Misstated sales in billions, Nortel reveals

Nortel Networks Corp. delayed the restatement of its financial results yesterday for the third time after the board of directors unexpectedly discovered more than $3-billion (U.S.) of revenue was improperly booked at the height of the technology boom and expressed fears that there could be still more adjustments to come.

The delay raises credibility issues for the company's freshman chief executive officer and the possibility that Canada's biggest technology company could be delisted from either, or both, the Toronto and New York stock exchanges.

Just last week, Bill Owens, Nortel's president and CEO, committed Nortel to releasing restated financial results for 2003, as well as numbers for the first half of this year, on schedule.

"Pure and simple, we will have the results out by mid-November," he said in a speech at a Morgan Stanley technology conference in Scottsdale, Ariz., on Nov. 1.

But at some point in the past two weeks, Nortel's leadership learned that the telecommunication equipment maker's accounting troubles were even deeper than expected and decided to set a new target of completing the restatement within the next 60 days.

"In light of the amount of the adjustments, the board determined it would be prudent to confirm whether any additional revenue adjustments are necessary, and hence asked for the 30 to 60 days," Nortel spokeswoman Tina Warren said.

In its biweekly status update, which Nortel is required to give the Ontario Securities Commission until its filing obligations are up to date, the company said sales will be reduced for 1999 by $600-million and for 2000 by $2.5-billion, of which about $250-million will be permanently erased. The remainder will be deferred to the next three years. The adjustments should increase sales in 2001, 2002 and 2003 by $1.4-billion, $450-million and $450-million respectively, the company said.

"This implies that in 2000, the height of the tech bubble, revenue was distorted by $2.5-billion or 9 per cent," noted Michael Urlocker, an analyst with UBS.

The news pushed the price of Nortel shares down 5.6 per cent to $4.04 (Canadian) on the TSX.

Mr. Owens spent the day talking to customers and employees and was unavailable for comment. In a prepared statement, he said Nortel was making a prudent decision to "undertake a deliberate, focused but bounded double-checking of several revenue areas."

John Gavin, president of SEC Insight Inc., an independent research firm, said it is difficult to figure out what is going on inside Nortel.

"An optimist would want to say, rather than risk giving a bad number, the CEO is willing instead to take the heat for short-term upset to ultimately give you a number you can trust," he said. "A pessimist would say, this is much worse than anyone expected or projected."

Nortel has been working on the restatement for about eight months and said it has more than 200 outside consultants and advisers helping 650 of its own financial staff review and verify hundreds of thousands of documents. During the process, the board has met more than 30 times and the audit committee more than 40 times.

But the complexity of the situation extends beyond the financial documents themselves, Mr. Gavin said.

"The new CEO has to figure out who he can trust and there may still be people in there who have an incentive to hide things and cover their own tracks. It makes the forensic accounting exercise inherently challenging," he said. "You may have former employees who know where the bodies are, so to speak, and aren't saying a word on the advice of counsel."

Nortel warned yesterday that if it fails to file audited results for 2003 by Dec. 15, its shares may be delisted from the New York Stock Exchange. In addition, the Ontario Securities Commission, or the Toronto Stock Exchange, could suspend trading, and the TSX could also begin delisting procedures, the company said.

The NYSE is in the process of trying to implement stricter rules for all late filing companies that would force them to adhere to a fixed time frame, but a spokesman said the rules have yet to be implemented.

While there is no review under way at this time by the TSX that could lead to a suspension, there will be a meeting with senior Nortel officials at the exchange within the next several days, said Steve Kee, a spokesman for the TSX Group Inc.

The OSC said it is satisfied with the level of disclosure from Nortel and that the company has been co-operating fully. "We want to let the board process proceed," spokeswoman Wendy Dey said. "Our job is to reassess the situation daily according to any new information that comes to light." She said discussions continue with Nortel but would not say whether they include talk about suspending trading in the company's shares.

Among the financial disclosures Nortel made yesterday, the company said profit for 2003 will now be cut by 35 per cent, rather than the 50 per cent first expected. Sales were adjusted upward by $450-million (U.S.), which reduced estimated growth for this year to the "low single digits" from "mid single digits" forecast in September.

Nortel also revealed that it is in discussions with the U.S. Securities and Exchange Commission on matters that could affect coming filings.