Nortel Fires Seven More Execs

Updated from 8:47 a.m. EDT

Nortel (NT) shares rose 8% early Thursday even as accounting issues continued to crop up at the telecom equipment giant.

Nortel filed some "estimated limited preliminary" numbers for previous quarters, helping to clear away some of its restatement-related overhang. But the company also slashed its workforce by 10% and fired seven more executives who might have been mixed up in a plot to inflate the company's earnings last year. That scandal is now the subject of a C$250 million lawsuit in Ontario.

The executive dismissals come amid a widening criminal investigation of accounting that allegedly enabled key executives to pocket millions of dollars in unearned incentive bonuses last year. Nortel previously cut loose its chief executive, chief financial officer and controller.

The basis for the alleged fraud was the improper release of reserves to goose earnings. Nortel found that "each of these 10 individuals had primary, or substantial, responsibility for the company's financial reporting; that if not aware, each ought to have been aware that the establishment and/or release to income of such accruals and provisions were not in accordance with applicable generally accepted accounting principles; and that the improper application of generally accepted accounting principles with respect to these accruals and provisions misstated the company's financial statements."

Nortel said it will demand repayment of any improper bonuses paid because of the alleged malfeasance. The company disclosed Thursday that a purported class-action suit was filed in Ontario Superior Court claiming damages of C$250 million. It alleges "breaches of trust and fiduciary duty, oppressive conduct and misappropriation of corporate assets and trust property" via the bonus system.

The broader layoff, part of a strategic plan to cut up to $500 million from its annual cost structure, will result in about 3,500 lost jobs, primarily in the company's North American wireline division. Executives said its wireless division will be untouched. The company expects the layoffs to cost $300 million to $400 million.

The company also estimated its first-half 2004 earnings, saying bottom-line results were breakeven to earnings of 2 cents a share on revenue of $5.1 billion, including a 2-cent gain on a contract settlement in South America. As for the ongoing review of past results, Nortel still expects to file completed results for 2003 and the first two quarters of 2004 by the end of the third quarter. The company again tweaked its opinion of the net impact of the restatement, saying roughly three-quarters of the 2003 earnings reduction will fall in the first half of 2003, not the two-thirds it previously estimated.

As for its business outlook, Nortel reiterated that it expects its markets will grow in the low to mid-single digits in 2004 compared to 2003, and that its revenues will grow faster than the market. The company thinks the restructuring it announced Thursday will reduce operating expenses to 35% of revenues or lower on an annualized basis in 2005.

"Considering the impacts of the strategic plan and higher costs associated with initial customer deployments in emerging markets, the company expects gross margins in the range of 40% to 44% of revenues through 2005," it said.

Early Thursday, Nortel rose 30 cents to $3.90.

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