Financial Statements (unaudited) Contents Consolidated Financial State

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Financial Statements (unaudited) Contents Consolidated Financial Statements PAGE Consolidated Statements Operations Consolidated Balance Sheets. Consolidated Statements Cash Flows. Notes Consolidated Financial Statements.
NORTEL NETWORKS LIMITED Consolidated Statements Operations (unaudited) (millions U.S. dollars, except share figures) Three months ended March 2000 Revenues Cost revenues. Gross profit Selling, general administrative expense. Research development expense Purchased in-process research development expense. Amortization intangibles Acquired technology Goodwill Special charges. 6,322 3,718 2,604 1,192 (967) Equity loss associated companies Other income Interest expense Long-term debt. Other Loss before income taxes Income provision. loss Dividends preferred shares. loss applicable common shares Loss common share basic. diluted Dividends declared common share (23) (16) (466) (722) (730) 1999 4,286 2,415 1,871 (93) (21) (27) (15) (134) (179) (186)
(.52) (.52) .0375
(.14) (.14) .0375
NORTEL NETWORKS LIMITED Consolidated Balance Sheets (unaudited) (millions U.S. dollars) March 2000 ASSETS Current assets Cash cash equivalents. Accounts receivable Related parties Trade (less provision uncollectibles $375 2000; $319 1999) Inventories Prepaid expenses. Deferred income taxes net. December 1999
2,060 7,046 3,625 14,203
2,153 5,784 2,823 12,176
Long-term receivables (less provision uncollectibles $288 2000; $284 1999) Investments cost associated companies equity. Plant equipment (net accumulated amortization $3,020 2000; $2,857 1999) Long-term deferred income taxes net. Intangible assets Acquired technology Goodwill
1,218
1,356 1,072
2,589
2,333
1,291 9,308 10,599
1,202 5,093 6,295 24,007
Other assets. Total assets.
29,953
NORTEL NETWORKS LIMITED Consolidated Balance Sheets (unaudited) (millions U.S. dollars) March 2000 LIABILITIES SHAREHOLDERS' EQUITY Current liabilities Notes payable. Accounts payable accrued liabilities Trade other payables Related parties Payroll benefit-related liabilities Other accrued liabilities Income taxes payable Long-term debt within year Long-term liabilities Deferred income. Long-term debt. Deferred income taxes net. Other liabilities December 1999
2,575 3,685 7,524 1,484 1,016 10,93
2,359 3,191 7,101 1,391 10,278
Minority interest subsidiary companies. Commitments contingencies (note Shareholders' equity Preferred shares, without value Authorized shares: unlimited; Issued outstanding shares: 30,000,200 2000 1999. Common shares, without value Authorized shares: unlimited; Issued outstanding shares: 1,449,433,080 2000 1,377,154,698 1999 Retained earnings. Additional paid-in capital. Accumulated other comprehensive loss
16,726 1,662 (326) 18,855
11,745 (434) 13,681 24,007
Total liabilities shareholders' equity
29,953
NORTEL NETWORKS LIMITED Consolidated Statements Cash Flows (unaudited) (millions U.S. dollars)
Three months ended March 2000 Cash flows used operating activities loss. Adjustments reconcile loss cash used operating activities, effects from acquisitions businesses: Amortization. Purchased in-process research development. Equity loss associated companies excess dividends received benefit from stock options Increase deferred income taxes. Increase other liabilities Gain sale investments. Other. Change operating assets liabilities: Accounts receivable. Inventories. Income taxes payable. Accounts payable accrued liabilities. Other operating assets liabilities Total Cash flows from (used investing activities Expenditures plant equipment. Proceeds disposals plant equipment Increase long-term receivables Decrease long-term receivables. Acquisitions investments businesses, cash acquired Proceeds sale investments Total Cash flows from financing activities Dividends common preferred shares Increase notes payable. Decrease notes payable Additions long-term debt Reductions long-term debt Increase (decrease) capital leases payable Issuance common shares Common shares purchased cancellation Total Effect exchange rate changes cash cash equivalents decrease cash cash equivalents Cash cash equivalents beginning period Cash cash equivalents period net. (76) (622) (330) (441) (85) (607) (308) (419) (61) (21) (25) (10) (93) 2,153 2,060 (183) (301) (260) (275) (112) (504) (136) (260) (115) (273) (57) (39) (14) (726) 2,230 1,504 (513) (722) 1999 (179)
NORTEL NETWORKS LIMITED Notes Consolidated Financial Statements (unaudited) (millions U.S. dollars except share figures, unless otherwise stated) Accounting policies consolidated financial statements Nortel Networks Limited, previously known Nortel Networks Corporation (the "Corporation"), subsidiary companies (collectively, "Nortel Networks") have been prepared accordance with accounting principles generally accepted United States. Although Corporation headquartered Canada, consolidated financial statements expressed United States dollars greater part earnings assets Corporation denominated United States dollars. Effective 2000, Corporation (also referred herein "Old Nortel") participated court-approved plan arrangement with Inc. ("BCE") (the "Arrangement") under Canadian (see "Subsequent events" note below). result Arrangement, Nortel subsidiaries became direct indirect subsidiaries, respectively, newly formed Canadian corporation ("New Nortel"). part Arrangement, Nortel assumed name "Nortel Networks Corporation." Nortel been renamed "Nortel Networks Limited," percent common shares owned Nortel. Except otherwise indicated, these financial statements notes thereto relate operations Nortel prior implementation Arrangement, give effect changes attributable Arrangement. Basis presentation interim financial statements necessarily indicative financial results full year. These Consolidated Financial Statements (unaudited) should read conjunction with audited consolidated financial statements notes thereto included Corporation's Annual Report Form 10-K year ended December 1999, amended Corporation's Annual Report Form 10-K/A year ended December 1999 (together, "1999 Form 10-K"). opinion management, adjustments necessary effect fair statement results periods presented have been made such adjustments normal recurring nature. Principles consolidation financial statements entities which controlled Corporation, referred subsidiaries, consolidated; entities which jointly controlled, referred joint ventures, entities which controlled over which Corporation ability exercise significant influence, referred associated companies, accounted using equity method; investments other entities accounted using cost method. Translation foreign currencies functional currency Corporation United States dollar. financial statements Corporation's operations whose functional currency other than United States dollar translated from functional currency United States dollars using current rate method, except those operations countries considered have highly inflationary economy, described below. Under current rate method, assets liabilities translated exchange rates effect balance sheet date. Revenues expenses, including gains losses foreign exchange transactions, translated average rates period. Where current rate method used, unrealized translation gains losses Corporation's investment these operations, including long-term intercompany advances, accumulated other comprehensive income. Corporation hedges floating percentage exposure foreign exchange gains losses incurred translation such foreign operations. Hedging instruments used Corporation comprise combination foreign currency denominated debt, foreign currency swaps foreign currency forward contracts that
denominated same currency hedged operations. translation gains losses these hedging instruments recorded foreign currency translation adjustment ("CTA") expected closely offset translation amounts recorded hedged portion these operations. Corporation monitors effectiveness this hedging strategy regularly. Transactions financial statement items denominated currency other than functional currency translated into Corporation's functional currency using temporal method. addition, financial statements operations countries considered have highly inflationary economies translated into United States dollars using temporal method. Under temporal method, monetary assets liabilities translated exchange rates effect balance sheet date. Nonmonetary assets liabilities translated historical exchange rates. Revenues expenses translated average rates period, except amortization which translated same basis related assets. Exchange gains losses reflected earnings. Revenue recognition Revenues generally recognized, trade discounts allowances, upon shipment when significant contractual obligations have been satisfied collection reasonably assured. Software revenues generally recognized when delivered accordance with terms conditions customer contracts, upon acceptance from customer, when collection reasonably assured. Revenues long-term contracts, including turnkey contracts, recognized using percentage-ofcompletion method basis percentage costs incurred date contract, relative estimated total contract costs. Profit estimates long-term contracts revised periodically based changes circumstances losses contracts recognized period that such losses become known. Generally, terms long-term contracts provide progress billings based completion certain phases work. Service revenues recognized time performance proportionately over term contract, appropriate. Nortel Networks provides extended payment terms certain software contracts, sell these receivables third parties. fees these contracts considered fixed determinable based Nortel Networks' standard business practice using these types contracts well Nortel Networks' history successfully collecting under original payment terms without making concessions. software arrangements involving multiple elements, Nortel Networks allocates revenue each element based objective evidence relative fair values, which derived allocating value each element that based upon prices charged when element sold separately. Nortel Networks makes certain sales through multiple distribution channels, primarily resellers distributors. These customers generally given certain rights return. products sold through these distribution channels, revenue recognized from product sales time shipment accruals also made estimated returns time shipment. Accruals warranty costs, sales returns, other allowances time shipment based contract terms prior claims experience. Research development Research development ("R&D") costs charged earnings periods which they incurred, except costs incurred pursuant specific contracts with third parties which charged earnings same period related revenue recognized. Related global investment credits deducted from income provision, provided there reasonable assurance benefits will realized.
Income taxes Nortel Networks provides income taxes using asset liability approach. This method recognizes amount taxes payable refundable current year, well deferred liabilities assets future consequences events recognized financial statements returns. Deferred income taxes adjusted reflect effects changes laws rates.
Earnings common share Earnings common share calculated after deducting dividends preferred shares from earnings, based weighted average number common shares outstanding during period. Diluted earnings share presented using treasury stock method calculated dividing earnings applicable common shares weighted average number common shares outstanding additional common shares that would have been outstanding potentially dilutive common shares been issued.
Cash cash equivalents highly liquid investments with original maturities three months less classified cash cash equivalents. fair value cash cash equivalents approximates amounts shown financial statements.
Inventories Inventories valued lower cost (calculated generally first-in, first-out basis) realizable value. cost finished goods work process comprises material, labour, manufacturing overhead.
Plant equipment Plant equipment stated cost less accumulated amortization. Amortization calculated generally straight-line basis over expected useful lives plant equipment. expected useful lives buildings twenty forty years, machinery equipment five years.
Intangible assets Acquired technology represents value proprietary "know-how" which technologically feasible acquisition date, charged earnings straight-line basis over estimated useful life three years. Goodwill represents excess purchase prices over fair values identifiable assets subsidiary companies, joint ventures, associated companies, amortized straight-line basis over estimated useful life three forty years.
Valuation long-lived assets Corporation evaluates carrying value long-lived assets held used, when events circumstances warrant such review. carrying value long-lived assets considered impaired when anticipated undiscounted cash flow from such assets less than carrying value. that event, loss recognized based amount which carrying value exceeds fair market value. Fair market value determined using anticipated cash flows discounted rate commensurate with risk involved. Losses long-lived assets disposed determined similar manner, except that fair market values reduced cost dispose.
Derivative financial instruments Nortel Networks enters into forward, swap, option contracts manage exposure fluctuations interest rates foreign exchange rates. These derivative financial instruments effective
meeting risk reduction objectives Corporation generating cash flows which offset cash flows related underlying position respect amount timing. Nortel Networks does hold issue derivative financial instruments trading purposes. Forward cross currency swap contracts used hedge certain foreign investments. Gains losses these instruments deferred reported part CTA, outlined note 1(c). target percentage total foreign currency risk associated with firm purchase sale commitments denominated foreign currency hedged with combination forward contracts, options, cross currency coupon swap contracts. foreign currency gains losses these contracts recognized consolidated financial statements until underlying firm commitment recorded earnings. that time, gains losses derivatives recorded earnings adjustment underlying transaction. Premiums paid with respect options deferred charged earnings over contract period. Interest rate cross currency swap contracts designated hedges interest rate foreign currency risk certain financial instruments, including debt certain receivables payables. interest payments relating swap contracts recorded earnings over life transaction accrual basis adjustment interest income interest expense. Corporation records earnings mark-to-market adjustments financial instruments that meet specific criteria hedge accounting. Pension, postretirement postemployment benefits Pension expense, based management's assumptions, consists actuarially computed costs pension benefits respect current year's service; imputed interest plan assets pension obligations; straight-line amortization experience gains losses, assumption changes, plan amendments over expected average remaining service life employee group. expected costs postretirement postemployment benefits, other than pensions, active employees accrued consolidated financial statements during years employees provide service Corporation. estimates preparation Corporation's consolidated financial statements conformity with generally accepted accounting principles ("GAAP") requires management make estimates assumptions that affect reported amounts assets liabilities disclosures contingent assets liabilities date financial statements reported amounts revenues expenses during reporting period. Actual results could differ from those estimates. Estimates used when accounting items matters such long-term contracts, allowance uncollectible accounts receivable, inventory obsolescence, product warranty, amortization, employee benefits, taxes, provisions, contingencies. Information operating segments General description full description Nortel Networks' operating segments, reference should made 1999 Form 10-K. Operating segments reflect evolution certain businesses within management structure, revenues segment quarter ended March 1999 have been reclassified. Accordingly, amounts earnings (loss) before income taxes from operations quarter ended March 1999 have also been reclassified. primary effect these reclassifications move certain businesses among segments more closely align
businesses with their primary customers. following tables forth information operating segments three months ended March 2000 1999, respectively: Three months ended March 2000 SP&C External revenues Earnings (loss) before income taxes from operations. 5,097 Enterprise 1,224 Corporate Other Total 6,322
(79)
Total assets
13,276
March 2000 2,477 14,200
29,953
Three months ended March 1999 SP&C External revenues Earnings (loss) before income taxes from operations. 3,099 Enterprise 1,163 Corporate Other Total 4,286
(59)
Represents revenues from business units below quantitative thresholds. Includes corporate services, organization that manages centralized internal functions Corporation. Corporate services managed "fee service" basis. corporate services expenses charged operating segments either direct basis through matrix allocation. Direct charges based actual usage services while matrix allocation based revenue, headcount, some other appropriate factor. Costs charged operating segments remain within Corporate Other. Excludes impact "Acquisition Related Costs" (purchased in-process research development (''purchased IPR&D'') expense related acquisitions, amortization acquired technology, amortization goodwill from acquisition Networks Inc. ("Bay Networks") subsequent acquisitions) one-time gains charges, dividends preferred shares. Reconciliation segment earnings before income taxes from operations loss before income taxes reported consolidated financial statements: Three months ended March 2000 Total earnings before income taxes from operations reportable segments Acquisition Related Costs One-time gains Special charges one-time costs Loss before income taxes 1999
(1,311) (197) (466)
(441)
(134)
Acquisitions following table sets certain information acquisitions completed Corporation three months ended March 2000. remainder purchase price allocation also outlined below. these acquisitions were accounted using purchase method. consolidated financial statements include operating results each these businesses from date acquisition. Three months ended March 2000 Purchase Acquired Date Price Technology March March January January Purchased IPR&D
Acquisition Promatory Clarify (ii) Qtera (iii) Dimension (iv) Other
Goodwill
2,114 2,761
1,814 2,181
Form consideration other Promatory Communications, Inc. ("Promatory") leading developer Digital Subscriber Line ("DSL") platforms high-speed Internet access. connection with acquisition, Corporation issued approximately million common shares Corporation, which approximately million common shares Corporation were issued into escrow related contingent consideration payable Corporation upon achievement Promatory certain business performance objectives 2000. Corporation also assumed equivalent approximately million stock options purchase common shares Corporation. fair value assumed Promatory stock options, using Black-Scholes valuation model, $14. maximum contingent consideration approximately $75, payable common shares Corporation, upon Promatory achieving certain business objectives. allocation purchase price included assumed tangible liabilities $10. acquired technology assets being charged earnings straight-line basis over three years purchased IPR&D assets were charged earnings period. Goodwill being amortized straight-line basis over three years. Clarify Inc. ("Clarify") global provider eBusiness front office solutions. connection with acquisition, Corporation issued approximately 31.7 million common shares Corporation assumed equivalent approximately million stock options purchase common shares Corporation. fair value assumed Clarify stock options, using Black-Scholes valuation model, $363. allocation purchase price included tangible assets $26. acquired technology assets being charged earnings straightline basis over years purchased IPR&D assets were charged earnings period. Goodwill being amortized straight-line basis over three years. Qtera Corporation ("Qtera") producer ultra-long-reach optical networking systems. connection with acquisition, Corporation issued approximately 28.2 million common shares Corporation, which approximately million common shares Corporation were issued into escrow related contingent consideration payable Corporation upon achievement Qtera certain business objectives. Corporation also assumed equivalent approximately million stock options purchase common shares Corporation million warrants convertible into common shares Corporation. fair values assumed Qtera stock options warrants, using Black-Scholes valuation model were $385 $78, respectively. These shares, stock options warrants exclude stock options warrants
(ii)
(iii)
that would assumed achievement certain business objectives. maximum contingent consideration approximately $500, payable common shares Corporation, assumed stock options assumed warrants, upon Qtera achieving certain business objectives. allocation purchase price included tangible assets $21. purchased IPR&D assets were charged earnings period goodwill being amortized straight-line basis over three years. (iv) Dimension Enterprises, Inc. ("Dimension") engineering business strategy consulting firm. closing, Corporation paid approximately cash Dimension. additional cash payable subject fulfillment Dimension certain business performance objectives 2002. allocation purchase price included tangible assets Goodwill being amortized straight-line basis over four years. Other Nortel Dasa Effective January 2000, Corporation increased ownership Nortel Dasa Network Systems GmbH ("Nortel Dasa"), joint venture with DaimlerChrysler Aerospace Germany, from percent joint control interest percent controlling interest. Effective January 2000, Corporation increased ownership Matra Nortel Communications ("MNC"), joint venture with Aerospatiale Matra France, from percent joint control interest percent controlling interest. Nortel Networks' acquisitions Promatory, Clarify, Qtera, Dimension collectively referred herein "First Quarter 2000 Acquisitions." Purchased in-process research development Purchased IPR&D charges related acquisitions companies that were accounted under purchase method, which portion purchase price allocated acquired in-process technology. Included purchase price allocations First Quarter 2000 Acquisitions aggregate amount purchased IPR&D $673. Independent valuations were performed assess allocate value purchased IPR&D. value allocated purchased IPR&D represented estimated fair value based risk-adjusted future cash flows generated from products that would result from each in-process projects. Estimated future after-tax cash flows each project, product product basis, were based Nortel Networks' estimates revenue less operating expenses, cash flow adjustments, income taxes, charges contributory assets. Future cash flows were also adjusted value contributed core technology development efforts that were completed post-acquisition. Revenues were estimated based relevant market size growth factors, expected industry trends, individual product sales cycles, estimated life each product's underlying technology, historical pricing. Estimated operating expenses include cost goods sold, selling, general administrative, expenses. estimated expenses include costs maintain products once they have been introduced into market generating revenues, costs complete purchased IPR&D. Operating expense estimates were consistent with historical margins expense levels similar products. discount rates used discount projected returns were based weighted average cost capital relative Nortel Networks high technology industry, well product-specific risk associated with purchased IPR&D products. Product-specific risk includes stage completion each project, complexity development work completed date, likelihood achieving technological feasibility, market acceptance.
forecast data employed analyses based upon both forecast information maintained target management Nortel Networks management's estimate future performance business. inputs used Nortel Networks analyzing purchased IPR&D were based upon assumptions that management believes reasonable which inherently uncertain unpredictable. These assumptions incomplete inaccurate, assurance given that unanticipated events circumstances will occur. Accordingly, actual results vary from forecasted results. While management believes that development projects will successfully completed, failure these projects achieve technological feasibility, and/or variance from forecasted results, result material adverse effect Nortel Networks' financial condition results operations. brief description purchased IPR&D projects related First Quarter 2000 Acquisitions forth below, including estimated percentage-of-completion products within each project their respective acquisition dates. Promatory Intelligent Multiservice Access System ("IMAS") suite products. IMAS broadband access platform which delivers business-class services accommodates varieties with direct integration into optical Internet backbone. Nortel Networks estimated that project 44.0 percent complete time acquisition, that would require approximately $2.3 complete project, that product revenues would begin during second quarter 2000. discount rate 21.0 percent employed analysis. Clarify FrontOffice Release 9.0. FrontOffice fully scalable Customer Relationship Management software product that allows companies effectively manage aspects customer relationship throughout customer lifecycle. FrontOffice allows companies automate integrate collection utilization customer information obtained from each point contact, including sales staff, call center representatives, field staff technical personnel. FrontOffice Release intended provide eBusiness initiatives that fully integrated with existing application modules. Nortel Networks estimated that project 59.0 percent complete time acquisition, that would require approximately $7.1 complete project, that product revenues initial release would begin during second quarter 2000. subsequent release, which percent complete time acquisition, will require approximately $6.9 complete, product revenues expected begin fourth quarter 2000. discount rate 22.0 percent employed analysis. Qtera Photonic Networking Systems. Photonic Networking Systems ultra-long-reach optical networking systems. These systems allow scalable optical Internet capabilities which enable high performance, rapid wavelength provisioning restoration, cost survivable bandwidth. Nortel Networks estimates that project 56.0 percent complete time acquisition, that would require approximately $15.8 complete project, that product revenues would begin 2000. discount rate 22.0 percent employed analysis. following updates projects from other acquisitions that were in-process March 2000: Periphonics VPS/is Version 6.x. Voice Processing Services Information Server ("VPS/is") scalable transaction processing system that configured both small very large installations. system allows caller access information organization's computer database through touch tone telephone, speech input Internet, receive information from that database form computer generated voice response. Version represents redesign existing VPS/is product, which will include reduced system
cost, higher density, more features, greater reliability, increased scalability. Completion this project been delayed product revenues expected begin during second half 2000. CallSPONSOR Version 4.x. CallSPONSOR Computer Telephony Integration server product that integrates more private branch exchange/automatic call distribution systems, Interactive Voice Response ("IVR") systems, desktop applications which allows call center agents utilize information already captured system. Version represents significant expansion available application modules, well re-write existing core modules. Specific modules under development include provision inter-switch routing, operator data recording, operator preview dialing. This project schedule product revenues expected begin first half 2000. PeriDirect. PeriDirect application designed financial services companies automate complex financial transactions. This product will work conjunction with VPS/is system. Features under development included: multi-channel access supporting advanced speech processing, Internet, facsimile, from single platform host connection; modular design; support multiple platforms technology. This project schedule product revenues expected begin first half 2000. Networks ultra high performance Internet protocol router, which directs traffic network, designed core next generation carrier service provider networks. This project completed first quarter 2000. modular wide area network edge router, which directs communications network, medium-scale branch office applications. This project completed first quarter 2000. next generation version Networks' Accelar product, comprised high performance, high density routing switch, technology that directs traffic network. Completion this project been delayed expected achieved second quarter 2000. MCNS, CMTS. Design standard based cable modem, which allows remote data communications, cable headend unit, which receives communications from cable modem, that comply with specification known Data Over Cable Service Interface Specification ("DOCSIS"). This project experienced delays completion cable modem product difficulties DOCSIS certification process. result, cable modem product project discontinued. cable headend unit completed second quarter 1999. Nortel Networks does specifically track revenues generated from in-process technology subsequent acquisitions. Nortel Networks' normal practice begin integration acquired businesses following closing transaction. This includes management responsibilities, financial reporting human resources. Furthermore, order Nortel Networks succeed highly competitive rapidly changing marketplace which operates, acquired assets must integrated quickly into Unified Networks solutions enhancements existing technology part larger platform.
Research development Three months ended March 2000 expense costs incurred behalf others*. Total. 1999
These costs include charged customers Nortel Networks pursuant contracts that provide full recovery estimated cost development, material, engineering, installation, other attracted costs, which accounted contract costs.
Special charges one-time costs Three months ended March 2000 Workforce reduction Contract settlement. Other. Total special charges Cumulative draw-downs Provision balance 2000 first quarter 2000, Corporation recorded special charges aggregating $195 relating restructuring other costs. same period, Corporation also recorded one-time costs Restructuring activities involved continued implementation Corporation's strategic resource realignment initiative, which approved begun fourth quarter 1999. additional restructuring activity involved termination employees MNC, subsidiary Corporation located France, result technological shifts within industry. One-time costs related inventory provisions associated with restructuring were recorded cost revenues. Workforce reduction This charge represented cost severance related benefits termination approximately 1,600 employees above noted restructuring activities. Workforce reduction costs approximately related approximately 1,500 employees, primarily located North America within SP&C Enterprise. remaining workforce reduction charge related approximately employees MNC, within Enterprise. (149)
Contract settlement charge reflects contract settlement costs computer equipment 1,600 employees impacted workforce reduction, penalties Corporation's withdrawal from certain trade events. Other This charge primarily represented reduction goodwill related MNC. Corporation changed business mandate from product focus which acquired, restructured business focus distribution channels. Status provision provision balance been drawn-down $149 resulting provision balance March 2000. remaining expenditures against this provision expected substantially completed December 2000. 1999 year ended December 1999, Corporation recorded special charges aggregating $160 relating restructuring costs one-time costs $49. Restructuring activities involved Corporation's exit Satellite time division multiple access small switch operations within SP&C, Consumer Products Open Speech operations within Enterprise. restructuring activities also involved consolidation Broadband Wireless Access operations, well streamlining SP&C manufacturing operations related Corporation's operations strategy announced January 1999. Also reflected 1999 restructuring costs were charges associated with Corporation's initiative realign resource investment into growth areas response industry shifts well create efficiencies within Corporation's existing organizations. This initiative impacted various organizations within SP&C Enterprise largely within North America including Mobility, Marketing Communications, Global Service Portfolio Networks organizations. Corporation also restructured, purposes outsourcing, corporate processes including portion payroll, accounts payable, training, resourcing functions. One-time costs included charge write-off remaining book value redundant materials inventory related Consumer Products operations SP&C operations were recorded cost revenues. One-time costs also included charge which recorded selling, general administrative expenses related Corporation's coverage obligation customer third party settlement patent infringement suit. Status provision Cumulative expenditures approximately have been applied against provision, resulting provision balance $116 March 2000. remainder drawdown expected substantially completed fourth quarter 2000.
1998 year ended December 1998, Corporation recorded special charges aggregating $313 relating restructuring costs one-time costs $134.
part streamlining activities, Corporation significantly downsized operations SP&C Enterprise including Global System Mobile Communications, Consumer Products, North American Terminals, Meridian organizations. Corporation also exited Fixed Wireless Access operations within SP&C, primarily located Paignton, United Kingdom. One-time costs included charge write-off remaining book value redundant components finished goods inventory which recorded cost revenues. One-time costs also included non-recurring charge write-down number Corporation's investments related Corporation's write-down investments joint ventures were recorded other income net. Status provision Cumulative expenditures approximately $447 have been applied against provision, resulting provision balance March 2000. Other income Other income net, totaled $543 three months ended March 2000 1999, respectively. Other income three months ended March 2000, primarily related pre-tax gain $513, sale Corporation portion share ownership Entrust Technologies Inc. Income taxes Excluding impacts Acquisition Related Costs certain one-time charges, Corporation's effective income rate 33.0 percent quarter, compared with 34.6 percent prior year quarter. This decrease Corporation's effective rate primarily change Corporation's geographic earnings. Global investment credits have been applied against income provision three months ended March 2000 1999, respectively. Earnings (loss) common share Basic loss common share calculated dividing loss applicable common shares weighted average number common shares outstanding during period. Diluted earnings (loss) common share calculated dividing income (loss) applicable common shares weighted average number common shares outstanding plus additional common shares that would have been outstanding potentially dilutive common shares been issued. quarters ended March 2000 1999, respectively, effect converting options redeemable preferred shares antidilutive. following table details weighted average number common shares outstanding three months ended March 2000 1999, respectively: Three months ended March 2000 Weighted average number common shares outstanding (millions) basic diluted. 1,405 1,484 1999 1,331 1,372
Comprehensive income (loss) Comprehensive income (loss) represents change assets Corporation during period from transactions other events circumstances from non-owner sources. three months ended March 2000 1999, comprehensive loss, tax, comprised Three months ended March 2000 loss applicable common shares Other comprehensive income (loss): Change foreign currency translation adjustment Change unrealized gain investments net* Comprehensive loss (730) (21) (622) 1999 (186) (128) (10) (324)
Certain securities deemed available-for-sale Corporation measured fair value. Unrealized holding gains losses related these securities excluded from earnings included comprehensive income (loss) until they realized.
Related party transactions ordinary course business, Nortel Networks engages transactions with certain equity-owned investees that under subject significant influence, with joint ventures Corporation, with BCE, owner approximately 37.2 percent Corporation's common shares March 2000, with entities which owned BCE. (Reference made description contained "Subsequent events" note below with respect Arrangement which became final 2000.) These transactions sales purchases goods services under usual trade terms measured their exchange amounts. Transactions with related parties summarized follows: Three months ended March 2000 Revenues. Purchases 1999
Inventories March 2000 materials Work process. Finished goods. 1,019 1,677 3,625 December 1999 1,308 2,823
Condensed consolidated statements cash flows Interest income taxes paid Three months ended March 2000 Income taxes paid. Interest paid 1999
Convertible securities March 2000, Nortel Networks outstanding total approximately 140,177,581 issued assumed stock options, including stock appreciation rights, convertible into common shares Corporation one-for-one basis. these stock options were assumed Nortel part Arrangement described "Subsequent events" note below. July 1994, Corporation issued Exchange Rights ("Exchange Rights") holders Cumulative Redeemable Class Preferred Shares Series ("Series Shares") without cost such holders. Exchange Rights entitle holders exchange each Exchange Right, together with Series Share, that number common shares determined dividing C$500,000 greater C$2.50 percent weighted average trading price common shares Toronto Stock Exchange trading days ending immediately preceding exchange date. Exchange Rights will force effect until occurrence consecutive unsuccessful auctions which there sufficient clearing bids determine dividend rate respect Series Shares. March 2000, Exchange Rights been exercised. Exchange Right value except connection with Series Share. part Arrangement described "Subsequent events" note below, rights obligations Corporation under Exchange Rights were amended provide that, exercise Exchange Right, holder Series Shares will entitled acquire from Corporation common shares Nortel specified terms conditions.
Commitments contingencies Commitments March 2000, Corporation announced signing definitive agreement whereby Corporation will acquire CoreTek, Inc. ("CoreTek"), pioneer strategic optical components. aggregate purchase price common shares CoreTek diluted basis approximately $1,430. Under terms agreement, estimated $1,066 will paid common shares Corporation diluted basis closing. additional $361 common shares Corporation will issued, subject CoreTek's fulfillment certain milestones. connection with Arrangement described "Subsequent events" note below, these obligations under agreement will assumed Nortel will relate common shares Nortel. acquisition subject certain customary regulatory, shareholder other approvals. acquisition expected close second quarter 2000. March 2000, Corporation announced signing definitive agreement whereby Corporation will acquire Xros, Inc. ("Xros"), developer second-generation, large-scale, fully photonic switching. aggregate purchase price common shares Xros diluted basis approximately $3,250, paid common shares Corporation. connection with Arrangement described "Subsequent events" note below, these obligations under agreement have been assumed Nortel
relate common shares Nortel. acquisition subject certain customary regulatory, court other approvals. acquisition expected close second quarter 2000. Contingencies October 1998, class action complaint filed United States District Court Southern District York, purportedly behalf certain former Networks securities holders, alleging that proxy statement/prospectus registration statement connection with merger Networks with subsidiary Corporation, well certain public statements made Corporation certain named officers, violated applicable securities laws containing materially false misleading statements omissions concerning Corporation's financial condition. additional class action complaints were filed same court November 1998, December 1998, alleging substantially similar claims. court granted plaintiffs' motion consolidate three actions February 1999. January 2000, court granted Corporation's motion dismiss plaintiffs' consolidated amended class action complaint closed case. plaintiffs' appeal, filed March 2000, formally withdrawn April 2000. March 1997, Networks announced that shareholders filed separate lawsuits United States District Court Northern District California (the "Federal Court") California Superior Court, County Santa Clara (the "California Court") against Networks Networks then current former officers directors, purportedly behalf class shareholders purchased Networks common shares during period 1995, through October 1996. Arguments connection with defendants' motion dismiss case before Federal Court were heard 2000 matter under submission. April 1997, second lawsuit filed California Court, purportedly behalf class shareholders acquired Networks common shares pursuant registration statement prospectus that became effective November 1995. actions California Court, were consolidated April 1998; however, California Court denied plaintiffs' motion class certification. January 2000, California Court Appeal rejected plaintiffs' appeal decision. petition review filed with California Supreme Court plaintiffs February 2000 under submission. June 1993, certain holders Corporation's securities commenced class action United States District Court Southern District York alleging that Corporation certain officers violated Securities Exchange 1934 common making material misstatements omitting state, material facts relating business operations prospects financial condition Corporation. January 2000, court heard arguments Corporation's motion summary judgment with respect claims case matter under submission. Nortel Networks also defendant various other suits, claims investigations that arise normal course business. Corporation unable ascertain ultimate aggregate amount monetary liability financial impact these matters therefore cannot determine whether these actions will, individually collectively, have material adverse impact consolidated financial position results operations Corporation. Unless otherwise noted, Corporation named directors officers intend vigorously defend these actions. Recent pronouncements June 1998, FASB issued Statement Financial Accounting Standards ("SFAS") 133, "Accounting Derivative Instruments Hedging Activities" ("SFAS 133"), which establishes accounting reporting standards derivative financial instruments hedging activities. SFAS will require Nortel Networks measure derivatives fair value recognize them balance sheet asset liability, depending Nortel Networks' rights obligations under applicable derivative contract.
standard becomes effective Nortel Networks January 2001. Corporation continues evaluate potential impact standard. Subsequent events Effective 2000, Corporation (also referred herein "Old Nortel") participated courtapproved plan arrangement with (the "Arrangement") under Canadian law. result Arrangement, Nortel subsidiaries became direct indirect subsidiaries, respectively, newly formed Canadian corporation ("New Nortel"). Arrangement, outstanding common shares Nortel were exchanged common shares Nortel. Prior Arrangement, approximately percent outstanding common shares Nortel were held BCE. substantial portion Nortel common shares issuable respect BCE's interest Nortel was, through Arrangement, indirectly distributed shareholders. aggregate number Nortel common shares issued Arrangement same aggregate number Nortel common shares outstanding immediately prior Arrangement (excluding effects exercise dissenters' rights reservation certain shares issuance pursuant stock option plans). consolidated assets liabilities Nortel subsidiaries immediately after Arrangement were same those Nortel subsidiaries immediately prior Arrangement (except differences attributable accounting treatment accorded outstanding preferred shares Nortel). business operations conducted Nortel subsidiaries prior effectiveness Arrangement continue conducted Nortel subsidiaries subsidiaries Nortel. Nortel assumed name "Nortel Networks Corporation," Nortel common shares trade publicly York Toronto stock exchanges under symbol "NT." Nortel been renamed "Nortel Networks Limited," percent common shares owned Nortel. preferred stock debt securities Nortel outstanding immediately prior Arrangement remain outstanding continue obligations Nortel. part Arrangement, Nortel implemented two-for-one stock split with respect common shares (the "New Nortel Stock Split"). record date determining Nortel Networks shareholders entitled receive certificates representing Nortel common shares issuable Arrangement, post-split basis, 2000. Certificates that represented common shares Nortel prior Arrangement will exchanged deemed represent same number common shares Nortel. following table details effect Nortel Stock Split conjunction with Arrangement forma basis: Three months ended March 2000 forma information reflecting impact Nortel Stock Split conjunction with Arrangement: Loss common share Dividends declared common share. Weighted average number common shares outstanding (millions): basic diluted 1999
(.26) .0188
(.07) .0188
2,811 2,967
2,663 2,743
Nortel successor Nortel various purposes under Securities Exchange 1934 (the "Exchange Act"), assumed Nortel's Commission File Number (1-7260). Nortel will file reports under Exchange beginning with this Quarterly Report Form 10-Q period ended March 2000. Nortel will also reporting company under Exchange Act, filed registration statement Form order obtain Commission File Number (3-0758). Nortel will also file Quarterly Report Form 10-Q period ended March 2000. Also effective 2000, upon effectiveness Arrangement, Nortel adopted shareholders rights plan (the "Rights Plan"), pursuant Shareholder Rights Plan Agreement dated March 2000, between Nortel Montreal Trust Company Canada Rights Agent. right "Right") been issued Nortel respect each Nortel common share outstanding 2000 record date, after giving effect Nortel Stock Split, respect each Nortel common share issued thereafter, until occurrence certain events associated with unsolicited take-over specified Rights Plan. Until such time, Rights will evidenced certificates representing Nortel common shares will transferable only together with associated common shares. Each Right will, such time any) becomes exercisable pursuant Rights Plan, entitle holder purchase number Nortel common shares exercise price specified Rights Plan. more complete description Rights Plan contained Nortel's amended registration statement Form 8-A/A filed with United States Securities Exchange Commission 2000. April 2000, Corporation announced signing definitive agreement whereby Corporation will acquire Architel Systems Corporation ("Architel"), global leader software systems that allow service providers provide Internet other next-generation services. Under terms agreement, Architel shareholders will, subject certain conditions, receive 0.21 common share Corporation each Architel common share (subject adjustment reflect Nortel Stock Split). Based closing price $108.75 common share Corporation April 2000, this represents price $22.84 common share Architel aggregate purchase price approximately $395 common shares Architel diluted basis. closing, however, value Nortel Networks common shares below $83.81 common share, Nortel Networks will $17.60 Nortel Networks common shares each share Architel, diluted basis. value Nortel Networks common shares above $125.71 common share, Nortel Networks will $26.40 Nortel Networks common shares each Architel share, diluted basis. Boards Directors Corporation Architel have approved transaction. connection with Arrangement described above, these obligations under agreement will assumed Nortel will relate common shares Nortel. acquisition subject certain customary regulatory other approvals, including court approval approval Architel's shareholders. transaction fails proceed certain circumstances, Nortel Networks will entitled receive either termination benefits option acquire 19.9 percent common share interest Architel. acquisition expected close third quarter 2000. April 2000, Nortel Networks announced agreement divest outsource specific operations North America Asia Solectron Corporation ("Solectron"), electronics manufacturing services company offering full range integrated supply-chain solutions. companies also discussing divestiture outsourcing certain manufacturing repair operations Europe. conclusion proposed North American, Asian European transactions will represent fulfillment Nortel Networks' strategy, originally announced January 1999, simplify streamline Corporation's businesses operations processes better meet rapidly changing needs values customers worldwide, move from vertically integrated company virtually integrated company. transactions subject customary conditions, regulatory approvals applicable European consultation processes. transactions expected close North America second quarter 2000; Europe second quarter beginning third quarter 2000; Turkey third quarter 2000.
Comparative figures Certain comparative figures consolidated financial statements have been reclassified conform with current period's presentation.
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Attached hereto Exhibit incorporated herein reference certain portions 2000 First Quarter Report mailed shareholders Nortel Networks Corporation Nortel Networks Limited, including Consolidated Financial Statements (unaudited) Nortel Networks Limited three months ended March 2000, selected notes thereto, prepared accordance with Canadian generally accepted accounting principles ("GAAP"). (See Explanatory Note Quarterly Report From 10Q). Also contained Exhibit incorporated herein reference certain additional information contained 2000 First Quarter Report included therein purposes incorporation reference into Part this Quarterly Report Form 10-Q accordance with applicable United States securities regulations, including certain additional notes Nortel Networks Limited financial statements contained 2000 First Quarter Report Management's Discussion Analysis Financial Condition Results Operations relating financial statements prepared accordance with Canadian GAAP.

Financial Statements (unaudited) Contents Consolidated Financial State

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