Document:

exv10w74

 

Exhibit 10.74

CONFIDENTIAL-SPECIAL HANDLING

October 4, 2007

To: David Drinkwater

From Mike Zafirovski

Subject: Special Bonus

Dear David:

In
recognition of your appointment as Chief Financial Officer for the
period from May 1, 2007 through November 11, 2007, I am pleased to inform you that
the Compensation and Human Resources Committee has approved a special bonus of
CDN$100,000 for you.

This bonus
will be paid to you in the first quarter of 2008 at the same time as the bonus payment under
Nortel Networks Limited Annual Incentive Plan (AIP Plan). If no 2007 bonus payment is made under
the AIP Plan, this bonus will be paid on or before March 28, 2008.

I want to personally thank you for your continued leadership to both the Finance and
Legal organizations.

	 	 	 	 	 
	Sincerely,

 	 	 
	/s/ Mike Zafirovski
 	 	 
	Mike Zafirovski 	 	 
	President and Chief Executive Officer 	 	 
	 

Mike Zafirovski

President and Chief Executive Officer

Nortel

195 The West Mall, Toronto, ON M9C 5K1 T 905-863-1101
mikez@nortel.comexv10w75

 

Exhibit 10.75

July 5, 2006

Nortel Networks Corporation

Nortel Networks Inc.

8200 Dixie Road, Suite 100

Brampton, Ontario, L6T 5P6

Canada

Re: Pay-Off Letter for Nortel Networks Inc.

Ladies and Gentlemen:

     Reference is hereby made to the credit agreement dated as of February 14, 2006 (as amended,
restated, modified or supplemented from time to time, the (“Credit Agreement”) among Nortel
Networks Inc. (“Borrower”), the Lenders party thereto, JPMorgan Chase Bank, N.A., as administrative
agent (the “Agent”), J.P. Morgan Securities Inc. and Citigroup Global Markets Inc., as joint lead
arrangers, Citicorp USA, Inc. as syndication agent, Royal Bank of Canada, as documentation agent
and Export Development Canada, as managing agent. Terms used in that pay-off letter (this “Pay-Off
Letter”) but not defined herein have the meanings assigned to such terms in the Credit Agreement.

     Borrower has advised the Lenders that is intends to prepay all amounts outstanding under the
Credit Agreement and terminate its obligations under the Credit Agreement and the other Loan
Documents, which will result in the release of the Liens granted to the Collateral Agent on the
Collateral pursuant to the Security Documents under the terms of such Security Documents.

     The total amount necessary to pay, on the date hereof, the outstanding indebtedness and all
other liabilities (other than (i) liabilities that by the terms of the Loan Documents survive the
repayment of the Loans and (ii) any reimbursement obligations referred to in the following
paragraph) owing by Borrower under the Credit Agreement and the Loans (such indebtedness and other
liabilities, the “Liabilities”) is calculated as follows:

     (a)  The aggregate outstanding principal amount of the Tranche A Loans as of the date hereof is $850,000,000, plus

     (b)  The aggregate amount of accrued and unpaid interest on the Tranche A Loans as of the
date hereof is $1,044,791.67, plus

     (c)  The aggregate outstanding principal amount of the Tranche B Loans as of the date hereof
is $450,000,000, plus

 

 

     (d)  The aggregate amount of accrued and unpaid interest on the Tranche B Loans as of the
date hereof is $646,875, plus

     (e)  The aggregate amount of accrued and unpaid legal fees, as of the date hereof, of
Cahill Gordon & Reindel LLP (“Cahill”), counsel to the Agent, with respect to the
Credit Agreement is $246,317.96, an invoice for which has been presented to the Borrower,
plus

     (f)  The aggregate amount of accrual and unpaid work in progress, and unpaid legal fees, as
of the date hereof, of Blake, Cassels & Graydon LLP (“Blakes”), Canadian counsel to the
Agent, with respect to the Credit Agreement, is Cdn. $43,933.75, an invoice for which has
been presented to the Borrower.

The sum of the foregoing clauses (a) through (f) is USD$1,301,937,984.63, and Cdn.$43,933.75,
which, taken together, are referred to herein as the “Pay-Off Amount”.

     The Borrower acknowledges and agrees that its obligations and liabilities under the Credit
Agreement and the other Loan Documents shall be reinstated with full force and effect, if at any
time on or after the payment of the Pay-Off Amount, all or any portion of the Pay-Off Amount paid
in connection herewith is voided or rescinded or must otherwise be returned to the Borrower
upon the Borrower’s insolvency, bankruptcy or reorganization or otherwise, all as though such
payment had not been made.

     Except as set forth below, payment of the Pay-Off Amount shall be made pursuant to Section
2.11(b) of the Credit Agreement, no later than 12:00 p.m., noon (New York City time), on July 5,
2006, by the Borrower to the Agent by wire transfer of immediately
available funds in U.S. dollars
to the following account:

JP
Morgan Chase Bank, N.A.

ABA #021000021

Account No. #304631736

Account Name: Nortel

Attn: Maryann Bui

     All amounts owed to Cahill should be made to Cahill by a wire transfer of immediately
available funds directed as follows:

Cahill Gordon & Reindel LLP

c/o HSBC Bank

100 Maiden Lane

New York, New York 10005

Account Name: Cahill Gordon & Reindel LLP

Account No.: 015-70965-5

ABA No.: 021001088

Reference: 57310.672

-2-

 

     All amounts owed to Blakes should be made to Blakes by a wire transfer of immediately
available funds directed as follows:

Blake, Cassels & Graydon LLP

Canadian Imperial Bank of Commerce

Main Branch, Commerce Court West

Toronto, Ontario M5L 1A2

Transit No. 00002

Swiftcode: CIBCCATT

Beneficiary: Blake Cassels & Graydon LLP, in Trust

Account No. 000021602314

Reference: FPA55795/24

     The Agent hereby certifies and confirms to Borrower that upon payment of the Pay-off Amount in
the manner set forth above by no later than 12:00 p.m., noon (New York City time), on July 5, 2006,
(i) the Liabilities shall be repaid in full, (ii) the Collateral Agent’s security interest in and
liens on all the Collateral shall be automatically terminated and released, (iii) the Agent will
execute and deliver to the Borrower any and all documents as Borrower reasonably requests in order
to evidence or otherwise give public notice of such terminations and releases (provided that any
and all reasonable expenses relating to the preparation, execution, delivery and/or recordation of
any such terminations and releases (and all documentation with respect thereto) shall be paid by
Borrower), (iv) the Agent will promptly return to the Borrower any and all certificated securities,
instruments and other possessory collateral (together with any related stock powers or instruments
of endorsement) previously delivered to the Agent by any Credit Party, and (v) the Credit Parties
shall be fully authorized to file any and all Uniform Commercial Code financing termination
statements, PPSA termination statements, Requisitions d’inscription d’une radiation volontaire,
intellectual property filings and any other termination statements or other filings as it may
reasonably deem necessary in order to terminate any Uniform Commercial Code financing statements,
PPSA registrations, Quebec Register of Personal and Moveable Real Rights registrations,
intellectual property filings or other filings or registrations on record in any jurisdiction that identify the
Collateral Agent as the secured party and any Credit Party as the debtor under the Security
Documents.

-3-

 

     This Pay-Off Letter is hereby delivered by the undersigned on the date first written above.

	 	 	 	 	 
	 	JPMORGAN CHASE BANK, N.A.

 

 	 
	 	By:  	
/s/  David M. Mallen
 	 
	 	 	Name:  	David M. Mallen 	 
	 	 	Title:  	Vice President 	 
	 

Acknowledged and agreed

as of the date first written above

NORTEL NETWORKS INC.

	 	 	 	 	 
	 	 
	By:  	                              /s/  Allen K. Stout
 	 
	 	Name:  	Allen K. Stout 	 
	 	Title:  	Vice President, Finance 	 
	 

Pay-Off Letterexv10w76

 

Exhibit 10.76

UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF NEW YORK

	 	 	 	 
	 
	 	 
	 
	 	 	 
	SECURITIES AND EXCHANGE 

COMMISSION,
	 	 	 
	 
	 	 	 
	Plaintiff,
	 	 	 
	 
	 	 	 
	v.

	 	 	Civil Action No.
	 
	 	 	 
	NORTEL NETWORKS CORPORATION and

NORTEL NETWORKS LIMITED,
	 	 	 
	 
	 	 	 
	Defendants.
	 	 	 
	 
	 	 	 
	 
	 	 	 

CONSENT OF DEFENDANTS NORTEL NETWORKS

CORPORATION AND NORTEL NETWORKS LIMITED

     1. Defendants Nortel Networks Corporation and Nortel Networks Limited (“Defendants”) waive
service of a summons and the Complaint in this action, enter a general appearance, and admit the
Court’s jurisdiction over Defendants and over the subject matter of this action.

     2. Without admitting or denying the allegations of the complaint (except as to personal and
subject matter jurisdiction, which Defendants admit), Defendants hereby consent to the entry of the
Final Judgment as to Defendants Nortel Networks Corporation and Nortel Networks Limited in the form
attached hereto (the “Final Judgment”) and incorporated by reference herein, which, among other
things:

	 	(a)	 	permanently restrains and enjoins Defendants from violation of
Section 17(a) of the Securities Act of 1933 (the “Securities Act”) [15 U.S.C.
§77q(a)], Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B) and 13(b)(5) of the
Securities Exchange Act of 1934 (the “Exchange Act”) [15 U.S.C. §§

 

 

	 	 	 	78j(b), 78m(a), 78m(b)(2)(A), 78m(b)(2)(B) and 78m(b)(5)], and Exchange Act
Rules 10b-5, 12b-20, 13a-1 and 13a-13 [17 C.F.R. §§ 240.10b-5, 240.12b-20,
240.13a-1 and 240.13a-13];
	 
	 	(b)	 	orders Defendant Nortel Networks Corporation to pay
disgorgement in the amount of $1;
	 
	 	(c)	 	orders Defendant Nortel Networks Corporation to pay a civil
penalty in the amount of $35,000,000 under Section 20(d) of the Securities Act
and Section 21(d)(3) of the Exchange Act [15 U.S.C. 15 §§ 77t(d) and
78u(d)(3)]; and
	 
	 	(d)	 	orders Defendants to perform the undertakings identified in
Paragraph 5 below.

     3. Defendants acknowledge that the civil penalty paid pursuant to the Final Judgment may be
distributed pursuant to the Fair Fund provisions of Section 308(a) of the Sarbanes-Oxley Act of
2002. Defendant Nortel Networks Corporation agrees to pay all costs incurred under any plan
resulting from the distribution or payment of the $35,000,001 disgorgement and civil penalty, and
there will be no deduction from the Fund for those costs. Regardless of whether any such Fair Fund
distribution is made, the civil penalty shall be treated as a penalty paid to the government for
all purposes, including all tax purposes. To preserve the deterrent effect of the civil penalty,
Defendants agree that they shall not, after offset or reduction or any award of compensatory
damages in any Related Investor Action based on Defendant Nortel Networks Corporation’s payment of
disgorgement in this action, argue that they are entitled to, nor shall they further benefit by,
offset or reduction of such compensatory damages award by the amount of any part of Defendant
Nortel Networks Corporation’s payment of a civil

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penalty in this action (“Penalty Offset”). If the court in any Related Investor Action grants
such a Penalty Offset, Defendants agree that they shall, within 30 days after entry of a final
order granting the Penalty Offset, notify the Commission’s counsel in this action, and Defendant
Nortel Networks Corporation shall pay the amount of the Penalty Offset to the United States
Treasury or to a Fair Fund, as the Commission directs. Such a payment shall not be deemed an
additional civil penalty and shall not be deemed to change the amount of the civil penalty imposed
in this action. For purposes of this paragraph, a “Related Investor Action” means a private
damages action brought against Nortel Networks Corporation and/or Nortel Networks Limited by or on
behalf of one or more investors based on substantially the same facts as alleged in the complaint
in this action.

     4. Defendants agree that they shall not seek or accept, directly or indirectly, reimbursement
or indemnification from any source, including but not limited to payment made pursuant to any
insurance policy, with regard to any civil penalty amounts that Defendant Nortel Networks
Corporation pays pursuant to the Final Judgment, regardless of whether such penalty amounts or any
part thereof are added to a distribution fund or otherwise used for the benefit of investors.
Defendants further agree that they shall not claim, assert, or apply for a tax deduction or tax
credit with regard to any federal, state, or local tax for any penalty amounts that Defendant
Nortel Networks Corporation pays pursuant to the Final Judgment, regardless of whether such penalty
amounts or any part thereof are added to a distribution fund or otherwise used for the benefit of
investors.

3

 

     5. Defendants agree to and shall perform the following undertakings:

          (a) Within 15 days of the entry of the Final Judgment, Defendants shall provide the
Commission’s counsel in this action with a written report detailing what steps need to be taken, as
of the close of Defendants’ second quarter 2007, to complete the remediation plan attached as
Exhibit A to this Consent. Defendants shall continue to provide such reports to the Commission’s
counsel in this action, within 30 days of the filing of each Form 10-K or 10-Q, until the
remediation plan has been fully implemented.

          (b) Within 15 days of the entry of the Final Judgment, Defendants shall provide the
Commission’s counsel in this action with a written report detailing what steps need to be taken, as
of the close of Defendants’ second quarter 2007, to address and/or resolve the material weakness
identified in Defendants’ 2006 Forms 10-K. Defendants shall continue to provide such reports to
the Commission’s counsel in this action, within 30 days of the filing of each Form 10-K or 10-Q,
until Defendants conclude that the material weakness identified in Defendants’ 2006 Forms 10-K has
been resolved and no longer exists and Defendants’ outside auditor (currently KPMG LLP) attests or
agrees with management’s conclusion that the material weakness no longer exists.

          (c) Upon reasonable notice, Defendants agree to make their representatives available
(including, where appropriate, their Chief Financial Officer, their Controller, their Chief
Compliance Officer and/or the Chair of Defendants’ Audit Committees) to meet with the Commission’s
staff to discuss and answer any questions raised by any of the reports.

          (d) Defendants’ Chief Compliance Officer shall provide the Commission’s counsel in this action
with written certifications of completion 45 days after Defendants have: (i) completed the
implementation of the remediation plan attached as Exhibit A to this Consent; and

4

 

(ii) concluded that the material weakness identified in their 2006 Forms 10-K has been
resolved and no longer exists, and that conclusion has been attested or agreed to by Defendants’
outside auditor. The certifications shall be countersigned by Defendants’ Chief Executive Officer.
The certifications shall provide written evidence of completion in the form of a narrative
supported by exhibits sufficient to establish completion. The Commission staff may request such
further evidence of completion as is reasonable, and Defendants agree to provide such evidence.

     6. Defendants waive the entry of findings of fact and conclusions of law pursuant to Rule 52
of the Federal Rules of Civil Procedure.

     7. Defendants waive the right, if any, to a jury trial and to appeal from the entry of the
Final Judgment.

     8. Defendants enter into this Consent voluntarily and represent that no threats, offers,
promises, or inducements of any kind have been made by the Commission or any member, officer,
employee, agent, or representative of the Commission to induce Defendants to enter into this
Consent.

     9. Defendants agree that this Consent shall be incorporated into the Final Judgement with the
same force and effect as if fully set forth therein.

     10. Defendants will not oppose the enforcement of the Final Judgment on the ground, if any
exists, that it fails to comply with Rule 65(d) of the Federal Rules of Civil Procedure, and hereby
waives any objection based thereon.

5

 

     11. Defendants waive service of the Final Judgment and agree that entry of the Final Judgment
by the Court and filing with the Clerk of the Court will constitute notice to Defendants of its
terms and conditions. Defendants further agree to provide counsel for the Commission, within
thirty days after the Final Judgment is filed with the Clerk of the Court, with an affidavit or
declaration stating that Defendants have received and read a copy of the Final Judgment.

     12. Consistent with 17 C.F.R. § 202.5(f), this Consent resolves only the claims asserted
against Defendants in this civil proceeding. Defendants acknowledge that no promise or
representation has been made by the Commission or any member, officer, employee, agent, or
representative of the Commission with regard to any criminal liability that may have arisen or may
arise from the facts underlying this action or immunity from any such criminal liability.
Defendants waive any claim of Double Jeopardy based upon the settlement of this proceeding,
including the imposition of any remedy or civil penalty herein. Defendants further acknowledge
that the Court’s entry of a permanent injunction may have collateral consequences under federal or
state law and the rules and regulations of self-regulatory organizations, licensing boards, and
other regulatory organizations. Such collateral consequences include, but are not limited to, a
statutory disqualification with respect to membership or participation in, or association with a
member of, a self-regulatory organization. This statutory disqualification has consequences that
are separate from any sanction imposed in an administrative proceeding. In addition, in any
disciplinary proceeding before the Commission based on the entry of the injunction in this action,
Defendants understand that they shall not be permitted to contest the factual allegations of the
Complaint in this action.

     13. Defendants understand and agree to comply with the Commission’s policy “not to permit a
defendant or respondent to consent to a judgment or order that imposes a sanction while

6

 

denying the allegation in the complaint or order for proceedings.” 17 C.F.R. § 202.5. In
compliance with this policy, Defendants agree: (i) not to take any action or to make or permit to
be made any public statement denying, directly or indirectly, any allegation in the complaint or
creating the impression that the complaint is without factual basis; and (ii) that upon the filing
of this Consent, Defendants hereby withdraw any papers filed in this action to the extent that they
deny any allegation in the complaint. If Defendants breach this agreement, the Commission may
petition the Court to vacate the Final Judgment and restore this action to its active docket.
Nothing in this paragraph affects Defendants’: (i) testimonial obligations; or (ii) right to take
legal or factual positions in litigation or other legal proceedings in which the Commission is not
a party.

     14. Defendants hereby waive any rights under the Equal Access to Justice Act, the Small
Business Regulatory Enforcement Fairness Act of 1996, or any other provision of law to seek from
the United States, or any agency, or any official of the United States acting in his or her
official capacity, directly or indirectly, reimbursement of attorney’s fees or other fees,
expenses, or costs expended by Defendants to defend against this action. For these purposes,
Defendants agree that they are not the prevailing parties in this action since the parties have
reached a good faith settlement.

     15. Defendants agree that they will cooperate fully with the Commission in any and all
investigations, litigation, or other proceedings relating to or arising from the subject matter of the complaint in this action and the Commission’s investigation of the facts and
circumstances which resulted in the Commission’s bringing this action and complaint, by undertaking
to do the following:

7

 

          (a) Appear and be interviewed by (and use their best efforts to encourage their executives,
officers, directors, and/or employees to appear and be interviewed by) the Commission’s staff at
such times and places as the staff requests upon reasonable notice;

          (b) Agree to accept service by regular or overnight mail or electronic transmission (including
email) any notices or subpoenas issued by the Commission for documents or testimony at depositions,
hearings, or trials, or in connection with any related investigation
by Commission staff;

          (c) Appoint Defendants’ undersigned attorney as agent to receive service of such notices and
subpoenas;

          (d) Agree, with respect to such notices and subpoenas, to waive the territorial limits on
service contained in Rule 45 of the Federal Rules of Civil Procedure and any applicable local
rules, and in the Hague Convention on Taking of evidence Abroad in Civil or Commercial Matters; and

          (f) Consent to personal jurisdiction over Defendants in any United States District Court for
purposes of enforcing any such subpoena.

     16. Defendants agree that the Commission may present the Final Judgment to the Court for
signature and entry without further notice.

8

 

     17. Defendants agree that this Court shall retain jurisdiction over this matter for the
purpose of enforcing the terms of the Final Judgment.

	 	 	 	 	 	 	 	 	 
	 	 	NORTEL NETWORKS CORPORATION and

NORTEL NETWORKS LIMITED	 	 
	 
	 	 	 	 	 	 	 	 
	Dated: September 28, 2007

	 	By:
	 	/s/ Gordon A. Davies	 	 	 	 
	 	 	 	 	 	 	 
	 	 	[Name, Title and Address]	 	Gordon A. Davies,
	 	 	 	 	 	 	Chief Legal Officer and Corporate Secretary
	 	 	 	 	 	 	195 The West Mall, Toronto Ontario M9C 5K1

On September 28, 2007, Gordon A. Davies, a person known to me, personally
appeared before me and acknowledged executing the foregoing Consent with full authority to do so on
behalf of Nortel Networks Corporation and Nortel Networks Limited as its Chief Legal
Officer and Corporate Secretary.

	 	 	 	 	 
	 	 	 
	 	/s/  Anna Ventresca 	 
	 	Notary Public 	 
	 	Commission expires:      N/A 	 
	 

Approved as to form:

/s/ William R. McLucas

William R. McLucas

Wilmer Cutler Pickering
   Hale
and Dorr LLP

1875 Pennsylvania Avenue, NW

Washington, DC 20006

Counsel for Defendants
   Nortel
Networks Corporation and
   Nortel
Networks Limited

9

 

A - 1

EXHIBIT A

REMEDIATION PLAN REFERRED TO IN PARAGRAPH 5(a) OF THE CONSENT OF NORTEL NETWORKS CORPORATION AND
NORTEL NETWORKS LIMITED

	 	People:
	 
	 	(i)	 	New executive management has communicated, in multiple ways, consistently and
frequently, its expectation to Nortel employees that all employees will be held
accountable for their conduct. In connection with the inappropriate provisioning and
revenue recognition practices identified by the independent inquiries, appropriate
disciplinary sanctions were developed by management based on the individual conduct and
knowledge of employees that were involved in these practices. After evaluating
individual conduct and knowledge, management has taken further employee disciplinary
actions in 2006.
	 
	 	(ii)	 	Recognizing that Nortel needed to “turn a new page” with new operational
leaders, in November 2005 the four individuals who headed the business units in 2002
and 2003 and the individual who headed Nortel’s Global Operations unit during the same
period left the Company.
	 
	 	(iii)	 	Management has made significant progress in upgrading the skill sets and
experience of the Company’s Finance organization, both through external hires and
through remedial and on-going training of current employees, and including the
establishment of a new senior Finance management team and appointment of a Controller
with extensive experience in U.S. GAAP. From January 1, 2004 to December 31, 2006, the
Company filled 673 positions with external hires (476 in Control and 197 in Financial
Planning & Analysis (“FP&A”)), of which 168 (142 in Control and 26 in FP&A) are
certified public accountants. In 2005, the CFO reviewed the job requirements of every
vacancy and new position in the Finance organization to ensure that candidates would
have the appropriate skill sets, experience and professional designations for each such
position. Starting in 2006, Finance leaders are required to review and approve the job
requirements of every
vacancy and new position. As well, the Finance organization has supplemented its
capacity by retaining outside experts on a temporary or project basis.

 

A - 2

	 	(iv)	 	Through its Global Finance Training and Communications (“GFTC”) group, which
reports to the Assistant Controller, Nortel has developed and offered (on a mandatory
basis for targeted employee populations in 2006) remedial and ongoing training in areas
of financial accounting that were found to be problematic in the restatements,
including provisions and accruals, revenue recognition, foreign exchange and finance
ethics. These training programs include the following:

	 	–	 	since 2004, a one-day mandatory training program for Finance employees
related to provisioning focusing on SFAS No. 5 and expense accruals under U.S.
GAAP. As of December 31, 2006, 1,373 Finance employees (representing
approximately 89% of the 1,539 Finance personnel designated to take this
mandatory training) have successfully completed the course.
	 
	 	–	 	implemented in 2006, a supplemental training session on provisions
accounting based on learnings and specific case study examples from the
Company’s restatements which is mandatory for all Control employees with
authority to approve manual journal entry transactions. As of December 31,
2006, 75 Control employees (representing approximately 70% of the 107 Control
employees designated to take this mandatory training) have successfully
completed the course.
	 
	 	–	 	a comprehensive three-day revenue recognition training program, which was
made mandatory in 2006 for a targeted population of FP&A and Control employees.
As of December 31, 2006, 568 FP&A and Control employees (representing
approximately 87% of the 650 FP&A and Control employees designated to take this
mandatory training) have successfully completed the course.

 

A - 3

	 	 	 	Nortel retained third party resources and expertise as it considered appropriate to
assist with the development and delivery of these training programs. In addition,
an Executive Global Finance Training Council has been established to oversee and set
priorities for training for Finance employees in accordance with a new Finance
training policy, which details minimum annual training requirements (by level) for
all Finance employees. In addition to direct feedback from the Executive Finance
Training Council (including direction from the Assistant Controller who is a member
of the Council), the GFTC group identifies on-going training needs through a variety
of sources such as: (i) recommendations from the Company’s technical accounting
function relative to queries received and errors identified on a consistent basis as
well as emerging issues and new accounting guidance; and (ii) informal feedback from
other Finance leaders. As new accounting guidance, pronouncements and directives on
U.S. GAAP are promulgated, the Controller and other members of the GFTC group now
provide quarterly training and updates, by webcast. Further, Nortel is in the
process of developing a Competency and Training Model to define the necessary skill
sets for key positions and accompanying training requirements in FP&A and Control.
In this connection, Nortel surveyed its Finance leadership team to identify core
skills required to successfully perform certain Finance roles and compared the
identified skills with its existing training curriculum. The Competency and
Training Model will be used to facilitate employee development, evaluate candidates
for vacant positions, provide guidelines on mandatory and elective training
requirements, and further develop and refine the GFTC group’s priorities.
	 
	 	(v)	 	The Company initially created separate Offices of Ethics and Compliance, and in
November 2006 combined these functions, which include Internal Audit and Security,
under the responsibility of the Chief Compliance Officer. Nortel believes that this
new structure will allow for more effective coordination of ethics and compliance
activities and is in line with best practices of large multi-national corporations.
The Board has appointed, in its assessment, a highly qualified individual to oversee
these four key functions. Nortel believes that it has put in place a compliance
infrastructure as well as a consistent approach to corporate discipline for breaches of
its policies, procedures and Code of Conduct. The Chief Compliance Officer reports
directly to the CEO and the Audit

 

A - 4

	 	 	 	Committee and only the Audit Committee can hire or fire the Chief Compliance
Officer. The Ethics function is responsible for recommending changes to and
interpretations of Nortel’s Code of Conduct, improving employee awareness of the
Code of Conduct, monitoring annual employee certification of the Code of Conduct,
devising and conducting Code-specific and other training for employees, and intake
of employee allegations of Code violations. An updated Code of Conduct was issued
by the Ethics function in September 2006, and mandatory training in the new Code’s
provisions and employee certification, where permitted by applicable law, has been
implemented. The Compliance function has the following responsibilities: reviewing
planned activities and transactions to ensure compliance with Company policies and
applicable laws; reviewing policies and procedures to ensure compliance with
applicable laws; developing employee compliance training; conducting compliance
audits of the business units and regions in which compliance risks are assessed;
reviewing findings of compliance audits; monitoring resolution of calls to Nortel’s
ethics “hot line” to ensure complaints are promptly and thoroughly investigated and
resolved; identifying risk areas that require additional training; and identifying
potential areas of compliance risk, based on the internal and external environments,
and developing corrective action plans. Nortel has enhanced its anti-fraud
management process, including by establishing an anti-fraud policy and guidance on
how to communicate knowledge of potential fraud under the Code of Conduct. To
ensure that Nortel’s ethics hot line will remain an effective and active means for
employees to report concerns, Nortel continues to promote the use and effectiveness
of the hot line to employees. A highly visible icon was developed and is placed on
Nortel’s Global Web home page to provide employees with a daily visible reminder of
the hot line. As a further means of reminding employees of the hot line, posters
advertising the hot line were prepared and placed at major facilities in 2006. A
follow-up poster campaign is contemplated for 2007. Nortel’s ethics certification
process requires employees to certify annually that they have read, understood and
will comply with the Code of Conduct. The certification process is typically used
as another opportunity to remind employees

 

A - 5

	 	 	 	of the requirement to report actual and suspected violations, and of the existence
of the hot line. In addition, many of Nortel’s general training sessions are used
to reinforce the existence and importance of the hot line. Specialized training for
Finance employees has also been used to remind Finance employees of the hot line.
In late 2006, Nortel launched an on-line scenario-based ethics training module. The
training is mandatory for all employees. This training module reinforces the
existence and importance of the hot line. One scenario in particular involves using
the hot line to deal with employee concerns. Nortel issues a quarterly Compliance
newsletter which also publicizes the hot line. In addition to the above,
communications from leaders have from time to time reminded employees of the hot
line and encouraged them to use it. To demonstrate the effectiveness of the hot
line, Nortel is implementing measures to communicate generally to employees, to the
extent permitted by privacy laws and Nortel’s privacy policy, the results of
disciplinary actions arising from reported allegations. This is intended to ensure
employees understand that allegations are taken seriously, will be investigated and
dealt with thoroughly, and employees are treated similarly. The primary vehicle for
communicating such matters to employees will be the quarterly Compliance newsletter.
In addition, employees reporting concerns are advised of the results of
investigations, to the extent permitted by privacy laws and Nortel’s privacy policy.
The quarterly Compliance newsletter, as well as Nortel’s annual ethics
certification process, will serve as a continuing means to communicate the
importance of compliance with Nortel’s Code of Conduct.
	 
	 	(vi)	 	The Company created a Compliance Committee in February 2006 to oversee the
effectiveness of Nortel’s compliance program, policies, procedures and the Code of
Conduct and provide direction to the Office of Compliance. The Compliance Committee is
now composed of Nortel’s CEO, CFO, Chief Compliance Officer, Chief Legal Officer, and
Executive Vice President, Corporate Operations, in order to ensure coordination of
legal, compliance, ethics and risk management programs and activities throughout the
Company. The Compliance Committee’s oversight responsibilities include: ensuring that
the Company’s compliance program is well

 

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	 	 	 	communicated; regularly reviewing policies, procedures and other internal systems to
ensure they are in compliance with the Code of Conduct, relevant laws, and are in
alignment with the overall compliance program; receiving reports on calls to the
ethics hot line and other sources to verify that each complaint is properly
reviewed, investigated and resolved; monitoring on-going compliance training and
awareness programs; reviewing the results of compliance audits and actions taken to
address audit findings and recommendations; reviewing all reports of fraud or
related unethical activities to ensure they are brought to the attention of the
Audit Committee and investigated as appropriate; reviewing the compliance risk
assessments and proactive actions to address the risks; and monitoring of discipline
imposed by the Company to ensure that discipline is fair and consistent across the
Company. The Chief Compliance Officer reports on the activities of the Compliance
Committee to the Audit Committee on a quarterly basis, including the volume of usage
of the ethics hot line and any areas identified by the Compliance function as
requiring additional training or potential areas of compliance risk.
	 
	 	Processes:
	 
	 	(vii)	 	In response to the finding of the Independent Review that historically Nortel
Finance employees responsible for meeting EBT targets, rather than employees in the
Control organization, had authority to record and release provisions, the Board
directed management to end that practice by separating the FP&A and Control functions
and by vesting the Control organization with sole responsibility for accounting
decisions and accounting entries. With the exception of joint venture entities and
Nortel Government Solutions, Inc. (a variable interest entity for accounting purposes,
which is subject to a “hold separate” arrangement to comply with U.S. national
industrial security requirements), the Company implemented the new segregated structure
over a six-month period, from September 2005 to February 2006, and the FP&A functions
are now separate from the Control function, and the Control organization has had the
exclusive authority to approve and post general ledger entries commencing with the
closing of Nortel’s books
and records for the quarter ended March 31, 2006, other than tax-related entries
which are approved by the Company’s Tax organization.

 

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	 	(viii)	 	Management has restructured the Company’s technical accounting function into two
groups to provide technical accounting guidance: one for revenue recognition issues,
called Global Revenue Governance (“GRG”), and one for all other accounting issues,
called Global Technical Accounting (“GTA”). Both GRG and GTA report directly to the
Assistant Controller. The mandate of GRG is to render binding guidance on the
accounting for revenue recognition for contracts and contract amendments and to serve
as the final authority on revenue recognition decisions. The mandate of GTA is to make
binding decisions for the accounting on all technical non-revenue issues, including
issues related to provisions. Important issues arising out of either GRG or GTA are
required to be raised with the Controller for resolution. Internal finance process
guidelines (“FPGs”) have been adopted to formalize the authority of GRG and GTA. These
FPGs contain matrices with dollar thresholds above which the Assistant Controller or
the Controller, as applicable, must approve the accounting guidance. New directors of
both GRG and GTA, with appropriate technical qualifications, have been recruited from
outside Nortel. Management has also increased the staffing of GRG and GTA and upgraded
the technical qualifications of their respective personnel.
	 
	 	(ix)	 	Since April 2004, responsibility for drafting and revising Nortel’s internal
accounting and finance process guidelines has been vested in the Global Finance
Policies & Process (“GFPP”) group, led by a certified public accountant. The mandate
of GFPP is to keep Nortel’s internal accounting guidance current and in compliance with
U.S. GAAP, to make that guidance “user-friendly” with “real life” examples of practical
applications where appropriate and to identify changes to U.S. GAAP and update Nortel’s
accounting policies accordingly. As at December 31, 2006, GFPP has developed
twenty-five accounting guidelines on various topics, including accruals, provisions,
revenue recognition and foreign exchange. In addition, GFPP has developed thirteen
FPGs on various topics,

 

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	 	 	 	including manual journal entries, balance sheet reviews, revenue recognition
documentation and account reconciliations. Further, as at March 31, 2007, GFPP has
reviewed and, where necessary, revised all key internal accounting guidelines and
included “real life” examples of practical applications of such guidance where it
was considered appropriate. Monthly newsletters to Finance employees are issued on
new policies, accounting guidelines and FPGs.
	 
	 	(x)	 	As part of its remediation efforts and to compensate for the material
weaknesses in Nortel’s internal control over financial reporting, management undertook
intensive efforts in 2005 and early 2006 to improve its internal controls and
procedures relating to revenue recognition. These efforts included, among other
measures, an extensive collection and review by GRG of documentation on customer
contracts, comprising approximately 75% of 2005 revenues, to determine whether Nortel’s
revenue recognition accounting policies were being applied properly and consistently
across the organization. As a result of these and other efforts, various revenue
recognition errors were identified and adjusted in the 2005 Annual Report, as described
in more detail in paragraphs 45-47 of the Settlement Agreement. In the first quarter
of 2006, Nortel issued a new FPG requiring a review by GRG for all new contracts and
amendments to existing contracts having a total revenue impact in excess of $5 million.
The review is required to be completed by the time of the Audit Committee meeting in
respect of the quarter in which the delivery of product, or performance of services or
fulfillment of other contractual obligations, occurs. Additional measures have been
implemented in an effort to ensure that all contracts are submitted to GRG for binding
accounting guidance. For example, GRG is now provided with a quarterly confirmation of
all contracts, and incremental approval from the Controller is required for amendments
or superseding contracts that change the timing of revenue recognition. Both GRG and
Nortel’s Contract Assurance group, which group’s mandate is to accurately execute on
the application of U.S. GAAP and GRG guidance issued pursuant to the new FPG, now
report to the Assistant Controller.

 

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	 	(xi)	 	Starting in 2004, Nortel’s management has implemented significant controls
around manual journal entries (“MJEs”) in an effort to reduce their susceptibility to
human error and manipulation. These controls include the development and adoption of
FPGs that specify the supporting documentation that must be provided before a MJE can
be approved and posted to the general ledger, the authority level of individuals
authorized to approve MJEs and the segregation of duties among the initiator, approver
and poster of the MJE. MJEs and all supporting documentation are required to be loaded
into a database to facilitate both record retention and access by all appropriate
parties, such as the compliance reviewers, Internal Audit and the external auditors.
Also, Finance employees received training on the application of the new MJE controls
and their requirements. With the exception of joint venture entities and Nortel
Government Solutions, Inc., incremental compliance reviews were commenced in 2005 for
all MJEs over a specified dollar value for compliance with the new documentation
requirements for MJEs. In 2006, Nortel established the Global MJE Center of Excellence
to implement a consistent global compliance review process and global compliance
reporting under the leadership of the Company’s U.S. Regional Controller, who reports
directly to the Controller. Under this global incremental review process, any MJE that
fails to satisfy one or more of the substantive requirements (such as failure to attach
complete, relevant supporting documents or appropriate approvals) is required to be
rejected by the reviewer and returned to the initiator of the MJE for remediation and
subsequent validation by the reviewer.
	 
	 	(xii)	 	Beginning with the filing of Nortel’s 2004 Form 10-K, management adopted and
began to implement a series of improved internal controls on the preparation and review
of post closing adjustments (“PCAs”). Because all PCAs are MJEs submitted after the
initial consolidation of the financial statements, management determined to apply all
of the control requirements governing MJEs to PCAs. To eliminate the potential for
inappropriate corporate initiation of PCAs, PCAs must be initiated in the regions or
business units, with the exception of normal and appropriate corporate tax,
consolidation and elimination entries. Once approved, proposed PCAs are subject to the
same incremental compliance review as MJEs.

 

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	 	 	 	All of the materials relevant to each PCA are loaded into a database that is
accessible by all appropriate parties including Nortel’s external auditors. The
Director of Corporate Consolidations (the “Director”) is required to review each
proposed PCA for materiality and, based on that analysis, recommend to the
Controller the proposed PCAs that should be posted and those that should be placed
on a list of unadjusted differences. The Director and Controller then review those
recommendations and the underlying accounting rationale, and the Controller must
determine which adjustments to record. Any unadjusted differences remaining at the
end of this process which have been deemed to be immaterial are required to be
reported to the Audit Committee. Management’s goal is to remediate the gaps in
controls which do not operate effectively to prevent late entries. During 2006, the
Corporate Consolidations group commenced a process to review the root causes of
PCAs. This process has evolved and, starting in 2007, Corporate Consolidations,
with assistance from the SOX group, collects information on each PCA to determine
the root cause of the PCA, in particular what (if any) internal control deficiency
gave rise to the PCA, and a remediation plan is developed and implemented by the
initiator of the PCA, as appropriate, with specific timelines for completion of the
required remedial activity. Corporate Consolidations is responsible for tracking
the remedial actions against plans and timelines.
	 
	 	(xiii)	 	Commencing in 2005, the Controller initiated weekly meetings, held throughout the
quarter-close process until the financial statements are filed, in which technical
accounting issues are discussed, monitored and resolved. These meetings are attended
by the Controller, Assistant Controller, senior managers in GRG and GTA and other
employees, depending on the issues under discussion, and the external auditors.
	 
	 	(xiv)	 	Starting in 2005, Nortel’s management has implemented an enhanced balance
sheet review (“BSR”) process in recognition that timely and thorough BSRs provide an
effective internal control. With the exception of tax (which is the responsibility of
the Company’s Tax organization), all balance sheet line items

 

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	 	 	 	have been assigned an “owner” within the Control organization who is responsible for
overseeing all transactional activity within the account, including determining the
propriety of all such activity in compliance with U.S. GAAP and for preparing
documentation about the account prior to each quarterly BSR. The BSR process
includes a comprehensive evaluation of activity within key liability accounts and a
specific focus on the review of provisioning activity as well as cumulative foreign
exchange translation adjustment movements. The process also includes a review of
restructuring charges, the monitoring of which has been centralized within the
Control function. Each balance sheet account owner must explain the activity in the
account and identify the triggering events for all substantial activity. The
controls and review processes around current liability balances and related releases
have been enhanced through the development of improved continuity schedules (which
track quarterly changes in accrued liabilities accounts) with narrative explanation
for substantial additions and identification of the triggering events for all
substantial releases. The continuity schedules are required to be reviewed and
analyzed by Nortel’s Corporate Consolidations group and presented by the Controller
to the Audit Committee quarterly.
	 
	 	(xv)	 	Beginning in 2005, management enhanced the reviews conducted during its
internal quarterly profit and loss meetings (“Results Calls”) to provide a forum for
discussion of the results for each of its business units separately and the results on
a consolidated basis, and discuss the variance analysis to budget, to the prior period
and to the prior year. In the Results Calls for each business unit, the finance leader
of the business unit, FP&A and the applicable Regional Controller are called upon to
identify and discuss significant technical accounting issues, including revenue
recognition items, that arose during the period that could affect the results for that
period. Where technical accounting issues remain outstanding, they are discussed
during the Results Calls as well as during the Controller’s accounting issues meetings.
To the extent technical accounting issues have not been resolved at the time of the
Results Calls, such issues are to be resolved and reported on during the BSRs, which
occur prior to the filing of the financial statements.

 

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	 	(xvi)	 	Recognizing that timely and accurate account reconciliations are a priority,
Nortel’s new management has implemented a policy requiring timely account
reconciliations to confirm the accuracy and completeness of ending balances in each
general ledger account. In the third quarter of 2006, management issued a new global
FPG on the account reconciliation process to outline the requirements for account
reconciliations, and which requires quarterly reconciliation of each balance sheet
account. Certain accounts determined to be high risk, based on an account risk
analysis by the appropriate Control leader, must be reconciled prior to the Audit
Committee meeting for the applicable reporting period. Reports are prepared to monitor
the timely preparation and review of reconciliations.
	 
	 	(xvii)	 	With respect to foreign exchange, in 2005, Nortel’s management enhanced its annual
functional currency study which ultimately determines the methodology for translating
subsidiary foreign currency results to U.S. dollar reporting currency. The enhanced
study improved the analysis and documentation to substantiate the functional currency
determination, and is reviewed and approved by the appropriate regional Controller and
corporate Controller. In addition, in 2005, management implemented a quarterly process
to analyze inter-company balances for compliance with SFAS No. 52, paragraph 20. The
Treasury function reviews inter-company loans quarterly and inter-company trade
positions annually to assist Control in determining if any balances are of a long-term
investment, whereby foreign exchange would be recorded in equity. Systems have been
automated to support the translation of a significant operating subsidiary’s foreign
currency results to U.S. dollar reporting.
	 
	 	(xviii)	 	The Audit Committee has established new priorities for the Internal Audit
organization relating to the evaluation of risk exposures for financial reporting, and
management has amended the charter for the internal audit function to include oversight
responsibilities for the adequacy and effectiveness of financial reporting controls.
The Audit Committee realigned the reporting responsibilities for Internal Audit and
directed senior management to strengthen significantly the internal audit function in
the first quarter of 2004, and also hired a new Internal

 

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	 	 	 	Audit leader as of July 2005. The head of Internal Audit reports directly to the
CEO and the Audit Committee to ensure that Internal Audit is independent from the
activities it reviews. Beginning in 2005, Internal Audit work plans include a focus
on accounting for transactions, financial reporting and financial reporting
controls. Starting in 2006, the Internal Audit work plan includes an assessment of
the adequacy and degree of compliance with financial, operational and system
controls.
	 
	 	(xix)	 	As part of the efforts to increase awareness of and timely and appropriate
remediation of internal controls, in the second quarter of 2006 Nortel established a
SOX Steering Committee comprised of senior management from Finance, Legal, Human
Resources, Internal Audit, Information Services and Operations. Regular reporting of
remediation activities to senior management, including an escalation process to address
areas where remediation planned dates were not met was implemented. The SOX vice
president regularly meets with Internal Audit and reports to the Audit Committee on the
ongoing development, implementation and progress of remedial measures. Training is
provided for teams that document and administered controls to improve control design
competencies. In addition, the SOX team implemented a revised SOX 404 scope, a
comprehensive methodology redesign and changes to the documentation requirements to
greatly improve the quality of the SOX 404 documentation. As a result of all of these
activities, there was significant remediation in 2006 of internal control deficiencies
identified in various business processes that impact the Company’s internal control
over financial reporting.
	 
	 	(xx)	 	The Board has implemented processes for Nortel’s management to provide
quarterly assessments in respect of the overall quality and transparency of the
Company’s financial reporting and suggestions for improvements in its form and content,
which Nortel’s external auditors have the opportunity to review and comment on. These
processes include quarterly reporting by the CFO and Controller to the Board and by the
SOX vice president and head of Internal Audit to the Audit Committee. Further, the
presidents of the business units are expected

 

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	 	 	 	to take full responsibility for the respective financial results of their businesses
and, commencing in 2007, will be required, on a quarterly rotation basis, to provide
presentations to the Board with the Vice President, Finance on the financial results
of their respective business units. In addition, the Audit Committee will
periodically hold separate executive sessions with the Vice President, Finance to
discuss financial issues specific to each business unit.
	 
	 	Technology:
	 
	 	(xxi)	 	In an effort to improve Nortel’s financial reporting systems and capabilities,
to simplify its multiple accounting systems, and to reduce the number of MJEs, Nortel
retained an outside consulting firm to advise on the appropriateness of implementing a
Systems, Application and Products (“SAP”) platform worldwide that would consolidate
many of Nortel’s systems into a single integrated financial software system. Based on
that advice, Nortel adopted the SAP platform to integrate its processes and systems,
and undertook an assessment of existing financial systems and processes to determine
the most effective implementation of standard SAP software. The finance design and
build for the initial scope of the SAP system, including general ledger functionality,
was completed by the end of August 2006, and these processes are planned to be tested
and fully deployed during 2007. Once fully deployed, Nortel estimates that MJEs will
be reduced by approximately 30%. Processes for additional activities will be built
upon this first phase of functionality. Process design for these additional activities
has been completed and management expects that the build, testing and deployment will
be completed by the third quarter of 2007.
	 
	 	(xxii)	 	The Company’s general computing control (“GCC”) environment has been strengthened
with the implementation of new and enhanced controls. During 2006, numerous control
deficiencies were remediated across applications, interfaces and the infrastructure
impacting internal control over financial reporting. In particular, Nortel established
a standard user management process that facilitates the approval of all user access
requests and the removal of accounts when appropriate and implemented regular reviews
of business user accounts.

 

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	 	 	 	Further, Nortel implemented standard and enhanced controls regarding change
management to applications to ensure the changes are appropriately tested, approved
and implemented. In addition, enhanced security protection of data files used to
transfer data from one application to another were implemented. Segregation of
duties was improved in the GCC environment by restricting the number of operating
system administrators with privileged access maintaining an audit trail of software
changes that are made to some key information system applications.

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