    

Third parties

     62        224   

Non-Debtor subsidiaries

     463        570   

Debtor subsidiaries

     —          —     

Inventories — net

     23        68   

Other current assets

     272        258   

Assets held for sale

     232        234   

Assets of discontinued operations

     25        120   
                

Total current assets

     2,272        2,704   

Restricted cash

     3,011        1,928   

Investments

     —          24   

Investments in non-Debtors / Debtor subsidiaries

     382        311   

Plant and equipment — net

     128        566   

Other assets

     172        155   
                

Total assets

   $ 5,965      $ 5,688   
                
LIABILITIES AND SHAREHOLDERS’ DEFICIT     

Current liabilities

    

Trade and other accounts payable

   $ 40      $ 99   

Trade and other accounts payable to non-Debtor subsidiaries

     138        198   

Payroll and benefit-related liabilities

     81        97   

Contractual liabilities

     3        4   

Restructuring liabilities

     6        3   

Other accrued liabilities

     142        331   

Liabilities held for sale

     —          178   

Liabilities of discontinued operations

     30        43   
                

Total current liabilities

     440        953   

Long-term liabilities

    

Other liabilities

     47        62   
                

Total long-term liabilities

     47        62   

Liabilities subject to compromise

     9,198        9,015   

Liabilities subject to compromise of discontinued operations

     117        129   
                

Total liabilities

     9,802        10,159   
                
SHAREHOLDERS’ DEFICIT     

Total shareholders’ deficit of Debtors

     (4,388     (5,018

Noncontrolling interests in Debtors

     551        547   
                

Total shareholders’ deficit

     (3,837     (4,471
                

Total liabilities and shareholders’ deficit

   $ 5,965      $ 5,688   
                

 

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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) — (Continued)

 

CONDENSED COMBINED STATEMENT OF CASH FLOWS (unaudited)

(Millions of U.S. Dollars)

 

     Six Months Ended
June 30, 2010
    Six Months Ended
June 30, 2009
 

Cash flows from (used in) operating activities

    

Net loss

   $ (125   $ (1,580

Net (earnings) loss from discontinued operations

     (32     213   

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

    

Reorganization items — net

     (225     625   

Other adjustments (a)

     544        698   
                

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

     162        (44

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

     (239     (15
                

Net cash from (used in) operating activities

     (77     (59
                

Cash flows from (used in) investing activities

    

Expenditures for plant and equipment

     (7     (13

Proceeds on disposal of plant and equipment

     —          86   

Change in restricted cash and cash equivalents

     (1,110     (40

Decrease in short and long-term investments

     24        40   

Proceeds from the sales of investments and businesses — net

     883        29   
                

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

     (210     102   

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

     239        15   
                

Net cash from (used in) investing activities

     29        117   
                

Cash flows from (used in) financing activities

    

Repayments of capital lease obligations

     (3     (4
                

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

     (3     (4

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

     —          —     
                

Net cash from (used in) financing activities

     (3     (4
                

Effect of foreign exchange rate changes on cash and cash equivalents

     9        6   
                

Net cash from (used in) continuing operations

     (42     60   

Net cash from (used in) discontinued operations

     —          —     
                

Net increase (decrease) in cash and cash equivalents

     (42     60   

Cash and cash equivalents at beginning of the period

     1,132        861   
                

Cash and cash equivalents at end of the period

     1,090        921   

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

   $ 1,090      $ 921   
                

 

(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 represent 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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NORTEL NETWORKS CORPORATION

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

Notes to Condensed Consolidated Financial Statements (unaudited) — (Continued)

 

3. Accounting changes

(a) Accounting for Transfers of Financial Assets

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 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 beginning after November 15, 2009 and will be applied prospectively. Nortel adopted the provisions of SFAS 166 on January 1, 2010. The adoption of SFAS 166 did not have a material impact on Nortel’s results of operations and financial condition.

(b) Amendments to FASB Interpretation No. 46(R)

In June 2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No.46(R)” (“SFAS 167”). SFAS 167 revises guidance relevant to variable interest entities within FASB ASC 810 “Consolidation” (“ASC 810”), 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 is effective for interim and annual periods beginning after November 15, 2009 and will be applied prospectively. Nortel adopted the provisions of revised ASC 810 on January 1, 2010. The adoption of ASC 810 did not have a material impact on Nortel’s results of operations and financial condition.

(c) Improving Disclosure about Fair Value Measurements

In January 2010, the FASB issued ASU No. 2010-06, “Improving Disclosure about Fair Value Measurements” (“ASU 2010-06”). ASU 2010-06 clarifies existing disclosures for (1) the different classes of assets and liabilities measured at fair value, (2) the valuation techniques and inputs used and requires new disclosures for the activity in Level 3 fair value measurements, and (3) the transfers between Levels 1, 2, and the reason for those transfers. ASU 2010-06 is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosure about the activity in level 3 fair value measurements which is effective for interim and annual periods beginning after December 15, 2010. Nortel adopted the provisions of ASU 2010-06 on January 1, 2010. The adoption of ASU 2010-06 did not have a material impact on Nortel’s results of operations and financial condition.

4. Discontinued Operations

ES

On December 18, 2009 Nortel completed the sale of substantially all of the assets of the ES business globally as well as the shares of NGS and DiamondWare, Ltd. to Avaya for $908 in cash, with an additional pool of $15 reserved for an employee retention program, subject to certain purchase price adjustments and withholding taxes. As a result of the sale, Nortel recognized a gain of $756 in the fourth quarter of 2009.

 

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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) — (Continued)

 

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

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
         2010             2009             2010             2009      

Operations

        

Total revenues

   $ 5      $ 389      $ 12      $ 711   
                                

Loss from discontinued operations before income taxes

   $ (9   $ (127   $ (9   $ (324

Income tax benefit (expense)

     —          —          —          —     

Income attributable to noncontrolling interests

     —          —          —          —     
                                

Net loss from discontinued operations — net of taxes

   $ (9   $ (127   $ (9   $ (324
                                

The ES operating results for the three and six months ended June 30, 2010 and 2009 exclude the ES business results of the Equity Investees. The net loss from discontinued operations for the six months ended June 30, 2010 and 2009 includes a goodwill impairment loss of nil and $48, respectively.

Certain assets and liabilities related to the ES business were not transferred to Avaya and continue to be classified as assets and liabilities of discontinued operations. These assets and liabilities are expected to be reduced as the Creditor Protection Proceedings progress. The remaining assets and liabilities related to the operations of the ES business for the periods presented are as follows:

 

     June 30, 2010    December 31, 2009

Assets

     

Accounts receivable — net

   $ 15    $ 103

Inventories — net

     8      10

Other current assets

     14      31

Plant and equipment — net

     —        4
             

Assets of discontinued operations

   $ 37    $ 148
             

Liabilities

     

Trade and other accounts payable

   $ 20    $ 9

Employee related liabilities

     1      13

Contractual liabilities

     1      —  

Other current liabilities

     16      31
             

Liabilities of discontinued operations

   $ 38    $ 53
             

Nortel has agreed to undertake certain activities to assist Avaya with the transition of the business from Nortel’s infrastructure to that of Avaya. As a result of this agreement, Nortel expects to generate certain 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 associated cash flows are principally related to transition services. The operations and cash flows of the ES 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 when 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

 

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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) — (Continued)

 

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. Nortel does not expect to have any significant continuing involvement with the ES business after the disposition.

LGN

On June 29, 2010, Nortel completed the sale of NNL’s 50% plus 1 share interest in LGN to Ericsson for $242 in cash, subject to certain purchase price adjustments and taxes. As a result of the sale, Nortel recognized a gain of $53 in the second quarter of 2010.

The following table summarizes certain financial information of the LGN business for the presented periods:

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
         2010             2009             2010             2009      

Operations

        

Total revenues

   $ 88      $ 199      $ 210      $ 387   
                                

Earnings (loss) from discontinued operations before income taxes

   $ (18   $ 27      $ (16   $ 71   

Income tax benefit (expense)

     6        (17     2        (24

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

     —          —          —          1   

Income attributable to noncontrolling interests

     3        (2     3        (18
                                

Net earnings (loss) from discontinued operations before disposal — net of taxes

   $ (9   $ 8      $ (11   $ 30   
                                

Disposal

        

Gain on disposal before income taxes

   $ 84      $ —        $ 84      $ —     

Income tax benefit (expense)

     (31     —          (31     —     
                                

Gain on disposal, net of taxes

   $ 53      $ —        $ 53      $ —     
                                

Net earnings (loss) from discontinued operations — net of taxes

   $ 44      $ 8      $ 42      $ 30   
                                

 

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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) — (Continued)

 

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 for the three and six months ended June 30, 2010 and 2009 consisted of the following:

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
         2010             2009             2010             2009      

Professional fees (a)

   $ (43   $ (30   $ (81   $ (53

Interest income (b)

     3        4        7        10   

Lease repudiation (c)

     (3     (1     (3     23   

Employee incentive plans (d)

     (12     (13     (21     (17

Penalties (e)

     —          (9     —          (14

Post-retirement and post-employment plans (f)

     (29     —          6        —     

Settlements (g)

     —          —          (2     —     

Gain (loss) on deconsolidation (h)

     8        —          (74     —     

Gain on divestitures (i)

     225        —          865        —     

Asset impairments (j)

     (113     —          (138     —     

NNUK pension guarantee (k)

     (634     —          (634     —     

EMEA deconsolidation adjustment (l)

     (763     —          (763     —     

Other (m)

     (26     (9     (53     (15
                                

Total reorganization items — net

   $ (1,387   $ (58   $ (891   $ (66
                                

 

(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 during the Creditor Protection Proceedings.
(e) Relates to liquidated damages on early termination of contracts.
(f) Includes amounts related to the Settlement Agreement. See note 13.
(g) Includes net payments pursuant to settlement agreements since the Petition Date, and in some instances the extinguishment of net pre-petition liabilities. See note 20 for further information on settlements.
(h) Relates to deconsolidation of certain entities in connection with the Creditor Protection Proceedings.
(i) Relates to the gains on various divestitures. See note 2.
(j) Relates to impairments on certain long-lived assets. See note 8.
(k) Relates to the NNUK pension guarantees. See note 14.
(l) Relates to the change due to the deconsolidation of the Equity Investees and the application of the cost method of accounting. See notes 1, 18 and 22 for further information.
(m) Includes other miscellaneous items directly related to the Creditor Protection Proceedings, such as loss on disposal of certain assets, and foreign exchange.

 

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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) — (Continued)

 

Nortel received $791 relating to reorganization items in the six months ended June 30, 2010, attributable to $881 received for various divestitures and $3 for interest income, partially offset by $77 paid for professional fees and $16 paid for employee incentive plans.

Nortel paid $25 relating to reorganization items in the six months ended June 30, 2009, attributable to $32 paid for professional fees, partially offset by $7 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 for three and six months ended June 30, 2010 and 2009, and the condensed consolidated balance sheets as of June 30, 2010 and December 31, 2009.

Condensed consolidated statements of operations

Other operating expense (income) — net:

 

     Three Months Ended
June 30,
   Six Months Ended
June 30,
 
         2010             2009            2010             2009      

Royalty license income — net

   $ (3   $ —      $ (6   $ (4

Litigation charges (recovery) — net

     —          —        (3     —     

Billings under transition services agreements

     (92     —        (149     —     

Other — net

     (1     8      2        1   
                               

Other operating expense (income) — net

   $ (96   $ 8    $ (156   $ (3
                               

Other income (expense) — net:

 

     Three Months Ended
June 30,
   Six Months Ended
June 30,
 
         2010             2009            2010             2009      

Gain (loss) on sale and impairment of investments

   $ 8      $ —      $ 8      $ (1

Rental income

     16        —        29        —     

Currency exchange gain (loss) — net

     (44     5      —          (32

Other — net

     (8     1      (5     (7
                               

Other income (expense) — net

   $ (28   $ 6    $ 32      $ (40
                               

Condensed consolidated balance sheets

Cash and cash equivalents:

Included in cash at June 30, 2010 and December 31, 2009 is $13 and $24, respectively, collected by Nortel on behalf of purchasers related to transferred receivables as part of the various divestitures.

 

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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) — (Continued)

 

Restricted cash:

Restricted cash includes, in part, $72 and nil as of June 30, 2010 and December 31, 2009, respectively, related to assets held in an employee benefit trust in Canada, and restricted as to their use in operations by Nortel. The employee benefit trust investments of $73 were classified as a long-term investment at December 31, 2009 and reclassified to restricted cash as of June 30, 2010 due to the sale and reinvestment of the proceeds into cash equivalents.

Accounts receivable — net:

 

     June 30,
2010
    December 31,
2009
 

Trade receivables

   $ 257      $ 593   

Notes receivable

     3        3   

Contracts in process

     5        45   
                
     265        641   

Less: provisions for doubtful accounts

     (11     (16
                

Accounts receivable — net

   $ 254      $ 625   
                

Inventories — net:

 

     June 30,
2010
    December 31,
2009
 

Raw materials

   $ 31      $ 53   

Work in process

     3        2   

Finished goods

     96        157   

Deferred costs

     22        144   
                
     152        356   

Less: provision for inventories

     (99     (129
                

Inventories and long-term deferred costs — net

     53        227   

Less: long-term deferred costs (a)

     —          (44
                

Inventories — net

   $ 53      $ 183   
                

 

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

At June 30, 2010 and December 31, 2009, inventory included approximately $69, of which a portion is included in assets held for sale, and $153, respectively, of gross inventory on consignment. See note 8.

Other current assets:

 

     June 30,
2010
   December 31,
2009

Prepaid expenses

   $ 35    $ 54

Income taxes recoverable

     44      30

Current investments

     26      10

Other

     247      254
             

Other current assets

   $ 352    $ 348
             

 

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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) — (Continued)

 

Plant and equipment — net:

 

     June 30,
2010
    December 31,
2009
 

Cost:

    

Buildings

   $ 116      $ 686   

Machinery and equipment

     522        752   

Assets under capital lease

     75        153   

Sale lease-back assets

     49        49   
                
     762        1,640   
                

Less accumulated depreciation:

    

Buildings

     (75     (262

Machinery and equipment

     (421     (586

Assets under capital lease

     (52     (93

Sale lease-back assets

     (11     (11
                
     (559     (952
                

Plant and equipment — net

   $ 203      $ 688   
                

Intangible assets — net:

 

     June 30,
2010
   December 31,
2009
 

Cost

   $ —      $ 103   

Less: accumulated amortization

     —        (52
               

Intangible assets — net

   $ —      $ 51   
               

Other assets:

 

     June 30,
2010
   December 31,
2009

Long-term deferred costs

   $ —      $ 44

Long-term inventories

     2      6

Debt issuance costs

     43      49

Financial assets

     47      49

Other

     55      29
             

Other assets

   $ 147    $ 177
             

 

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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) — (Continued)

 

Other accrued liabilities:

 

     June 30,
2010
   December 31,
2009

Outsourcing and selling, general and administrative related provisions

   $ 53    $ 67

Customer deposits

     6      6

Product-related provisions

     13      22

Warranty provisions (note 14)

     2      58

Deferred revenue

     41      138

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

     14      76

Miscellaneous taxes

     2      8

Income taxes payable

     40      41

Deferred income taxes

     —        14

Tax uncertainties (note 12)

     —        83

Other

     56      147
             

Other accrued liabilities

   $ 227    $ 660
             

 

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

Other liabilities:

 

     June 30,
2010
   December 31,
2009

Pension benefit liabilities

   $ —      $ 6

Post-employment and post-retirement benefit liabilities

     7      8

Restructuring liabilities (notes 10 and 11)

     4      4

Deferred revenue

     —        71

Tax uncertainties (note 12)

     17      89

Other long-term provisions

     36      48
             

Other liabilities

   $ 64    $ 226
             

 

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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) — (Continued)

 

Condensed consolidated statements of cash flows

Change in operating assets and liabilities — net:

 

     Six Months Ended
June 30,
 
       2010         2009    

Accounts receivable — net

   $ 221      $ 243   

Inventories — net

     36        66   

Deferred costs

     5        52   

Income taxes

     (67     (8

Accounts payable

     (45     48   

Payroll, accrued and contractual liabilities

     (34     (51

Deferred revenue

     26        33   

Advance billings in excess of revenues recognized to date on contracts

     (71     (78

Restructuring liabilities

     (13     (21

Other

     (54     (6
                

Change in operating assets and liabilities (a)

   $ 4      $ 278   
                

 

(a) The changes in liability amounts noted above include obligations that are subject to compromise.

Interest and taxes paid:

 

     Six Months Ended
June 30,
       2010         2009  

Cash interest paid

   $ 4      $ 9

Cash taxes paid

   $ 45      $ 4

Net payment (receipt) for reorganization items (note 5)

   $ (791   $ 25

7. Goodwill

In the six months ended June 30, 2009, Nortel recorded $48 of impairment loss related to the NGS reporting unit prior to its reclassification to discontinued operations.

8. Assets and liabilities held for sale

As of June 30, 2010, Nortel had $232 of long-lived assets classified as held for sale as a result of reaching the appropriate stage in the various sales processes. During the three and six months ended June 30, 2010, Nortel recorded impairment charges of $113 and $138, respectively, as a result of the fair value less estimated costs to sell being less than the carrying value of those assets.

9. Segment information

Segment descriptions

In the first quarter of 2010, Nortel completed the sale of substantially all of the Optical Networking and Carrier Ethernet businesses to Ciena, which were included in the MEN segment, and the sale of substantially all

 

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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) — (Continued)

 

of the GSM/GSM-R business to Ericsson and Kapsch, which was included in the WN segment. In the second quarter of 2010, Nortel completed the sale of substantially all of the CVAS business to GENBAND, which was included in our CVAS segment, and the sale of NNL’s interest in LGN to Ericsson.

Prior to the quarter ended June 30, 2010, the LGN business was a reportable segment. As discussed in note 4, NNL completed the sale of its interest in LGN to Ericsson in the second quarter of 2010. The LGN financial results of operations have been classified as discontinued operations as of June 30, 2010 and, accordingly, are no longer presented as a segment.

As of June 30, 2010, Nortel’s three reportable segments were WN, CVAS and MEN:

 

   

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 June 30, 2010, WN includes the residual CDMA, and GSM businesses.

 

   

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. As of June 30, 2010, CVAS includes the residual CVAS business.

 

   

The MEN segment offers solutions 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 (“MSS”) products and related services. As of June 30, 2010, MEN includes the residual Optical Networking and Carrier Ethernet solutions businesses and the MSS business.

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

Other miscellaneous and temporary business activities and corporate functions do not meet the 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”.

In the first quarter of 2010, Nortel’s then Chief Restructuring Officer (“CRO”) (effective March 21, 2010 and for the remainder of the first quarter of 2010, the CRO’s title was changed to Special Advisor) and the President of NBS were both identified as Chief Operating Decision Makers in assessing the performance of and allocating resources to Nortel’s operating segments. The CRO was responsible for the remaining businesses and the President of NBS was responsible for the contracts included in operating segments that did not transfer to the purchasers of the divested businesses. As a result of the departure of the CRO, the Chief Strategy Officer and Business Unit President became the Chief Operating Decision Maker (“CODM”) in the second quarter of 2010 responsible for the remaining businesses, while the President of NBS continues to be the CODM responsible for the contracts included in operating segments that did not transfer, as noted above. In the second quarter 2010, the primary financial measure used by the CRO and the President of NBS was Management Operating Margin

 

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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) — (Continued)

 

(“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. Management OM percentage is a non-U.S. GAAP measure defined as Management OM divided by revenue. The financial information for Nortel’s business segments presented below includes the results of the Equity Investees as if they were consolidated, which is consistent with the way Nortel manages its business segments. However, as discussed in note 1, under U.S. GAAP, the Equity Investees are accounted for under the equity method of accounting as of the Petition Date until May 31, 2010. Commencing June 1, 2010, the EMEA Subsidiaries are accounted for by the cost method.

Segments

The following tables set forth information by segment:

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
         2010             2009             2010             2009      

Segment revenues

        

WN

   $ 47      $ 757      $ 215      $ 1,325   

CVAS

     89        163        243        332   

MEN

     97        333        313        693   
                                

Total reportable segments

     233        1,253        771        2,350   

Other

     4        3        8        5   
                                

Total segment revenues

     237        1,256        779        2,355   

Less: Equity Investees — equity method revenues

     (63     (247     (243     (492

Less: Equity Investees — cost method revenues

     (29     —          (29     —     
                                

Total consolidated revenues

   $ 145      $ 1,009      $ 507      $ 1,863   
                                

Management OM

        

WN

   $ 9      $ 220      $ 64      $ 280   

CVAS

     (33     (7     (41     (25

MEN

     29        27        20        69   
                                

Total reportable segments

     5        240        43        324   

Other

     (200     (166     (418     (412
                                

Total Management OM

     (195     74        (375     (88

Impact of deconsolidation of Equity Investees

     (45     (79     (74     (154

Amortization of intangible assets

     —          (1     —          (1

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

     1        (16     3        (16

Other operating expense (income) — net

     (96     8        (156     (3
                                

Operating earnings (loss)

     (55     162        (148     86   

Other income (expense) — net

     (28     6        32        (40

Interest expense

     (75     (74     (150     (150

Reorganization items — net

     (1,387     (58     (891     (66

Income tax benefit (expense)

     41        (17     33        (13

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

     —          1        (1     (1

Equity in net loss of Equity Investees

     (30     (167     (50     (289
                                

Net loss from continuing operations

   $ (1,534   $ (147   $ (1,175   $ (473
                                

 

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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) — (Continued)

 

Nortel had no customer that generated more than 10% of total consolidated revenues for the three months ended June 30, 2010. Nortel had one customer, AT&T that generated revenues of approximately 12% of total consolidated revenues for the six months ended June 30, 2010. For the three and six months ended June 30, 2009, Nortel had one customer, Verizon Communications Inc., that generated revenues of approximately 25% and 22%, respectively, of total consolidated revenues. Although these revenues were generated primarily within the WN segment, they were also from Nortel’s other reportable segments.

10. Pre-Petition Date cost reduction plans

As a result of the Creditor Protection Proceedings, Nortel ceased taking any further actions under the previously announced workforce and cost reduction plans as of January 14, 2009. Any revisions to actions taken up to that date under previously announced workforce and cost reduction plans will continue to be accounted for under such plans, and will be classified in cost of revenues, SG&A, and R&D as applicable. Any remaining actions under these plans will be accounted for under the workforce reduction plan announced on February 25, 2009 (see note 11). Nortel’s contractual obligations are subject to re-evaluation in connection with the Creditor Protection Proceedings and, as a result, expected cash outlays disclosed below relating to contract settlement and lease costs are subject to change. As well, Nortel is not following its pre-Petition Date practices with respect to the payment of severance in jurisdictions under the Creditor Protection Proceedings.

During the six months ended June 30, 2010, changes to the provision were as follows:

 

    November 2008
Restructuring
Plan
    2008
Restructuring
plan
    2007
Restructuring
plan
    2004 and 2001
Restructuring
Plan
  Total  

Workforce Reduction

         

Provision balance as of December 31, 2009

  $ 27      $ 18      $ 10      $ —     $ 55   

Revisions to prior accruals

    (3     (2     —          —       (5
                                     

Provision balance as of June 30, 2010

  $ 24      $ 16      $ 10      $ —     $ 50   
                                     

Contract Settlement and lease costs

         

Provision balance as of December 31, 2009

  $ —        $ 4      $ 7      $ 17   $ 28   

Current period charges

    —          —          —          1     1   

Revisions to prior accruals

    —          —          (1     —       (1

Current period utilization

    —          —          (1     —       (1
                                     

Provision balance as of June 30, 2010

  $ —        $ 4      $ 5      $ 18   $ 27   
                                     

Total provision balance as of June 30, 2010 (a)

  $ 24      $ 20      $ 15      $ 18   $ 77   
                                     

 

(a) As of June 30, 2010 and December 31, 2009, the short-term provision balances were $3 and $2, respectively, and the long-term provision balances were $2 and $4, respectively, and the liabilities subject to compromise balances were $72 and $76, respectively.

 

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

Notes to Condensed Consolidated Financial Statements (unaudited) — (Continued)

 

During the three and six months ended June 30, 2010 and 2009 the charge (recovery) by profit and loss category was as follows:

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
         2010             2009             2010             2009      

Cost of revenues

   $ (1   $ —        $ (1   $ (7

Selling, general and administrative

     (2     —          (3     (10

Research and development

     (1     —          (1     (3

Reorganization items — lease repudiation

     —          —          —          (34

Other

     —          (26     —          (25
                                

Total charge (recovery) excluding discontinued operations

     (4     (26     (5     (79

Discontinued operations

     (2     —          (2     —     
                                

Total charge (recovery) including discontinued operations

   $ (6   $ (26   $ (7   $ (79
                                

The following table sets forth the charge (recovery) incurred for each of Nortel’s cost reduction plans by segment during the three and six months ended June 30, 2010 and 2009:

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
         2010             2009             2010             2009      

WN

   $ (4   $ (17   $ (5   $ (45

CVAS

     —          (3     —          (13

MEN

     —          (6     —          (21
                                

Total charges

   $ (4   $ (26   $ (5   $ (79
                                

A significant portion of Nortel’s provisions for workforce reductions and contract settlement and lease costs is associated with shared services. These costs have been allocated to the segments in the table above, based generally on headcount, SG&A allocations and revenue streams. Previously, Nortel allocated these costs only based on headcount and revenue streams. Charges related to these plans prior to 2009 were recorded in special charges and were not included in the calculation of Management OM, while any revisions to provisions after this date will be recorded in operations and are included in the calculation of Management OM.

11. Post-Petition Date cost reduction activities

In connection with the Creditor Protection Proceedings, Nortel has commenced certain workforce and other cost reduction activities and will undertake further workforce and cost reduction activities during this process. The actions related to these activities are expected to occur as they are identified. The following current estimated charges are based upon accruals made in accordance with U.S. GAAP. The current estimated total charges to earnings and cash outlays are subject to change as a result of Nortel’s ongoing review of applicable law. In addition, the current estimated total charges to earnings and cash outlays do not reflect all potential claims or contingency amounts that may be allowed under the Creditor Protection Proceedings and thus are also subject to change.

 

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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) — (Continued)

 

Workforce Reduction Activities

On February 25, 2009, Nortel announced a workforce reduction plan to reduce its global workforce by approximately 5,000 net positions which, upon completion, was expected to result in total charges to earnings of approximately $270 with expected total cash outlays of approximately $160 and the balance classified as a liability subject to compromise. Included in these amounts are actions related to the Equity Investees (see note 22). On a consolidated basis, absent amounts related to the Equity Investees, the plan was expected to result in total charges to earnings of approximately $168 with expected and total cash outlays of approximately $77 with the balance classified as a liability subject to compromise.

Subsequent to the February 25, 2009 announcement, as Nortel continued to progress through the creditor protection proceedings additional workforce reductions were deemed necessary to achieve the broader cost reduction initiative. On a consolidated basis, absent amounts related to Equity Investees, the incremental workforce reductions were expected to result in charges to earnings and cash outlays of $176 and $89, respectively, with the balance being classified as subject to compromise.

On a consolidated basis, absent amounts related to the Equity Investees, Nortel completed all 2009 announced workforce reductions discussed above resulting in a net workforce reduction of 4,625 with charges to earnings and cash outlays of approximately $117 and $38, respectively, with the balance being classified as subject to compromise.

Three and six months ended June 30, 2010

In addition to the concluded 2009 workforce reduction plans discussed above, Nortel has continued workforce reduction initiatives during 2010. For the three and six months ended June 30, 2010, approximately $17 and $31, respectively, of the total charges relating to the net workforce reduction of 470 and 1,030 positions, respectively, were incurred. For the three and six months ended June 30, 2010, Nortel incurred workforce reduction recovery of nil and $2, respectively and charges of $3 and $65, respectively, for discontinued operations. As Nortel continues to progress through the Creditor Protection Proceedings, Nortel expects to incur charges and cash outlays related to workforce and other cost reduction strategies. Nortel will continue to report future charges and cash outlays under the broader strategy of the post petition cost reduction plan.

During the six months ended June 30, 2010 changes to the provision balances were as follows:

 

Provision balance as of December 31, 2009

   $ 70   

Other charges

     36   

Revisions to prior accruals

     (5

Cash drawdowns

     (9

Foreign exchange and other adjustments

     1   
        

Provision balance as of June 30, 2010 (a)

   $ 93   
        

 

(a) As of June 30, 2010, $91 was included in liabilities subject to compromise, the short-term provision balance was $2, and the long-term provision balance was nil.

 

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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) — (Continued)

 

During the three and six months ended June 30, 2010 and 2009 workforce reduction charges were as follows:

 

     Three Months Ended
June 30,
   Six Months Ended
June 30,
         2010            2009            2010            2009    

Cost of revenues

   $ 4    $ 7    $ 11    $ 20

SG&A

     7      7      13      24

R&D

     6      3      7      11

Other

     —        —        —        —  
                           

Total workforce reduction charge

   $ 17    $ 17    $ 31    $ 55
                           

The following table sets forth charges incurred for workforce reductions by segment during the three and six months ended June 30, 2010 and 2009:

 

     Three Months Ended
June 30,
   Six Months Ended
June 30,
         2010            2009            2010            2009    

WN

   $ 2    $ 10    $ 3    $ 35

CVAS

     14      5      21      16

MEN

     1      2      7      4
                           

Total charges

   $ 17    $ 17    $ 31    $ 55
                           

Other Cost Reduction Activities

During the three and six months ended June 30, 2010, Nortel’s real estate related cost reduction activities resulted in charges of $3 and $6, respectively, which were recorded against SG&A and reorganization items. During the three and six months ended June 30, 2010, Nortel recorded plant and equipment write downs of nil and $11, respectively, against SG&A and reorganization items, and additional charges of $2 and $13, respectively, against reorganization items for lease repudiations and other contract settlements. As of June 30, 2010, Nortel’s real estate and other cost reduction balances were approximately $32, of which $29 is classified as subject to compromise.

12. Income taxes

During the six months ended June 30, 2010, Nortel recorded a tax recovery of $33 on loss from continuing operations before income taxes and equity in net loss of associated companies and Equity Investees of $1,157. The tax recovery of $33 is largely comprised of $9 of income taxes on current year profits in various jurisdictions offset by decreases in uncertain tax positions and other taxes of $14 and the reversal of previously accrued income taxes and interest of $28.

During the six months ended June 30, 2009, Nortel recorded a tax expense of $13 on loss from continuing operations before income taxes and equity in net loss of associated companies and Equity Investees of $170. The tax expense of $13 was largely comprised of $6 of income taxes in profitable jurisdictions and the provision of $21 relating to uncertain tax positions. This was offset by revisions to prior year estimates of $14. Previously included in continuing operations, Nortel reallocated to discontinued operations tax expense of $6 relating to the accrual of the deferred tax liability associated with NNL’s investment in LGN.

 

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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) — (Continued)

 

As of June 30, 2010, Nortel’s net deferred tax assets were $nil. In June 2009, Nortel concluded that the sale of Nortel’s remaining businesses was the best path forward. As described in note 2, Nortel disposed of substantially all of its CDMA business and LTE Access assets to Ericsson, its Packet Core Assets to Hitachi, substantially all of the assets of the ES business to Avaya, substantially all of the assets of the Optical Networking and Carrier Ethernet businesses to Ciena, substantially all of the assets of the GSM/GSM-R business to Ericsson and Kapsch and substantially all of the assets of the CVAS business to GENBAND. Nortel has entered into TSA with the buyers of these businesses and, as described in note 2, is in the process of selling its remaining businesses and assets. Certain of these dispositions have been considered positive evidence in the determination of future income available to support the realization of the remaining net deferred tax assets. Although these additional dispositions are estimated to generate gains in 2010, due to the significant uncertainty concerning the forecasted income for 2010 and beyond, the uncertainty concerning the estimated final proceeds allocation by jurisdiction and Nortel’s limited ability to control the ultimate closing of any remaining transactions, this positive evidence does not outweigh the significant negative evidence that exists and therefore, Nortel continues to conclude that as at June 30, 2010 a full valuation allowance continues to be necessary against Nortel’s deferred tax assets in all jurisdictions.

At December 31, 2009, Nortel’s net deferred tax asset was $13, which included a net deferred tax asset of $20 in Korea, offset by a deferred tax liability of $7 associated with NNL’s investment in LGN. As at June 30, 2010, the net deferred tax assets decreased from $13 to $nil, mainly due the sale of the Company’s interest in the LGN joint venture.

In accordance with ASC 740, Nortel recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. For purposes of intraperiod allocation, Nortel includes all changes in reserves relating to historical periods for uncertain tax positions in continuing operations.

Nortel had approximately $1,871 and $1,004 of total gross unrecognized tax benefits as of December 31, 2009 and June 30, 2010, respectively. As of June 30, 2010, of the total gross unrecognized tax benefits in its consolidated entities, $15 represented the amount of unrecognized tax benefits that would favorably affect the effective income tax rate in future periods, if recognized. The net decrease of $867 since December 31, 2009 resulted from $813 from the resolution and settlement of the 2001 through 2005 Advance Pricing Arrangements (“APA”) between Canada and the U.S, $37.5 from the settlement payment made to the IRS on February 22, 2010, $22, $8 and $6 from the deconsolidation of its Brazil entity, its Colombia entity and the LGN joint venture, respectively and by a decrease of $1 from changes to the measurement of existing uncertain tax positions for changes to foreign exchange rates and other measurement criteria. This was offset by an increase of $21 from adjustments to prior year uncertain tax positions, mainly attributable to the finalization of amended tax returns and filing positions in Canada.

Nortel recognizes interest and penalties accrued related to unrecognized tax benefits in income tax expense. During the six months ended June 30, 2010, Nortel recognized approximately $2 related to interest, penalties and foreign exchange losses, which was offset by a decrease of $56, $13 and $2 for the deconsolidation of its Brazil entity, its Colombia entity and the LGN joint venture, respectively. Nortel had accrued approximately $10 and $79 for the payment of interest and penalties as of June 30, 2010 and December 31, 2009, respectively.

Nortel believes it is reasonably possible that $123 of its gross unrecognized tax benefit will decrease during the twelve months ending June 30, 2011 with such amounts attributable to possible decreases from the potential settlement of audit exposures of $120 in Canada and $3 in various jurisdictions.

 

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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) — (Continued)

 

Nortel is subject to tax examinations in all major taxing jurisdictions in which it continues to operate and Nortel regularly assesses the status and the potential for adverse outcomes to determine the adequacy of the provision for income and other taxes. Other than the U.S., Nortel’s 2000 through 2009 tax years remain open in most of these jurisdictions primarily as a result of ongoing negotiations regarding APAs affecting these periods and ongoing audit activity. Specifically, the tax authorities in Canada are close to completing an audit in respect of non-refundable investment tax credits claimed by NNL in its 2002 tax year. It is expected that this audit will result in a substantial denial of NNL’s non-refundable investment tax credit claim and NNL has reduced its investment tax credit balance and related valuation allowance to reflect the more likely than not audit outcome. We are in the process of assessing the anticipated 2002 audit and the impact on future non-refundable investment tax credits. NNL has not decreased future period investment tax credit claims as a result of the 2002 tax audit. However, since these investment tax credits are not refundable, can only be applied against taxes payable and these balances have a full valuation allowance, any potential audit adjustments are not expected to result in any charge to tax expense. Nortel believes that it has adequately provided for other tax adjustments that are more likely than not to be realized as a result of these ongoing examinations.

Nortel had previously entered into APAs with the U.S. and Canadian taxation authorities in connection with its intercompany transfer pricing and cost sharing arrangements between Canada and the U.S. These arrangements expired in 1999 and 2000. In 2002, Nortel filed APA requests with the taxation authorities in the U.S., Canada and the U.K. that applied to the 2001 through 2005 taxation years (“2001-2005 APA”). In February 2010, Nortel and the U.S. and Canadian taxing authorities settled and executed the 2001-2005 APA resulting in a reallocation of losses from NNI to NNL in the amount of $2,000. The agreement between the tax authorities makes no mention of an appropriate transfer pricing method for the 2001-2005 APA. Nortel continues to apply the transfer pricing methodology proposed in the 2001-2005 APA requests to the other parties subject to the transfer pricing methodology in preparing its tax returns and its accounts for its 2001 to 2005 taxation years. The other parties are the U.K., France, Ireland and Australia.

Although Nortel continues to apply the transfer pricing methodology that was requested in the previously withdrawn 2007-2010 APA to the 2006 through to the 2008 taxation years, the ultimate outcome is uncertain and the ultimate reallocation of losses cannot be determined at this time. Other than in the U.S., there could be a further material shift in historical earnings between the above mentioned parties. If these matters are resolved unfavorably, they could have a material effect on Nortel’s consolidated financial position, results of operations and/or cash flows.

Nortel has not provided for foreign withholding taxes or deferred income tax liabilities for temporary differences related to the undistributed earnings of foreign subsidiaries since Nortel does not currently expect to repatriate earnings that would create any material tax consequences. It is not practical to reasonably estimate the amount of additional deferred income tax liabilities or foreign withholding taxes that may be payable should these earnings be distributed in the future.

During the second quarter of 2010, NNL completed the process of amending a number of previously filed Canadian tax returns to reflect adjustments relating to various restatements of its financial statements and the 2001-2005 APA settlement described above. As a result of completing the filing these amended tax returns, NNL has released income tax liabilities in the amount of $28, mainly relating to previously accrued interest and other tax exposures that are no longer estimated to be payable due to the finalization of filing positions in the restated Canadian tax returns.

 

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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) — (Continued)

 

13. Employee benefit plans

Plan Description

Nortel maintains various retirement programs covering substantially all of its employees, consisting of defined benefit, defined contribution and investment plans.

Nortel has defined contribution and investment programs available to substantially all of its North American employees. Additionally, Nortel has traditional defined benefit programs that are closed to new entrants. See below regarding the PBGC termination of the U.S. Retirement Income Plan on September 8, 2009. See note 2 regarding the transfer of administration of the Canadian registered defined benefit programs on September 30, 2010. Although these programs represent Nortel’s major retirement programs, Nortel also has smaller pension plan arrangements in other countries.

Nortel also provides other benefits, including post-retirement benefits and post-employment benefits. Employees previously enrolled in the capital accumulation and retirement programs offering post-retirement benefits are eligible for company sponsored post-retirement health care and/or death benefits, depending on age and/or years of service. See note 2 regarding the termination of the Canadian post-retirement benefits on December 31, 2010.

Nortel’s policy is to fund registered defined benefit pension benefits based on accepted actuarial methods as permitted by regulatory authorities. Other post-retirement and post-employment benefits are funded as claims are incurred. The funded amounts reflect actuarial assumptions regarding compensation, interest and other projections. See note 2 regarding changes to the funding of Canadian registered defined benefit pension plans, post-retirement and post-employment benefits. Pension and other post-retirement benefit costs reflected in the consolidated statements of operations are based on the projected benefit method of valuation.

PBGC termination of the U.S. Retirement Income Plan

On July 17, 2009, the PBGC provided a notice to NNI that the PBGC had determined under the Employee Retirement Income Securities Act of 1974 (“ERISA”) that: (i) the Nortel Networks Retirement Income Plan (the “Retirement Income Plan”), a defined benefit pension plan sponsored by NNI, will be unable to pay benefits when due; (ii) under Section 4042(c) of ERISA, the Retirement Income Plan must be terminated in order to protect the interests of participants and to avoid any unreasonable increase in the liability of the PBGC insurance fund; and (iii) July 17, 2009 was to be established as the date of termination of the Retirement Income Plan. NNI worked to voluntarily assign trusteeship of the Retirement Income Plan to the PBGC and avoid further court involvement in the termination process.

On September 8, 2009, pursuant to an agreement between the PBGC and the Retirement Plan Committee, the Retirement Income Plan was terminated with a termination date of July 17, 2009, and the PBGC was appointed trustee of the plan.

The PBGC has filed a proof of claim against NNI and each of the Debtors in the Chapter 11 Proceedings for the unfunded benefit liabilities of the Nortel Networks Retirement Income Plan, a defined benefit pension plan sponsored by NNI, (“U.S. Pension Plan”) in the amount of $546. The PBGC has also filed unliquidated claims for contributions necessary to satisfy the minimum funding standards, a claim for insurance premiums, interest and penalties, and a claim for shortfall and amortization charges. Under ERISA, the PBGC may have the ability to impose certain claims and liens on NNI and certain NNI subsidiaries and affiliates (including liens on assets of

 

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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) — (Continued)

 

certain Nortel entities not subject to the Creditor Protection Proceedings). Nortel has recorded a liability of $334 representing Nortel’s current best estimate of the expected allowed claim amount in accordance with ASC 852 in relation to these claims. To the extent that information available in the future indicates a difference from the recognized amounts, the provision will be adjusted.

Settlement Agreement with Former and Disabled Canadian Employee Representatives

As discussed in note 2, on February 8, 2010, the Canadian Debtors entered into the Settlement Agreement in relation to the Canadian registered pension plans, post-retirement benefits and post-employment benefits. The Settlement Agreement, as amended, was approved by the Canadian Court on March 31, 2010. The Canadian registered pension plans will be transferred to a new administrator on September 30, 2010. Benefit payments in the Canadian post-retirement benefit plan and the Canadian long-term disability plan will cease on December 31, 2010.

As a result of the approved cessation of post-retirement benefit payments on December 31, 2010, Nortel recorded the impacts of the Settlement Agreement in accordance with FASB ASC 715-60 “Defined Benefit Plans — Other Post Retirement” (“ASC 715-60”), which required a derecognition of the liability and deferred actuarial gains totaling $432 in the first quarter of 2010 in reorganization items. Nortel has recorded in reorganization items a charge of $439 representing its current best estimate of the expected allowed claim amount in accordance with ASC 852 in relation to the participant claims for future years benefits they will no longer receive due to the cessation of the plans. To the extent that information available in the future indicates a difference from the recognized amounts, the provision will be adjusted.

Impacts of workforce reductions and divestiture activities

As a result of workforce reductions in connection with the Creditor Protection Proceedings and the divestiture activities, Nortel remeasured the post-retirement benefit obligations for the U.S. and Canada and recorded the impacts of these remeasurements in the first quarter of 2010 in accordance with ASC 715-60. The curtailment and remeasurement impacts related to the Canadian post-retirement benefit obligations were recorded in addition to the Settlement Agreement impacts described above. Curtailment gains of $6 and $7 were recorded to the statement of operations in the U.S. and Canada, respectively. As a result of these remeasurements, Nortel changed its post-retirement discount rate, a key assumption used in estimating post-retirement benefit costs, for the U.S. and Canada. This resulted in a change in the weighted average post-retirement discount rate to 5.9% from 6.0% at December 31, 2009. In addition as a result of the remeasurements, Nortel was required to adjust the liability for impacts from the curtailment gain and changes in assumptions at the re-measurement date. For the U.S, the effect of these adjustments was to decrease post-retirement liabilities by $3 and accumulated other comprehensive loss (before tax) by $3. For Canada, the effect of this adjustment and the related foreign currency translation adjustment was to increase post-retirement liabilities by $15 and accumulated other comprehensive loss (before tax) by $18.

As a result of additional workforce reductions in connection with the Creditor Protection Proceedings and the divestiture activities, Nortel remeasured the post-retirement benefit obligation for the U.S. and recorded the impacts of this remeasurement in the second quarter of 2010 in accordance with ASC 715-60. A curtailment gain of $4 was recorded to the statement of operations in the U.S. in the second quarter of 2010. As a result of this remeasurement, Nortel changed its post-retirement discount rate, a key assumption used in estimating post-retirement benefit costs for the U.S. This resulted in a change in the weighted average post-retirement discount rate to 5.4% from 5.9% at March 31, 2010. In addition, as a result of the remeasurement, Nortel was required to

 

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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) — (Continued)

 

adjust the liability for impacts from the curtailment gain and changes in assumptions at the re-measurement date. The effect of these adjustments was to increase post-retirement liabilities by $5 and accumulated other comprehensive loss (before tax) by $9.

U.S. Healthcare Reform Acts

In March 2010, the President of the United States signed into law comprehensive health care reform legislation under the Patient Protection and Affordable Care Act and the Health Care Education and Affordability Reconciliation Act (the Acts). The Acts contain provisions that could impact Nortel’s accounting for retiree medical benefits in future periods. However, the ultimate extent of that impact, if any, on Nortel cannot be determined until final regulations are promulgated under the Acts and additional interpretations of the Acts become available. Nortel will continue to assess the accounting implications of the Acts as related regulations and interpretations of the Acts become available. Based on the analysis to date of the provisions in the Acts for which the impacts are reasonably determinable, a re-measurement of Nortel’s post-retirement plan liabilities is not required at this time.

Pension and Post Retirement Benefits

The following details the net pension expense for the defined benefit plans for the following periods:

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
         2010             2009             2010             2009      

Pension expense:

        

Service cost

   $ 3      $ 3      $ 6      $ 6   

Interest cost

     52        62        102        122   

Expected return on plan assets

     (38     (59     (76     (116

Amortization of prior service cost

     1        1        1        1   

Amortization of net losses (gains)

     10        (1     20        (1

Curtailment, contractual and special termination losses (gains)

     —          —          2        3   

Settlement losses (gains)

       1        (1     2   
                                

Net pension expense

   $ 28      $ 7      $ 54      $ 17   
                                

The following details the net cost components of post-retirement benefits other than pensions for the following periods:

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
         2010             2009             2010             2009      

Post-retirement benefit cost:

        

Service cost

   $ —        $ 1      $ —        $ 2   

Interest cost

     3        9        11        17   

Amortization of prior service cost

     (1     (3     (2     (5

Amortization of net gains

     —          (3     (3     (6

Settlement gain

     —          —          (68     —     

Curtailment gain

     (4     (13     (381     (13
                                

Net post-retirement benefit cost

   $ (2   $ (9   $ (443   $ (5
                                

 

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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) — (Continued)

 

During the six months ended June 30, 2010 and 2009, contributions of $25 and $23, respectively, were made to the defined benefit plans and $19 and $19, respectively, to the post-retirement benefit plans. Nortel expects to contribute an additional $2 in 2010 to the defined benefit pension plans for a total contribution of $27, and an additional $25 in 2010 to the post-retirement benefit plans for a total contribution of $44.

14. Guarantees

Nortel’s requirement to make payments (either in cash, financial instruments, other assets, NNC common shares or through the provision of services) to a third party will be triggered as a result of changes in an underlying economic characteristic (such as interest rates or market value) that is related to an asset, a liability or an equity security of the guaranteed party or a third party’s failure to perform under a specified agreement.

The following table provides a summary of Nortel’s guarantees as of June 30, 2010:

 

     Carrying Amount
of Liability
   Maximum
Potential Liability  (n)

Business sale and business combination agreements

     

Third party claims (a)

   $