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Nortel's Numbers: A No-Show -- Again

By Roger O. Crockett Is more trouble lurking inside Nortel Networks (NT)? On Sept. 2, the Canadian telecom-equipment giant hit Wall Street with yet another surprising and disappointing development, warning that it will need an additional month to complete its audit and file restated financials.

Nortel said in a statement that "the volume and complexity of the work involved" in the cleaning up and restating of its financials means it will miss its Sept. 30 filing deadline for 2003 and the first half of 2004. Nortel now expects to will complete the work by the end of October. The outfit stresses that this is a paperwork issue and that although it's disappointed to have missed a deadline, it wants to make sure that it conducts its restatements thoroughly and accurately.

NO ASSURANCES. Still, those assurances may not prevent further troubles for the limping Nortel, which has promised to restate results going back to 2001 after an accounting scandal that led to criminal investigation by the Royal Canadian Mounted Police and the U.S. Attorney's office in Dallas. It also faces civil probes by the U.S. Securities & Exchange Commission and the Ontario Securities Commission.

The latest filing delay puts Nortel in violation of an important lending agreement. Export Development Canada (EDC), which had extended Nortel a $750 million line of credit, had previously granted it a waiver allowing the concern to file its financials with the SEC on Sept. 30. Now that Nortel will miss that deadline, the crucial credit facility is in jeopardy.

Many think it's unlikely a Canadian creditor would close the door on such an important company in the country. And investors don't seem worried. They dragged Nortel shares down by less than 1%, to $3.77, on Sept. 2 (the stock closed at $3.83). But even Nortel acknowledges that it has no assurances the EDC will grant yet another waiver.

BONDHOLDER REVOLT? A Nortel spokeswoman says the outfit is in discussions with the EDC but declined to comment on the possibility of default triggered by the EDC or bondholders. She said Nortel has yet to receive any calls from concerned bondholders.

If Nortel did slip into credit default, bondholders could revolt. And indeed, they have the power to determine its fate. With 25% of the holders of a particular bond in agreement, they can trigger a notice of default, launching a 90-day period during which Nortel must produce its financial reports -- perhaps sooner than it's prepared to. The new target date is sometime in October, but skepticism is in order. Nortel says it may apply to the Ontario Superior Court of Justice for an extension to hold its 2004 annual meeting after the end of the year, if necessary.

Still, Nortel CEO Bill Owens suggests that investors have little cause for worry. He told Wall Street in a press release: "Notwithstanding the delay in the expected filing of our financial statements, we have made substantial progress to date and continue to dedicate all necessary resources and work closely with our external auditors to complete the financial statements as soon as possible in October."

SERIES OF SCARES. Investors are giving him the benefit of the doubt this time. But Nortel's credibility will suffer substantially if it gives them another scare around Halloween. They've certainly had their share of frights already this year. In August, Owens announced a several-step restructuring in the neighborhood of $400 million, including the dismissal of seven executives. Nortel had previously showed former CEO Frank Dunn and other senior execs the door. And falling revenues have forced the concern to cut the workforce down to about 30,000, from its heyday levels of 100,000.

Analysts say Nortel's telecom products are still in demand, but until it can move more quickly to put this ugly accounting scandal behind it, the company's reputation and revenues could continue to suffer. Crockett is BusinessWeek's deputy bureau chief in Chicago

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