Troubled Canadian telecom equipment manufacturer Nortel Networks Corp., currently embroiled in an accounting scandal, a criminal investigation and numerous lawsuits, has fired seven senior executives with responsibilities for financial reporting. All have been terminated “for cause”.
In April, Nortel fired CEO Frank Dunn, former CFO Douglas Beatty and controller Michael Gollogly after discovering that its financial results for the past three years would have to be revised.
During a conference call to outline the preliminary financial results for the first two quarters of 2004, new CEO Bill Owens said that the company will be seeking to recover approximately $10 million paid in bonuses to the ten executives who were fired.
The company will demand repayment by these individuals of payments made under company bonus plans in respect of 2003, and will take further additional action with respect to these individuals, if appropriate.
Owens then went onto praise Nortel’s workforce as our most valuable asset, shortly after announcing that he would be axing 3,500 jobs, or roughly ten percent of the remaining 36,000 workforce. Most of the job losses will be in North America, with most of the losses coming from the managerial ranks, Owens said.
The associated costs will amount to between $300 million and $400 million, with expected annual cost savings of $450 million to $500 million.
On news of the announcements, Nortel shares trading on the New York Stock Exchange rallied up 10.2% to $3.97, as of 3pm GMT. During the dot-com boom, Nortel traded as high as $124.50 and once employed more than 100,000 people.
In June, the Toronto, Canada-based company agreed to sell most of its global manufacturing operations to Flextronics International Ltd (which included the transfer of 2,500 people to Flextronics). The sale of those operations and the new layoffs will reduce Nortel’s workforce to 30,000, Owens said.
Nortel is currently facing battles on several fronts. In October 2003, the company announced that it was restating its financial results for the past three years. It had undertaken an independent review of the company’s figures after suggestions that losses were exaggerated during the industry downturn in 2001 and 2002 to give a misleading impression of the strength of its recovery in 2003.
Nortel then terminated for cause the CEO, CFO, and a controller.
As the SEC and Ontario Securities Commission are currently engaged in probes into the company, this means that Nortel has not been able to finalize its figures for the year to December 31, although it claimed net income of $732 million (its first profit since 1997), on sales 7.2% lower at $9.81 billion.
Nortel has found discrepancies in results for the years 2002 and 2003, but they won’t be released at least until the end of the third quarter.
Meanwhile, Nortel has released preliminary fiscal results for the first two quarters of 2004. It has estimated its first-half 2004 earnings, saying bottom-line results were breakeven to earnings of $0.02 a share, on revenue of $5.1 billion. The company ended the period with $3.7 billion cash on hand.
Our restatement work is progressing. We are nearing an end, Owens said on the conference call. This is an important first step in the return of Nortel.
Yet other battles are looming after shareholders filed several lawsuits against the company. One class-action suit filed in Ontario Superior Court this week is claiming damages of CAD250 million ($192 million). It alleges breaches of trust and fiduciary duty, oppressive conduct and misappropriation of corporate assets and trust property via the bonus system.
Only a few days ago, Nortel revealed that Canadian police had launched a criminal investigation into the financial accounting situation at Nortel.
The decision by the Integrated Market Enforcement Team of the Royal Canadian Mounted Police (RCMP) to mount a full-scale investigation suggests that allegations that the figures were massaged to exaggerate losses during the recession, and then overstate a recovery in order to enhance executive bonuses, are being taken seriously by the authorities.
Nortel also announced it has established an officer of ethics and compliance, who will report to the CEO.