March 11, 2004 11:51 AM PST

Nortel hits accounting snag

Just as telecom giant Nortel Networks seemed to be back on its feet, it has hit another bump in the road.

Late on Wednesday, the company announced that it will delay filing its 2003 annual report with the Securities and Exchange Commission as it continues an internal review of its accounting. Last October, Nortel announced that it was reviewing its financials from previous quarters. The company has already restated earnings from 2000, 2001 and 2002, along with figures for the first two quarters of 2003.

The latest restatements actually narrowed losses for the years 2000 through 2002, and resulted in a profit for the second quarter of 2003 rather than a loss. However, the first-quarter 2003 profit was revised downward to $11 million from $54 million.

Nortel's internal auditors began looking into the company's finances after it was discovered that roughly $900 million in liabilities had been either recorded incorrectly in prior periods or had not been properly released in the appropriate periods.

Nortel said that re-examined results from previous periods could have an impact on results for the fourth quarter of 2003. As a result, the company will likely revise the unaudited results it reported for the year ended Dec. 31, 2003.

The company didn't give a time frame for when it expects these audits to be complete.

If the delay extends beyond March 30, Nortel will not be in compliance with some of its debt obligations, which require it to deliver SEC filings to relevant parties by a certain date. Currently, Nortel has about $3.6 billion in debt, which includes approximately $1.8 billion in notes held by its operating unit, Nortel Networks Limited, and $1.8 billion in convertible debt securities. Even if debt holders call in their loans, Nortel will still have a grace period before payments are due.

If Nortel is unable to meet its payment obligations, it will seek alternative financing sources, according to the company.

Steven Levy, an analyst with Lehman Brothers, said in a research note that he isn't worried that Nortel could default on its loans. But, he said, the situation could affect the company's ability to get access to credit.

Standard & Poor's Ratings Services said recently it has delayed upgrading Nortel's debt rating because of the ongoing accounting review.

The news of more restatements comes at a time when Nortel appeared to be making a comeback. The company had reported better-than-expected fourth-quarter earnings and finally returned to profitability. It also reported strong growth in new technology areas, such as wireless and voice over Internet Protocol. It said it expects more growth in emerging markets such as China.

 

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