-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, D/wnQsfLHCqr/vkR951gbi5EC1MuI/zURAj679SfjJ+UH0akimUvOW5iBfXPUvnl Y2OEyANEHfsEk+z+GVrSJQ== 0000950123-02-004634.txt : 20020503 0000950123-02-004634.hdr.sgml : 20020503 ACCESSION NUMBER: 0000950123-02-004634 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020503 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AT&T CORP CENTRAL INDEX KEY: 0000005907 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE COMMUNICATIONS (NO RADIO TELEPHONE) [4813] IRS NUMBER: 134924710 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 001-01105 FILM NUMBER: 02633563 BUSINESS ADDRESS: STREET 1: 295 NORTH MAPLE AVENUE CITY: BASKING RIDGE STATE: NJ ZIP: 07920 BUSINESS PHONE: 9082214000 MAIL ADDRESS: STREET 1: 295 NORTH MAPLE AVENUE CITY: BASKING RIDGE STATE: NJ ZIP: 07920 FORMER COMPANY: FORMER CONFORMED NAME: AMERICAN TELEPHONE & TELEGRAPH CO DATE OF NAME CHANGE: 19920703 10-K/A 1 e56632a1e10-ka.txt AT&T CORP. AS FILED ELECTRONICALLY WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 3, 2002 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-K/A [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-1105 AT&T CORP. A NEW YORK I.R.S. EMPLOYER CORPORATION NO. 13-4924710
295 NORTH MAPLE AVENUE, BASKING RIDGE, NEW JERSEY 07920 TELEPHONE NUMBER 908-221-2000 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: SEE ATTACHED SCHEDULE A. SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE. Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] At February 28, 2002, the aggregate market value of voting common stock held by non-affiliates was approximately $54 billion. At February 28, 2002, 3,545,275,809 shares of AT&T common stock were outstanding. DOCUMENTS INCORPORATED BY REFERENCE NONE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW AT&T Corp. (AT&T or the company) is among the world's communications leaders, providing voice, data and video communications services to large and small businesses, consumers and government agencies. We provide domestic and international long distance, regional and local communications services, cable (broadband) television and Internet communication services. RESTRUCTURING OF AT&T On October 25, 2000, AT&T announced a restructuring plan designed to fully separate or issue separately tracked stocks intended to reflect the financial performance and economic value of each of AT&T's four major operating units. On December 19, 2001, AT&T and Comcast Corporation (Comcast) announced an agreement to combine AT&T Broadband with Comcast. Under the terms of the agreement, AT&T will spin-off AT&T Broadband and simultaneously merge it with Comcast, forming a new company to be called AT&T Comcast Corporation (AT&T Comcast). AT&T shareowners will receive a number of shares of AT&T Comcast common stock based on an exchange ratio calculated pursuant to a formula specified in the merger agreement. If determined as of the date of the merger agreement, the exchange ratio would have been approximately 0.34, assuming the AT&T shares held by Comcast are included in the number of shares of AT&T common stock outstanding. Assuming Comcast retains its AT&T shares and converts them into exchangeable preferred stock of AT&T as contemplated by the merger agreement, the exchange ratio would be approximately 0.35. Assuming certain conditions, AT&T shareowners will own an approximate 55% economic stake and an approximate 61% voting interest in the new company, calculated as of the date of the merger agreement. The merger of AT&T Broadband and Comcast is subject to regulatory review, approval by both companies' shareowners and certain other conditions, and is expected to close by the end of 2002. AT&T also intends to proceed with the creation of a tracking stock for its AT&T Consumer Services business, which is expected to be distributed to AT&T shareowners following shareowner approval. AT&T has not yet determined the timing of the distribution, which may be made within a year of shareowner approval or may be made thereafter, depending on market conditions. Additionally, the AT&T board of directors could decide not to proceed with the distribution of the tracking stock, or could proceed at a time or in a manner different from its current intentions. These restructuring activities are complicated and involve a substantial number of steps and transactions, including obtaining various approvals, such as Internal Revenue Service (IRS) rulings. AT&T anticipates, however, that the transactions associated with AT&T's restructuring plan will be tax-free to U.S. shareowners. Future financial conditions, superior alternatives or other factors may arise or occur that make it inadvisable to proceed with part or all of AT&T's restructuring plans. Any or all of the elements of AT&T's restructuring plan may not occur as we currently expect or in the time frames that we currently contemplate, or at all. Alternative forms of restructuring, including sales of interests in these businesses, would reduce what is available for distribution to AT&T shareowners in the restructuring. On May 25, 2001, AT&T completed an exchange offer of AT&T common stock for AT&T Wireless stock. Under the terms of the exchange offer, AT&T issued 1.176 shares of AT&T Wireless Group tracking stock in exchange for each share of AT&T common stock validly tendered. A total of 372.2 million shares of AT&T common stock were tendered in exchange for 437.7 million shares of AT&T Wireless Group tracking stock. In conjunction with the exchange offer, AT&T recorded an $80 premium as a reduction to net income available to common shareowners. The premium represents the excess of the fair value of the AT&T Wireless Group tracking stock issued over the fair value of the AT&T common stock exchanged. On July 9, 2001, AT&T completed the split-off of AT&T Wireless as a separate, independently traded company. All AT&T Wireless Group tracking stock was converted into AT&T Wireless common stock on a one-for-one basis and 1,136 million shares of AT&T Wireless common stock held by AT&T were distributed to AT&T common shareowners on a basis of 0.3218 of a share of AT&T Wireless for each AT&T share outstanding. AT&T common shareowners received whole shares of AT&T Wireless and cash payments for 1 fractional shares. The IRS ruled that the transaction qualified as tax-free for AT&T and its shareowners for U.S. federal income tax purposes, with the exception of cash received for fractional shares. For accounting purposes, the deemed effective split-off date was June 30, 2001. At the time of split-off, AT&T retained approximately $3 billion, or 7.3%, of AT&T Wireless common stock, about half of which was used in a debt-for-equity exchange in July in 2001. The remaining portion of these holdings was monetized in October and December through the issuance of debt that is exchangeable into Wireless shares (or their cash equivalents) at maturity. The split-off of AT&T Wireless resulted in a noncash tax-free gain of $13.5 billion, which represented the difference between the fair value of the AT&T Wireless tracking stock at the date of the split-off and AT&T's book value in AT&T Wireless Services. This gain was recorded in the third quarter of 2001 as a "Gain on disposition of discontinued operations" in the Consolidated Statement of Income. On August 10, 2001, AT&T completed the split-off of Liberty Media Corporation as an independent, publicly traded company (since AT&T did not exit the line of business that Liberty Media Group (LMG) operated in, LMG was not accounted for as a discontinued operation). AT&T redeemed each outstanding share of Class A and Class B LMG tracking stock for one share of Liberty Media Corporation's Series A and Series B common stock, respectively. The IRS ruled that the split-off of Liberty Media Corporation qualified as a tax-free transaction for AT&T, Liberty Media and their shareowners. For accounting purposes, the deemed effective split-off date was July 31, 2001. TRACKING STOCKS During the periods 1999 through 2001, AT&T had one or more tracking stocks outstanding. In 1999, in connection with the acquisition of Tele-Communications, Inc. (TCI), AT&T issued a separate tracking stock to reflect 100% of the performance of LMG. In 2000, AT&T issued a tracking stock to track the financial performance of AT&T Wireless Group. The shares initially issued tracked approximately 16% of the performance of AT&T Wireless Group. A tracking stock is designed to provide financial returns to its holders based on the financial performance and economic value of the assets it tracks. Ownership of shares of AT&T common stock, AT&T Wireless Group tracking stock or Liberty Media Class A or B tracking stock did not represent a direct legal interest in the assets and liabilities of any of the groups, but an ownership of AT&T in total. The specific shares represented an interest in the economic performance of the net assets of each of the groups. The earnings attributable to AT&T Wireless Group are excluded from the earnings available to AT&T Common Stock Group and are reflected as "Income (loss) from discontinued operations," net of applicable taxes of AT&T Wireless Group in the Consolidated Statements of Income. Similarly, the earnings and losses related to LMG are excluded from the earnings available to AT&T Common Stock Group. The remaining results of operations of AT&T, including the financial performance of AT&T Wireless Group not represented by the tracking stock, are referred to as the AT&T Common Stock Group and are represented by AT&T common stock. We did not have a controlling financial interest in LMG for financial accounting purposes; therefore, our ownership in LMG was reflected as an investment accounted for under the equity method in AT&T's consolidated financial statements. The amounts attributable to LMG are reflected in the accompanying consolidated financial statements as "Equity (losses) earnings from Liberty Media Group" and "Investment in Liberty Media Group and related receivables, net" prior to its split-off from AT&T. AT&T Wireless Group was an integrated business of AT&T, and LMG was a combination of certain assets and businesses of AT&T; neither was a stand-alone entity prior to its split-off from AT&T. MERGER WITH MEDIAONE GROUP, INC. We completed the merger with MediaOne Group, Inc. (MediaOne) on June 15, 2000, in a cash and stock transaction valued at approximately $45 billion. We issued approximately 603 million shares of AT&T common stock, of which 60 million were treasury shares, and made cash payments of approximately $24 billion. 2 The merger was recorded under the purchase method of accounting, whereby the assets and liabilities of MediaOne Group were recorded at fair value on the date of the acquisition. Accordingly, the results of MediaOne have been included with the financial results of AT&T, within AT&T Broadband, since the date of acquisition. In accordance with the purchase method of accounting, periods prior to the merger were not restated to include the results of MediaOne. FORWARD-LOOKING STATEMENTS This document may contain forward-looking statements with respect to AT&T's restructuring plan, financial condition, results of operations, cash flows, dividends, financing plans, business strategies, operating efficiencies or synergies, budgets, capital and other expenditures, network build out and upgrade, competitive positions, availability of capital, growth opportunities for existing products, benefits from new technologies, availability and deployment of new technologies, plans and objectives of management, and other matters. These forward-looking statements, including, without limitation, those relating to the future business prospects, revenue, working capital, liquidity, capital needs, network build out, interest costs and income, are necessarily estimates reflecting the best judgment of senior management and involve a number of risks and uncertainties that could cause actual results to differ materially from those suggested by the forward-looking statements. These forward-looking statements should, therefore, be considered in light of various important factors that could cause actual results to differ materially from estimates or projections contained in the forward-looking statements including, without limitation: - the risks associated with the implementation of AT&T's restructuring plan, which is complicated and involves a substantial number of different transactions each with separate conditions, any or all of which may not occur as we currently intend, or which may not occur in the timeframe we currently expect, - the risks associated with each of AT&T's main business units, operating as independent entities as opposed to as part of an integrated telecommunications provider following completion of AT&T's restructuring plan, including the inability of these groups to rely on the financial and operational resources of the combined company and these groups having to provide services that were previously provided by a different part of the combined company, - the impact of existing and new competitors in the markets in which these groups compete, including competitors that may offer less expensive products and services, desirable or innovative products, technological substitutes, or have extensive resources or better financing, - the impact of oversupply of capacity resulting from excessive deployment of network capacity, - the ongoing global and domestic trend toward consolidation in the telecommunications industry, which may have the effect of making the competitors of these entities larger and better financed and afford these competitors with extensive resources and greater geographic reach, allowing them to compete more effectively, - the effects of vigorous competition in the markets in which the company operates, which may decrease prices charged, increase churn and change customer mix, profitability and average revenue per user, - the ability to enter into agreements to provide services, and the cost of entering new markets necessary to provide services, - the ability to establish a significant market presence in new geographic and service markets, - the availability and cost of capital and the consequences of increased leverage, - the impact of any unusual items resulting from ongoing evaluations of the business strategies of the company, 3 - the requirements imposed on the company or latitude allowed to competitors by the Federal Communications Commission (FCC) or state regulatory commissions under the Telecommunications Act of 1996 or other applicable laws and regulations, - the risks associated with technological requirements, technology substitution and changes and other technological developments, - the results of litigation filed or to be filed against the company, - the possibility of one or more of the markets in which the company competes being impacted by changes in political, economic or other factors, such as monetary policy, legal and regulatory changes or other external factors over which these groups have no control, and - the risks related to AT&T's investments and joint ventures. The words "estimate," "project," "intend," "expect," "believe," "plan" and similar expressions are intended to identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this document. Moreover, in the future, AT&T, through its senior management, may make forward-looking statements about the matters described in this document or other matters concerning AT&T. The discussion and analysis that follows provides information management believes is relevant to an assessment and understanding of AT&T's consolidated results of operations for the years ended December 31, 2001, 2000 and 1999, and financial condition as of December 31, 2001 and 2000. CRITICAL ACCOUNTING POLICIES, ESTIMATES AND JUDGMENTS AT&T's financial statements are prepared in accordance with accounting principles that are generally accepted in the United States. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses as well as the disclosure of contingent assets and liabilities. Management continually evaluates its estimates and judgments including those related to revenue recognition, allowances for doubtful accounts, useful lives of property, plant and equipment, internal use software and intangible assets, investments, derivative contracts, pension and other postretirement benefits and income taxes. Management bases its estimates and judgments on historical experience and other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. We believe that of our significant accounting policies, the following may involve a higher degree of judgment or complexity: Revenue recognition -- We only record revenue for transactions which are considered to be part of our central, ongoing operations. We recognize long distance and local voice and data services revenue based upon minutes of traffic processed or contracted fee schedules including sales of prepaid calling cards. Cable video and nonvideo installation revenue is recognized in the period the installation services are provided to the extent of direct selling costs. Any remaining amount is deferred and recognized over the estimated average period that customers are expected to remain connected to the cable distribution systems. Customer activation fees, along with the related costs up to but not exceeding the revenues, are deferred and amortized over the customer relationship period. We recognize other products and services revenue when the products are delivered and accepted by customers and when services are provided in accordance with contract terms. For contracts where we provide customers with an indefeasible right to use network capacity, we recognize revenue ratably over the stated life of the agreement. Any sales of installed fiber are not recognized as revenue. We consider these transactions to be sales of property, plant and equipment and record any gain or loss in "Other income (expense)" in the Consolidated Statements of Income. Allowances for doubtful accounts -- We maintain allowances for doubtful accounts for estimated losses which result from the inability of our customers to make required payments. We base our allowances on the likelihood of recoverability of accounts receivable based on past experience and taking into account current collection trends that are expected to continue. If economic or specific industry trends worsen beyond our 4 estimates, we would increase our allowances for doubtful accounts by recording additional expense. Accounts receivable are fully reserved for when past due 180 days or more. Estimated useful lives of property, plant and equipment, internal use software and intangible assets -- We estimate the useful lives of property, plant and equipment, internal use software and intangible assets in order to determine the amount of depreciation and amortization expense to be recorded during any reporting period. The useful lives are estimated at the time the asset is acquired and are based on historical experience with similar assets as well as taking into account anticipated technological or other changes. If technological changes were to occur more rapidly than anticipated or in a different form than anticipated, the useful lives assigned to these assets may need to be shortened, resulting in the recognition of increased depreciation and amortization expense in future periods. Alternatively, these types of technological changes could result in the recognition of an impairment charge to reflect the write-down in value of the asset. We review these types of assets for impairment annually, or when events or circumstances indicate that the carrying amount may be not be recoverable over the remaining lives of the assets. In assessing impairments, we use cash flows which take into account management's estimates of future operations. Beginning January 1, 2002, in accordance with the provisions of Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets," we will no longer amortize goodwill, excess basis related to equity-method investments and franchise costs, but will test these assets at least annually for impairment. Investments -- We hold investments in other companies which we account for under either the cost method or equity method of accounting. Many of these companies are publicly traded and have volatile share prices however, some of these companies are not publicly traded and therefore the value may be difficult to determine. For investments that are not publicly traded we estimate fair value using market-based (comparable sales) and income-based (discounted cash flow) methods. In addition, we have monetized some of these investments by issuing debt that is tied to the trading price of the security, and which can be settled in shares or cash. Some of our cost-method investments are classified as "trading" securities under SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities," and are marked-to-market through the income statement. However, other cost method investments are classified as "available-for-sale" under SFAS No. 115 and are marked-to-market through other comprehensive income on the balance sheet. We record an investment impairment charge on our "available-for-sale" and equity-method investments when we believe the decline in the investment value is other than temporary. When determining an other than temporary decline, we consider, among other items, the length of time the trading price has been below our carrying value, the financial condition of the investee company, including the industry in which they operate, and our ability or intent to retain the investment. If the financial condition of the investee company or the industry in which it operates were to be materially different than our expectation, we would record an expense to reflect the other than temporary decline in value of the investment. At December 31, 2001, unrealized losses on "available-for-sale" securities included in "Other comprehensive income" as a component of shareowners' equity were approximately $0.3 billion (pretax). Derivative contracts -- We enter into derivative contracts to mitigate market risk from changes in interest rates, foreign currency exchange rates and equity prices. Certain exchangeable debt (debt exchangeable into or tied to the value of securities we own) contain embedded derivatives that require accounting separate from the debt instrument, while other exchangeable debt has derivatives issued in conjunction with net purchased options. The fair value of option based derivatives is determined using the Black-Scholes option pricing model, which is based on a set of inputs, including the price of the underlying stock, volatility of the underlying stock and interest rates. These inputs are based on prevailing market indications that are either directly observable in the market, received from qualified investment banking firms or are internally calculated. Changes in these inputs would result in a change in the fair value of the option contracts. Changes in the fair value of option contracts accounted for as cash flow hedges would be recorded, net of income taxes, within Other Comprehensive Income on the balance sheet. Changes in the fair value of option contracts undesignated for accounting purposes would be recorded within other income (expense) on the income statement. Generally, fair value calculations of other derivative contracts (e.g., interest rate swaps and foreign exchange forwards) require less judgment and are valued based on market interest rates and foreign exchange rates. 5 Pension and postretirement benefits -- The amounts recognized in the financial statements related to pension and postretirement benefits are determined on an actuarial basis, which utilizes many assumptions in the calculation of such amounts. A significant assumption used in determining our net pension credit (income) and postretirement expense is the expected long-term rate of return on plan assets. In 2001, we assumed an expected long-term rate of return on plan assets of 9.5%. On average, our actual return on plan assets over the long-term has substantially exceeded 9.5%; however, in the past two years, the plan's assets have experienced rates of return substantially lower than 9.5%. For 2002, we will lower our expected long-term rate of return assumption from 9.50% to 9.0%, reflecting the generally expected moderation of long-term rates of return in the financial markets. We expect this decrease in the expected long-term rate of return to decrease operating income by approximately $0.1 billion. Another estimate that affects our net pension credit and postretirement expense is the discount rate used in the annual actuarial valuations of pension and postretirement benefit plan obligations. At the end of each year, we determine the appropriate discount rate, which represents the interest rate that should be used to determine the present value of future cash flows currently expected to be required to settle the pension and postretirement benefit obligations. The discount rate is generally based on the yield on high-quality corporate fixed-income investments. At December 31, 2001, we lowered our discount rate to 7.25% from 7.5% at December 31, 2000. Changes in the discount rate do not have a material impact on our results of operations. Income taxes -- We record deferred tax assets and liabilities using enacted tax rates for the effect of temporary differences between the book and tax bases of assets and liabilities. If enacted tax rates changed, we would adjust our deferred tax assets and liabilities, through the provision for income taxes in the period of change, to reflect the enacted tax rate expected to be in effect when the deferred tax items reverse. A one percentage point change in the enacted tax rates would increase or decrease net income by approximately $0.7 billion. We record a valuation allowance on deferred tax assets to reflect the expected future tax benefits to be realized. In determining the appropriate valuation allowance, we take into account the level of expected future taxable income and available tax planning strategies. If future taxable income was lower than expected or if expected tax planning strategies were not available as anticipated, we may record additional valuation allowance through income tax expense in the period such determination was made. At December 31, 2001, we had long-term deferred tax assets (included within long-term deferred tax liabilities) of $5.4 billion, which included a valuation allowance of $57 million. CONSOLIDATED RESULTS OF OPERATIONS The comparison of 2001 results with 2000 results was affected by events such as acquisitions and dispositions that occurred in these two years. For example, included in 2001 was a full year of MediaOne results; however, 2000 included MediaOne's results only since the June 15, 2000, date of acquisition. In addition, we had dispositions of certain cable systems during each year and disposed of international businesses during 2000. Cable systems and businesses disposed of in 2000 were included in 2000 results for part of the year and not in 2001 results. Likewise, cable systems disposed of in 2001 were included in 2000 results for the full year and in 2001 results for part of the year. Also, At Home Corp. (Excite@Home) affected the comparison of annual results. For the period January 1, 2000, through August 31, 2000, Excite@Home was accounted for as an equity method investment. For the period September 1, 2000, through December 31, 2000, Excite@Home was fully consolidated as a result of corporate governance changes, which gave AT&T the right to designate six of the 11 Excite@Home board members, and therefore, a controlling interest. In 2001, Excite@Home was fully consolidated for the period January 1, 2001, through September 28, 2001, the date Excite@Home filed for Chapter 11 bankruptcy protection. As a result of the bankruptcy and AT&T removing four of its six members from the Excite@Home board of directors, AT&T no longer consolidated Excite@Home as of September 30, 2001. The consolidation of Excite@Home (effective September 1, 2000) resulted in the inclusion of 100% of its results in each line item of AT&T's Consolidated Balance Sheets and Consolidated Statements of Income. The approximate 77% of Excite@Home not owned by AT&T is shown in the 2000 Consolidated Balance Sheet within "Minority Interest" and as a component of "Minority interest income (expense)" in the 2001 and 2000 Consolidated Statements of Income. As a result of the significant losses incurred by Excite@Home, 6 the minority interest balance was fully utilized (in September); therefore, in September 2001 AT&T recognized more than its 23% share of losses of Excite@Home. Under the equity method of accounting, any earnings or losses are included as a component of "Net losses related to other equity investments" in the Consolidated Statement of Income. Beginning October 1, 2001, AT&T no longer records equity earnings or losses related to Excite@Home since AT&T recognized losses in excess of its investment in Excite@Home. Effective July 1, 2000, the FCC eliminated Primary Interexchange Carrier Charges (PICC or per-line charges) that AT&T pays for residential and single-line business customers. The elimination of these per-line charges resulted in lower access expense as well as lower revenue, since AT&T has historically billed its customers for these charges. The comparison of 2000 results with 1999 results was also affected by the acquisition of MediaOne and the elimination PICC. In addition, we acquired TCI and the IBM Global Network (now AT&T Global Network Services or AGNS) during 1999. Therefore, twelve months of their results are included in 2000's results, but are included for only a part of 1999 (since their respective dates of acquisition). Dispositions of certain cable systems and international businesses occurred during 1999 and 2000, affecting comparability. The consolidation of Excite@Home, effective September 1, 2000, also affected comparability. Prior to September 1, 2000, Excite@Home was accounted for as an equity method investment. Finally, the comparison of 2000 results with 1999 results was impacted by the launch of Concert on January 5, 2000, our global joint venture with British Telecommunications plc (BT). AT&T contributed all of its international gateway-to-gateway assets and the economic value of approximately 270 multinational customers specifically targeted for direct sales by Concert. As a result, 2000 results do not include the revenue and expenses associated with these customers and businesses, while 1999 does, and 2000 results include our proportionate share of Concert's earnings in "Net losses related to other equity investments" in the Consolidated Statements of Income. On October 16, 2001, AT&T and BT announced that they had reached binding agreements to unwind Concert. Under the Concert dissolution agreement with BT, AT&T will reclaim customer contracts and assets that were initially contributed to the venture, including international transport facilities and gateway assets. In addition, AT&T Business Services will obtain ownership of certain frame relay assets located in the Asia Pacific region that BT initially contributed to the venture. AT&T Business Services expects to combine these assets with its existing international networking and other assets. The unwind of Concert is expected to close by the end of the first half of 2002. REVENUE
FOR THE YEARS ENDED DECEMBER 31, --------------------------------- 2001 2000 1999 --------- --------- --------- DOLLARS IN MILLIONS AT&T Business Services.................................. $28,024 $28,900 $28,692 AT&T Consumer Services.................................. 15,079 18,894 21,753 AT&T Broadband.......................................... 9,799 8,226 5,070 Corporate and other..................................... (352) (487) (542) ------- ------- ------- Total Revenue........................................... $52,550 $55,533 $54,973 ======= ======= =======
Total revenue decreased 5.4%, or $3.0 billion, in 2001 compared with 2000. The decline was largely driven by accelerating declines in long distance voice revenue of approximately $5.7 billion. Partially offsetting the decline was revenue of approximately $2.2 billion, primarily attributable to growth in data and Internet protocol (IP), local and outsourcing services within AT&T Business Services, and increased revenue from AT&T Broadband, primarily telephony, high-speed data, expanded basic cable and digital video. Also offsetting the decline was revenue of approximately $0.3 billion largely due to net acquisitions (primarily MediaOne), and the consolidation of Excite@Home, partially offset by the elimination of PICC. We expect long distance revenue to continue to be negatively impacted by ongoing competition and product substitution and while we expect data and IP revenue to continue to grow, we expect the growth rate to slow. Revenue in 2002 will be positively impacted by the inclusion of revenue resulting from the unwind of Concert, including 7 revenue from multinational customers and foreign-billed revenue previously contributed to Concert. In addition, we expect revenue from AT&T Broadband to increase. Total revenue increased 1.0%, or $0.6 billion, in 2000 compared with 1999 primarily driven by a growing demand for our IP, outsourcing within AT&T Business Services and growth in AT&T Broadband of approximately $2.2 billion, as well as the impact of acquisitions and the consolidation of Excite@Home, partially offset by the impact of Concert, dispositions and the elimination of PICC of approximately $1.5 billion. These revenue increases were partially offset by continued declines in long distance voice revenue of approximately $2.9 billion. Revenue by segment is discussed in greater detail in the segment results section.
FOR THE YEARS ENDED DECEMBER 31, --------------------------------- 2001 2000 1999 --------- --------- --------- DOLLARS IN MILLIONS Access and other connection............................. $12,136 $13,140 $14,439
Access and other connection expenses decreased 7.6%, or $1.0 billion, in 2001 compared with 2000. Included within access and other connection expenses are costs that we pay to connect calls on the facilities of other service providers, as well as the Universal Service Fund contributions and per-line charges mandated by the FCC. Approximately $1.6 billion of the decrease was due to mandated reductions in per-minute access-rates, lower per-line charges and lower international connection rates. In July 2000, per-line charges that AT&T paid for residential and single-line business customers were eliminated by the FCC. These reductions were partially offset by a $0.6 billion increase due to overall volume growth primarily related to local and international services and higher Universal Service Fund contributions. Since most of these charges are passed through to the customer, the per-minute access-rate and per-line charge reductions and the increased Universal Service Fund contributions have generally resulted in a corresponding impact on revenue. In 2002, access and other connection expenses will continue to decline as a result of mandated reductions in per minute access rates, lower universal service fund contributions and lower long distance call volumes. These reductions will be partially offset by an increase in local connectivity expenses primarily due to growth in local services. In addition, the unwind of Concert will also result in lower access and other connections expenses, since in 2001 the charge from Concert was recorded as access and other connection expenses and in 2002 as we take back assets, we will record the expenses in each line item based on how the assets and customers are served and managed. Access and other connection expenses decreased 9.0% to $13.1 billion in 2000, compared with $14.4 billion in 1999. Mandated reductions in per-minute access costs and decreased per-line charges resulted in lower costs of approximately $1.5 billion. Also contributing to the decrease was more efficient network usage. These decreases were partially offset by approximately $0.6 billion of higher costs due to volume increases, and $0.5 billion as a result of higher Universal Service Fund contributions. Costs paid to telephone companies outside of the United States to connect calls made to countries outside of the United States (international settlements) are also included within access and other connection expenses. International interconnection charges decreased approximately $0.5 billion in 2000, as a result of the commencement of operations of Concert. Concert incurred most of our international settlements and earned most of our foreign-billed revenue, previously incurred and earned directly by AT&T. In 2000, Concert billed us a net expense composed of international settlement (interconnection) expense and foreign-billed revenue. The amount charged by Concert in 2000 was lower than interconnection expense incurred in 1999, since AT&T recorded these transactions as revenue and expense, as applicable. Partially offsetting the decline were costs incurred related to Concert products that AT&T now sells to its customers.
FOR THE YEARS ENDED DECEMBER 31, --------------------------------- 2001 2000 1999 --------- --------- --------- DOLLARS IN MILLIONS Costs of services and products.......................... $13,960 $12,795 $11,013
8 Costs of services and products include the costs of operating and maintaining our networks, costs to support our outsourcing contracts (including cost of equipment sold), programming for cable services, the provision for uncollectible receivables and other service-related costs. These costs increased $1.2 billion, or 9.1%, in 2001 compared with 2000. Approximately $0.6 billion of the increase was driven by net acquisitions, primarily MediaOne, and the consolidation of Excite@Home. Also contributing to the increase was approximately $0.8 billion of higher costs associated with our growth businesses, primarily at AT&T Business Services, including the cost of equipment sold within our outsourcing solutions business, and higher cable television programming costs. In addition, costs increased approximately $0.3 billion due to estimated losses on certain long-term contracts at AT&T Business Services and a lower pension credit (income) and higher postretirement expense in 2001 resulting from a decreased return on plan assets. These increases were partially offset by approximately $0.4 billion of lower costs associated with lower revenue, primarily lower volumes at AT&T Business Services, including our international operations and lower payphone compensation costs. In 2002, costs of services and products are expected to increase slightly as a result of the unwind of Concert, significantly offset by the deconsolidation of Excite@Home. Costs of services and products increased $1.8 billion, or 16.2%, in 2000 compared with 1999. Nearly $1.9 billion of the increase was due to acquisitions and the impact of consolidating Excite@Home, net of the impact of Concert and divestments of international businesses. The expense also increased due to higher costs associated with new outsourcing contracts of approximately $0.5 billion and approximately $0.3 billion of higher cable television programming costs principally due to rate increases and higher costs associated with new broadband services. These increases were partially offset by approximately $0.9 billion of cost savings from continued cost control initiatives and a higher pension credit in 2000, primarily driven by a higher pension trust asset base, resulting from increased investment returns.
FOR THE YEARS ENDED DECEMBER 31, -------------------------------- 2001 2000 1999 --------- -------- --------- DOLLARS IN MILLIONS Selling, general and administrative...................... $10,832 $9,752 $10,894
Selling, general and administrative (SG&A) expenses increased $1.1 billion, or 11.1%, in 2001 compared with 2000. Approximately $0.2 billion of the increase was due to expenses associated with acquisitions, primarily MediaOne, net of the impact of dispositions. Increased expenses in support of growth businesses, primarily data and IP, broadband, and local voice services, drove approximately $0.8 billion of the increase. These expenses included customer care, facilities and other related expenses, advertising, research and development and other general and administrative expenses. Also included in the increased SG&A expenses were transaction costs of approximately $0.2 billion associated with AT&T's restructuring announced in October 2000. A lower pension credit (income) and higher postretirement expense resulting from decreased return on plan assets, combined with higher compensation accruals contributed approximately $0.3 billion to the increase. Partially offsetting these increases were lower costs associated with the impact of cost control efforts and decreased customer care and billing expenses of approximately $0.8 billion primarily from AT&T Consumer Services. As a result of the unwind of Concert as well as lower pension credit (income), selling, general and administrative expenses are expected to increase slightly in 2002. Selling, general and administrative expenses decreased $1.1 billion, or 10.5%, in 2000 compared with 1999. Approximately $2.0 billion of the decrease was due to savings from continued cost-control initiatives and a higher pension credit in 2000, primarily driven by a higher pension trust asset base, resulting from increased historical investment returns. Partially offsetting this decrease was approximately $0.5 billion of higher 9 expenses associated with our growing broadband business, and nearly $0.5 billion of expenses associated with acquisitions and the consolidation of Excite@Home, net of the impact of Concert and dispositions.
FOR THE YEARS ENDED DECEMBER 31, ------------------------ 2001 2000 1999 ------ ------ ------ DOLLARS IN MILLIONS Depreciation and other amortization........................ $6,865 $5,924 $5,137
Depreciation and other amortization expenses increased $0.9 billion, or 15.9%, in 2001 compared with 2000. Approximately $0.4 billion of the increase was attributable to the acquisition of MediaOne and the consolidation of Excite@Home, partially offset by net dispositions, primarily cable systems. The remaining increase was primarily due to a higher asset base resulting from continued infrastructure investments. Depreciation and other amortization expenses are expected to increase in 2002 reflecting the infrastructure investments made in 2001 as well as the impact of the unwind of Concert. In 2000, depreciation and other amortization expenses rose $0.8 billion, or 15.3%, compared with 1999. Approximately $0.5 billion of the increase was due to acquisitions and the consolidation of Excite@Home, net of dispositions and the impact of Concert. The remaining increase was primarily due to a higher asset base resulting from continued infrastructure investment. Total capital expenditures for 2001, 2000 and 1999 were $8.4 billion, $10.5 billion and $11.2 billion, respectively. We continue to focus the vast majority of our capital spending on our growth businesses of broadband, data and IP, and local.
FOR THE YEARS ENDED DECEMBER 31, ------------------------ 2001 2000 1999 ------ ------ ------ DOLLARS IN MILLIONS Amortization of goodwill, franchise costs and other purchased intangibles.................................... $2,473 $2,665 $1,057
Amortization of goodwill, franchise costs and other purchased intangibles decreased $0.2 billion, or 7.2%, in 2001 compared with 2000. The decrease was primarily due to a lower goodwill balance relating to Excite@Home as a result of the impairment charges recorded in the fourth quarter of 2000 and the first quarter of 2001, partially offset by the acquisition of MediaOne. Franchise costs represent the value attributable to agreements with local authorities that allow access to homes in AT&T Broadband's service areas. Other purchased intangibles arising from business combinations primarily included customer relationships. In 2002, we will no longer amortize goodwill or franchise costs in accordance with the provisions of SFAS No. 142. Accordingly, amortization of goodwill, franchise costs and other purchased intangibles will be significantly lower in 2002. A further discussion of the impacts of SFAS No. 142 is included in "New Accounting Pronouncements" in this document. In 2000, amortization of goodwill, franchise costs and other purchased intangibles increased $1.6 billion, or 152.3%, compared with the prior year. This increase was largely attributable to the consolidation of Excite@Home, as well as acquisitions, primarily MediaOne and TCI.
FOR THE YEARS ENDED DECEMBER 31, ---------------------- 2001 2000 1999 ------ ------ ---- DOLLARS IN MILLIONS Net restructuring and other charges......................... $2,530 $7,029 $975
During 2001, we recorded $2,530 million of net restructuring and other charges including approximately $1,330 million of restructuring and exit costs associated with AT&T's continued cost reduction initiatives and $1,200 million of asset impairment charges which were primarily related to Excite@Home. 10 The $1,330 million of charges for restructuring and exit plans were comprised of $1,014 million for employee separations and benefit plan curtailment costs, $322 million for facility closings and $27 million related to termination of contractual obligations. The restructuring and exit plans support our cost reduction efforts through headcount reductions across all segments of the business, primarily network support and customer care functions in AT&T Business Services, continued cost reduction efforts by Excite@Home (which was still consolidated into AT&T's results until September 2001), in addition to impacts of the MediaOne merger. These charges were slightly offset by the reversal in December 2001 of $33 million related to the business restructuring plans for fourth quarter 1999 and first quarter 2000. Included in the $1,014 million of employee separations were $200 million of benefit plan curtailment costs associated with employee separations as part of these exit plans. Approximately 18 thousand employees will be separated in conjunction with these exit plans, approximately one-half of which are management and one-half are nonmanagement employees. Nearly 17 thousand employee separations related to involuntary terminations and more than one thousand related to voluntary terminations. Approximately 50% of the employees affected by the 2001 restructuring charges left their positions as of December 31, 2001, and the remaining will leave the company throughout 2002. Termination benefits of approximately $341 million were paid throughout 2001. The $1,200 million of asset impairments consisted of $1,032 million associated with the write-down of goodwill and other intangibles, warrants granted in connection with distributing the @Home service and fixed assets. These charges were due to continued deterioration in the business climate of, and reduced levels of venture capital funding activity for, Internet advertising and other Internet-related companies, continued significant declines in the market values of Excite@Home's competitors in the Internet advertising industry, and changes in its operating and cash flow forecasts for the remainder of 2001. These charges were also impacted by Excite@Home's decision to sell or shut down narrowband operations. As a result of the foregoing, and other factors, Excite@Home entered into bankruptcy proceedings in September 2001. In addition, AT&T recorded a related goodwill impairment charge of $139 million associated with its acquisition goodwill of Excite@Home. Since we consolidated, but only owned approximately 23% of Excite@Home, a portion of the charges recorded by Excite@Home was not included as a reduction to AT&T's net income, but rather was eliminated in our 2001 Consolidated Statement of Income as a component of "Minority interest income (expense)." Additionally, we recorded asset impairment charges of $29 million related to the write-down of unrecoverable support assets where the carrying value was no longer supported by estimated future cash flows. The restructuring and exit plans did not yield cash savings (net of severance benefit payouts) in 2001. In subsequent years, the net cash savings will increase, due to the timing of actual separations and associated payments, until the completion of the exit plan at which time we expect to yield approximately $1.1 billion of cash savings per year. Accordingly, there was no benefit to operating income (net of the restructuring charges recorded) in 2001. In subsequent years, the operating income benefit will continue to increase, due to timing of actual separations, until the completion of the exit plan, at which time we expect a benefit to operating income of approximately $1.2 billion per year. As a result of continuing realignment within AT&T Broadband, we expect to record a restructuring charge in the first quarter of 2002 in the range of $50 million to $100 million. During 2000, we recorded $7,029 million of net restructuring and other charges including $6,179 million of asset impairment charges related to Excite@Home, $759 million for restructuring and exit costs associated with AT&T's initiative to reduce costs, and $91 million related to the government-mandated disposition of AT&T Communications (U.K.) Ltd., which would have competed directly with Concert. The asset impairment charges related to Excite@Home resulted from the deterioration of the market conditions and market valuations of Internet-related companies during the fourth quarter of 2000, which caused Excite@Home to conclude that intangible assets related to their acquisitions of Internet-related companies may not be recoverable. Accordingly, Excite@Home conducted a detailed assessment of the recoverability of the carrying amounts of acquired intangible assets. This assessment resulted in a determination that certain acquired intangible assets, including goodwill, related to these acquisitions, including Excite, 11 were impaired as of December 31, 2000. As a result, Excite@Home recorded impairment charges of $4,609 million in December 2000, representing the excess of the carrying amount of the impaired assets over their fair value. The impairment was allocated to each asset group based on a comparison of carrying values and fair values. The impairment write-down within each asset group was allocated first to goodwill, and if goodwill was reduced to zero, to identifiable intangible assets in proportion to carrying values. Since we consolidated but only owned approximately 23% of Excite@Home, 77% of the charge recorded by Excite@Home was not included as a reduction to AT&T's net income, but rather was eliminated in our 2000 Consolidated Statement of Income as "Minority interest income (expense)." Also as a result of the foregoing, AT&T recorded a goodwill and acquisition-related impairment charge of $1,570 million associated with the acquisition of our investment in Excite@Home. The write-down of our investment to fair value was determined utilizing discounted expected future cash flows. The $759 million charge for restructuring and exit plans was primarily due to headcount reductions, mainly in AT&T Business Services, including network operations, primarily for the consolidation of customer-care and call centers, as well as synergies created by the MediaOne merger. Included in exit costs was $503 million of cash termination benefits associated with the separation of approximately 7,300 employees as part of voluntary and involuntary termination plans. Approximately one-half of the separations were management employees and one-half were non-management employees. Approximately 6,700 employee separations were related to involuntary terminations and approximately 600 to voluntary terminations. We also recorded $62 million of network lease and other contract termination costs associated with penalties incurred as part of notifying vendors of the termination of these contracts during the year, and net losses of $32 million related to the disposition of facilities primarily due to synergies created by the MediaOne merger. Also included in restructuring and exit costs in 2000 was $144 million of benefit plan curtailment costs associated with employee separations as part of these exit plans. Further, we recorded an asset impairment charge of $18 million related to the write-down of unrecoverable assets in certain businesses where the carrying value was no longer supported by estimated future cash flows. During 1999, we recorded $975 million of net restructuring and other charges. A $594 million in-process research and development charge was recorded reflecting the estimated fair value of research and development projects at TCI, as of the date of the acquisition, which had not yet reached technological feasibility or had no alternative future use. The projects identified related to efforts to offer voice over IP, product-integration efforts for advanced set-top devices, cost-savings efforts for broadband-telephony implementation, and in- process research and development related to Excite@Home. We estimated the fair value of in-process research and development for each project using an income approach, which was adjusted to allocate fair value based on the project's percentage of completion. Under this approach, the present value of the anticipated future benefits of the projects was determined using a discount rate of 17%. For each project, the resulting net present value was multiplied by a percentage of completion based on effort expended to date versus projected costs to complete. Also in 1999, a $145 million charge for restructuring and exit costs was recorded as part of AT&T's initiative to reduce costs. The restructuring and exit plans primarily focused on the maximization of synergies through headcount reductions in AT&T Business Services, including network operations, primarily for the consolidation of customer-care and call centers. Included in exit costs was $142 million of cash termination benefits associated with the separation of approximately 2,800 employees as part of voluntary and involuntary termination plans. Approximately one-half of the separations were management employees and one-half were non-management employees. Approximately 1,700 employee separations were related to involuntary terminations and approximately 1,100 to voluntary terminations. 12 We also recorded net losses of $307 million related to the government-mandated disposition of certain international businesses that would have competed directly with Concert, and $50 million related to a contribution agreement AT&T Broadband entered into with Phoenixstar, Inc. That agreement requires AT&T Broadband to satisfy certain liabilities owed by Phoenixstar and its subsidiaries. The remaining obligation under this contribution agreement and an agreement that MediaOne had is $35 million, which was fully accrued for at December 31, 2001. In addition, we recorded benefits of $121 million related to the settlement of pension obligations for former employees who accepted AT&T's 1998 voluntary retirement incentive program (VRIP) offer.
FOR THE YEARS ENDED DECEMBER 31, ------------------------- 2001 2000 1999 ------ ------ ------- DOLLARS IN MILLIONS Operating income.......................................... $3,754 $4,228 $11,458
In 2001, operating income decreased $0.5 billion, or 11.2%. The decline was primarily attributable to accelerating declines in the long distance business. In addition, the acquisition of MediaOne and net dispositions negatively impacted operating income by $0.7 billion. Significantly offsetting these decreases was the net impact of Excite@Home (including the effect of lower asset impairments). Operating income decreased $7.2 billion, or 63.1%, in 2000 compared with 1999. The decrease was primarily due to higher net restructuring and other charges of $6.1 billion. Also contributing to the decrease was the impact of the acquisition of MediaOne and the consolidation of Excite@Home, which lowered operating income by $1.5 billion. A majority of the impact of operating losses and the restructuring charge generated by Excite@Home was offset in "Minority interest income (expense)" in the Consolidated Statement of Income, reflecting the approximate 77% of Excite@Home we do not own. Partially offsetting these decreases were cost-control initiatives and a larger pension credit associated with our mature long distance businesses and related support groups, partially offset by lower long distance revenue.
FOR THE YEARS ENDED DECEMBER 31, ----------------------- 2001 2000 1999 ------- ------ ---- DOLLARS IN MILLIONS Other (expense) income...................................... $(1,547) $1,150 $826
Other (expense) income in 2001 was an expense of $1.5 billion compared with income of $1.2 billion in 2000. The unfavorable variance of $2.7 billion was driven primarily by higher investment impairment charges of $0.8 billion, mostly consisting of impairments of Vodafone plc and Time Warner Telecom. Also contributing to the higher expense was an expense of $0.8 billion reflecting mark-to-market charges in conjunction with the adoption of SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" and $0.8 billion of lower net gains on the sales of businesses and investments. Other (expense) income improved $0.3 billion, or 39.3%, in 2000 compared with 1999. This improvement was primarily due to greater net gains on sales of businesses and investments of approximately $0.7 billion, and higher investment-related income of approximately $0.3 billion. The higher gains on sales were driven by significant gains associated with the swap of cable properties with Comcast and Cox, the sale of our investment in Lenfest and related transactions, which gains aggregated approximately $0.5 billion. In 1999, we recorded significant gains associated with the sale of our Language Line Services business and a portion of our ownership interest in AT&T Canada, which aggregated approximately $0.3 billion. Offsetting the improvements to other (expense) income in 2000 was an approximate $0.5 billion charge reflecting the increase in the fair value of put options held by Comcast and Cox related to Excite@Home stock, and approximately $0.2 billion of higher investment impairment charges.
FOR THE YEARS ENDED DECEMBER 31, ------------------------ 2001 2000 1999 ------ ------ ------ DOLLARS IN MILLIONS Interest expense........................................... $3,242 $2,964 $1,503
13 In 2001, interest expense increased $0.3 billion, or 9.4%. The increase was due primarily to a higher average debt balance in 2001, compared with 2000. The higher average debt balance was primarily a result of our June 2000 acquisition of MediaOne, including outstanding debt of MediaOne and debt issued to fund the MediaOne acquisition. The impact of MediaOne was partially offset by the company's debt reduction efforts in 2001. Interest expense increased 97.2%, or $1.5 billion, in 2000 compared with 1999. The increase was primarily due to a higher average debt balance as a result of our June 2000 acquisition of MediaOne, including outstanding debt of MediaOne and debt issued to fund the MediaOne acquisition, and our March 1999 acquisition of TCI.
FOR THE YEARS ENDED DECEMBER 31, ----------------------- 2001 2000 1999 ----- ------ ------ DOLLARS IN MILLIONS (Benefit) provision for income taxes........................ $(791) $3,284 $4,016
The effective income tax rate is the (benefit) provision for income taxes as a percent of (loss) income from continuing operations before income taxes. The effective income tax rate was 76.4% in 2001, 136.1% in 2000 and 37.3% in 1999. In 2001, the effective tax rate was positively impacted by a significant net tax benefit related to Excite@Home, including a benefit from the deconsolidation and the put obligation settlement with Cox and Comcast, partially offset by the prior consolidation of its operating losses (which included asset impairment charges) for which the company was unable to record tax benefits. Also positively impacting the effective tax rate was the net impact of a tax-free exchange with Comcast of AT&T stock held by Comcast for an entity owning certain cable systems and the resulting reduction of a previously established deferred tax liability. In addition, a benefit was recognized associated with the tax-free gain from the disposal of a portion of AT&T's retained interest in AT&T Wireless in a debt-for-equity exchange. In 2000, the effective tax rate was negatively impacted by Excite@Home, for which the company was unable to record tax benefits associated with its pretax losses. Therefore, the $4.6 billion restructuring charges taken by Excite@Home in 2000 had no associated tax benefit. The company also recorded a related nondeductible asset impairment charge of $1.6 billion associated with its acquisition of Excite@Home and a nondeductible charge to reflect the increase in the fair value of the put options related to Excite@Home held by Comcast and Cox, both of which negatively impacted the effective tax rate. The 2000 effective tax rate was positively impacted by a tax-free gain resulting from an exchange of AT&T stock for an entity owning certain cable systems and other assets with Cox and the benefit of the write-off of the related deferred tax liability. The 1999 effective tax rate was negatively impacted by a non-tax-deductible research and development charge, but positively impacted by a change in the net operating loss utilization tax rules that resulted in a reduction in the valuation allowance and the income tax provision.
FOR THE YEARS ENDED DECEMBER 31, --------------------- 2001 2000 1999 ---- ------ ----- DOLLARS IN MILLIONS Minority interest income (expense).......................... $963 $4,103 $(126)
Minority interest income (expense), which is recorded net of income taxes, represents an adjustment to AT&T's income to reflect the less than 100% ownership of consolidated subsidiaries as well as dividends on preferred stock issued by subsidiaries of AT&T. Minority interest income (expense) decreased $3.1 billion in 2001 compared with 2000 primarily due to lower losses generated by Excite@Home, mainly as a result of lower goodwill impairment charges recorded by Excite@Home in 2001 compared with 2000. As a result of significant losses incurred by Excite@Home, AT&T fully utilized the minority interest balance during the third quarter of 2001; therefore, we no longer recorded minority interest income related to Excite@Home. The $4.2 billion increase in minority interest income (expense) in 2000 resulted from the consolidation of Excite@Home effective September 1, 2000. The minority interest income in 2000 primarily reflects losses 14 generated by Excite@Home, including the goodwill impairment charge, that were attributable to the approximate 77% of Excite@Home not owned by AT&T. The income tax benefit within minority interest income (expense) was $100 million in both 2001 and 2000, and a benefit of $54 million in 1999.
FOR THE YEARS ENDED DECEMBER 31, -------------------------- 2001 2000 1999 ------- ------ ------- DOLLARS IN MILLIONS Equity (losses) earnings from Liberty Media Group........ $(2,711) $1,488 $(2,022)
Equity (losses) earnings from LMG, which are recorded net of income taxes, were a loss of $2.7 billion in 2001, compared with earnings of $1.5 billion in 2000. The decline of $4.2 billion was largely driven by gains on dispositions recorded in 2000, including gains associated with the mergers of various companies that LMG had investments in, as well as higher stock compensation expense in 2001 compared with 2000. Partially offsetting these declines were lower impairment charges recorded on LMG's investments to reflect other than temporary declines in value. Equity losses for 2001 reflect results through July 31, 2001, the deemed effective date of the split-off. Equity (losses) earnings from LMG were earnings of $1.5 billion in 2000, compared with losses of $2.0 billion in 1999. The improvement was primarily due to gains on dispositions, including gains associated with the mergers of various companies that LMG had investments in. Gains were recorded for the difference between the carrying value of LMG's interest in the acquired company and the fair value of securities received in the merger. In addition, lower stock compensation expense in 2000 compared with 1999 contributed to the improvement. These were partially offset by impairment charges recorded on LMG's investments to reflect other than temporary declines in value and higher losses relating to LMG's equity affiliates.
FOR THE YEARS ENDED DECEMBER 31, -------------------- 2001 2000 1999 ------ ---- ---- DOLLARS IN MILLIONS Net losses related to other equity investments.............. $4,850 $588 $756
Net losses related to other equity investments were $4.9 billion in 2001 compared with $0.6 billion in 2000, an increase of approximately $4.3 billion. The increase was driven primarily by higher net equity investment impairment charges of $4.3 billion. The pretax impairment charges were $7.0 billion and consisted primarily of $3.0 billion in charges related to the estimated loss on AT&T's commitment to purchase the shares of AT&T Canada we do not own, a $2.9 billion impairment charge related to the unwind of Concert and an impairment of our investment in Net2Phone of $1.1 billion. In addition, we recorded higher equity losses of $0.7 billion from Concert and Net2Phone. These losses were partially offset by $0.6 billion in losses recorded for Excite@Home in the first eight months of 2000 when we recorded the investment as an equity method investment. Excite@Home was fully consolidated beginning in September 2000. In 2000, net losses related to other equity investments were $0.6 billion, a 22.2% improvement compared with 1999. This improvement was primarily a result of higher earnings from our investment in Cablevision Systems Corp. (Cablevision) of approximately $0.2 billion due to gains from cable-system sales. Partially offsetting this improvement were losses from our stake in TWE, which we acquired in connection with the MediaOne merger, and greater equity losses from Excite@Home, which aggregated approximately $0.1 billion. The income tax benefit recorded on net losses related to other equity investments was $0.4 billion in both 2001 and 2000, and a benefit of $0.5 billion in 1999. The amortization of excess basis associated with nonconsolidated investments, recorded as a reduction of income, totaled $0.2 billion in 2001, and $0.5 billion 15 in both 2000 and 1999. Effective January 1, 2002, in accordance with the provisions of SFAS No. 142, we will no longer amortize excess basis related to nonconsolidated investments.
FOR THE YEARS ENDED DECEMBER 31, --------------------- 2001 2000 1999 ------- ---- ---- DOLLARS IN MILLIONS Gain on disposition of discontinued operations.............. $13,503 $-- $--
In 2001, we realized a gain on the disposition of discontinued operations of $13.5 billion, representing the difference between the fair value of the AT&T Wireless tracking stock on July 9, 2001, the date of the split-off, and AT&T's book value in AT&T Wireless Services.
FOR THE YEARS ENDED DECEMBER 31, --------------------- 2001 2000 1999 ----- ----- ----- DOLLARS IN MILLIONS Cumulative effect of accounting change...................... $904 $-- $--
Cumulative effect of accounting change, net of applicable income taxes, is comprised of $0.4 billion for AT&T Group (other than LMG) and $0.5 billion for LMG in 2001. The $0.4 billion recorded by AT&T, excluding LMG, was attributable primarily to fair value adjustments of equity derivative instruments embedded in indexed debt instruments and warrants held in both public and private companies due to the adoption of SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities." The $0.5 billion recorded by LMG represents the impact of separately recording the embedded call option obligations associated with LMG's senior exchangeable debentures due to the adoption of SFAS No. 133.
FOR THE YEARS ENDED DECEMBER 31, --------------------- 2001 2000 1999 ----- ----- ----- DOLLARS IN MILLIONS Dividend requirements of preferred stock.................... $652 $-- $--
Dividend requirements of preferred stock were $0.7 billion in 2001. The preferred stock dividend represented interest in connection with convertible preferred stock issued to NTT DoCoMo in January of 2001 as well as accretion of the beneficial conversion feature associated with this preferred stock. The beneficial conversion feature was recorded upon the issuance of the NTT DoCoMo preferred stock and represented the excess of the fair value of the preferred shares issued over the proceeds received. On July 9, 2001, in conjunction with the split-off of AT&T Wireless Group, these preferred shares were converted into AT&T Wireless common stock. As a result, we fully amortized the remaining beneficial conversion feature balance.
FOR THE YEARS ENDED DECEMBER 31, --------------------- 2001 2000 1999 ----- ----- ----- DOLLARS IN MILLIONS Premium on exchange of AT&T Wireless tracking stock......... $80 $-- $--
The premium on exchange of AT&T Wireless tracking stock was $80 million in 2001. The premium, which is a reduction of net income available to common shareowners, represents the excess of the fair value of the AT&T Wireless tracking stock issued over the fair value of the AT&T common stock exchanged and was calculated based on the closing share prices of AT&T common stock and AT&T Wireless tracking stock on May 25, 2001. 16
FOR THE YEARS ENDED DECEMBER 31, --------------------------- 2001 2000 1999 ------- ------ ------ (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) AT&T Common Stock Group -- per basic share: (Loss) earnings from continuing operations............... $(1.33) $0.76 $1.91 AT&T Common Stock Group earnings......................... 2.50 0.89 1.77 AT&T Common Stock Group -- per diluted share: (Loss) earnings from continuing operations............... (1.33) 0.75 1.87 AT&T Common Stock Group earnings......................... 2.50 0.88 1.74
In 2001, AT&T had a loss from continuing operations before cumulative effect of accounting change per diluted share of $1.33, compared with earnings of $0.75 per diluted share in 2000. The decline of $2.08 per diluted share was primarily attributable to an unfavorable variance in net losses related to other equity investments, other (expense) income and lower operating income, excluding net restructuring and other charges, in 2001 compared with 2000, partially offset by lower net restructuring and other charges in 2001. Earnings per diluted share (EPS) attributable to continuing operations of the AT&T Common Stock Group were $0.75 in 2000 compared with $1.87 in 1999, a decrease of 59.9%. The decrease was primarily due to higher restructuring and asset impairment charges and the MediaOne acquisition, including the impact of shares issued, operating losses of MediaOne and additional interest expense. Also contributing to the decrease was the impact of Excite@Home, including the mark-to-market adjustment related to the put options held by Comcast and Cox. These decreases were partially offset by improvements in other (expense) income, primarily associated with higher net gains on sales of businesses and investments, and higher investment-related income, and lower losses from equity investments. Also impacting EPS was higher operating income associated with our mature long distance businesses. In 2001, diluted EPS of AT&T Common Stock Group of $2.50 included a loss from continuing operations as discussed above of $1.33, income from discontinued operations of $0.03, a gain on the disposition of discontinued operations of $3.70 and income related to the cumulative effect of accounting change of $0.10. In 2000, diluted EPS of AT&T Common Stock Group of $0.88 included earnings from continuing operations as discussed above of $0.75 and income from discontinued operations of $0.13. In 1999, diluted EPS of AT&T Common Stock Group of $1.74 included earnings from continuing operations as discussed above of $1.87 and a loss from discontinued operations of $0.13. LMG reported a loss per share, excluding the cumulative effect of an accounting change, of $0.84 in 2001 through its split-off from AT&T on August 10, 2001. In 2000, LMG reported earnings per basic and diluted share of $0.58. The decline of $1.42 per share was primarily due to gains on dispositions reported in 2000, including gains associated with the mergers of various companies that LMG had investments in. Partially offsetting the decline were charges recorded on LMG's investments in 2000. EPS for LMG was $0.58 in 2000, compared with a loss of $0.80 per share in 1999. The increase in EPS was primarily due to gains on dispositions, including gains associated with the mergers of various companies that LMG had investments in. In addition, lower stock compensation expense in 2000 compared with 1999 contributed to the increase. These increases were partially offset by impairment charges recorded on LMG's investments to reflect other than temporary declines in value and higher losses relating to LMG's equity affiliates. In 2001, EPS for the AT&T Wireless Group, through its split-off date from AT&T on July 9, 2001, was $0.08 per basic and diluted share. EPS for AT&T Wireless Group for the period from April 27, 2000, the stock offering date, through December 31, 2000, was $0.21 per basic and diluted share. 17 DISCONTINUED OPERATIONS Pursuant to Accounting Principles Board Opinion No. 30 "Reporting the Results of Operations -- Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions," the consolidated financial statements of AT&T reflect the disposition of AT&T Wireless, which was split-off from AT&T on July 9, 2001, as discontinued operations. Accordingly, the revenue, costs and expenses, and cash flows of AT&T Wireless through June 30, 2001, the effective split-off date for accounting purposes, have been excluded from the respective captions in the 2001, 2000 and 1999 Consolidated Statements of Income and Consolidated Statements of Cash Flows and have been reported as "Income (loss) from discontinued operations," net of applicable income taxes; and as "Net cash provided by (used in) discontinued operations." The assets and liabilities of AT&T Wireless have been excluded from the respective captions in the December 31, 2000 Consolidated Balance Sheet, and are reported as "Net assets of discontinued operations." The gain associated with the disposition of AT&T Wireless is recorded as "Gain on disposition of discontinued operations," in the Consolidated Statement of Income. SEGMENT RESULTS In support of the services we provided in 2001, we segment our results by the operating units that support our primary lines of business: AT&T Business Services, AT&T Consumer Services and AT&T Broadband. The balance of AT&T's operations, excluding LMG, is included in a corporate and other category. Although not a segment, we also discuss the results of LMG prior to its split-off as an independent company. EBIT and EBITDA are the primary measures used by AT&T's chief operating decision makers to measure AT&T's operating results and to measure segment profitability and performance. AT&T calculates EBIT as operating income (loss) plus other income (expense), pretax minority interest income (expense) and net pretax losses related to other equity investments. EBITDA is defined as EBIT, excluding minority interest income (expense) other than Excite@Home's minority interest income (expense), plus depreciation and amortization. Interest and income taxes are not factored into the segment profitability measure used by the chief operating decision makers; therefore, trends for these items are discussed on a consolidated basis. Management believes EBIT and EBITDA are meaningful to investors because they provide analyses of operating results using the same measures used by AT&T's chief operating decision makers. In addition, we believe that both EBIT and EBITDA allow investors a means to evaluate the financial results of each segment in relation to total AT&T. EBIT for AT&T was a deficit of $4.8 billion and earnings of $8.4 billion and $10.9 billion for the years ended December 31, 2001, 2000 and 1999, respectively. EBITDA for AT&T was $4.7 billion, $17.1 billion and $17.7 billion for the years ended December 31, 2001, 2000 and 1999, respectively. Our calculations of EBIT and EBITDA may or may not be consistent with the calculation of these measures by other public companies. EBIT and EBITDA should not be viewed by investors as an alternative to generally accepted accounting principles (GAAP) measures of income as a measure of performance or to cash flows from operating, investing and financing activities as a measure of liquidity. In addition, EBITDA does not take into account changes in certain assets and liabilities as well as interest and income taxes which can affect cash flow. The discussion of segment results includes revenue, EBIT, EBITDA, capital additions and total assets. The discussion of EBITDA for AT&T Broadband is modified to exclude other income (expense) and net pretax losses related to equity investments. Total assets for each segment generally include all assets, except intercompany receivables. Prepaid pension assets and corporate-owned or leased real estate are generally held at the corporate level, and therefore are included in the corporate and other group. In addition, all impacts of the adoption of SFAS No. 133, as well as the ongoing investment and derivative revaluation, are reflected in the corporate and other group. The net assets of discontinued operations and the related income (loss) and gain on disposition are not reflected in the corporate and other group. Capital additions for each segment include capital expenditures for property, plant and equipment, acquisitions of licenses, additions to nonconsolidated investments, increases in franchise costs and additions to internal-use software. In connection with our corporate restructuring program set forth in late 2000, our existing segments reflect certain managerial changes that were implemented during 2001. The changes are as follows: AT&T 18 Business Services was expanded to include the results of international operations and ventures. In addition, certain corporate costs that were previously recorded within the corporate and other group have been allocated to the respective segments in an effort to ultimately have the results of these businesses reflect all direct corporate costs as well as overhead for shared services. All prior period results have been restated to reflect these changes. Reflecting the dynamics of our business, we continuously review our management model and structure, which may result in additional adjustments to our operating segments in the future. AT&T BUSINESS SERVICES AT&T Business Services offers a variety of global communications services to small and medium-sized businesses, large domestic and multinational businesses and government agencies. AT&T Business' services include long distance, international, toll-free and local voice; data and IP networking; managed networking services and outsourcing solutions; and wholesale transport services (sales of services to service resellers).
FOR THE YEARS ENDED DECEMBER 31, --------------------------------- 2001 2000 1999 --------- --------- --------- DOLLARS IN MILLIONS External revenue Services revenue...................................... $27,056 $27,972 $28,070 Equipment and product sales revenue................... 228 185 17 Total external revenue.................................. 27,284 28,157 28,087 Internal revenue........................................ 740 743 605 Total revenue........................................... 28,024 28,900 28,692 EBIT.................................................... (2,154) 5,990 5,248 EBITDA.................................................. 1,949 10,200 9,468 Capital additions....................................... 5,456 6,839 9,091
AT DECEMBER 31, ----------------- 2001 2000 ------- ------- Total assets............................................ $40,339 $42,747
REVENUE In 2001, AT&T Business Services revenue decreased $0.9 billion, or 3.0%, to $28.0 billion. A decline in long distance voice revenue of approximately $2.1 billion drove the revenue decline. Significantly offsetting the decline was approximately $1.4 billion of growth in data and IP services, local voice services and outsourcing solutions, including equipment sales. In 2000, AT&T Business Services revenue grew $0.2 billion, or 0.7%, compared with 1999. Strength in data and IP services as well as growth in outsourcing solutions contributed $1.8 billion to the increase. This growth was largely offset by an approximate $0.9 billion decline in long distance voice services as a result of continued pricing pressures in the industry and approximately $0.5 billion due to the net impacts of Concert, international dispositions and acquisitions. In 2001, long distance voice revenue declined at a low-teen percentage rate reflecting the continuing impact of pricing pressures, mitigated somewhat by volume growth. While volumes grew at a low single-digit percentage rate, the rate of growth declined from a high single-digit percentage growth rate in 2000, reflecting the economic weakness impacting many key industry sectors, including travel, financial services, technology and retail, as well as the impact of wireless and e-mail substitution. These factors, along with pricing pressures, are expected to continue to negatively impact revenue in 2002. In 2000, long distance voice services revenue declined at a mid single-digit percentage rate after excluding the impact of Concert. The decline was primarily due to a declining average price per minute reflecting the competitive forces within the industry. Partially offsetting this decline was the high single-digit percentage growth rate in volumes. 19 Data and IP services (including related product sales) grew at a low double-digit percentage rate in 2001 compared with 2000. The growth was led by packet services, which include frame relay, IP and Asynchronous Transfer Mode (ATM). Packet services grew at a rate in the mid-20 percent range. Total IP services (a component of packet services), which include IP connectivity services, Virtual Private Network (VPN) services and hosting services, also grew in the mid-20 percent rate range. The rate of growth of data services revenue declined in 2001 due primarily to a slow-down in the rate of growth of high-speed private line services and frame relay services as well as a decline in international private line services. In 2002, we expect data and IP revenue to grow; however, we expect the growth rate to decline from the 2001 growth rate. The 2000 data and IP services growth rate (including related product sales), as compared with 1999, was impacted by acquisitions and the formation of Concert. Excluding these impacts, data services grew at a high-teens percentage rate. Growth was led by the continued strength of frame relay services; IP services, which include IP-connectivity services and VPN services; and high-speed private-line services. Local voice services revenue grew more than 20% in 2001 compared with 2000, and grew nearly 20% in 2000 compared with 1999. In 2001, AT&T added more than 670 thousand access lines and added more than 867 thousand lines in 2000. Access lines at the end of 2001 and 2000 were more than 2.9 million and nearly 2.3 million, respectively. Access lines enable AT&T to provide local service to customers by allowing direct connection from customer equipment to the AT&T network. At the end of 2001, AT&T served more than 6,300 buildings on-network (buildings where AT&T owns the connection that runs into the building), representing an increase of approximately 3.2% over 2000. At the end of 2000, AT&T served more than 6,100 buildings on-network, compared with slightly more than 5,800 buildings at the end of 1999. In 2002, we expect local voice services revenue to grow; however, we expect the growth rate to decline from the 2001 growth rate. AT&T Business Services internal revenue was essentially flat in 2001 compared with 2000, and increased $138 million, or 22.7%, in 2000 compared with 1999. The impact of internal revenue is included in the revenue by product discussions, above. In 2001, AT&T Business Services had lower internal revenue due to the split-off of AT&T Wireless on July 9, 2001, as these sales are now reported as external revenue. This decrease was almost entirely offset by greater sales of services to other AT&T units, primarily AT&T Broadband. The increase in 2000 was the result of greater sales of business long distance services to other AT&T units that resell such services to their external customers, primarily AT&T Broadband and AT&T Wireless. EBIT/EBITDA In 2001, EBIT decreased $8.1 billion, or 136.0%, compared with 2000. EBITDA declined $8.3 billion, or 80.9%, in 2001 compared with 2000. The declines in EBIT and EBITDA were primarily due to charges of $3.0 billion in 2001, related to the estimated loss on AT&T's commitment to purchase the remaining public shares of AT&T Canada, and charges of $2.9 billion in 2001 related to the unwind of Concert. Also reflected in the declines was the impact of pricing pressure within the long distance voice business, as well as a shift from higher margin long distance services to lower margin growth services. In 2002, EBIT and EBITDA are expected to improve, primarily due to the 2001 charges we recorded related to AT&T Canada and the unwind of Concert, partially offset by lower net gains recorded in other (expense) income and lower operating income, reflecting continued softness in the long distance market. EBIT improved $0.7 billion, or 14.2%, and EBITDA improved $0.7 billion, or 7.7%, in 2000 compared with 1999. The improvements reflect an increase in revenue and lower costs as a result of our continued cost-control efforts, partially offset by the formation of Concert and the acquisition of AGNS. OTHER ITEMS Capital additions decreased $1.4 billion in 2001, and decreased $2.3 billion in 2000. In 2001, the decrease was a result of lower capital expenditures for the AT&T world-wide intelligent network, as well as a reduced investment in Concert. In 2000 the decrease was a result of lower spending for our network and lower infusions into nonconsolidated international investments. 20 Total assets decreased $2.4 billion, or 5.6%, at December 31, 2001, compared with December 31, 2000. The decrease was primarily due to a decline in our investments in nonconsolidated subsidiaries, primarily due to the write-down of our investment in Concert and equity losses from Concert, and reduced receivables resulting from lower revenue and increased collection efforts. These declines were partially offset by an increase in property, plant and equipment. AT&T CONSUMER SERVICES AT&T Consumer Services provides a variety of communications services to residential customers including domestic and international long distance; transaction based long distance, such as operator assisted service and prepaid phone cards; local and local toll (intrastate calls outside the immediate local area); and dial-up Internet.
FOR THE YEARS ENDED DECEMBER 31, --------------------------------- 2001 2000 1999 --------- --------- --------- DOLLARS IN MILLIONS Revenue................................................. $15,079 $18,894 $21,753 EBIT.................................................... 4,875 6,893 7,619 EBITDA.................................................. 5,075 7,060 7,803 Capital additions....................................... 140 148 299
AT DECEMBER 31, ----------------- 2001 2000 ------- ------- Total assets............................................ $ 2,141 $ 3,150
REVENUE AT&T Consumer Services revenue declined $3.8 billion, or 20.2%, in 2001 compared with 2000. The decline was primarily due to a $3.7 billion decline in traditional voice services, such as domestic and international dial services (long distance calls where the number "1" is dialed before the call), and domestic calling card services. The traditional voice services were negatively impacted by an acceleration of wireless and e-mail product substitution, and the impact of ongoing competition, which has led to a loss of market share. In addition, the continued migration of customers to lower-priced products and optional calling plans has also negatively impacted revenue. As a result of the acceleration of substitution and competition, calling volumes declined at a low double-digit percentage rate in 2001. The revenue decline also reflects a $0.5 billion impact due to the elimination of per-line charges in July 2000. Partially offsetting these revenue declines was revenue growth of $0.6 billion for prepaid card and local services. We expect product substitution, competition (including the continued entry of the Regional Bell Operating Companies into the long distance market) and customer migration to lower-priced calling plans and products to continue to negatively impact AT&T Consumer Services revenue in 2002. In 2000, AT&T Consumer Services revenue decreased 13.1%, or $2.9 billion, compared with 1999. Approximately $0.9 billion of the decline was due to the elimination of per-line charges in 2000 and the impact of Concert. The remainder of the decline was primarily due to a decline in traditional voice services, reflecting the ongoing competitive nature of the consumer long distance industry, which has resulted in pricing pressures and a loss of market share. Also negatively impacting revenue was product substitution and market migration away from direct-dial wireline and higher-priced calling-card services to the rapidly growing wireless services and lower-priced prepaid-card services. As a result, calling volumes declined at a mid single-digit percentage rate in 2000. EBIT/EBITDA EBIT declined $2.0 billion, or 29.3%, and EBITDA declined $2.0 billion, or 28.1%, in 2001 compared with 2000. In 2001, EBIT and EBITDA margins declined to 32.3% and 33.7%, from 36.5% and 37.4% in 2000, respectively. As customers substitute long distance calling with wireless and e-mail services and migrate to 21 lower priced calling plans and lower margin products, they tend to remain AT&T Consumer Services customers. These customers generate less revenue, however, the billing, customer care and fixed costs remain, resulting in lower EBIT margins. The margin decline was also impacted by a slight increase in marketing spending targeted at high value customers, partially offset by a $0.2 billion settlement of disputes relating to obligations resulting from the sale of AT&T Universal Card Services to Citigroup in 1998, as well as cost control initiatives. In 2002, we expect the impacts of revenue decline to continue to negatively impact EBIT and EBITDA. EBIT and EBITDA both declined $0.7 billion, or 9.5%, in 2000 compared with 1999. The declines primarily reflect the decline in the long distance business, offset somewhat by cost-control initiatives. In addition, the declines reflect $0.2 billion of lower gains on sales of businesses, due primarily to the 1999 sale of Language Line Services, and higher restructuring charges. Reflecting our cost-control initiatives, EBIT and EBITDA margins in 2000 improved to 36.5% and 37.4%, respectively, compared with 35.0% and 35.9%, respectively, in 1999. OTHER ITEMS In 2001, capital additions decreased $8 million, or 5.2%, compared with 2000. Capital additions decreased $0.2 billion, or 50.6%, in 2000 compared with 1999 as a result of reduced spending on internal-use software, as most of the functionality upgrades were completed in 1999. Total assets declined $1.0 billion, or 32.0%, in 2001. The decline was primarily due to lower accounts receivable, reflecting lower revenue. AT&T BROADBAND AT&T Broadband offers a variety of services through our cable (broadband) network, including traditional analog video and advanced services, such as digital video, high-speed data and broadband telephony.
FOR THE YEARS ENDED DECEMBER 31, -------------------------------- 2001 2000 1999 --------- --------- -------- DOLLARS IN MILLIONS External revenue...................................... $ 9,785 $ 8,212 $ 5,069 Internal revenue...................................... 14 14 1 Total revenue......................................... 9,799 8,226 5,070 EBIT.................................................. (3,215) (1,240) (1,545) EBITDA*............................................... 2,040 1,639 733 Capital additions..................................... 3,607 4,968 4,759
AT DECEMBER 31, ------------------- 2001 2000 -------- -------- Total assets.......................................... $103,060 $114,848
- --------------- * EBITDA for AT&T Broadband excludes net losses related to equity investments and other income (expense). Results of operations for the year ended December 31, 2001, include a full twelve months of MediaOne operations, while the year ended December 31, 2000, includes the results of MediaOne since its acquisition on June 15, 2000, and the year ended December 31, 1999, does not include any results of MediaOne. Additionally, the results of operations for the year ended December 31, 1999, include 10 months of TCI's results, reflecting its acquisition in March 1999, while 2000 and 2001 include a full 12 months of TCI's results. 22 REVENUE AT&T Broadband revenue grew $1.6 billion in 2001, or 19.1%, compared with 2000. Approximately $0.6 billion of the increase was due to the acquisition of MediaOne, partially offset by the net dispositions of cable systems. In addition, the increase was attributable to revenue growth from advanced services (broadband telephony and high-speed data) of approximately $0.6 billion and growth in other video services, primarily expanded basic cable and digital video, of approximately $0.4 billion. We expect 2002 revenue to increase as demand for advanced services continues to grow. AT&T Broadband revenue grew $3.2 billion in 2000, or 62.3%, compared with 1999. Approximately $2.8 billion of the increase in revenue was due to the acquisition of MediaOne in 2000 and TCI in 1999. In addition, revenue from advanced services and a basic-cable rate increase contributed approximately $0.4 billion to the revenue increase. At December 31, 2001, AT&T Broadband serviced approximately 13.6 million basic cable customers, passing approximately 24.6 million homes, compared with 16.0 million basic cable customers, passing approximately 28.3 million homes at December 31, 2000. The decrease in the number of homes passed and basic cable customers primarily reflect the net disposition of cable systems in 2001. In addition, the number of basic cable customers declined due to the impacts of competition. At December 31, 2001, we provided digital video service to approximately 3.5 million customers, high-speed data service to approximately 1.5 million customers and broadband telephony service to approximately 1.0 million customers. This compares with approximately 2.8 million digital-video customers, approximately 1.1 million high-speed data customers, and approximately 547 thousand broadband telephony customers at December 31, 2000. These amounts reflect the acquisition of MediaOne. At December 31, 1999, AT&T Broadband serviced approximately 11.4 million basic cable customers, passing approximately 19.7 million homes. At December 31, 1999, we provided digital video service to approximately 1.8 million customers, high-speed data service to approximately 207 thousand customers and broadband telephony service to nearly 8,300 customers. EBIT/EBITDA The EBIT deficit in 2001 increased $2.0 billion to $3.2 billion from the 2000 deficit of $1.2 billion. The increased deficit was largely due to the impacts of the acquisition of MediaOne and the net dispositions of cable systems of approximately $0.8 billion, as well as a $0.9 billion impact of net losses on the sales of businesses and investments recorded in 2001 compared with net gains recorded in 2000. In 2001, we recorded net losses from the sale of cable properties to Comcast, as well as a loss on the sale of part of our ownership interest in Cablevision. In 2000, we recorded a gain on the sale of Lenfest and gains on the sales of properties to Cox and Comcast. Also contributing to the increased deficit were higher depreciation and amortization, programming and advertising expenses and higher restructuring and other charges of approximately $0.8 billion, as well as greater investment impairment charges of $0.4 billion. These increases to the deficit were partially offset by $0.3 billion of lower pretax equity losses, improved EBIT of approximately $0.4 billion in other video services, primarily expanded basic cable and digital video, and improved EBIT in advanced services of approximately $0.2 billion. EBITDA, which excludes net losses related to equity investments and other income (expense), was $2.0 billion in 2001, an improvement of $0.4 billion compared with $1.6 billion in 2000. This improvement was primarily due to the acquisition of MediaOne of $0.4 billion and improved EBITDA in other video services, primarily expanded basic cable and digital video, of approximately $0.4 billion and improved EBITDA in advanced services of approximately $0.2 billion. Partially offsetting this improvement was the impact of net dispositions of cable systems of $0.4 billion, increased programming and advertising expenses of $0.2 billion, and higher restructuring and other charges of $0.1 billion. In 2002, we expect EBITDA, which excludes net losses related to equity investments and other income (expense), to increase as a result of expense reductions generated from previous years' restructuring charges as well as continued growth from advanced services (broadband telephony and high-speed data). 23 EBIT in 2000 was a deficit of $1.2 billion, an improvement of $0.3 billion, or 19.7% compared with 1999. This improvement was due to approximately $0.5 billion of higher gains on sales of businesses and investments, primarily gains on the swap of cable properties with Cox and Comcast and the sale of our investment in Lenfest, and $0.4 billion lower restructuring charges primarily associated with an in-process research and development charge recorded in connection with the 1999 acquisition of TCI. Also contributing to the improvement were lower pretax losses from equity investments of $0.5 billion, due in part to a $0.3 billion improvement from our investment in Cablevision due to gains from cable-system sales. These improvements were largely offset by the impact of the acquisition of MediaOne and TCI of approximately $0.5 billion and higher expenses associated with high-speed data and broadband telephony services of approximately $0.4 billion. EBITDA, which excludes net losses related to equity investments and other income, was $1.6 billion in 2000, an improvement of $0.9 billion compared with 1999. This improvement was due to the impact of the MediaOne and TCI acquisitions of $0.7 billion and lower restructuring charges of $0.4 billion. Higher expenses associated with high-speed data and broadband telephony of approximately $0.2 billion partially offset these increases. OTHER ITEMS Capital additions decreased $1.4 billion, or 27.4%, to $3.6 billion in 2001, from $5.0 billion in 2000. This decrease was primarily driven by a $0.9 billion decrease in capital expenditures combined with a $0.5 billion decrease in infusions into nonconsolidated investments. The 2001 spending was primarily related to the growth and support of advanced services and plant upgrade expenditures. Capital additions increased 4.4% to $5.0 billion in 2000, from $4.8 billion in 1999. The increase was due to higher capital expenditures of $0.8 billion, primarily due to MediaOne, which was almost entirely offset by decreased contributions to various nonconsolidated investments of $0.7 billion. The 2000 spending was primarily related to the growth and support of advanced services and plant upgrade expenditures. In 1999, spending was largely directed toward cable-distribution systems, focusing on the upgrade of cable plant assets, as well as equity infusions into various investments. Total assets at December 31, 2001, decreased $11.8 billion, or 10.3%, to $103.1 billion compared with $114.8 billion at December 31, 2000. The decrease in total assets was primarily due to lower franchise costs as a result of the net disposition of cable systems and the current year amortization; lower investments, primarily related to the impairment of and settlement of exchangeable notes with Vodafone ADRs, the sale of certain investments, including shares of Cablevision and Rainbow Media and unfavorable mark-to-market adjustments on certain investments; and lower other assets primarily due to unfavorable mark-to-market adjustments on certain derivative instruments, and the amortization of purchased intangibles. CORPORATE AND OTHER This group reflects the results of corporate staff functions, the elimination of transactions between segments, as well as the impacts of Excite@Home.
FOR THE YEARS ENDED DECEMBER 31, --------------------------------- 2001 2000 1999 --------- --------- ------- DOLLARS IN MILLIONS Revenue................................................. $ (352) $ (487) $(542) EBIT.................................................... (4,324) (3,279) (441) EBITDA.................................................. (3,737) (2,382) 37 Capital additions....................................... 327 1,683 271
AT DECEMBER 31, ----------------- 2001 2000 ------- ------- Total assets.............................................. $19,742 $12,101
24 REVENUE Revenue for corporate and other primarily includes negative revenue of $0.8 billion in both 2001 and 2000, representing the elimination of intercompany revenue, and revenue of Excite@Home of $0.4 billion in 2001 and $0.2 billion in 2000. The increase in revenue of Excite@Home is primarily due to nine months of revenue included in our 2001 results compared with four months of revenue included in our 2000 results. The elimination of intercompany revenue was essentially flat in 2001 compared with 2000, however, we had a higher elimination of intercompany revenue in 2001 resulting from increased sales from AT&T Business Services and Excite@Home to AT&T Broadband, offset by lower intercompany revenue from AT&T Wireless due to its split-off on July 9, 2001. Corporate and other revenue was negative $0.5 billion in both 2000 and 1999. Revenue in 2000 primarily included $0.8 billion of negative revenue, representing the elimination of intercompany revenue, and revenue of Excite@Home of $0.2 billion. Revenue in 1999 primarily included $0.6 billion of negative revenue representing the elimination of intercompany revenue. EBIT/EBITDA EBIT and EBITDA deficits in 2001 increased $1.0 billion and $1.4 billion to deficits of $4.3 billion and $3.7 billion, respectively. The deficit increases were largely due to $1.5 billion of greater investment impairment charges, which included a $1.1 billion impairment charge for Net2Phone and a $0.3 billion impairment charge for Time Warner Telecom recorded in 2001; and $0.8 billion of expense due to the adoption, in 2001, of SFAS No. 133. Also contributing to the deficit increases were higher restructuring and other charges (other than Excite@Home) and higher transaction costs associated with AT&T's restructuring announced in October 2000, totaling $0.4 billion; lower net gains on sales of investments and lower interest income, totaling $0.4 billion; and a lower pension credit (income) and higher postretirement expense of $0.3 billion. These increases to the deficits were largely offset by the improved EBIT and EBITDA of Excite@Home of $2.6 billion primarily due to the goodwill impairment charges recorded in 2000 by Excite@Home and AT&T related to Excite@Home, partially offset by a $0.3 billion greater loss in 2001 on the Excite@Home put obligation with Cox and Comcast. In 2000, EBIT and EBITDA deficits increased $2.8 billion and $2.4 billion to $3.3 billion and $2.4 billion, respectively. The increases in the deficits were largely related to Excite@Home. In 2000, restructuring and other charges, net of minority interest, were $2.9 billion higher primarily due to goodwill impairment charges recorded by Excite@Home and AT&T related to Excite@Home. Other impacts included a charge of approximately $0.5 billion for the fair market value increase of put options held by Comcast and Cox related to Excite@Home, and operating losses from Excite@Home. Partially offsetting these declines was an increase in the pension credit due to a higher pension trust asset base resulting from increased investment returns, and lower expenses associated with our continued efforts to reduce costs, which aggregated approximately $0.6 billion. In addition, higher net gains on sales of investments and an increase in interest income increased EBIT and EBITDA by approximately $0.6 billion. OTHER ITEMS Capital additions decreased $1.4 billion in 2001 and increased $1.4 billion in 2000. The spike in capital additions in 2000 was driven by our investment in Net2Phone. Total assets increased $7.6 billion, to $19.7 billion in 2001. The increase was primarily driven by a higher cash balance at December 31, 2001, mainly a result of proceeds received from our $10 billion bond offering in November 2001, and an investment in AT&T Wireless (which was monetized in the fourth quarter of 2001). These increases were partially offset by the impact of Excite@Home, the write-down of our investment in Net2Phone and the transfer of a loan to Concert to the AT&T Business Services segment, which was written off in the third quarter of 2001. 25 LIBERTY MEDIA GROUP LMG produces, acquires and distributes entertainment, educational and informational programming services through all available formats and media. LMG is also engaged in electronic-retailing services, direct-marketing services, advertising sales relating to programming services, infomercials and transaction processing. LMG was split-off from AT&T on August 10, 2001. The operating results of LMG were reflected as "Equity (losses) earnings from Liberty Media Group" in the Consolidated Statements of Income prior to its split-off from AT&T. Our investment in LMG was included in the Consolidated Balance Sheet at December 31, 2000. Losses from LMG were $2.7 billion in 2001 through July 31, 2001, the deemed effective split-off date for accounting purposes, compared with earnings of $1.5 billion in 2000. The decline was primarily due to gains on dispositions reported in 2000, including gains associated with the mergers of various companies that LMG had investments in. Gains were recorded for the difference between the carrying value of LMG's interest in the acquired company and the fair value of securities received in the merger. Partially offsetting the decline were charges recorded on LMG's investments in 2000, to reflect other than temporary declines in value. In 2001, LMG also recorded income of $0.5 billion for the cumulative effect of accounting change representing the impact of separately recording the embedded call option obligations associated with LMG's senior exchangeable debentures due to the adoption of SFAS No. 133. In 2000, earnings from LMG were $1.5 billion, compared with losses of $2.0 billion from the date of acquisition through December 31, 1999. The improvement was primarily due to gains on dispositions, including gains associated with the mergers of various companies that LMG had investments in. In addition, lower stock compensation expense in 2000 compared with 1999 contributed to the improvement, partially offset by impairment charges recorded on LMG's investments to reflect other than temporary declines in value and higher losses relating to LMG's equity affiliates. LIQUIDITY
FOR THE YEARS ENDED DECEMBER 31, --------------------------------- 2001 2000 1999 --------- --------- --------- DOLLARS IN MILLIONS CASH FLOWS: Provided by operating activities of continuing operations............................................ $10,558 $11,665 $10,509 Used in investing activities of continuing operations... (1,860) (30,045) (23,884) (Used in) provided by financing activities of continuing operations............................................ (3,030) 25,732 13,854 Provided by (used in) discontinued operations........... 4,860 (8,306) (2,594)
Net cash provided by operating activities of $10.6 billion for the year ended December 31, 2001, primarily included the $12.8 billion of income from continuing operations, adjusted to exclude noncash income items and net gains on sales of businesses and investments, and a decrease in accounts receivable of $0.7 billion, partially offset by net changes in other operating assets and liabilities of $2.2 billion and a decrease in accounts payable of $0.8 billion. Net cash provided by operating activities of $11.7 billion for the year ended December 31, 2000, primarily included income from continuing operations, excluding noncash income items and the adjustment for net gains on sales of businesses and investments of $15.1 billion, partially offset by an increase in accounts receivable of $2.5 billion and a decrease in accounts payable of $0.6 billion. Net cash provided by operating activities of $10.5 billion for the year ended December 31, 1999, primarily included income from continuing operations excluding noncash income items and the adjustment for net gains on sales of businesses and investments of $14.9 billion, partially offset by an increase in accounts receivable of $2.4 billion and net changes in other operating assets and liabilities of $1.8 billion. AT&T's investing activities resulted in a net use of cash of $1.9 billion in 2001, compared with $30.0 billion in 2000. During 2001, AT&T spent $9.3 billion on capital expenditures and $0.4 billion on nonconsolidated investments and received approximately $4.9 billion, primarily from the net dispositions of cable systems, and approximately $3.0 billion from the sales of investments. During 2000, AT&T used approximately $16.7 billion for acquisitions of businesses, primarily MediaOne, and spent $11.5 billion on 26 capital expenditures. During 1999, AT&T spent approximately $11.9 billion on capital expenditures, approximately $6.0 billion on acquisitions of businesses, primarily AGNS, and contributed $5.5 billion of cash to LMG. During 2001, net cash used in financing activities was $3.0 billion, compared with net cash provided by financing activities of $25.7 billion in 2000. During 2001, AT&T made net debt payments of $6.4 billion, paid AT&T Wireless $5.8 billion to settle an intercompany loan in conjunction with its split-off from AT&T, and paid dividends of $0.5 billion. Partially offsetting these outflows was the receipt of $9.8 billion from the issuance of convertible preferred stock to NTT DoCoMo. During 2000, AT&T received $10.3 billion from the AT&T Wireless Group tracking stock offering and had net borrowings of debt of $19.5 billion. These were partially offset by the payment of $3.0 billion in dividends. In 1999, AT&T had net borrowings of debt of $16.3 billion and received $4.6 billion from the issuance of redeemable preferred securities. These sources of cash were partially offset by the acquisition of treasury shares of $4.6 billion and the payment of dividends of $2.7 billion. Since the announced restructuring plans to create four new businesses, AT&T's credit ratings have been under review by the applicable rating agencies. As a result of this review, in 2001, AT&T's short-term and the long-term ratings were downgraded as outlined below. These actions have resulted in an increased cost of borrowings and decreased our access to the capital markets. Our current credit ratings are as follows:
SHORT-TERM CREDIT LONG-TERM CREDIT CHARACTERIZATION OF LONG-TERM CREDIT RATING AGENCY RATING RATING CREDIT RATING - -------------------- ----------------- ---------------- ----------------------------- Standard & Poor's........ A-2 BBB+ On credit watch with negative implications Moody's.................. P-2 A3 Under review with possibility of downgrade Fitch Ratings............ F-2 A- Rating watch negative
There are provisions in several of our debt instruments that require us to pay up to the $0.9 billion present value of future interest payments if our credit ratings are downgraded below investment grade. We do not believe downgrades below investment grade are likely to occur. In November 2001, we completed a $10 billion private bond offering which includes provisions that would allow bondholders to require AT&T to repurchase the notes if certain conditions are not met in conjunction with the spin-off or other separation of AT&T Broadband from AT&T at the time of notification to bondholders of the intention to separate AT&T Broadband. These conditions include a maximum debt to EBITDA ratio (adjusted) for pro forma AT&T, excluding AT&T Broadband, of no more than 2.75 times. In addition, the Moody's and Standard & Poor's credit ratings for pro forma AT&T, excluding AT&T Broadband, are required to be at least Baa3 and BBB-, respectively, with such ratings having at least a stable outlook. On December 14, 2001, we amended and restated a pre-existing revolving-credit facility. The amended facility, which is syndicated to 30 banks, makes $8 billion available to AT&T for a 364-day term. At December 31, 2001, we had not utilized this facility, and we currently have the entire $8 billion facility available to us. The credit facility agreement contains a financial covenant that requires AT&T to maintain a net debt-to-EBITDA ratio (as defined in the credit agreement) not exceeding 3.00 to 1.00 for four consecutive quarters ending on the last day of each fiscal quarter. At December 31, 2001, we were in compliance with this covenant. If AT&T were to become noncompliant it could result in the cancellation of the credit facility with any amounts outstanding under the credit facility becoming payable immediately. The holder of certain private debt has an annual right to cause AT&T to repay up to the $0.7 billion face value of the debt upon payment of an exercise fee. In exchange for the elimination of this put right for 2002, AT&T will obtain a letter of credit collateralized by $0.4 billion of cash which will be restricted in its use. The creditor could also accelerate repayment of the debt if unfavorable local law changes were to occur in its country of operation. 27 If AT&T's debt ratings are further downgraded or any of the risks or covenants noted above are triggered, AT&T may not be able to obtain sufficient financing in the timeframe required, and/or such replacement financing may be more costly or have additional covenants than we had in connection with our debt at December 31, 2001. In addition, if the financial markets become more cautious regarding the industry/ratings category we operate in, our ability to issue commercial paper would be further reduced. This could negatively impact our ability to pursue acquisitions, make capital expenditures to expand our network and cable plant or to pay dividends. At December 31, 2001, we had current assets of $22.5 billion and current liabilities of $25.4 billion. Included in current assets was $10.6 billion of cash and cash equivalents. Included in current liabilities was $13.0 billion of debt maturing within one year, including $9.2 billion of commercial paper and debt with an original maturity of one year or less. We expect to fund our operations primarily with cash from operations, cash on hand, commercial paper and our securitization program. If economic conditions worsen or do not improve and/or competition and product substitution accelerate beyond current expectations, our cash flow from operations would decrease, negatively impacting our liquidity. In addition, potential sources of funds include the sale of our ownership interest in TWE. On February 28, 2001, we exercised our registration rights in TWE and formally requested TWE to begin the process of converting the limited partnership into a corporation with registered equity securities. On May 14, 2001, we named Credit Suisse First Boston as our investment banker for the registration process under the TWE partnership agreement. If the proposed spin-off of AT&T Broadband occurs as currently structured, our investment in TWE will be included in the net assets spun-off. In the event our cash flow from operations or access to the commercial paper markets are negatively impacted, we have alternative funding available through the utilization of our $8 billion credit facility, as long as we are in compliance with certain covenants discussed above and our $2.7 billion receivables securitization program, which is limited by eligible receivables that change from month to month. Subsequent to December 31, 2001, AT&T notified holders of certain Trust Originated Preferred Securities, originally issued by TCI and MediaOne, that it will call these securities for early redemption on February 28, 2002, March 4, 2002 and April 1, 2002. These debt redemptions total approximately $1.4 billion and will be funded with cash on hand. Such amounts are included within "Short-term debt" on the Consolidated Balance Sheet at December 31, 2001. On February 27, 2002, AT&T signed an agreement with AT&T Latin America (ALA) that restructured approximately $725 million of ALA's short-term and long-term debt and preferred stock held by AT&T, plus accrued interest and dividends. At December 31, 2001, $72 million of the $725 million financing was not drawn. ALA's senior secured vendor financing of $298 million became effective on March 27, 2002. The AT&T provided debt and preferred facilities are subordinated to the ALA senior secured vendor financing. The agreement between AT&T and ALA, which also took effect on March 27, 2002, extends the maturity and redemption dates of all ALA debt and preferred stock payable to AT&T to October 2008. In addition, while the vendor financing is outstanding, the agreement defers interest payments on all AT&T debt and dividend payments on AT&T preferred stock until October 2008. If the proposed spin-off of AT&T Broadband occurs as currently structured, the debt of TCI and MediaOne will be included in the net assets spun-off and will be included in AT&T Comcast. The amount of this third-party debt at December 31, 2001, was $19.3 billion. The intercompany debt of AT&T Broadband payable to AT&T that is outstanding at the time of the spin-off will be repaid immediately prior to the spin-off. At December 31, 2001 such intercompany debt amounted to approximately $4.0 billion. In addition, AT&T's quarterly convertible income preferred securities, which had a book value of $4.7 billion at December 31, 2001, will be included in the net assets spun-off and will be included in AT&T Comcast. 28 The following summarizes AT&T's contractual cash obligations and commercial commitments at December 31, 2001, and the effect such obligations are expected to have on liquidity and cash flow in future periods.
PAYMENTS DUE BY PERIOD ----------------------------------------------------- LESS THAN 2-3 4-5 AFTER 5 CONTRACTUAL OBLIGATIONS TOTAL 1 YEAR YEARS YEARS YEARS - ----------------------- ------- --------- --------- --------- ------- (DOLLARS IN MILLIONS) Long-term debt, including current maturities(a)..................... $35,008 $2,975 $5,850 $6,958 $19,225 Operating leases(b)................. 2,996 550 924 648 874 Unconditional purchase Obligations(c)(d)(e)(f)(g)........ 8,532 810 894 910 5,918 ------- ------ ------ ------ ------- Total Contractual Cash Obligations....................... $46,536 $4,335 $7,668 $8,516 $26,017 ======= ====== ====== ====== =======
- --------------- (a) Long-term debt excludes debt that is exchangeable or collateralized by securities (monetized debt) since AT&T has the option to settle this debt in shares or cash. Amounts due less than one year were $679 million; two to three years $4,918 million; and four to five years $3,312 million at December 31, 2001. In addition, debt excludes discounts and excess of fair value over the recorded value of debt in connection with the TCI and MediaOne mergers. (b) Under certain real estate operating leases, we could be required to make payments to the lessor up to $586 million at the end of the lease term (lease terms range from 2002 through 2011). The actual amount paid, if any, would be reduced by amounts received by the lessor upon remarketing of the property. (c) AT&T has contractual obligations to utilize network facilities from local exchange carriers with terms greater than one year. These contracts are based on volumes and have penalty fees if certain volume levels are not met. We assessed our minimum exposure based on penalties to exit the contracts. At December 31, 2001, penalties to exit these contracts in any given year totaled approximately $1.5 billion. (d) AT&T has contractual obligations that extend through 2006 for services that include computer application design, development and testing as well as the operation of a data center that hosts many of the computer applications operated throughout AT&T. These contracts are based on the level of services we require and include termination fees if the level of services required is reduced in excess of limits outlined in the agreements. These contracts also include termination fee clauses if we exit the contracts. Since these contracts are based on the level of services we require, we assessed our minimum exposure based on the termination fees to exit the contracts which decline each year throughout the term of the contracts. If we elect to exit these contracts, the maximum termination fees we would be obligated to pay in the year of termination would be approximately $475 million in 2002, $360 million in 2003, $310 million in 2004, $240 million in 2005 or $165 million in 2006. (e) In connection with the decision to unwind Concert, AT&T has agreed to acquire the 9% interest of AT&T Canada owned by British Telecommunications plc (BT) and assume BT's portion of the obligation to purchase the AT&T Canada shares not already owned by AT&T and BT. We do not know the timing or amounts we will have to pay in connection with this obligation but, in 2001, AT&T recorded a liability of $3.0 billion reflecting the estimated loss on AT&T's commitment to purchase the publicly owned shares of AT&T Canada. (f) AT&T Broadband is party to an agreement under which it purchases certain billing services from CSG Systems, Inc. ("CSG"). Unless terminated by either party pursuant to terms of the agreement, the agreement expires on December 31, 2012. The agreement calls for monthly payments which are subject to adjustments and conditions pursuant to the terms of the underlying agreements. (g) In 1997, AT&T Broadband's predecessor, TCI, entered into a 25-year affiliation term sheet with Starz Encore Group pursuant to which AT&T may be obligated to pay fixed monthly amounts in exchange for unlimited access to all of the existing Encore and STARZ! programming. The future commitment, which 29 is calculated based on a fixed number of subscribers, increases annually from $306 million in 2002 to $315 million in 2003 and will increase annually through 2022 with inflation, subject to certain adjustments, including increases in the number of subscribers. The amounts in the above table do not take into account any increase in subscribers or expected inflation. The affiliation term sheet further provides that to the extent Starz Encore Group's programming costs increase above certain levels, AT&T's payments under the term sheet will be increased in proportion to the excess. Excess programming costs that may be payable by AT&T in future years are not presently estimable and could be significant.
COMMITMENTS BY PERIOD ----------------------------------------------------------- TOTAL AMOUNTS LESS THAN 2-3 4-5 AFTER 5 OTHER COMMERCIAL COMMITMENTS COMMITTED 1 YEAR YEARS YEARS YEARS - ---------------------------- ------------- --------- --------- --------- ------- (DOLLARS IN MILLIONS) Guarantees........................ $1,522 $55 $-- $-- $1,467
RISK MANAGEMENT We are exposed to market risk from changes in interest and foreign exchange rates, as well as changes in equity prices associated with previously affiliated companies. In addition, we are exposed to market risk from fluctuations in the prices of securities, some of which we have monetized through the issuance of debt. On a limited basis, we use certain derivative financial instruments, including interest rate swaps, options, forwards, equity hedges and other derivative contracts, to manage these risks. We do not use financial instruments for trading or speculative purposes. All financial instruments are used in accordance with board-approved policies. We enter into foreign currency contracts to minimize our exposure to risk of adverse changes in currency exchange rates. We are subject to foreign exchange risk for foreign-currency-denominated transactions, such as debt issued, recognized payables and receivables and forecasted transactions. As of December 31, 2001, our foreign currency market exposures were principally Canadian dollars, Euros, Japanese yen, Swiss francs and Brazilian reais. The fair value of foreign exchange contracts is subject to the changes in foreign currency exchange rates. For the purpose of assessing specific risks, we use a sensitivity analysis to determine the effects that market risk exposures may have on the fair value of our financial instruments and results of operations. To perform the sensitivity analysis, we assess the risk of loss in fair values from the effect of a hypothetical 10% change in the value of foreign currencies, assuming no change in interest rates. For contracts outstanding at December 31, 2001 and 2000, a 10% appreciation of the US dollar against foreign currencies from the prevailing rates would have resulted in an incremental pretax net unrealized loss of approximately $492 million and $6 million, respectively. The increase of the change from last year is primarily due to approximately $5.3 billion of foreign exchange contracts entered into relating to the commencement of a Euro Commercial Paper Program and our obligation to purchase the outstanding AT&T Canada shares we do not own. Because our foreign exchange contracts are entered into for hedging purposes, we believe that these losses would be largely offset by gains on the underlying transactions. The model to determine sensitivity assumes a parallel shift in all foreign currency exchange rates, although exchange rates rarely move in the same direction. Additionally, the amounts above do not necessarily represent the actual changes in fair value we would incur under normal market conditions, because all variables other than the exchange rates are held constant in the calculations. We use interest rate swaps to manage the impact of interest rate changes on earnings and cash flows. We monitor our interest rate risk on the basis of changes in fair value. The fair value of our fixed-rate long-term debt is sensitive to changes in interest rates. Interest rate changes would result in gains or losses in the market value of the debt due to differences between the market interest rates and rates at the inception of the obligation. We perform a sensitivity analysis on our fixed-rate long-term debt to assess the risk of changes in fair value. The model to determine sensitivity assumes a hypothetical 10% parallel shift in all interest rates. At December 31, 2001 and 2000, assuming a 10% increase in interest rates, the fair value of interest rate swaps and the underlying hedged debt would have decreased by $22 million and $11 million, respectively. 30 In both 2001 and 2000, we entered into combined interest rate forward contracts to hedge foreign-currency-denominated debt. Assuming a 10% downward shift in interest rates, the fair value of the contracts and the underlying hedged debt would have changed by $112 million and $88 million respectively. Assuming a 10% downward shift in interest rates at December 31, 2001 and 2000, the fair value of unhedged debt would have increased by $1.4 billion and $1.2 billion, respectively. We have certain notes which are indexed to the market price of equity securities we own. Certain of these notes contain embedded derivatives, while other debt is issued in conjunction with net purchased options. Changes in the market prices of these securities result in changes in the fair value of the derivatives. Assuming a 10% downward change in the market price of these securities, the fair value of the combined collars and underlying debt would decrease by $661 million and $534 million at December 31, 2001, and 2000 respectively. Because these collars hedge the underlying equity securities monetized, we believe that the increase in the fair value of the collars would be largely offset by decreases in the fair value of the underlying equity securities. The changes in fair values referenced above do not represent the actual changes in fair value we would incur under normal market conditions because all variables other than the equity prices were held constant in the calculations. We use equity hedges to manage our exposure to changes in equity prices associated with stock appreciation rights (SARs) of previously affiliated companies. Assuming a 10% decrease in equity prices of these companies, the fair value of the equity hedges (net liability) would have increased by $27 million and $29 million at December 31, 2001 and 2000, respectively. Because these contracts are entered into for hedging purposes, we believe that the decrease in fair value would be largely offset by decreases in the underlying SAR liabilities. In order to determine the changes in fair value of our various financial instruments, including options, equity collars and SARS, we use certain financial modeling techniques, including Black-Scholes. We apply rate sensitivity changes directly to our interest rate swap transactions and forward rate sensitivity to our foreign currency forward contracts. The changes in fair value, as discussed above, assume the occurrence of certain market conditions, which could have an adverse financial impact on the Company. They do not consider the potential effect of changes in market factors that would result in favorable impacts to us, and do not represent projected losses in fair value that we expect to incur. Future impacts would be based on actual developments in global financial markets. We do not foresee any significant changes in the strategies used to manage interest rate risk, foreign currency rate risk or equity price risk in the near future. FINANCIAL CONDITION
AT DECEMBER 31, ------------------- 2001 2000 -------- -------- DOLLARS IN MILLIONS Total assets................................................ $165,282 $234,360 Total liabilities........................................... 105,322 121,611 Total shareowners' equity................................... 51,680 103,198
Total assets decreased $69.1 billion, or 29.5%, to $165.3 billion at December 31, 2001, from $234.4 billion at December 31, 2000. This decrease was primarily due to the split-off of LMG in August 2001 and AT&T Wireless in July 2001. In addition, the decrease was due to lower investments and related advances resulting from the write-down of Concert and Net2Phone, and unfavorable mark-to-market adjustments on certain investments as well as the sale of other investments; lower franchise costs as a result of the net disposition of cable systems and amortization; and lower goodwill, primarily driven by the impairments associated with Excite@Home, as well as amortization. Partially offsetting these decreases was a higher cash balance, primarily reflecting proceeds from our $10.0 billion bond offering in November 2001. Total liabilities decreased $16.3 billion, or 13.4%, to $105.3 billion at December 31, 2001, from $121.6 billion at December 31, 2000. This decrease was primarily a result of lower debt, due to repayments, 31 partially offset by our bond offering. In addition, deferred income taxes were lower, primarily resulting from deferred tax assets recorded as a result of the write-down of Concert, our obligation to purchase all of the outstanding shares of AT&T Canada and cable systems sales, partially offset by a higher deferred tax liability associated with greater tax depreciation. Also contributing to the total liability decrease was the settlement with AT&T common stock of the Excite@Home put obligation with Cox and Comcast. Partially offsetting these decreases was an increase in other long-term liabilities and deferred credits recorded in the third quarter of 2001 for our obligation to purchase all of the outstanding shares of AT&T Canada. Minority interest decreased $1.3 billion, or 26.5%, to $3.6 billion at December 31, 2001, from $4.8 billion at December 31, 2000. This decrease was primarily due to Excite@Home. Due to the significant losses of Excite@Home, we fully utilized the minority interest balance during the third quarter of 2001, and therefore no longer have a minority interest balance related to Excite@Home. Total shareowners' equity decreased $51.5 billion, or 49.9%, to $51.7 billion at December 31, 2001, from $103.2 billion at December 31, 2000. This decrease was primarily due to the split-off of LMG, the net impacts of the split-off of AT&T Wireless and net losses from continuing operations. The decrease was partially offset by the issuance of stock to settle the Excite@Home put obligation with Cox and Comcast. In September and December 2001, when AT&T declared its quarterly dividends to the AT&T Common Stock Group shareowners, the company was in an accumulated deficit position primarily as a result of the split-off of AT&T Wireless. As a result, the company reduced additional paid-in capital by $0.3 billion, the entire amount of the dividends declared. The ratio of total debt to total capital for AT&T's continuing operations, excluding LMG (debt of continuing operations divided by total debt of continuing operations and equity excluding discontinued operations and LMG) was 47.7% at December 31, 2001, compared with 57.2% at December 31, 2000. For purposes of this calculation, equity includes the convertible trust preferred securities, as well as subsidiary redeemable preferred stock and excludes the equity of discontinued operations and LMG at December 31, 2000. In addition, included in debt of continuing operations was approximately $8.6 billion and $8.7 billion of notes at December 31, 2001 and 2000, respectively, which are exchangeable into or collateralized by securities we own. Excluding this debt, the debt ratio for AT&T's continuing operations at December 31, 2001, was 43.4%, compared with 53.6% at December 31, 2000. The lower debt, as well as increased equity drove the decreases in the debt ratios. NEW ACCOUNTING PRONOUNCEMENTS In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 141, "Business Combinations" which supercedes Accounting Principles Board (APB) Opinion No. 16. SFAS No. 141 requires all business combinations initiated after June 30, 2001, to be accounted for under the purchase method. In addition, SFAS No. 141 establishes criteria for the recognition of intangible assets separately from goodwill. The adoption of SFAS No. 141 will not have a material effect on AT&T's results of operations, financial position or cash flows. Also in June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets" which supercedes APB Opinion No. 17. Under SFAS No. 142, goodwill and indefinite-lived intangible assets will no longer be amortized, but rather will be tested for impairment upon adoption and at least annually thereafter. In addition, the amortization period of intangible assets with finite lives will no longer be limited to 40 years. SFAS No. 142 is effective for AT&T as of January 1, 2002. In connection with the adoption of this standard, AT&T's unamortized goodwill balance and excess basis related to equity method investments will no longer be amortized, but will continue to be tested for impairment. The goodwill balance as of December 31, 2001, was $24.7 billion, and the related amortization in 2001 was $0.9 billion. The excess basis balance at December 31, 2001, was $8.8 billion, with related amortization in 2001 of $207 million. In addition, we have determined that our franchise costs are indefinite-lived assets, as defined in SFAS No. 142, and therefore will not be subject to amortization beginning in 2002. The balance of our franchise costs as of December 31, 2001, was $42.8 billion and the related amortization for 2001 was $1.2 billion. The adoption of SFAS No. 142 will have a significant impact on our future operating results due to the cessation of goodwill and franchise cost amortization. For 32 2001, the amortization of goodwill, excess basis and franchise costs had an approximate impact of $0.45 per share. In accordance with SFAS No. 142, goodwill was tested for impairment by comparing the fair value of our reporting units to their carrying values. As of January 1, 2002, the fair value of the reporting units' goodwill exceeded their carrying value, and therefore no impairment loss will be recognized upon adoption. In accordance with SFAS No. 142, the franchise costs were tested for impairment as of January 1, 2002, by comparing the fair value to the carrying value (at market level). An impairment loss of $0.9 billion, net of taxes of $0.5 billion will be recognized as a change in accounting principle in the first quarter of 2002. In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations". This standard requires that obligations associated with the retirement of tangible long-lived assets be recorded as liabilities when those obligations are incurred, with the amount of the liability initially measured at fair value. Upon initially recognizing a liability for an asset retirement obligation, an entity must capitalize the cost by recognizing an increase in the carrying amount of the related long-lived asset. Over time, this liability is accreted to its present value, and the capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the liability, an entity either settles the obligation for its recorded amount or incurs a gain or loss upon settlement. SFAS No. 143 is effective for financial statements issued for fiscal years beginning after June 15, 2002. For AT&T, this means that the standard will be adopted on January 1, 2003. AT&T does not expect that the adoption of this statement will have a material impact on AT&T's results of operations, financial position or cash flows. In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" which supercedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". SFAS No. 144 applies to all long-lived assets, including discontinued operations, and consequently amends APB opinion No. 30, "Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." Based on SFAS No. 121, SFAS No. 144 develops one accounting model for long-lived assets that are to be disposed of by sale, as well as addresses the principal implementation issues. SFAS No. 144 requires that long-lived assets that are to be disposed of by sale be measured at the lower of book value or fair value less cost to sell. Additionally, SFAS No. 144 expands the scope of discontinued operations to include all components of an entity with operations that (1) can be distinguished from the rest of the entity and (2) will be eliminated from the ongoing operations of the entity in a disposal transaction. SFAS No. 144 also amends Accounting Research Bulletin (ARB) No. 51, "Consolidated Financial Statements" to eliminate the exception to consolidation for a subsidiary for which control is likely to be temporary. SFAS No. 144 is effective for AT&T as of January 1, 2002. The adoption of SFAS No. 144 will not have a material impact on AT&T's results of operations, financial position or cash flows. SUBSEQUENT EVENTS In March 2002, AT&T Canada announced the formation of a committee of the board of directors to help AT&T Canada with issues they are facing in the foreseeable future. Such issues include a significant regulatory decision expected in the next month which could have a significant impact on the future of sustainable competition in Canada; the effect of AT&T satisfying its obligation to purchase the shares of AT&T Canada it does not own; and the impact of these events on operating and financial results of AT&T Canada. In addition, the committee appointed financial advisors to evaluate various scenarios regarding issues, opportunities and alternatives for AT&T Canada. It is expected that the outcome of these evaluations will have a negative effect on the underlying value of AT&T Canada shares, which will result in AT&T recording up to $250 million of additional losses on its commitment to purchase the publicly owned shares of AT&T Canada, excluding any impact of the floor price accretion. Effective April 1, 2002, Concert was unwound. Pursuant to the partnership termination agreement, each of the partners generally reclaimed the customer contracts and assets that were initially contributed to the joint venture (see Note 5). 33 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information required by this Item is contained in the section entitled "Risk Management" in Item 7. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA REPORT OF MANAGEMENT Management is responsible for the preparation, integrity and objectivity of the consolidated financial statements and all other financial information included in this report. Management is also responsible for maintaining a system of internal controls as a fundamental requirement for the operational and financial integrity of results. The financial statements, which reflect the consolidated accounts of AT&T Corp. and subsidiaries (AT&T) and other financial information shown, were prepared in conformity with generally accepted accounting principles. Estimates included in the financial statements were based on judgments of qualified personnel. To maintain its system of internal controls, management carefully selects key personnel and establishes the organizational structure to provide an appropriate division of responsibility. We believe it is essential to conduct business affairs in accordance with the highest ethical standards as set forth in the AT&T Code of Conduct. These guidelines and other informational programs are designed and used to ensure that policies, standards and managerial authorities are understood throughout the organization. Our internal auditors monitor compliance with the system of internal controls by means of an annual plan of internal audits. On an ongoing basis, the system of internal controls is reviewed, evaluated and revised as necessary in light of the results of constant management oversight, internal and independent audits, changes in AT&T's business and other conditions. Management believes that the system of internal controls, taken as a whole, provides reasonable assurance that (1) financial records are adequate and can be relied upon to permit the preparation of financial statements in conformity with generally accepted accounting principles, and (2) access to assets occurs only in accordance with management's authorizations. The Audit Committee of the Board of Directors, which is composed of directors who are not employees, meets periodically with management, the internal auditors and the independent accountants to review the manner in which these groups of individuals are performing their responsibilities and to carry out the Audit Committee's oversight role with respect to auditing, internal controls and financial reporting matters. Periodically, both the internal auditors and the independent accountants meet privately with the Audit Committee and have access to its individual members at any time. The consolidated financial statements in this annual report have been audited by PricewaterhouseCoopers LLP, Independent Accountants. Their audits were conducted in accordance with generally accepted auditing standards and include an assessment of the internal control structure and selective tests of transactions. Their report follows. C. Michael Armstrong Charles H. Noski Chairman of the Board, Vice Chairman, Chief Executive Officer Chief Financial Officer
34 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareowners of AT&T Corp.: In our opinion, based on our audits and the report of other auditors, the accompanying consolidated balance sheets and the related consolidated statements of income, changes in shareowners' equity and of cash flows present fairly, in all material respects, the financial position of AT&T Corp. and its subsidiaries (AT&T) at December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of AT&T's management; our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the financial statements as of and for the years ended December 31, 2000 and 1999 of Liberty Media Group, an equity method investee, which was acquired by AT&T on March 9, 1999. AT&T's financial statements include an investment of $34,290 million as of December 31, 2000, and equity method earnings (losses) of $1,488 million and $(2,022) million, for the years ended December 31, 2000 and 1999, respectively. Those statements were audited by other auditors whose report thereon has been furnished to us, and our opinion expressed herein, insofar as it relates to the amounts included for Liberty Media Group, as of and for the years ended December 31, 2000 and 1999, is based solely on the report of the other auditors. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits and the report of other auditors provide a reasonable basis for our opinion. As discussed in the notes to the financial statements, AT&T was required to adopt Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, effective January 1, 2001. PRICEWATERHOUSECOOPERS LLP New York, New York March 25, 2002 35 AT&T CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, --------------------------- 2001 2000 1999 ------- ------- ------- (DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS) Revenue..................................................... $52,550 $55,533 $54,973 ------- ------- ------- Operating Expenses Costs of services and products (excluding depreciation of $4,818, $4,410 and $4,215 included below)................. 13,960 12,795 11,013 Access and other connection................................. 12,136 13,140 14,439 Selling, general and administrative......................... 10,832 9,752 10,894 Depreciation and other amortization......................... 6,865 5,924 5,137 Amortization of goodwill, franchise costs and other purchased intangibles..................................... 2,473 2,665 1,057 Net restructuring and other charges......................... 2,530 7,029 975 ------- ------- ------- Total operating expenses.................................... 48,796 51,305 43,515 ------- ------- ------- Operating income............................................ 3,754 4,228 11,458 Other (expense) income...................................... (1,547) 1,150 826 Interest expense............................................ 3,242 2,964 1,503 ------- ------- ------- (Loss) income from continuing operations before income taxes, minority interest, and (losses) earnings related to equity investments........................................ (1,035) 2,414 10,781 (Benefit) provision for income taxes........................ (791) 3,284 4,016 Minority interest income (expense).......................... 963 4,103 (126) Equity (losses) earnings from Liberty Media Group........... (2,711) 1,488 (2,022) Net losses related to other equity investments.............. 4,850 588 756 ------- ------- ------- (Loss) income from continuing operations.................... (6,842) 4,133 3,861 Income (loss) from discontinued operations (net of income taxes of $158, $307, and $(238)).......................... 150 536 (433) Gain on disposition of discontinued operations.............. 13,503 -- -- ------- ------- ------- Income before cumulative effect of accounting change........ 6,811 4,669 3,428 Cumulative effect of accounting change -- (net of income taxes of $578)............................................ 904 -- -- ------- ------- ------- Net income.................................................. 7,715 4,669 3,428 Dividend requirements of preferred stock.................... 652 -- -- Premium on exchange of AT&T Wireless tracking stock......... 80 -- -- ------- ------- ------- Net income available to common shareowners.................. $ 6,983 $ 4,669 $ 3,428 ======= ======= ======= AT&T Common Stock Group -- per basic share: (Loss) earnings from continuing operations.................. $ (1.33) $ 0.76 $ 1.91 Earnings (loss) from discontinued operations................ 0.03 0.13 (0.14) Gain on disposition of discontinued operations.............. 3.70 -- -- Cumulative effect of accounting change...................... 0.10 -- -- ------- ------- ------- AT&T Common Stock Group earnings............................ $ 2.50 $ 0.89 $ 1.77 ======= ======= ======= AT&T Common Stock Group -- per diluted share: (Loss) earnings from continuing operations.................. $ (1.33) $ 0.75 $ 1.87 Earnings (loss) from discontinued operations................ 0.03 0.13 (0.13) Gain on disposition of discontinued operations.............. 3.70 -- -- Cumulative effect of accounting change...................... 0.10 -- -- ------- ------- ------- AT&T Common Stock Group earnings............................ $ 2.50 $ 0.88 $ 1.74 ======= ======= ======= AT&T Wireless Group -- per basic and diluted share: Earnings from discontinued operations....................... $ 0.08 $ 0.21 $ -- Liberty Media Group -- per basic and diluted share: (Loss) earnings -- before cumulative effect of accounting change.................................................... $ (1.05) $ 0.58 $ (0.80) Cumulative effect of accounting change...................... 0.21 -- -- ------- ------- ------- Liberty Media Group (loss) earnings......................... $ (0.84) $ 0.58 $ (0.80) ======= ======= =======
The notes are an integral part of the consolidated financial statements. 36 AT&T CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
AT DECEMBER 31, --------------------- 2001 2000 --------- --------- (DOLLARS IN MILLIONS) ASSETS Cash and cash equivalents................................... $ 10,592 $ 64 Accounts receivable, less allowances of $827 and $1,185..... 7,736 9,408 Other receivables........................................... 1,645 1,645 Investments................................................. 668 2,102 Deferred income taxes....................................... 1,230 720 Other current assets........................................ 657 781 -------- -------- Total Current Assets........................................ 22,528 14,720 -------- -------- Property, plant and equipment, net.......................... 41,322 41,269 Franchise costs, net of accumulated amortization of $2,501 and $1,664................................................ 42,819 48,218 Goodwill, net of accumulated amortization of $1,307 and $609...................................................... 24,675 26,782 Investment in Liberty Media Group and related receivables, net....................................................... -- 34,290 Other investments and related advances...................... 23,818 30,875 Prepaid pension costs....................................... 3,337 3,003 Other assets................................................ 6,783 7,979 Net assets of discontinued operations....................... -- 27,224 -------- -------- Total Assets................................................ $165,282 $234,360 ======== ======== LIABILITIES Accounts payable............................................ $ 4,744 $ 5,382 Payroll and benefit-related liabilities..................... 2,084 1,991 Debt maturing within one year............................... 12,958 31,838 Liability under put options................................. -- 2,564 Other current liabilities................................... 5,641 6,200 -------- -------- Total Current Liabilities................................... 25,427 47,975 -------- -------- Long-term debt.............................................. 40,527 33,089 Long-term benefit-related liabilities....................... 3,594 3,670 Deferred income taxes....................................... 28,160 32,054 Other long-term liabilities and deferred credits............ 7,614 4,823 -------- -------- Total Liabilities........................................... 105,322 121,611 -------- -------- Minority Interest........................................... 3,560 4,841 Company-Obligated Convertible Quarterly Income Preferred Securities of Subsidiary Trust Holding Solely Subordinated Debt Securities of AT&T................................... 4,720 4,710 SHAREOWNERS' EQUITY Common Stock: AT&T Common Stock, $1 par value, authorized 6,000,000,000 shares; issued and outstanding 3,542,405,744 shares (net of 851,746,431 treasury shares) at December 31, 2001 and 3,760,151,185 shares (net of 416,887,452 treasury shares) at December 31, 2000...................................... 3,542 3,760 AT&T Wireless Group Common Stock, $1 par value, authorized 6,000,000,000 shares, issued and outstanding 361,802,200 shares at December 31, 2000............................... -- 362 Liberty Media Group Class A Common Stock, $1 par value, authorized 4,000,000,000 shares, issued and outstanding 2,363,738,198 shares (net of 59,512,496 treasury shares) at December 31, 2000...................................... -- 2,364 Liberty Media Group Class B Common Stock, $1 par value, authorized 400,000,000 shares, issued and outstanding 206,221,288 shares (net of 10,607,776 treasury shares) at December 31, 2000......................................... -- 206 Additional paid-in capital.................................. 51,964 90,496 (Accumulated deficit) retained earnings..................... (3,484) 7,408 Accumulated other comprehensive loss........................ (342) (1,398) -------- -------- Total Shareowners' Equity................................... 51,680 103,198 -------- -------- Total Liabilities and Shareowners' Equity................... $165,282 $234,360 ======== ========
The notes are an integral part of the consolidated financial statements. 37 AT&T CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREOWNERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, -------------------------------- 2001 2000 1999 --------- --------- -------- (DOLLARS IN MILLIONS) AT&T Common Stock Balance at beginning of year.............................. $ 3,760 $ 3,196 $ 2,630 Shares issued (acquired), net: Under employee plans................................... 15 3 -- For acquisitions....................................... 44 607 566 Settlement of put option............................... 155 -- -- For Wireless tracking stock exchange................... (372) -- -- Other*................................................. (60) (46) -- -------- -------- ------- Balance at end of year...................................... 3,542 3,760 3,196 -------- -------- ------- AT&T Wireless Group Common Stock Balance at beginning of year.............................. 362 -- -- Shares issued: For stock offering..................................... -- 360 -- Under employee plans................................... 2 2 -- For Wireless stock exchange............................ 438 -- -- Conversion of preferred stock.......................... 406 -- -- AT&T Wireless Group split-off............................... (1,208) -- -- -------- -------- ------- Balance at end of year...................................... -- 362 -- -------- -------- ------- Liberty Media Group Class A Common Stock Balance at beginning of year.............................. 2,364 2,314 -- Shares issued (acquired), net: For acquisitions....................................... -- 62 2,280 Other.................................................. 14 (12) 34 Liberty Media Group split-off............................. (2,378) -- -- -------- -------- ------- Balance at end of year...................................... -- 2,364 2,314 -------- -------- ------- Liberty Media Group Class B Common Stock Balance at beginning of year.............................. 206 217 -- Shares issued (acquired), net............................. 6 (11) 220 Liberty Media Group split-off............................. (212) -- -- Other..................................................... -- -- (3) -------- -------- ------- Balance at end of year...................................... -- 206 217 -------- -------- ------- Additional Paid-In Capital Balance at beginning of year.............................. 90,496 59,526 15,195 Shares issued (acquired), net: Under employee plans................................... 279 98 431 For acquisitions....................................... 827 23,097 42,425 Settlement of put option............................... 3,237 -- -- Other*................................................. (1,007) (2,767) 323 Proceeds in excess of par value from issuance of AT&T Wireless common stock.................................. -- 9,915 -- Common stock warrants issued.............................. -- -- 306 Gain on issuance of common stock by affiliates............ 20 530 667 Conversion of preferred stock............................. 9,631 -- -- AT&T Wireless Group split-off............................. (20,955) -- --
38 AT&T CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREOWNERS' EQUITY -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, -------------------------------- 2001 2000 1999 --------- --------- -------- (DOLLARS IN MILLIONS) Liberty Media Group split-off............................. (30,768) -- -- Wireless tracking stock exchange.......................... 14 -- -- Beneficial conversion value of preferred stock............ 295 -- -- Dividends declared -- AT&T Common Stock Group............. (265) -- -- Other..................................................... 160 97 179 -------- -------- ------- Balance at end of year...................................... 51,964 90,496 59,526 -------- -------- ------- Guaranteed ESOP Obligation Balance at beginning of year.............................. -- (17) (44) Amortization.............................................. -- 17 27 -------- -------- ------- Balance at end of year...................................... -- -- (17) -------- -------- ------- (Accumulated Deficit)/Retained Earnings Balance at beginning of year.............................. 7,408 6,712 7,800 Net income................................................ 7,715 4,669 3,428 Dividends declared -- AT&T Common Stock Group............. (275) (2,485) (2,807) Dividends accrued -- preferred stock...................... (652) -- -- Premium on exchange of AT&T Wireless tracking stock....... (80) -- -- Treasury shares issued at less than cost.................. (7) (1,488) (1,709) AT&T Wireless Group split-off............................. (17,593) -- -- -------- -------- ------- Balance at end of year...................................... (3,484) 7,408 6,712 -------- -------- ------- Accumulated Comprehensive Income Balance at beginning of year.............................. (1,398) 6,979 (59) Other comprehensive income................................ 1,742 (8,377) 7,038 AT&T Wireless Group split-off............................. 72 -- -- Liberty Media Group split-off............................. (758) -- -- -------- -------- ------- Balance at end of year...................................... (342) (1,398) 6,979 -------- -------- ------- Total Shareowners' Equity................................... $ 51,680 $103,198 $78,927 ======== ======== ======= Summary of Total Comprehensive Income (Loss): Income before cumulative effect of accounting change........ $ 6,811 $ 4,669 $ 3,428 Cumulative effect of accounting change...................... 904 -- -- Net income.................................................. 7,715 4,669 3,428 Other comprehensive income (loss)[net of income taxes of $1,119, $(5,348) and $4,600].............................. 1,742 (8,377) 7,038 -------- -------- ------- Comprehensive Income (Loss)................................. $ 9,457 $ (3,708) $10,466 ======== ======== =======
- --------------- AT&T accounts for treasury stock as retired stock. We have 100 million authorized shares of preferred stock at $1 par value. * Other activity in 2001 and 2000 represents AT&T common stock received in exchange for entities owning certain cable systems. The notes are an integral part of the consolidated financial statements. 39 AT&T CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, -------------------------------- 2001 2000 1999 -------- -------- -------- (DOLLARS IN MILLIONS) OPERATING ACTIVITIES Net income.................................................. $ 7,715 $ 4,669 $ 3,428 Deduct: Income (loss) from discontinued operations................ 150 536 (433) Gain on disposition of discontinued operations............ 13,503 -- -- -------- -------- -------- (Loss) income from continuing operations.................... (5,938) 4,133 3,861 Adjustments to reconcile (loss) income from continuing operations to net cash provided by operating activities of continuing operations: Cumulative effect of accounting change -- net of income taxes................................................... (904) -- -- Net gains on sales of businesses and investments.......... (528) (1,321) (585) Cost investment impairment charges........................ 1,083 248 40 Put option settlement loss and mark-to-market charges..... 838 537 -- Net restructuring and other charges....................... 2,343 6,793 678 Depreciation and amortization............................. 9,338 8,589 6,194 Provision for uncollectible receivables................... 1,130 1,080 1,216 Deferred income taxes..................................... (4,818) 341 354 Net revaluation of certain financial instruments.......... 809 -- -- Minority interest (income) expense........................ (1,263) (4,329) 24 Net equity losses (earnings) from Liberty Media Group..... 2,711 (1,488) 2,022 Net losses related to other equity investments............ 7,889 1,017 1,223 Decrease (increase) in receivables........................ 716 (2,512) (2,409) Decrease in accounts payable.............................. (819) (577) (165) Net change in other operating assets and liabilities...... (2,153) (376) (1,785) Other adjustments, net.................................... 124 (470) (159) -------- -------- -------- Net Cash Provided by Operating Activities of Continuing Operations................................................ 10,558 11,665 10,509 -------- -------- -------- INVESTING ACTIVITIES Capital expenditures and other additions.................... (9,300) (11,511) (11,876) Proceeds from sale or disposal of property, plant and equipment................................................. 83 600 286 (Increase) decrease in other receivables.................... (114) (1,052) 17 Sales of marketable securities.............................. 102 96 -- Purchases of marketable securities.......................... (18) -- -- Investment distributions and sales.......................... 3,014 992 1,574 Investment contributions and purchases...................... (378) (2,394) (7,837) Net dispositions (acquisitions) of businesses, net of cash disposed/acquired......................................... 4,913 (16,657) (5,969) Other investing activities, net............................. (162) (119) (79) -------- -------- -------- Net Cash Used in Investing Activities of Continuing Operations................................................ (1,860) (30,045) (23,884) -------- -------- -------- FINANCING ACTIVITIES Proceeds from long-term debt issuances, net of issuance costs..................................................... 12,415 4,601 8,396 Retirement of long-term debt................................ (1,661) (2,118) (2,255) (Decrease) increase in short-term borrowings, net........... (17,168) 16,973 10,173 Repayment of borrowings from AT&T Wireless.................. (5,803) -- -- Issuance of convertible preferred securities and warrants... 9,811 -- 4,638 Redemption of redeemable securities......................... -- (152) -- Issuance of AT&T common shares.............................. 224 99 -- Issuance of AT&T Wireless Group common shares............... 54 10,314 -- Net issuance (acquisition) of treasury shares............... 24 (581) (4,624) Dividends paid on common stock.............................. (549) (3,047) (2,712) Dividends paid on preferred securities...................... (336) (294) (135) Other financing activities, net............................. (41) (63) 373 -------- -------- -------- Net Cash (Used in) Provided by Financing Activities of Continuing Operations..................................... (3,030) 25,732 13,854 -------- -------- -------- Net cash provided by (used in) discontinued operations...... 4,860 (8,306) (2,594) Net increase (decrease) in cash and cash equivalents........ 10,528 (954) (2,115) Cash and cash equivalents at beginning of year.............. 64 1,018 3,133 -------- -------- -------- Cash and cash equivalents at end of year.................... $ 10,592 $ 64 $ 1,018 ======== ======== ========
The notes are an integral part of the consolidated financial statements. 40 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DOLLARS IN MILLIONS UNLESS OTHERWISE NOTED (EXCEPT PER SHARE AMOUNTS) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONSOLIDATION The consolidated financial statements include all controlled subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. Investments in majority-owned subsidiaries where control does not exist and investments in which we exercise significant influence but do not control (generally a 20% to 50% ownership interest) are accounted for under the equity method of accounting. Investments in which there is no significant influence (generally less than a 20% ownership interest) are accounted for under the cost method of accounting. FOREIGN CURRENCY TRANSLATION For operations outside the United States that prepare financial statements in currencies other than the U.S. dollar, we translate income statement amounts at average exchange rates for the year, and we translate assets and liabilities at year-end exchange rates. We present these translation adjustments as a component of accumulated other comprehensive income within shareowners' equity. Gains and losses from foreign currency transactions are included in results of operations. REVENUE RECOGNITION We recognize long distance, local voice and data services revenue based upon minutes of traffic processed or contracted fee schedules. Cable video and nonvideo installation revenue is recognized in the period the installation services are provided to the extent of direct selling costs. Any remaining amount is deferred and recognized over the estimated average period that customers are expected to remain connected to the cable distribution systems. Customer activation fees, along with the related costs up to but not exceeding the revenue, are deferred and amortized over the customer relationship period. We recognize other products and services revenue when the products are delivered and accepted by customers and when services are provided in accordance with contract terms. For contracts where we provide customers with an indefeasible right to use network capacity, we recognize revenue ratably over the stated life of the agreement. ADVERTISING AND PROMOTIONAL COSTS We expense costs of advertising and promotions, including cash incentives used to acquire customers, as incurred. Advertising and promotional expenses were $1,549, $1,377 and $1,418 in 2001, 2000 and 1999, respectively. Of these amounts, $236, $288 and $320 were cash incentives to acquire customers in 2001, 2000 and 1999, respectively. INCOME TAXES Under the balance sheet method we recognize deferred tax assets and liabilities at enacted income tax rates for the temporary differences between the financial reporting basis and the tax basis of our assets and liabilities. Any effects of changes in income tax rates or tax laws are included in the provision for income taxes in the period of enactment. When it is more likely than not that a portion or all of a deferred tax asset will not be realized in the future, we provide a corresponding valuation allowance against the deferred tax asset. We amortize investment tax credits as a reduction to the provision for income taxes over the useful lives of the assets that produced the credits. CASH EQUIVALENTS We consider all highly liquid investments with original maturities of generally three months or less to be cash equivalents. 41 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) PROPERTY, PLANT AND EQUIPMENT We state property, plant and equipment at cost. Construction costs, labor and applicable overhead related to installations and interest during construction are capitalized. Costs of additions and substantial improvements to property, plant and equipment are capitalized. The costs of maintenance and repairs of property, plant and equipment are charged to operating expense. Depreciation is determined based upon the assets' estimated useful lives using either the group or unit method. The useful lives of communications and network equipment range from three to 15 years. The useful lives of other equipment ranges from three to seven years. The useful lives of buildings and improvements range from 10 to 40 years. The group method is used for most depreciable assets, including the majority of communications and network equipment. The unit method is primarily used for large computer systems, buildings and support assets. Under the group method, a specific asset group has an average life. The depreciation rate is developed based on the average useful life for the specific asset group. This method requires the periodic revision of depreciation rates. Under the unit method, assets are depreciated based on the useful life of the individual asset. When we sell or retire assets depreciated using the group method, the cost is deducted from property, plant and equipment and charged to accumulated depreciation, without recognition of a gain or loss. When we sell assets that were depreciated using the unit method, we include the related gains or losses in "Other income (expense)" in the Consolidated Statements of Income. We use accelerated depreciation methods primarily for certain high-technology computer-processing equipment and digital equipment used in the telecommunications network, except for switching equipment placed in service before 1989, where a straight-line method is used. All other plant and equipment is depreciated on a straight-line basis. FRANCHISE COSTS Franchise costs include the value assigned to agreements with local authorities that allow access to homes in cable service areas acquired in connection with business combinations. Such amounts are amortized on a straight-line basis over 25 or 40 years. Beginning in 2002, in accordance with the provisions of Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets", such franchise costs will no longer be amortized, but will continue to be tested for impairment (see Note 23). GOODWILL Goodwill is the excess of the purchase price over the fair value of net assets acquired in business combinations accounted for under the purchase method. We amortize goodwill on a straight-line basis over the periods benefited, ranging from five to 40 years. Beginning in 2002, in accordance with the provisions of SFAS No. 142 such goodwill will no longer be amortized, but will continue to be tested for impairment (see Note 23). SOFTWARE CAPITALIZATION Certain direct development costs associated with internal-use software are capitalized, including external direct costs of material and services, and payroll costs for employees devoting time to the software projects. These costs are included within other assets and are amortized over a period not to exceed five years beginning when the asset is substantially ready for use. Costs incurred during the preliminary project stage, as well as maintenance and training costs, are expensed as incurred. AT&T also capitalizes initial operating-system software costs and amortizes them over the life of the associated hardware. AT&T also capitalizes costs associated with the development of application software incurred from the time technological feasibility is established until the software is ready to provide service to customers. These 42 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) capitalized costs are included in property, plant and equipment and are amortized over a useful life not to exceed five years. VALUATION OF LONG-LIVED ASSETS Long-lived assets, such as property, plant and equipment, franchise costs, goodwill, investments and software, are reviewed for impairment annually or whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If the total of the expected future undiscounted cash flows is less than the carrying amount of the asset, a loss is recognized for the difference between the fair value and carrying value of the asset. DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES We use derivative financial instruments to mitigate market risk from changes in interest rates, foreign currency exchange rates and equity prices. Derivative financial instruments may be exchange-traded or contracted in the over-the-counter market and include swaps, options, warrants and forward contracts. We do not use derivative financial instruments for speculative purposes. All derivatives are recognized on the balance sheet at fair value. To qualify for hedge accounting treatment, derivatives, at inception, must be designated as hedges and evaluated for effectiveness throughout the hedge period. We designate certain derivative contracts, at the date entered into, as either (1) a hedge of the fair value of a recognized asset or liability or of an unrecognized firm commitment (fair value hedge), (2) a hedge of a forecasted transaction or of the variability of cash flows to be received or paid related to a recognized asset or liability (cash flow hedge) or (3) a foreign currency fair value or cash flow hedge (foreign currency hedge). Other derivatives (undesignated) are not formally designated for accounting purposes. These derivatives, except for warrants, although undesignated for accounting purposes are entered into to hedge economic risks. We record changes in the fair value of fair-value hedges (including fair value foreign currency hedges), along with the changes in fair value of the hedged asset or liability that is attributable to the hedged risk (including losses or gains on firm commitments), in "Other income (expense)" in the Consolidated Statement of Income. We record changes in the fair value of cash-flow hedges (including foreign currency cash flow hedges) that are highly effective in "Other comprehensive income", net of income taxes, as a component of shareowners' equity, until earnings are affected by the variability of cash flows of the hedged transaction. Changes in the fair value of undesignated derivatives are recorded in "Other income (expense)" in the Consolidated Statement of Income, along with the change in fair value of any related asset or liability. We currently do not have any net investment hedges in a foreign operation. We assess embedded derivatives to determine whether (1) the economic characteristics of the embedded instruments are not clearly and closely related to the economic characteristics of the remaining component of the financial instrument (the host instrument) and (2) whether a separate instrument with the same terms as the embedded instrument would meet the definition of a derivative instrument. When it is determined that both conditions exist, we designate the derivatives as described above, and recognize at fair value. We formally document all relationships between hedging instruments and hedged items, as well as its risk-management objective and strategy for undertaking various hedge transactions. This process includes linking all derivatives that are designated as fair value or cash flow hedges to specific assets and liabilities on the balance sheet or to specific firm commitments or forecasted transactions. 43 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) We discontinue hedge accounting prospectively when (1) it is determined that the derivative is no longer effective in offsetting changes in the fair value of cash flows of a hedged item (2) the derivative expires or is sold, terminated, or exercised; (3) it is determined that the forecasted hedged transaction will no longer occur; (4) a hedged firm commitment no longer meets the definition of a firm commitment or (5) management determines that the designation of the derivative as a hedge instrument is no longer appropriate. When hedge accounting is discontinued because it is determined that the derivative no longer qualifies as an effective fair value hedge, the derivative will continue to be adjusted for changes in fair value through "Other income (expense)" in the Consolidated Statement of Income, and the hedged asset or liability will no longer be adjusted for changes in fair value. When hedge accounting is discontinued because the hedged item no longer meets the definition of a firm commitment, the derivative will continue to be adjusted for changes in the fair value through "Other income (expense)" in the Consolidated Statement of Income, and any asset or liability that was recorded pursuant to the recognition of the firm commitment will be removed from the balance sheet and recorded in current period earnings. When hedge accounting is discontinued because it is probable that a forecasted transaction will not occur, the derivative will then be adjusted for changes in the fair value through "Other income (expense)" in the Consolidated Statement of Income, and gains and losses that were accumulated in "Other comprehensive income" as a component of shareowners' equity, will be recognized immediately in "Other income (expense)" in the Consolidated Statement of Income. In all other situations in which hedge accounting is discontinued, the derivative will continue to be carried at fair value on the balance sheet, with changes in its fair value recognized in "Other income (expense)" in the Consolidated Statement of Income. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and revenue and expenses during the period reported. Actual results could differ from those estimates. Estimates are used when accounting for certain items such as allowances for doubtful accounts, depreciation and amortization, employee benefit plans, taxes, restructuring reserves and contingencies. CONCENTRATIONS As of December 31, 2001, we do not have any significant concentration of business transacted with a particular customer, supplier or lender that could, if suddenly eliminated, severely impact our operations. We also do not have a concentration of available sources of labor, services, franchises or other rights that could, if suddenly eliminated, severely impact our operations. We invest our cash with several high-quality credit institutions. ISSUANCE OF COMMON STOCK BY AFFILIATES Changes in our proportionate share of the underlying equity of a subsidiary or equity method investee, which result from the issuance of additional equity securities by such entity, are recognized as increases or decreases to additional paid-in capital in the Consolidated Statements of Shareowners' Equity. RECLASSIFICATIONS AND RESTATEMENTS We reclassified certain amounts for previous years to conform to the 2001 presentation. 44 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 2. RESTRUCTURING OF AT&T On October 25, 2000, AT&T announced a restructuring plan designed to fully separate or issue separately tracked stocks intended to reflect the financial performance and economic value of each of AT&T's four major operating units. On December 19, 2001, AT&T and Comcast Corporation (Comcast) announced an agreement to combine AT&T Broadband with Comcast. Under the terms of the agreement, AT&T will spin-off AT&T Broadband and simultaneously merge it with Comcast, forming a new company to be called AT&T Comcast Corporation (AT&T Comcast). AT&T shareowners will receive a number of shares of AT&T Comcast common stock based on an exchange ratio calculated pursuant to a formula specified in the merger agreement. If determined as of the date of the merger agreement, the exchange ratio would have been approximately 0.34, assuming the AT&T shares held by Comcast are included in the number of shares of AT&T common stock outstanding. Assuming Comcast retains its AT&T shares and converts them into exchangeable preferred stock of AT&T as contemplated by the merger agreement, the exchange ratio would have been approximately 0.35. Assuming certain conditions, AT&T shareowners will own an approximate 55% economic stake and an approximate 61% voting interest in the new company, calculated as of the date of the merger agreement. The merger of AT&T Broadband and Comcast is subject to regulatory review, approval by both companies' shareowners and certain other conditions and is expected to close by the end of 2002. AT&T also intends to proceed with the creation of a tracking stock for its AT&T Consumer Services business, which is expected to be distributed to AT&T shareowners following shareowner approval. AT&T has not yet determined the timing of the distribution, which may be made within a year of shareowner approval or may be made thereafter, depending on market conditions. Additionally, the AT&T board of directors could decide not to proceed with the distribution of the tracking stock, or could proceed at a time or in a manner different from its current intentions. These restructuring activities are complicated and involve a substantial number of steps and transactions, including obtaining various approvals, such as Internal Revenue Service (IRS) rulings. AT&T expects, however, that the transactions associated with AT&T's restructuring plan will be tax-free to U.S. shareowners. Future financial conditions, superior alternatives or other factors may arise or occur that make it inadvisable to proceed with part or all of AT&T's restructuring plans. Any or all of the elements of AT&T's restructuring plan may not occur as we currently expect or in the time frames that we currently contemplate, or at all. Alternative forms of restructuring, including sales of interests in these businesses, would reduce what is available for distribution to shareowners in the restructuring. On May 25, 2001, AT&T completed an exchange offer of AT&T common stock for AT&T Wireless stock. Under the terms of the exchange offer, AT&T issued 1.176 shares of AT&T Wireless Group tracking stock in exchange for each share of AT&T common stock validly tendered. A total of 372.2 million shares of AT&T common stock were tendered in exchange for 437.7 million shares of AT&T Wireless Group tracking stock. In conjunction with the exchange offer, AT&T recorded an $80 premium as a reduction to net income available to common shareowners. The premium represents the excess of the fair value of the AT&T Wireless Group tracking stock issued over the fair value of the AT&T common stock exchanged. On July 9, 2001, AT&T completed the split-off of AT&T Wireless as a separate, independently traded company. All AT&T Wireless Group tracking stock was converted into AT&T Wireless common stock on a one-for-one basis, and 1,136 million shares of AT&T Wireless common stock, held by AT&T were distributed to AT&T common shareowners on a basis of 0.3218 of a share of AT&T Wireless for each AT&T share outstanding. AT&T common shareowners received whole shares of AT&T Wireless and cash payments for fractional shares. The IRS ruled that the transaction qualified as tax-free for AT&T and its shareowners for U.S. federal income tax purposes, with the exception of cash received for fractional shares. For accounting purposes, the deemed effective split-off date was June 30, 2001. At the time of split-off, AT&T retained approximately $3 billion, or 7.3%, of AT&T Wireless common stock, about half of which was used in a debt- 45 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) for-equity exchange in July 2001. The remaining portion of these holdings was monetized in October and December of 2001 through the issuance of debt that is exchangeable into Wireless shares (or their cash equivalent) at maturity. The split-off of AT&T Wireless resulted in a noncash tax-free gain of $13.5 billion, which represented the difference between the fair value of the AT&T Wireless tracking stock at the date of the split-off and AT&T's book value in AT&T Wireless. This gain was recorded in the third quarter of 2001 as a "Gain on disposition of discontinued operations." On August 10, 2001, AT&T completed the split-off of Liberty Media Corporation as an independent, publicly traded company (since AT&T did not exit the line of business that Liberty Media Group (LMG) operated in, LMG was not accounted for as a discontinued operation). AT&T redeemed each outstanding share of Class A and Class B LMG tracking stock for one share of Liberty Media Corporation's Series A and Series B common stock, respectively. The IRS ruled that the split-off of Liberty Media Corporation qualified as a tax-free transaction for AT&T, Liberty Media and their shareowners. For accounting purposes, the deemed effective split-off date was July 31, 2001. 3. SUPPLEMENTARY FINANCIAL INFORMATION SUPPLEMENTARY INCOME STATEMENT INFORMATION
FOR THE YEARS ENDED DECEMBER 31, ----------------------- 2001 2000 1999 ------- ------ ---- INCLUDED IN SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Research and development expenses........................... $ 325 $ 402 $550 ======= ====== ==== OTHER (EXPENSE) INCOME Cost investment impairment charges.......................... $(1,083) $ (248) $(40) Settlement loss and mark-to-market charges on Excite@Home put options............................................... (838) (537) -- Net revaluation of certain financial instruments............ (809) -- -- Net gains on sales of businesses and investments............ 528 1,321 585 Investment-related income................................... 426 512 203 Miscellaneous, net.......................................... 229 102 78 ------- ------ ---- Total other (expense) income................................ $(1,547) $1,150 $826 ======= ====== ====
SUPPLEMENTARY BALANCE SHEET INFORMATION
AT DECEMBER 31, ------------------- 2001 2000 -------- -------- PROPERTY, PLANT AND EQUIPMENT Communications, network and other equipment................. $ 64,372 $ 60,232 Buildings and improvements.................................. 8,512 8,643 Land and improvements....................................... 484 523 -------- -------- Total property, plant and equipment......................... 73,368 69,398 Accumulated depreciation.................................... (32,046) (28,129) -------- -------- Property, plant and equipment, net.......................... $ 41,322 $ 41,269 ======== ========
46 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) LEVERAGED LEASES We lease airplanes, energy-producing facilities and transportation equipment under leveraged leases having original terms of 10 to 30 years, expiring in various years from 2004 through 2020. The investment in leveraged leases is primarily included in other assets on the balance sheet. Following is a summary of our investment in leveraged leases:
AT DECEMBER 31, --------------- 2001 2000 ------ ------ Rentals receivable (net of nonrecourse debt*)............... $1,241 $1,278 Estimated unguaranteed residual values...................... 964 976 Unearned income............................................. (953) (997) Allowance for credit losses................................. (31) (33) ------ ------ Investment in leveraged leases (included in other assets)... 1,221 1,224 Deferred taxes.............................................. 1,105 1,124 ------ ------ Net investment.............................................. $ 116 $ 100 ====== ======
- --------------- * The rentals receivable are net of nonrecourse debt of $3.2 billion and $3.4 billion at December 31, 2001 and 2000, respectively. SUPPLEMENTARY SHAREOWNERS' EQUITY INFORMATION
FOR THE YEARS ENDED DECEMBER 31, ------------------------- 2001 2000 1999 ------ ------- ------ OTHER COMPREHENSIVE INCOME (LOSS) Net foreign currency translation adjustment [net of income taxes of $(160), $(181) and $87](1)..................... $ (250) $ (309) $ 148 Net revaluation of certain financial instruments: Unrealized gains (losses) [net of income taxes of $343, $(4,686) and $4,499](2).............................. 475 (7,317) 6,868 Recognition of previously unrealized losses (gains) on available-for-sale securities [net of income taxes of $950, $(480) and $7](3).............................. 1,535 (750) 10 Net minimum pension liability adjustment [net of income taxes of $(14), $(1) and $7]............................ (18) (1) 12 ------ ------- ------ Total other comprehensive income (loss)................... $1,742 $(8,377) $7,038 ====== ======= ======
- --------------- (1) Includes LMG's foreign currency translation adjustments, net of applicable income taxes, totaling $(149) in 2001 through July 31, 2001, $(202) in 2000 and $60 in 1999, from March 1, 1999, date of acquisition, to December 31, 1999. (2) Includes LMG's unrealized gains (losses) on available-for-sale securities, net of applicable income taxes, totaling $1,286 in 2001 through July 31, 2001, $(6,117) in 2000 and $6,497 in 1999, from March 1, 1999, date of acquisition, to December 31, 1999. (3) See below for a summary of the "Recognition of previously unrealized losses (gains) on available-for-sale securities" and the income statement line items impacted. 47 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) SUMMARY OF RECOGNITION OF PREVIOUSLY UNREALIZED LOSSES (GAINS) ON AVAILABLE-FOR-SALE SECURITIES AND THE INCOME STATEMENT LINE ITEMS IMPACTED
FOR THE YEARS ENDED DECEMBER 31, ------------------------------------------------------------- 2001 2000 1999 ------------------ ------------------- ------------------ PRETAX AFTER-TAX PRETAX AFTER-TAX PRETAX AFTER-TAX ------ --------- ------- --------- ------ --------- AT&T GROUP: Other (expense) income: Reclassification of securities to "trading" in conjunction with the adoption of SFAS No. 133(4)....................... $1,154 $ 713 $ -- $ -- $-- $-- Sales of various securities.... 317 196 (476) (294) (3) (2) Other-than-temporary investment impairments.................. 985 608 290 179 -- -- LIBERTY MEDIA GROUP: Earnings (losses) from Liberty Media Group: Sale of various securities..... 173 105 (1,044) (635) 20 12 Cumulative effect of accounting change(4)...................... (144) (87) -- -- -- -- ------ ------ ------- ----- --- --- Total recognition of previously unrealized losses (gains) on available-for-sale securities..... $2,485 $1,535 $(1,230) $(750) $17 $10 ====== ====== ======= ===== === ===
- --------------- (4) See Note 14 for detailed discussion. SUPPLEMENTARY CASH FLOW INFORMATION
FOR THE YEARS ENDED DECEMBER 31, -------------------------------- 2001 2000 1999 -------- -------- -------- Interest payments, net of capitalized interest of $138, $177 and $143.......................................... $3,396 $3,059 $1,292 Income tax payments...................................... 803 2,369 3,948
4. MERGERS WITH MEDIAONE GROUP, INC., AND TELE-COMMUNICATIONS, INC. MERGER WITH MEDIAONE GROUP, INC. On June 15, 2000, AT&T completed a merger with MediaOne Group, Inc. (MediaOne) in a cash and stock transaction valued at approximately $45 billion. For each share of MediaOne stock, MediaOne shareowners received, in the aggregate 0.95 of a share of AT&T common stock and $36.27 per share in cash, consisting of $30.85 per share as stipulated in the merger agreement and $5.42 per share based on AT&T's stock price preceding the merger, which was below a predetermined amount. AT&T issued approximately 603 million shares of common stock in the transaction, of which approximately 60 million were treasury shares. The AT&T shares had an aggregate market value of approximately $21 billion, and cash payments totaled approximately $24 billion. 48 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The merger was accounted for under the purchase method. Accordingly, the results of MediaOne have been included in the accompanying consolidated financial statements since the date of acquisition as part of our AT&T Broadband segment. Approximately $17 billion of the purchase price of $45 billion has been attributed to agreements with local franchise authorities that allow access to homes in our broadband service areas (franchise costs) and is being amortized on a straight-line basis over 40 years. Also included in the purchase price was approximately $22 billion related to nonconsolidated investments, including investments in Time Warner Entertainment Company, L.P. (TWE) and Vodafone Group plc (Vodafone), approximately $5 billion related to property, plant and equipment, and approximately $5 billion of other net assets. In addition, included was approximately $13 billion in deferred income tax liabilities, approximately $10 billion attributable to MediaOne debt, and approximately $1 billion of minority interest in Centaur Funding Corporation, a subsidiary of MediaOne. The purchase resulted in goodwill of approximately $20 billion, which is being amortized on a straight-line basis over 40 years. MERGER WITH TELE-COMMUNICATIONS, INC. On March 9, 1999, AT&T completed a merger with Tele-Communications, Inc. (TCI), renamed AT&T Broadband, in an all-stock transaction valued at approximately $52 billion. Each share of TCI Group Series A common stock was converted into 1.16355 shares of AT&T common stock, and each share of TCI Group Series B common stock was converted into 1.27995 shares of AT&T common stock. AT&T issued approximately 664 million shares of common stock in the transaction, of which approximately 149 million were treasury shares. The AT&T shares had an aggregate market value of approximately $27 billion. Certain subsidiaries of TCI held TCI Group Series A common stock, which was converted into 216 million shares of AT&T common stock. These shares were held by the subsidiaries throughout 1999 and 2000 and were reflected as treasury stock in the balance sheet. In the second quarter of 2001, these shares were converted into AT&T Subsidiary Exchangeable Preferred Stock. Each subsidiary preferred share is exchangeable into 1,000 shares of AT&T Common Stock. In addition, TCI simultaneously combined its LMG programming business with its TCI Ventures Group technology investment business, forming LMG. In connection with the closing, AT&T issued separate tracking stock in exchange for the TCI, LMG and TCI Ventures Group tracking shares previously outstanding. We issued 2,280 million shares of LMG Class A tracking stock (including 120 million shares related to the conversion of convertible notes) and 220 million shares of Liberty Media Group Class B tracking stock. The tracking stock was designed to reflect the separate financial performance and economic value of LMG. These shares had an aggregate market value of approximately $23 billion. LMG was split-off from AT&T as an independent, publicly-traded company on August 10, 2001 (see Notes 2 and 10). The TCI merger was accounted for under the purchase method. Accordingly, the results of TCI have been included in the financial results of AT&T since the date of acquisition as part of our AT&T Broadband segment. The operating results of TCI have been included in the accompanying consolidated financial statements at their fair value since March 1, 1999, the deemed effective date of acquisition for accounting purposes. The impact of the results from March 1 through March 9, 1999, were deemed immaterial to our consolidated results. Approximately $20 billion of the purchase price of $52 billion was attributed to franchise costs and is being amortized on a straight-line basis over 40 years. Pursuant to SFAS No. 109, "Accounting for Income Taxes", AT&T recorded an approximate $13 billion deferred tax liability in connection with this franchise intangible, which is also included in franchise costs. We do not expect that this deferred tax liability will ever be paid. This deferred tax liability is being amortized on a straight-line basis over 40 years and is included in the provision for income taxes. Also included was approximately $11 billion related to nonconsolidated investments, approximately $5 billion related to property, plant and equipment, approximately $11 billion of 49 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) TCI long-term debt and approximately $7 billion related to other net liabilities. In addition, our investment in LMG was recorded at approximately $34 billion, including approximately $11 billion of goodwill. In 2002, in accordance with the provisions of SFAS No. 142, "Goodwill and Other Intangible Assets", we will no longer amortize goodwill, franchise costs or the deferred tax liability associated with franchise costs related to the mergers discussed above (see Note 23). Following is a summary of the pro forma results of AT&T as if the mergers with MediaOne and TCI had closed effective January 1, 1999:
FOR THE YEARS ENDED DECEMBER 31, ------------------- 2000 1999 -------- -------- (SHARES IN MILLION) (UNAUDITED) Revenue..................................................... $56,858 $58,609 Income from continuing operations........................... 5,081 6,885 Weighted-average AT&T common shares......................... 3,762 3,784 Weighted-average AT&T common shares and potential common shares.................................................... 3,821 3,906 Weighted-average Liberty Media Group shares................. 2,572 2,519 AT&T Common Stock Group earnings from continuing operations per common share: Basic..................................................... $ 0.96 $ 2.41 Diluted................................................... 0.95 2.34 Liberty Media Group earnings (loss) per common share: Basic and diluted......................................... $ 0.58 $ (0.89)
Pro forma data may not be indicative of the results that would have been obtained had these events actually occurred at the beginning of the periods presented, nor does it intend to be a projection of future results. 5. CONCERT AND AT&T CANADA On October 16, 2001, AT&T announced a decision to unwind Concert, its global venture with British Telecommunications plc (BT), which was launched in January 2000. Under the partnership termination agreement, each of the partners generally will reclaim the customer contracts and assets that were initially contributed to the joint venture, including international transport facilities and gateway assets. In addition, AT&T will assume certain other assets that BT originally contributed to the joint venture. AT&T also will acquire BT's 9% interest in AT&T Canada and assume BT's obligation to purchase a portion of the publicly owned shares of AT&T Canada. The agreement to dissolve the Concert venture, impacted AT&T's intent and ability to hold its investment in Concert, therefore, AT&T recorded a $1.8 billion after-tax investment impairment charge ($2.9 billion pretax) in 2001 included in "Net losses related to other equity investments" in the Consolidated Statement of Income. This charge primarily relates to the difference between the fair market value of the net assets AT&T will receive in the transaction and the carrying value of AT&T's investment in Concert which included a note receivable from Concert of approximately $1.1 billion. Our investment in Concert was accounted for as an equity method investment. The remaining carrying value of our investment in Concert was approximately $0.1 billion at December 31, 2001. The agreement to dissolve Concert remains subject to regulatory approval in the United States, Europe and other jurisdictions and is expected to close by the first-half of 2002. Through a joint venture, AT&T and BT have an approximate 31% equity ownership of AT&T Canada. In connection with the decision to unwind Concert, AT&T has agreed to acquire BT's 9% interest in AT&T Canada and assume BT's portion of the obligation to purchase the AT&T Canada shares not already owned by 50 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) AT&T and BT. AT&T has the right to trigger, at any time, the purchase by AT&T or another entity the remaining equity of AT&T Canada for the Back-end Price which is the greater of the floor price (Cdn $47.45 as of December 31, 2001) and the fair market value. The floor price accretes at 4% each quarter, commencing on June 30, 2000. In the event foreign ownership restrictions in Canada are lifted, in whole or in part, prior to June 30, 2003, AT&T is required to purchase the outstanding shares (to the extent permitted by any remaining foreign ownership restrictions) at the Back-end Price. If foreign ownership restrictions in Canada are not lifted and we do not exercise the call right by June 30, 2003, the shares would be put up for auction, and AT&T would have to make the shareholders whole for the amount, if any, by which the Back-End Price exceeds the proceeds received in auction. In 2001, AT&T recorded $1.8 billion after-tax charges ($3.0 billion pretax) reflecting the estimated loss on AT&T's commitment to purchase the publicly owned shares of AT&T Canada. Included in these charges was approximately $0.6 billion related to the assumption of BT's obligation to purchase the publicly owned shares of AT&T Canada. These charges reflect the difference between the underlying value of AT&T Canada shares and the price AT&T has committed to pay for them, including the 4% accretion of the floor price, and are included in "Net losses related to other equity investments" in the Consolidated Statement of Income and the related liability within "Other long-term liabilities and deferred credits" in the Consolidated Balance Sheet. The purchase commitment will continue to be evaluated against the difference between the contractual floor price and underlying value of AT&T Canada shares, which could result in the recognition of future additional charges in the amount of approximately $1.1 billion, assuming that the commitment is executed on June 30, 2003. As of December 31, 2001, the aggregate amount that AT&T would need to pay to complete its obligation related to AT&T Canada is approximately $3.2 billion. This obligation may be settled using cash or AT&T common stock, or any combination thereof. AT&T no longer records equity earnings or losses related to AT&T Canada since AT&T's investment balance was written down to zero largely through losses generated by AT&T Canada. In the event AT&T acquires more than 50% of the voting equity of AT&T Canada, AT&T Canada's results will be consolidated into AT&T's results. At December 31, 2001, AT&T Canada had outstanding debt of $2.9 billion and other net assets of $2.8 billion. 6. OTHER ACQUISITIONS, EXCHANGES, STOCK OFFERING, AND DISPOSITIONS CABLEVISION SYSTEMS CORPORATION On October 23, 2001, AT&T sold approximately 19.2 million shares of Cablevision NY Group Class A common stock and, monetized through a trust, 26.9 million shares of a mandatorily exchangeable trust security that is exchangeable into up to 26.9 million shares of Cablevision NY Group Class A common stock at maturity in three years. The offering price was $36.05 per share for both the common shares and the exchangeable securities. The offerings generated approximately $1.4 billion of pretax proceeds, net of underwriting fees. The sale resulted in a pretax loss of approximately $0.3 billion recorded in "Other (expense) income" in the Consolidated Statement of Income. On January 8, 2001, AT&T and Cablevision Systems Corporation (Cablevision) completed the transfer of cable systems in which AT&T received cable-systems serving 358 thousand customers in Boston and Eastern Massachusetts. In exchange, Cablevision received cable-systems serving approximately 130 thousand customers in the northern New York suburbs, and 44 million shares of AT&T common stock valued at approximately $0.9 billion, and approximately $0.2 billion in cash. Cablevision recorded a gain as a result of the transaction. AT&T did not record any gain or loss on the transaction, however due to its ownership interest in Cablevision, AT&T recorded a proportionate amount of a gain recorded by Cablevision of approximately $0.1 billion included within "Net losses related to other equity investments" in the Consolidated Statement of Income. 51 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) AT HOME CORPORATION On August 28, 2000, AT&T and At Home Corporation (Excite@Home) announced shareholder approval of a new board of directors and governance structure for Excite@Home. AT&T was given the right to designate six of the 11 Excite@Home board members. In addition, Excite@Home converted approximately 50 million of AT&T's Series A shares into Series B shares, each of which has 10 votes. As a result of these governance changes, AT&T gained a controlling interest and began consolidating Excite@Home's results upon the closing of the transaction on September 1, 2000. As of December 31, 2000, AT&T had, on a fully diluted basis, approximately 23% of the economic interest and 74% of the voting interest in Excite@Home. The consolidation of Excite@Home resulted in minority interest of approximately $2.2 billion, goodwill of approximately $2.4 billion, short-term liabilities of approximately $2.4 billion (including an initial put option liability), other net assets of approximately $1.2 billion and the removal of our investment in Excite@Home of approximately $1.9 billion. On September 28, 2001, At Home Corporation filed for bankruptcy protection under Chapter 11 in the U.S. Bankruptcy Court, for the Northern District of California. As a result of the bankruptcy and AT&T's removal of four of its six members from the Excite@Home board of directors, AT&T ceased consolidating Excite@Home as of September 30, 2001. Beginning October 1, 2001, AT&T no longer records equity earnings or losses related to Excite@Home since AT&T recognized losses in excess of its investment in Excite@Home. The noncash impacts of the deconsolidation of At Home Corporation primarily included a reduction to property, plant and equipment of approximately $0.3 billion, goodwill of approximately $0.3 billion and debt of approximately $1.0 billion. This resulted in the recording of a liability of approximately $0.4 billion. This liability will continue to be evaluated. In addition, other noncash items included a tax benefit of $0.7 billion reflecting changes to deferred tax liabilities. COX COMMUNICATIONS, INC. AND COMCAST -- EXCITE@HOME PUT OPTIONS In August 2000, in exchange for Cox Communications, Inc. (Cox) and Comcast relinquishing their rights under the shareholder agreement in connection with Excite@Home's governance change, AT&T granted put options to Cox and Comcast. The obligation under these put options was recorded at fair value, with gains or losses resulting from changes in fair value being recorded as a component of "Other (expense) income" in the Consolidated Statement of Income. For 2001 and 2000, changes in fair market value resulted in a pretax expense of $63 and $537, respectively. On May 18, 2001, AT&T, Cox and Comcast reached an agreement to revise the terms of the put options. Under the new agreement, Cox and Comcast retained their stakes in Excite@Home and AT&T issued 75 million AT&T common shares to Cox and more than 80 million AT&T common shares to Comcast. We recorded an approximate $0.8 billion loss in "Other (expense) income" in the Consolidated Statement of Income for this put option settlement in 2001. The new agreement resulted in a tax benefit to AT&T, which essentially offset this loss. COMCAST CABLE SYSTEM TRANSACTIONS On June 30, 2001, AT&T transferred its 99.75% interest in an entity owning the Baltimore Maryland cable-system serving approximately 115 thousand customers to Comcast for approximately $0.5 billion cash. The transaction resulted in a pretax gain of $0.1 billion recorded in "Other (expense) income" in the Consolidated Statement of Income. On April 30, 2001, AT&T received 63.9 million shares of AT&T common stock held by Comcast in exchange for cable systems that served approximately 590 thousand customers in six states. The transaction resulted in a pretax loss of $0.3 billion recorded in "Other (expense) income" in the Consolidated Statement of Income. 52 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) JAPAN TELECOM CO. LTD On April 27, 2001, AT&T completed the sale of our 10% stake in Japan Telecom Co. Ltd to Vodafone for $1.35 billion in cash. The proceeds from the transaction were split evenly between AT&T and AT&T Wireless Group since AT&T Wireless Group held approximately one-half of AT&T's investment. The transaction resulted in a pretax gain of approximately $0.5 billion recorded in "Other (expense) income" and a pretax gain of approximately $0.5 billion recorded in "Income from discontinued operations" in the Consolidated Statement of Income. INSIGHT COMMUNICATIONS COMPANY LP Effective January 1, 2001, AT&T sold to Insight Communications Company LP (Insight) several Illinois cable systems serving approximately 98 thousand customers for $0.4 billion. Insight subsequently contributed the purchased cable system and additional cable systems serving approximately 177 thousand customers to Insight Midwest L.P. in which AT&T has a 50% interest. AT&T also contributed cable systems serving approximately 248 thousand customers in Illinois to Insight Midwest L.P. The transactions resulted in a pretax gain of $0.2 billion, which was deferred due to a debt support agreement with Insight Midwest, L.P. AT&T WIRELESS GROUP On April 27, 2000, AT&T created a new class of stock and completed a public stock offering of 360 million shares, which represented 15.6% of AT&T Wireless Group tracking stock at a price of $29.50 per share. This stock was intended to track the financial performance and economic value of AT&T's wireless services business. The net proceeds to AT&T, after deducting the underwriter's discount and related fees and expenses, were $10.3 billion. AT&T allocated $7.0 billion of the net proceeds to AT&T Wireless Group, which were used for acquisitions, network expansion, capital expenditures and general corporate purposes. The remaining net proceeds of $3.3 billion were utilized by AT&T for general corporate purposes. On July 9, 2001, AT&T completed the split-off of AT&T Wireless (see Notes 2 and 7). COX -- CABLE SYSTEM TRANSACTION On March 15, 2000, AT&T received 50.3 million shares of AT&T common stock held by Cox in exchange for an entity owning cable systems serving approximately 312 thousand customers and certain other net assets. The transaction resulted in a pretax gain of $0.2 billion recorded in "Other (expense) income" in the Consolidated Statement of Income. LENFEST COMMUNICATIONS, INC. On January 18, 2000, AT&T sold its ownership in Lenfest Communications, Inc. to a subsidiary of Comcast. In connection with the sale, we received 47.3 million shares of Comcast Class A Special common stock. The transaction resulted in a pretax gain of $0.2 billion recorded in "Other (expense) income" in the Consolidated Statement of Income. ACC EUROPE On November 5, 1999, AT&T sold ACC Corp. (ACC) in Europe, including ACC's principal operations in the United Kingdom as well as ACC's operating companies in France, Germany and Italy, to WORLDxCHANGE Communications. We were required to dispose of this investment pursuant to a government mandate since it would have competed directly with Concert. The transaction resulted in a pretax loss of $0.2 billion recorded in "Other (expense) income" in the Consolidated Statement of Income. 53 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) IBM GLOBAL NETWORK On April 30, 1999, AT&T completed its acquisition of the IBM Global Network business (renamed AT&T Global Network Services or AGNS) and its assets in the United States. The non-U.S. acquisitions were completed in phases throughout 1999 and during the first quarter of 2000. Under the terms of the agreement, AT&T acquired the global network of IBM, and the two companies entered into outsourcing agreements with each other. The acquisition was accounted for under the purchase method. Accordingly, the operating results of AGNS have been included in the accompanying consolidated financial statements since the date of acquisition. The pro forma impact of AGNS on historical AT&T results is not material. 7. DISCONTINUED OPERATIONS Pursuant to AT&T's restructuring plan (see Note 2), AT&T completed the split-off of AT&T Wireless as a separate, independently traded company on July 9, 2001. All AT&T Wireless tracking stock was converted into AT&T Wireless common stock on a one-for-one basis and 1,136 million shares of AT&T Wireless common stock, held by AT&T, were distributed to AT&T common shareowners on a basis of 0.3218 of a share of AT&T Wireless for each AT&T share outstanding. AT&T common shareowners received whole shares of AT&T Wireless and cash payments for fractional shares. The IRS ruled that the transaction qualified as tax-free for AT&T and its shareowners for U.S. federal income tax purposes, with the exception of cash received for fractional shares. AT&T retained approximately $3 billion, or 7.3%, of AT&T Wireless common stock, about half of which was used in a debt-for-equity exchange in July resulting in a $0.5 billion gain recorded in "Other (expense) income" in the Consolidated Statement of Income. The remaining portion of these holdings was monetized in October and December of 2001 through the issuance of debt that is exchangeable into Wireless shares (or their cash equivalent) at maturity (see Note 12). In connection with the split-off of AT&T Wireless, AT&T wrote-up the net assets of AT&T Wireless to fair value. This resulted in a tax-free noncash gain of $13.5 billion, which represented the difference between the fair value of AT&T Wireless at the date of the split-off and AT&T's book value in AT&T Wireless. This gain was recorded as a "Gain on disposition of discontinued operations" in the Consolidated Statement of Income. The consolidated financial statements of AT&T have been restated to reflect AT&T Wireless as a discontinued operation. Accordingly, the revenue, costs and expenses, assets and liabilities and cash flows of AT&T Wireless have been excluded from the respective captions in the Consolidated Statements of Income, Consolidated Balance Sheets and Consolidated Statements of Cash Flows, and have been reported through June 30, 2001, the deemed effective split-off date for accounting purposes, as "Income from discontinued operations", net of applicable income taxes; as "Net assets of discontinued operations"; and as "Net cash provided by (used in) discontinued operations". The impact of the operating results from July 1 through July 9, 2001, were deemed immaterial to our consolidated results. Revenue for discontinued operations was $6,592, $10,448 and $7,627 for 2001, 2000 and 1999, respectively. At December 31, 2000, "Net Assets of Discontinued Operations" included total assets of $35,087 and total liabilities of $7,822. Total assets were comprised primarily of licensing costs, property, plant and equipment, goodwill and investments. Total liabilities were comprised primarily of deferred income taxes, accounts payable and other short-term liabilities. Net assets of discontinued operations also included minority interest of $41 at December 31, 2000. Interest expense of $153, $330 and $253 was allocated to discontinued operations in 2001, 2000 and 1999, respectively, based on the debt of AT&T that was attributable to AT&T Wireless. This debt was repaid to AT&T in connection with the split-off of AT&T Wireless. 54 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The noncash impacts of the split-off of AT&T Wireless include the reduction of assets of approximately $39.7 billion and reduced shareowners' equity of approximately $39.7 billion, including the $13.5 billion noncash gain on split-off. 8. EARNINGS PER COMMON SHARE AND POTENTIAL COMMON SHARE Income (loss) attributable to the different classes of AT&T common stock is as follows:
AT&T WIRELESS AT&T COMMON STOCK GROUP GROUP LIBERTY MEDIA GROUP ------------------------- ------------------ -------------------------- FOR THE YEARS ENDED DECEMBER 31, --------------------------------------------------------------------------- 2001 2000 1999 2001 2000 1999 2001 2000 1999 ------- ------ ------ ---- ---- ---- ------- ------ ------- (Loss) income from continuing operations before cumulative effect of accounting change................. $(4,131) $2,645 $5,883 $-- $-- $-- $(2,711) $1,488 $(2,022) Dividend requirements of preferred stock................................ 652 -- -- -- -- -- -- -- -- Premium on Wireless tracking stock exchange............................. 80 -- -- -- -- -- -- -- -- (Loss) income from continuing operations available to common shareowners.......................... (4,863) 2,645 5,883 -- -- -- (2,711) 1,488 (2,022) Income (loss) from discontinued operations........................... 115 460 (433) 35 76 -- -- -- -- Gain on disposition of discontinued operations........................... 13,503 -- -- -- -- -- -- -- -- Cumulative effect of accounting change............................... 359 -- -- -- -- -- 545 -- -- ------- ------ ------ --- --- -- ------- ------ ------- Net income (loss) available to common shareowners.......................... $ 9,114 $3,105 $5,450 $35 $76 $-- $(2,166) $1,488 $(2,022) ======= ====== ====== === === == ======= ====== =======
Basic earnings (loss) per share for AT&T Common Stock Group for 2001, 2000 and 1999 were computed by dividing AT&T Common Stock Group income (loss) by the weighted-average number of shares outstanding of 3,643 million, 3,486 million and 3,082 million during 2001, 2000 and 1999, respectively. Since AT&T recorded a loss from continuing operations for 2001, the diluted loss per share is the same as basic, as any potentially dilutive securities would be antidilutive to continuing operations. At December 31, 2001, potentially dilutive securities outstanding, included shares issuable for stock options, convertible quarterly income preferred securities, TCI Pacific Communications, Inc. preferred securities and the settlement of AT&T's commitment to purchase the public shares of AT&T Canada (see Note 5). Diluted earnings per share (EPS) for AT&T Common Stock Group for 2000 and 1999 were computed by dividing AT&T Common Stock Group income, adjusted for the conversion of securities, by the weighted-average number of shares and dilutive potential shares outstanding during the year, assuming conversion of the potential shares at the beginning of the years presented using the treasury stock method, which assumes any (after-tax) proceeds are used to repurchase shares. Shares issuable upon conversion of preferred stock of subsidiaries, convertible debt securities of a subsidiary and stock options have been included in the diluted calculation of weighted-average shares to the extent that the assumed issuance of such shares would have been dilutive, as illustrated below. The convertible quarterly income preferred securities were antidilutive and were excluded from the computation of diluted EPS. 55 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) A reconciliation of the income and share components for basic and diluted EPS calculations with respect to AT&T Common Stock Group continuing operations is as follows:
FOR THE YEARS ENDED DECEMBER 31, -------------------- 2000 1999 -------- -------- AT&T Common Stock Group: Income from continuing operations......................... $2,645 $5,883 Income impact of assumed conversion of preferred stock of subsidiary............................................. 32 26 Income adjusted for conversion of securities.............. $2,677 $5,909 Shares in millions Weighted-average common shares............................ 3,486 3,082 Stock options............................................. 19 35 Preferred stock of subsidiary............................. 40 33 Convertible debt securities of subsidiary................. -- 2 Weighted-average common shares and potential common shares................................................. 3,545 3,152
Basic EPS from discontinued operations for AT&T Wireless Group for 2001 through June 30, 2001, the deemed effective split-off date for accounting purposes, and from April 27, 2000, the stock offering date, through December 31, 2000, was computed by dividing income attributable to AT&T Wireless Group by the weighted-average number of shares outstanding of AT&T Wireless Group of 438 million and 361 million, respectively. Basic (loss) earnings per share for LMG was computed by dividing (loss) income attributable to LMG by the weighted-average number of LMG shares outstanding of 2,582 million in 2001 through July 31, 2001, the deemed effective split-off date for accounting purposes, 2,572 million in 2000 and 2,519 million from March 9, 1999, date of issuance through December 31, 1999. Potentially dilutive securities, including fixed and nonvested performance awards and stock options, have not been factored into the dilutive calculations because past history indicated that these contracts were generally settled in cash. 9. NET RESTRUCTURING AND OTHER CHARGES During 2001, we recorded $2,530 of net restructuring and other charges. These charges included approximately $1,330 of restructuring and exit costs associated with AT&T's continued cost reduction initiatives and $1,200 of asset impairment charges which were primarily related to Excite@Home. The $1,330 of charges for restructuring and exit plans were primarily due to headcount reductions with $1,014 for employee separations and benefit plan curtailment costs, $322 for facility closings and $27 related to termination of contractual obligations. The restructuring and exit plans support our cost reduction efforts through headcount reductions across all segments of the business, primarily network support and customer care functions in AT&T Business Services, continued cost reduction efforts by Excite@Home (which was still consolidated into AT&T's results through September 2001), in addition to impacts of the MediaOne merger. These charges were slightly offset by the reversal in December 2001 of $33 related to the business restructuring plans for fourth quarter 1999 and first quarter 2000. Included in the $1,014 of employee separations were $200 of benefit plan curtailment costs associated with employee separations as part of these exit plans. Approximately 18 thousand employees will be separated in conjunction with these exit plans, approximately one-half of which are management and one-half are non-management employees. Nearly 17 thousand employee separations related to involuntary terminations and more than 1 thousand related to voluntary terminations. Approximately 50% of the employees affected by the 56 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 2001 restructuring charges left their positions as of December 31, 2001, and the remaining will leave the company throughout 2002. Termination benefits of approximately $341 were paid throughout 2001. The following table displays the activity and balances of the restructuring reserve account:
TYPE OF COST ------------------------------------------ EMPLOYEE FACILITY SEPARATIONS CLOSINGS OTHER TOTAL ----------- -------- ----- ------ Balance at January 1, 1999.................... $ 118 $ 369 $ 30 $ 517 Additions................................... 142 -- 3 145 Deductions.................................. (110) (130) (12) (252) Balance at December 31, 1999.................. 150 239 21 410 Additions................................... 503 32 62 597 Deductions.................................. (394) (98) (47) (539) Balance at December 31, 2000.................. 259 173 36 468 Additions................................... 1,014 322 27 1,363 Deductions.................................. (765) (179) (44) (988) Balance at December 31, 2001.................. $ 508 $ 316 $ 19 $ 843
Deductions reflect cash payments of $209, $369, and $428 for 1999, 2000 and 2001, respectively. These payments included cash termination benefits of $40, $257 and $341, respectively, which were primarily funded through cash from operations. Deductions also reflect noncash utilization of $43, $170 and $560 for 1999, 2000 and 2001, respectively. Noncash utilization in 2001 includes $200 associated with benefit plan curtailment costs, $188 associated with management separation benefits in connection with U.S. based managers expected to be funded through AT&T's pension assets, $121 for the deconsolidation of Excite@Home, reversal of $33 related to the 1999 and 2000 business restructuring plan (of which $15 related to employee separations and $18 related to contract terminations) and $18 of deferred severance payments primarily related to executives. Noncash utilization in 1999 and 2000 included deferred severance payments primarily related to executives. The business restructuring plans of 1999 and 2000 are substantially complete as of December 31, 2001. The $1,200 million of asset impairments consisted of $1,032 million associated with the write-down of goodwill and other intangibles, warrants granted in connection with distributing the @Home service and fixed assets. These charges were due to continued deterioration in the business climate of, and reduced levels of venture capital funding activity for, Internet advertising and other Internet-related companies, continued significant declines in the market values of Excite@Home's competitors in the Internet advertising industry, and changes in their operating and cash flow forecasts for the remainder of 2001. These charges were also impacted by Excite@Home's decision to sell or shut down narrowband operations. As a result of the foregoing, and other factors, Excite@Home entered into bankruptcy proceedings in September 2001. In addition, AT&T recorded a related goodwill impairment charge of $139 associated with its acquisition goodwill of Excite@Home. Since we consolidated, but only owned approximately 23% of Excite@Home, a portion of the charges recorded by Excite@Home was not included as a reduction to AT&T's net income, but rather was eliminated in our Consolidated Statement of Operations as a component of "Minority interest income (expense)." Additionally, we recorded asset impairment charges of $29 related to the write-down of unrecoverable support assets where the carrying value was no longer supported by estimated future cash flows. During 2000, we recorded $7,029 of net restructuring and other charges, which included $6,179 of asset impairment charges related to Excite@Home, $759 for restructuring and exit costs associated with AT&T's initiative to reduce costs, and $91 related to the government-mandated disposition of AT&T Communications (U.K.) Ltd., which would have competed directly with Concert. 57 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The charges related to Excite@Home included $4,609 of asset impairment charges recorded by Excite@Home associated with the impairment of goodwill from various acquisitions, including Excite, and a related goodwill impairment charge of $1,570 recorded by AT&T associated with goodwill from the acquisition of our investment in Excite@Home. The impairments resulted from the deterioration of the market conditions and market valuations of Internet-related companies during the fourth quarter of 2000, which caused Excite@Home to conclude that intangible assets related to their acquisitions of Internet-related companies may not be recoverable. In accordance with SFAS No. 121, "Accounting For The Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", Excite@Home conducted a detailed assessment of the recoverability of the carrying amounts of acquired intangible assets. This assessment resulted in a determination that certain acquired intangible assets, including goodwill, related to these acquisitions, including Excite, were impaired as of December 31, 2000. As a result, Excite@Home recorded impairment charges of $4,609 in December 2000, representing the excess of the carrying amount of the impaired assets over their fair value. The review for impairment included a review of publicly traded Internet companies that are comparable to the companies that Excite@Home acquired. These companies experienced a substantial decline in stock price and market capitalization during the fourth quarter of 2000. Excite@Home also reviewed the business climate for Internet advertising and web-based infrastructure companies as of December 31, 2000, and observed the following: (1) investor and consumer enthusiasm for the Internet sector severely deteriorated during the fourth quarter of 2000; (2) many Internet companies, including those acquired by Excite@Home, experienced significant decelerations in their growth both as a result of economic conditions and due to Internet-sector specific issues such as competition and the weakening of the Internet advertising market; and (3) funding sources for Internet-based consumer businesses, which require considerable amounts of capital, had substantially evaporated as of December 31, 2000. As a result, Excite@Home concluded that fundamental, permanent and significant adverse changes had occurred during the fourth quarter of 2000 in the business climate for companies providing Internet advertising and other web-based services. In addition, Excite@Home reviewed operating and cash flow projections that existed at the time Excite@Home made the acquisitions and that were used as a basis upon which the decisions to complete the acquisitions were made. These operating and cash flow projections indicated that the acquired companies, over their useful lives, would be profitable and generate positive cash flows. The operating and cash flow projections were compared to operating results after the date of the acquisitions through December 31, 2000, as well as to projected operating results for 2001. These comparisons indicated that certain acquisitions generated operating and cash flow losses through the end of 2000, and were projected to continue generating operating and cash flow losses for the foreseeable future. As a result of these factors, Excite@Home determined that the intangible assets related to the acquisitions might not be recoverable and conducted impairment tests. Generally, the impairment tests were performed at an asset group level corresponding to the lowest level at which cash flows independent of other assets could be identified. Each asset group consisted of the goodwill and acquired identifiable intangible assets related to a specific acquisition. Acquired intangible assets were combined for those acquisitions where separately identifiable cash flows that are largely independent of the cash flows of other groups of assets could not be identified. For each of the asset groups to be tested for impairment, Excite@Home projected undiscounted cash flows over a future projection period of five years, based on Excite@Home's determination of the current remaining useful lives of the asset groups, plus an undiscounted terminal period cash flow to reflect disposition of the entities at the end of their useful lives. Undiscounted future cash flows were estimated using projected net realizable value in a sales transaction (undiscounted cash flows during the expected remaining holding 58 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) period until disposition were estimated as negligible). The undiscounted future cash flows were compared to the carrying amount of each asset group and for those asset groups where the carrying amount exceeded the undiscounted future cash flows, Excite@Home concluded that the asset group was impaired. Excite@Home measured the impairment loss related to impaired asset groups based on the amount by which the carrying amount of the asset group exceeded the fair value of the asset group. Measurement of fair value was based on an analysis by Excite@Home utilizing the best information available in the circumstances using reasonable and supportable assumptions and projections, and including the discounted cash flow and market comparison valuation techniques. The discounted cash flow analysis considered the likelihood of possible outcomes and was based on Excite@Home's best estimate of projected future cash flows, including terminal value cash flows expected to result from the disposition of the asset at the end of its useful life, discounted at our weighted average cost of capital. Weighted average cost of capital was based on historical risk premiums required by investors for companies of Excite@Home's size, industry and capital structure and included risk factors specific to Excite@Home. The market comparison model represented Excite@Home's estimate of the prices that a buyer would be willing to pay currently for similar assets, based on comparable products and services, customer base, risks, earnings capabilities and other factors. Based on the foregoing, Excite@Home recorded an impairment write-down of $4,609 in the aggregate, which was allocated to each asset group based on a comparison of carrying values and fair values. The impairment write-down within each asset group was allocated first to goodwill, and if goodwill was reduced to zero, to identifiable intangible assets in proportion to carrying values. Also as a result of the foregoing, AT&T recorded a goodwill and acquisition-related impairment charge of $1,570 associated with the acquisition of our investment in Excite@Home. The write-down of our investment to fair value was determined utilizing discounted expected future cash flows. Since we consolidated but owned only approximately 23% of Excite@Home, 77% of the charge recorded by Excite@Home was not included as a reduction to AT&T's net income, but rather was eliminated in the Consolidated Statement of Income as "Minority interest income (expense)." The $759 charge for restructuring and exit plans was primarily due to headcount reductions, mainly in AT&T Business Services, including network services, primarily for the consolidation of customer-care and call centers, as well as synergies created by the MediaOne merger. Included in exit costs was $503 of cash termination benefits associated with the separation of approximately 7,300 employees as part of voluntary and involuntary termination plans. Approximately one-half of the separations were management employees and one-half were non-management employees. Approximately 6,700 employee separations were related to involuntary terminations and approximately 600 to voluntary terminations. We also recorded $62 of network lease and other contract termination costs associated with penalties incurred as part of notifying vendors of the termination of these contracts during the year, and net losses of $32 related to the disposition of facilities primarily due to synergies created by the MediaOne merger. Also included in restructuring and exit costs in 2000 was $144 of benefit plan curtailment costs associated with employee separations as part of these exit plans. Further, we recorded an asset impairment charge of $18 related to the write-down of unrecoverable assets in certain businesses where the carrying value was no longer supported by estimated future cash flows. During 1999, we recorded $975 of net restructuring and other charges. A $594 in-process research and development charge was recorded reflecting the estimated fair value of research and development projects at TCI, as of the date of acquisition, which had not yet reached technological feasibility or had no alternative future use. The projects identified related to efforts to offer voice over Internet protocol (IP), product-integration efforts for advanced set-top devices that would enable the offering of next-generation digital 59 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) services and cost-savings efforts for broadband-telephony implementation. In addition, Excite@Home had research and development efforts underway, including projects to allow for self-provisioning of devices and the development of next-generation client software, network and back-office infrastructure to enable a variety of network devices beyond personal computers, and improved design for the regional data centers' infrastructure. Also in 1999, a $145 charge for restructuring and exit costs was recorded as part of AT&T's initiative to reduce costs. The restructuring and exit plans primarily focused on the maximization of synergies through headcount reductions in AT&T Business Services, including network operations, primarily for the consolidation of customer-care and call centers. Included in exit costs was $142 of cash termination benefits associated with the separation of approximately 2,800 employees as part of voluntary and involuntary termination plans. Approximately one-half of the separations were management employees and one-half were non-management employees. Approximately 1,700 employee separations were related to involuntary terminations and approximately 1,100 to voluntary terminations. We also recorded net losses of $307 related to the government-mandated disposition of certain international businesses that would have competed directly with Concert, and $50 related to a contribution agreement AT&T Broadband entered into with Phoenixstar, Inc. That agreement requires AT&T Broadband to satisfy certain liabilities owed by Phoenixstar and its subsidiaries. In addition, we recorded benefits of $121 related to the settlement of pension obligations for former employees who accepted AT&T's 1998 voluntary retirement incentive program (VRIP) offer. 10. INVESTMENT IN LIBERTY MEDIA GROUP As a result of our merger with TCI, we acquired Liberty Media Group (LMG). Although LMG was wholly-owned, we accounted for it as an equity method investment since we did not have a controlling financial interest. On August 10, 2001, AT&T completed the split-off of Liberty Media Corporation (LMC) as an independent, publicly-traded company (see Note 2). The operating results of LMG from March 1, 1999, the date of acquisition through July 31, 2001, the deemed effective split-off date for accounting purposes, were reflected as "Equity (losses) earnings from Liberty Media Group" in the Consolidated Statements of Income. The impact of the operating results from August 1 through August 10, 2001, were deemed immaterial to our consolidated results. Our investment in LMG at December 31, 2000, was reflected as "Investment in Liberty Media Group and related receivables, net" in the accompanying Consolidated Balance Sheet. Upon split-off, AT&T paid LMG $0.8 billion pursuant to a tax sharing agreement, related to TCI net operating losses generated prior to AT&T's merger with TCI. In addition, AT&T received approximately $0.1 billion from LMG related to taxes pursuant to a tax-sharing agreement between LMG and AT&T Broadband which existed prior to the TCI merger. At December 31, 2000, this receivable was included in "Investment in Liberty Media Group and related receivables, net" in the Consolidated Balance Sheet. At December 31, 2001, the remaining receivable from LMG under the tax-sharing agreement was $0.1 billion and was included in "Accounts receivable" in the Consolidated Balance Sheet. 60 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Summarized results of operations for LMG were as follows:
FOR THE SEVEN FOR THE TEN MONTHS ENDED FOR THE YEAR ENDED MONTHS ENDED JULY 31, 2001 DECEMBER 31, 2000 DECEMBER 31, 1999 ------------- ------------------ ----------------- Revenue................................ $ 1,190 $1,526 $ 729 Operating (loss) income................ (426) 436 (2,214) (Loss) income from continuing operations before cumulative effect of accounting change................. (2,711) 1,488 (2,022) Cumulative effect of accounting change............................... 545 -- -- Net (loss) income...................... $(2,166) $1,488 $(2,022)
AT DECEMBER 31, 2000 ------------ Current assets.............................................. $ 2,954 Noncurrent assets........................................... 51,314 Current liabilities......................................... 2,962 Noncurrent liabilities...................................... 16,668 Minority interest........................................... 348
During 2000, certain investees of LMG issued common stock. Changes in the equity of the investees, net of the dilution of LMG's ownership interest, resulted in an increase to AT&T's additional paid-in capital of $355. 11. OTHER INVESTMENTS We have investments in various companies and partnerships that are accounted for under the equity method of accounting and included within "Other investments and related advances" in the Consolidated Balance Sheets. Under the equity method, investments are stated at initial cost, and are adjusted for subsequent contributions and our share of earnings, losses and distributions. At December 31, 2001 and 2000, we had equity investments (other than LMG) of $4.6 billion and $10.5 billion, respectively. The carrying value of these investments exceeded our share of the underlying reported net assets by approximately $3.1 billion and $8.3 billion, at December 31, 2001 and 2000, respectively. The excess basis, or goodwill is being amortized over periods ranging from 15 to 40 years. Pretax amortization of excess basis was $0.2 billion, $0.5 billion and $0.5 billion in 2001, 2000 and 1999, respectively. The amortization is shown as a component of "Net losses related to other equity investments" in the Consolidated Statements of Income. Effective January 1, 2002, in accordance with the provisions of SFAS No. 142, this excess basis will no longer be amortized (see Note 23). Distributions from equity investments totaled $25, $13, and $85, for the years ended December 31, 2001, 2000 and 1999, respectively. 61 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Ownership of significant equity investments was as follows:
AT DECEMBER 31, ----------------- 2001 2000 ------ ------ Cablevision Systems Corporation............................. N/A(a) 27.98%(a) Concert..................................................... 50.00%(b) 50.00%(b) AT&T Canada Corporation..................................... 21.52%(c) 21.52%(c) Texas Cable Partnerships.................................... 50.00% 50.00% Net2Phone, Inc.............................................. N/A(d) 31.34%(d) Insight Midwest LP.......................................... 50.00% 50.00% Century-TCI California, LP.................................. 25.00% 25.00% Kansas City Cable Partners.................................. 50.00% 50.00% Midcontinent Communications................................. 50.00% 50.00% Parnassos, LP............................................... 33.33% 33.33%
- --------------- (a) In June 2001, as a result of AT&T no longer having representation on the Cablevision board of directors, the accounting of our investment in Cablevision was changed from equity method to cost method of accounting. At December 31, 2001, we owned 29.8 million shares, or a 16.8% ownership interest, of Cablevision NY Group Class A common stock, which had a closing market price of $47.45 per share. At December 31, 2000, we owned 48.9 million shares of Cablevision Systems Corporation Class A common stock, which had a closing market price of $84.94 per share. (b) On October 16, 2001, AT&T announced a decision to unwind Concert, its Global venture with BT formed on January 5, 2000 (see Note 5). (c) AT&T no longer records equity earnings or losses related to AT&T Canada because AT&T recognized losses in excess of its investment in AT&T Canada (see Note 5). (d) At December 31, 2000, we owned 18.9 million shares of Net2Phone, Inc. Class A common stock, which had a closing market price of $7.38 per share on that date. In 2001, AT&T recorded a pretax investment impairment charge of $1.1 billion included in "Net losses related to other equity investments" in the Consolidated Statement of Income. This charge primarily represents the difference between the fair market value and the carrying value of our investment in Net2Phone, resulting from the deterioration of market valuations of Internet-related companies. Also, in October 2001, AT&T contributed its investment of 18.9 million shares in Net2Phone to NTOP Holdings, LLC (NTOP), and received 189 units of NTOP ownership. AT&T then sold 160 units of NTOP to LMC Animal Planet, a subsidiary of Liberty Media Corporation, and IDT Corporation. AT&T retained 29 units of NTOP ownership at December 31, 2001, which was accounted for as a cost method investment. 62 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Summarized combined financial information for investments accounted for under the equity method was as follows:
FOR THE YEARS ENDED DECEMBER 31, -------------------------------- 2001 2000 1999 --------- -------- --------- CONCERT Revenue.................................................. $ 6,189 $7,748 -- Operating (loss) income.................................. (3,574) 329 -- (Loss) income from continuing operations before extraordinary items and cumulative effect of accounting change................................................. (3,609) 103 -- Net (loss) income........................................ (3,609) 103 --
AT DECEMBER 31, --------------- 2001 2000 ------ ------ Current assets.............................................. $3,744 $4,652 Non-current assets.......................................... 1,758 4,702 Current liabilities......................................... 4,296 4,677 Non-current liabilities..................................... 76 2,107 Redeemable preferred stock.................................. -- -- Minority interest........................................... -- --
FOR THE YEARS ENDED DECEMBER 31, ---------------------------- 2001 2000 1999 ------- ------- ------ AT&T CANADA Revenue................................................... $1,000 $1,001 $ 590 Operating (loss).......................................... (226) (225) (248) (Loss) from continuing operations before extraordinary items and cumulative effect of accounting change........ (521) (351) (4) Net (loss)................................................ (518) (351) (4)
AT DECEMBER 31, --------------- 2001 2000 ------ ------ Current assets.............................................. $ 391 $ 227 Non-current assets.......................................... 2,590 2,661 Current liabilities......................................... 256 276 Non-current liabilities..................................... 2,963 2,439 Redeemable preferred stock.................................. -- -- Minority interest........................................... -- --
63 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, -------------------------------- 2001 2000 1999 -------- --------- --------- OTHER EQUITY INVESTMENTS Revenue.................................................. $8,150 $18,686 $ 8,376 Operating income (loss).................................. 87 (1,051) (1,278) Income (loss)from continuing operations before extraordinary items and cumulative effect of accounting change................................................. 729 (1,503) (2,266) Net income (loss)........................................ 716 (1,550) (2,373)
AT DECEMBER 31, ----------------- 2001 2000 ------- ------- Current assets.............................................. $ 654 $ 4,994 Non-current assets.......................................... 11,183 25,015 Current liabilities......................................... 1,188 4,042 Non-current liabilities..................................... 7,010 17,970 Redeemable preferred stock.................................. 7 1,589 Minority interest........................................... 151 623
We also have investments accounted for under the cost method of accounting. At December 31, 2001 and 2000, we had cost method investments included in "Other investments and related advances" in the Consolidated Balance Sheets of $19.2 billion and $20.4 billion, respectively. At December 31, 2001 and 2000, approximately $7.9 billion and $6.5 billion, respectively, of our cost investments are indexed to certain long term debt instruments (see Note 12). In addition, there were approximately $0.7 billion and $2.1 billion of investments that were classified as current assets at December 31, 2001 and 2000, respectively, since they are indexed to certain currently maturing debt instruments. Under the cost method, investments are stated at cost, and earnings are recognized to the extent distributions are received from the accumulated earnings of the investee. Distributions received in excess of accumulated earnings are recognized as a reduction of our investment balance. These investments, are covered under the scope of SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities" and are carried at fair value. Some of our cost method investments are classified as "trading" securities, and are marked-to-market through the income statement. Other cost investments are classified as "available-for-sale" securities, and are marked-to-market through other comprehensive income on the balance sheet. We record an investment impairment charge on our "available-for-sale" securities in "Other (expense) income" in the Consolidated Statement of Income when we believe the decline in the investment value is other than temporary. During 2001, we recorded impairment charges on such securities of $1.1 billion, consisting primarily of charges related to Vodafone plc and Time Warner Telecom of $0.4 billion and $0.3 billion, respectively. In addition, at December 31, 2001 and 2000, our 25.5% interest in TWE is accounted for as a cost method investment since we do not have the right to exercise significant influence. On February 28, 2001, we exercised our registration rights in TWE and formally requested TWE to begin the process of converting the limited partnership into a corporation with registered equity securities. If the proposed spin-off of AT&T Broadband occurs as currently structured, our investment in TWE will be included in the net assets spun-off. 64 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 12. DEBT OBLIGATIONS DEBT MATURING WITHIN ONE YEAR
AT DECEMBER 31, ----------------- 2001 2000 ------- ------- Commercial paper............................................ $ 5,087 $16,234 Short-term notes............................................ 3,970 11,505 Currently maturing long-term debt........................... 3,779 3,724 Other....................................................... 122 375 ------- ------- Total debt maturing within one year......................... $12,958 $31,838 ======= ======= Weighted-average interest rate of short-term debt........... 5.4% 6.5%
SECURITIZATIONS During 2001, AT&T initiated a 364-day accounts receivable securitization program providing for up to $2.7 billion of funding, limited by monthly eligible receivables. Under the program, AT&T Business Services and AT&T Consumer Services accounts receivable were sold on a discounted, revolving basis, to a special purpose, wholly-owned subsidiary of AT&T, which assigns interests in such receivables to unrelated third-party financing entities. The securitization proceeds were recorded as a borrowing and included in "Debt maturing within one year" in the Consolidated Balance Sheet. At December 31, 2001, such short-term notes totaled $2.3 billion. The interest payment for the associated loan was approximately $54 for the year ending December 31, 2001. Interest is currently paid based on a floating London Interbank Offered Rate (LIBOR) set by the corresponding agreements. At December 31, 2001, the borrowing was collateralized by $5.4 billion of accounts receivable. CREDIT FACILITY On December 14, 2001, we amended and restated a pre-existing revolving-credit facility. The amended facility, which is syndicated to 30 banks, is for commercial paper back-up and makes $8 billion available to AT&T for a 364-day term. At December 31, 2001, AT&T had not utilized this facility, and currently has the entire $8 billion facility available to us. The credit facility agreement contains a financial covenant that requires AT&T to maintain a net debt-to-EBITDA ratio (as defined in the credit agreement) not exceeding 3.00 to 1.00 for four consecutive quarters ending on the last day of each fiscal quarter. At December 31, 2001, we were in compliance with this covenant. If AT&T were to become noncompliant it could result in the cancellation of the credit facility and any amounts outstanding under the credit facility becoming payable immediately. 65 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) LONG-TERM DEBT
AT DECEMBER 31, ----------------- 2001 2000 ------- ------- DEBENTURES, NOTES AND TRUST PREFERRED SECURITIES(A)
INTEREST RATES(B) MATURITIES - ----------------- ---------- 4.00% -- 6.00% 2002 -- 2009.......................................... $ 7,353 $ 6,639 6.06% -- 6.50% 2002 -- 2029.......................................... 7,253 6,660 6.55% -- 7.50% 2002 -- 2037.......................................... 8,252 6,470 7.53% -- 8.50% 2002 -- 2097.......................................... 7,788 5,267 8.60% -- 19.95%* 2002 -- 2038.......................................... 6,994 7,317 Variable rate 2002 -- 2054.......................................... 6,744 4,164 ------- -------
Total debentures, notes and trust preferred securities...... 44,384 36,517 Other....................................................... 382 360 Unamortized discount, net................................... (460) (64) ------- ------- Total long-term debt........................................ 44,306 36,813 Less: Currently maturing long-term debt..................... 3,779 3,724 ------- ------- Net long-term debt.......................................... $40,527 $33,089 ======= =======
- --------------- * 19.95% interest rate relates to bank loans held by AT&T Latin America in the amount of $2.7 million (a) Included in these balances was $858 and $946 representing the remaining excess of the fair value over the recorded value of debt in connection with the TCI and MediaOne mergers at December 31, 2001 and December 31, 2000, respectively. The excess is being amortized to interest expense over the remaining lives of the underlying debt obligations. (b) The actual interest paid on our debt obligations may have differed from the stated amount due to our entering into interest rate swap contracts to manage our exposure to interest rate risk and our strategy to reduce finance costs (see Note 14). The following table shows the maturities at December 31, 2001, of the $44,306 in total long-term obligations:
2002 2003 2004 2005 2006 LATER YEARS ---- ---- ---- ---- ---- ----------- $3,779.. $4,753 $5,801 $4,357 $5,867 $19,749
On November 21, 2001, AT&T completed a private bond offering which consists of $1.5 billion in five-year Senior Notes with an interest rate of 6.5%, $2.75 billion in 10 year Senior Notes with an interest rate of 7.30%, $2.75 billion in 30 year Senior Notes with an interest rate of 8.00%, 1.5 billion Euros of two-year Senior Notes with a floating interest rate of Euro Interbank Offered Rate (EURIBOR) plus 1.50% and 2.0 billion Euros of five-year Senior Notes with an interest rate of 6.00%. We received net proceeds of approximately $10.0 billion from the sale of the notes. The proceeds will primarily be utilized to retire short-term indebtedness and for general corporate purposes. The bond offering included provisions that would allow bondholders to require AT&T to repurchase the notes if certain conditions are not met in conjunction with the spin-off or the separation of AT&T Broadband from AT&T at the time of notification to bondholders of the intention to separate AT&T Broadband. These conditions include a maximum debt to EBITDA ratio (adjusted) for pro forma AT&T excluding AT&T Broadband of no more than 2.75 times at specified times and if credit ratings of these notes are downgraded below a certain level. 66 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) SUBSIDIARY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY TRUSTS HOLDING SOLELY SUBORDINATED DEBT SECURITIES Included in long-term and short-term debt are subsidiary-obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely subordinated debt securities. Certain subsidiary trusts of TCI (TCI Trusts) had preferred securities outstanding at December 31, 2001 and 2000, as follows:
CARRYING AMOUNT INTEREST MATURITY --------------- SUBSIDIARY TRUST RATE DATE 2001 2000 - ---------------- -------- -------- ------ ------ TCI Communications Financing I.................... 8.72% 2045 $ 527 $ 528 TCI Communications Financing II................... 10.00% 2045 513 514 TCI Communications Financing III.................. 9.65% 2027 380 357 TCI Communications Financing IV................... 9.72% 2036 204 204 ------ ------ Total............................................. $1,624 $1,603 ====== ======
The TCI Trusts exist for the purpose of issuing trust preferred securities and investing the proceeds into subordinated deferrable interest notes (subordinated debt securities) of TCI. The subordinated debt securities have interest rates equal to the interest rate of the corresponding trust preferred securities and have maturity dates ranging from 30 to 49 years from the date of issuance. The preferred securities are mandatorily redeemable upon repayment of the subordinated debt securities, and are callable by AT&T. The Financing I and II trust preferred securities were redeemable at face value beginning in January and May 2001, respectively. Financing III trust preferred securities are callable at 104.825% of face value beginning in March 2007. Financing IV trust preferred securities are callable at face value beginning in March 2002. On February 28, 2002, AT&T called for early redemption Financing I and II preferred securities. On February 26, 2002, AT&T announced that it was notifying holders that it will call Financing IV preferred securities for early redemption on April 1, 2002. At December 31, 2001, the Financing I, II and IV trust preferred securities were reclassed from long-term debt to short-term debt. TCI effectively provides a full and unconditional guarantee of the TCI Trusts' obligations under the trust preferred securities. During 2000, AT&T provided a full and unconditional guarantee of the trust preferred securities for TCI Communications Financing I, II and IV subsidiary trusts (see Note 21). AT&T has the right to defer interest payments up to 20 consecutive quarters; as a consequence, dividend payments on the trust preferred securities can be deferred by the trusts during any such interest-payment period. Certain subsidiary trusts of MediaOne (MediaOne Trusts) had preferred securities outstanding at December 31, 2001 and 2000, as follows:
CARRYING AMOUNT INTEREST MATURITY ----------- SUBSIDIARY TRUST RATE DATE 2001 2000 - ---------------- -------- -------- ---- ---- MediaOne Financing A................................. 7.96% 2025 $ 30 $ 30 MediaOne Financing B................................. 8.25% 2036 28 28 MediaOne Finance II.................................. 9.50% 2036 214 214 MediaOne Finance III................................. 9.04% 2038 504 504 ---- ---- Total................................................ $776 $776 ==== ====
67 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The MediaOne Trusts exist for the purpose of issuing the trust preferred securities and investing the proceeds into subordinated deferrable interest notes (subordinated deferrable notes) of MediaOne Group Funding, Inc., a wholly owned subsidiary of MediaOne. The subordinated deferrable notes have the same interest rate and maturity date as the trust preferred securities to which they relate. All of the subordinated deferrable notes are redeemable by AT&T at a redemption price of $25.00 per security, plus accrued and unpaid interest. Upon redemption of the subordinated deferrable notes, the trust preferred securities will be mandatorily redeemable, at a price of $25.00 per share, plus accrued and unpaid distributions. The 7.96% subordinated deferrable notes became redeemable after September 11, 2000. The 9.50% and 8.25% subordinated deferrable notes became redeemable after October 29, 2001. The 9.04% subordinated deferrable notes are redeemable after October 28, 2003. On March 4, 2002, AT&T called for early redemption MediaOne Financing A, MediaOne Financing B and MediaOne Financing II preferred securities. At December 31, 2001, the Financing A, B and II preferred securities were reclassed from long-term debt to short-term debt. MediaOne has effectively provided a full and unconditional guarantee of the MediaOne Trusts' obligations under the trust preferred securities. During 2000, AT&T provided a full and unconditional guarantee of MediaOne's trust preferred securities (see Note 21). AT&T has the right to defer interest payments up to 20 consecutive quarters; as a consequence, dividend payments on the trust preferred securities can be deferred by the trusts during any such interest-payment period. EXCHANGEABLE NOTES Included in long-term and short-term debt are exchangeable notes. During 2001, we issued exchangeable notes which are mandatorily redeemable at AT&T's option into shares of AT&T Wireless and Cablevision NY Group Class A (Cablevision) common stock and Rainbow Media Group Class A (Rainbow Media Group) tracking stock, as applicable or its cash equivalent. During 2000, we issued exchangeable notes which are mandatorily redeemable at AT&T's option into shares of Comcast and Microsoft Corporation (Microsoft) common stock, as applicable, or its cash equivalent. During 1999 and 1998, MediaOne issued exchangeable notes which are mandatorily redeemable at AT&T's option into (i) Vodafone American Depository Receipts (ADRs) held by MediaOne, (ii) the cash equivalent, or (iii) a combination of cash and Vodafone ADRs. The maturity value of these exchangeable notes varies based upon the fair market value of the security it is indexed to. Following is a summary of the exchangeable notes outstanding at December 31, 2001, which are indexed to 45.8 million shares of AT&T Wireless common stock:
PUT PRICE PER CALL PRICE CARRYING MATURITIES FACE VALUE INTEREST RATE SHARE PER SHARE VALUE - ---------- ---------- ------------- --------- ---------- -------- 2005....................... $220 LIBOR + 0.4% $14.41 $18.87 $220 2006....................... 220 LIBOR + 0.4% 14.41 19.31 219 2006....................... 220 LIBOR + 0.4% 14.41 19.74 219
68 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Following is a summary of the exchangeable notes outstanding at December 31, 2001, which are indexed to 45 million shares of AT&T Wireless common stock:
PUT PRICE PER CALL PRICE CARRYING MATURITIES FACE VALUE INTEREST RATE SHARE PER SHARE VALUE - ---------- ---------- ------------- --------- ---------- -------- 2006....................... $204 LIBOR + 0.4% $13.57 $19.03 $216 2006....................... 201 LIBOR + 0.4% 13.37 19.27 216 2006....................... 204 LIBOR + 0.4% 13.57 19.90 216
At maturity, the exchangeable notes will be redeemed, at AT&T's option, with (i) a number of shares of AT&T Wireless common stock equal to the underlying shares multiplied by the exchange ratio, or (ii) its equivalent cash value. The exchange ratio will be calculated at maturity in the following manner: (a) If the fair market value of a share of AT&T Wireless common stock is greater than the call price, the exchange ratio will be a fraction, the numerator of which is equal to the sum of (i) the put price, plus (ii) the excess of the fair market value of a share of AT&T Wireless common stock over the call price, and the denominator of which is equal to the fair market value of a share of AT&T Wireless common stock; (b) If the fair market value of a share of AT&T Wireless common stock is less than or equal to the put price, the exchange ratio will be 1; (c) If the fair market value of a share of AT&T Wireless common stock is less than or equal to the call price but greater than the put price, the exchange ratio will be a fraction, the numerator of which is equal to the put price, and the denominator of which is equal to the fair market value of a share of AT&T Wireless common stock. Following is a summary of the exchangeable notes outstanding at December 31, 2001, which are indexed to 26.9 million shares of Cablevision common stock:
PUT PRICE PER CALL PRICE CARRYING MATURITY FACE VALUE INTEREST RATE SHARE PER SHARE VALUE - -------- ---------- ------------- --------- ---------- -------- 2004.......................... $970 6.50% $36.05 $43.98 $1,030
At maturity, the exchangeable notes will be redeemed, at AT&T's option, with (i) a number of shares of Cablevision common stock equal to the underlying shares multiplied by the exchange ratio, or (ii) its equivalent cash value. The exchange ratio will be calculated at maturity in the following manner: (a) If the fair market value of a share of Cablevision common stock is greater than the call price, the exchange ratio will be 0.8197; (b) If the fair market value of a share of Cablevision common stock is less than or equal to the put price, the exchange ratio will be 1; (c) If the fair market value of a share of Cablevision common stock is less than or equal to the call price but greater than the put price, the exchange ratio will be a fraction, the numerator of which is equal to the put price, and the denominator of which is equal to the fair market value of a share of Cablevision common stock. 69 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Following is a summary of the exchangeable notes outstanding at December 31, 2001, which are indexed to 9.8 million shares of Rainbow Media Group tracking stock:
PUT PRICE PER CALL PRICE CARRYING MATURITY FACE VALUE INTEREST RATE SHARE PER SHARE VALUE - -------- ---------- ------------- --------- ---------- -------- 2005.......................... $220 6.25% $22.50 $27.45 $196
At maturity, the exchangeable notes will be redeemed, at AT&T's option, with (i) a number of shares of Rainbow Media Group tracking stock equal to the underlying shares multiplied by the exchange ratio, or (ii) its equivalent cash value. The exchange ratio will be calculated at maturity in the following manner: (a) If the fair market value of a share of Rainbow Media Group tracking stock is greater than the call price, the exchange ratio will be 0.8197; (b) If the fair market value of a share of Rainbow Media Group tracking stock is less than or equal to the put price, the exchange ratio will be 1; (c) If the fair market value of a share of Rainbow Media Group tracking stock is less than or equal to the call price but greater than the put price, the exchange ratio will be a fraction, the numerator of which is equal to the put price, and the denominator of which is equal to the fair market value of a share of Rainbow Media Group tracking stock. Following is a summary of the exchangeable notes outstanding at December 31, 2001 and 2000, which are indexed to 25 million shares of Comcast common stock:
PUT PRICE CARRYING VALUE PER CALL PRICE -------------- MATURITIES FACE VALUE INTEREST RATE SHARE PER SHARE 2001 2000 - ---------- ---------- ------------- --------- ---------- ----- ----- 2003.................... $371 6.75% $41.50 $49.80 $320 $371 2004.................... 314 5.50% 41.06 49.27 277 314 2005.................... 329 4.63% 39.13 46.96 286 329
At maturity, the exchangeable notes will be redeemed, at AT&T's option, with (i) a number of shares of Comcast common stock equal to the underlying shares multiplied by the exchange ratio, or (ii) its equivalent cash value. The exchange ratio will be calculated at maturity in the following manner: (a) If the fair market value of a share of Comcast common stock is greater than the call price, the exchange ratio will be 0.8333; (b) If the fair market value of a share of Comcast common stock is less than or equal to the put price, the exchange ratio will be 1; (c) If the fair market value of a share of Comcast common stock is less than or equal to the call price but greater than the put price, the exchange ratio will be a fraction, the numerator of which is equal to the put price, and the denominator of which is equal to the fair market value of a share of Comcast common stock. 70 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Following is a summary of the exchangeable notes outstanding at December 31, 2001 and 2000, which are indexed to 10 million shares of Microsoft common stock:
PUT PRICE CARRYING VALUE PER CALL PRICE -------------- MATURITIES FACE VALUE INTEREST RATE SHARE PER SHARE 2001 2000 - ---------- ---------- ------------- --------- ---------- ----- ----- 2003.................... $227 6.96% $67.87 $97.39 $201 $145 2004.................... 226 7.00% 67.87 111.64 198 144 2005.................... 226 7.04% 67.87 128.60 196 144
At maturity, the exchangeable notes will be redeemed, at AT&T's option, with (i) a number of shares of Microsoft common stock equal to the underlying shares multiplied by the exchange ratio, or (ii) its equivalent cash value. The exchange ratio will be calculated at maturity in the following manner: (a) If the fair market value of a share of Microsoft common stock is greater than the call price, the exchange ratio will be a fraction, the numerator of which is equal to the sum of (i) the put price, plus (ii) the excess of the fair market value of a share of Microsoft common stock over the call price, and the denominator of which is equal to the fair market value of a share of Microsoft common stock; (b) If the fair market value of a share of Microsoft common stock is less than or equal to the put price, the exchange ratio will be 1; (c) If the fair market value of a share of Microsoft common stock is less than or equal to the call price but greater than the put price, the exchange ratio will be a fraction, the numerator of which is equal to the put price, and the denominator of which is equal to the fair market value of a share of Microsoft common stock. Following is a summary of the exchangeable notes outstanding at December 31, 2001 and 2000, which are indexed to 22.3 million shares of Comcast common stock:
PUT PRICE CARRYING VALUE PER CALL PRICE -------------- MATURITIES FACE VALUE INTEREST RATE SHARE PER SHARE 2001 2000 - ---------- ---------- ------------- --------- ---------- ----- ----- 2003.................... $267 6.76% $35.89 $50.64 $244 $267 2004.................... 267 6.80% 35.89 58.39 244 267 2005.................... 267 6.84% 35.89 67.97 245 267
At maturity, the exchangeable notes will be redeemed, at AT&T's option, with (i) a number of shares of Comcast common stock equal to the underlying shares multiplied by the exchange ratio, or (ii) its equivalent cash value. The exchange ratio will be calculated at maturity in the following manner: (a) If the fair market value of a share of Comcast common stock is greater than or equal to the call price, the exchange ratio will be a fraction, the numerator of which is equal to the sum of (i) the put price, plus (ii) the excess of the fair market value of a share of Comcast common stock over the call price, and the denominator of which is equal to the fair market value of a share of Comcast common stock; (b) If the fair market value of a share of Comcast common stock is less than or equal to the put price, the exchange ratio will be 1; (c) If the fair market value of a share of Comcast common stock is less than the call price but greater than the put price, the exchange ratio will be a fraction, the numerator of which is equal to the put price, and the denominator of which is equal to the fair market value of a share of Comcast common stock. 71 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Following is a summary of the exchangeable notes outstanding at December 31, 2001 and 2000, which are indexed to Vodafone ADRs:
PUT PRICE CARRYING VALUE PER CALL PRICE -------------- MATURITIES FACE VALUE INTEREST RATE SHARE PER SHARE 2001 2000 - ---------- ---------- ------------- --------- ---------- ---- ------ 2001.................. $1,686 6.25% $19.65 $25.10 $ -- $2,337 2002.................. $1,129 7.00% 43.44 51.26 715 1,012
In the third quarter of 2001, exchangeable notes that were indexed to a portion of holdings of Vodafone ADR securities matured. Prior to the settlement, the carrying value of the notes was $1,634. These notes were settled with approximately 70 million shares of Vodafone ADR's and $252 million in cash. Approximately 57 million shares of the Vodafone ADR's used in the settlement were accounted for as "trading" securities and the remaining shares were accounted for as "available-for-sale" securities under SFAS No. 115. The settlement resulted in a pretax loss of approximately $392, which was reclassified from "Other comprehensive income" to "Other (expense) income" in the Consolidated Statement of Income. The exchangeable notes that mature in 2002 are indexed to 26 million Vodafone ADRs, and will be exchanged at maturity as follows: (a) If the fair market value of a Vodafone ADR is greater than or equal to the call price, each exchangeable note is equivalent to 0.8475 of a Vodafone ADR; (b) If the fair market value of a Vodafone ADR is less than or equal to the put price, each exchangeable note is equivalent to one Vodafone ADR; or (c) If the fair market value of a Vodafone ADR is less than the call price but greater than the put price, each exchangeable note is equivalent to a fraction of a Vodafone ADR equal to (i) the put price divided by (ii) the fair market value of a Vodafone ADR. The exchangeable notes indexed to AT&T Wireless, Cablevision, Comcast and Microsoft common stock and Rainbow Media Group that are secured by AT&T's investments in AT&T Wireless, Cablevision, Comcast, Microsoft and Rainbow Media Group. The exchangeable notes indexed to Vodafone ADRs that are unsecured obligations, ranking equally in right of payment with all other unsecured and unsubordinated obligations of AT&T. These exchangeable notes are being accounted for as indexed debt instruments since the maturity value of the debt is dependent upon the fair market value of the underlying securities. These exchangeable notes contain embedded derivatives that require separate accounting as the maturity value of the debt is dependent upon the fair market value of the underlying AT&T Wireless, Cablevision, Rainbow Media Group, Comcast, Microsoft and Vodafone securities, as applicable. The economic characteristics of the embedded derivatives (i.e., equity like features) are not clearly and closely related to that of the host instruments (a debt security). As a result the embedded derivatives are separated from the host debt instrument for valuation purposes and are carried at fair value within the host debt instrument. The embedded derivatives for AT&T Wireless, Cablevision and Rainbow Media Group exchangeable notes are designated as cash flow hedges. These designated options are carried at fair value with changes in fair value recorded, net of income taxes, within "Other comprehensive income" as a component of shareowners' equity. There was no ineffectiveness recognized on the cash flow hedges. The Comcast, Microsoft, Vodafone and certain of the Cablevision and Rainbow Media Group options are undesignated and are carried at fair value with changes in fair value recorded in "Other income (expense)" in the Consolidated Statement of Income. The options hedge the market risk of a decline in value of AT&T Wireless, Cablevision, Rainbow Media Group, Comcast, Microsoft and Vodafone securities. The market risk of a decline in these securities, below the respective put prices has been eliminated. In addition, any market gains we may earn have been limited to 72 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) the call prices, with the exception of certain debt indexed to Comcast stock, the Cablevision stock, Rainbow Media Group and Vodafone ADRs, which provide for our participation in a portion of the market gains above the call price. Since all the AT&T Wireless, Cablevision and Rainbow Media Group securities and a portion of the Comcast, Microsoft and Vodafone ADR securities are cost method investments being accounted for as "available-for-sale" securities under SFAS No. 115, changes in the maturity value of the options and the underlying securities are being recorded as unrealized gains or losses, net of income taxes, within "Other comprehensive income as a component of shareowners' equity." The remaining portion of the Comcast, Microsoft and Vodafone securities are cost method investments being accounted for as "trading" securities as permitted under SFAS No. 115 and changes in the fair value of the options and the underlying securities are being recorded as net revaluation of certain financial instruments within "Other income (expense)" in the Consolidated Statement of Income. OTHER DEBT Included in long-term debt is other debt. During 2000, we entered into a series of purchased and written options on 21.9 million shares of Microsoft common stock, and issued floating rate debt. The carrying value of the debt at both December 31, 2001 and 2000, was $1,369, which pays interest at three-month LIBOR plus 0.4%. The debt in conjunction with the options is, repayable at AT&T's option in either Microsoft stock or cash and matures annually with $458 maturing in 2003 and 2004, and $453 maturing in 2005 (see Note 14). In addition, during 1999 two subsidiaries of MediaOne, MediaOne SPC IV and MediaOne SPC VI, entered into a series of purchased and written options on Vodafone ADRs contributed to them by MediaOne, and issued floating rate debt. The carrying value of the debt at both December 31, 2001 and 2000, was $1,739, which pays interest at three-month LIBOR plus 0.5%. This debt matures in equal quarterly installments beginning in 2003 and ending in 2005. The assets of MediaOne SPC IV, which are primarily 29.1 million Vodafone ADRs, are available only to pay the creditors of MediaOne SPC IV. Likewise, the assets of MediaOne SPC VI, which are primarily 18.0 million Vodafone ADRs, are available only to pay the creditors of MediaOne SPC VI. MediaOne SPC IV and VI will generate cash to settle these notes by selling its Vodafone ADRs to the market (or to AT&T, at AT&T's option) and cash settle the option (see Note 14). 13. OTHER SECURITIES PREFERRED STOCK OF SUBSIDIARIES Prior to the TCI merger, TCI Pacific Communications Inc. (Pacific) issued 5% Class A Senior Cumulative Exchangeable preferred stock, which was outstanding as of December 31, 2001. Each share is exchangeable, from and after August 1, 2001, for approximately 8.365 shares of AT&T common stock (as adjusted for the July 2001 split-off of AT&T Wireless Services, Inc. from AT&T), subject to certain antidilution adjustments. Additionally, Pacific may elect to make any dividend, redemption or liquidation payment in cash, shares of AT&T common stock or a combination of the foregoing. Dividends on the Pacific preferred stock were $31, $31 and $26 for the years ended December 31, 2001, 2000 and 1999, respectively and are reported within "Minority interest income (expense)" in the Consolidated Statements of Income. The Pacific preferred stock is reflected within "Minority Interest" in the Consolidated Balance Sheets, and aggregated $2.1 billion at both December 31, 2001 and 2000. As of December 31, 2001, 59 thousand shares of the Pacific preferred stock had been exchanged for 495 thousand shares of AT&T common stock. At December 31, 2001 and 2000 there were approximately 6.2 million and 6.3 million shares outstanding, respectively. 73 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Pacific has elected to exercise its right to redeem all outstanding shares of the Pacific preferred stock, that have not been exchanged as of April 26, 2002, at a price of $102.50 per share plus accrued dividends of $0.96 per share. The redemption price will be paid in AT&T Common Stock, up to a maximum of 52.3 million shares which were registered with the SEC in February of 2002, with any shortfall paid in cash. COMPANY-OBLIGATED CONVERTIBLE QUARTERLY INCOME PREFERRED SECURITIES OF SUBSIDIARY TRUST HOLDING SOLELY SUBORDINATED DEBT SECURITIES OF AT&T AND RELATED WARRANTS On June 16, 1999, AT&T Finance Trust I (AT&T Trust), a wholly owned subsidiary of AT&T, completed the private sale of 100 million shares of 5.0% cumulative quarterly income preferred securities (quarterly preferred securities) to Microsoft. Proceeds of the issuance were invested by the AT&T Trust in junior subordinated debentures (debentures) issued by AT&T due 2029, which represent the sole asset of the AT&T Trust. The quarterly preferred securities pay dividends at an annual rate of 5.0% of the liquidation preference of fifty dollars per security, and are convertible at any time prior to maturity into 88.016 million shares of AT&T common stock (as adjusted for the July 2001 split-off of AT&T Wireless Services, Inc. from AT&T). The quarterly preferred securities are subject to mandatory redemption upon repayment of the debentures at maturity or their earlier redemption. The conversion feature can be terminated, under certain conditions, after three years. The debentures make a quarterly payment in arrears of 62.5 cents per security on the last day of March, June, September and December of each year. AT&T has the right to defer such interest payments up to 20 consecutive quarters. As a consequence, quarterly dividend payments on the quarterly preferred securities can be deferred by the AT&T Trust during any such interest-payment period. If AT&T defers any interest payments, we may not, among other things, pay any dividends on our common stock until all interest in arrears is paid to the AT&T Trust. Dividends paid on the quarterly preferred securities were $250, $250 and $135 for the years ended December 31, 2001, 2000 and 1999, respectively, and were reported within "Minority interest income (expense)" in the Consolidated Statements of Income. On June 16, 1999, AT&T also issued to Microsoft 53 million warrants, each to purchase one share of AT&T common stock at a price of fifty-seven dollars per share at the end of three years (as adjusted for the July 2001 split-off of AT&T Wireless Services, Inc. from AT&T). Alternatively, the warrants are exercisable on a cashless basis. If the warrants are not exercised on the three-year anniversary of the closing date, the warrants expire. A discount on the quarterly preferred securities equal to the value of the warrants of $306 was recognized and is being amortized over the 30-year life of the quarterly preferred securities as a component of "Minority interest income (expense)" in the Consolidated Statements of Income. In connection with the merger of Comcast and AT&T Broadband (see Note 2), AT&T Comcast Corporation will assume the quarterly preferred securities. In conjunction with this transaction, Microsoft Corporation has agreed to convert these preferred securities into 115 million shares of AT&T Comcast Corporation common stock. CENTAUR FUNDING CORPORATION Centaur Funding Corporation (Centaur), a subsidiary of MediaOne, issued three series of preferred shares prior to AT&T's acquisition of MediaOne. Centaur was created for the principal purpose of raising capital through the issuance of preferred shares and investing those proceeds into notes issued by MediaOne SPC II, a subsidiary of MediaOne. Principal and interest payments from the notes are expected to be 74 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Centaur's primary source of funds to make dividend and redemption payments on the preferred shares. In addition, the dividend and certain redemption payments on the preferred shares will be determined by reference to the dividend and redemption activity of the preferred stock of AirTouch Communications, Inc. (ATI Shares) held by MediaOne SPC II. Payments on the preferred shares are neither guaranteed nor secured by MediaOne or AT&T. The assets of MediaOne SPC II, which include the ATI shares, are available only to pay the creditors of MediaOne SPC II. These securities remained outstanding at December 31, 2001 and 2000 as follows:
CARRYING AMOUNT --------------- DIVIDEND RATE MATURITY DATE 2001 2000 ------------- ------------- ------ ------ Series A.................................. Variable None $ 100 $ 100 Series B.................................. 9.08% April, 2020 927 927 Series C.................................. None April, 2020 127 118 ------ ------ Total..................................... $1,154 $1,145 ====== ======
The Auction Market Preference Shares, Series A, have a liquidation value of $250 thousand per share and dividends are payable quarterly when declared by Centaur's board of directors out of funds legally available. The 9.08% Cumulative Preference Shares, Series B, have a liquidation value of $1 thousand per share and dividends are payable quarterly in arrears when declared by Centaur's board of directors out of funds legally available. In addition, dividends may be declared and paid only to the extent that dividends have been declared and paid on the ATI shares. The preference shares, Series C, have a liquidation value of $1 thousand per share at maturity. The value of the Series C will be accreted to reach its liquidation value upon maturity. The Series B shares rank equally with the Series C shares as to redemption payments and upon liquidation, and the Series B and Series C shares rank senior to the Series A shares as to redemption payments and upon liquidation. The preference shares issued by Centaur are reflected within "Minority interest" in the Consolidated Balance Sheets. Dividends on the preferred shares were $99 for the year ended December 31, 2001 and $55 for the period ended December 31, 2000, and were included within "Minority interest income (expense)" in the Consolidated Statements of Income. CONVERTIBLE PREFERRED STOCK On January 22, 2001, NTT DoCoMo invested approximately $9.8 billion for 812,512 shares of a new class of AT&T preferred stock with a par value of $1 per share; and five-year warrants to purchase the equivalent of an additional 41.7 million shares of AT&T Wireless Group tracking stock at $35 per share. The $9.8 billion of proceeds were recorded based on their relative fair values as $9.2 billion for the preferred shares, $0.3 billion for the warrants in other current liabilities and $0.3 billion for the amortizable beneficial conversion feature. The beneficial conversion feature represented the excess of the fair value of the preferred shares issued over the proceeds received and were recorded in "Additional paid-in capital" in the Consolidated Balance Sheet. Prior to the split-off of AT&T Wireless Group, the preferred shares, convertible at NTT DoCoMo's option, were economically equivalent to 406 million shares (a 16 percent interest) of AT&T Wireless Group tracking stock. On July 9, 2001, in conjunction with the split-off of AT&T Wireless Group, these preferred shares were converted into AT&T Wireless common stock. Upon conversion, AT&T reduced its portion of the financial performance and economic value in the AT&T Wireless Group by 178 million shares, and the balance of the 406 million shares came from the issuance of 228 million new shares of AT&T Wireless common stock. 75 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) In 2001, included in "Dividends requirements of preferred stock" in the Consolidated Statement of Income, was the amortization of the beneficial conversion feature of $0.3 billion as well as dividends on the preferred shares of $0.3 billion. 14. FINANCIAL INSTRUMENTS ADOPTION OF SFAS NO. 133 Effective January 1, 2001, AT&T adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" and its corresponding amendments under SFAS No. 138. SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. All derivatives, whether designated in hedging relationships or not, are required to be recorded on the balance sheet at fair value. The adoption of SFAS No. 133 on January 1, 2001, resulted in a pretax cumulative-effect increase to income of $1.5 billion ($0.9 billion net-of-tax). $0.6 billion ($0.4 billion net-of-tax) and $0.9 billion ($0.5 billion net-of-tax) were attributable to AT&T Group (other than LMG) and LMG, respectively. AT&T GROUP AT&T Group's cumulative-effect increase to net income of $0.4 billion was attributable primarily to equity based derivative instruments embedded in indexed debt instruments and warrants held in both public and private companies. Included in the after-tax cumulative effect benefit of $0.4 billion, was a $0.2 billion benefit for the changes in the valuation of the embedded and non-embedded net purchased options related to the indexed debt instruments and $0.2 billion benefit for changes in the fair value of warrants. Upon adoption, AT&T Group, as permitted by SFAS No. 133, reclassified $9.3 billion of securities from "available-for-sale" to "trading." This reclassification resulted in the recognition, in the income statement, of losses previously recorded within accumulated Other Comprehensive Income (OCI). A portion of the loss ($1.6 billion pretax; $1.0 billion net-of-tax) was recorded as part of the cumulative effect of adoption. This loss completely offset a gain for amounts also previously recorded within accumulated OCI on the indexed debt obligation that had been considered a hedge of Comcast, Microsoft and Vodafone available-for-sale securities. The reclassification of securities also resulted in a pretax charge of $1.2 billion ($0.7 billion net-of-tax) recorded in "Other (expense) income" in the Consolidated Statement of Income. In addition, the adoption of SFAS No. 133 also resulted in a pretax charge to OCI of $10 ($6 net-of-tax) on cash flow hedges. The net derivative loss included in OCI as of January 1, 2001 will be reclassified into earnings over the life of the instruments, of which the last expires in February 2005. LMG LMG's cumulative-effect increase to income of $0.5 billion was attributable primarily to separately recording the embedded call option obligations associated with LMG's senior exchangeable debentures. Also included in the cumulative-effect was $87 previously included in OCI related primarily to changes in the fair value of LMG's warrants and options to purchase certain available-for-sale securities. FINANCIAL INSTRUMENTS In the normal course of business, we use various financial instruments, including derivative financial instruments, for purposes other than trading. These instruments include letters of credit, guarantees of debt, interest rate swap agreements, foreign currency exchange contracts, option contracts, equity contracts and warrants. Collateral is generally not required for these types of instruments. 76 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) By their nature, all such instruments involve risk, including the credit risk of nonperformance by counterparties, and our maximum potential loss may exceed the amount recognized in our balance sheet. However, at December 31, 2001 and 2000, in management's opinion, there was no significant risk of loss in the event of nonperformance of the counterparties to these financial instruments. We control our exposure to credit risk through credit approvals, credit limits and monitoring procedures. We do not have any significant exposure to any individual customer or counterparty, nor do we have any major concentration of credit risk related to any financial instruments. LETTERS OF CREDIT Letters of credit are purchased guarantees that ensure our performance or payment to third parties in accordance with specified terms and conditions. Management has determined that the Company's letters of credit do not create additional risk to AT&T. The notional amounts outstanding at December 31, 2001 and 2000 were $696 and $833 respectively. The fair values of the letters of credit, based on the fees paid to obtain the obligations, were immaterial at December 31, 2001 and 2000. GUARANTEES OF DEBT From time to time, we guarantee the debt of our subsidiaries and certain unconsolidated joint ventures. TCI, primarily before the merger, had agreed to take certain steps to support debt compliance with respect to obligations aggregating $1,461 at both December 31, 2001 and 2000 of certain cable television partnerships in which TCI has a noncontrolling ownership interest. Although there can be no assurance, management believes that it will not be required to meet its obligations under such guarantees. Additionally, in connection with the restructuring of AT&T in 1996, we issued guarantees for certain debt obligations of our former subsidiaries AT&T Capital Corp. and NCR. The amount of guaranteed debt associated with AT&T Capital Corp. and NCR was $51 at both December 31, 2001 and 2000, respectively. Total notional amounts of guaranteed debt at December 31, 2001 and 2000 were $1,522 and $1,557, respectively. At December 31, 2001 and 2000, there were no quoted market prices for similar agreements. INTEREST RATE SWAP AGREEMENTS We enter into interest rate swaps, which are typically designated as either cash flow or fair value hedges, to manage our exposure to changes in interest rates. We enter into swap agreements to manage the fixed/floating mix of our debt portfolio in order to reduce aggregate risk to interest rate movements. Interest rate swaps also allow us to raise funds at floating rates and effectively swap them into fixed rates that are generally lower than those available to us if fixed-rate borrowings were made directly. These agreements involve the exchange of floating-rate for fixed-rate payments or fixed-rate for floating-rate without the exchange of the underlying principal amount. Floating-rate payments are based on rates tied to LIBOR. The following table indicates the types of swaps in use at December 31, 2001 and 2000, the respective notional amounts and their weighted-average interest rates. Average variable rates are those in effect at the reporting date, and may change significantly over the lives of the contracts:
2001 2000 ----- ----- Fixed-rate to variable-rate swaps -- notional amount........ $ 500 $ 750 Average receive rate...................................... 9.68% 8.16% Average pay rate.......................................... 4.02% 8.16% Variable-rate to fixed-rate swaps -- notional amount........ $ 218 $ 218 Average receive rate...................................... 2.08% 6.81% Average pay rate.......................................... 7.31% 7.31%
77 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) In addition, we also have combined interest rate, foreign currency swap agreements for foreign-currency-denominated debt, which hedge our risk to both interest rate and currency movements. At December 31, 2001 and 2000 the notional amounts related to these contracts were $3,826 and $739 respectively. The increase is primarily related to the hedges associated with our Euro bond offering in 2001. The notional amounts of these hedges were approximately $3,087 at December 31, 2001. The table below summarizes the fair and carrying values of the interest rate swaps. These swaps are valued using current market quotes which were obtained from dealers.
2001 2000 ----------------- ----------------- FAIR/CARRYING FAIR/CARRYING VALUE VALUE ----------------- ----------------- ASSET LIABILITY ASSET LIABILITY ----- --------- ----- --------- Interest rate swap agreements......................... $26 $19 $4 $5 Combined interest rate foreign currency swap agreements.......................................... 18 26 1 3
FOREIGN EXCHANGE We enter into foreign currency forward contracts to manage our exposure to changes in currency exchange rates related to foreign-currency-denominated transactions. Although we do not designate most of our foreign exchange contracts as accounting hedges, we have certain contracts that are designated as foreign currency cash flow hedges in accordance with SFAS No. 133. In 2001, our foreign exchange contracts consisted principally of Canadian dollars, related to our obligation to purchase the remaining shares of AT&T Canada (the Canadian obligation), Euros, Japanese yen, Swiss francs, and Brazilian reais related to debt. In 2000, our foreign exchange contracts consisted principally of Brazilian reais and Swiss francs related to debt. In addition, we are subject to foreign exchange risk related to other foreign-currency-denominated transactions. The notional amounts under contract at December 31, 2001 and 2000 were $6,422 and $71 respectively. The increase in our foreign currency contract activity was primarily related to foreign exchange contracts entered into relating to the commencement of a Euro commercial paper program and the Canadian obligation with notional amounts outstanding of $5.3 billion respectively at December 31, 2001. The following table summarizes the fair and carrying values of the foreign exchange contracts at December 31, 2001 and 2000.
2001 2000 ----------------- ------------------------------------- FAIR/CARRYING VALUE FAIR VALUE CARRYING VALUE ----------------- ----------------- ----------------- ASSET LIABILITY ASSET LIABILITY ASSET LIABILITY ----- --------- ----- --------- ----- --------- Foreign Exchange Contracts............ $72 $299 $1 $2 $-- $1
EQUITY COLLARS In 2000, we entered into three series of option agreements (Microsoft collars) with a single bank counterparty (counterparty) to hedge our exposure to 21.9 million shares of Microsoft common stock. These option agreements, combined with the underlying shares, secure a floating-rate borrowing from the counterparty, the face value of which is equal to the product of (i) the underlying shares multiplied by (ii) the put price. (see Note 12) The option agreements are a series of purchased and written options that hedge a portion of our holdings in Microsoft common stock. The Microsoft collar is undesignated for accounting purposes in accordance with SFAS No. 133 and is carried on our balance sheet at fair value, with unrealized gains or losses being recorded in "Other income (expense)" in the Consolidated Statement of Income. These unrealized gains or losses are largely offset by the changes in the fair value of a certain number of our shares of Microsoft common stock that are classified as "trading in accordance with SFAS No. 115." The carrying value of the Microsoft collar 78 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) was $6 and $419 at December 31, 2001 and 2000, respectively. The fluctuation of the carrying value of the collars is primarily due to the change in the market prices of the underlying shares, which were $66.25 per share and $43.375 per share at December 31, 2001 and 2000, respectively and the adoption of SFAS No. 133, which required valuing the instruments at fair value rather than intrinsic value. The following is a summary of the Microsoft collars outstanding at December 31, 2001:
MATURITY DATE 2003 2004 2005 - ------------- ------ ------- ------- Put price per share...................................... $62.48 $ 62.48 $ 62.48 Call price per share..................................... 86.26 100.44 118.36
Since the debt and the collar are contracted with the same counterparty, the treatment is similar to a debt instrument with an embedded instrument and will be net settled as follows: At the expiration of the Microsoft collar, we will satisfy the debt and collar net obligations under the floating-rate debt by delivering (i) a number of Microsoft shares equal to the underlying share amount multiplied by the exchange ratio, or (ii) its equivalent cash value. The exchange ratio will be calculated at expiration in the following manner: (a) If the fair market value of a share of Microsoft common stock is greater than the call price, the exchange ratio will be a fraction, the numerator of which is equal to the sum of (i) the put price, plus (ii) the excess of the fair market value of a share of Microsoft common stock over the call price, and the denominator of which is equal to the fair market value of a share of Microsoft common stock; (b) If the fair market value of a share of Microsoft common stock is less than or equal to the put price, the exchange ratio will be 1; (c) If the fair market value of a share of Microsoft common stock is less than or equal to the call price but greater than the put price, the exchange ratio will be a fraction, the numerator of which is equal to the put price, and the denominator of which is equal to the fair market value of a share of Microsoft common stock. Prior to our merger with MediaOne, two subsidiaries of MediaOne, MediaOne SPC IV and MediaOne SPC VI, each entered into a series of option agreements ("Vodafone collars") with a single bank counterparty ("counterparty") to hedge its exposure to 47.2 million Vodafone ADRs. In conjunction with the Vodafone collars, MediaOne SPC IV and MediaOne SPC VI also issued floating-rate debt in a series of private placements, the face value of which is equal to the product of (i) the underlying shares multiplied by (ii) the put price. Simultaneous with the execution of the Vodafone collars, MediaOne SPC IV and MediaOne SPC VI each entered into floating-to-fixed interest rate swaps in which future fixed payments were prepaid by each of MediaOne SPC IV and MediaOne SPC VI at inception. Therefore, the on-going interest payments on the floating-rate notes are paid by the counterparty. These prepaid interest rate swaps are designated as cash flow hedges in accordance with SFAS No. 133. The option agreements are a series of purchased and written options that hedge a portion of our holdings in Vodafone ADRs. The Vodafone collars are undesignated for accounting purposes in accordance with SFAS No. 133 and are carried on our balance sheet at fair value, with unrealized gains or losses being recorded to "Other income (expense)" in the Consolidated Statement of Income. These unrealized gains or losses are largely offset by the changes in the fair value of a certain number of our Vodafone ADRs that are classified as "trading". The carrying value of the Vodafone collars was $462 and $(453) at December 31, 2001 and 2000, respectively. The fluctuation of the carrying value of the collars is primarily due to the change in the per share market price of the underlying ADRs, which was $25.68 per share and $35.81 per share at December 31, 2001 and 2000, respectively, and the adoption of SFAS No. 133, which requires valuing the instruments at fair value rather than intrinsic value. 79 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following is a summary of the Vodafone collars outstanding at December 31, 2001:
MATURITY DATE ------------------------ MEDIAONE SPC IV VODAFONE COLLARS 2003 2004 2005 - -------------------------------- ------ ------ ------ Average put price per share................................ $34.06 $33.78 $33.53 Average call price per share............................... 49.13 48.85 48.60
MATURITY DATE ------------------------ MEDIAONE SPC VI VODAFONE COLLARS 2003 2004 2005 - -------------------------------- ------ ------ ------ Average put price per share................................ $39.85 $39.86 $39.86 Average call price per share............................... 57.72 57.72 57.73
Since the debt and the collars are contracted with different counterparties, the instruments will be settled independently. MediaOne SPC IV and MediaOne SPC VI will satisfy its obligations to the floating-rate debt holders by delivering cash equal to the face value (see note 12). At the expiration of the Vodafone collars, MediaOne SPC IV and MediaOne SPC VI will cash settle its collars with the counterparty. Cash settlement of the Vodafone collars will be completed in the following manner: a. If the fair market value of a Vodafone ADR is greater than the call price, MediaOne SPC IV or MediaOne SPC VI (as appropriate) will pay a sum of cash equal to the excess of the fair market value of a Vodafone ADR over the call price; b. If the fair market value of a Vodafone ADR is less than the put price, the counterparty will pay to MediaOne SPC IV or MediaOne SPC VI (as appropriate) a sum of cash equal to the excess of the put price over the fair market price of a Vodafone ADR; c. If the fair market value of a Vodafone ADR is less than or equal to the call price but greater than or equal to the put price, the Vodafone collar will expire worthless and no cash payment will be made or received by MediaOne SPC IV or MediaOne SPC VI (as appropriate). The net value of (i) the sale of all Vodafone ADRs and (ii) the cash settlement of the Vodafone collars will always be equal to or greater than the face value of the floating-rate notes. Any remaining cash will be retained by MediaOne SPC IV and MediaOne SPC VI and would become available to AT&T for general corporate purposes. EQUITY OPTION AND EQUITY SWAP CONTRACTS We enter into equity option and equity swap contracts, which are undesignated in accordance with SFAS No. 133, to manage our exposure to changes in equity prices associated with stock appreciation rights of previously affiliated companies. The notional amounts outstanding on these contracts at December 31, 2001 and 2000 were $360 and $392 million, respectively. The following table summarizes the carrying and fair values of these instruments. Market prices are based on market quotes.
2001 2000 ----------------- ----------------- CARRYING/FAIR CARRYING/FAIR VALUE VALUE ----------------- ----------------- ASSET LIABILITY ASSET LIABILITY ----- --------- ----- --------- Equity hedges......................................... $-- $85 $2 $100
WARRANTS We may obtain warrants to purchase equity securities in other private and public companies as a result of certain transactions. Private warrants and public warrants that provide for net share settlement (i.e. allow for 80 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) cashless exercise) are considered to be derivative instruments and recognized on our balance sheet at fair value (in accordance with SFAS No. 133). Warrants are not eligible to be designated as hedging instruments because there is no underlying exposure. Instead, these are effectively investments in private and public companies. The fair value of these warrants was $41 at December 31, 2001. DEBT AND PREFERRED SECURITIES The carrying value of debt maturing within one year approximates market value. The table below summarizes the carrying and fair values of long-term debt, excluding capital leases, and certain preferred securities. The market values of long-term debt were obtained based on quotes or rates available to us for debt with similar terms and maturities, and the market value of the preferred securities was based on market quotes. It is not practicable to estimate the fair market value of our quarterly preferred securities that aggregated $4,720 and $4,710 at December 31, 2001 and 2000, respectively as there are no current market quotes available on this private placement.
2001 2000 --------------------------- --------------------------- CARRYING VALUE FAIR VALUE CARRYING VALUE FAIR VALUE -------------- ---------- -------------- ---------- Long-term Debt, excluding capital leases................................ $43,978 $41,845 $32,591 $29,735 Pacific preferred stock................. 2,100 948 2,121 595
DERIVATIVE IMPACTS For the year ended December 31, 2001, "Other comprehensive income", as a component of shareowners' equity, net of tax, included deferred net unrealized losses of $244 relating to derivatives that are designated as cash flow hedges. This amount included net losses of $166 related to the ongoing fair value adjustments of equity based derivative instruments embedded in certain debt instruments, net losses of $78 related to certain swaps and foreign currency transactions. For the year ended December 31, 2001, "Other (expense) income" in the Consolidated Statement of Income, included net gains of $1,328, relating to ongoing fair value adjustments of undesignated derivatives and derivatives designated as fair value hedges. The fair value adjustments included net gains of $1,247 for equity based derivative instruments related to certain debt instruments, net gains of $81 for changes in the fair value of warrants, swaps and foreign currency transactions. These gains were offset by the ongoing mark-to-market adjustments of the "trading" securities underlying the monetizations of $(983). 15. PENSION, POSTRETIREMENT AND OTHER EMPLOYEE BENEFIT PLANS We sponsor noncontributory, defined benefit pension plans covering the majority of our employees. Pension benefits for management employees are based principally on career-average pay. Pension benefits for occupational employees are not directly related to pay. Pension trust contributions are made to trust funds held for the sole benefit of plan participants. Our benefit plans for current and certain future retirees include health-care benefits, life insurance coverage and telephone concessions. 81 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following table shows the components of the net periodic benefit costs included in our Consolidated Statements of Income:
PENSION BENEFITS POSTRETIREMENT BENEFITS --------------------------- ------------------------ FOR THE YEARS ENDED DECEMBER 31, ------------------------------------------------------ 2001 2000 1999 2001 2000 1999 ------- ------- ------- ------ ------ ------ Service cost benefits earned during the period......................... $ 257 $ 248 $ 247 $ 27 $ 35 $ 54 Interest cost on benefit obligations........................ 951 991 919 346 352 324 Amortization of unrecognized prior service cost....................... 172 174 159 4 4 13 Credit for expected return on plan assets............................. (1,660) (1,821) (1,458) (201) (230) (200) Amortization of transition asset..... (89) (156) (158) -- -- -- Amortization of gains................ (181) (332) (10) -- (16) (1) Charges for special termination benefits*.......................... 188 -- -- 28 16 5 Net curtailment losses (gains)*...... 112 121 -- 58 (14) -- Net settlement losses (gains)*....... 4 8 (121) -- -- -- ------- ------- ------- ----- ----- ----- Net periodic benefit (credit)cost.... $ (246) $ (767) $ (422) $ 262 $ 147 $ 195 ======= ======= ======= ===== ===== =====
- --------------- * Primarily included in "Net restructuring and other charges" in the Consolidated Statements of Income. In connection with our restructuring plan announced in the fourth quarter of 2001 we recorded a $188 charge related to management employee separation benefits expected to be funded by assets of the AT&T Management Pension Plan. We also recorded pension and postretirement benefit curtailment charges of $170 and a $28 charge related to expanded eligibility for postretirement benefits for certain employees expected to exit under the plan. In 1998 we offered a voluntary retirement incentive program (VRIP) to employees who were eligible participants in the AT&T Management Pension Plan. Approximately 15,300 management employees accepted the VRIP offer and had terminated employment as of December 31, 1999. The VRIP permitted employees to choose either a total lump-sum distribution of their pension benefits or periodic future annuity payments. Lump-sum pension settlements resulted in settlement gains of $121 recorded in 1999. 82 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following tables provide a reconciliation of the changes in the plans' benefit obligations and fair value of assets, and a statement of the funded status:
PENSION BENEFITS POSTRETIREMENT BENEFITS ----------------- ------------------------ FOR THE YEARS ENDED DECEMBER 31, -------------------------------------------- 2001 2000 2001 2000 ------- ------- ---------- ---------- CHANGE IN BENEFIT OBLIGATIONS: Benefit obligation, beginning of year......... $13,063 $12,868 $ 4,886 $ 4,642 Service cost.................................. 257 248 27 35 Interest cost................................. 951 991 346 352 Plan amendments............................... 62 32 -- (45) Actuarial losses (gains)...................... 655 5 376 203 Acquisition................................... -- 204 -- 38 Benefit payments.............................. (1,117) (1,228) (407) (362) Special termination benefits.................. 188 -- 28 16 Settlements................................... (17) (57) -- -- Curtailment losses............................ (7) -- 60 7 ------- ------- ------- ------- Benefit obligation, end of year............... $14,035 $13,063 $ 5,316 $ 4,886 ======= ======= ======= ======= CHANGE IN FAIR VALUE OF PLAN ASSETS: Fair value of plan assets, beginning of year........................................ $21,203 $21,854 $ 2,526 $ 2,852 Actual return on plan assets.................. (1,650) 335 (214) (128) Employer contributions........................ 66 94 255 159 Acquisition................................... -- 205 -- 5 Benefit payments.............................. (1,117) (1,228) (407) (362) Settlements................................... (17) (57) -- -- ------- ------- ------- ------- Fair value of plan assets, end of year........ $18,485 $21,203 $ 2,160 $ 2,526 ======= ======= ======= ======= At December 31, Funded (unfunded) benefit obligation.......... $ 4,450 $ 7,992 $(3,156) $(2,360) Unrecognized net (gain) loss.................. (2,506) (6,493) 605 (188) Unrecognized transition asset................. (34) (123) -- -- Unrecognized prior service cost............... 883 1,100 (12) (9) ------- ------- ------- ------- Net amount recorded........................... $ 2,793 $ 2,476 $(2,563) $(2,557) ======= ======= ======= =======
At December 31, 2001, our pension plan assets included $31 of AT&T common stock. At December 31, 2000, our pension plan assets included $34 of AT&T common stock and $26 of LMG Series A common stock, and $2 of AT&T Wireless Group common stock. 83 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following table provides the amounts recorded in our Consolidated Balance Sheets:
PENSION BENEFITS POSTRETIREMENT BENEFITS ----------------- ------------------------ AT DECEMBER 31, -------------------------------------------- 2001 2000 2001 2000 ------- ------- ---------- ---------- Prepaid pension cost............................ $3,337 $3,003 $ -- $ -- Benefit related liabilities..................... (648) (579) (2,563) (2,557) Intangible asset................................ 50 30 -- -- Accumulated other comprehensive income.......... 54 22 -- -- ------ ------ ------- ------- Net amount recorded............................. $2,793 $2,476 $(2,563) $(2,557) ====== ====== ======= =======
Our nonqualified pension plans had an unfunded accumulated benefit obligation of $132 and $125 at December 31, 2001 and 2000, respectively. On January 1, 2001 our postretirement health and life benefit plans were merged into one plan. At December 31, 2000, our postretirement health and telephone benefit plans had accumulated postretirement benefit obligations of $4,282, which were in excess of plan assets of $1,413. The assumptions in the following table were used in the measurement of the pension and postretirement benefit obligations and the net periodic benefit costs as applicable.
WEIGHTED-AVERAGE ASSUMPTIONS AT DECEMBER 31: ------------------ 2001 2000 1999 ---- ---- ---- Discount rate............................................... 7.25% 7.5% 7.75% Expected return on plan assets.............................. 9.5% 9.5% 9.5% Rate of compensation increase............................... 4.5% 4.5% 4.5%
We assumed a rate of increase in the per capita cost of covered health-care benefits (the health-care cost trend rate) of 9.5%. This rate was assumed to gradually decline after 2001 to 5.0% by 2012 and then remain level. Assumed health-care cost trend rates have a significant effect on the amounts reported for the health-care plans. A one percentage point increase or decrease in the assumed health-care cost trend rate would increase or decrease the total of the service and interest-cost components of net periodic postretirement health-care benefit cost by $11 and $10, respectively, and would increase or decrease the health-care component of the accumulated postretirement benefit obligation by $155 and $135, respectively. We also sponsor savings plans for the majority of our employees. The plans allow employees to contribute a portion of their pretax and/or after-tax income in accordance with specified guidelines. We match a percentage of the employee contributions up to certain limits. Our contributions amounted to $185 in 2001, $220 in 2000 and $197 in 1999. 16. STOCK-BASED COMPENSATION PLANS Under the 1997 Long-term Incentive Program (Program), which was effective June 1, 1997, and amended on May 19, 1999 and March 14, 2000, we grant stock options, performance shares, restricted stock and other awards on AT&T common stock as well as stock options on AT&T Wireless Group tracking stock prior to the split-off of AT&T Wireless. Under the initial terms of the Program, there were 150 million shares of AT&T common stock available for grant with a maximum of 22.5 million common shares that could be used for awards other than stock options. Subsequent to the 1999 modification, beginning with January 1, 2000, the remaining shares available for grant at December 31 of the prior year, plus 1.75% of the shares of AT&T common stock outstanding on January 1 of each year, become available for grant. Under the amended terms, a maximum of 37.5 million 84 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) shares can be used for awards other than stock options. As a result of the equity restructuring of stock options and other awards in connection with the AT&T Wireless split-off, the number of shares available for stock option grants and the number of shares available for other stock-based awards increased by 17.7 million and 2.9 million, respectively. The exercise price of any stock option is equal to the stock price when the option is granted. Generally, the options vest over three or four years and are exercisable up to 10 years from the date of grant. Under the Program, performance share units are awarded to key employees in the form of either common stock or cash at the end of a three-year period, based on certain financial-performance targets. On April 27, 2000, AT&T created a new class of stock and completed an offering of AT&T Wireless Group tracking stock. Under the Program, 5% of the outstanding AT&T Wireless Group shares became available for grant with a maximum of 1.25% of the outstanding shares that could be used for awards other than options. On January 1, 2001, the remaining AT&T Wireless Group shares available for grant at December 31, 2000, plus 2% of the outstanding AT&T Wireless Group shares on January 1 became available for grant. The exercise price of any stock option was equal to the stock price when the option was granted. When granted, the options had a two to three and one-half year vesting period. They are exercisable up to 10 years from the date of grant. In 2001 and 2000, there were no grants of awards other than stock options. On April 27, 2000, substantially all employees were granted AT&T Wireless Group tracking stock options. On July 9, 2001, AT&T completed the split-off of AT&T Wireless Group as a separate, independently traded company. All AT&T Wireless Group tracking stock was converted into AT&T Wireless common stock on a one-for-one basis, and AT&T Wireless common stock held by AT&T was distributed to AT&T common shareowners on a basis of 0.3218 of a share of AT&T Wireless for each AT&T share outstanding. All outstanding AT&T Wireless Group tracking stock options and all AT&T common stock options granted prior to January 1, 2001 were treated in a similar manner. AT&T modified the terms and conditions of all outstanding stock option grants to allow the AT&T Wireless common stock options held by AT&T employees to immediately vest and become exercisable for their remaining contractual term and to also allow the AT&T common stock options held by AT&T Wireless employees to immediately vest and become exercisable for their remaining contractual term. In 2001, AT&T recognized $3 of compensation expense related to these modifications. Under the AT&T 1996 Employee Stock Purchase Plan (Plan), which was effective July 1, 1996, and amended on May 23, 2001, we are authorized to sell up to 105 million shares of AT&T common stock to our eligible employees through June 30, 2006. Under the terms of the Plan, employees may have up to 10% of their earnings withheld to purchase AT&T's common stock. The purchase price of the stock on the date of exercise is 85% of the average high and low sale prices of shares on the New York Stock Exchange for that day. Under the Plan, we sold approximately 6 million shares to employees in both 2001 and 2000 and 3 million shares to employees in 1999. We apply APB Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations in accounting for our plans. Accordingly, no compensation expense has been recognized for our stock-based compensation plans other than for our performance-based and restricted stock awards and stock appreciation rights (SARs). Stock based-compensation (expense) income was $(121), $253 and $(462) in 2001, 2000 and 1999, respectively. These amounts included (expense) income of $(3), $269 and $(382) in 2001, 2000 and 1999, respectively, related to grants of SARs of affiliated companies held by certain employees subsequent to the TCI merger. We also entered into an equity hedge in 1999 to offset potential future compensation costs associated with these SARs. (Expense) income related to this hedge was $(16), $(324) and $227 in 2001, 2000 and 1999, respectively. 85 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) A summary of the AT&T common stock option transactions is shown below:
WEIGHTED- WEIGHTED- WEIGHTED- AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE 2001 PRICE 2000 PRICE 1999 PRICE ------- --------- ------- --------- ------- --------- SHARES IN THOUSANDS Outstanding at January 1....................... 249,026 $35.82 168,763 $37.42 131,904 $30.41 Options assumed in mergers................. -- 29,613 $24.71 11,770 $14.79 Options granted........... 68,402 $22.17 74,570 $36.12 47,927 $57.13 AT&T Wireless split-off adjustments............. 21,644 Options and SARs exercised............... (5,218) $11.63 (11,446) $22.07 (17,858) $22.87 Options canceled or forfeited............... (16,308) $31.07 (12,474) $45.61 (4,980) $42.44 AT DECEMBER 31: Options outstanding....... 317,546 $24.58 249,026 $35.82 168,763 $37.42 Options exercisable....... 171,446 $26.05 131,450 $30.44 57,894 $28.21 Shares available for grant................... 34,718 34,204 41,347
The weighted average exercise prices for the period prior to the AT&T Wireless split-off in 2001, and for the years ended December 31, 2000 and 1999 have not been adjusted to reflect the impact of the split-off. At December 31, 2001, there were 4.5 million AT&T stock options with 2.2 million tandem SARs outstanding that were originally assumed in connection with our merger with MediaOne. All of the SARs were exercisable at a price of $19.33. There were no SARs exercised during 2001 or 2000. 86 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following table summarizes information about the AT&T common stock options outstanding at December 31, 2001:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ---------------------------------------- -------------------------- WEIGHTED- NUMBER AVERAGE WEIGHTED- NUMBER WEIGHTED- OUTSTANDING AT REMAINING AVERAGE EXERCISABLE AT AVERAGE DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE RANGE OF EXERCISE PRICES 2001 LIFE PRICE 2001 PRICE - ------------------------ -------------- ----------- --------- -------------- --------- (IN THOUSANDS) (IN THOUSANDS) $2.03 -- $13.65............ 16,245 4.9 $ 7.90 15,767 $ 7.75 $13.70 -- $16.77........... 12,968 8.6 $15.84 3,882 $15.38 $16.85 -- $17.33........... 28,866 9.4 $16.86 1,319 $16.95 $17.39..................... 48,088 9.2 $17.39 2,907 $17.39 $17.44 -- $18.49........... 11,193 5.3 $17.88 7,312 $17.78 $18.50..................... 14,420 5.6 $18.50 14,420 $18.50 $18.53 -- $19.77........... 9,325 5.7 $19.12 8,159 $19.11 $19.79..................... 15,858 5.1 $19.79 15,858 $19.79 $19.88 -- $24.13........... 19,659 5.8 $22.88 14,768 $22.83 $24.23..................... 25,088 8.6 $24.23 6,287 $24.23 $24.30 -- $31.74........... 24,575 7.4 $27.98 17,337 $28.89 $31.79..................... 23,874 6.1 $31.79 23,874 $31.79 $31.85 -- $34.30........... 19,406 8.1 $34.16 7,372 $34.00 $34.33 -- $44.98........... 22,925 7.7 $38.80 16,105 $38.42 $45.20 -- $46.90........... 25,056 7.1 $45.21 16,079 $45.21 ------- ------- 317,546 7.4 $24.58 171,446 $26.05
A summary of the AT&T Wireless Group tracking stock option transactions is shown below:
WEIGHTED- WEIGHTED- AVERAGE AVERAGE EXERCISE EXERCISE 2001 PRICE 2000 PRICE ------- --------- ------ --------- SHARES IN THOUSANDS OUTSTANDING AT JANUARY 1...................... 73,626 $29.29 -- $ -- Options granted............................... 4,037 $22.57 76,983 $29.29 Options exercised............................. (1) $22.03 -- $ -- Options canceled or forfeited................. (2,711) $29.11 (3,357) $29.43 Options assumed by AT&T Wireless on July 9th......................................... (74,951) AT DECEMBER 31: Options outstanding........................... -- 73,626 $29.29 Options exercisable........................... -- 12,391 $29.48 Shares available for grant.................... -- 41,874
AT&T has adopted the disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation". If AT&T had elected to recognize compensation costs based on the fair value at the date of 87 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) grant of the awards, consistent with the provisions of SFAS No. 123, net income and earnings per share amounts would have been as follows:
FOR THE YEARS ENDED DECEMBER 31, ------------------------- 2001 2000 1999 ------- ------ ------ AT&T COMMON STOCK GROUP: (Loss) income from continuing operations available to common shareowners...................................... $(5,423) $2,342 $5,685 Income (loss) from discontinued operations................ 58 283 (492) Gain on sale of discontinued operations................... 13,503 -- -- Cumulative effect of accounting change.................... 359 -- -- Net income available to common shareowners................ $ 8,497 $2,625 $5,193 (LOSS) EARNINGS PER AT&T COMMON STOCK GROUP COMMON SHARE -- BASIC: Continuing operations..................................... $ (1.48) $ 0.67 $ 1.84 Discontinued operations................................... 0.01 0.08 (0.16) Gain on sale of discontinued operations................... 3.70 -- -- Cumulative effect of accounting change.................... 0.10 -- -- AT&T Common Stock Group earnings.......................... 2.33 $ 0.75 $ 1.68 (LOSS) EARNINGS PER AT&T COMMON STOCK GROUP COMMON SHARE -- DILUTED: Continuing operations..................................... $ (1.48) $ 0.66 $ 1.80 Discontinued operations................................... 0.01 0.08 (0.15) Gain on sale of discontinued operations................... 3.70 -- -- Cumulative effect of accounting change.................... 0.10 -- -- AT&T Common Stock Group earnings.......................... 2.33 $ 0.74 $ 1.65 AT&T WIRELESS GROUP: Income.................................................... $ 18 $ 51 $ -- EARNINGS PER SHARE: Basic and diluted......................................... $ 0.04 $ 0.14 $ --
The pro forma effect on net loss from continuing operations available to AT&T common shareowners for 2001 includes an expense of $50 due to the conversion of AT&T common stock options in connection with the split-off of AT&T Wireless, and also includes an expense of $175 due to the accelerated vesting of AT&T Wireless stock options held by AT&T employees after the split-off. The weighted-average fair values at date of grant for AT&T common stock options granted during 2001, 2000 and 1999 were $7.90, $12.10 and $15.64, respectively, and were estimated using the Black-Scholes option-pricing model. The weighted-average risk-free interest rates applied for 2001, 2000 and 1999 were 4.61%, 6.29% and 5.10%, respectively. The following assumptions were applied for 2001, 2000 and 1999, respectively: (i) expected dividend yields of ...85%, 1.6% and 1.7%, (ii) expected volatility rates of 36.9%, 33.5% and 28.3% and (iii) expected lives of 4.7 years in 2001 and 2000 and 4.5 years in 1999. The weighted-average fair values at date of grant for AT&T Wireless Group tracking stock options granted during 2001 and 2000 were $11.58 and $14.20, respectively, and were estimated using the Black-Scholes option-pricing model. The following weighted-average assumptions were applied for 2001 and 2000, 88 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) respectively: (i) risk-free rate of 4.92% and 6.53%, (ii) expected volatility rate of 55.0% in 2001 and 2000 and (iii) expected lives of 4.8 years and 3.9 years. In January 2002, AT&T modified its outstanding stock option agreements for AT&T stock options and other equity awards held by current AT&T Broadband employees to provide that upon the change in control of AT&T Broadband their stock options and other equity awards granted prior to January 1, 2002 will be immediately vested and exercisable through their remaining contractual term. The potential compensation cost associated with this modification for current AT&T Broadband employees has been measured as of the modification date and is approximately $50 pretax. The actual charge will be finalized and recorded by AT&T Broadband at the time of the change in control in connection with the anticipated merger with Comcast. 17. INCOME TAXES The following table shows the principal reasons for the difference between the effective income (benefit) tax rate and the U.S. federal statutory income tax rate:
FOR THE YEARS ENDED DECEMBER 31, ------------------------- 2001 2000 1999 ------- ------ ------ U.S. federal statutory income tax rate.................... 35% 35% 35% Federal income tax (benefit) provision at statutory rate.................................................... $ (362) $ 845 $3,774 Amortization of investment tax credits.................... (18) (23) (10) State and local income tax (benefit) provision, net of federal income tax provision (benefit) effect........... (92) 176 279 In-process research and development write-off............. -- -- 208 Amortization of intangibles............................... 188 91 26 Foreign rate differential................................. 209 104 56 Taxes on repatriated and accumulated foreign income, net of tax credits.......................................... (84) (84) (45) Research and other credits................................ (43) (37) (61) Valuation allowance....................................... -- -- (76) Investment dispositions, acquisitions and legal entity restructurings.......................................... (176) (445) (94) Operating losses and charges relating to Excite@Home...... 649 2,757 -- Deconsolidation of and put obligation settlement related to Excite@Home.......................................... (1,045) -- -- Other differences, net.................................... (17) (100) (41) ------- ------ ------ (Benefit) provision for income taxes...................... $ (791) $3,284 $4,016 Effective income (benefit) tax rate....................... 76.4% 136.1% 37.3%
89 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The U.S. and foreign components of (loss) income from continuing operations before income taxes and the (benefit) provision for income taxes are presented in this table:
FOR THE YEARS ENDED DECEMBER 31, -------------------------------- 2001 2000 1999 --------- -------- --------- (LOSS) INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES United States.......................................... $(1,030) $2,823 $10,449 Foreign................................................ (5) (409) 332 ------- ------ ------- Total.................................................. $(1,035) $2,414 $10,781 (BENEFIT) PROVISION FOR INCOME TAXES CURRENT Federal................................................ $ 1,392 $2,323 $ 2,896 State and local........................................ 152 281 417 Foreign................................................ 102 89 100 ------- ------ ------- 1,646 2,693 3,413 DEFERRED Federal................................................ (2,125) 633 593 State and local........................................ (293) (14) 12 Foreign................................................ (1) (5) 8 ------- ------ ------- (2,419) 614 613 Deferred investment tax credits.......................... (18) (23) (10) ------- ------ ------- (Benefit) provision for income taxes..................... $ (791) $3,284 $ 4,016
In addition, we also recorded current and deferred income tax benefits related to minority interest income (expense) and net equity losses related to other equity investments, respectively in the amounts of $756 and $2,383 in 2001, $279 and $251 in 2000 and $273 and $249 in 1999, respectively. Deferred income tax liabilities are taxes we expect to pay in future periods. Similarly, deferred income tax assets are recorded for expected reductions in taxes payable in future periods. Deferred income taxes arise because of differences in the book and tax basis of certain assets and liabilities. 90 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Deferred income tax liabilities and assets consist of the following:
AT DECEMBER 31, ----------------- 2001 2000 ------- ------- LONG-TERM DEFERRED INCOME TAX LIABILITIES Property, plant and equipment............................. $ 6,420 $ 5,393 Investments............................................... 7,768 9,558 Franchise costs........................................... 16,839 18,571 Other..................................................... 2,519 2,694 ------- ------- Total long-term deferred income tax liabilities........... 33,546 36,216 LONG-TERM DEFERRED INCOME TAX ASSETS Business restructuring.................................... 163 127 Net operating loss/credit carryforwards................... 180 602 Employee pensions and other benefits, net................. 1,027 1,470 Reserves and allowances................................... 1,724 99 Other..................................................... 2,349 2,604 Valuation allowance....................................... (57) (740) ------- ------- Total net long-term deferred income tax assets.............. 5,386 4,162 Net long-term deferred income tax liabilities............... $28,160 $32,054 CURRENT DEFERRED INCOME TAX LIABILITIES Investments............................................... $ 11 $ 670 Other..................................................... 121 310 ------- ------- Total current deferred income tax liabilities............. 132 980 CURRENT DEFERRED INCOME TAX ASSETS Business restructuring.................................... 216 155 Employee pensions and other benefits...................... 182 377 Reserves and allowances................................... 493 621 Other..................................................... 471 586 Valuation allowance....................................... (0) (39) ------- ------- Total net current deferred income tax assets................ 1,362 1,700 Net current deferred income tax assets...................... $ 1,230 $ 720
At December 31, 2001, we had net operating loss carryforwards (tax effected) for federal and state income tax purposes of $15 and $116, respectively, expiring through 2020. In addition, we had federal tax credit carryforwards of $17, of which $1 has no expiration date and $16 expire through 2003. We also had state tax credit carryforwards (tax effected) of $32 expiring through 2003. In connection with the TCI and MediaOne mergers, we acquired certain federal and state net operating loss carryforwards that are subject to a valuation allowance of $23 at December 31, 2001. If in the future, the realization of these acquired deferred tax assets becomes more likely than not, any reduction of the associated valuation allowance will be allocated to reduce franchise costs and other intangibles. On September 30, 2001, the assets and liabilities of Excite@Home were deconsolidated from AT&T's consolidated balance sheet. Accordingly, AT&T's deferred income tax assets and liabilities at December 31, 2001, presented above, exclude any amounts related to Excite@Home. 91 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 18. COMMITMENTS AND CONTINGENCIES In the normal course of business we are subject to proceedings, lawsuits and other claims, including proceedings under laws and regulations related to environmental and other matters. Such matters are subject to many uncertainties, and outcomes are not predictable with assurance. Consequently, we are unable to ascertain the ultimate aggregate amount of monetary liability or financial impact with respect to these matters at December 31, 2001. These matters could affect the operating results of any one quarter when resolved in future periods. However, we believe that after final disposition, any monetary liability or financial impact to us beyond that provided for at year-end would not be material to our annual consolidated financial statements. We lease land, buildings and equipment through contracts that expire in various years through 2050. Our rental expense under operating leases was $696 in 2001, $705 in 2000 and $622 in 1999. The total of minimum rentals to be received in the future under non-cancelable operating subleases as of December 31, 2001, was $189. The following table shows our future minimum commitments due under non-cancelable operating and capital leases at December 31, 2001:
OPERATING CAPITAL LEASES LEASES --------- ------- 2002........................................................ $ 550 $ 66 2003........................................................ 492 63 2004........................................................ 432 60 2005........................................................ 350 58 2006........................................................ 298 44 Later years................................................. 874 131 ------ ---- Total minimum lease payments................................ $2,996 $422 ====== ==== Less: Amount representing interest.......................... 95 ---- Present value of net minimum lease payments................. $327 ====
In addition, under certain real estate operating leases, we could be required to make payments to the lessor up to $586 at the end of the lease term (lease terms range from 2002 through 2011). The actual amount paid, if any, would be reduced by amounts received by the lessor upon remarketing of the property. AT&T has an agreement with Motorola, Inc. to purchase a minimum of 1.6 million digital set-top devices at an average price of $234 per unit in 2002. During 2001, AT&T satisfied its obligation under a previous agreement with Motorola, Inc. to purchase set-top devices. AT&T has certain commitments relating to AT&T Canada (see Note 5). In 1997, AT&T Broadband's predecessor, TCI, entered into a 25-year affiliation term sheet with Starz Encore Group pursuant to which AT&T may be obligated to pay fixed monthly amounts in exchange for unlimited access to all of the existing Encore and STARZ! programming. Starz Encore Group is a subsidiary of LMG. The future commitment, which is calculated based on a fixed number of subscribers, increases annually from $306 in 2002 to $315 in 2003 and will increase annually through 2022 with inflation, subject to certain adjustments, including increases in the number of subscribers. The affiliation term sheet further provides that to the extent Starz Encore Group's programming costs increase above certain levels, AT&T's payments under the term sheet will be increased in proportion to the excess. Excess programming costs that may be payable by AT&T in future years are not presently estimable and could be significant. By letter dated May 29, 2001, AT&T Broadband indicated that in its view the Starz Encore term sheet as a whole is 92 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) unenforceable and reserved its right to terminate the term sheet. Starz Encore subsequently initiated a lawsuit against AT&T Broadband seeking a declaration that the term sheet is a binding and enforceable contract. AT&T has contractual obligations to utilize network facilities from local exchange carriers with terms greater than one year. These contracts are based on volumes and have penalty fees if certain volume levels are not met. We assessed our minimum exposure based on penalties to exit the contracts. At December 31, 2001, penalties to exit these contracts in any given year totaled approximately $1.5 billion. AT&T Broadband is party to an agreement under which it purchases certain billing services from CSG Systems, Inc. ("CSG"). Unless terminated by either party pursuant to terms of the agreement, the agreement expires on December 31, 2012. The agreement calls for monthly payments which are subject to adjustments and conditions pursuant to the terms of the underlying agreements. The annual commitment under the agreement is $130 for 2002 and will increase annually with inflation. 19. RELATED PARTY TRANSACTIONS AT&T has various related party transactions with Concert. Included in "Revenue" in the Consolidated Statements of Income was $1,080 for services provided to Concert for the years ended December 31, 2001 and 2000. Included in "Access and other connection" in the Consolidated Statements of Income are charges from Concert representing costs incurred on our behalf to connect calls made to foreign countries (international settlements) and costs paid by AT&T to Concert for distributing Concert products totaling $2,073 and $2,364 for the year ended December 31, 2001 and 2000, respectively. AT&T loaned $1,000 to Concert; that loan was included within "Other investments and related advances" in the Consolidated Balance Sheet. Interest income of $67 was recognized for the year ended December 31, 2000. This loan together with the associated accrued interest was written off in connection with the decision to unwind Concert (see Note 5). At December 31, 2001 and 2000, AT&T had a floating rate loan payable to Concert in the amount of $80 and $126, respectively. The loan, which is due on demand, is included in "Debt maturing within one year" in the Consolidated Balance Sheets. Interest expense was $3 and $6 for the year ended December 31, 2001 and 2000, respectively. Included in "Accounts receivable" in the Consolidated Balance Sheets at December 31, 2001 and 2000, was $438 and $462, respectively, related to telecommunications transactions with Concert. Included in "Accounts payable" in the Consolidated Balance Sheets at December 31, 2001 and 2000, was $201 and $518, respectively, related to transactions with Concert. Included in "Other receivables" in the Consolidated Balance Sheets at December 31, 2001 and 2000, was $781 and $1,106, respectively, related to administrative transactions performed on behalf of Concert. Included in "Other current liabilities" in the Consolidated Balance Sheets at December 31, 2001 and 2000, was $935 and $1,032, respectively, related to administrative transactions performed on behalf of Concert. We had various related party transactions with LMG. Included in costs of services and products were programming expenses related to services from LMG. These expenses amounted to $199 for the 7 months ended July 31, 2001, the effective split-off date of LMG for accounting purposes, $239 for the year ended December 31, 2000, and $184 for the 10 months ended December 31, 1999 (see Note 9). 20. SEGMENT REPORTING AT&T's results are segmented according to the way we manage our business: AT&T Business Services, AT&T Consumer Services and AT&T Broadband. 93 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) AT&T Business Services includes long distance, international and toll-free voice, local, data and Internet protocol (IP) networking, managed networking services and outsourcing solutions, and wholesale transport services (sales of services to service resellers). AT&T Consumer Services provides a variety of communications services to residential customers, including domestic and international long distance, transaction based long distance, such as operator-assisted and prepaid phone cards, local and local toll (intrastate calls outside the immediate local area) and dial-up Internet. AT&T Broadband offers a variety of services through our cable (broadband) network, including traditional analog video and advanced services such as digital video, high-speed data and broadband telephony. The balance of AT&T's continuing operations (excluding LMG) is included in a "Corporate and Other" group. This group reflects corporate staff functions and the elimination of transactions between segments, as well as the impacts of Excite@Home. In addition, all impacts of the adoption of SFAS No. 133 as well as the ongoing investment and derivative revaluations are reflected in the Corporate and Other group. LMG was not an operating segment of AT&T prior to its split-off from AT&T because AT&T did not have a controlling financial interest in LMG for financial accounting purposes. Therefore, we accounted for this investment under the equity method. Additionally, LMG's results were not reviewed by the chief operating decision-makers for purposes of determining resources to be allocated. Total assets for our reportable segments generally include all assets, except intercompany receivables. AT&T prepaid pension assets and Corporate-owned or leased real estate are held at the corporate level and therefore, are included in the Corporate and Other group. AT&T Broadband and MediaOne prepaid pension assets and owned or leased real estate is included in the AT&T Broadband segment. In addition, as the "Net Assets of Discontinued Operations" is not considered to be a part of AT&T's ongoing operations, it is included in a category separate from reportable segments and Corporate and Other group for reporting purposes. Capital additions for each segment include capital expenditures for property, plant and equipment, additions to nonconsolidated investments, increases in franchise costs and additions to internal-use software. The accounting policies of the segments are the same as those described in the summary of significant accounting policies (see Note 1). AT&T evaluates performance based on several factors, of which the primary financial measure is earnings before interest and taxes, including pretax minority interest and net pretax losses from other equity investments (EBIT). Generally, AT&T accounts for AT&T Business Services' and AT&T Broadband's Inter-segment transactions at market prices. 94 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) REVENUE
FOR THE YEARS ENDED DECEMBER 31, --------------------------------- 2001 2000 1999 --------- --------- --------- AT&T Business Services external revenue................. $27,284 $28,157 $28,087 AT&T Business Services internal revenue............... 740 743 605 ------- ------- ------- Total AT&T Business Services revenue.................... 28,024 28,900 28,692 AT&T Consumer Services external revenue................. 15,079 18,894 21,753 AT&T Broadband external revenue....................... 9,785 8,212 5,069 AT&T Broadband internal revenue....................... 14 14 1 ------- ------- ------- Total AT&T Broadband revenue............................ 9,799 8,226 5,070 ------- ------- ------- Total reportable segments.......................... 52,902 56,020 55,515 Corporate and Other(1).................................. (352) (487) (542) ------- ------- ------- Total revenue........................................... $52,550 $55,533 $54,973 ======= ======= =======
- --------------- (1) Includes $418, $248 and $10 related to Excite@Home in 2001, 2000 and 1999, respectively. DEPRECIATION AND AMORTIZATION(1)
FOR THE YEARS ENDED DECEMBER 31, ------------------------ 2001 2000 1999 ------ ------ ------ AT&T Business Services..................................... $4,215 $4,220 $4,219 AT&T Consumer Services..................................... 200 167 184 AT&T Broadband............................................. 4,376 3,063 1,636 ------ ------ ------ Total reportable segments............................. 8,791 7,450 6,039 Corporate and Other(2)..................................... 547 1,139 155 ------ ------ ------ Total depreciation and amortization........................ $9,338 $8,589 $6,194 ====== ====== ======
- --------------- (1) Includes the amortization of goodwill, franchise costs and other purchased intangibles. (2) Includes $404, $991 and $38 related to Excite@Home in 2001, 2000 and 1999, respectively. (LOSSES) EARNINGS RELATED TO OTHER EQUITY INVESTMENTS
FOR THE YEARS ENDED DECEMBER 31, ----------------------- 2001 2000 1999 ------- ----- ----- AT&T Business Services..................................... $(3,978) $ 35 $ (72) AT&T Broadband............................................. (40) (215) (396) ------- ----- ----- Total reportable segments............................. (4,018) (180) (468) Corporate and Other(1)..................................... (832) (408) (288) ------- ----- ----- Total net losses related to other equity investments....... $(4,850) $(588) $(756) ======= ===== =====
- --------------- (1) Includes $(29), $(382) and $(311) related to Excite@Home in 2001, 2000 and 1999, respectively. 95 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) RECONCILIATION OF EBIT TO INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES, MINORITY INTEREST AND LOSSES RELATED TO OTHER EQUITY INVESTMENTS
FOR THE YEARS ENDED DECEMBER 31, --------------------------------- 2001 2000 1999 --------- --------- --------- AT&T Business Services.................................. $(2,154) $ 5,990 $ 5,248 AT&T Consumer Services.................................. 4,875 6,893 7,619 AT&T Broadband.......................................... (3,215) (1,240) (1,545) ------- ------- ------- Total reportable segments.......................... (494) 11,643 11,322 Corporate and Other(1).................................. (4,324) (3,279) (441) Deduct: Pretax minority interest income (expense)....... 864 4,003 (180) Add: Pretax losses related to other equity investments........................................... 7,889 1,017 1,223 Interest expense........................................ (3,242) (2,964) (1,503) ------- ------- ------- Total income from continuing operations before income taxes, minority interest and losses related to other equity investments.................................... $(1,035) $ 2,414 $10,781 ======= ======= =======
- --------------- (1) Includes $(714), $(3,603) and $(686) related to Excite@Home in 2001, 2000 and 1999, respectively. ASSETS
AT DECEMBER 31, ------------------------------ 2001 2000 1999 -------- -------- -------- AT&T Business Services............................... $ 40,339 $ 42,747 $ 37,974 AT&T Consumer Services............................... 2,141 3,150 3,781 AT&T Broadband....................................... 103,060 114,848 53,810 -------- -------- -------- Total reportable segments....................... 145,540 160,745 95,565 Corporate and Other Assets: Other segments..................................... 1,145 1,174 1,204 Prepaid pension costs.............................. 3,329 3,003 2,464 Deferred income taxes.............................. 960 406 527 Other corporate assets(1)(2)....................... 14,308 7,518 7,874 Net assets of discontinued operations................ -- 27,224 17,363 Investment in Liberty Media Group and Related receivables, net................................... -- 34,290 38,460 -------- -------- -------- Total assets......................................... $165,282 $234,360 $163,457 ======== ======== ========
- --------------- (1) Includes $2,541 and $2,726 related to Excite@Home for 2000 and 1999, respectively. (2) 2001 amount includes cash of $10,425. 96 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) EQUITY INVESTMENTS (EXCLUDING LMG)
AT DECEMBER 31, -------------------------- 2001 2000 1999 ------ ------- ------- AT&T Business Services................................... $ 84 $ 2,355 $ 582 AT&T Broadband........................................... 4,287 6,473 10,327 ------ ------- ------- Total reportable segments........................... 4,371 8,828 10,909 Corporate and Other(1)................................... 228 1,666 3,012 ------ ------- ------- Total equity investments................................. $4,599 $10,494 $13,921 ====== ======= =======
- --------------- (1) Includes $35 and $2,726 related to Excite@Home for 2000 and 1999, respectively. CAPITAL ADDITIONS
FOR THE YEARS ENDED DECEMBER 31, -------------------------------- 2001 2000 1999 -------- --------- --------- AT&T Business Services................................... $5,456 $ 6,839 $ 9,091 AT&T Consumer Services................................... 140 148 299 AT&T Broadband........................................... 3,607 4,968 4,759 ------ ------- ------- Total reportable segments........................... 9,203 11,955 14,149 Corporate and Other(1)................................... 327 1,683 271 ------ ------- ------- Total capital additions.................................. $9,530 $13,638 $14,420 ====== ======= =======
- --------------- (1) Includes $181 and $92 related to Excite@Home in 2001 and 2000, respectively. Geographic information is not presented due to the immateriality of revenue attributable to international customers. Reflecting the dynamics of our business, we continually review our management model and structure, which may result in additional adjustment to our operating segments in the future. 21. GUARANTEE OF PREFERRED SECURITIES TCI SECURITIES: Prior to the consummation of the TCI merger, TCI issued mandatorily redeemable preferred securities through subsidiary trusts that held subordinated debt securities of TCI. At December 31, 2001, $1,244 of the guaranteed redeemable preferred securities remained outstanding. In the first quarter of 2002, AT&T notified holders that it will call the mandatorily redeemable preferred securities issued by TCI Communications Financing I, TCI Communications Financing II and TCI Communications Financing IV for early redemption. (see Note 12) MEDIAONE SECURITIES: Prior to the consummation of the MediaOne merger, MediaOne issued mandatorily redeemable preferred securities through subsidiary trusts that held subordinated debt securities of MediaOne. At December 31, 2001, $776 of the guaranteed securities remained outstanding. 97 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) In the first quarter of 2002, AT&T notified holders that it will call the mandatorily redeemable preferred securities issued by MediaOne Financing A, MediaOne Financing B and MediaOne Financing II for early redemption (see Note 12). AT&T provides a full and unconditional guarantee on the outstanding securities issued by TCI Communications Financing I, II and IV and the outstanding securities issued by MediaOne Financing A and B and MediaOne Finance II and III. Following are the condensed consolidating financial statements of AT&T Corp., which include the financial results of TCI and MediaOne for each of the corresponding periods. The results of MediaOne have been included in the financial results of AT&T since the date of acquisition on June 15, 2000, and the results of TCI have been included since the March 9, 1999, date of acquisition. 98 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) AT&T CORP. CONSOLIDATING CONDENSED BALANCE SHEET AS OF DECEMBER 31, 2001
TCI MEDIAONE MEDIAONE GUARANTOR GUARANTOR GUARANTOR FINANCING FINANCING FINANCE AT&T SUBSIDIARY SUBSIDIARY ------------------ --------- ----------- PARENT TCI MEDIAONE I II IV A B II III --------- ---------- ---------- ---- ---- ---- --- --- ---- ---- (DOLLARS IN MILLIONS) ASSETS Cash and cash equivalents......... $ 10,415 $ -- $ 12 $ -- $ -- $ -- $-- $-- $ -- $ -- Receivables....................... 11,682 Investments....................... Deferred income taxes............. 729 Other current assets.............. 302 71 689 527 513 204 31 29 220 11 Total Current Assets.............. 23,128 71 701 527 513 204 31 29 220 11 Property, plant & equipment, net.............................. 8,580 135 Franchise costs, net.............. 20 Goodwill, net..................... 70 2,526 Investment in Liberty Media Group and related receivables, net..... Other investments and related advances......................... 130,219 12,747 41,413 Other assets...................... 5,445 91 21 16 16 516 Net assets of discontinued operations....................... Total Assets...................... $167,442 $13,064 $44,640 $527 $513 $204 $52 $45 $236 $527 LIABILITIES Debt maturing within one year..... $ 34,195 $ 616 $ 753 $527 $513 $204 $30 $28 $214 Liability under put options....... Other current liabilities......... 8,763 597 59 1 1 6 11 Total Current Liabilities......... 42,958 1,213 812 527 513 204 31 29 220 11 Long-term debt.................... 23,810 9,866 676 504 Deferred income taxes............. 1,147 934 Other long-term liabilities and deferred credits................. 6,850 45 23 Total Liabilities................. 74,765 11,124 2,445 527 513 204 31 29 220 515 Minority Interest................. Company-Obligated Convertible Quarterly Income Preferred Securities of Subsidiary Trust Holding Solely Subordinated Debt Securities of AT&T............... 4,720 SHAREOWNERS' EQUITY AT&T Common Stock................. 3,542 AT&T Wireless Group common stock.. Liberty Media Group Class A Common Stock............................ Liberty Media Group Class B Common Stock............................ Preferred stock issued to subsidiaries..................... 10,559 Other shareowners' equity......... 73,856 1,940 42,195 21 16 16 12 Total Shareowners' Equity......... 87,957 1,940 42,195 21 16 16 12 Total Liabilities and Shareowners' Equity........................... $167,442 $13,064 $44,640 $527 $513 $204 $52 $45 $236 $527 ELIMINATION AND NON-GUARANTOR CONSOLIDATION CONSOLIDATED SUBSIDIARIES ADJUSTMENTS AT&T CORP. ------------- ------------- ------------ (DOLLARS IN MILLIONS) ASSETS Cash and cash equivalents......... $ 165 $ -- $ 10,592 Receivables....................... 44,516 (46,817) 9,381 Investments....................... 668 668 Deferred income taxes............. 501 1,230 Other current assets.............. (45) (1,895) 657 Total Current Assets.............. 45,805 (48,712) 22,528 Property, plant & equipment, net.............................. 32,607 41,322 Franchise costs, net.............. 42,799 42,819 Goodwill, net..................... 22,079 24,675 Investment in Liberty Media Group and related receivables, net..... -- Other investments and related advances......................... 63,996 (224,557) 23,818 Other assets...................... 8,835 (4,820) 10,120 Net assets of discontinued operations....................... -- Total Assets...................... $216,121 $(278,089) $165,282 LIABILITIES Debt maturing within one year..... $ 8,985 $ (33,107) $ 12,958 Liability under put options....... -- Other current liabilities......... 11,419 (8,388) 12,469 Total Current Liabilities......... 20,404 (41,495) 25,427 Long-term debt.................... 14,640 (8,969) 40,527 Deferred income taxes............. 26,079 28,160 Other long-term liabilities and deferred credits................. 7,378 (3,088) 11,208 Total Liabilities................. 68,501 (53,552) 105,322 Minority Interest................. 3,560 3,560 Company-Obligated Convertible Quarterly Income Preferred Securities of Subsidiary Trust Holding Solely Subordinated Debt Securities of AT&T............... 4,720 SHAREOWNERS' EQUITY AT&T Common Stock................. 3,542 AT&T Wireless Group common stock.. -- Liberty Media Group Class A Common Stock............................ -- Liberty Media Group Class B Common Stock............................ -- Preferred stock issued to subsidiaries..................... (10,559) -- Other shareowners' equity......... 144,060 (213,978) 48,138 Total Shareowners' Equity......... 144,060 (224,537) 51,680 Total Liabilities and Shareowners' Equity........................... $216,121 $(278,089) $165,282
99 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) AT&T CORP. CONSOLIDATING CONDENSED STATEMENTS OF INCOME FOR THE YEAR ENDED DECEMBER 31, 2001
TCI MEDIAONE MEDIAONE GUARANTOR GUARANTOR GUARANTOR FINANCING FINANCING FINANCE AT&T SUBSIDIARY SUBSIDIARY --------------- ------------- --------- PARENT TCI MEDIAONE I II IV A B II III --------- ---------- ---------- --- --- --- ----- ----- --- --- (DOLLARS IN MILLIONS) Revenue............................... $19,587 $ -- $ -- $-- $-- $-- $ -- $ -- $-- $-- Operating Expenses Costs of services and products........ 3,310 1 Access and other connection........... 6,355 Selling, general and administrative... 1,600 406 14 Depreciation and other amortization... 1,470 57 Amortization of goodwill, franchise costs and other purchased intangibles.......................... 35 3 71 Net restructuring and other charges... 693 Total operating expenses.............. 13,463 466 86 Operating income (loss)............... 6,124 (466) (86) Other (expense) income................ 1,245 91 978 43 46 17 4 3 21 47 Interest expense (benefit)............ 4,214 1,149 180 43 46 17 3 2 20 45 (Loss) income from continuing operations before income taxes, minority interest, and (losses) earnings related to other equity investments.......................... 3,155 (1,524) 712 1 1 1 2 (Benefit) provision for income taxes................................ (237) (569) 299 Minority interest income (expense).... (160) Equity losses from Liberty Media Group................................ 2,711 Net (losses) earnings related to other equity investments................... (2,690) (2,098) (2,577) (Loss) income from continuing operations........................... 542 (5,764) (2,164) 1 1 1 2 Income (loss) from discontinued operations (net of income taxes)..... Gain on disposition of discontinued operations........................... 13,503 Income (loss) before cumulative effect of accounting change................. 14,045 (5,764) (2,164) 1 1 1 2 Cumulative effect of accounting change (net of income taxes)................ 508 545 540 Net income (loss)..................... 14,553 (5,219) (1,624) 1 1 1 2 Dividend requirements of preferred stock................................ 652 Premium on exchange of AT&T Wireless tracking stock....................... 80 Net income (loss) available to common shareowners.......................... $13,821 $(5,219) $(1,624) $-- $-- $-- $ 1 $ 1 $ 1 $ 2 ELIMINATION AND NON-GUARANTOR CONSOLIDATION CONSOLIDATED SUBSIDIARIES ADJUSTMENTS AT&T CORP. ------------- ------------- ------------ (DOLLARS IN MILLIONS) Revenue............................... $35,413 $(2,450) $52,550 Operating Expenses Costs of services and products........ 12,871 (2,222) 13,960 Access and other connection........... 5,976 (195) 12,136 Selling, general and administrative... 8,822 (10) 10,832 Depreciation and other amortization... 5,338 6,865 Amortization of goodwill, franchise costs and other purchased intangibles.......................... 2,364 2,473 Net restructuring and other charges... 1,837 2,530 Total operating expenses.............. 37,208 (2,427) 48,796 Operating income (loss)............... (1,795) (23) 3,754 Other (expense) income................ (834) (3,208) (1,547) Interest expense (benefit)............ 1,263 (3,740) 3,242 (Loss) income from continuing operations before income taxes, minority interest, and (losses) earnings related to other equity investments.......................... (3,892) 509 (1,035) (Benefit) provision for income taxes................................ (284) (791) Minority interest income (expense).... 1,123 963 Equity losses from Liberty Media Group................................ 2,711 Net (losses) earnings related to other equity investments................... (4,382) 6,897 (4,850) (Loss) income from continuing operations........................... (6,867) 7,406 (6,842) Income (loss) from discontinued operations (net of income taxes)..... 178 (28) 150 Gain on disposition of discontinued operations........................... 13,503 Income (loss) before cumulative effect of accounting change................. (6,689) 7,378 6,811 Cumulative effect of accounting change (net of income taxes)................ (689) 904 Net income (loss)..................... (7,378) 7,378 7,715 Dividend requirements of preferred stock................................ 652 Premium on exchange of AT&T Wireless tracking stock....................... 80 Net income (loss) available to common shareowners.......................... $(7,378) $ 7,378 $ 6,983
100 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) AT&T CORP. CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 2001
TCI MEDIAONE MEDIAONE GUARANTOR GUARANTOR GUARANTOR FINANCING FINANCING FINANCE AT&T SUBSIDIARY SUBSIDIARY --------------- --------- --------- PARENT TCI MEDIAONE I II IV A B II III --------- ---------- ---------- --- --- --- --- --- --- --- (DOLLARS IN MILLIONS) Net Cash Provided by (Used in) Operating Activities of Continuing Operations........................... $ 6,500 $ (1,238) $ 808 $ 1 $ 1 $ 1 $ 2 INVESTING ACTIVITIES Capital expenditures and other additions............................ (1,325) (67) Investment distributions and sales.... 813 19,730 59 Net (acquisitions) dispositions of businesses, net of cash acquired/disposed.................... 14 Other................................. 6,136 158 Net Cash (Used in) Provided by Investing Activities of Continuing Operations........................... 5,638 19,821 59 FINANCING ACTIVITIES Proceeds from long-term debt issuances, net of issuance costs..... 11,281 Proceeds from debt from AT&T.......... 3,990 Retirement of long-term debt.......... (629) (252) Retirement of AT&T debt............... (5,867) (22,213) (354) Repayment of borrowings from AT&T Wireless............................. Issuance of convertible preferred securities and warrants.............. 9,811 (Decrease)increase in short-term borrowings, net...................... (19,589) (360) (Decrease)increase in short-term borrowings from AT&T, net............ 2,471 (249) Other................................. 799 (1) (1) (1) (2) Net Cash (Used in) Provided by Financing Activities of Continuing Operations........................... (1,723) (18,583) (855) (1) (1) (1) (2) Net cash provided by (used in) discontinued operations.............. Net increase (decrease) in cash and cash equivalents..................... 10,415 12 Cash and cash equivalents at beginning of year.............................. Cash and cash equivalents at end of period............................... $ 10,415 $ -- $ 12 $-- $-- $-- $-- $-- $-- $-- ELIMINATION AND NON-GUARANTOR CONSOLIDATION CONSOLIDATED SUBSIDIARIES ADJUSTMENTS AT&T CORP. ------------- ------------- ------------ (DOLLARS IN MILLIONS) Net Cash Provided by (Used in) Operating Activities of Continuing Operations........................... $ 4,520 $ (37) $ 10,558 INVESTING ACTIVITIES Capital expenditures and other additions............................ (7,825) (9,217) Investment distributions and sales.... 2,201 (19,789) 3,014 Net (acquisitions) dispositions of businesses, net of cash acquired/disposed.................... 4,899 4,913 Other................................. 2,725 (9,589) (570) Net Cash (Used in) Provided by Investing Activities of Continuing Operations........................... 2,000 (29,378) (1,860) FINANCING ACTIVITIES Proceeds from long-term debt issuances, net of issuance costs..... 1,134 12,415 Proceeds from debt from AT&T.......... (3,990) Retirement of long-term debt.......... (780) (1,661) Retirement of AT&T debt............... 28,434 Repayment of borrowings from AT&T Wireless............................. (5,803) (5,803) Issuance of convertible preferred securities and warrants.............. 9,811 (Decrease)increase in short-term borrowings, net...................... 2,781 (17,168) (Decrease)increase in short-term borrowings from AT&T, net............ (649) (1,573) Other................................. (7,801) 6,383 (624) Net Cash (Used in) Provided by Financing Activities of Continuing Operations........................... (11,118) 29,254 (3,030) Net cash provided by (used in) discontinued operations.............. 4,699 161 4,860 Net increase (decrease) in cash and cash equivalents..................... 101 10,528 Cash and cash equivalents at beginning of year.............................. 64 64 Cash and cash equivalents at end of period............................... $ 165 $ -- $ 10,592
101 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) AT&T CORP. CONSOLIDATING CONDENSED BALANCE SHEET AS OF DECEMBER 31, 2000
TCI MEDIAONE MEDIAONE GUARANTOR GUARANTOR GUARANTOR FINANCING FINANCING FINANCE AT&T SUBSIDIARY SUBSIDIARY ------------------ --------- ----------- PARENT TCI MEDIAONE I II IV A B II III --------- ---------- ---------- ---- ---- ---- --- --- ---- ---- (DOLLARS IN MILLIONS) ASSETS Cash and cash equivalents........ $ -- $ -- $ -- $ -- $ -- $ -- $-- $-- $ -- $ -- Receivables...................... 11,424 2,577 78 Investments...................... Deferred income taxes............ 811 Other current assets............. 1,103 11 Total Current Assets............. 13,338 2,588 78 Property, plant & equipment, net............................. 9,463 102 22 Franchise costs, net............. 838 30 Goodwill, net.................... 161 19,786 Investment in Liberty Media Group and related receivables, net.... 34,290 Other investments and related advances........................ 164,844 32,650 27,712 Other assets..................... 5,500 186 528 514 204 51 44 230 516 Net assets of discontinued operations...................... Total Assets..................... $194,144 $69,846 $47,598 $528 $514 $204 $51 $44 $230 $516 LIABILITIES Debt maturing within one year.... $ 52,556 $ 664 $ 2,337 $ -- $ -- $ -- $-- $-- $ -- $ -- Liability under put options...... Other current liabilities........ 9,535 1,129 76 Total Current Liabilities........ 62,091 1,793 2,413 Long-term debt................... 21,333 30,096 1,702 528 514 204 30 28 214 504 Deferred income taxes............ 569 230 Other long-term liabilities and deferred credits................ 7,341 773 129 Total Liabilities................ 91,334 32,662 4,474 528 514 204 30 28 214 504 Minority Interest................ Company-Obligated Convertible Quarterly Income Preferred Securities of Subsidiary Trust Holding Solely Subordinated Debt Securities of AT&T.............. 4,710 SHAREOWNERS' EQUITY AT&T Common Stock................ 4,176 AT&T Wireless Group common stock........................... 362 Liberty Media Group Class A Common Stock.................... 2,364 Liberty Media Group Class B Common Stock.................... 206 Other shareowners' equity........ 90,992 37,184 43,124 21 16 16 12 Total Shareowners' Equity........ 98,100 37,184 43,124 21 16 16 12 Total Liabilities and Shareowners' Equity............. $194,144 $69,846 $47,598 $528 $514 $204 $51 $44 $230 $516 ELIMINATION AND NON-GUARANTOR CONSOLIDATION CONSOLIDATED SUBSIDIARIES ADJUSTMENTS AT&T CORP. ------------- ------------- ------------ (DOLLARS IN MILLIONS) ASSETS Cash and cash equivalents........ $ 64 $ -- $ 64 Receivables...................... 48,896 (51,922) 11,053 Investments...................... 2,102 2,102 Deferred income taxes............ (91) 720 Other current assets............. (328) (5) 781 Total Current Assets............. 50,643 (51,927) 14,720 Property, plant & equipment, net............................. 31,685 (3) 41,269 Franchise costs, net............. 47,350 48,218 Goodwill, net.................... 6,835 26,782 Investment in Liberty Media Group and related receivables, net.... 34,290 Other investments and related advances........................ 19,673 (214,004) 30,875 Other assets..................... 15,714 (12,505) 10,982 Net assets of discontinued operations...................... 24,876 2,348 27,224 Total Assets..................... $196,776 $(276,091) $234,360 LIABILITIES Debt maturing within one year.... $ 5,432 $ (29,151) $ 31,838 Liability under put options...... 2,564 2,564 Other current liabilities........ 11,219 (8,386) 13,573 Total Current Liabilities........ 19,215 (37,537) 47,975 Long-term debt................... 2,558 (24,622) 33,089 Deferred income taxes............ 31,255 32,054 Other long-term liabilities and deferred credits................ 331 (81) 8,493 Total Liabilities................ 53,359 (62,240) 121,611 Minority Interest................ 4,841 4,841 Company-Obligated Convertible Quarterly Income Preferred Securities of Subsidiary Trust Holding Solely Subordinated Debt Securities of AT&T.............. 4,710 SHAREOWNERS' EQUITY AT&T Common Stock................ (416) 3,760 AT&T Wireless Group common stock........................... 362 Liberty Media Group Class A Common Stock.................... 2,364 Liberty Media Group Class B Common Stock.................... 206 Other shareowners' equity........ 138,992 (213,851) 96,506 Total Shareowners' Equity........ 138,576 (213,851) 103,198 Total Liabilities and Shareowners' Equity............. $196,776 $(276,091) $234,360
102 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) AT&T CORP. CONSOLIDATING CONDENSED STATEMENTS OF INCOME FOR THE YEAR ENDED DECEMBER 31, 2000
TCI MEDIAONE GUARANTOR GUARANTOR GUARANTOR FINANCING FINANCING AT&T SUBSIDIARY SUBSIDIARY --------------------- ------------- PARENT TCI MEDIAONE I II IV A B --------- ---------- ---------- ----- ----- ----- ----- ----- (DOLLARS IN MILLIONS) Revenue................................. $22,234 $ -- $ -- $ -- $ -- $ -- $ -- $ -- Operating Expenses Costs of services and products.......... 2,961 Access and other connection............. 7,047 Selling, general and administrative..... 2,071 19 29 Depreciation and other amortization..... 1,806 52 7 Amortization of goodwill, franchise costs and other purchased intangibles............................ 50 6 226 Net restructuring and other charges..... 443 60 Total operating expenses................ 14,378 137 262 Operating income (loss)................. 7,856 (137) (262) Other (expense) income.................. 971 30 64 43 46 18 2 2 Interest expense (benefit).............. 4,786 1,793 170 43 46 18 1 1 (Loss) income from continuing operations before income taxes, minority interest and (losses) earnings from equity investments............................ 4,041 (1,900) (368) 1 1 (Benefit) provision for income taxes.... 1,505 (727) (54) Minority interest income (expense)...... (161) Equity earnings from Liberty Media Group.................................. 1,488 Net (losses) earnings related to other equity investments..................... 6,258 (3,765) (202) (Loss) income from continuing operations............................. 8,633 (3,450) (516) 1 1 Income from discontinued operations (net of income taxes)....................... Net income (loss)....................... 8,633 (3,450) (516) 1 1 Dividend requirements on preferred stock held by AT&T, net...................... Net income (loss) after preferred stock dividends.............................. $ 8,633 $(3,450) $(516) $ -- $ -- $ -- $ 1 $ 1 MEDIAONE ELIMINATION FINANCE NON- AND ------------- GUARANTOR CONSOLIDATION CONSOLIDATED II III SUBSIDIARIES ADJUSTMENTS AT&T CORP. ----- ----- ------------ ------------- ------------ (DOLLARS IN MILLIONS) Revenue................................. $ -- $ -- $35,386 $(2,087) $55,533 Operating Expenses Costs of services and products.......... 11,536 (1,702) 12,795 Access and other connection............. 6,425 (332) 13,140 Selling, general and administrative..... 7,649 (16) 9,752 Depreciation and other amortization..... 4,059 5,924 Amortization of goodwill, franchise costs and other purchased intangibles............................ 2,383 2,665 Net restructuring and other charges..... 6,526 7,029 Total operating expenses................ 38,578 (2,050) 51,305 Operating income (loss)................. (3,192) (37) 4,228 Other (expense) income.................. 11 25 4,242 (4,304) 1,150 Interest expense (benefit).............. 11 24 311 (4,240) 2,964 (Loss) income from continuing operations before income taxes, minority interest and (losses) earnings from equity investments............................ 1 739 (101) 2,414 (Benefit) provision for income taxes.... 1 2,559 3,284 Minority interest income (expense)...... 4,264 4,103 Equity earnings from Liberty Media Group.................................. 1,488 Net (losses) earnings related to other equity investments..................... (586) (2,293) (588) (Loss) income from continuing operations............................. 1,858 (2,394) 4,133 Income from discontinued operations (net of income taxes)....................... 546 (10) 536 Net income (loss)....................... 2,404 (2,404) 4,669 Dividend requirements on preferred stock held by AT&T, net...................... 111 (111) Net income (loss) after preferred stock dividends.............................. $ -- $ -- $ 2,293 $(2,293) $ 4,669
103 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) AT&T CORP. CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 2000
TCI MEDIAONE MEDIAONE GUARANTOR GUARANTOR GUARANTOR FINANCING FINANCING FINANCE AT&T SUBSIDIARY SUBSIDIARY --------------------- --------- ------------- PARENT TCI MEDIAONE I II IV A B II III --------- ---------- ---------- ----- ----- ----- --- --- ----- ----- (DOLLARS IN MILLIONS) Net Cash Provided by (used in) Operating Activities of Continuing Operations........................... $ 2,735 $ (374) $ (138) $ -- $ -- $ -- $ 1 $ 1 $ -- $ -- INVESTING ACTIVITIES Capital expenditures and other additions............................ (51) (79) (21) Investment distributions and sales.... 363 1,384 Investment contributions and purchases............................ (1,700) (7,360) Net (acquisitions) dispositions of businesses, net of cash acquired/disposed.................... (23,943) Other................................. (2,057) (48) Net Cash (used in) Provided by Investing Activities of Continuing Operations........................... (27,388) (7,487) 1,363 FINANCING ACTIVITIES Proceeds from long-term debt issuances, net of issuance costs..... 739 Proceeds from debt from AT&T.......... 5,867 13,743 275 Retirement of long-term debt.......... (498) (1,058) Retirement of AT&T debt............... (4,990) (1,500) Issuance of AT&T Wireless Group common shares............................... 10,314 Dividends paid on common stock........ (3,047) (Decrease) increase in short-term borrowings, net.................... 12,108 Other................................. (830) 166 (1) (1) Net Cash Provided by (used in) Financing Activities of Continuing Operations........................... 24,653 7,861 (1,225) (1) (1) Net cash (used in) provided by discontinued operations.............. Net increase (decrease) in cash and cash equivalents..................... Cash and cash equivalents at beginning of year.............................. Cash and cash equivalents at end of period............................... $ -- $ -- $ -- $ -- $ -- $ -- $-- $-- $ -- $ -- ELIMINATION AND NON-GUARANTOR CONSOLIDATION CONSOLIDATED SUBSIDIARIES ADJUSTMENTS AT&T CORP. ------------- ------------- ------------ (DOLLARS IN MILLIONS) Net Cash Provided by (used in) Operating Activities of Continuing Operations........................... $ 9,079 $ 361 $ 11,665 INVESTING ACTIVITIES Capital expenditures and other additions............................ (10,760) (10,911) Investment distributions and sales.... 629 (1,384) 992 Investment contributions and purchases............................ (694) 7,360 (2,394) Net (acquisitions) dispositions of businesses, net of cash acquired/disposed.................... 7,286 (16,657) Other................................. (6,186) 7,216 (1,075) Net Cash (used in) Provided by Investing Activities of Continuing Operations........................... (9,725) 13,192 (30,045) FINANCING ACTIVITIES Proceeds from long-term debt issuances, net of issuance costs..... 3,862 4,601 Proceeds from debt from AT&T.......... 4,595 (24,480) Retirement of long-term debt.......... (562) (2,118) Retirement of AT&T debt............... 6,490 Issuance of AT&T Wireless Group common shares............................... 10,314 Dividends paid on common stock........ (3,047) (Decrease) increase in short-term borrowings, net.................... 706 4,159 16,973 Other................................. (1,242) 917 (991) Net Cash Provided by (used in) Financing Activities of Continuing Operations........................... 7,359 (12,914) 25,732 Net cash (used in) provided by discontinued operations.............. (7,667) (639) (8,306) Net increase (decrease) in cash and cash equivalents..................... (954) (954) Cash and cash equivalents at beginning of year.............................. 1,018 1,018 Cash and cash equivalents at end of period............................... $ 64 $ -- $ 64
104 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) AT&T CORP. CONSOLIDATING CONDENSED STATEMENTS OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1999
GUARANTOR TCI FINANCING AT&T GUARANTOR --------------------------------- NON-GUARANTOR PARENT SUBSIDIARY TCI I II IV SUBSIDIARIES --------- -------------- --------- --------- --------- ------------- (DOLLARS IN MILLIONS) Revenue............................ $24,755 $ -- $-- $-- $-- $31,879 Operating Expenses Costs of services and products..... 1,536 10,707 Access and other connection........ 8,403 6,232 Selling, general and administrative................... 4,363 575 5,960 Depreciation and other amortization..................... 2,072 49 3,016 Amortization of goodwill, franchise costs and other purchased intangibles...................... 34 4 1,019 Net restructuring and other charges.......................... 18 326 631 Total operating expenses........... 16,426 954 27,565 Operating income (loss)............ 8,329 (954) 4,314 Other (expense) income............. 539 6 36 40 16 2,734 Interest expense (benefit)......... 3,186 342 36 40 16 634 (Loss) income from continuing operations before income taxes, minority interest, and (losses) earnings related to other equity investments...................... 5,682 (1,290) 6,414 (Benefit) provision for income taxes............................ 2,118 (363) 2,261 Minority interest income (expense)........................ (87) (39) Equity losses from Liberty Media Group............................ 2,022 Net (losses) earnings related to other equity investments......... 4,171 (1,271) (779) (Loss) income from continuing operations....................... 7,648 (4,220) 3,335 Income (losses) from discontinued operations (net of income taxes)........................... (458) Net income (loss).................. $ 7,648 $(4,220) $-- $-- $-- $ 2,877 ELIMINATION AND CONSOLIDATION CONSOLIDATED ADJUSTMENTS AT&T CORP. --------------- ------------ (DOLLARS IN MILLIONS) Revenue............................ $(1,661) $54,973 Operating Expenses Costs of services and products..... (1,230) 11,013 Access and other connection........ (196) 14,439 Selling, general and administrative................... (4) 10,894 Depreciation and other amortization..................... 5,137 Amortization of goodwill, franchise costs and other purchased intangibles...................... 1,057 Net restructuring and other charges.......................... 975 Total operating expenses........... (1,430) 43,515 Operating income (loss)............ (231) 11,458 Other (expense) income............. (2,545) 826 Interest expense (benefit)......... (2,751) 1,503 (Loss) income from continuing operations before income taxes, minority interest, and (losses) earnings related to other equity investments...................... (25) 10,781 (Benefit) provision for income taxes............................ 4,016 Minority interest income (expense)........................ (126) Equity losses from Liberty Media Group............................ 2,022 Net (losses) earnings related to other equity investments......... (2,877) (756) (Loss) income from continuing operations....................... (2,902) 3,861 Income (losses) from discontinued operations (net of income taxes)........................... 25 (433) Net income (loss).................. $(2,877) $ 3,428
105 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) AT&T CORP. CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS FOR THE YEAR ENDING DECEMBER 31, 1999
GUARANTOR GUARANTOR TCI FINANCING AT&T SUBSIDIARY --------------------------------- NON-GUARANTOR PARENT TCI I II IV SUBSIDIARIES --------- ---------- --------- --------- --------- ------------- (DOLLARS IN MILLIONS) Net Cash Provided by (used in) Operating Activities of Continuing Operations......................... $ 2,672 $ (578) $-- $-- $-- $ 8,613 INVESTING ACTIVITIES Capital expenditures and other additions.......................... (1,733) (60) (9,797) Investment distributions and sales... 61 1,513 Investment contributions and purchases.......................... (5,473) (1,857) (2,364) Net (acquisitions) dispositions of businesses net of cash acquired/disposed.................. (6,405) 436 Other................................ (203) 103 (15,056) Net Cash (used in) Provided by Investing Activities of Continuing Operations......................... (13,753) (1,814) (25,268) FINANCING ACTIVITIES Proceeds from long-term debt issuances.......................... 8,396 Proceeds from debt from AT&T......... 5,866 5,365 Retirement of long-term debt......... (1,014) (1,365) 124 Retirement of AT&T debt.............. (2,109) Issuance of AT&T convertible preferred securities and warrants........................... 4,694 (56) Net acquisitions of treasury shares............................. (4,624) Dividends paid on common stock....... (2,685) (27) (Decrease) increase in short-term borrowings, net.................... 19,154 (1,207) Other................................ (13,215) 13,365 Net Cash (used in) Provided by Financing Activities of Continuing Operations......................... 10,706 2,392 17,564 Net cash provided by (used in) discontinued operations............ (2,649) Net increase (decrease) in cash and cash equivalents................... (375) (1,740) Cash and cash equivalents at beginning of year.................. 375 2,758 Cash and cash equivalents at end of period............................. $ -- $ -- $-- $-- $-- $ 1,018 ELIMINATION AND CONSOLIDATION CONSOLIDATED ADJUSTMENTS AT&T CORP. --------------- ------------ (DOLLARS IN MILLIONS) Net Cash Provided by (used in) Operating Activities of Continuing Operations......................... $ (198) $ 10,509 INVESTING ACTIVITIES Capital expenditures and other additions.......................... (11,590) Investment distributions and sales... 1,574 Investment contributions and purchases.......................... 1,857 (7,837) Net (acquisitions) dispositions of businesses net of cash acquired/disposed.................. (5,969) Other................................ 15,094 (62) Net Cash (used in) Provided by Investing Activities of Continuing Operations......................... 16,951 (23,884) FINANCING ACTIVITIES Proceeds from long-term debt issuances.......................... 8,396 Proceeds from debt from AT&T......... (11,231) Retirement of long-term debt......... (2,255) Retirement of AT&T debt.............. 2,109 Issuance of AT&T convertible preferred securities and warrants........................... 4,638 Net acquisitions of treasury shares............................. (4,624) Dividends paid on common stock....... (2,712) (Decrease) increase in short-term borrowings, net.................... (7,774) 10,173 Other................................ 88 238 Net Cash (used in) Provided by Financing Activities of Continuing Operations......................... (16,808) 13,854 Net cash provided by (used in) discontinued operations............ 55 (2,594) Net increase (decrease) in cash and cash equivalents................... (2,115) Cash and cash equivalents at beginning of year.................. 3,133 Cash and cash equivalents at end of period............................. $ -- $ 1,018
106 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 22. QUARTERLY INFORMATION (UNAUDITED)
FIRST SECOND THIRD(1) FOURTH ------- ------- -------- ------- 2001 Revenue................................................... $13,551 $13,326 $13,087 $12,586 Operating income(2)....................................... 814 1,364 1,365 211 (Loss) income from continuing operations before cumulative effect of accounting change(3).......................... (1,180) (2,176) (2,095) (1,391) (Loss) income from discontinued operations -- net of income taxes............................................ (68) 218 -- -- Net (loss) income before cumulative effect of accounting change.................................................. (1,248) (1,958) 11,408 (1,391) Net (loss) income(4)...................................... $ (344) $(1,958) $11,408 $(1,391) AT&T Common Stock Group: Earnings (loss) per share -- basic: Continuing operations before cumulative effect of accounting change.................................... $ (.17) $ (.10) $ (.69) $ (.39) Discontinued operations................................. (.02) .05 -- -- Total................................................... $ (.10) $ (.05) $ 3.13 $ (.39) Earnings (loss) per share -- diluted: Continuing operations before cumulative effect of accounting change.................................... $ (.17) $ (.10) $ (.69) $ (.39) Discontinued operations................................. (.02) .05 -- -- Total................................................... $ (.10) $ (.05) $ 3.13 $ (.39) Dividends declared........................................ $ .0375 $ .0375 $ .0375 $ .0375 AT&T Wireless Group:(5) (Loss) earnings from discontinued operations per share: Basic and diluted.................................... $ (.02) $ .08 -- -- Liberty Media Group:(3,6) (Loss) earnings per share: Basic and diluted.................................... $ (.06) $ (.82) $ .04 -- Stock price(7) AT&T common stock High.................................................... $ 19.53 $ 18.07 $ 21.46 $ 20.00 Low..................................................... 13.40 15.39 16.50 14.75 Quarter-end close....................................... 16.54 17.09 19.30 18.14 AT&T Wireless Group common stock(5) High.................................................... 27.30 21.10 19.92 -- Low..................................................... 17.06 15.29 12.52 -- Quarter-end close....................................... 19.18 16.35 -- -- Liberty Media Group Class A common stock(6) High.................................................... 17.25 18.04 17.85 -- Low..................................................... 11.88 11.50 14.50 -- Quarter-end close....................................... 14.00 17.49 -- -- Liberty Media Group Class B common stock(6) High.................................................... 18.69 18.75 18.35 -- Low..................................................... 14.20 12.50 12.00 -- Quarter-end close....................................... 15.00 18.15 -- --
107 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRST SECOND THIRD(1) FOURTH ------- ------- -------- ------- 2000 Revenue................................................... $13,703 $13,744 $14,176 $13,910 Operating income (loss)(2)................................ 2,347 3,140 2,907 (4,166) Income (loss) from continuing operations before the cumulative effect of accounting change.................. 2,650 1,857 3,074 (3,448) Income (loss) from discontinued operations -- net of income taxes............................................ 33 177 (2) 328 Net income (loss)......................................... $ 2,683 $ 2,034 $ 3,072 $(3,120) AT&T Common Stock Group: Earnings (loss) per share -- basic: Continuing operations before the cumulative effect of accounting change.................................... $ .54 $ .49 $ .35 $ (.52) Discontinued operations................................. .01 .05 -- .07 Total................................................... $ .55 $ .54 $ .35 $ (.45) Earnings (loss) per share -- diluted: Continuing operations before the cumulative effect of accounting change.................................... $ .53 $ .48 $ .35 $ (.52) Discontinued operations................................. .01 .05 -- .07 Total................................................... $ .54 $ .53 $ .35 $ (.45) Dividends declared........................................ $ .22 $ .22 $ .22 $ .0375 AT&T Wireless Group:(5) Earnings (loss) from discontinued operations per share: Basic and diluted.................................... $ -- $ .06 $ (.01) $ .16 Liberty Media Group:(6) Earnings (loss) per share: Basic and diluted.................................... $ .37 $ .10 $ .68 $ (.57) Stock price(7) AT&T common stock High.................................................... $ 47.37 $ 45.67 $ 27.33 $ 23.30 Low..................................................... 34.41 24.27 21.16 12.81 Quarter-end close....................................... 43.73 24.71 22.52 13.40 AT&T Wireless Group common stock High.................................................... -- 36.00 29.56 24.94 Low..................................................... -- 23.56 20.50 16.38 Quarter-end close....................................... -- 27.88 20.88 17.31 Liberty Media Group Class A common stock High.................................................... 30.72 29.94 26.56 19.25 Low..................................................... 24.44 19.19 17.44 10.75 Quarter-end close....................................... 29.63 24.25 18.00 13.56 Liberty Media Group Class B common stock High.................................................... 36.56 32.69 32.63 20.63 Low..................................................... 27.00 22.13 18.75 12.75 Quarter-end close....................................... 32.81 32.50 18.75 18.75
- --------------- (1) Third quarter 2001 net income included a gain on disposition of discontinued operations of $13,503, or $3.82 per share. 108 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (2) Operating income (loss) included net restructuring and other charges of $808 in first quarter 2001, $287 in second quarter 2001, $399 in third quarter 2001, $1,036 in fourth quarter 2001, $773 in first quarter 2000, $24 in third quarter 2000 and $6,232 in fourth quarter 2000. (3) First quarter 2001 results have been restated to properly classify losses related to the implementation of SFAS No. 133. A loss of $1.6 billion pretax ($1.1 billion after-tax) was reclassified from other (expense) income to cumulative effect of accounting change. There was no impact to the total net loss or the loss per share recorded in the first quarter of 2001. (4) First quarter 2001 net income included cumulative effect of accounting change of $359 and $545, or $0.09 per share and $0.21 per share, for AT&T Common Stock Group and LMG, respectively, due to the adoption of SFAS No. 133. (5) No dividends had been declared on AT&T Wireless Group common stock. AT&T Wireless Group was split-off from AT&T on July 9, 2001. (6) No dividend had been declared on LMG common stock. LMG was split-off from AT&T on August 10, 2001. (7) Stock prices obtained from the New York Stock Exchange Composite Tape. AT&T Common Stock prices have been restated to reflect the split-off of AT&T Wireless. 23. NEW ACCOUNTING PRONOUNCEMENTS In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 141, "Business Combinations", which supercedes Accounting Principles Board (APB) opinion No. 16. SFAS No. 141 requires all business combinations initiated after June 30, 2001, to be accounted for under the purchase method. In addition, SFAS No. 141 establishes criteria for the recognition of intangible assets separately from goodwill. The adoption of SFAS No. 141 will not have a material effect on AT&T's results of operations, financial position or cash flows. Also in June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets", which supercedes APB opinion No. 17. Under SFAS No. 142, goodwill and indefinite-lived intangible assets will no longer be amortized, but rather will be tested for impairment upon adoption and at least annually thereafter. In addition, the amortization period of intangible assets with finite lives will no longer be limited to 40 years. SFAS No. 142 is effective for AT&T as of January 1, 2002. In connection with the adoption of this standard, AT&T's unamortized goodwill balance and excess basis related to equity method investments will no longer be amortized, but will continue to be tested for impairment. The goodwill balance as of December 31, 2001, was $24.7 billion, and the related amortization in 2001 was $0.9 billion. The excess basis balance as of December 31, 2001, was $8.8 billion with related amortization in 2001 of $0.2 billion. In addition, we have determined that our franchise costs are indefinite-lived assets, as defined in SFAS No. 142, and therefore will not be subject to amortization beginning in 2002. The balance of our franchise costs as of December 31, 2001, was $42.8 billion and the related amortization in 2001 was $1.2 billion. The adoption of SFAS No. 142 will have a significant impact on our future operating results due to the cessation of goodwill and franchise cost amortization. For 2001, the amortization of goodwill, excess basis and franchise costs had an approximate impact of $0.45 per share. In accordance with SFAS No. 142, goodwill was tested for impairment by comparing the fair value of our reporting units to their carrying values. As of January 1, 2002, the fair value of the reporting units' goodwill exceeded their fair value, and therefore no impairment loss will be recognized upon adoption. In accordance with SFAS No. 142, the franchise costs were tested for impairment as of January 1, 2002, by comparing the fair value to the carrying value (at market level). An impairment loss of $0.9 billion, net of taxes of $0.5 billion will be recognized as a change in accounting principle in the first quarter of 2002. 109 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." This standard requires that obligations associated with the retirement of tangible long-lived assets be recorded as liabilities when those obligations are incurred, with the amount of the liability initially measured at fair value. Upon initially recognizing a liability for an asset retirement obligation, an entity must capitalize the cost by recognizing an increase in the carrying amount of the related long-lived asset. Over time, this liability is accreted to its present value, and the capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the liability, an entity either settles the obligation for its recorded amount or incurs a gain or loss upon settlement. SFAS No. 143 is effective for financial statements issued for fiscal years beginning after June 15, 2002. For AT&T, this means that the standard will be adopted on January 1, 2003. AT&T does not expect that the adoption of this statement will have a material impact on AT&T's results of operations, financial position or cash flows. In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", which supercedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS No. 144 applies to all long-lived assets, including discontinued operations, and consequently amends APB opinion No. 30, "Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." Based on SFAS No. 121, SFAS No. 144 develops one accounting model for long-lived assets that are to be disposed of by sale, as well as addresses the principal implementation issues. SFAS No. 144 requires that long-lived assets that are to be disposed of by sale be measured at the lower of book value or fair value less cost to sell. Additionally, SFAS No. 144 expands the scope of discontinued operations to include all components of an entity with operations that (1) can be distinguished from the rest of the entity and (2) will be eliminated from the ongoing operations of the entity in a disposal transaction. SFAS No. 144 also amends Accounting Research Bulletin (ARB) No. 51, "Consolidated Financial Statements" to eliminate the exception to consolidation for a subsidiary for which control is likely to be temporary. SFAS No. 144 is effective for AT&T as of January 1, 2002. The adoption of SFAS No. 144 will not have a material impact on AT&T's results of operations, financial position or cash flows. 24. SUBSEQUENT EVENTS In March 2002, AT&T Canada announced the formation of a committee of its board of directors to help AT&T Canada with issues they are facing in the foreseeable future. Such issues include a significant regulatory decision expected in the next month which could have a significant impact on the future of sustainable competition in Canada; the effect of AT&T satisfying its obligation to purchase the shares of AT&T Canada it does not own; and the impact of these events on operating and financial results of AT&T Canada. In addition, the committee appointed financial advisors to evaluate various scenarios regarding issues, opportunities and alternatives for AT&T Canada. It is expected that the outcome of these evaluations will have a negative effect on the underlying value of AT&T Canada shares, which will result in AT&T recording up to $250 of additional losses on its commitment to purchase the publicly owned shares of AT&T Canada, excluding any impact of the floor price accretion (see Note 5). (Unaudited) Effective April 1, 2002, Concert was unwound. Pursuant to the partnership termination agreement, each of the partners generally reclaimed the customer contracts and assets that were initially contributed to the joint venture (see Note 5). 110 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K (a) Documents filed as a part of the report: (1) The following consolidated financial statements are included in Part II, Item 8:
PAGES ----- Report of Management................................... 34 Report of Independent Accountants...................... 35 Statements: Consolidated Statements of Income...................... 36 Consolidated Balance Sheets............................ 37 Consolidated Statements of Changes in Shareowners' Equity................................................ 38 Consolidated Statements of Cash Flows.................. 40 Notes to Consolidated Financial Statements............. 41
(2) Exhibits: Exhibits identified in parentheses below, on file with the Securities and Exchange Commission ("SEC"), are incorporated herein by reference as exhibits hereto. (3)a Restated Certificate of Incorporation of the registrant filed January 10, 1989, Certificate of Correction of the registrant filed June 8, 1989, Certificate of Change of the registrant filed March 18, 1992, Certificate of Amendment of the registrant filed June 1, 1992, Certificate of Amendment of the registrant filed April 20, 1994, Certificate of Amendment of the registrant filed June 8, 1998, Certificate of Amendment of the registrant filed March 9, 1999, Certificate of Amendment of the registrant filed April 12, 2000,Certificate of Amendment of the registrant filed June 2, 2000, Certificate of Amendment of the registrant filed on June 15, 2000, Certificate of Amendment of the registrant filed on January 19, 2001, Certificate of Amendment of the registrant filed on June 6, 2001 and Certificate of Amendment of the registrant filed on June 20, 2001. (3)b By-Laws of the registrant, as amended January 25, 2001 (Exhibit (3)b to Form 10-K for 2000, File No. 1-1105). (4) No instrument which defines the rights of holders of long term debt, of the registrant and all of its consolidated subsidiaries, is filed herewith pursuant to Regulation S-K, Item 601(b)(4)(iii)(A). Pursuant to this regulation, the registrant hereby agrees to furnish a copy of any such instrument to the SEC upon request. (10)(i)1 Form of Separation and Distribution Agreement by and among AT&T Corp., Lucent Technologies Inc. and NCR Corporation, dated as of February 1, 1996 and amended and restated as of March 29, 1996 (incorporated by reference to Exhibit (10)(i)1 to Form 10-K for 1996, File No. 1-1105). (10)(i)2 Form of Distribution Agreement, dated as of November 20, 1996, by and between AT&T Corp. and NCR Corporation (incorporated by reference to Exhibit (10)(i)2 to Form 10-K for 1996, File No. 1-1105).
111 (10)(i)3 Tax Sharing Agreement by and among AT&T Corp., Lucent Technologies Inc. and NCR Corporation, dated as of February 1, 1996 and amended and restated as of March 29, 1996 (incorporated by reference to Exhibit (10)(i)3 to Form 10-K for 1996, File No. 1-1105). (10)(i)4 Employee Benefits Agreement by and between AT&T Corp. and Lucent Technologies Inc., dated as of February 1, 1996 and amended and restated as of March 29, 1996 (incorporated by reference to Exhibit (10)(i)4 to Form 10-K for 1996, File No. 1-1105). (10)(i)5 Form of Employee Benefits Agreement, dated as of November 20, 1996, between AT&T Corp. and NCR Corporation (incorporated by reference to Exhibit (10)(i)5 to Form 10-K for 1996, File No. 1-1105). (10)(i)6 Separation and Distribution Agreement by and between AT&T Corp. and AT&T Wireless Services, Inc., dated as of June 4, 2001 (incorporated by reference to Exhibit 10.1 to the AT&T Wireless Services, Inc. Registration Statement on Form S-1/A (Commission file No. 333-59174), filed June 21, 2001). (10)(i)7 Amended and Restated Tax Sharing Agreement by and between AT&T Corp. and AT&T Wireless Services, Inc., dated as of June 4, 2001 (incorporated by reference to Exhibit 10.2 to the AT&T Wireless Services, Inc. Registration Statement on Form S-1/A (Commission file No. 333-59174), filed June 21, 2001). (10)(i)8 Employee Benefits Agreement by and between AT&T Corp. and AT&T Wireless Services, Inc., dated as of June 7, 2001 (incorporated by reference to Exhibit 10.3 to the AT&T Wireless Services, Inc. Registration Statement on Form S-1/A (Commission file No. 333-59174), filed June 21, 2001). (10)(i)9 Brand License Agreement by and between AT&T Corp. and AT&T Wireless Services, Inc., dated as of June 4, 2001 (incorporated by reference to Exhibit 10.4 to the AT&T Wireless Services, Inc. Registration Statement on Form S-1/A (Commission file No. 333-59174), filed June 11, 2001). (10)(i)10 Intellectual Property Agreement by and between AT&T Corp. and AT&T Wireless Services, Inc., effective as of July 9, 2001 (incorporated by reference to Exhibit 10.6 to the AT&T Wireless Services, Inc. Registration Statement on Form S-1/A (Commission file No. 333-59174), filed June 11, 2001). (10)(i)11 Inter-Group Agreement dated as of March 9, 1999, between AT&T Corp. and Liberty Media Corporation, Liberty Media Group LLC and each Covered Entity listed on the signature pages thereof (incorporated by reference to Exhibit 10.2 to the Registration Statement on Form S-4 of Liberty Media Corporation (File No. 333-86491) as filed on September 3, 1999). (10)(i)12 Intercompany Agreement dated as of March 9, 1999, between Liberty and AT&T Corp. (incorporated by reference to Exhibit 10.3 to the Registration Statement on Form S-4 of Liberty Media Corporation (File No. 333-86491) as filed on September 3, 1999). (10)(i)13 Tax Sharing Agreement dated as of March 9, 1999, by and among AT&T Corp., Liberty Media Corporation, Tele-Communications, Inc., Liberty Ventures Group LLC, Liberty Media Group LLC, TCI Starz, Inc., TCI CT Holdings, Inc. and each Covered Entity listed on the signature pages thereof (incorporated by reference to Exhibit 10.4 to the Registration Statement on Form S-4 of Liberty Media Corporation (File No. 333-86491) as filed on September 3, 1999). (10)(i)14 First Amendment to Tax Sharing Agreement dated as of May 28, 1999, by and among AT&T Corp., Liberty Media Corporation, Tele-Communications, Inc., Liberty Ventures Group LLC, Liberty Media Group LLC, TCI Starz, Inc., TCI CT Holdings, Inc. and each Covered Entity listed on the signature pages thereof (incorporated by reference to Exhibit 10.5 to the Registration Statement on Form S-4 of Liberty Media Corporation (File No. 333-86491) as filed on September 3, 1999).
112 (10)(i)15 Second Amendment to Tax Sharing Agreement dated as of September 24, 1999, by and among AT&T Corp., Liberty Media Corporation, Tele-Communications, Inc., Liberty Ventures Group LLC, Liberty Media Group LLC, TCI Starz, Inc., TCI CT Holdings, Inc., and each Covered Entity listed on the signature pages thereof (incorporated by reference to Exhibit 10.6 to the Registration Statement on Form S-1 of Liberty Media Corporation (File No. 333-93917) as filed on December 30, 1999). (10)(i)16 Third Amendment to Tax Sharing Agreement dated as of October 20, 1999, by and among AT&T Corp., Liberty Media Corporation, Tele-Communications, Inc., Liberty Ventures Group LLC, Liberty Media Group LLC, TCI Starz, Inc., TCI CT Holdings, Inc. and each Covered Entity listed on the signature pages thereof (incorporated by reference to Exhibit 10.7 to the Registration Statement on Form S-1 of Liberty Media Corporation (File No. 333-93917) as filed on December 30, 1999). (10)(i)17 Fourth Amendment to Tax Sharing Agreement dated as of October 28, 1999, by and among AT&T Corp., Liberty Media Corporation, Tele-Communications, Inc., Liberty Ventures Group LLC, Liberty Media Group LLC, TCI Starz, Inc., TCI CT Holdings, Inc. and each Covered Entity listed on the signature pages thereof (incorporated by reference to Exhibit 10.8 to the Registration Statement on Form S-1 of Liberty Media Corporation (File No. 333-93917) as filed on December 30, 1999). (10)(i)18 Fifth Amendment to Tax Sharing Agreement dated as of December 6, 1999, by and among AT&T Corp., Liberty Media Corporation, Tele-Communications, Inc., Liberty Ventures Group LLC, Liberty Media Group LLC, TCI Starz, Inc., TCI CT Holdings, Inc. and each Covered Entity listed on the signature pages thereof (incorporated by reference to Exhibit 10.9 to the Registration Statement on Form S-1 of Liberty Media Corporation (File No. 333-93917) as filed on December 30, 1999). (10)(i)19 Sixth Amendment to Tax Sharing Agreement dated as of December 10, 1999, by and among AT&T Corp., Liberty Media Corporation, Tele-Communications, Inc., Liberty Ventures Group LLC, Liberty Media Group LLC, TCI Starz, Inc., TCI CT Holdings, Inc. and each Covered Entity listed on the signature pages thereof (incorporated by reference to Exhibit 10.10 to the Registration Statement on Form S-1 of Liberty Media Corporation (File No. 333-93917) as filed on December 30, 1999). (10)(i)20 Seventh Amendment to Tax Sharing Agreement dated as of December 30, 1999, by and among AT&T Corp., Liberty Media Corporation, Tele-Communications, Inc., Liberty Ventures Group LLC, Liberty Media Group LLC, TCI Starz, Inc., TCI CT Holdings, Inc. and each Covered Entity listed on the signature pages thereof (incorporated by reference to Exhibit 10.11 to the Registration Statement on Form S-1 of Liberty Media Corporation (File No. 333-93917) as filed on December 30, 1999). (10)(i)21 Eighth Amendment to Tax Sharing Agreement dated as of July 25, 2000, by and among AT&T Corp., Liberty Media Corporation, AT&T Broadband LLC, Liberty Ventures Group LLC, Liberty Media Group LLC, TCI Starz, Inc., TCI CT Holdings, Inc. and each Covered Entity listed on the signature pages thereof (incorporated by reference to Exhibit 10.12 to the Registration Statement on Form S-1 of Liberty Media Corporation (File No. 333-55998) as filed on February 21, 2001). (10)(i)22 Instrument dated January 14, 2000, adding The Associated Group, Inc. as a party to the Tax Sharing Agreement dated as of March 9, 1999, as amended, among The Associated Group, Inc., AT&T Corp., Liberty Media Corporation, Tele-Communications, Inc., Liberty Ventures Group LLC, Liberty Media Group LLC, TCI Starz, Inc., TCI CT Holdings, Inc. and each Covered Entity listed on the signature pages thereof (incorporated by reference to Exhibit 10.12 to the Registration Statement on Form S-1 of Liberty Media Corporation (File No. 333-93917) as filed on December 30, 1999). (10)(i)23 First Supplement to Inter-Group Agreement dated as of May 28, 1999, between and among AT&T Corp., on the one hand, and Liberty Media Corporation, Liberty Media Group LLC and each Covered Entity listed on the signature pages thereof, on the other hand (incorporated by reference to Exhibit 10.14 to the Registration Statement on Form S-1 of Liberty Media Corporation (File No. 333-93917) as filed on December 30, 1999).
113 (10)(i)24 Second Supplement to Inter-Group Agreement dated as of September 24, 1999, between and among AT&T Corp., on the one hand, and Liberty Media Corporation, Liberty Media Group LLC and each Covered Entity listed on the signature pages thereof, on the other hand (incorporated by reference to Exhibit 10.15 to the Registration Statement on Form S-1 of Liberty Media Corporation (File No. 333-93917) as filed on December 30, 1999). (10)(i)25 Third Supplement to Inter-Group Agreement dated as of October 20, 1999, between and among AT&T Corp., on the one hand, and Liberty Media Corporation, Liberty Media Group LLC and each Covered Entity listed on the signature pages thereof, on the other hand (incorporated by reference to Exhibit 10.16 to the Registration Statement on Form S-1 of Liberty Media Corporation (File No. 333-93917) as filed on December 30, 1999). (10)(i)26 Fourth Supplement to Inter-Group Agreement dated as of December 6, 1999, between and among AT&T Corp., on the one hand, and Liberty Media Corporation, Liberty Media Group LLC and each Covered Entity listed on the signature pages thereof, on the other hand (incorporated by reference to Exhibit 10.17 to the Registration Statement on Form S-1 of Liberty Media Corporation (File No. 333-93917) as filed on December 30, 1999). (10)(i)27 Fifth Supplement to Inter-Group Agreement dated as of December 10, 1999, between and among AT&T Corp., on the one hand, and Liberty Media Corporation, Liberty Media Group LLC and each Covered Entity listed on the signature pages thereof, on the other hand (incorporated by reference to Exhibit 10.18 to the Registration Statement on Form S-1 of Liberty Media Corporation (File No. 333-93917) as filed on December 30, 1999). (10)(i)28 Sixth Supplement to Inter-Group Agreement dated as of December 30, 1999, between and among AT&T Corp., on the one hand, and Liberty Media Corporation, Liberty Media Group LLC and each Covered Entity listed on the signature pages thereof, on the other hand (incorporated by reference to Exhibit 10.19 to the Registration Statement on Form S-1 of Liberty Media Corporation (File No. 333-93917) as filed on December 30, 1999). (10)(i)29 Seventh Supplement to Inter-Group Agreement dated as of July 25, 2000, between and among AT&T Corp., on the one hand, and Liberty Media Corporation, Liberty Media Group LLC and each Covered Entity listed on the signature pages thereof, on the other hand (incorporated by reference to Exhibit 10.21 to the Registration Statement on Form S-1 of Liberty Media Corporation (File No. 333-55998) as filed on February 21, 2001). (10)(i)30 Instrument dated January 14, 2000, adding The Associated Group, Inc. as a party to the Inter-Group Agreement dated as of March 9, 1999, as supplemented, between and among AT&T Corp., on the one hand, and Liberty Media Corporation, Liberty Media Group LLC and each Covered Entity listed on the signature pages thereof, on the other hand (incorporated by reference to Exhibit 10.20 to the Registration Statement on Form S-1 of Liberty Media Corporation (File No. 333-93917) as filed on December 30, 1999). (10)(i)31 Eighth Supplement to Inter-Group Agreement dated as of November 20, 2000, between and among AT&T Corp., on the one hand, and Liberty Media Corporation, Liberty Media Group LLC and each Covered Entity listed on the signature pages thereof, on the other hand (incorporated by reference to Exhibit 10.24 to the Registration Statement on Form S-1 of Liberty Media Corporation (File No. 333-66034) as filed on July 27, 2001). (10)(i)32 Ninth Supplement to Inter-Group Agreement dated as of June 14, 2001, between and among AT&T Corp., on the one hand, and Liberty Media Corporation, Liberty Media Group LLC, AGI LLC, Liberty SP, Inc., LMC Interactive, Inc. and Liberty AGI, Inc., on the other hand (incorporated by reference to Exhibit 10.25 to the Registration Statement on Form S-1 of Liberty Media Corporation (File No. 333-66034) as filed on July 27, 2001).
114 (10)(i)33 Agreement and Plan of Merger dated as of December 19, 2001 among AT&T Corp., AT&T Broadband Corp., Comcast Corporation, AT&T Broadband Acquisition Corp., Comcast Acquisition Corp. and AT&T Comcast Corporation (incorporated by reference to Exhibit 2.1 to the Registration Statement on Form S-4 of AT&T Comcast Corporation (File No. 333-82460) as filed on February 11, 2001). (10)(i)34 Separation and Distribution Agreement dated as of December 19, 2001 between AT&T Corp. and AT&T Broadband Corp. (incorporated by reference to Exhibit 2.2 to the Registration Statement on Form S-4 of AT&T Comcast Corporation (File No. 333-82460) as filed on February 11, 2001). (10)(i)35 Support Agreement dated as of December 19, 2001 among AT&T Corp., Comcast Corporation, AT&T Comcast Corporation, Sural LLC and Brian L. Roberts (incorporated by reference to Exhibit 2.3 to the Registration Statement on Form S-4 of AT&T Comcast Corporation (File No. 333-82460) as filed on February 11, 2001). (10)(i)36 Tax Sharing Agreement dated as of December 19, 2001 between AT&T Corp. and AT&T Broadband Corp. (incorporated by reference to Exhibit 2.4 to the Registration Statement on Form S-4 of AT&T Comcast Corporation (File No. 333-82460) as filed on February 11, 2001). (10)(i)37 Employee Benefits Agreement dated as of December 19, 2001 between AT&T Corp. and AT&T Broadband Corp. (Exhibit (10)(i)37 to Form 10-K for 2001, File No. 1-1105). (10)(i)38 Amended and Restated 364-Day Competitive Advance and Revolving Credit Facility Agreement, dated as of December 14, 2001, among AT&T Corp., the Lenders party thereto, CITIBANK, N.A., CREDIT SUISSE FIRST BOSTON and GOLDMAN SACHS CREDIT PARTNERS L.P., as Administrative Agents, and CITIBANK, N.A., as Paying Agent. (Exhibit (10)(i)38 to Form 10-K for 2001, File No. 1-1105). (10)(iii)(A)1 AT&T Short Term Incentive Plan as amended March, 1994 (Exhibit (10)(iii)(A)1 to Form 10-K for 1994, File No. 1-1105). (10)(iii)(A)2 AT&T 1987 Long Term Incentive Program as amended December 17, 1997 (Exhibit 10)(iii)(A)2 to Form 10-K for 1997, File No. 1-1105). (10)(iii)(A)3 AT&T Senior Management Individual Life Insurance Program as amended March 3, 1998 (Exhibit (10)(iii)(A)3 to Form 10-K for 1997, File No. 1-1105). (10)(iii)(A)4 AT&T Senior Management Long Term Disability and Survivor Protection Plan, as amended and restated effective January 1, 1995 (Exhibit (10)(iii)(A)4 to Form 10-K for 1996, File No. 1-1105). (10)(iii)(A)5 AT&T Senior Management Financial Counseling Program dated December 29, 1994 (Exhibit (10)(iii)(A)5 to Form 10-K for 1994, File No. 1-1105). (10)(iii)(A)6 AT&T Deferred Compensation Plan for Non-Employee Directors, as amended December 15, 1993 (Exhibit (10)(iii)(A)6 to Form 10-K for 1993, File No. 1-1105). (10)(iii)(A)7 The AT&T Directors Individual Life Insurance Program as amended March 2, 1998 (Exhibit (10)(iii)(A)1 to Form 10-K for 1997, File No. 1-1105). (10)(iii)(A)8 AT&T Plan for Non-Employee Directors' Travel Accident Insurance (Exhibit (10)(iii)(A)8 to Form 10-K for 1990, File No. 1-1105). (10)(iii)(A)9 AT&T Excess Benefit and Compensation Plan, as amended and restated effective October 1, 1996 (Exhibit (10)(iii)(A)9 to Form 10-K for 1996, File No. 1-1105). (10)(iii)(A)10 AT&T Non-Qualified Pension Plan, as amended and restated January 1, 1995 (Exhibit (10)(iii)(A)10 to Form 10-K for 1996, File No. 1-1105). (10)(iii)(A)11 AT&T Senior Management Incentive Award Deferral Plan, as amended January 21, 1998 (Exhibit (10)(iii)(A)11 to Form 10-K for 1998, File No. 1-1105). (10)(iii)(A)12 AT&T Mid-Career Hire Program revised effective January 1, 1988 (Exhibit (10)(iii)(A)4 to Form SE, dated March 25, 1988, File No. 1-1105) including AT&T Mid-Career Pension Plan, as amended and restated July 1, 1999 (Exhibit (10)(iii)(A)12 to Form 10-K for 1999, File No. 1-1105).
115 (10)(iii)(A)13 AT&T 1997 Long Term Incentive Program as amended through March 14, 2000 (Exhibit (10)(iii)(A)13 to Form 10-K for 1999, File No. 1-1105). (10)(iii)(A)14 Form of Indemnification Contract for Officers and Directors (Exhibit (10)(iii)(A)6 to Form SE, dated March 25, 1987, File No. 1-1105). (10)(iii)(A)15 Pension Plan for AT&T Non-Employee Directors revised February 20, 1989 (Exhibit (10)(iii)(A)15 to Form 10-K for 1993, File No. 1-1105). (10)(iii)(A)16 AT&T Corp. Senior Management Universal Life Insurance Program effective October 1, 1999 (Exhibit (3)b to Form 10-K for 2000, File No. 1-1105). (10)(iii)(A)17 Form of AT&T Benefits Protection Trust Agreement as amended and restated as of November 1993, including the first amendment thereto dated December 23, 1997 (Exhibit (10)(iii)(A)17 to Form 10-K for 1999, File No. 1-1105). (10)(iii)(A)18 AT&T Senior Officer Severance Plan effective October 9, 1997, as amended October 30, 1997 (Exhibit (10)(iii)(A)18 to Form 10-K for 1997, File No. 1-1105). (10)(iii)(A)19 Form of Pension Agreement between AT&T Corp. and Frank Ianna dated October 30, 1997 (Exhibit (10)(iii)(A)19 to Form 10-K for 1997, File No. 1-1105). (10)(iii)(A)20 Form of Pension Agreement between AT&T Corp. and John C. Petrillo dated October 30, 1997 (Exhibit (10)(iii)(A)21 to Form 10-K for 1997, File No. 1-1105). (10)(iii)(A)21 Form of Employment Agreement between AT&T Corp. and Betsy J. Bernard dated April 6, 2001 (Exhibit (10)(iii)(A)21 to Form 10-K for 2001, File No. 1-1105). (10)(iii)(A)22 Form of Employment Agreement between AT&T Corp. and C. Michael Armstrong dated October 17, 1997 (Exhibit (10)(iii)(A)23 to Form 10-K for 1997, File No. 1-1105). (10)(iii)(A)23 Form of Employment Agreement between AT&T Corp. and William T. Schleyer dated November 6, 2001 (Exhibit (10)(iii)(A)23 to Form 10-K for 2001, File No. 1-1105). (10)(iii)(A)24 Liberty Media 401(K) Savings Plan (Incorporation herein by reference to Exhibit 99.1 to Post-Effective Amendment No. 2 on Form S-8 to the Registration Statement on Form S-4 of AT&T Corp. (Commission File No. 333-70279) filed March 10, 1999). (10)(iii)(A)25 AT&T Corp. Directors' Universal Life Insurance Program effective June 1, 2000 (Exhibit (10)(iii)(A)25 to Form 10-K for 2000, File No. 1-1105). (10)(iii)(A)26 AT&T Corp. Senior Management Universal Life Insurance Program for Former Executives effective October 1, 1999 (Exhibit (10)(iii)(A)26 to Form 10-K for 2000, File No. 1-1105). (10)(iii)(A)27 Form of Employment Agreement between AT&T Corp. and Charles H. Noski dated December 8, 1999 (Exhibit (10)(iii)(A)27 to Form 10-K for 2000, File No. 1-1105). (10)(iii)(A)28 Form of Special Deferral Agreement between AT&T Corp. and Charles H. Noski dated January 26, 2001 (Exhibit (10)(iii)(A)28 to Form 10-K for 2000, File No. 1-1105). (10)(iii)(A)29 Form of Special Deferral Agreement between AT&T Corp. and Frank Ianna dated January 16, 2001 (Exhibit (10)(iii)(A)29 to Form 10-K for 2000, File No. 1-1105). (10)(iii)(A)30 Form of Loan Agreement between AT&T Corp. and David Dorman dated December 21, 2000 (Exhibit (10)(iii)(A)30 to Form 10-K for 2000, File No. 1-1105). (10)(iii)(A)31 Form of Loan Agreement between AT&T Corp. and David Dorman dated December 21, 2000 (Exhibit (10)(iii)(A)31 to Form 10-K for 2000, File No. 1-1105). (10)(iii)(A)32 AT&T Corp. board resolutions adopting change in control provision to various plans effective October 23, 2000 (Exhibit (10)(iii)(A)32 to Form 10-K for 2000, File No. 1-1105). (10)(iii)(A)33 Form of Loan Agreement between AT&T Corp. and David Dorman dated April 13, 2001. (Exhibit (10)(iii)(A)33 to Form 10-K for 2001, File No. 1-1105). (10)(iii)(A)34 Form of Special Deferral Agreement between AT&T Corp. and Charles H. Noski dated January 16, 2002. (Exhibit (10)(iii)(A)34 to Form 10-K for 2001, File No. 1-1105). (10)(iii)(A)35 Form of Employment Agreement between AT&T Corp. and David Dorman dated May 18, 2001. (Exhibit (10)(iii)(A)35 to Form 10-K for 2001, File No. 1-1105).
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(12) Computation of Ratio of Earnings to Fixed Charges. (Exhibit (12) to Form 10-K for 2001, File No. 1-1105). (21) List of subsidiaries of AT&T. (Exhibit (21) to Form 10-K for 2001, File No. 1-1105). (23)a Consent of PricewaterhouseCoopers, LLP. (23)b Consent of KPMG, LLP. (23)c Consent of KPMG, LLP. (23)d Consent of PricewaterhouseCoopers, LLP. (24) Powers of Attorney executed by officers and directors who signed this report. (Exhibit (24) to Form 10-K for 2001, File No. 1-1105). (99) Liberty Media Corporation Financials (Exhibit (99) to Form 10-K for 2001, File No. 1-1105). (99)a AT&T Canada Inc. Financials (99)b Concert, B.V. Financials
AT&T will furnish, without charge, to a shareholder upon request a copy of the annual report to shareholders and the proxy statement, portions of which are incorporated herein by reference thereto. AT&T will furnish any other exhibit at cost. (b) Reports on Form 8-K: During the fourth quarter 2001, Form 8-K dated October 15, 2001 was filed pursuant to Item 5 (Other Events and Item 7 (Financial Statements and Exhibits) on October 23, 2001 and Form 8-K dated December 19, 2001 was filed pursuant to Item 5 (Other Events) and Item 7 (Financial Statements and Exhibits) on December 21, 2001. 117 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. AT&T CORP. By: /s/ MARILYN J. WASSER ------------------------------------ M. J. Wasser Vice President -- Law and Secretary May 2, 2002 118 EX-23.A 3 e56632a1ex23-a.txt CONSENT OF PRICEWATERHOUSECOOPERS, LLP Exhibit 23a CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the registration statements on Form S-3 for the Shareowner Dividend Reinvestment and Stock Purchase Plan (Registration No. 333-00573), Form S-8 for the AT&T Long Term Savings and Security Plan (Registration No. 333-47257), Forms S-8 for the AT&T Long Term Savings Plan for Management Employees (Registration Nos. 33-34264, 33-29256 and 33-21937), Form S-8 for the AT&T Retirement Savings and Profit Sharing Plan (Registration No. 33-39708), Form S-8 for Shares Issuable Under the Stock Option Plan of the AT&T 1987 Long Term Incentive Program (Registration No. 333-47251), Form S-8 for the AT&T of Puerto Rico, Inc. Long Term Savings Plan for Management Employees (Registration No. 33-50819), Form S-8 for the AT&T of Puerto Rico, Inc. Long Term Savings and Security Plan (Registration No. 33-50817), Post-Effective Amendment No. 1 to Form S-8 Registration Statement (Registration No. 33-54797) for the AT&T 1996 Employee Stock Purchase Plan, Form S-8 for the AT&T Shares for Growth Program (Registration No. 333-47255), Form S-8 for the AT&T 1997 Long Term Incentive Program (Registration Nos. 333-43440 and 33-28665), Form S-3 for the AT&T $2,600,000,000 Notes and Warrants to Purchase Notes (Registration No. 33-49589), Form S-3 for the AT&T $3,000,000,000 Notes and Warrants to Purchase Notes (Registration No. 33-59495), Form S-4 for the AT&T 5,000,000 Common Shares (Registration No. 33-57745), and in Post-Effective Amendment Nos.1, 2 and 3 on Form S-8 to Form S-4 Registration Statement (Registration No. 33-42150) for the NCR Corporation 1989 Stock Compensation Plan (Registration No.33-42150-01), the NCR Corporation 1984 Stock Option Plan (Registration No. 33-42150-02) and the NCR Corporation 1976 Stock Option Plan (Registration No. 33-42150-03), respectively, and the Post-Effective Amendment Nos. 1, 2, 3 and 5 on Form S-8 to Form S-4 Registration Statement (Registration No. 33-52119) for the McCaw Cellular Communications, Inc. 1983 Non-Qualified Stock Option Plan (Registration No. 33-52119-01), the McCaw Cellular Communications, Inc. 1987 Stock Option Plan (Registration No. 33-52119-02), the McCaw Cellular Communications, Inc. Equity Purchase Plan (Registration No. 33-52119-03) and the McCaw Cellular Communications, Inc. Employee Stock Purchase Plan (Registration No. 33-52119-05), respectively, and Post-Effective Amendment No.1 on Form S-8 to Form S-4 Registration Statement (Registration No. 33-45302) for the Teradata Corporation 1987 Incentive and Other Stock Option Plan (Registration No. 33-45302-01), Form S-8 for the AT&T Amended and Restated 1969 Stock Option Plan for LIN Broadcasting Corp. (Registration No. 33-63195), and in Post Effective Amendment Nos. 1, 2, 3, 4 and 5 on Form S-8 to Form S-4 Registration Statement (Registration No. 333-49419) for the Teleport Communications Group Inc. 1993 Stock Option Plan (Registration No. 333-49419-01), Teleport Communications Group Inc. 1996 Equity Incentive Plan (Registration No. 333-49419-02), ACC CorpEmployee Long Term Incentive Plan (Registration No. 333-49419-03), ACC Corp. Non-Employee Directors' Stock Option Plan (Registration No. 333-49419-04) and ACC Corp. 1996 UK Sharesave Scheme (Registration No. 333-49419-05), and in Post-Effective Amendment Nos.1 and 2 on Form S-8 and Post-Effective Amendment No. 3 to Form S-4 Registration Statement (Registration No. 333-70279) for the Tele-Communications, Inc. 1998 Incentive Plan, the Tele-Communications, Inc. 1996 Incentive Plan (Amended and Restated), the Tele-Communications, Inc. 1995 Employee Stock Incentive Plan (Amended and Restated), the Tele-Communications, Inc. 1994 Stock Incentive Plan (Amended and Restated), the Tele-Communications, Inc. 1994 Nonemployee Director Stock Option Plan, the Tele-Communications International, Inc., the 1996 Nonemployee Director Stock Option Plan, the Tele-Communications International, Inc. 1995 Stock Incentive Plan (Registration No. 333-70279-01), the Liberty Media 401(K) Savings Plan, the TCI 401(K) Stock Plan (Registration No. 333-70279-02), , Form S-4 for Vanguard Cellular Systems, Inc. (Registration No. 333-75083), Form S-4 for MediaOne Corp, (Registration No. 333-86019), Post-Effective Amendment No. 1 to Form S-8 Registration Statement for the AT&T Long Term Savings Plan for Management Employees, the AT&T Long Term Savings Plan - San Francisco, and the AT&T Wireless Services 401(K) Retirement Plan (Registration No. 33-34264-1), Post Effective Amendment No. 1 on Form S-8 to Form S-4 Registration Statement for the MediaOne Group 1999 Supplemental Stock Plan and the Amended MediaOne Group 1994 Stock Plan (Registration No. 333-86019-1), Post Effective Amendment No. 2 on Form S-8 to Form S-4 Registration Statement for MediaOne Group 401(K) Savings Plan (Registration No. 333-86019-2), Form S-8 for the AT&T Broadband Deferred Compensation Plan (Registration No. 333-53134), Form S-8 for AT&T Deferred Compensation Plan for Non-Employee Directors (Registration No. 333-61676), Form S-3 for the Redemption of TCI Preferred Securities (Registration No. 333-73120-01), Amendment No. 1 to Form S-3 for the Redemption of TCI Preferred Securities (Registration No. 333-73120-02), Amendment No. 2 to Form S-3 for the Redemption of TCI Preferred Securities (Registration No. 333-73120-03), Amendment No. 3 to Form S-3 for the Redemption of TCI Preferred Securities (Registration No. 333-73120-04) Form S-3 for the AT&T Universal Shelf Registration (Registration No. 333-83174, which supercedes Form S-3 for the $13,080,000 Debt Securities and Warrants to Purchase Debt Securities 333-71167), and Amendment No. 1 to the Form S-3 for the AT&T Universal Shelf Registration (Registration No. 333-83174-01) and Amendment No. 1 to Form S-8 for AT&T Deferred Compensation Plan for Non-Employee Directors (Registration No. 333-61676) of our report dated March 25, 2002, relating to the consolidated financial statements of AT&T Corp. and its subsidiaries, which appears in this Annual Report on Form 10-K/A, for the year ended December 31, 2001. We also consent to the incorporation by reference of our report dated March 25, 2002, relating to the consolidated financial statement schedule, which appears in this Form 10-K/A. PricewaterhouseCoopers LLP New York, New York May 3, 2002 EX-23.B 4 e56632a1ex23-b.txt CONSENT OF KPMG, LLP Exhibit 23b Independent Auditors' Consent The Board of Directors Liberty Media Corporation: We consent to the incorporation by reference in the following AT&T Corp. registration statements of our report dated March 8, 2002, relating to the consolidated balance sheets of Liberty Media Corporation and subsidiaries ("New Liberty" or "Successor") as of December 31, 2001 and 2000, and the related consolidated statements of operations, comprehensive earnings, stockholders' equity, and cash flows for the years ended December 31, 2001 and 2000 and the period from March 1, 1999 to December 31, 1999 (Successor periods) and from January 1, 1999 to February 28, 1999 (Predecessor period), which appears as an exhibit to the AT&T Corp. 2001 Annual Report on Form 10-K/A:
Form Registration Statement No. Description - ---- -------------------------- ----------- S-3 333-00573 Shareholder Dividend Reinvestment and Stock Purchase Plan S-8 333-47257 AT&T Long Term Savings and Security Plan S-8 33-34264, 33-29256 and AT&T Long Term Savings Plan for Management 33-21937 Employees S-8 33-39708 AT&T Retirement Savings and Profit Sharing Plan S-8 333-47251 Shares Issuable Under the Stock Option Plan of the AT&T 1987 Long Term Incentive Program S-8 33-50819 AT&T of Puerto Rico, Inc. Long Term Savings Plan for Management Employees S-8 33-50817 AT&T of Puerto Rico, Inc. Long Term Savings and Security Plan S-8 33-54797 (Post-Effective AT&T 1996 Employee Stock Purchase Plan Amendment No. 1) S-8 333-47255 AT&T Shares for Growth Program S-8 333-43440 and 33-28665 AT&T 1997 Long Term Incentive Program S-3 33-49589 AT&T $2,600,000,000 Notes and Warrants to Purchase Notes S-3 33-59495 AT&T $3,000,000,000 Notes and Warrants to Purchase Notes S-4 33-57745 AT&T 5,000,000 Common Shares S-8 33-42150 (Post-Effective NCR Corporation 1989 Stock Compensation Plan Amendment Nos. 1 to Form S-4, (33-42150-01)) S-8 33-42150 (Post-Effective NCR Corporation 1984 Stock Compensation Plan Amendment No. 2 to Form S-4, (33-42150-02)) S-8 33-42150 (Post-Effective NCR Corporation 1976 Stock Compensation Plan Amendment No. 3 to Form
S-4, (33-42150-03)) S-8 33-52119 (Post-Effective McCaw Cellular Communications, Inc. 1983 Non- Amendment No. 1 to Qualified Stock Option Plan Form S-4, (33-52119-01)) S-8 33-52119 (Post-Effective McCaw Cellular Communications, Inc. 1987 Amendment No. 2 to Stock Option Plan Form S-4, (33-52119-02)) S-8 33-52119 (Post-Effective McCaw Cellular Communications, Inc. Equity Amendment No. 3 to Purchase Plan Form S-4, (33-52119-03)) S-8 33-52119 (Post-Effective McCaw Cellular Communications, Inc. Employee Amendment No. 5 to Stock Purchase Plan Form S-4, (33-52119-05)) S-8 33-45302 (Post-Effective Teradata Corporation 1987 Incentive and Other Amendment No. 1 to Stock Option Plan Form S-4, (33-45302-01)) S-8 33-63195 AT&T Amended and Restated 1969 Stock Option Plan for LIN Broadcasting Corp. S-8 333-49419 (Post-Effective Teleport Communications Group Inc. 1993 Stock Amendment No. 1 to Option Plan Form S-4, (333-49419-01)) S-8 333-49419 (Post-Effective Teleport Communications Group Inc. 1996 Equity Incentive Plan Amendment No. 2 to Form S-4, (333-49419-02)) S-8 333-49419 (Post-Effective ACC Corp. Employee Long Term Incentive Plan Amendment No. 3 to Form S-4, (333-49419-03)) S-8 333-49419 (Post-Effective ACC Corp. Non-Employee Directors' Stock Option Plan Amendment No. 4 to Form S-4, (333-49419-04)) S-8 333-49419 (Post-Effective ACC Corp. 1996 UK Sharesave Scheme Amendment No. 5 to Form S-4, (333-49419-05)) S-8 333-70279 (Post-Effective Tele-Communications, Inc. 1998 Incentive Plan Amendments Nos. 1 and 3 to Form S-4, (333-70279-01)) Tele-Communications, Inc. 1996 Incentive Plan (Amended and Restated) Tele-Communications, Inc. 1995 Employee Stock Incentive Plan (Amended and Restated) Tele-Communications, Inc. 1994 Stock Incentive Plan (Amended and Restated) Tele-Communications, Inc. 1994 Nonemployee Director Stock Option Plan
Tele-Communications International, Inc., 1996 Nonemployee Director Stock Option Plan Tele-Communications International, Inc. 1995 Stock Incentive Plan S-8 333-70279 (Post-Effective Liberty Media 401(K) Savings Plan Amendment No. 2 to Form S-4, (333-70279-02)) TCI 401(K) Stock Plan S-4 333-75083 Vanguard Cellular Systems, Inc. S-4 333-86019 MediaOne Corp. S-8 33-34264-1 (Post-Effective AT&T Long Term Savings Plan for Management Amendment No. 1) Employees AT&T Long Term Savings Plan - San Francisco AT&T Wireless Services 401(K) Retirement Plan S-8 333-86019-1 (Post-Effective MediaOne Group 1999 Supplemental Stock Plan Amendment No. 1 to Form S-4) Amended MediaOne Group 1994 Stock Plan S-8 333-86019-2 (Post-Effective MediaOne Group 401(K) Savings Plan Amendment No. 2 to Form S-4) S-8 333-53134 AT&T Broadband Deferred Compensation Plan S-8 333-61676 AT&T Deferred Compensation Plan for Non- Employee Directors S-3 333-73120-01 Redemption of TCI Preferred Securities S-3 333-73120-02 (Amendment No. 1) Redemption of TCI Preferred Securities S-3 333-73120-03 (Amendment No. 2) Redemption of TCI Preferred Securities S-3 333-73120-04 (Amendment No. 3) Redemption of TCI Preferred Securities S-3 333-83174 (which supercedes AT&T Universal Shelf Registration Form S-3 for the $13,080,000 Debt Securities and Warrants to Purchase Debt Securities 333-71167) S-3 333-83174-01 (Amendment No. 1) AT&T Universal Shelf Registration S-8 333-61676 (Amendment No. 1) AT&T Deferred Compensation Plan for Non-Employee Directors
As discussed in notes 3 and 8 to the aforementioned consolidated financial statements, the Company changed its method of accounting for derivative instruments and hedging activities in 2001. As discussed in note 1 to the aforementioned consolidated financial statements, effective March 9, 1999, AT&T Corp., the former parent company of New Liberty, acquired Tele-Communications, Inc., the former parent company of Liberty Media Corporation, in a business combination accounted for as a purchase. As a result of the acquisition, the consolidated financial information for the periods after the acquisition is presented on a different cost basis than that for the periods before the acquisition and, therefore, is not comparable. KPMG LLP Denver, Colorado May 2, 2002 EX-23.C 5 e56632a1ex23-c.txt CONSENT OF KPMG, LLP Exhibit 23c EXHIBIT INDEPENDENT AUDITORS' CONSENT The Board of Directors AT&T Canada Inc. We consent to the incorporation by reference in the following AT&T Corp. registration statements of our report dated February 1, 2002, except as to note 2, which is as of March 14, 2002, as to note 5, which is as of February 20, 2002 and as to note 9(h), which is as of May 1, 2002, relating to the consolidated balance sheets of AT&T Canada Inc. ("the Company") as of December 31, 2001 and 2000, and the related consolidated statements of operations and deficit and cash flows for the three-year period ended December 31, 2001, which appears as an exhibit to the AT&T Corp. 2001 Annual Report on Form 10-K/A:
Form Registration Statement No. Description - ---- -------------------------- ----------- S-3 333-00573 Shareholder Dividend Reinvestment and Stock Purchase Plan S-8 333-47257 AT&T Long Term Savings and Security Plan S-8 33-34264, 33-29256 and AT&T Long Term Savings Plan for 33-21937 Management Employees S-8 33-39708 AT&T Retirement Savings and Profit Sharing Plan S-8 333-47251 Shares Issuable Under the Stock Option Plan of the AT&T 1987 Long Term Incentive Program S-8 33-50819 AT&T of Puerto Rico, Inc. Long Term Savings Plan for Management Employees S-8 33-50817 AT&T of Puerto Rico, Inc. Long Term Savings and Security Plan S-8 33-54797 (Post-Effective AT&T 1996 Employee Stock Purchase Amendment No. 1) Plan S-8 333-47255 AT&T Shares for Growth Program S-8 333-43440 and 33-28665 AT&T 1997 Long Term Incentive Program S-3 33-49589 AT&T $2,600,000,000 Notes and Warrants to Purchase Notes S-3 33-59495 AT&T $3,000,000,000 Notes and Warrants to Purchase Notes S-4 33-57745 AT&T 5,000,000 Common Shares S-8 33-42150 (Post-Effective NCR Corporation 1989 Stock Amendment Nos. 1 to Compensation Plan Form S-4, (33-42150-01)) S-8 33-42150 (Post-Effective NCR Corporation 1984 Stock Amendment No. 2 to Compensation Plan Form S-4, (33-42150-02)) S-8 33-42150 (Post-Effective NCR Corporation 1976 Stock Amendment No. 3 to Compensation Plan Form S-4, (33-42150-03))
Page 2 S-8 33-52119 (Post-Effective McCaw Cellular Communications, Inc. Amendment No. 1 to 1983 Non-Qualified Stock Option Plan Form S-4, (33-52119-01)) S-8 33-52119 (Post-Effective McCaw Cellular Communications, Inc. Amendment No. 2 to 1987 Stock Option Plan Form S-4, (33-52119-02)) S-8 33-52119 (Post-Effective McCaw Cellular Communications, Inc. Amendment No. 3 to Equity Purchase Plan Form S-4, (33-52119-03)) S-8 33-52119 (Post-Effective McCaw Cellular Communications, Inc. Amendment No. 5 to Employee Stock Purchase Plan Form S-4, (33-52119-05)) S-8 33-45302 (Post-Effective Teradata Corporation 1987 Incentive Amendment No. 1 to and Other Stock Option Plan Form S-4, (33-45302-01)) S-8 33-63195 AT&T Amended and Restated 1969 Stock Option Plan for LIN Broadcasting Corp. S-8 333-49419 (Post-Effective Teleport Communications Group Inc. Amendment No. 1 to 1993 Stock Option Plan Form S-4, (333-49419-01)) S-8 333-49419 (Post-Effective Teleport Communications Group Inc. Amendment No. 2 to 1996 Equity Incentive Plan Form S-4, (333-49419-02)) S-8 333-49419 (Post-Effective ACC Corp. Employee Long Term Amendment No. 3 to Form S-4, Incentive Plan (333-49419-03)) S-8 333-49419 (Post-Effective ACC Corp. Non-Employee Directors' Amendment No. 4 to Form S-4, Stock Option Plan (333-49419-04)) S-8 333-49419 (Post-Effective ACC Corp. 1996 UK Sharesave Scheme Amendment No. 5 to Form S-4, (333-49419-05)) S-8 333-70279 (Post-Effective Tele-Communications, Inc. 1998 Amendments Nos. 1 and 3 to Incentive Plan Form S-4, (333-70279-01)) Tele-Communications, Inc. 1996 Incentive Plan (Amended and Restated) Tele-Communications, Inc. 1995 Employee Stock Incentive Plan (Amended and Restated) Tele-Communications, Inc. 1994 Stock Incentive Plan (Amended and Restated) Tele-Communications, Inc. 1994 Nonemployee Director Stock Option Plan Tele-Communications International, Inc., 1996 Nonemployee Director Stock Option Plan Tele-Communications International, Inc., 1995 Stock Incentive Plan
Page 3 S-8 333-70279 (Post-Effective Liberty Media 401(K) Savings Plan Amendment No. 2 to Form S-4, (333-70279-02)) TCI 401(K) Stock Plan S-4 333-75083 Vanguard Cellular Systems, Inc. S-4 333-86019 MediaOne Corp. S-8 33-34264-1 (Post-Effective AT&T Long Term Savings Plan for Amendment No. 1) Management Employees AT&T Long Term Savings Plan - San Francisco AT&T Wireless Services 401(K) Retirement Plan S-8 333-86019-1 (Post-Effective MediaOne Group 1999 Supplemental Amendment No. 1 to Form S-4) Stock Plan Amended MediaOne Group 1994 Stock Plan S-8 333-86019-2 (Post-Effective MediaOne Group 401(K) Savings Plan Amendment No. 2 to Form S-4) S-8 333-53134 AT&T Broadband Deferred Compensation Plan S-8 333-61676 AT&T Deferred Compensation Plan for Non-Employee Directors S-3 333-73120-01 Redemption of TCI Preferred Securities S-3 333-73120-02 (Amendment No. 1) Redemption of TCI Preferred Securities S-3 333-73120-03 (Amendment No. 2) Redemption of TCI Preferred Securities S-3 333-73120-04 (Amendment No. 3) Redemption of TCI Preferred Securities S-3 333-83174 (which supercedes AT&T Universal Shelf Registration Form S-3 for the $13,080,000 Debt Securities and Warrants to Purchase Debt Securities 333-71167) S-3 333-83174-01 (Amendment No. 1) AT&T Universal Shelf Registration S-8 333-61676 (Amendment No.1) AT&T Deferred Compensation Plan for Non-Employee Directors
Our report dated February 1, 2002, except as to note 2, which is as of March 14, 2002, as to note 5, which is as of February 20, 2002, and as to note 9(h), which is as of May 1, 2002, contains Comments by the Auditors for U.S. Readers on Canada - U.S. Reporting Differences which states that in the United States, reporting standards for auditors require the addition of an explanatory paragraph (following the opinion paragraph) when the financial statements are affected by conditions and events that cast substantial doubt on the Company's ability to continue as a going concern such as those described in note 2 to the consolidated financial statements. Our report to the shareholders is expressed in accordance with Canadian reporting standards, which do not permit a reference to such conditions and events in the auditors' report when these are adequately disclosed in the financial statements. KPMG LLP Toronto, Canada May 1, 2002 EX-23.D 6 e56632a1ex23-d.txt CONSENT OF PRICEWATERHOUSECOOPERS, LLP. Exhibit 23d CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the registration statements on Form S-3 for the Shareowner Dividend Reinvestment and Stock Purchase Plan (Registration No. 333-00573), Form S-8 for the AT&T Long Term Savings and Security Plan (Registration No. 333-47257), Forms S-8 for the AT&T Long Term Savings Plan for Management Employees (Registration Nos. 33-34264, 33-29256 and 33-21937), Form S-8 for the AT&T Retirement Savings and Profit Sharing Plan (Registration No. 33-39708), Form S-8 for Shares Issuable Under the Stock Option Plan of the AT&T 1987 Long Term Incentive Program (Registration No. 333-47251), Form S-8 for the AT&T of Puerto Rico, Inc. Long Term Savings Plan for Management Employees (Registration No. 33-50819), Form S-8 for the AT&T of Puerto Rico, Inc. Long Term Savings and Security Plan (Registration No. 33-50817), Post-Effective Amendment No. 1 to Form S-8 Registration Statement (Registration No. 33-54797) for the AT&T 1996 Employee Stock Purchase Plan, Form S-8 for the AT&T Shares for Growth Program (Registration No. 333-47255), Form S-8 for the AT&T 1997 Long Term Incentive Program (Registration Nos. 333-43440 and 33-28665), Form S-3 for the AT&T $2,600,000,000 Notes and Warrants to Purchase Notes (Registration No. 33-49589), Form S-3 for the AT&T $3,000,000,000 Notes and Warrants to Purchase Notes (Registration No. 33-59495), Form S-4 for the AT&T 5,000,000 Common Shares (Registration No. 33-57745), and in Post-Effective Amendment Nos.1, 2 and 3 on Form S-8 to Form S-4 Registration Statement (Registration No. 33-42150) for the NCR Corporation 1989 Stock Compensation Plan (Registration No.33-42150-01), the NCR Corporation 1984 Stock Option Plan (Registration No. 33-42150-02) and the NCR Corporation 1976 Stock Option Plan (Registration No. 33-42150-03), respectively, and the Post-Effective Amendment Nos. 1, 2, 3 and 5 on Form S-8 to Form S-4 Registration Statement (Registration No. 33-52119) for the McCaw Cellular Communications, Inc. 1983 Non-Qualified Stock Option Plan (Registration No. 33-52119-01), the McCaw Cellular Communications, Inc. 1987 Stock Option Plan (Registration No. 33-52119-02), the McCaw Cellular Communications, Inc. Equity Purchase Plan (Registration No. 33-52119-03) and the McCaw Cellular Communications, Inc. Employee Stock Purchase Plan (Registration No. 33-52119-05), respectively, and Post-Effective Amendment No.1 on Form S-8 to Form S-4 Registration Statement (Registration No. 33-45302) for the Teradata Corporation 1987 Incentive and Other Stock Option Plan (Registration No. 33-45302-01), Form S-8 for the AT&T Amended and Restated 1969 Stock Option Plan for LIN Broadcasting Corp. (Registration No. 33-63195), and in Post Effective Amendment Nos. 1, 2, 3, 4 and 5 on Form S-8 to Form S-4 Registration Statement (Registration No. 333-49419) for the Teleport Communications Group Inc. 1993 Stock Option Plan (Registration No. 333-49419-01), Teleport Communications Group Inc. 1996 Equity Incentive Plan (Registration No. 333-49419-02), ACC CorpEmployee Long Term Incentive Plan (Registration No. 333-49419-03), ACC Corp. Non-Employee Directors' Stock Option Plan (Registration No. 333-49419-04) and ACC Corp. 1996 UK Sharesave Scheme (Registration No. 333-49419-05), and in Post-Effective Amendment Nos.1 and 2 on Form S-8 and Post-Effective Amendment No. 3 to Form S-4 Registration Statement (Registration No. 333-70279) for the Tele-Communications, Inc. 1998 Incentive Plan, the Tele-Communications, Inc. 1996 Incentive Plan (Amended and Restated), the Tele-Communications, Inc. 1995 Employee Stock Incentive Plan (Amended and Restated), the Tele-Communications, Inc. 1994 Stock Incentive Plan (Amended and Restated), the Tele-Communications, Inc. 1994 Nonemployee Director Stock Option Plan, the Tele-Communications International, Inc., the 1996 Nonemployee Director Stock Option Plan, the Tele-Communications International, Inc.1995 Stock Incentive Plan (Registration No. 333-70279-01), the Liberty Media 401(K) Savings Plan, the TCI 401(K) Stock Plan (Registration No. 333-70279-02), Form S-4 for Vanguard Cellular Systems, Inc. (Registration No. 333-75083), Form S-4 for MediaOne Corp, (Registration No. 333-86019), Post-Effective Amendment No. 1 to Form S-8 Registration Statement for the AT&T Long Term Savings Plan for Management Employees, the AT&T Long Term Savings Plan - San Francisco, and the AT&T Wireless Services 401(K) Retirement Plan (Registration No. 33-34264-1), Post Effective Amendment No. 1 on Form S-8 to Form S-4 Registration Statement for the MediaOne Group 1999 Supplemental Stock Plan and the Amended MediaOne Group 1994 Stock Plan (Registration No. 333-86019-1), Post Effective Amendment No. 2 on Form S-8 to Form S-4 Registration Statement for MediaOne Group 401(K) Savings Plan (Registration No. 333-86019-2), Form S-8 for the AT&T Broadband Deferred Compensation Plan (Registration No. 333-53134), Form S-8 for AT&T Deferred Compensation Plan for Non-Employee Directors (Registration No. 333-61676), Form S-3 for the Redemption of TCI Preferred Securities (Registration No. 333-73120-01), Amendment No. 1 to Form S-3 for the Redemption of TCI Preferred Securities (Registration No. 333-73120-02), Amendment No. 2 to Form S-3 for the Redemption of TCI Preferred Securities (Registration No. 333-73120-03), Amendment No. 3 to Form S-3 for the Redemption of TCI Preferred Securities (Registration No. 333-73120-04) Form S-3 for the AT&T Universal Shelf Registration (Registration No. 333-83174, which supercedes Form S-3 for the $13,080,000 Debt Securities and Warrants to Purchase Debt Securities 333-71167), Amendment No. 1 to the Form S-3 for the AT&T Universal Shelf Registration (Registration No. 333-83174-01), and Amendment No. 1 to Form S-8 for AT&T Deferred Compensation Plan for Non-Employee Directors (Registration No. 333-61676) of our report dated May 1, 2002, relating to the consolidated financial statements of Concert, B.V. and its subsidiaries, which appears in AT&T Corp.'s Annual Report on Form 10-K/A, for the year ended December 31, 2001. PricewaterhouseCoopers LLP McLean, Virginia May 3, 2002 EX-99.A 7 e56632a1ex99-a.txt AT&T CANADA INC. FINANCIALS Exhibit 99a Consolidated Financial Statements (Expressed in Canadian dollars) AT&T CANADA INC. Years ended December 31, 2001, 2000 and 1999 [KPMG LOGO] KPMG LLP CHARTERED ACCOUNTANTS Telephone (416) 228-7000 Yonge Corporate Centre Telefax (416) 228-7123 4120 Yonge Street Suite 500 www.kpmg.ca North York ON M2P 2B8 AUDITORS' REPORT TO THE SHAREHOLDERS We have audited the consolidated balance sheets of AT&T Canada Inc. as at December 31, 2001 and 2000 and the consolidated statements of operations and deficit and cash flows for each of the years in the three year period ended December 31, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company as at December 31, 2001 and 2000 and the results of its operations and its cash flows for each of the years in the three year period ended December 31, 2001 in accordance with Canadian generally accepted accounting principles. /s/KPMG LLP - --------------------- Chartered Accountants Toronto, Canada February 1, 2002, except as to note 2, which is as of March 14, 2002, as to note 5, which is as of February 20, 2002 and as to note 9(h), which is as of May 1, 2002 COMMENTS BY THE AUDITORS FOR U.S. READERS ON CANADA-U.S REPORTING DIFFERENCES In the United States, reporting standards for auditors require the addition of an explanatory paragraph (following the opinion paragraph) when the financial statements are affected by conditions and events that cast substantial doubt on the Company's ability to continue as a going concern such as those described in note 2 to the consolidated financial statements. Our report to the shareholders dated February 1, 2002, except as to note 2, which is as of March 14, 2002, as to note 5, which is as of February 20, 2002 and as to note 9(h), which is as of May 1, 2002, is expressed in accordance with Canadian reporting standards, which do not permit a reference to such conditions and events in the auditors' report when these are adequately disclosed in the financial statements. /s/KPMG LLP - --------------------- Chartered Accountants Chartered Accountants Toronto, Canada February 1, 2002, except as to note 2, which is as of March 14, 2002, as to note 5, which is as of February 20, 2002 and as to note 9(h), which is as of May 1, 2002. AT&T CANADA INC. Consolidated Balance Sheets (In thousands of Canadian dollars) December 31, 2001 and 2000
================================================================================ 2001 2000 - -------------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents (note 4) $ 537,294 $ 68,587 Accounts receivable (note 5) 70,640 258,425 Other current assets 14,154 12,922 ----------------------------------------------------------------------------- 622,088 339,934 Property, plant and equipment (note 6) 2,180,773 2,120,659 Goodwill (note 7) 1,639,065 1,705,155 Deferred pension asset (note 15) 45,174 10,626 Deferred foreign exchange 127,116 40,853 Other assets (note 8) 132,238 112,691 - -------------------------------------------------------------------------------- $ 4,746,454 $ 4,329,918 ================================================================================ LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) Current liabilities: Accounts payable $ 63,291 $ 78,961 Accrued liabilities 267,229 285,231 Accrued interest payable 70,004 43,589 Income taxes payable 5,584 3,655 Current portion of long-term debt (note 9) 1,930 2,210 ----------------------------------------------------------------------------- 408,038 413,646 Long-term debt (note 9) 4,672,738 3,628,465 Other long-term liabilities 45,110 28,254 Shareholders' equity (deficit) (note 11): Common shares 1,133,664 1,039,065 Warrants 709 1,192 Deficit (1,513,805) (780,704) ----------------------------------------------------------------------------- (379,432) 259,553 - -------------------------------------------------------------------------------- $ 4,746,454 4,329,918 ================================================================================
Impact of Strategic Business Combination on basis of presentation (note 2) Reconciliation to accounting principles generally accepted in the United States (note 22) Other commitments and contingencies (note 23) Subsequent events (notes 2, 5 and 9(h)) See accompanying notes to consolidated financial statements. On behalf of the Board: "Alan D. Horn" Director "D. Craig Young" Director - ----------------- -------------------- 1 AT&T CANADA INC. Consolidated Statements of Operations and Deficit (In thousands of Canadian dollars, except per share amounts) Years ended December 31, 2001, 2000 and 1999
============================================================================================= 2001 2000 1999 - --------------------------------------------------------------------------------------------- Revenue $ 1,544,721 $ 1,505,378 $ 866,721 Expenses: Service costs 1,005,790 1,034,860 586,761 Selling, general and administrative 385,966 411,947 253,677 ------------------------------------------------------------------------------------------ 1,391,756 1,446,807 840,438 - --------------------------------------------------------------------------------------------- Earnings before interest, taxes, depreciation and amortization, integration costs, provision for restructuring, workforce reduction costs and minority interest 152,965 58,571 26,283 Integration costs, provision for restructuring and workforce reduction costs (note 12) 21,901 (10,249) 157,790 - --------------------------------------------------------------------------------------------- Earnings (loss) before interest, taxes, depreciation and amortization and minority interest 131,064 68,820 (131,507) Depreciation and amortization 465,600 402,551 232,782 - --------------------------------------------------------------------------------------------- Loss from operations (334,536) (333,731) (364,289) Other income (expense): Interest income 19,134 17,243 35,070 Interest expense (401,114) (319,046) (259,589) Gain on sale of minority interest (note 3(h)) -- -- 462,028 Other (note 13) (8,620) 13,739 1,998 ------------------------------------------------------------------------------------------ (390,600) (288,064) 239,507 Loss before minority interest and provision for income taxes (725,136) (621,795) (124,782) Minority interest (note 10) -- 104,274 124,460 Provision for income taxes (note 14) 7,965 5,686 4,964 - --------------------------------------------------------------------------------------------- Loss for the year (733,101) (523,207) (5,286) Deficit, beginning of year (780,704) (257,497) (252,211) - --------------------------------------------------------------------------------------------- Deficit, end of year $ (1,513,805) $ (780,704) $(257,497) ============================================================================================= Basic and diluted loss per common share (note 11(f)) $ (7.45) $ (5.48) $ (0.06) ============================================================================================= Weighted average number of common shares outstanding (in thousands) 98,406 95,561 92,457 =============================================================================================
See accompanying notes to consolidated financial statements. 2 AT&T CANADA INC. Consolidated Statements of Cash Flows (In thousands of Canadian dollars) Years ended December 31, 2001, 2000 and 1999
=========================================================================================================== 2001 2000 1999 - ----------------------------------------------------------------------------------------------------------- Cash provided by (used in): Operating activities: Loss for the year $(733,101) $ (523,207) $ (5,286) Adjustments required to reconcile loss to cash flows from operating activities: Depreciation and amortization 465,600 402,551 232,782 Accretion of Senior Discount Note interest 145,148 125,916 118,735 Amortization of debt issue costs 15,661 16,248 -- Write-down of networks and equipment -- -- 35,568 Loss (gain) on disposition of investments 8,894 (13,011) -- Gain on sale of minority interest (note 3(h)) -- -- (462,028) Minority interest (note 10) -- (104,274) (124,460) Amortization of deferred foreign exchange 1,440 -- -- Amortization of deferred gain on termination of cross currency swaps and forward contracts (4,264) -- -- Deferred pension charge (4,148) (4,848) (3,492) Change in pension plan valuation allowance (31,934) 2,937 2,029 Other 2,137 2,012 (8,767) - ----------------------------------------------------------------------------------------------------------- (134,567) (95,676) (214,919) Change in non-cash working capital (note 19) 117,270 (164,023) 47,325 - ----------------------------------------------------------------------------------------------------------- Net cash used in operating activities (17,297) (259,699) (167,594) Investing activities: Acquisitions, net of cash acquired (43,410) (197,867) 31,362 Dispositions of investments 3,580 17,656 -- Additions to plant, property and equipment (345,279) (472,235) (629,304) Reductions (additions) to other assets 236 (1,164) 12,145 Decrease to restricted investments -- 42,429 47,178 - ----------------------------------------------------------------------------------------------------------- Net cash used in investing activities (384,873) (611,181) (538,619) Financing activities: Issue of share capital, net of issue costs 48,243 35,206 24,807 Termination of cross currency swaps and forward contracts (note 16(b)) 150,664 -- -- Draw from (repayment of) credit facility (100,000) 270,000 -- Issues of long-term debt 781,959 355,912 869,730 Debt issue costs (6,230) (5,234) (6,481) Increase (decrease) in other long-term liabilities (5,054) (5,935) 2,605 Repayment of shareholder loans -- -- (157,187) Repayment of subordinated debentures -- -- (88,325) Repayment of preferred shares -- -- (500,000) Net cash provided by financing activities 869,582 649,949 145,149 Effect of exchange rate changes on cash 1,295 187 (4,334) - ----------------------------------------------------------------------------------------------------------- Increase (decrease) in cash and cash equivalents 468,707 (220,744) (565,398) Cash and cash equivalents, beginning of year 68,587 289,331 854,729 - ----------------------------------------------------------------------------------------------------------- Cash and cash equivalents, end of year $ 537,294 $ 68,587 $ 289,331 ===========================================================================================================
See accompanying notes to consolidated financial statements . 3 AT&T CANADA INC. Notes to Consolidated Financial Statements (Tabular amounts in thousands of Canadian dollars, except per share amounts) Years ended December 31, 2001, 2000 and 1999 AT&T Canada Inc. (the "Company") was incorporated as MetroNet Communications Corp. ("MetroNet") under the laws of the Province of Alberta and was subsequently continued under the Canada Business Corporations Act. The Company changed its name to AT&T Canada Inc. coincident with the consummation of the combination of MetroNet and AT&T Canada Corp. (formerly AT&T Canada Long Distance Services Company) ("AT&T LDS") and ACC TelEnterprises Ltd. ("ACC") effective June 1, 1999. The Company is a holding company, which engages in the telecommunications business in Canada through its subsidiaries the most significant of which is its 69% owned operating subsidiary, AT&T Canada Corp. The Company's activities in the telecommunications business consist primarily of the development and construction of telecommunications networks for the provision of local, data, Internet and E-Business solutions and long distance services to businesses in Canada. 1. SIGNIFICANT ACCOUNTING POLICIES: The accompanying consolidated financial statements are prepared in accordance with accounting principles generally accepted in Canada which, in the case of the Company, conform in all material respects with those in the United States, except as outlined in note 22. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses. Actual results could differ from those estimates. The Company believes the most significant estimates used in the preparation of its consolidated financial statements are the useful lives of property, plant and equipment and goodwill and other intangibles and the related estimates of future cash flows to evaluate recoverability of such long- lived assets. The Company's significant accounting policies are as follows: (a) Cash and cash equivalents: Cash equivalents consist of investments in money market instruments with a maturity at the date of purchase of less than three months. Cash and cash equivalents are recorded at cost, which approximates current market value. 4 AT&T CANADA INC. Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of Canadian dollars, except per share amounts) Years ended December 31, 2001, 2000 and 1999 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED): (b) Revenue recognition: Revenue on long distance, and other usage based services and products is recognized based upon minutes of traffic processed. Revenue on local, data, internet and other products and services is recognized upon delivery in accordance with contract terms, including customer acceptance. Revenue from technical support is recognized over the term of the contract during which the support services are rendered. Revenue on multiple element arrangements is allocated to each element based on the relative fair value of the elements. (c) Restricted investments: Restricted investments consist of U.S. government securities which are restricted to the payment of interest on certain debt and are stated at cost plus accrued interest. (d) Accounts receivable securitization: The Company accounts for the transfer of receivables according to Accounting Guideline AcG-12, "Transfer of Receivables." The Company recognizes gains or losses on the transfer of receivables that qualify as sales and retains a subordinated retained interest in the accounts receivable transferred and ongoing servicing responsibilities. Losses on the sale of accounts receivable are recorded in the consolidated statements of operations and deficit at the date of sale. The amount of the losses depends in part on the carrying amount of the accounts receivable involved in the transfer, allocated between the accounts receivable sold and the Company's retained interest based on their relative fair value at the date of the transfer. The Company measures fair value based on the expected future cash receipts to be realized using management's best estimates of key assumptions for credit and dilution losses, collection term of the accounts receivable, and the trust' s contracted return. Any subsequent decline in the value of the retained interest, other than a temporary decline, will be recorded in income. 5 AT&T CANADA INC. Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of Canadian dollars, except per share amounts) Years ended December 31, 2001, 2000 and 1999 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED): (e) Property, plant and equipment: Property, plant and equipment are recorded at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets as follows: Telecommunications facilities and equipment 3 - 20 years Buildings 13 - 40 years Other capital assets 4 - 40 years Equipment under capital leases 3 - 15 years Leasehold improvements Term of lease Application software 1 - 7 years
Costs incurred in developing new networks or expanding existing networks, including costs of acquiring rights-of-way, network design and interest are included within telecommunications facilities and equipment. Construction costs related to telecommunications facilities and equipment that are installed on rights-of-ways granted by others are capitalized and depreciated over the lives of rights-of-ways, including option periods. Telecommunications facilities and equipment begin to depreciate once the network is put in service. Interest is capitalized on assets that are under construction for more than three months at the Company's weighted average cost of capital. 6 AT&T CANADA INC. Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of Canadian dollars, except per share amounts) Years ended December 31, 2001, 2000 and 1999 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED): (f) Business combinations, goodwill, intangible and other long-lived assets: (i) Business combinations are accounted for by the purchase method of accounting, under which the assets and liabilities purchased are recorded at their fair values with the excess of the purchase price over the fair value of identifiable assets and the liabilities acquired recorded as goodwill. The results of operations are included from the date of acquisition. (ii) The consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries. All intercompany transactions and balances have been eliminated on consolidation. (iii) Goodwill and other intangible assets are recorded at the date of acquisition and are amortized on a straight-line basis over their estimated useful lives of five to 25 years. (iv) Long-lived assets, such as property, plant and equipment, goodwill and other intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If the total of the expected future undiscounted cash flows is less than the carrying amount of the asset, a loss is recognized for the difference between the expected future undiscounted cash flows and carrying value of the asset. 7 AT&T CANADA INC. Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of Canadian dollars, except per share amounts) Years ended December 31, 2001, 2000 and 1999 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED): (v) Effective January 1, 2002, the Company will adopt the Canadian Institute of Chartered Accountants Handbook Section ("HB") 1581 "Business Combinations", and HB 3062 "Goodwill and Other Intangible Assets". The new sections are substantially consistent with equivalent U.S. pronouncements, SFAS No. 141 "Business Combinations" and SFAS No. 142 "Goodwill and Other Intangible Assets" issued by the Financial Accounting Standards Board ("FASB") in July 2001. HB 1581 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. Use of the pooling-of-interests method is no longer permitted. HB 1581 also includes guidance on the initial recognition and measurement of goodwill and other intangible assets acquired in a business combination that is completed after June 30, 2001. HB 3062 no longer permits the amortization of goodwill and indefinite-lived intangible assets effective January 1, 2002. Instead, these assets must be reviewed annually (or more frequently under certain conditions) for impairment using a fair value approach rather than the undiscounted cash flow approach previously used. Intangible assets that have definite lives will continue to be amortized over their estimated useful lives and tested for impairment in accordance with HB 3062. In connection with HB 3062's transitional goodwill impairment evaluation, HB 3062 requires the Company to perform an assessment of whether there is an indication that goodwill is impaired as of the date of adoption. This involves identifying reporting units and determining the carrying value of each reporting unit by assigning the assets and liabilities, including the existing goodwill and intangible assets, to those reporting units as of January 1, 2002. The Company then has until June 30, 2002 to determine the fair value of each reporting unit and compare it to the carrying amount of the reporting unit. If the carrying amount of a reporting unit exceeds its fair value, the Company must perform the second step of the transitional impairment test as soon as possible, but no later than the end of the year of adoption. In the second step, the Company must compare the implied fair value of the reporting unit goodwill with the carrying amount of the reporting unit goodwill. Any transitional impairment loss will be recognized as a prior period adjustment to opening retained earnings at January 1, 2002. 8 AT&T CANADA INC. Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of Canadian dollars, except per share amounts) Years ended December 31, 2001, 2000 and 1999 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED): The Company currently accounts for all business combinations under the purchase method and does not expect adoption of HB 1581 to have an effect on the result of operations. As of the date of adoption of HB 3062, the Company has unamortized goodwill in the amount of $1,639.1 million and unamortized identifiable intangible assets in the amount of $14.8 million, all of which will be subject to the transition provisions of HB 3062. Amortization expense related to goodwill was $110 million for the year ended December 31, 2001. The Company is in the process of assessing the impact of adoption and it is expected that a significant portion of its goodwill will be impaired under the new accounting standards. Because of the extensive effort needed to comply with adopting HB 3062, it is not practicable to reasonably estimate the impact of adoption on the Company's financial statements at the date of this report. (g) Debt issuance costs: Debt issuance costs are amortized on a straight-line basis over the terms of the related debt financing. (h) Foreign currency translation and hedging relationships: Foreign currency-denominated monetary items are translated into Canadian dollars at the exchange rate prevailing at the balance sheet date. Foreign currency-denominated non-monetary items are translated at the historical exchange rate. Transactions included in operations are translated at the average exchange rate for the period. Translation gains or losses are reflected in the consolidated statements of operations in the period in which they occur except for those related to long-term monetary items. Unrealized gains and losses on translation of foreign currency-denominated long-term monetary items which are not hedged are deferred and amortized over the remaining lives of the related items. 9 AT&T CANADA INC. Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of Canadian dollars, except per share amounts) Years ended December 31, 2001, 2000 and 1999 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED): The Company hedges its exposure to foreign currency exchange rate risk on long-term debt from time to time, by designating existing foreign currency denominated monetary assets as hedge instruments and, through the purchase of currency options, cross currency swaps and forward exchange contracts. All such instruments are only used for risk management purposes and are designated as hedges of specific debt instruments. The Company accounts for these financial instruments as hedges and, as a result, foreign exchange gains and losses on hedge instruments are recorded in the same period as the corresponding gains and losses on the related long-term debt. Premiums paid to acquire currency options, cross currency swaps and forward exchange contracts are deferred and amortized on a straight-line basis over the terms of the instruments. Effective January 1, 2002, the Company will adopt the amendment to HB 1650 "Foreign Currency Translation". The revised HB requires the immediate recognition in income of unrealized currency exchange gains and losses on long-term monetary items with a fixed or ascertainable life as opposed to unrealized gains and losses being deferred and amortized over the remaining term of the long-term monetary items. The revised recommendations are to be applied retroactively with prior years' financial statements being restated. The effect of applying the revisions will be that foreign exchange gains and losses on the unhedged portion of the Company's long-term debt currently deferred and amortized over the term of the debt will be reflected in the consolidated statement of operations. The reported losses for the years ended December 31, 2001 and 2000 will be increased by $12.3 million and nil, respectively. Effective January 1, 2003, the Company will adopt the new Accounting Guideline, AcG-13, "Hedging Relationships," which requires that in order to apply hedge accounting, all hedging relationships must be identified, designated, documented and effective. Where hedging relationships cannot meet these requirements, hedge accounting must be discontinued. The Company is currently evaluating the impact of adoption of AcG-13 and has not yet determined the effect of adoption on its results of operations or financial condition. 10 AT&T CANADA INC. Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of Canadian dollars, except per share amounts) Years ended December 31, 2001, 2000 and 1999 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED): (i) Employee benefit plans: (i) Retirement benefits: The Company recognizes the costs of retirement benefits and certain post-employment benefits over the period in which employees render services in return for the benefits. The costs of pensions and other retirement benefits earned by employees are actuarially determined using the projected benefit method prorated on credited service and management's best estimate of expected plan investment performance, salary escalation and retirement ages of employees. For the purpose of calculating the expected return on plan assets, those assets are valued using a market-related value. Past service costs from plan amendments are amortized on a straight-line basis over the average remaining service period of employees active at the date of amendment. The excess of the cumulative unrecognized net gains (loss) over 10% of the greater of the benefit obligation and the market-related value of plan assets is amortized over the average remaining service period of active employees. When the restructuring of a benefit plan gives rise to both a curtailment and a settlement of obligations, the curtailment is accounted for prior to the settlement. (ii) Stock option plans: No compensation expense is recognized for these plans when shares or options are issued to employees. Any consideration paid by employees on exercise of options or purchase of shares is credited to share capital. (iii) Employee Share Ownership Plan: Compensation expense is recognized for the Company's contributions to the Employee Share Ownership Plan. The Company's contributions are made through the issuance of Class B Non-Voting Shares from treasury. 11 AT&T CANADA INC. Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of Canadian dollars, except per share amounts) Years ended December 31, 2001, 2000 and 1999 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED): (iv) Recent pronouncement: Effective January 1, 2002, the Company will adopt the new HB 3870 "Stock-based Compensation and Other Stock-based Payments", which establishes standards for the recognition, measurement and disclosure of stock-based compensation and other stock-based payments made in exchange for goods and services. HB 3870 sets out a fair value based method of accounting that is required for certain, but not all, stock-based transactions. HB 3870 must be applied to: all stock-based payments to non-employees, and to employee awards that are direct awards of stock, that call for settlement in cash or other assets, or are stock appreciation rights that call for settlement by the issuance of equity instruments. However, the new standard permits the Company to continue its existing policy that no compensation cost is recorded on the grant of stock options to employees. Consideration paid by employees on the exercise of stock options is recorded as share capital. HB 3870, however, does require additional disclosures for options granted to employees, including disclosure of pro forma earnings and pro forma earnings per share as if the fair value based accounting method had been used to account for employee stock options. The Company has evaluated the impact of adoption of HB 3870 and has determined that adoption will not have an effect on its results of operations or financial condition. (j) Income taxes: The Company uses the liability method of accounting for income taxes. Future income tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. When necessary, a valuation allowance is recorded to reduce future income tax assets to an amount where realization is more likely than not. Future income tax assets and liabilities are measured using enacted or substantively enacted tax laws and rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on future income tax assets and liabilities of a change in tax laws and rates is recognized as part of the provision for income taxes in the period that includes the enactment date (or the period in which the change in rates are substantively enacted). 12 AT&T CANADA INC. Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of Canadian dollars, except per share amounts) Years ended December 31, 2001, 2000 and 1999 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED): (k) Loss per common share: Basic and diluted loss per share is calculated using the weighted average number of common shares outstanding during the year after giving retroactive effect to the share split described in note 11(b)(ii). Effective January 1, 2001, the Company adopted, retroactively with restatement, the recommendations of HB 3500 with respect to loss per share. Under the revised standard, the treasury stock method is used instead of the imputed earnings approach for determining the dilutive effect of options, issued warrants or other similar instruments. The change in the method of calculation of loss per share did not impact basic and diluted loss per share for 2001, 2000 and 1999 as further described in note 11(f). 2. IMPACT OF STRATEGIC BUSINESS COMBINATION ON BASIS OF PRESENTATION: The consolidated financial statements have been prepared on a going concern basis in accordance with Canadian generally accepted accounting principles ("GAAP"). The going concern basis of presentation assumes that the Company will continue in operation for the foreseeable future and will be able to realize its assets and discharge its liabilities and commitments in the normal course of business. The consolidated financial statements do not reflect adjustments that would be necessary if the going concern assumption was not appropriate. If the going concern basis was not appropriate for these consolidated financial statements, then adjustments would be necessary to the carrying value of assets and liabilities, the reported revenues and expenses, and the balance sheet classifications used. Certain circumstances relating to the future ownership of the Company under the Strategic Business Combination, as described in 3(h) and in the following paragraph, raise doubt about the appropriateness of the use of the going concern assumption in the preparation of the consolidated financial statements. The outcome of these circumstances will be largely determined by third parties. 13 AT&T CANADA INC. Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of Canadian dollars, except per share amounts) Years ended December 31, 2001, 2000 and 1999 2. IMPACT OF STRATEGIC BUSINESS COMBINATION ON BASIS OF PRESENTATION: (CONTINUED): The Strategic Business Combination provides for the purchase of the outstanding shares of the Company by AT&T Corp. and/or a third party at AT&T Corp.'s discretion any time prior to July 1, 2003. In the event that foreign ownership restrictions are lifted, in whole or in part, on or before June 30, 2003, AT&T Corp. is obligated to purchase or to arrange for a third party affiliated with AT&T Corp. to purchase the outstanding shares of the Company up to the extent permitted by law, subject to certain limitations in the Deposit Receipt Agreement. At any time prior to July 1, 2003, AT&T Corp. may elect to purchase or cause to be purchased by any third party, all of the outstanding shares. In the event that, by June 30, 2003, (i) foreign ownership restrictions are not amended so as to allow AT&T Corp. to acquire all of the outstanding shares, and (ii) AT&T Corp. has not elected to purchase or arrange for a third party to purchase the outstanding shares of the Company, the Company will be put up for auction upon and subject to the terms of the Deposit Receipt Agreement. A change in control of the Company, resulting in the Company being owned by an entity other than AT&T Corp., could require the Company to repurchase some or all of the outstanding unsecured senior notes of the Company at 101% of their principal value and repay amounts drawn from its Senior Credit Facility. The Company is not in a position at this time to determine the business strategy of AT&T Corp. and/or a third party following such acquisition or auction and the effect that any such transaction or the results therefrom would have on the Company's business plan, capital spending program, and the funding of its operating and working capital requirements. There is uncertainty about what will occur on or before June 30, 2003 relating to the transactions that may arise as a result of the Strategic Business Combination, whether or not the Company will be required, as a result of such events, to repurchase any debt obligations and how it will finance its operations following any change in control. On March 14, 2002, the Company announced the formation of a committee of its board of directors to work with management to address complex issues facing the Company in the foreseeable future. Such issues include a significant regulatory decision expected on or before May 31, 2002, which could have a significant impact on the future of sustainable competition in telecommunications in Canada, as further described in note 23(a); the effect of AT&T Corp. satisfying its obligations under the Deposit Receipt Agreement; and the impact of these events on operating and financial circumstances of the Company. In addition, the committee appointed independent financial advisors to evaluate various scenarios regarding issues, opportunities and alternatives for the Company. 14 AT&T CANADA INC. Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of Canadian dollars, except per share amounts) Years ended December 31, 2001, 2000 and 1999 3. ACQUISITIONS AND DISPOSITIONS: Details of business acquisitions during 2001, 2000 and 1999 are as follows. Consideration is cash unless otherwise noted below. 2001 AND 2000
=============================================================================== 2000 2001 ------------------------------------------- MONTAGE Contour Brak Netcom DMC (b) (c) (d) (e) (f) ------------------------------------------------------------------------------- Current assets $15,493 $10,373 $ 4,044 $ 6,192 $ 3,993 Capital assets 4,717 7,093 548 -- 501 Other assets -- 694 990 5,545 -- Goodwill 51,029 70,032 29,554 66,892 92,309 ------------------------------------------------------------------------------- 71,239 88,192 35,136 78,629 96,803 Current liabilities 11,869 11,337 4,708 11,157 1,308 Long-term debt -- 6,875 202 -- -- ------------------------------------------------------------------------------- 11,869 18,212 4,910 11,157 1,308 ------------------------------------------------------------------------------- Purchase price $59,370 $69,980 $30,226 $67,472 $95,495 ===============================================================================
1999
MetroNet, AT&T LDS and ACC Netcom 1999 (h) (e) --------------------------------------------------------------------------- Current assets $ 253,545 $ 5,686 Capital assets 575,954 7,084 Other assets 9,954 314 Goodwill 897,031 22,020 --------------------------------------------------------------------------- 1,736,484 35,104 Current liabilities 244,132 4,233 Preferred shares 500,000 -- Subordinated debentures 83,289 -- Shareholder loan 130,500 -- Long-term debt -- 28 Minority interest -- 4,323 Other long-term liabilities 33,981 -- --------------------------------------------------------------------------- 991,902 8,584 --------------------------------------------------------------------------- Purchase price $ 744,582 $ 26,520 ===========================================================================
15 AT&T CANADA INC. Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of Canadian dollars, except per share amounts) Years ended December 31, 2001, 2000 and 1999 3. ACQUISITIONS AND DISPOSITIONS (CONTINUED): 2001 (a) On May 1, 2001, the Company disposed of certain call centres. Proceeds on disposition were $3.6 million in cash. The disposition generated a loss on sale of $8.9 million. (b) Acquisition of MONTAGE eIntegration Inc.: On June 1, 2001, the Company acquired all of the issued and outstanding shares of MONTAGE eIntegration Inc. ("MONTAGE"). MONTAGE is a Canadian E-Business solutions integrator focused on transforming traditional organizations into connected enterprises through internet technologies. Consideration of $58.4 million was paid on closing, comprised of $13.7 million in cash and $44.7 million, represented by 967,355 Class B Non-Voting Shares of the Company. In addition, acquisition costs of $1.0 million were incurred. The vendors have the potential to earn up to an additional $30.0 million contingent upon the attainment by June 30, 2002 of certain specified performance targets. Any earned contingent consideration is payable over the three-year period ending June 30, 2004 and will be recorded once the contingent amount is determinable. A portion of the contingent payment will be accounted for as additional purchase price with the balance recorded as compensation expense. 2000 (c) Acquisition of Contour Telecom Inc. (Canada) (formerly TigerTel Inc.) ("Contour"): On January 6, 2000, the Company acquired all of the issued and outstanding shares of Contour, a Canadian business telecommunications provider. (d) Acquisition of Brak Systems Inc.: On March 20, 2000, the Company acquired all of the issued and outstanding shares of Brak Systems Inc. ("Brak"), a Canadian internet security company. 16 AT&T CANADA INC. Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of Canadian dollars, except per share amounts) Years ended December 31, 2001, 2000 and 1999 3. ACQUISITIONS AND DISPOSITIONS (CONTINUED): (e) Acquisition of Netcom Canada Holding Inc.: On April 10, 2000, the Company exercised its right to acquire the remaining 49% of issued and outstanding shares of Netcom Canada Holding Inc. ("Netcom"), an internet service provider for U.S. $46.2 million (Cdn. $67.5 million) in cash. On March 16, 1999, the Company acquired 51% of the issued and outstanding shares of Netcom. (f) Acquisition of DMC Inc.: On May 31, 2000, the Company acquired all of the issued and outstanding shares of DMC Inc. ("DMC"), a Canadian business specializing in the deployment of business-focused Internet and E-Business strategies and solutions. Purchase consideration of $95.5 million, recorded at the date of acquisition, was funded by a combination of the issuance of 769,231 of the Company's Class B Non-Voting Shares priced at market on date of acquisition and $50 million in cash, $25 million of which was held in escrow pending attainment of certain specified performance targets. In July 2001, the remaining $25 million of purchase consideration was paid. (g) Shared Technologies of Canada: On July 18, 2000, the Company reduced its ownership in Shared Technologies of Canada ("STOC") from 70% to 15%. Proceeds on disposition were $16.5 million: $13.6 million received in cash and a receivable of $2.9 million recorded. STOC also repaid intercompany loans owing of $4.5 million. The disposition generated a gain on sale of $13.0 million before income taxes. The remaining 15% investment in STOC is accounted for by the cost method of accounting. 17 AT&T CANADA INC. Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of Canadian dollars, except per share amounts) Years ended December 31, 2001, 2000 and 1999 3. ACQUISITIONS AND DISPOSITIONS (CONTINUED): 1999 (h) Combination with AT&T LDS and ACC (also known as "Strategic Business Combination"): On June 1, 1999, MetroNet and AT&T LDS and ACC consummated a combination by way of a plan of arrangement. This resulted in MetroNet shareholders indirectly owning approximately 69% of the equity of the combined company and AT&T Corp. ("AT&T") indirectly owning approximately 31% of the equity of the combined company. MetroNet contributed all of its assets and operations to the combined company. AT&T contributed its 33% voting interest in AT&T LDS. In addition, AT&T agreed to purchase, if permitted to do so under Canadian foreign ownership regulations as a result of any amendment of such regulations prior to July 1, 2003, all of the outstanding shares of the Company for the greater of (i) $37.50 per share and (ii) the appraised fair market value. The exact timing of this purchase by AT&T is dependent upon the future status of Canadian foreign ownership regulations. If such regulations do not permit AT&T to purchase the shares of the Company before June 30, 2003, AT&T may elect to purchase or arrange for another entity to purchase the shares of the Company. Effective June 30, 2000, the minimum $37.50 per share price began to increase by 16% per annum compounded quarterly from that date through to no later than June 30, 2003. If by June 30, 2003, AT&T has not elected to purchase or arranged for the purchase of the outstanding shares, then upon and subject to the terms of the Deposit Receipt Agreement, the Company has agreed that it will be put up for auction and AT&T would make whole the shareholders of the Company for the difference between the proceeds received from the auction and the greater of (i) the accreted minimum price, and (ii) the appraised fair market value of the shares. The combination has been accounted for by the purchase method of accounting and the results of operations of AT&T LDS and ACC are included from the date of combination. The Company recorded a gain of $462 million, resulting from the sale of the 31% interest in MetroNet to AT&T. The shares issued to AT&T for its 31% economic interest in the Company were issued from the Company's operating subsidiary, AT&T Canada Corp., which is 69% owned by the Company. The purchase consideration of $744.6 million represents the value of the 69% interest in AT&T LDS and ACC, including acquisition costs of $34.7 million. 18 AT&T CANADA INC. Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of Canadian dollars, except per share amounts) Years ended December 31, 2001, 2000 and 1999 3. ACQUISITIONS AND DISPOSITIONS (CONTINUED): Unaudited pro forma consolidated financial information The following unaudited pro forma consolidated financial information reflects the combination with AT&T LDS and ACC and the acquisitions of Contour, Brak, Netcom and DMC as if these transactions had occurred on January 1, 1999 and reflects the acquisition of MONTAGE as if it had occurred on January 1, 2000:
================================================================================================= 2001 2000 1999 - ------------------------------------------------------------------------------------------------- Revenue $ 1,568,655 $ 1,560,729 $ 1,456,893 Expenses: Service costs 1,020,851 1,068,704 993,855 Selling, general and administrative expenses 395,208 430,368 426,428 ----------------------------------------------------------------------------------------------- 1,416,059 1,499,072 1,420,283 - ------------------------------------------------------------------------------------------------- Earnings before interest, taxes, depreciation and amortization, integration costs, provision for restructuring, workforce reduction costs and minority interest 152,596 61,657 36,610 Integration costs, provision for restructuring and workforce reduction costs 21,901 (10,249) 157,790 - ------------------------------------------------------------------------------------------------- Earnings (loss) before interest, taxes, depreciation and amortization and minority interest 130,695 71,906 (121,180) Depreciation and amortization 470,309 422,780 333,814 - ------------------------------------------------------------------------------------------------- Loss from operations (339,614) (350,874) (454,994) Other income (expense): Interest expense, net (382,094) (302,064) (242,828) Gain on sale of minority interest -- -- 462,028 Gain on sale of residential business -- -- 29,349 Other (4,812) 13,874 (801) ----------------------------------------------------------------------------------------------- (386,906) (288,190) 247,748 - ------------------------------------------------------------------------------------------------- Loss before minority interest and provision for income taxes (726,520) (639,064) (207,246) Minority interest -- 101,983 121,523 Provision for income taxes 9,580 6,073 6,660 - ------------------------------------------------------------------------------------------------- Loss for the year $ (736,100) $ (543,154) $ (92,383) ================================================================================================= Basic and diluted loss per common share $ (7.48) $ (5.68) $ (0.99) =================================================================================================
19 AT&T CANADA INC. Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of Canadian dollars, except per share amounts) Years ended December 31, 2001, 2000 and 1999 3. ACQUISITIONS AND DISPOSITIONS (CONTINUED): This financial information has not been adjusted to give effect to the dispositions of STOC and certain call centres on July 18, 2000 and May 1, 2001, respectively. The pro forma consolidated financial information has been provided for information purposes only and is not necessarily indicative of the results of operations or financial condition that actually would have been achieved if the acquisitions had been completed on January 1, 2000 and 1999, respectively, or that may be reported in the future. 4. CASH AND CASH EQUIVALENTS:
=================================================================== 2001 2000 ------------------------------------------------------------------- Cash on deposit: Canadian dollar $ 10,139 $ 723 U.S. dollar 214 (2,662) Short-term investments, at rates of interest varying between 1.60% and 2.45%: Canadian dollar 481,434 48,312 U.S. dollar 45,507 22,214 ------------------------------------------------------------------- $537,294 $ 68,587 ===================================================================
5. ACCOUNTS RECEIVABLE SECURITIZATION: On July 20, 2001, the Company signed a securitization agreement with a special purpose trust. Under the terms of the securitization agreement, the Company has the ability to sell certain of its accounts receivable on a revolving basis through securitization transactions at varying monthly limits. The maximum cash proceeds that may be funded under the program is $150 million. The accounts receivable pool consists of the Company's trade accounts receivable for telecommunications products and services rendered. 20 AT&T CANADA INC. Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of Canadian dollars, except per share amounts) Years ended December 31, 2001, 2000 and 1999 5. ACCOUNTS RECEIVABLE SECURITIZATION (CONTINUED): When the accounts receivable are sold to the trust, an initial purchase price is paid to the Company and the Company is entitled to an additional deferred purchase price based on the realized value of the receivables sold. The Company retains ongoing servicing responsibilities with respect to the receivables transferred. The investors and the trust have no recourse against the Company beyond the level of the trust assets. The Company does not receive compensation for its servicing responsibilities and the related servicing liability is considered insignificant. On July 20, 2001, the Company sold accounts receivable for initial proceeds of $100 million and recorded a loss of $0.4 million, representing the cost relating to establishing the agreement at the date of the sale. The following table illustrates the effect of securitization on the Company's balance sheet as at December 31, 2001: =============================================================== Total cash received $100.0 Net carrying amount of accounts receivable transferred 149.8 Deferred purchase price included in other assets 49.8 ===============================================================
The fair value of the retained interest approximates the carrying value. The key economic assumption used in measuring the loss on sale and value of the retained interest is the expected credit and dilution losses estimated to be 6.5%. On February 20, 2002, the Company repurchased for approximately $100 million, all of the outstanding accounts receivable sold in the above securitization program. The program has not been terminated and may be resumed in the future if certain conditions are satisfied. The securitization agreement included the requirement that the Company maintains an investment grade credit rating from both Moody's Investor Services Inc. and Standard & Poor's Rating Services. 21 AT&T CANADA INC. Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of Canadian dollars, except per share amounts) Years ended December 31, 2001, 2000 and 1999 6. PROPERTY, PLANT AND EQUIPMENT:
========================================================================= Accumulated Net book 2001 Cost depreciation value ------------------------------------------------------------------------- Telecommunications facilities and equipment $2,060,341 $ 483,964 $1,576,377 Land and buildings 169,516 41,601 127,915 Other capital assets 600,911 254,104 346,807 Equipment under capital leases 28,542 6,430 22,112 Leasehold improvements 31,115 12,841 18,274 Application software 163,253 73,965 89,288 ------------------------------------------------------------------------- $3,053,678 $ 872,905 $2,180,773 =========================================================================
========================================================================= Accumulated Net book 2000 Cost depreciation value ------------------------------------------------------------------------- Telecommunications facilities and equipment $1,800,550 $ 290,287 $1,510,263 Land and buildings 152,727 24,794 127,933 Other capital assets 547,311 168,470 378,841 Equipment under capital leases 28,756 5,318 23,438 Leasehold improvements 27,780 8,834 18,946 Application software 99,332 38,094 61,238 ------------------------------------------------------------------------- $2,656,456 $ 535,797 $2,120,659 =========================================================================
As of December 31, 2001 and 2000, property, plant and equipment include $16.9 million and $48.3 million, respectively, of networks in progress that are not in service and, accordingly, have not been depreciated. Interest capitalized to property, plant and equipment during 2001 amounted to $0.9 million (2000 - $6.9 million) and has been calculated using the Company's weighted average cost of capital of 11.5% (2000 - 10.8%) applied to the monthly amount expended in networks in progress that are not in service. 22 AT&T CANADA INC. Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of Canadian dollars, except per share amounts) Years ended December 31, 2001, 2000 and 1999 7. GOODWILL:
======================================================= Accumulated Net book 2001 Cost amortization value ------------------------------------------------------- Goodwill $1,913,208 $274,143 $1,639,065 =======================================================
======================================================= Accumulated Net book 2000 Cost amortization value ------------------------------------------------------- Goodwill $1,870,112 $164,957 $1,705,155 =======================================================
8. OTHER ASSETS:
=========================================================================== Accumulated Net book 2001 Cost amortization value --------------------------------------------------------------------------- Debt issuance costs $ 78,926 $ 27,602 $ 51,324 Retained interest on accounts receivable securitization (note 5) 49,829 -- 49,829 Non-compete agreement 32,500 28,435 4,065 Long-term investments, at cost 10,745 -- 10,745 Other 20,407 4,132 16,275 --------------------------------------------------------------------------- $192,407 $ 60,169 $132,238 ===========================================================================
=========================================================================== Accumulated Net book 2000 Cost amortization value --------------------------------------------------------------------------- Debt issuance costs $ 71,146 $ 18,654 $ 52,492 Option premiums on financial instruments (note 8(a)) 38,271 20,638 17,633 Non-compete agreement 32,500 20,311 12,189 Long-term investments, at cost 10,755 -- 10,755 Other 21,484 1,862 19,622 --------------------------------------------------------------------------- $174,156 $ 61,465 $112,691 ===========================================================================
23 AT&T CANADA INC. Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of Canadian dollars, except per share amounts) Years ended December 31, 2001, 2000 and 1999 8. OTHER ASSETS (CONTINUED): (a) During 2001, the Company monetized certain swaptions, cross currency swaps and the related option premiums (note 16(b)). The option premiums had a cost of $38.3 million with accumulated amortization of $26.0 million. 9. LONG-TERM DEBT:
============================================================================================ 2001 2000 - -------------------------------------------------------------------------------------------- 12.0% Senior Notes (2001 - U.S. $248.6 million; 2000 - U.S. $248.4 million) (note 9(a)) $ 395,988 $ 372,419 10.75% Senior Discount Notes (2001 - U.S. $155.8 million; 2000 - U.S. $140.4 million) (note 9(b)) 248,227 210,455 9.95% Senior Discount Notes (2001 - U.S. $842.2 million; 2000 - U.S. $764.3 million) (note 9(c)) 1,341,482 1,146,036 10.625% Senior Notes (2001 - U.S. $225.0 million; 2000 - U.S. $225.0 million) (note 9(d)) 358,380 337,388 7.65% Senior Notes (2001 - U.S. $1,000.0 million; 2000 - U.S. $500.0 million) (note 9(e)) 1,592,800 749,750 7.15% Senior Notes (note 9(f)) 150,000 150,000 7.625% Senior Notes (2001 - U.S. $250.0 million) 2000 - $250.0 million) (note 9(g)) 398,200 374,875 Senior credit facilities (note 9(h)) 170,000 270,000 Capital lease obligations (note 9(i)) 19,591 19,752 - -------------------------------------------------------------------------------------------- 4,674,668 3,630,675 Less current portion of capital lease 1,930 2,210 obligations (note 9(i)) - -------------------------------------------------------------------------------------------- $4,672,738 $3,628,465 ============================================================================================
At December 31, 2001, principal repayments on long-term debt required in the next five years consist of the following:
======================================================================================= 2002 2003 2004 2005 2006 - --------------------------------------------------------------------------------------- Senior credit facility nil $20,400 $149,600 7.15% Senior Notes 150,000 7.625% Senior Notes U.S.$ 250,000 7.65% Senior Notes U.S. $1,000,000 =======================================================================================
24 AT&T CANADA INC. Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of Canadian dollars, except per share amounts) Years ended December 31, 2001, 2000 and 1999 9. LONG-TERM DEBT (CONTINUED): (a) 12.0% Senior Notes: The Company's 12.0% Senior Notes (the "12.0% Notes") are due on August 15, 2007 and are repayable in the amount of U.S. $250.0 million. The 12.0% Notes are redeemable, at the option of the Company, in whole or in part, on or after August 15, 2002, beginning at 106% of par value and declining to par value in 2005, plus accrued and unpaid interest. In the event of a change in control of the Company, as defined in the indenture governing the 12.0% Notes, resulting in the Company being owned by an entity other than AT&T Corp., the 12.0% Notes are redeemable at the option of the note holders at a price of 101% of par value, plus accrued and unpaid interest. The 12% Notes are unsecured and rank pari passu with other unsubordinated senior debt of the Company. The 12.0% Note Indenture contains certain covenants, including limits on the incurrence of additional indebtedness or liens, payment of dividends, redemption of shares and certain default provisions, including defaults under other indebtedness. (b) 10.75% Senior Discount Notes: The Company's 10.75% Senior Discount Notes (the "10.75% Notes") are due November 1, 2007, repayable in the amount of U.S. $170.0 million and bear interest at 10.75% per annum at the issue price of U.S. $592.24 per U.S. $1,000 stated amount at maturity until November 1, 2002. Interest to November 1, 2002 accrues on the issue price but is not payable until maturity. From November 1, 2002, interest at a rate of 10.75% per annum on the stated amount at maturity of the 10.75% Notes, will be payable in cash. The 10.75% Notes are unsecured and rank pari passu with other senior unsubordinated indebtedness of the Company. The 10.75% Notes are redeemable at the option of the Company in whole or in part at any time on or after November 1, 2002, beginning at 105.375% of par value and declining to par value in 2005, plus accrued and unpaid interest. In the event of a change in control of the Company, as defined in the Indenture governing the 10.75% Notes, resulting in the Company being owned by an entity other than AT&T Corp., the 10.75% Notes are redeemable at the option of the holders at a price of 101% of par value, plus accrued and unpaid interest. The 10.75% Note Indenture contains certain covenants, including limits on the incurrence of additional indebtedness or liens, payment of dividends, redemption of shares and certain default provisions, including defaults under other indebtedness. The effective interest rate for 2001 was 11.04% (2000 - 11.04%). 25 AT&T CANADA INC. Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of Canadian dollars, except per share amounts) Years ended December 31, 2001, 2000 and 1999 9. LONG-TERM DEBT (CONTINUED): (c) 9.95% Senior Discount Notes: The Company's 9.95% Senior Discount Notes (the "9.95% Notes") are due June 15, 2008, repayable in the amount of U.S. $970.0 million and bear interest at 9.95% per annum at the issue price of U.S. $614.55 per U.S. $1,000 stated amount at maturity until June 15, 2003. Interest to June 15, 2003, accrues on the issue price but is not payable until maturity. Thereafter, interest will be payable in cash. The 9.95% Notes are unsecured and rank pari passu with other unsubordinated senior debt of the Company. The 9.95% Notes are redeemable at the option of the Company in whole or in part at any time on or after June 15, 2003 beginning at 104.975% of par value, declining to par value in 2006 plus accrued and unpaid interest. In the event of a change in control of the Company, as defined in the Indenture governing the 9.95% Notes, resulting in the Company being owned by an entity other than AT&T Corp., the 9.95% Notes are redeemable at the option of the holders at a price of 101% of par value, plus accrued and unpaid interest. The 9.95% Note Indenture contains certain covenants, including limits on the incurrence of additional indebtedness or liens, payment of dividends, redemption of shares and certain default provisions, including defaults under other indebtedness. The effective interest rate for 2001 was 10.2% (2000 - 10.2%). (d) 10.625% Senior Notes: The Company's 10.625% Senior Notes (the "10.625% Notes") are due November 1, 2008 and are repayable in the amount of U.S. $225.0 million. At any time on or after November 1, 2003, the 10.625% Notes are redeemable at the option of the Company, in whole or in part, at redemption prices beginning at 105.313% of par value and declining to par in 2006 plus accrued and unpaid interest. In the event of a change in control of the Company, as defined in the Indenture governing the 10.625% Notes, resulting in the Company being owned by an entity other than AT&T Corp., the 10.625% Notes are redeemable at the option of the holders at a price of 101% of par value plus accrued and unpaid interest. The 10.625% Notes are unsecured and rank pari passu with all senior unsubordinated debt of the Company. The 10.625% Note Indenture contains certain covenants, including limits on the incurrence of additional indebtedness or liens, payment of dividends, redemption of shares and certain default provisions, including defaults under other indebtedness. 26 AT&T CANADA INC. Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of Canadian dollars, except per share amounts) Years ended December 31, 2001, 2000 and 1999 9. LONG-TERM DEBT (CONTINUED): (e) 7.65% Senior Notes: The Company's 7.65% Senior Notes (the "7.65% Notes") are due on September 15, 2006 and are repayable in the amount of U.S. $1 billion. The 7.65% Notes are redeemable, in whole or in part, at the option of the Company at a redemption price equal to the greater of (i) 100% of the principal amount and (ii) the sum of the present values of the remaining scheduled payments of principal and interest thereon discounted at a prescribed interest rate to the redemption date on a semi-annual basis plus accrued and unpaid interest, if any, to the date of redemption. Each holder of the 7.65% Notes has the right to require the Company to repurchase all or any part of such holder's 7.65% Notes in the event of a change in control of the Company, as defined in the Indenture governing the 7.65% Notes, resulting in the Company being owned by an entity other than AT&T Corp., at a repurchase price in cash equal to 101% of the principal amount thereof, plus accrued and unpaid interest to the repurchase date. The 7.65% Notes are unsecured, subordinated to all existing and future secured indebtedness of the Company and rank pari passu to existing unsecured indebtedness. The Indenture covering the 7.65% Notes contains certain covenants including limits on sale/leaseback transactions or liens, the ability to subordinate certain intercompany debt and the ability of the Company to consolidate or merge with or into or transfer all or substantially all of its assets to another entity, and certain default provisions, including defaults under other indebtedness. (f) 7.15% Senior Notes: The 7.15% Senior Notes (the "7.15% Notes") are due September 23, 2004 and are repayable in the amount of $150 million. Each holder of the 7.15% Notes has the right to require the Company to repurchase all or any part of such holder's 7.15% Notes in the event of a change in control of the Company, as defined in the Indenture governing the 7.15% Notes, resulting in the Company being owned by an entity other than AT&T Corp., at a repurchase price in cash equal to 101% of the principal amount thereof, plus accrued and unpaid interest. The 7.15% Notes are unsecured and rank pari passu with other unsubordinated senior debt of the Company. The Indenture covering the 7.15% Notes contains certain covenants, including limits on sale/leaseback transactions, the incurrence of certain liens, the ability to subordinate certain intercompany debt and the ability to consolidate or merge with or into or transfer all or substantially all of its assets to another entity, and certain default provisions, including defaults under other indebtedness. 27 AT&T CANADA INC. Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of Canadian dollars, except per share amounts) Years ended December 31, 2001, 2000 and 1999 9. LONG-TERM DEBT (CONTINUED): (g) 7.625% Senior Notes: The Company's 7.625% Senior Notes (the "7.625% Notes") are due March 15, 2005 and are repayable in the amount of U.S. $250.0 million. The 7.625% Notes are redeemable, in whole or in part, at the option of the Company at a redemption price equal to the greater of (i) 100% of the principal amount and (ii) the sum of the present values of the remaining scheduled payments of principal and interest thereon discounted at a prescribed interest rate to the redemption date on a semi-annual basis plus accrued and unpaid interest, if any, to the date of redemption. Each holder of the 7.625% Notes has the right to require the Company to repurchase all or any part of such holders' 7.625% Notes in the event of a change in control of the Company, as defined in the Indenture governing the 7.625% Notes, resulting in the Company being owned by an entity other than AT&T Corp., at a repurchase price in cash equal to 101% of the principal amount thereof, plus accrued and unpaid interest to the repurchase date. The 7.625% Notes are unsecured, subordinated to all existing and future secured indebtedness of the Company and rank pari passu to existing unsecured indebtedness. The Indenture covering the 7.625% Notes contains certain covenants, including limits on sale/leaseback transactions or liens, the ability to subordinate certain intercompany debt and the ability of the Company to consolidate or merge with or into or transfer all or substantially all of its assets to another entity, and certain default provisions, including defaults under other indebtedness. (h) Senior Credit Facility ("Facility"): At December 31, 2001, the Company had a credit agreement ("Credit Agreement") with a syndicate of financial institutions to provide the Company with the following: (i) a revolving term facility to a maximum of $525 million (or the equivalent U.S. dollar amount thereof) to be used to refinance vendor financing indebtedness in the amount of up to 90% of the cost of telecommunication assets, as defined, acquired by the Company; and (ii) an operating facility to a maximum of $75 million (or the equivalent U.S. dollar amount thereof) to be used for working capital and general corporate purposes, of which $25 million is available for letters of credit and $10 million is available as a swingline credit line. 28 AT&T CANADA INC. Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of Canadian dollars, except per share amounts) Years ended December 31, 2001, 2000 and 1999 9. LONG-TERM DEBT (CONTINUED): Outstanding principal amounts under the Facility bear interest at the Canadian prime rate, the LIBOR rate or the market rate for bankers' acceptances, as applicable, plus an Applicable Margin, as defined, which is based on the Company' s corporate credit rating. The Facility is secured by all of the assets of the Company and may be drawn at any time by the Company subject to compliance with the terms of the Facility. The revolving term facility has scheduled principal repayments, including accrued interest, which begin on a quarterly basis on September 30, 2003 through March 31, 2004, when the Facility expires. The operating facility is due in full on March 31, 2004. The Facility includes several financial and other covenants, such as restrictions on the Company's ability to create additional indebtedness, permit or incur liens, sell assets, make investments or pay dividends. Events of default under the Facility include defaults under other indebtedness, non-compliance with the above mentioned covenants, receipt of an opinion rendered on its financial statements by independent auditors with an impermissible qualification (as defined in the Credit Agreement), and in certain circumstances change in control of the Company, resulting in the Company being owned by an entity other than AT&T Corp. as defined in the Credit Agreement. During 2001, the Company repaid $240 million and $10 million of the revolving term facility and the operating facility, respectively, and drew $150 million under the revolving term facility. The financial covenants include the maintenance of certain prescribed levels of Consolidated Senior Debt to Total Capitalization and Minimum Consolidated EBITDA and effective June 30, 2003, Consolidated Senior Debt to Consolidated EBITDA and Consolidated EBITDA to Consolidated Cash Debt Service, all as defined. The Company is currently in compliance with all covenants under the facilities. 29 AT&T CANADA INC. Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of Canadian dollars, except per share amounts) Years ended December 31, 2001, 2000 and 1999 9. LONG-TERM DEBT (CONTINUED): On May 1, 2002, the Credit Agreement was amended, reducing the total facility from $600 million to $400 million. The total amount drawn on May 1, 2002 was $200 million. The revolving term facility component was reduced to $325 million from $525 million. The $75 million operating facility component was unchanged. Further draws are permitted as follows: $100 million is available under the revolving term facility upon delivery of a business plan, following the release of the CRTC "price cap" decision, that demonstrated compliance with covenants under the Senior Credit Facility and is approved by lenders representing two-thirds of the amount committed, and, a further $100 million is available under the revolving term facility upon the approval of each lender. The amendment also requires that the Company unwinds a sufficient amount of its cross-currency interest rate swaps to generate cash proceeds of at least $100 million, which will be used to fund the Company's capital expenditure program. Under the amendment, the maximum allowable out-of-the-money-mark-to-market position on the Company's hedged position has been set at $100 million. The Company believes that the disclosure in note 2 to these consolidated financial statements does not constitute an impermissible qualification under the Credit Agreement and the lenders have agreed not to assert or otherwise claim that such disclosure constitutes an impermissible qualification for the 2001 consolidated financial statements. This amendment does not affect the interpretation by either the Company or the lenders of the definition of impermissible qualification in any future period. 30 AT&T CANADA INC. Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of Canadian dollars, except per share amounts) Years ended December 31, 2001, 2000 and 1999 9. LONG-TERM DEBT (CONTINUED): (i) Capital lease obligations: The following is a schedule, by year, of the future minimum lease payments for capital leases, together with the balance of the obligation, as at December 31, 2001: ======================================================================= 2002 $ 3,118 2003 2,287 2004 1,980 2005 1,885 2006 1,850 2007 and thereafter 20,350 ----------------------------------------------------------------------- Total minimum lease payments 31,470 Less imputed interest at rates varying from 3.9% to 11.8% 11,879 ----------------------------------------------------------------------- Balance of the obligations 19,591 Less current portion 1,930 ----------------------------------------------------------------------- $ 17,661 =======================================================================
31 AT&T CANADA INC. Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of Canadian dollars, except per share amounts) Years ended December 31, 2001, 2000 and 1999 10. MINORITY INTEREST: The minority interest arose primarily from the June 1, 1999 acquisition by AT&T Corp., of approximately 31% of the Company's operating subsidiary, AT&T Canada Corp. The losses of AT&T Canada Corp. have drawn down the minority interest balance to nil. In accordance with generally accepted accounting principles, losses in excess of the minority interest balance are charged against the majority interest. When future earnings materialize, the majority interest will be credited for those earnings up to the amount of the losses previously absorbed. As at December 31, 2001, the amount of the losses absorbed was $247.9 million. 11. SHARE CAPITAL: (a) Authorized: Common: Unlimited number of convertible Class A Voting Shares without nominal or par value, each Class A Share has one vote, and unlimited number of Class B Non-Voting Shares without nominal or par value. Other than with respect to voting rights and conversion rights, the two classes of common shares have identical rights. Each Class A Voting Share may, under certain circumstances at the option of the holder, be converted into one Class B Non-Voting Share. Each Class B Non-Voting Share may, under certain circumstances at the option of the holder, be converted into one Class A Voting Share. The holders of Common Shares are entitled to receive dividends as determined by the Board of Directors, subject to the rights of the holders of the Preferred Shares. The holders of Common Shares are also entitled to participate equally in the event of liquidation of the Company, subject to the rights of the holders of the Preferred Shares. Preferred: Unlimited number of Non-Voting Preferred Shares without nominal or par value. The Preferred Shares may be issued in one or more series. The Board of Directors of the Company may fix the number of shares in each series and designate rights, privileges, restrictions, conditions and other provisions. The Preferred Shares shall be entitled to preference over any other shares of the Company with respect to the payment of dividends and in the event of liquidation of the Company. 32 AT&T CANADA INC. Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of Canadian dollars, except per share amounts) Years ended December 31, 2001, 2000 and 1999 11. SHARE CAPITAL (CONTINUED): Upon all the restrictions of the foreign ownership of voting shares being removed by an amendment to the Telecommunications Act, the Class B Non-Voting Shares shall be converted into Class A Voting Shares on a one-for-one basis. (b) Outstanding: COMMON SHARES
================================================================================================ Number of shares (000' s) - ------------------------------------------------------------------------------------------------ Class Voting A Non-Voting B Non-Voting C Total - ------------------------------------------------------------------------------------------------ Balances, January 1, 1999 155 45,084 325 45,564 Issued - options -- 1,115 -- 1,115 Issued for acquisitions -- 220 -- 220 Issued - warrants (note 11(c)(i)) -- 172 -- 172 Conversion (note 11(b)(i)) -- 325 (325) -- Share split (note 11(b)(ii)) 155 46,645 -- 46,800 Balances, December 31, 1999 310 93,561 -- 93,871 Issued - options (note 11(d)) -- 1,959 -- 1,959 Issued for acquisitions (note 3(f)) -- 769 -- 769 Issued - warrants (note 11(c)(i)) -- 155 -- 155 Issued - other (note 11(e)) -- 40 -- 40 - ------------------------------------------------------------------------------------------------ Balances, December 31, 2000 310 96,484 -- 96,794 Issued - options (note 11(d)) -- 2,097 -- 2,097 Issued for acquisitions (note 3(b)) -- 967 -- 967 Issued - warrants (note 11(c)(i)) -- 121 -- 121 Issued - other (note 11(e)) -- 27 -- 27 - ------------------------------------------------------------------------------------------------ Balances, December 31, 2001 310 99,696 -- 100,006 ================================================================================================
33 AT&T CANADA INC. Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of Canadian dollars, except per share amounts) Years ended December 31, 2001, 2000 and 1999 11. SHARE CAPITAL (CONTINUED): COMMON SHARES
============================================================================================ Amounts (000' s) - -------------------------------------------------------------------------------------------- Class Voting A Non-Voting B Non-Voting C Total - -------------------------------------------------------------------------------------------- Balances, January 1, 1999 $ 416 $ 926,273 $ 1,363 $ 928,052 Issued - options -- 16,283 -- 16,283 Issued for acquisitions -- 10,745 -- 10,745 Issued - warrants (note 11(c)(i)) -- 1,617 -- 1,617 Conversion (note 11(b)(i)) -- 1,363 (1,363) -- - -------------------------------------------------------------------------------------------- Balances, December 31, 1999 416 956,281 -- 956,697 Issued - options (note 11(d)) -- 33,629 -- 33,629 Issued for acquisitions (note 3(f)) -- 45,385 -- 45,385 Issued - warrants (note 11(c)(i)) -- 620 -- 620 Issued - other (note 11(e)) -- 2,734 -- 2,734 - -------------------------------------------------------------------------------------------- Balances, December 31, 2000 416 1,038,649 -- 1,039,065 Issued - options (note 11(d)) -- 48,244 -- 48,244 Issued for acquisitions (note 3(b)) -- 44,666 -- 44,666 Issued - warrants (note 11(c)(i)) -- 483 -- 483 Issued - other (note 11(e)) -- 1,206 -- 1,206 - -------------------------------------------------------------------------------------------- Balances, December 31, 2001 $ 416 $1,133,248 $ -- $1,133,664 ============================================================================================
(i) Share conversion: In accordance with the plan of arrangement described in note 3(h), the 325,000 Class C Non-Voting Shares were converted into Class B Non-Voting Shares. (ii) Share split: On October 14, 1999, the Board of Directors and voting shareholders of the Company approved the subdivision on a two-for-one basis of the issued and outstanding Class A Voting Shares and Class B Non-Voting Shares of the Company. 34 AT&T CANADA INC. Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of Canadian dollars, except per share amounts) Years ended December 31, 2001, 2000 and 1999 11. SHARE CAPITAL (CONTINUED): (c) Warrants:
============================================================ Number Amount (000's) (000's) - ------------------------------------------------------------ Balances, January 1, 1999 250 $ 3,429 Exercised for shares (118) (1,617) - ------------------------------------------------------------ Balances, December 31, 1999 132 1,812 Exercised for shares (45) (620) - ------------------------------------------------------------ Balances, December 31, 2000 87 1,192 Exercised for shares (35) (483) - ------------------------------------------------------------ Balances, December 31, 2001 52 $ 709 ============================================================
(i) Warrants: Warrants entitle the holder thereof to acquire 3.429 Class B Non-Voting Shares at an exercise price of U.S. $0.01 expiring August 15, 2007. The warrants were issued as part of the issue of the 12% Senior Notes described in note 9(a) and the amount of $3.4 million reflects the valuation of the warrants on the issue date. 35 AT&T CANADA INC. Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of Canadian dollars, except per share amounts) Years ended December 31, 2001, 2000 and 1999 11. SHARE CAPITAL (CONTINUED): (d) Share purchase options: The Board of Directors has established two stock option plans under which options to purchase Class B Non-Voting Shares are granted to directors, officers and employees of the Company. Pursuant to the stock option plans, 17.5 million Class B Non-Voting Shares have been reserved for options. These options were granted at exercise prices estimated to be at least equal to the fair value of Class B Non-Voting Shares, vest over a three-year period and generally expire five years from the date of grant. The option information below has been retroactively restated to reflect the two-for-one share split that occurred in 1999:
================================================================================ Exercise Weighted Number of prices average shares per share exercise price (000's) - -------------------------------------------------------------------------------- Outstanding, January 1, 1999 6,426 $ 10.60 Granted 6,109 $ 23.75 to 58.25 40.52 Cancelled (570) 2.25 to 56.50 31.93 Exercised (1,946) 0.50 to 23.75 7.42 - -------------------------------------------------------------------------------- Outstanding, December 31, 1999 10,019 2.25 to 58.25 28.17 Granted 3,760 42.70 to 90.00 56.28 Cancelled (1,342) 2.25 to 90.00 47.97 Exercised (1,959) 0.50 to 45.10 17.19 - -------------------------------------------------------------------------------- Outstanding, December 31, 2000 10,478 2.25 to 90.00 37.80 Granted 996 44.20 to 47.96 45.67 Cancelled (587) 14.00 to 90.00 49.42 Exercised (2,097) 2.25 to 45.10 22.79 - -------------------------------------------------------------------------------- Outstanding, December 31, 2001 8,790 2.25 to 90.00 41.39 ================================================================================
At December 31, 2001, 4.9 million options (2000 - 4.2 million; 1999 - 2.6 million) were exercisable at a weighted average exercise price of $35.80 per share (2000 - $22.83; 1999 - $11.00). 36 AT&T CANADA INC. Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of Canadian dollars, except per share amounts) Years ended December 31, 2001, 2000 and 1999 11. SHARE CAPITAL (CONTINUED): The following table summarizes information concerning options outstanding at December 31, 2001:
========================================================================================= Options outstanding (000's) Options exercisable (000's) - ----------------------------------------------------------------------------------------- Weighted average Weighted Weighted Range of remaining average average exercise Number contractual life exercise Number exercise prices outstanding (years) price exercisable price - ----------------------------------------------------------------------------------------- $ 0.00 - 9.00 247 0.3 $ 3.79 247 $ 3.79 $ 9.01 - 18.00 1,117 0.5 12.96 1,117 12.96 $18.01 - 27.00 226 1.1 21.43 212 21.28 $27.01 - 36.00 29 2.1 27.72 15 27.73 $36.01 - 45.00 3,213 2.4 41.51 2,054 41.40 $45.01 - 54.00 2,764 3.3 48.78 821 49.82 $54.01 - 63.00 509 3.3 56.32 179 56.31 $63.01 - 72.00 606 2.7 65.58 271 65.43 $72.01 - 81.00 26 3.0 74.74 9 74.61 $81.01 - 90.00 53 2.9 85.56 21 85.54 =========================================================================================
(e) Employee Share Ownership Plan: The Employee Share Ownership Plan offers all full-time permanent employees the opportunity to purchase securities of the Company. Employees may contribute between 1% and 5% of their salary to buy units in a single stock mutual fund, the Company's Stock Fund, which in turn holds only Class B Non-Voting Shares. The Company contributes the equivalent of 25% of participant contributions per quarter. The Company's contributions are made through the issuance of Class B Non-Voting Shares from treasury. 200,000 Class B Non-Voting Shares have been authorized for issuance for this purpose. In 2001, the Company issued 26,592 shares (2000 - 40,253) under the plan. 37 AT&T CANADA INC. Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of Canadian dollars, except per share amounts) Years ended December 31, 2001, 2000 and 1999 11. SHARE CAPITAL (CONTINUED): (f) Diluted weighted average shares outstanding: Effective January 1, 2001, the Company adopted retroactively the treasury stock method of calculating diluted earnings per share in accordance with HB 3500. The treasury stock method includes only those unexercised options and warrants where the average market price of the common shares during the period exceeds the exercise price of the options and warrants. In addition, this method assumes that the proceeds would be used to purchase common shares at the average market price during the period. The change in the method of calculation of loss per share did not impact basic and diluted loss per share for 2001, 2000 and 1999. As a result of net losses for the years ended December 31, 2001, 2000 and 1999, respectively, the effect of converting stock options, warrants and other contingent consideration has not been included in the calculation of diluted loss per common share because to do so would have been anti-dilutive. 38 AT&T CANADA INC. Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of Canadian dollars, except per share amounts) Years ended December 31, 2001, 2000 and 1999 12. INTEGRATION COSTS, PROVISION FOR RESTRUCTURING AND WORKFORCE REDUCTION COSTS: (a) Integration costs and provision for restructuring: During 1999, the Company incurred integration costs and recorded a provision for restructuring and asset write-downs aggregating $157.8 million as a result of implementing certain initiatives required in order to consolidate the operations of the Company with those of AT&T LDS and ACC. The amounts were comprised of the following:
================================================================================ Integration costs (note 12(a)(i)) $ 24,400 Provision for restructuring (note 12(a)(ii)) 97,804 Write-down of carrying value of certain assets (note 12(a)(iii)) 35,586 - -------------------------------------------------------------------------------- Total provision $157,790 ================================================================================
(i) The Company incurred integration costs associated with consolidating office locations, interconnecting networks and consolidating systems and network operations of the Company and AT&T LDS and ACC. (ii) The provision for restructuring included amounts principally for employee severance and lease and other contract cancellation costs. The lease and other contract cancellation costs of $48.9 million related to excess space in various leased premises and to penalties incurred in connection with the termination of contracts with various resellers and alternate access facility providers. (iii) As a result of consolidating its operations, the Company identified certain capital assets which would not be used in the consolidated operations and the carrying value of these assets was no longer supported by future cash flows. Accordingly, these capital assets were written down to their net recoverable values. 2000 included a reversal of $10.2 million, the provision deemed no longer required, as a result of negotiation of lower expenditures than originally anticipated and the impact of changes in the real estate market that made it uneconomical to exit certain properties. During 2001, the outstanding balance of $22.2 million as at December 31, 2000 was substantially drawn down through payments related to lease contract penalties and settlement of lawsuits. The related activities have been completed. 39 AT&T CANADA INC. Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of Canadian dollars, except per share amounts) Years ended December 31, 2001, 2000 and 1999 12. INTEGRATION COSTS, PROVISION FOR RESTRUCTURING AND WORKFORCE REDUCTION COSTS (CONTINUED): (b) Workforce reduction costs: During 2001, management approved and carried out a workforce reduction plan and recorded a provision of $21.9 million for severance and benefits related to the termination of approximately 650 personnel, achieved through terminations, attrition and non-renewal of contract personnel. The personnel terminated were from various areas across the Company, including marketing, network services, customer service, Internet and E-Business solutions services and administration. The Company had substantially completed the terminations as at December 31, 2001. The remaining liability balance of $6.2 million at December 31, 2001 represents salary continuance payments in accordance with the employee termination agreements. 13. OTHER INCOME (EXPENSE):
============================================================================================ 2001 2000 1999 - -------------------------------------------------------------------------------------------- Gain on disposition of STOC (note 3(g)) $ -- $ 13,011 $ -- Loss on disposition of certain call centres (note 3(a)) (8,894) -- -- Other 274 728 1,998 - -------------------------------------------------------------------------------------------- $ (8,620) $ 13,739 $ 1,998 ============================================================================================
40 AT&T CANADA INC. Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of Canadian dollars, except per share amounts) Years ended December 31, 2001, 2000 and 1999 14. INCOME TAXES: The Company uses the liability method of accounting for income taxes. The tax effects of temporary differences that give rise to significant portions of future income tax assets and liabilities are as follows:
================================================================================ 2001 2000 - -------------------------------------------------------------------------------- Future tax assets: Future income tax deductions $ 56,244 $ 51,084 Operating loss carryforwards 794,172 840,220 Deferred foreign exchange 26,829 5,113 - -------------------------------------------------------------------------------- Total future tax assets 877,245 896,417 Future tax liabilities: Deferred pension asset (14,748) (4,050) Debt and share issue costs (6,717) (3,572) Tax depreciation claimed in excess of depreciation booked (119,926) (99,816) - -------------------------------------------------------------------------------- Total future tax liabilities (141,391) (107,438) - -------------------------------------------------------------------------------- 735,854 788,979 - -------------------------------------------------------------------------------- Valuation allowance (735,854) (788,979) - -------------------------------------------------------------------------------- Net future income tax assets $ -- $ -- ================================================================================
The reconciliation of the tax provision for income taxes, which consists only of current taxes, to amounts computed by applying federal and provincial tax rates to loss before minority interest and provision for income taxes is as follows:
==================================================================================================================================== 2001 2000 1999 - ------------------------------------------------------------------------------------------------------------------------------------ Computed at combined statutory rate $(303,107) 41.80 % $(270,481) 43.50% $ (56,152) 45.00% Tax effect of: Expenses not deductible for income tax purposes 47,762 (6.60)% 43,058 (6.90)% 9,914 (7.94)% Income not taxable for income tax purposes (891) 0.10 % (1,867) 0.30 % (207,913) 166.62 Large Corporations Tax 7,965 (1.10)% 5,686 (0.90)% 4,964 (3.98)% Change in valuation allowance 256,236 (35.30)% 229,290 (36.90)% 254,151 (203.68)% - ------------------------------------------------------------------------------------------------------------------------------------ $ 7,965 (1.10)% $ 5,686 (0.90)% $ 4,964 (3.98)% ====================================================================================================================================
41 AT&T CANADA INC. Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of Canadian dollars, except per share amounts) Years ended December 31, 2001, 2000 and 1999 14. INCOME TAXES (CONTINUED): At December 31, 2001, the Company has non-capital losses of approximately $2.468 billion, available to reduce future years' taxable income, which expire as follows:
================================================================================ 2002 $ 22,500 2003 204,700 2004 222,200 2005 309,700 2006 171,600 2007 599,900 2008 582,400 2009 354,500 ================================================================================
Certain amendments to tax filings may be made to avoid the expiry of losses that would otherwise expire in 2002. 15. EMPLOYEE BENEFITS: The Company provides a number of retirement benefits, including defined benefit plans, providing pension, other retirement and post-employment benefits to most of its employees. (a) The total expense (income) for the Company's defined benefit plans is as follows: 2001 2000 1999
================================================================================ 2001 2000 1999 - -------------------------------------------------------------------------------- Plans providing pension benefits $(26,860) $ 5,627 $ 3,578 Plans providing other benefits 505 474 576 ================================================================================
The average remaining service periods of the active employees covered by the pension plans range from 10 to 14 years. The average remaining service period of the active employees covered by the other retirement benefits plan is 13 years. 42 AT&T CANADA INC. Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of Canadian dollars, except per share amounts) Years ended December 31, 2001, 2000 and 1999 15. EMPLOYEE BENEFITS (CONTINUED): Information about the Company's defined benefit plans as at December 31, 2001 and 2000, in aggregate, is as follows:
============================================================================================== 2001 2000 - ---------------------------------------------------------------------------------------------- Pension Other Pension Other benefit plans benefit plans benefit plans benefit plans - ---------------------------------------------------------------------------------------------- Accrued benefit obligation: Balance, beginning of year $ 477,665 $ 5,390 $ 443,824 $ 5,965 Interest cost 34,158 379 33,218 353 Actuarial loss (gain) 46,514 374 32,146 (1,012) Current service cost 7,543 227 6,769 213 Employees' contributions 2,867 -- 2,397 -- Plan amendments 4,711 -- 1,031 -- Benefits paid (38,349) (192) (37,320) (129) Settlements -- -- (4,400) -- Curtailment loss (gain) 366 (26) -- -- - ---------------------------------------------------------------------------------------------- Balance, end of year $ 535,475 $ 6,152 $ 477,665 $ 5,390 ============================================================================================== Plan assets: Fair value, beginning of year $ 541,237 $ -- $ 528,069 $ -- Actual return on plan assets (24,716) -- 44,953 -- Employer contributions 7,688 192 7,538 129 Employees' contributions 2,867 -- 2,397 -- Benefits paid (38,349) (192) (37,320) (129) Settlements -- -- (4,400) -- - ---------------------------------------------------------------------------------------------- Fair value, end of year $ 488,727 $ -- $ 541,237 $ -- ==============================================================================================
================================================================================================= 2001 2000 - ------------------------------------------------------------------------------------------------ Pension Other Pension Other benefit plans benefit plans benefit plans benefit plans - ------------------------------------------------------------------------------------------------ Funded status - plan surplus (deficit) $(46,748) $(6,152) $ 63,572 $(5,390) Unrecognized actuarial loss (gain) 87,110 (1,061) (21,940) (1,510) Unrecognized prior service costs 4,812 -- 928 -- - ------------------------------------------------------------------------------------------------ Accrued benefit asset (liability) 45,174 (7,213) 42,560 (6,900) Valuation allowance (note 15(b)) -- -- (31,934) -- - ------------------------------------------------------------------------------------------------ Accrued benefit asset (liability), net of valuation allowance $ 45,174 $(7,213) $ 10,626 $(6,900) =================================================================================================
43 AT&T CANADA INC. Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of Canadian dollars, except per share amounts) Years ended December 31, 2001, 2000 and 1999 15. EMPLOYEE BENEFITS (CONTINUED): The significant actuarial assumptions adopted in measuring the Company's accrued benefit obligations are as follows (weighted average assumptions as of December 31, 2001 and 2000):
============================================================================================= 2001 2000 - --------------------------------------------------------------------------------------------- Pension Other Pension Other benefit plans benefit plans benefit plans benefit plans - --------------------------------------------------------------------------------------------- Discount rate 6.50% 6.50% 7.00% 7.00% Expected long-term rate of return on plan assets 8.00% -- 8.00% -- Rate of compensation increase 3.50% -- 3.50% -- =============================================================================================
The Company's net benefit plan expense for the year ended December 31, 2001 and 2000 is as follows:
============================================================================================= 2001 2000 - --------------------------------------------------------------------------------------------- Pension Other Pension Other benefit plans benefit plans benefit plans benefit plans - --------------------------------------------------------------------------------------------- Current service cost $ 7,543 $ 227 $ 6,769 $ 213 Interest cost 34,158 379 33,218 353 Expected return on plan assets (38,711) -- (37,397) -- Prior service costs amortization 574 -- 103 -- Valuation allowance (reversed) provided against accrued benefit asset (note 15(b)) (31,934) -- 2,937 -- Actuarial gain recognized (24) (75) (3) (92) Curtailment loss 1,534 (26) -- -- - --------------------------------------------------------------------------------------------- Net benefit plan expense (income) $(26,860) $ 505 $ 5,627 $ 474 =============================================================================================
(b) Change in valuation allowance: An accrued benefit asset arises when the accumulated cash contributions to a pension plan exceed the accumulated pension expense. The accrued benefit asset on an employer's books is comprised of two components: (i) plan surplus (i.e., the excess of the fair value of the plan assets over the accrued benefit obligation of the plan); and 44 AT&T CANADA INC. Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of Canadian dollars, except per share amounts) Years ended December 31, 2001, 2000 and 1999 15. EMPLOYEE BENEFITS (CONTINUED): (ii) net unrecognized (gains) losses (i.e., the sum of the unamortized past service costs, actuarial (gains) and losses and any transitional (asset) or transitional obligation). The expected future benefit from a surplus is generally the present value of employer contribution holidays expected in future years. However, if there is a net unrecognized loss, the accrued benefit asset will be expected to decrease over time due to the amortization of the net unrecognized loss. As a result, the accrued benefit asset on an employer's books cannot exceed the sum of the expected employer future benefit and any net unrecognized losses. When the accrued benefit asset first exceeds the limit, a valuation allowance is established in order to keep the accrued benefit asset on an employer's books at the limit. In future accounting periods, any change in the valuation allowance is recorded through the consolidated statements of operations. At December 31, 2000, the accrued benefit asset relating to the Company's defined benefit pension plans was affected by the limit and contained a cumulative valuation allowance of $31.9 million. The impact of negative returns on plan assets in the Company's defined benefit pension plans has been an elimination of the pension surplus and generation of unamortized losses at December 31, 2001. Under generally accepted accounting principles, the limit on the accrued benefit asset is required to be increased by the amount of the losses that will be charged as an expense in future years, resulting in a reduction in the valuation allowance and a credit to the pension expense amount of the Company. The impact of the above is that the valuation allowance of $31.9 million is no longer required and has been recognized into income in 2001. 16. FINANCIAL INSTRUMENTS: (a) Fair values of financial assets and liabilities: The fair values of cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities and accrued interest payable approximate their carrying values due to the short-term nature of these instruments. The fair value of long-term debt, including the attached warrants, at December 31, 2001, was approximately $3,022.1 million (2000 - $3,440.9 million), based on current trading values. 45 AT&T CANADA INC. Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of Canadian dollars, except per share amounts) Years ended December 31, 2001, 2000 and 1999 16. FINANCIAL INSTRUMENTS (CONTINUED): The fair value of foreign currency options, cross currency swaps and forward contracts at December 31, 2001 was approximately $138.8 million (2000 - $84.5 million), which includes the net fair value of the options monetized in November 2001 of $(2.1) million, based on current trading values, as further described in note 16(b)). (b) Foreign currency risk: The Company is exposed to foreign currency fluctuations on its U.S. dollar-denominated debt, cash and short-term deposits. For the year ended December 31, 2001, the Company held the following financial instruments to hedge the following financings:
============================================================================================================ Foreign Foreign Canadian currency exchange equivalent Financial obligation rates interest rate Fair Debt instruments notional Maturity weighted weighted market instrument type value date average average value - ------------------------------------------------------------------------------------------------------------ (In millions) (In millions) 10.75% Cross Notes currency November 1, Cdn. $1.5702 swaps U.S. $170.0 2007 to U.S. $1.00 11.24% $ (2.8) 9.95% Cross Notes currency June 15, Cdn. $1.5276 swaps U.S. $970.0 2008 to U.S. $1.00 9.73% $ 71.5 7.65% Cross Notes currency September 15, Cdn. $1.4977 swaps U.S. $500.0 2006 to U.S. $1.00 7.72% $ 47.4 7.625% Cross Notes currency March 15, Cdn. $1.5489 swaps U.S. $250.0 2005 to U.S. $1.00 7.87% $ 5.7 12% Forward Notes exchange February 28, Cdn. $1.5532 contract U.S. $250.0 2002 to U.S. $1.00 n/a $ 10.1 10.625% Forward Notes exchange February 28, Cdn. $1.5532 contract U.S. $225.0 2002 to U.S. $1.00 n/a $ 9.0 - ------------------------------------------------------------------------------------------------------------ $ 140.9 ============================================================================================================
46 AT&T CANADA INC. Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of Canadian dollars, except per share amounts) Years ended December 31, 2001, 2000 and 1999 16. FINANCIAL INSTRUMENTS (CONTINUED): Additional financial instruments: In addition to the financial instruments stated above, as at December 31, 2001, the Company held the following foreign currency options: A foreign currency option that allows the Company to acquire U.S. $85.0 million at an exchange rate equal to the lesser of (i) the October 31, 2002 spot exchange rate or (ii) Cdn. $1.435 to U.S. $1.00 on November 1, 2002; or on November 1, 2002 to enter a cross currency swap which will have the effect of acquiring the U.S. dollar-denominated interest payments relating to the 10.75% Notes from May 1, 2003 to November 1, 2007 at a rate of 11.25% on the notional Canadian dollar principal amount. A foreign currency option that allows the Company to acquire U.S. $122.0 million at an exchange rate equal to (i) the lesser of the June 15, 2003 spot exchange rate or (ii) Cdn. $1.515 to U.S. $1.00 on June 15, 2003; or on June 15, 2003, to enter into a cross currency swap, which will have the effect of acquiring the U.S. dollar-denominated interest payments relating to the 9.95% Notes from December 15, 2003 to June 15, 2008 at a rate of 10.45% on the notional Canadian dollar principal amount. In November 2001, the Company monetized the above foreign currency options by entering into foreign currency options with other counterparties containing terms that exactly offset the above foreign currency options for total proceeds of $26.7 million. As at December 31, 2001, the fair value of all the foreign currency options was $(2.1) million (comprising assets of $28.1 million offset by liabilities of $30.2 million). Monetization of swaps: In 2001, the Company monetized certain foreign currency options, including those mentioned above, cross currency swaps and a forward contract with a notional value totalling U.S. $1,415.4 million for total proceeds of $150.7 million. These hedges were replaced with new cross currency swaps and forward contracts at current market rates with a notional value totalling U.S. $1,420.4 million. The net deferred gain of $33.6 million will be recognized in earnings over the remaining term of the underlying debt for which the derivatives were designated as cash flow hedges. The unamortized balance of the premiums paid for the foreign currency options that were monetized has been netted against the gain. As at December 31, 2001, the Company recognized $4.3 million of the net deferred gain in earnings. 47 AT&T CANADA INC. Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of Canadian dollars, except per share amounts) Years ended December 31, 2001, 2000 and 1999 16. FINANCIAL INSTRUMENTS (CONTINUED): In the May 1, 2002 amendment to its Credit Facility, the Company agreed to unwind a sufficient amount of its cross-currency interest rate swaps to generate cash proceeds of at least $100 million (see note 9(h)). As at December 31, 2000, the Company held the following financial instruments:
============================================================================================================== Foreign Foreign Canadian currency exchange equivalent Financial obligation rates interest rate Fair Debt instruments notional Maturity weighted weighted market instrument type value date average average value - -------------------------------------------------------------------------------------------------------------- (In millions) (In millions) 10.75% Foreign Option Notes currency October 31, options U.S. $170.0 2002 Swap: November 1, Cdn. $1.4350 2007 to U.S. $1.00 11.25% $ 23.9 9.95% Foreign Option Notes currency June 15, options U.S. $244.1 2003 Swap: June 15, Cdn. $1.5150 2008 to U.S. $1.00 10.45% $ 7.4 9.95% Cross Notes currency June 15, Cdn. $1.5034 swaps U.S. $725.9 2008 to U.S. $1.00 9.36% $ 4.3 7.65% Cross Notes currency September 15, Cdn. $1.4740 swaps U.S. $500.0 2006 to U.S. $1.00 7.40% $ 12.4 7.625% Cross Notes currency March 15, Cdn. $1.4575 swaps U.S. $250.0 2005 to U.S. $1.00 6.86% $ 18.5 12% and Forward 10.625% exchange January 31, Cdn. $1.4602 Notes contract U.S. $450.0 2001 to U.S. $1.00 n/a $ 18.0 - -------------------------------------------------------------------------------------------------------------- $ 84.5 ==============================================================================================================
48 AT&T CANADA INC. Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of Canadian dollars, except per share amounts) Years ended December 31, 2001, 2000 and 1999 16. FINANCIAL INSTRUMENTS (CONTINUED): (c) Interest rate risk: The following table summarizes the Company's exposure to interest rate risk.
====================================================================================================== Fixed interest rate maturing within - ------------------------------------------------------------------------------------------------------ Floating After Non-interest 2001 rate 1 year 1 - 5 years 5 years bearing - ------------------------------------------------------------------------------------------------------ FINANCIAL ASSETS: Cash and cash equivalents $537,294 $ -- $ -- $ -- $ -- Accounts receivable -- -- -- -- 70,640 FINANCIAL LIABILITIES: Current liabilities -- 1,930 -- -- 406,108 Long-term debt 170,000 -- 2,145,334 2,357,404 -- ======================================================================================================
====================================================================================================== Fixed interest rate maturing within - ------------------------------------------------------------------------------------------------------ Floating After Non-interest 2000 rate 1 year 1 - 5 years 5 years bearing - ------------------------------------------------------------------------------------------------------ FINANCIAL ASSETS: Cash and cash equivalents $ 68,587 $ -- $ -- $ -- $ -- Accounts receivable -- -- -- -- 258,425 FINANCIAL LIABILITIES: Current liabilities -- 2,210 -- -- 411,436 Long-term debt 270,000 -- 542,417 2,816,048 -- ======================================================================================================
49 AT&T CANADA INC. Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of Canadian dollars, except per share amounts) Years ended December 31, 2001, 2000 and 1999 16. FINANCIAL INSTRUMENTS (CONTINUED): (d) Credit risk: The Company's financial instruments that are exposed to credit risk are cash and cash equivalents, accounts receivable and financial instruments used for hedging purposes. Cash and cash equivalents, which consist of investments in highly liquid, highly secure money market instruments, are on deposit at major financial institutions. Credit risk with respect to accounts receivable is limited due to the large number of customers to which the Company provides services. Credit risk on hedging instruments is limited as these transactions are only entered into with highly rated bank counterparties. 17. SEGMENTED INFORMATION: The Company currently operates in one operating segment, the telecommunications industry in Canada. The Company offers a number of products, delivered through its integrated fibre optics networks, sold by a national sales force, agents and telemarketers and provisioned by one operations group. The Company makes decisions and evaluates financial performance primarily based on its products. Revenue by product is as follows:
================================================================================ 2001 2000 1999 - -------------------------------------------------------------------------------- Data $ 485,031 $ 465,407 $282,273 Local 209,207 177,424 93,379 Internet and E-Business solutions 171,852 129,865 52,471 Other 20,843 32,643 37,407 - -------------------------------------------------------------------------------- 886,933 805,339 465,530 Long distance 657,788 700,039 401,191 - -------------------------------------------------------------------------------- $1,544,721 $1,505,378 $866,721 ================================================================================
During the years ended December 31, 2001, 2000 and 1999, no customers of the Company individually represented more than 10% of the Company's revenue. 50 AT&T CANADA INC. Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of Canadian dollars, except per share amounts) Years ended December 31, 2001, 2000 and 1999 18. RELATED PARTY TRANSACTIONS: Services are exchanged between the Company and its shareholders and certain of their subsidiaries. These transactions are in the normal course of operations and are measured at the exchange amounts being the amounts agreed to by the parties. Transactions with the above related parties were as follows:
==================================================== 2001 2000 1999 ---------------------------------------------------- Revenue $146,759 $114,278 $49,584 Expenses 100,900 117,173 84,928 ====================================================
Amounts due from and to the above related parties are as follows:
=============================================== 2001 2000 ----------------------------------------------- Accounts receivable $14,958 $14,265 Accounts payable 22,297 26,772 ===============================================
19. RECONCILIATION OF CHANGE IN NON-CASH WORKING CAPITAL: The change in non-cash working capital consists of the following:
================================================================== 2001 2000 1999 ------------------------------------------------------------------ Accounts receivable $ 184,114 $ 10,469 $(21,135) Other current assets (986) 1,734 8,185 Accounts payable (20,663) (110,155) 79,213 Accrued liabilities (67,942) (64,635) (57,750) Accrued interest payable 21,544 3,349 36,252 Income taxes payable 438 (4,785) 2,560 Deferred revenue in "Other long term liabilities" 765 -- -- ------------------------------------------------------------------ $ 117,270 $(164,023) $ 47,325 ==================================================================
51 AT&T CANADA INC. Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of Canadian dollars, except per share amounts) Years ended December 31, 2001, 2000 and 1999 20. SUPPLEMENTAL CASH FLOW INFORMATION:
======================================================================= 2001 2000 1999 ----------------------------------------------------------------------- Supplemental cash flow information: Cash interest paid $213,890 $165,362 $30,265 Cash income taxes paid 6,241 7,148 3,218 ======================================================================= Supplemental disclosures of non-cash investing and financing activities: Accrued liabilities and accounts payable incurred for the acquisition of property, plant and equipment $ 58,418 $ 27,878 $95,108 Capital lease obligations incurred for the purchase of networks and equipment -- 560 202 Class B Non-Voting Shares issued for acquisitions 44,666 45,385 10,745 Class B Non-Voting Shares issued for conversion of warrants 483 620 1,617 Class B Non-Voting Shares issued for the Company's contributions to the Employee Share Ownership Plan 1,206 2,734 -- =======================================================================
21. RECLASSIFICATION OF PRIOR PERIODS AMOUNTS: Certain amounts presented in the prior periods have been reclassified to conform with the presentation adopted in the current year. 52 AT&T CANADA INC. Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of Canadian dollars, except per share amounts) Years ended December 31, 2001, 2000 and 1999 22. RECONCILIATION TO ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED STATES: The Company's consolidated financial statements have been prepared in accordance with accounting principles generally accepted ("GAAP") in Canada which, in the case of the Company, conform in all material respects with those in the United States, except as outlined below: (a) Consolidated statements of operations and consolidated statements of comprehensive loss: The application of U.S. GAAP would have the following effect on loss for the year, deficit and basic loss per common share as reported:
======================================================================================================= 2001 2000 1999 - ------------------------------------------------------------------------------------------------------- Loss for the year, Canadian GAAP $ (733,101) $ (523,207) $ (5,286) Stock-based compensation expense (note 22(a)(iii)) (15,023) (4,364) (597) Foreign exchange loss (note 22(a)(iv)) (12,274) -- -- Loss on derivative instruments (note 22(a)(v)) (12,034) -- -- Change in valuation allowance (note 22(a)(vi)) (31,934) -- -- - ------------------------------------------------------------------------------------------------------- Loss for the year, U.S. GAAP before accounting change (804,366) (527,571) (5,883) - ------------------------------------------------------------------------------------------------------- Cumulative effect of accounting change, adoption of FAS 133 (note 22(a)(v)) 4,028 -- -- - ------------------------------------------------------------------------------------------------------- Loss for the year, U.S. GAAP (800,338) (527,571) (5,883) Opening deficit, U.S. GAAP (794,180) (266,609) (260,726) - ------------------------------------------------------------------------------------------------------- Closing deficit, U.S. GAAP $(1,594,518) $ (794,180) $ (266,609) ======================================================================================================= Basic and diluted loss per common share under U.S. GAAP: Before accounting change $ (8.17) $ (5.52) $ (0.06) Cumulative effect of accounting change 0.04 -- -- - ------------------------------------------------------------------------------------------------------- $ (8.13) $ (5.52) $ (0.06) ======================================================================================================= Weighted average number of common shares outstanding (in thousands) 98,406 95,561 92,457 =======================================================================================================
53 AT&T CANADA INC. Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of Canadian dollars, except per share amounts) Years ended December 31, 2001, 2000 and 1999 22. RECONCILIATION TO ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED STATES (CONTINUED): U.S. GAAP also requires disclosure of a Statement of Comprehensive Income (Loss). Comprehensive income (loss) generally encompasses all changes in shareholders' equity except those arising from transactions with shareholders:
================================================================================ 2001 2000 1999 - -------------------------------------------------------------------------------- Loss for the year, U.S. GAAP $(800,338) $(527,571) $ (5,883) Other comprehensive income, net of tax of nil: Cumulative effect of accounting change on adoption of FAS 133 (note 22(a)(v)) 21,990 -- -- Unrealized gain on derivative instruments (note 22(a)(v)) 10,397 -- -- - -------------------------------------------------------------------------------- Comprehensive loss, U.S. GAAP $(767,951) $(527,571) $ (5,883) ================================================================================
(i) Earnings before interest, taxes, depreciation and amortization, integration costs, provision for restructuring, workforce reduction costs and minority interest: United States GAAP requires that integration costs, provision for restructuring, workforce reduction costs, depreciation and amortization be included in the determination of operating income and does not permit the disclosure of subtotals of the amounts of operating income before these items. Canadian GAAP permits the subtotals of the amounts of operating income before these items. (ii) Statement of cash flows: Canadian GAAP permits the disclosure of a subtotal of the amount of funds provided by operations before changes in non-cash working capital items in the consolidated statement of cash flows. United States GAAP does not permit this subtotal to be included. 54 AT&T CANADA INC. Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of Canadian dollars, except per share amounts) Years ended December 31, 2001, 2000 and 1999 22. RECONCILIATION TO ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED STATES (CONTINUED): (iii) Stock-based compensation expense: For U.S. GAAP purposes, the Company has chosen to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees." Accordingly, compensation expense for U.S. GAAP purposes has been recognized at the date of share purchases or option grants at the amount by which the quoted market price of the stock exceeds the amount an employee must pay to acquire the stock. In March 2000, the FASB issued FASB Interpretation No. 44 ("FIN 44"), "Accounting for Certain Transactions involving Stock Compensation - an Interpretation of APB Opinion No. 25." FIN 44 clarifies the following: the criteria for determining whether a plan qualifies as a non-compensatory plan; the accounting consequences of various modifications to the terms of the previously fixed stock options or awards; and the accounting for an exchange of stock compensation awards in business combinations. The Company has accounted for FIN 44 as part of the reconciliation to accounting principles generally accepted in the United States. During the year, the Company recorded stock compensation expense of $1.4 million (2000-$4.4 million; 1999-$0.6 million) as a result of accelerating the vesting period of certain employee stock option awards. In addition, the Company recorded $13.6 million (2000-nil; 1999-nil) in stock compensation expense as a result of extending the expiry date of certain employee stock option awards. (iv) Foreign exchange: Under Canadian GAAP, unrealized gains and losses on translation of foreign currency-denominated long-term monetary items which are not hedged are deferred and amortized over the remaining lives of the related items. Under U.S. GAAP, gains or losses on translation of foreign currency-denominated long-term monetary items which are not hedged are credited or charged to earnings. Under Canadian GAAP, most of the U.S.-denominated long-term debt has been fully hedged, and for this portion, foreign exchange gains or losses on hedge instruments are recorded in the same period as the corresponding gains and losses on the related long-term debt. 55 AT&T CANADA INC. Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of Canadian dollars, except per share amounts) Years ended December 31, 2001, 2000 and 1999 22. RECONCILIATION TO ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED STATES (CONTINUED): The deferred loss under Canadian GAAP related to the U.S. denominated long-term debt that has not been hedged at December 31, 2001 was $12.3 million. (v) Unrealized loss on derivative instruments: The Company is required to and has implemented SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities", as amended by SFAS No. 137 and SFAS No. 138 ("SFAS 133") for the current fiscal year ended December 31, 2001. SFAS 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. All derivatives, whether designated in hedging relationships or not, are required to be recorded on the balance sheet at fair value. If the derivative is designated as a fair value hedge, the changes in the fair value of the derivative and of the hedged item attributable to the hedged risk are recognized in earnings. If the derivative is designated as a cash flow hedge, the effective portions of changes in the fair value of the derivative are recorded in Accumulated Other Comprehensive Income ("AOCI") and are recognized in the income statement when the hedged item affects earnings. The AOCI account forms a component of shareholders' equity. Changes in fair values of derivative instruments not designated as hedging instruments and ineffective portion of hedges, if any, are recognized in earnings in the current period. The Company recognized a one-time transition gain of $26.0 million which represents the net effect of recognizing the market value of the Company's derivative portfolio of $84.5 million (consisting of assets of $98.2 million and liabilities of $13.7 million), the derecognition of the unamortized balance of swaption premiums of $17.6 million and the derecognition of deferred foreign exchange losses of $40.9 million as at December 31, 2000. The portion of the one-time transition gain that relates to derivatives designated and qualifying as cash flow hedges, totalling $ 22.0 million has been recognized in the AOCI account and will be reclassified into earnings over the life of the underlying hedged items, of which the last expires in June 2008. The portion of the one-time transition gain related to derivatives not designated as hedges, totaling $4.0 million, has been recognized in earnings as the cumulative effect of the accounting change on adoption of FAS 133. 56 AT&T CANADA INC. Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of Canadian dollars, except per share amounts) Years ended December 31, 2001, 2000 and 1999 22. RECONCILIATION TO ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED STATES (CONTINUED): For the year ended December 31, 2001, as a result of SFAS 133 relative to Canadian GAAP, the Company realized a loss of $12.0 million due to the unfavourable change in time value of the swaptions of $12.1 million, the net gain in the fair market value of foreign exchange forward contracts not designated as hedging instruments of $(39.4) million, the effect of foreign exchange losses on the related debt of $44.3 million, the reversal of amortization of option premiums recorded under Canadian GAAP of $(5.4) million and recognition of $(3.9) million of a deferred gain relating to unwound swaps, offset by the reversal of the amortization of the deferred gain under Canadian GAAP of $4.3 million. Foreign currency risk: The Company enters into various financial instruments including swaptions and cross currency swaps to manage its exposure to changes in currency exchange rates related to its U.S. dollar-denominated debt. The Company enters into financial instruments solely for hedging requirements and does not use them for speculative purposes. The Company has designated derivatives with a net notional value of U.S. $1,890 million (composed of derivatives to purchase U.S. $2,097 million and derivatives to sell U.S. $207 million) as cash flow hedges which hedge the foreign currency risk of cash flows relating to U.S. dollar-denominated debt with a face value of the same amount. These cash flow hedges were and are expected to continue to be highly effective in hedging foreign currency rate risk. The changes in market value of the effective portion of the derivatives designated as cash flow hedges are reported in AOCI. Gains and losses reported in the AOCI account will be classified in earnings when the underlying debt matures or is repaid. The ineffective portion of the change in market value, specifically the time value component, is charged through earnings. In 2001, the change in market value of the time value component increased net loss by $12.1 million. 57 AT&T CANADA INC. Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of Canadian dollars, except per share amounts) Years ended December 31, 2001, 2000 and 1999 22. RECONCILIATION TO ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED STATES (CONTINUED):OTHER DERIVATIVES: As at December 31, 2001, the fair value of the derivatives designated as cash flow hedges was $119.7 million consisting of assets of $159.9 million and liabilities of $40.2 million. Other derivatives: In addition, the Company holds foreign exchange forward contracts with a notional value totaling U.S. $475 million, for periods of one to six months that are renewed for a further one to six months on a continuous basis, based on the historical rate of the contract, adjusted for the forward premium or discount. The foreign exchange contracts are used to hedge the foreign currency risk of cash flows relating to the payment of principal of certain U.S. dollar denominated debt with a face value of the same amount. These foreign exchange contracts are not eligible to be designated as effective hedges since the term of the contracts do not match the underlying debt being hedged and, therefore, the changes in their market value are recorded in earnings. As at December 31, 2001, the fair value of the foreign exchange contracts was $19.1 million. In May 2001, the Company unwound certain swaptions, cross currency swaps and a forward contract. The related AOCI balances of the derivatives unwound represented a deferred gain of $29.6 million. This gain is being recognized in earnings over the remaining term of the underlying debt for which these derivatives were designated as cash flow hedges. The gains to be recognized in future periods are as follows:
================================================================================ 2002 $ 6,242 2003 6,242 2004 6,242 2005 3,466 2006 2,344 2007 and thereafter 1,158 - -------------------------------------------------------------------------------- $25,694 ================================================================================
58 AT&T CANADA INC. Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of Canadian dollars, except per share amounts) Years ended December 31, 2001, 2000 and 1999 22. RECONCILIATION TO ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED STATES (CONTINUED): (vi) Change in valuation allowance: During the year, the Company recognized a gain under Canadian GAAP of $31.9 million from the reversal of the valuation allowance on the accrued benefit asset relating to its defined benefit pension plan. The reversal of the valuation allowance is not permitted under U.S. GAAP and accordingly, the gain has been reversed for U.S. GAAP reporting purposes. (b) Other disclosures: (i) Stock-based compensation expense disclosure: Had the Company determined compensation expense costs based on the fair value at the date of grant for stock options under SFAS No. 123, loss attributable to common shareholders and basic loss per share would have increased as indicated below. The company uses the Black-Scholes option-pricing model to estimate the fair value at the date of grant for options granted subsequent to the Company's initial public offering. In 2001, 996,939 (2000 - 3,760,500; 1999 - 6,109,104) options with a weighted average fair value of $18.33 (2000 - $15.16; 1999 - $16.20) were granted using the following weighted average assumptions:
================================================================================ 2001 2000 1999 - -------------------------------------------------------------------------------- Risk free interest rate (%) 5.1% 6.2% 5.5% Expected volatility (%) 35.7% 5.4% 0.44% Expected life (in years) 5 5 5 Expected dividends Nil Nil Nil ================================================================================
59 AT&T CANADA INC. Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of Canadian dollars, except per share amounts) Years ended December 31, 2001, 2000 and 1999 22. RECONCILIATION TO ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED STATES (CONTINUED):
================================================================================ 2001 2000 1999 - -------------------------------------------------------------------------------- Loss attributable to common shareholders, U.S. GAAP - as reported $(800,338) $(527,571) $ (5,883) Loss attributable to common shareholders, U.S. GAAP - pro forma (841,473) (578,200) (48,622) Loss per share - as reported (8.13) (5.52) (0.06) Loss per share - pro forma (8.55) (6.05) (0.53) ================================================================================ Weighted average number of shares outstanding (in thousands) 98,406 95,561 92,457 ================================================================================
(ii) Accounts receivable are net of an allowance for doubtful accounts of $24.3 million (2000 - $31.1 million) at December 31, 2001. (iii) Recent pronouncements: (a) Business combinations, goodwill and other intangible assets: Effective January 1, 2002, the Company will adopt The Canadian Institute of Chartered Accountants Handbook Section ("HB") 1581 "Business Combinations", and HB 3062 "Goodwill and Other Intangible Assets". The new sections are substantially consistent with equivalent U.S. pronouncements, SFAS No. 141 "Business Combinations" and SFAS No. 142 "Goodwill and Other Intangible Assets", issued by the Financial Accounting Standards Board ("FASB") in July 2001 except that under U.S. GAAP, any transitional impairment charge is recognized in earnings as a cumulative effect of a change in accounting principles. The accounting policy is described in note 1(f). 60 AT&T CANADA INC. Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of Canadian dollars, except per share amounts) Years ended December 31, 2001, 2000 and 1999 22. RECONCILIATION TO ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED STATES (CONTINUED): (b) Accounting for asset retirement obligations: In August 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations". The statement requires entities to record the fair value of a liability for an asset retirement obligation in the period in which the legal or contractual removal obligation is incurred. The statement is effective for fiscal years beginning after June 15, 2002, with earlier adoption encouraged. The Company does not believe that the adoption of SFAS No. 143 will have a material effect on its results of operations and financial position. (c) Accounting for the impairment or disposal of long-lived assets: SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets" was issued in October 2001. The statement supersedes SFAS No. 121 "Accounting for the Impairment of Long-Lives Assets to Be Disposed of" and the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions" (Opinion 30), for the disposal of a segment of a business (as previously defined in that Opinion). Statement 144 retains the fundamental provisions in Statement 121 for recognizing and measuring impairment losses on long-lived assets held for use and long-lived assets to be disposed of by sale. It also provides guidance on how a long-lived asset that is used as part of a group should be evaluated for impairment, establishes criteria for when a long-lived asset is held for sale, and prescribes the accounting for a long-lived asset that will be disposed of other than by sale. Statement 144 retains the basic provisions of Opinion 30 on how to present discontinued operations in the income statement but broadens that presentation to include a component of an entity (rather than a segment of a business). FAS 144 is effective for fiscal years beginning after December 15, 2001. The Company does not believe that the adoption of SFAS No. 144 will have a material effect on its results of operations and financial position. 61 AT&T CANADA INC. Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of Canadian dollars, except per share amounts) Years ended December 31, 2001, 2000 and 1999 23. OTHER COMMITMENTS AND CONTINGENCIES: (a) Regulatory environment: In previous submissions and in its recent proposals to the Canadian Radio-television and Telecommunications Commission ("CRTC") during the Price Cap proceeding, initiated to review the framework for local competition, the Company has stated its position that the existing regulatory framework is out of balance and favours the incumbent providers at the expense of competitive providers. A decision by the CRTC on the Price Cap proceeding is expected on or before May 31, 2002. Should this and the future decisions of the CRTC fail to recognize and remedy the existing imbalance, the sustainability of competition and the benefits of competition could be threatened. There is no assurance that the CRTC will accept the Company's proposals and the Company cannot predict the ultimate impact that the CRTC's decision and any future decisions will have. As stated during the course of the proceeding, should the CRTC not take this opportunity to establish a framework for effective competition in the local business telecommunications market, and thereby reduce the Company's costs, the Company will need to re-evaluate its plans and growth assumptions in this and related telecommunications markets. (b) Contractual commitments: Under the terms of its operating lease agreements for fibre optics maintenance, operating facilities, equipment rentals and minimum purchase commitments under supply contracts and customer contracts, the Company is committed to make the following payments for the years ending December 31, as follows: ================================================================================ 2002 $156,498 2003 91,995 2004 75,993 2005 63,919 2006 50,998 Thereafter 332,780 - -------------------------------------------------------------------------------- $772,183 ================================================================================
62 AT&T CANADA INC. Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of Canadian dollars, except per share amounts) Years ended December 31, 2001, 2000 and 1999 23. OTHER COMMITMENTS AND CONTINGENCIES (CONTINUED): (c) Litigation: In the normal course of business, the Company is subject to proceedings, lawsuits and other claims. Such matters are subject to many uncertainties, and outcomes are not predictable with assurance. Consequently, the Company is unable to ascertain the ultimate aggregate amount of monetary liability or financial impact with respect to these matters at December 31, 2001. These matters could affect the operating results of any one quarter when resolved in future periods. However, the Company believes that after final disposition, any monetary liability or financial impact to the Company beyond that provided for at year end would not be material to the annual consolidated financial statements. (d) Letters of credit: In the normal course of business, the Company issues letters of credit in compliance with its right-of-way agreements with various municipalities and utility companies. In general, the terms of the letter of credit permit the municipality or the utility company to draw on the letter of credit to recover any losses incurred under the right-of-way agreement, as defined. As at December 31, 2001, the Company had letters of credit outstanding of $2.2 million with nil drawn. (e) Contingent payment on acquisitions: In the acquisition of MONTAGE, the vendors have the potential to earn up to an additional $30.0 million contingent upon the attainment by June 30, 2002 of certain specified performance targets. Any earned contingent consideration is payable over the three-year period ending June 30, 2004 and will be recorded once the contingent amount is determinable. A portion of the contingent payment will be accounted for as additional purchase price with the balance recorded as compensation expense. 63 EX-99.B 8 e56632a1ex99-b.txt CONCERT, B.V. FINANCIALS EXHIBIT 99.B REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareowners' of Concert B.V. In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of operations, shareowners' equity and comprehensive loss and cash flows present fairly, in all material respects, the financial position of Concert, B.V. and its subsidiaries (the "Company") at December 31, 2001, and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. PricewaterhouseCoopers LLP McLean, Virginia May 1, 2002 CONCERT, B.V. CONSOLIDATED BALANCE SHEETS (DOLLARS IN MILLIONS, EXCEPT SHARE DATA)
ASSETS AT DECEMBER 31, ------------------------- (UNAUDITED) 2001 2000 -------- ----------- Current assets: Cash and cash equivalents $ 105 $ 127 Accounts receivable: Trade third parties, less allowances of $146 and $36 (unaudited) 2,539 1,825 Trade related parties 768 1,670 Other third parties, less allowance of $4 and $1 (unaudited) 80 222 Other related parties 54 444 Loans and interest due from related parties 159 328 Prepaid expenses and other 39 36 ------- ------- Total current assets 3,744 4,652 Property and equipment, net 1,744 3,753 Intangible and other assets, net 14 949 ------- ------- Total assets $ 5,502 $ 9,354 ======= ======= LIABILITIES AND SHAREOWNERS' EQUITY Current liabilities: Trade accounts payable and accrued expenses: Third parties $ 2,694 $ 2,450 Related parties 1,076 1,942 Accrued employee related costs 361 107 Capital lease obligation 15 15 Deferred revenue 81 47 Income and value added taxes payable 69 116 ------- ------- Total current liabilities 4,296 4,677 Accrued employee related costs, net of current portion -- 68 Capital lease obligation, net of current portion 29 41 Deferred revenue, net of current portion 46 39 Deferred income taxes 1 9 Long-term debt related parties -- 1,950 ------- ------- Total liabilities 4,372 6,784 ------- ------- Commitments and contingencies (Note 10) Shareowners' equity: Class A ordinary shares, par value 100 NLG; 300,000 shares authorized; 125,101 shares issued and outstanding at December 31, 2001; 125,100 shares issued and outstanding at December 31, 2000 (unaudited) 6 6 Class B ordinary shares, par value 400 NLG; 300,000 shares authorized; 125,101 shares issued and outstanding at December 31, 2001; 125,100 shares issued and outstanding at December 31, 2000 (unaudited) 24 24 Additional paid-in capital 5,476 3,355 Accumulated deficit (4,425) (816) Contribution receivable -- (22) Accumulated comprehensive income 49 23 ------- ------- Total shareowners' equity 1,130 2,570 ------- ------- Total liabilities and shareowners' equity $ 5,502 $ 9,354 ======= =======
The accompanying notes are an integral part of these financial statements. 1 CONCERT, B.V. CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN MILLIONS)
FOR THE YEARS ENDED DECEMBER 31, ------------ (UNAUDITED) 2001 2000 ---- ---- Net revenue $ 6,189 $ 7,748 Operating expenses: Access, interconnection and network 5,128 5,836 Selling, general and administrative 1,345 1,058 Asset write-offs 2,625 -- Depreciation and amortization 665 525 ------- ------- Total operating expenses 9,763 7,419 ------- ------- Operating loss (3,574) 329 Other income (expense): Interest income 19 36 Interest expense, net (76) (106) Loss on foreign currency transactions, net (50) (90) Other (expense) income (28) 34 ------- ------- Total other expense (135) (126) ------- ------- (Loss) income before income taxes (3,709) 203 Income tax benefit (provision) 76 (98) Minority interest 24 (2) ------- ------- Net (loss) income $(3,609) $ 103 ======= =======
The accompanying notes are an integral part of these financial statements. 2 CONCERT, B.V. CONSOLIDATED STATEMENTS OF CHANGES IN SHAREOWNERS' EQUITY AND COMPREHENSIVE (LOSS) INCOME (DOLLARS IN MILLIONS, EXCEPT SHARE DATA)
FOR THE YEARS ENDED DECEMBER 31, ------------ (UNAUDITED) 2001 2000 ---- ---- Class A ordinary shares: Balance at beginning of year $ 6 $ -- 125,100 shares issued to AT&T in connection with the formation of the Global Venture (Note 3) -- 6 1 share issued to AT&T in connection with the conversion of the AT&T Term Loan to equity (Note 3) -- -- ------- ------- Balance at end of year 6 6 ------- ------- Class B ordinary shares: Balance at beginning of year (125,100 shares) 24 24 1 share issued in connection with the conversion of the BT Term Loan to equity (Note 3) -- -- ------- ------- Balance at end of year 24 24 ------- ------- Additional paid-in capital: Balance at beginning of year 3,355 1,360 Shares issued in connection with the formation of the Global Venture (Note 3) -- 1,726 Cash contributions (Note 3) -- 256 Other non-cash contributions from shareowners (Note 3) -- 43 Contribution receivable from shareowner (Note 3) -- 22 Estimated income taxes paid on behalf of shareowners (Note 3) -- (52) Conversion of AT&T and BT Term Loans to equity (Note 3) 2,121 -- ------- ------- Balance at end of year 5,476 3,355 ------- ------- Accumulated deficit: Balance at beginning of year (816) (919) Net (loss) income (3,609) 103 ------- ------- Balance at end of year (4,425) (816) ------- ------- Contribution receivable: Balance at beginning of year (22) -- Cash contribution receivable from shareowner -- (22) Cash contribution received from shareowner 22 -- ------- ------- Balance at end of year -- (22) ------- ------- Accumulated comprehensive income: Balance at beginning of year 23 37 Foreign currency translation adjustment 26 (14) ------- ------- Balance at end of year 49 23 ------- ------- Total shareowners' equity $ 1,130 $ 2,570 ======= ======= Comprehensive (loss) income: Net (loss) income $(3,609) $ 103 Foreign currency translation adjustment, less income taxes of $8 and $(4) (unaudited), respectively 18 (10) ------- ------- Total comprehensive (loss) income $(3,591) $ 93 ======= =======
The accompanying notes are an integral part of these financial statements. 3 CONCERT, B.V. CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN MILLIONS)
FOR THE YEARS ENDED DECEMBER 31, ------------ (UNAUDITED) 2001 2000 ---- ---- Cash flows from operating activities: Net (loss) income $(3,609) $ 103 Adjustments to reconcile net (loss) income to net cash provided by operating activities: Depreciation and amortization 665 525 Bad debt expense 85 40 Unrealized foreign exchange losses, net 43 91 Deferred taxes (8) 1 Minority interest share of net (loss) income (24) 2 Asset write-offs 2,625 -- Other non-cash items 23 9 Changes in operating assets and liabilities: Accounts receivable: Trade third parties (838) (1,758) Trade related parties 902 43 Other third parties 142 (202) Other related parties 390 (420) Interest due from related parties 9 10 Prepaid expenses and other (1) 55 Trade accounts payable and accrued expenses: Third parties 332 1,152 Related parties (629) 1,140 Accrued employee related costs 188 244 Income and value added taxes payable (18) 84 Deferred revenue 41 86 Other assets and liabilities 19 12 ------- ------- Net cash provided by operating activities 337 1,217 ------- ------- Cash flows from investing activities: Acquisition of property and equipment (438) (1,108) Loans to related parties (1,015) (437) Repayments of loans due from related parties 1,163 130 Other investing activities (20) (78) ------- ------- Net cash used in investing activities (310) (1,493) ------- ------- Cash flows from financing activities: Proceeds from issuance of long-term debt related parties -- 1,000 Principal payments on long-term debt related parties -- (906) Proceeds from capital contributions from related party 22 308 Proceeds from the issuance of notes payable 217 -- Payments on accrued interest to related party (217) -- Cash overdraft (46) 48 Estimated income taxes paid on behalf of shareowners -- (52) Payments on capital lease obligation (13) (3) Other financing activities (11) -- ------- ------- Net cash (used) provided by financing activities (48) 395 ------- ------- Net effects of foreign currency on cash (1) -- ------- ------- Net decrease in cash and cash equivalents for the year (22) 119 Cash and cash equivalents, beginning of year 127 8 ------- ------- Cash and cash equivalents, end of year $ 105 $ 127 ======= =======
The accompanying notes are an integral part of these financial statements. 4 CONCERT, B.V. CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN MILLIONS)
FOR THE YEARS ENDED DECEMBER 31, ------------ (UNAUDITED) 2001 2000 ---- ---- Supplemental disclosure of cash flow information: Cash paid for interest, including interest capitalized $ 217 $ 6 Cash paid for income taxes, including amounts paid on behalf of shareowners of $0 and $52 (unaudited), respectively $ 25 $ 70 Non-cash investing and financing activities: Payment due for the purchase of assets from related parties $ 11 $ 23 Equipment acquired under capital lease $ -- $ 59 Non-cash contributions by related parties $ -- $ 43 Non-cash contributions in connection with the formation of the Global Venture $ -- $1,680 Conversion of long-term debt and related accrued interest - related parties $2,121 $ --
The accompanying notes are an integral part of these financial statements. 5 CONCERT, B.V. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT SHARE DATA) 1. ORGANIZATION DESCRIPTION OF THE BUSINESS Concert B.V., a private limited liability company established in Amsterdam, the Netherlands, on October 20, 1998, through the Concert global group of companies (collectively, "Concert" or the "Company"), provides global communications services to multi-national companies, traditional and emerging carriers, wholesalers and Internet service providers. Concert's core business offering and products include the sale of International Direct Dial (IDD), Select, Wholesale, Transit and other voice services, International Bandwidth, Data, IP and domestic services to multi-national customers. The ultimate parent company from inception to January 4, 2000 was British Telecommunications plc. ("BT"). On January 5, 2000, the Company became jointly owned by AT&T, Corp. ("AT&T") and BT, pursuant to the provisions of the Framework and Closing Agreements dated October 23, 1998 and November 22, 1999, respectively, as amended and effective for purposes of forming a joint venture ("The Global Venture" or "GV") on January 5, 2000. As part of the GV formation, as discussed further in Note 3, BT and AT&T (collectively, "the Parents") contributed certain assets, liabilities and economic benefits and risks of certain contracts. The contribution of assets, liabilities and contract rights was accounted for using the Parents' cost basis at January 5, 2000. Concert's operations are separated into the following business units: Global Accounts ("GA"), Global Markets ("GM"), International Carrier Services ("ICS"), Global Products ("GP"), and Networks & Systems ("N&S"). GA provides a named set of approximately 270 multinational corporations ("MNC") with global telecommunication sales and service. Customers are primarily in the finance, petrochemical, pharmaceutical, and information technology industry sectors. Global Accounts' customers have a single point of contact with responsibility for everything from service procurement to problem resolution, through a Global Account Manager with a full support team of service network designers, field engineers and billing specialists. GM provides international communications services through a network of over 50 distributors, (including the Parents) to multinational companies, and other business customers and institutions worldwide. Products include a range of Bandwidth (international private line), Data (international frame relay, packet and ATM services), Voice (freephone, virtual network services, global software-defined networks) and value-added IP ("Internet Protocol") services. 6 CONCERT, B.V. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT SHARE DATA) ICS is responsible for international voice traffic management and correspondent carrier relations for the Parents. In addition, ICS offers telecommunications services to traditional and emerging carriers, wholesalers and internet service providers worldwide. The unit manages the profit and loss of a wholesale voice cross-border service portfolio that includes international wholesale product platforms as well as switched transit and hubbing services. GP develops and manages the Concert portfolio of retail services sold by GA, the Parents, and other distributors. This organization creates innovative solutions in network-based corporate communication services. Emphasis is on the delivery of leading edge international services and applications. The functional areas in this organization include product management, service, marketing and strategy. N&S is responsible for designing, building, managing and maintaining Concert's global network, as well as delivering all aspects of customer service. The N&S unit is the interface with in-country domestic suppliers for access, whether with AT&T or BT in their home markets, or with local network providers in other countries. N&S is also responsible for the integration of networks, technical platforms and systems (including development), along with their associated processes. TERMINATION OF THE GV On October 15, 2001, AT&T, BT and Concert entered into binding agreements (collectively the "Termination Agreements"), which, upon closing, resulted in Concert's acquisition of 100% of AT&T's equity interest ("AT&T Shares") in Concert, in exchange for certain assets, liabilities, contracts, customers and other items of Concert ("Transferred Assets"). After completion of certain conditions, closing occurred on April 1, 2002 ("Close" or "Closing"). Upon Closing, as consideration for the AT&T Shares, a portion of the assets, liabilities, contracts, customers and other operational items transferred to AT&T. The Transferred Assets consisted primarily of those items that were contributed by AT&T in connection with the formation of the GV, in addition to certain assets and obligations that were purchased, generated or developed during the operation of the GV. The remaining business is now wholly owned by BT. As a result of the April 1, 2002 transaction described above, the financial position, results of operations and cash flows included in these financial statements are not representative of the remaining Concert business from April 1, 2002 forward. 7 CONCERT, B.V. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT SHARE DATA) CONTINUING OPERATIONS In order for Concert to continue its global operations, Concert has entered into commercial arrangements with AT&T at Closing. The purpose of these arrangements is to provide Concert the ability to offer telecommunication services in geographic regions where Concert will no longer have the operating assets as a result of the movement of the Transferred Assets to AT&T. LIQUIDITY In accordance with the Termination Agreements, a funding plan for supporting the operations of the Company between October 15, 2001 and the Close and a series of Transition Projects that will continue post Close was established. With minimal exceptions, this funding plan requires the Parents to equally fund operations through Close and the completion of the Transition Projects. Post Close, BT confirmed that sufficient funding will be available for Concert to meet its financial obligations up to and through March 31, 2003. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONSOLIDATION The consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (U.S.) and include the accounts of Concert and its majority-owned subsidiaries. All material inter-company accounts and transactions have been eliminated in the consolidated financial statements. Certain balances in the prior year have been reclassified to conform to the presentation adopted in the current year. The unaudited Consolidated Balance Sheet as of December 31, 2000, the unaudited Statement of Operations, Shareowners' Equity and Comprehensive (Loss) Income and Cash Flows for the year ended December 31, 2000 have been prepared in accordance with generally accepted accounting principles. In the opinion of management, all adjustments (consisting of only normal recurring adjustments) considered necessary for a fair presentation have been included. 8 CONCERT, B.V. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT SHARE DATA) USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. FOREIGN CURRENCY TRANSLATION Concert maintains its consolidated financial statements in U.S. dollars. Income statement amounts are translated at average exchange rates for the year and assets and liabilities are translated at year-end exchange rates for operations that prepare financial statements in currencies other than the U.S. dollar. These translation adjustments are presented as a component of accumulated other comprehensive (loss) income within shareowners' equity. Gains and losses from foreign currency transactions are included in net (loss) income. REVENUE RECOGNITION Concert records net revenue in accordance with Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements," and Emerging Issues Task Force No. 99-19, "Reporting Revenue Gross as a Principal versus Net as an Agent", which provide guidance on the recognition, presentation and disclosure of revenue in financial statements. Prior to October 15, 2001, the Company reported revenue generated from MNC Domestic services on a gross basis. This was based upon a number of key facts including customer ownership, economic risk, price control and the Company's intent to migrate the contractual relationship from the Parents direct to Concert. In connection with the decision to unwind the GV, a number of these factors changed and the Company has concluded the appropriate presentation for MNC domestic sales, post October 15, 2001 should be on a net basis. This change in presentation resulted in a reduction in net revenue, accounts receivable, operating expenses and accounts payable related party for the year ended December 31, 2001 of $299. Concert recognizes revenue from the sale of International Direct Dial (IDD), Select, Wholesale, Transit and other Voice services, International Bandwidth, Data, MNC Domestic and IP services when persuasive evidence of an arrangement exists, delivery has occurred or services are provided, prices are fixed and determinable and collection is reasonably assured. Revenue is recognized as services are provided net of amounts that will be neither billed nor 9 CONCERT, B.V. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT SHARE DATA) collected. Amounts invoiced to customers, including sub-sea capacity, prior to the relevant criteria for revenue recognition being satisfied, are included in deferred revenue which is included in the accompanying consolidated balance sheet. ADVERTISING Costs of advertising and promotions, excluding cash incentives used to acquire customers, are expensed as incurred. Advertising and promotional expenses were $45 and $38 (unaudited) for the years ended December 31, 2001 and 2000, respectively. CASH AND CASH EQUIVALENTS Concert considers all highly liquid investments having original maturities of ninety days or less at the date of acquisition to be cash equivalents. The carrying value of cash equivalents approximates fair value. PROPERTY AND EQUIPMENT Property and equipment, which includes capitalized leases, are stated at cost, net of depreciation and amortization. Expenditures for improvements that significantly add to productive capacity or extend the useful life of an asset are capitalized, while expenditures for repairs and maintenance are expensed as incurred. Expenditures for construction of network systems and other projects prior to the asset being ready for its intended use are reflected as construction in progress. Capitalized costs include costs incurred under the construction contracts, labor and interest. Total interest cost incurred for the years ended December 31, 2001 and 2000 were $99 and $133 (unaudited), respectively. Interest capitalized on construction in progress for the years ended December 31, 2001 and 2000 were $23 and $27 (unaudited), respectively. Costs incurred relating to the evaluation of new projects, prior to the date the development of the project becomes probable, are expensed as incurred. Depreciation is recorded on a straight-line basis over the estimated useful lives of the assets, with the exception of leasehold improvements and assets acquired through capital leases, which are depreciated over the lesser of the estimated useful lives of the asset or the term of the lease. The following are Concert's depreciable asset categories and their estimated useful lives: 10 CONCERT, B.V. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT SHARE DATA) Network and other equipment 3 to 20 years Software developed for internal use 3 years Buildings and leasehold improvements 5 to 40 years Administrative Assets 1 to 7 years
When assets are sold or retired, the cost and related accumulated depreciation are eliminated from the accounts and the resultant, gain or loss is included in other income (expense). INTANGIBLE ASSETS Intangible assets include goodwill, and customer lists. Amounts contributed by the shareowners' as goodwill is the excess of the purchase price over the fair value of net assets acquired in a business combination accounted for under the purchase method. Concert amortizes goodwill on a straight-line basis over 20 years. Customer lists are amortized over 5 years. In accordance with Accounting Principles Board Opinion No. 17, "Intangible Assets", Concert continues to evaluate the amortization periods of the Company's intangible assets to determine whether events or circumstances warrant revised amortization periods. SOFTWARE DEVELOPED FOR INTERNAL USE Certain development costs, including external direct costs of materials and services and payroll costs for employees devoting time to the projects associated with internal-use software are capitalized in accordance with Statement of Position No. 98-1, "Accounting for the Costs of Computer Software Development or Obtained for Internal Use". These costs are included within property and equipment and are amortized over a period of three years beginning when the asset is ready for its intended use. Costs incurred prior to technological feasibility, as well as maintenance and training costs are expensed as incurred. For the years ended December 31, 2001 and 2000, Concert capitalized costs of $198 and $117 (unaudited), respectively, related to software development. Research and development costs are expensed as incurred. Concert recorded $154 and $83 (unaudited) as research and development costs for the years ended December 31, 2001 and 2000, respectively. 11 CONCERT, B.V. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT SHARE DATA) LONG-LIVED ASSETS In accordance with Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to be Disposed of", long-lived assets, identifiable intangibles and goodwill related to those assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If the total of the expected future undiscounted cash flows is less than the carrying amount of the long-lived assets, related intangible assets and goodwill, then a loss is recognized for the difference between the fair value and carrying amount of the identifiable tangible, intangible assets and goodwill being evaluated. See note 4 for a discussion on asset impairments for the year ended December 31, 2001. SUB-SEA CABLE CAPACITY In connection with the formation of the GV, the Parents contributed sub-sea cable assets to Concert. These amounts have been recorded as Property and Equipment and are being depreciated over their remaining useful lives. In the normal course of business, Concert enters into transactions to acquire the right to use sub-sea cable assets or services. Dependent on the nature of the assets or services received, Concert accounts for the transaction as either a service contract or as a lease arrangement. If the services received do not meet the criteria of a lease, Concert accounts for the services received in accordance with accepted service contract accounting by recognizing the cost of the service offering over the term of the arrangement. If the assets received meet the criteria of a lease, Concert accounts for the arrangement in accordance with SFAS No. 13, "Accounting For Leases" (see note 10). DERIVATIVE FINANCIAL INSTRUMENTS Concert enters into foreign currency forward contracts to manage the risk of foreign currency exchange rate fluctuations. All foreign currency contracts are marked-to-market on a current basis with respective gains or losses recognized in other income (expense). The gains or losses on foreign currency contracts serve to offset (partially, or completely, depending on the nature of the instruments entered into in relation to the underlying assets) the impact of the revaluation of the underlying assets or liabilities (receivables or payables) that are recorded within Concert's financial statements in currencies other than U.S dollars. 12 CONCERT, B.V. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT SHARE DATA) CONCENTRATION OF CREDIT RISK Financial instruments that potentially subject Concert to concentration of credit risk consist principally of cash and cash equivalents, and accounts receivable. Concert maintains its cash and cash equivalents with high-quality financial institutions which, at times, may exceed federally insured limits. Concert has accounts receivable and loans receivable from its Parents, which exceed 10% of the December 31, 2001 and 2000 accounts receivable and loans receivable balances. Receivable balances due from the Parents at December 31, 2001 and 2000 are $2,247 and $3,470 (unaudited), respectively. No other customers represented more than 10% of accounts receivable at December 31, 2001 and 2000. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying value of Concert's financial instruments, including cash and cash equivalents, accounts receivable, loans and interest receivable, accounts payable and accrued expenses are carried at cost which approximates fair value due to the relative short maturities of these instruments. The fair value of Concert's long-term debt due to the Parents at December 31, 2000 is $1,812 (unaudited). INCOME TAXES Concert, B.V. is recognized as a partnership for U.S. income tax purposes, therefore Concert has not recorded current or deferred income taxes in the accompanying financial statements related to its U.S. operations. Concert's foreign subsidiaries recognize current and deferred income taxes using tax laws enacted in each local jurisdiction. Deferred taxes are recognized using the asset and liability approach in accordance with SFAS No. 109, "Accounting for Income Taxes". Under the asset and liability method, deferred income taxes are recognized for differences between the carrying amounts and tax basis of assets and liabilities at enacted statutory tax rates in effect for the years in which the differences are expected to reverse. Concert establishes a valuation allowance on net deferred tax assets when it is more likely than not that such assets will not be realized. 13 CONCERT, B.V. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT SHARE DATA) RECENT ACCOUNTING PRONOUNCEMENTS In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 141, "Business Combinations" which supercedes Accounting Principles Board (APB) Opinion No. 16. SFAS No. 141 requires all business combinations initiated after June 30, 2001, to be accounted for under the purchase method. In addition, SFAS No. 141 establishes criteria for the recognition of intangible assets separately from goodwill. Management is in the process of evaluating what impact the adoption of SFAS No. 141 will have on the Company's financial statements. Also in June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets" which supercedes APB Opinion No. 17. Under SFAS No. 142, goodwill and indefinite-lived intangible assets will no longer be amortized, but rather will be tested for impairment upon adoption of the standard and at least annually thereafter. In addition, the amortization period of intangible assets with finite lives will no longer be limited to 40 years. SFAS No. 142 is effective for the Company as of January 1, 2002. Management is in the process of evaluating the effect that this statement will have on the Company's financial statements. In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations". This standard requires that obligations associated with the retirement of tangible long-lived assets be recorded as liabilities when those obligations are incurred, with the amount of the liability initially measured at fair value. Upon initially recognizing a liability for an asset retirement obligation, an entity must capitalize the cost by recognizing an increase in the carrying amount of the related long-lived asset. Over time, this liability is accreted to its present value, and the capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the liability, an entity either settles the obligation for its recorded amount or incurs a gain or loss upon settlement. SFAS No. 143 is effective for financial statements issued for fiscal years beginning after June 15, 2002. Management is in the process of evaluating the effect that this statement will have on the Company's financial statements. In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" which supercedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". SFAS No. 144 applies to all long-lived assets, including discontinued operations, and amends APB opinion No. 30, "Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." Based on SFAS No. 121, SFAS No. 144 develops one accounting model for long-lived assets that are to be disposed of by sale, as well as addresses the principal 14 CONCERT, B.V. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in millions, except share data) ________ implementation issues. SFAS No. 144 requires that long-lived assets that are to be disposed of by sale be measured at the lower of book value or fair value less cost to sell. Additionally, SFAS No. 144 expands the scope of discontinued operations to include all components of an entity with operations that (1) can be distinguished from the rest of the entity and (2) will be eliminated from the ongoing operations of the entity in a disposal transaction. SFAS No. 144 also amends Accounting Research Bulletin (ARB) No. 51, "Consolidated Financial Statements" to eliminate the exception to consolidation for a subsidiary for which control is likely to be temporary. SFAS No. 144 is effective for Concert as of January 1, 2002. Management is in the process of evaluating the effect that this statement will have on the Company's financial statements. 3. RELATED PARTY TRANSACTIONS A substantial portion of Concert's business is transacted between the Company and its Parents. The majority of the terms and conditions, including renewal periods and renegotiation rights applicable to those business transactions, have been contractually agreed between the Parents. Below is a summary of the transactions between Concert and its Parents and the amounts included from those transactions in the Consolidated Statement of Operations for the years ended December 31, 2001 and 2000:
(Unaudited) 2001 2000 ---- ---- Net revenue $2,522 $3,274 Operating expenses 2,491 2,340 Other expense 81 94
Revenue earned from the Parents includes the sale of IDD, Wholesale, and other Voice services, International Bandwidth, Data, and IP services. Operating expenses relate to the cost of inland domestic services, network service, system support, maintenance and provisioning, international termination charges, US and UK domestic backhaul, billing and customer care, certain employee related costs and other general services inclusive of all related tax and regulatory charges. Other expenses include interest income and interest expense relating to the Parental loans and other commercial arrangements and settlements between Concert and BT. 15 CONCERT, B.V. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in millions, except share data) ________ As part of Concert's formation, provisions were included in the framework and closing agreement which required the Parents to reimburse Concert for certain costs under their commercial arrangements. During the years ended December 31, 2001 and 2000, Concert was to be reimbursed $30 and $346 (unaudited), respectively. These amounts are recorded as a reduction of operating and other expenses. Balances included in the Consolidated Balance Sheets at December 31, 2001 and 2000 for transactions with each Parent are as follows:
(Unaudited) 2001 2000 ---- ---- Accounts receivable, net $ 768 $1,670 Other related party receivables 54 444 Loans and interest due from related parties 159 328 Accounts payable and accrued expenses 1,076 1,942 Long-term debt -- 1,950
Included within trade-third parties accounts receivable balance at December 31, 2001 are amounts due from the Parents as part of their role as Concert's billing and collection service provider. In this role, the Parents bill and collect certain revenue streams on Concert's behalf. These revenues and receivables are not generated from the sale of product or services to the Parents and therefore, they have been classified as third party accounts receivable. Amounts included in the Consolidated Balance Sheet for such items at December 31, 2001 and 2000 are $1,266 and $1,028 (unaudited), respectively. Excluded from related party trade accounts payable and accrued expenses are amounts due to the Parents for payments, which the Parents make to unrelated third parties on Concert's behalf. Such payments consist primarily of property and equipment purchases and net settlement payments to third party carriers. At December 31, 2001 and 2000, $775 and $690 (unaudited), respectively, is included in trade third party accounts payables and accrued expenses for these items. 16 CONCERT, B.V. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT SHARE DATA) -------- CONTRIBUTIONS UPON FORMATION As discussed in Note 1, in connection with the GV formation, the Parents contributed certain assets, liabilities and the economic benefits and risks of certain contracts. The initial contributions to the GV have been accounted for using predecessor or carryover basis. The January 5, 2000 contributions of the Parents, including minority interest of $44 (unaudited), are summarized below:
(Unaudited) Cash and cash equivalents $ 52 Accounts receivable, net 44 Prepaid expenses and other 2 Property and equipment 1,785 Intangible and other assets 67 -------- Total assets $ 1,950 ======== Accounts payable and accrued expenses $ 172 Income and value added taxes payable 2 -------- Total liabilities $ 174 ======== Net Assets $ 1,776 ========
Under the Framework Agreement, Concert receives the economic benefit and risk associated with contracts assigned to the GV by AT&T and BT. Property and equipment contributed by the Parents consists primarily of Trans-Atlantic and Trans-Pacific sub-sea cable assets and related telecommunications network equipment. Included in the intangible and other assets contributed by the Parents is $65 (unaudited) related to rights to acquire capacity on a cable system in the Asia Pacific region. At December 31, 2001, Concert has activated $30 of this capacity and reclassified the balance to property and equipment, and is amortizing this amount over 15 years. The Company has reviewed the carrying value of the remaining cable capacity rights of $35, which will revert back to AT&T, as set forth in the Termination Agreements (Note 1) and concluded that neither the Company nor AT&T intends to activate this capacity. Therefore, the Company has written off the remaining carrying value of the capacity rights and has included the write-off within the Consolidated Statements of Operations in operating expenses. 17 CONCERT, B.V. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT SHARE DATA) -------- LOANS DUE FROM RELATED PARTIES On December 15, 2000, Concert extended a loan facility ("BT Loan Receivable") to BT. The BT Loan Receivable facility expires on December 15, 2003. Any outstanding principal balance is repayable on the expiration date of the facility. Interest is accrued monthly, based on a 365 day year, at the rate of a three month London Inter-bank Offered Rate ("LIBOR") plus 40 basis points, which is measured at the beginning of each quarter, or 4.94% and 6.58% (unaudited) at December 31, 2001 and 2000, respectively. The principal balance of the BT Loan Receivable was $67 and $181 (unaudited) at December 31, 2001 and 2000, respectively. Interest accrued during the facility period is payable on the first business day of the following calendar year. During 2001, BT made principal payments of $399 and took advances of $297. Accrued interest at December 31, 2001 and interest income recorded during 2001 was $9 and $9, respectively. Interest income accrued for 2000 was immaterial. Subsequent to December 31, 2001, all amounts due under the BT Loan Receivable were paid to Concert. On August 30, 2000, Concert extended a loan facility ("AT&T Loan Receivable") to AT&T. The AT&T Loan Receivable facility expires on August 30, 2003. Any outstanding principal balance is repayable on the expiration date of the facility. Interest is accrued monthly, based on a 360 day year, at the rate of a three month LIBOR (on USD deposits) plus 40 basis points, which is calculated at the beginning of each quarter, or 3.0% and 7.20% (unaudited) at December 31, 2001 and 2000, respectively. Interest accrued during the facility period is payable on the first business day of the following calendar year. Accrued interest at December 31, 2001 and 2000 was $3 and $2 (unaudited), respectively. Interest income recorded during 2001 and 2000 was $5 and $6 (unaudited), respectively. The principal balance of the AT&T Loan Receivable was $80 and $126 (unaudited) at December 31, 2001 and 2000, respectively. During 2001, AT&T made principal payments of $764 and took advances of $718. Subsequent to December 31, 2001, all amounts due under the AT&T Loan Receivable were paid to Concert. LOANS DUE TO RELATED PARTIES On November 29, 2001, in connection with the Termination Agreement, through a series of transactions AT&T and BT converted to equity the outstanding amounts of the AT&T Term Loan, BT Term Loan and amounts equal to the related accrued interest of $1,113 and $1,008, respectively. Prior to the conversion, accrued interest of $113 and $104 on the AT&T and BT Term Loans, respectively was paid. Subsequent to this transaction, the AT&T and BT Term Loans were cancelled and terminated. 18 CONCERT, B.V. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT SHARE DATA) -------- During January 2000, Concert renewed a $904 term loan facility ("BT Term Loan") with BT. The BT Term Loan, as amended, will expire on January 18, 2003. Interest accrues daily on the basis of the actual number of days elapsed and a 365 day year, at the rate of the three month LIBOR plus 40 basis points, which is measured at the beginning of each quarter, or 4.94% and 6.58% (unaudited) at December 31, 2001 and 2000, respectively. Accrued interest payable at December 31, 2001 and 2000 was zero and $60 (unaudited), respectively. Interest expense recorded during the years ended December 31, 2001 and 2000 on the BT Term Loan was $49 and $60 (unaudited), respectively. During January 2000, Concert entered into a $1,000 term loan facility ("AT&T Term Loan") with a wholly owned subsidiary of AT&T. The AT&T Term Loan was drawn down during January and February 2000, in separate advances totaling $1,000. The AT&T Term Loan, as amended, will expire on January 18, 2003. Interest is accrued daily on the basis of the actual number of days elapsed and a 360 day year, at the rate of a three month LIBOR plus 40 basis points, which is calculated at the beginning of each quarter, or 3.00% and 7.20% (unaudited) at December 31, 2001 and 2000, respectively. Accrued interest payable at December 31, 2001 and 2000 was zero and $67 (unaudited), respectively. Interest expense recorded during the years ended December 31, 2001 and 2000 on the AT&T Term Loan was $46 and $67 (unaudited), respectively. The AT&T Term Loan is denominated in a currency other than the Company's functional currency. Accordingly, the carrying value of the loan is subject to foreign exchange rate risk. Concert recorded an unrealized foreign currency loss on the AT&T Term Loan in the amount of $47 and $92 (unaudited) for the years ended December 31, 2001 and 2000, respectively, which is included in loss on foreign currency transactions, net on the Consolidated Statements of Operations. OTHER TRANSACTIONS WITH OR ON BEHALF OF THE PARENTS During the year ended December 31, 2000, the Parents made additional contributions of buildings in the amount of $41 (unaudited), cash and contribution receivable in the amount of $278 (unaudited) and other assets of $2 (unaudited). Concert also paid $52 (unaudited) of estimated income taxes on behalf of its Parents in accordance with applicable tax laws and regulations. On July 1, 2000, Concert acquired certain assets and assumed certain liabilities of AT&T Global Markets Europe ("GME") for $72 (unaudited). Of the purchase price, $50 (unaudited) was paid during 2000 with the balance paid in 2001 and 2002. This transaction resulted in Concert acquiring the customer base, customer lists, related receivables and 19 CONCERT, B.V. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT SHARE DATA) -------- obligations for the data and voice services provided to third parties by GME. The Company recorded liabilities of approximately $163 (unaudited), accounts receivable and other assets of approximately $147 (unaudited) and an intangible asset for the customer base of approximately $88 (unaudited). The Company is amortizing the identifiable intangible asset over five years. In December 2001, the Company completed negotiations to settle certain receivables and payables, which arose post GV formation, in dispute with the Parents. Against the total net unresolved disputes registered at December 31, 2001, Concert reserved $141 as an estimated loss in the accompanying Consolidated Balance Sheets and Consolidated Statements of Operations. The final resolution of this issue has concluded that the reserves were sufficient to close all parental disputes at December 31, 2001. 4. PROPERTY AND EQUIPMENT As of December 31, 2001 and 2000, property and equipment consists of the following:
(Unaudited) 2001 2000 ------- ------- Network and other equipment $ 2,016 $ 2,656 Construction in progress 222 1,162 Software developed for internal use 345 256 Administrative assets 233 149 ------- ------- 2,816 4,223 Less accumulated depreciation and amortization (1,072) (470) ------- ------- Property and equipment, net $ 1,744 $ 3,753 ======= =======
Property and equipment under capital lease is $59 at December 31, 2001 and 2000 (unaudited) and consist primarily of sub-sea cable assets and related equipment. Accumulated depreciation at December 31, 2001 and 2000, related to property and equipment under capital lease, was $4 and zero (unaudited), respectively. These assets are being amortized over the shorter of their estimated useful lives or the related lease term. Depreciation and amortization expense related to property and equipment for the years ended December 31, 2001 and 2000 amounted to $602 and $470 (unaudited), respectively. In connection with the execution of the Termination Agreements discussed in Note 1, it has been determined that certain of the Company's development projects will no longer be 20 CONCERT, B.V. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT SHARE DATA) -------- continued. Accordingly, certain development assets have been abandoned. A charge of $35 was recorded for these projects during 2001 and is included in operating expenses on the Consolidated Statement of Operations. Additionally, as a result of the decision to unwind the GV, certain assets have been identified which remain functional, and are required in the GV's operations, but which will not be required by either Parent after Close. As of October 15, 2001, the date of the Termination Agreements, management has accelerated the depreciation on these assets such that they will be fully depreciated at Close. Accelerated depreciation of approximately $22 was recorded during the year ended December 31, 2001. During 2001, events and circumstances within the telecommunications industry occurred, including the October 15, 2001 announcement by AT&T and BT to terminate the GV, which indicated that the carrying amount of the Company's long-lived assets and related intangible assets may not be recoverable. Accordingly, the Company prepared an undiscounted cash flow analysis to determine if an impairment existed at the balance sheet date. The analysis was prepared assuming Concert would continue in existence as constituted before the signing of the Termination Agreement dated October 15, 2001. The cash flows used in this hypothetical model assumed the assets were to be held and used and was provided by former Concert B.V. employees, now working for either AT&T or BT and may not be realized by the Company, AT&T or BT. The total future undiscounted cash flows in this analysis were less than the carrying amount included in the accompanying Consolidated Balance Sheet of the underlying long-lived assets and intangible assets at December 31, 2001. Accordingly, an impairment loss of $2,535 was recorded in the Consolidated Statements of Operations. This loss represents the amount by which the carrying amount of the long-lived assets, related intangible assets and goodwill being evaluated exceeded the fair value of the underlying assets. The estimated fair value of the long-lived assets at December 31, 2001 was determined through the use of discounted cash flow analysis. Given the nature of the Company's assets and operations, the cash flow analysis was prepared at the entity level, which is the asset level for which the lowest level of cash flows was identifiable. As a result, the Company has written off goodwill prior to making any reduction of the carrying amounts of the impaired long-lived assets and other identifiable intangible assets. As the impairment loss exceeds the carrying amount of goodwill, at December 31, 2001, goodwill totaling $690 has been fully written off. The remaining portion of the impairment 21 CONCERT, B.V. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT SHARE DATA) -------- loss, has been allocated to customer lists and then among the Company's property and equipment, $56 and $1,789, respectively. 5. INTANGIBLE ASSETS As of December 31, 2001 and 2000, Concert's intangible assets consisted of the following:
(Unaudited) 2001 2000 ----- ----- Goodwill $ -- $ 795 Customer lists and other -- 86 ----- ----- -- 881 Less accumulated amortization -- (51) ----- ----- Intangible assets, net $ -- $ 830 ===== =====
Amortization related to intangible assets for the years ended December 31, 2001 and 2000 amounted to $63 and $55 (unaudited), respectively. As described in Note 4, the Company recorded an impairment loss during the year ended December 31, 2001 which resulted in the reduction of the intangible asset values to zero. During 2000, the Company purchased $20 (unaudited) of prepaid capacity rights for cash included in Intangible and other assets on the Consolidated Balance Sheets. During 2001, the financial conditions of the provider indicated probable non-performance of the commitment by the provider. The Company wrote-off the prepayment of $20 and included the result in operating expenses on the Consolidated Statements of Operations for the year ended December 31, 2001. 6. SHAREOWNERS' EQUITY The authorized share capital amounts of the Company as of December 31, 2001 and 2000 consists of 300,000 of each Class A and Class B ordinary shares with an authorized par value of NLG 150. Class A ordinary share issued capital amounts to $6 and consists of 125,101 ordinary shares with a par value of NLG 100 per share. Class B ordinary share issued capital amounts to $24 and consists of 125,101 ordinary shares with a par value of NLG 400 per share. Notwithstanding the difference in par value, the Class A shares and the Class B shares have identical rights. 22 CONCERT, B.V. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT SHARE DATA) -------- On November 29, 2001, in connection with the Termination Agreements, the Company issued one Class A share, with a par value of NLG 100 to AT&T in consideration for the outstanding AT&T Term Loan and related accrued interest (as described in Note 3) of $1,113. The Company also issued one Class B share, with a par value of NLG 400 to BT in consideration for the outstanding BT Term Loan and related accrued interest (as described in Note 3) of $1,008. On January 5, 2000, in connection with the formation of the GV, Concert B.V. became the ultimate parent company of the Global Venture. Concurrent with the formation of the GV, BT retained their ownership of 125,100 Class B shares, and 125,100 Class A shares were issued to AT&T for its contribution. 7. EMPLOYEE BENEFIT PLANS 401(k) PLAN Concert maintains a defined contribution retirement savings plan under Section 401(k) of the United States of America Internal Revenue Code. This plan, covering substantially all US-based employees meeting the minimum age and service requirements, allows participants to defer a portion of their annual compensation on a pre and post-tax basis. Under the plan, Concert will match 66.7% of every dollar the employee contributes up to a maximum of 6% of the employee's annual base salary. The company matches both employee pre and after-tax contributions. Concert contributions to the plan for the years ended December 31, 2001 and 2000 totaled $11 and $11 (unaudited), respectively. PENSION PLAN Concert maintains a non-contributory defined benefit pension plan ("Cash Balance") covering the majority of its US-based employees. Concert also maintains a Supplemental Executive Retirement Plan (the "SERP"). The Plans were effective January 5, 2000. The Cash Balance plan is a non-contributory defined benefit pension plan. Employees are eligible to participate in the Cash Balance plan if they are compensated by salary or commission or by a combination of both. Retirement benefits are normally payable upon reaching age 65. Pension trust contributions are made to trust funds held for the sole benefit of plan participants. Each participant is assigned a nominal cash balance account that grows by pay credits and interest credits. Benefits are paid in either a lump sum or annuity form of payment based upon the election of the employee. 23 CONCERT, B.V. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT SHARE DATA) -------- The following table shows the change in benefit obligation, change in plan assets, funded status, accrued benefit cost, and components of the net periodic benefit cost for the Cash Balance and SERP included in the accompanying financial statements for the years ended December 31, 2001 and 2000:
(Unaudited) 2001 2000 -------- -------- CHANGE IN BENEFIT OBLIGATION Benefit obligation at beginning of year $ 8 $ -- Service cost 9 6 Interest cost -- -- Actuarial loss 2 2 Benefits paid (1) -- Additional benefit based on estimated future salary levels -- -- Curtailment 2 -- -------- -------- Benefit obligation at end of year $ 20 $ 8 ======== ======== CHANGE IN PLAN ASSETS Fair value of plan assets at beginning of year $ -- $ -- Actual return on plan assets -- -- Employer contribution 9 -- Benefits paid (1) -- -------- -------- Fair value of plan assets at end of year $ 8 $ -- ======== ======== FUNDED STATUS, AT DECEMBER 31 $ (12) $ (8) UNRECOGNISED NET LOSS, AT DECEMBER 31 3 2 -------- -------- ACCRUED BENEFIT COST, AT DECEMBER 31 $ (9) $ (6) ======== ======== COMPONENTS OF NET PERIODIC BENEFIT COST Service cost $ 9 $ 6 Interest cost -- -- Expected return on plan assets -- -- Amortisation of net loss -- -- Curtailment charge 2 -- -------- -------- Net periodic benefit cost $ 11 $ 6 ======== ========
24 CONCERT, B.V. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT SHARE DATA) -------- The following rates and assumptions were used in the measurement of the pension benefit obligations at December 31, 2001 and 2000:
(Unaudited) 2001 2000 ---- ---- Weighted average discount rate 7.25% 7.50% Expected return on plan assets 9.00% 9.00% Rate of compensation increase 5.50% 6.00%
In connection with Concert's Reduction in Force Programs (see Note 8), curtailment accounting was applied as of December 31, 2001 with respect to the 743 participants scheduled to terminate service with a vested benefit during 2002 as part of the Reduction in Force Program. The resultant increase in the projected benefit obligation is treated as a curtailment loss and recognized immediately as a component of 2001 expense. Certain Concert employees previously employed by BT or AT&T continue to participate in their respective parent's cash balance pension plans. These employees are not eligible to participate in the Concert cash balance plan, and Concert makes payments to the parents on behalf of these employees. These payments are included in operating expenses on the Consolidated Statement of Operations. 8. EMPLOYEE TERMINATION CHARGES On April 5, 2001, Concert announced a Reduction in Force program. As a result of this program, Concert terminated 389 employees across various levels throughout the Company. In connection with the Termination Agreements described in Note 1, Concert announced an additional Reduction in Force program. This program called for the termination of 1,770 employees to be effected in three phases. All employees effected by the reduction in force program were notified of their termination date and were advised of the amount of their termination benefits on or before December 31, 2001. The Company recorded a charge for employee termination benefits of $172 in 2001 related to these activities. This amount is included in operating expenses in the Consolidated Statements of Operations. At December 31, 2001, the Company had $136 included in accrued employee related costs on the Consolidated Balance Sheet related to employee termination benefits and expects to pay these amounts through 2002. 25 CONCERT, B.V. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT SHARE DATA) -------- 9. INCOME TAXES The provision for (benefit from) income taxes for the years ended December 31, 2001 and 2000 are comprised of the following:
(Unaudited) 2001 2000 ---- ---- Current $(68) $ 97 Deferred (8) 1 ---- ---- Income tax (benefit) expense $(76) $ 98 ==== ====
Deferred income tax liabilities are taxes that Concert expects to pay in future periods. Similarly, deferred income tax assets are recorded for expected reductions in taxes payable in future periods. Deferred income taxes arise because of differences in the book and tax basis of certain assets and liabilities. The following is a summary of the significant U.S. and foreign items giving rise to components of Concert's deferred tax assets and liabilities at December 31, 2001 and 2000:
(Unaudited) 2001 2000 -------- -------- Assets: Deductible items $ 75 $ 87 Less: valuation allowance (75) (42) -------- -------- Net deferred tax asset -- 45 Liabilities: Depreciation (1) (54) -------- -------- Total deferred tax liability $ (1) $ (9) ======== ========
At December 31, 2001 and 2000, Concert had net operating loss carryforwards of $14 and $200 (unaudited), respectively, generated primarily in the United Kingdom. Due to UK net operating loss carryover statutory provisions, it is unlikely the Company will recognize the benefit of these losses. The change in valuation allowance reflects the determination that a tax benefit related to the net operating losses will not be recognized. 26 CONCERT, B.V. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT SHARE DATA) -------- A reconciliation between the statutory federal income tax rate and the effective rate of income taxes for the years ended December 31, 2001 and 2000 is as follows:
(Unaudited) 2001 2000 ----- ---- United States federal statutory income tax rate 35.0% 35.0% Benefit of United States partnership status (8.1)% (10.5)% Non-United States net income (23.3)% (5.5)% Non-deductible charges (0.7)% 26.7% Other (0.9)% 2.6% ----- ---- Effective income tax rate 2.0% 48.3% ===== ====
10. COMMITMENTS AND CONTINGENCIES In the normal course of business, Concert is subject to proceedings, lawsuits and other claims. Such matters are subject to many uncertainties, and outcomes are not predictable with assurance. Consequently, Concert is unable to ascertain the ultimate aggregate amount of monetary liability or financial impact which may exist with respect to these matters at December 31, 2001. Concert believes that after final disposition, any monetary liability or financial impact beyond that provided for at December 31, 2001 will not be material to Concert's operations, financial position or cash flows. Concert leases office facilities, network facilities, airplanes, and copier equipment under operating leases that expire in various years through 2013. In addition, Concert leases capacity on telecommunication cables classified as capital leases. Future minimum annual payments under capital leases and non-cancelable operating leases with initial terms of one year or more consist of the following at December 31, 2001: 27 CONCERT, B.V. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT SHARE DATA) --------
Capital Operating Years ending December 31, Leases Leases ---------- ------------ 2002 $ 16 $ 34 2003 16 28 2004 14 23 2005 - 18 2006 - 15 Thereafter - 51 ---------- ------------ Total minimum lease payments 46 $ 169 ============ Less amount reported as interest (2) Less current portion (15) ---------- Capital lease obligations, net of current portion $ 29 ==========
Expenses for operating leases, including month to month leases, amounted to $118 and $111 (unaudited) for the years ended December 31, 2001 and 2000, respectively. Concert also incurs costs with its Parents for accommodation expenses, under separate commercial agreements. Rent expense, under these agreements amounted to $44 and $42 (unaudited) for the years ended December 31, 2001 and 2000, respectively. In addition, Concert has month to month lease agreements for shared network accommodations with third parties. Rent expense for the years ended December 31, 2001 and 2000 under these agreements was $26 and $49 (unaudited), respectively. 11. DERIVATIVE FINANCIAL INSTRUMENTS In the normal course of business, Concert uses derivative financial instruments for purposes other than trading. Concert does not use derivative financial instruments for speculative purposes. These instruments are limited to foreign currency exchange contracts. Foreign currency exchange contracts are used to manage Concert's exposure to changes in currency exchange rates related to foreign-currency-denominated transactions. In 2001, this consisted principally of British pounds sterling, European Union currency ("EURO") and Japanese Yen contracts related to international carrier settlements, intercompany loans and reimbursement from European distribution channels. Concert has established policies and procedures for risk assessment and the approval, reporting and monitoring of derivative financial instrument activities. By their nature, derivative instruments involve risk, including the credit risk of non-performance by counterparties. At December 31, 2001, it is management's opinion that there is no significant risk of loss in the event of non-performance of the counterparties to these 28 CONCERT, B.V. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT SHARE DATA) -------- financial instruments. Concert controls its exposure to credit risk through credit approvals, credit limits and monitoring procedures. Concert does not have any significant exposure to any individual counter-party, nor any major concentration of credit risk related to any derivative financial instruments. Foreign currency forward contracts amounted to $324 and $157 (unaudited) to purchase foreign currencies and $247 and $63 (unaudited) to sell foreign currencies at December 31, 2001 and 2000, respectively, resulting in net unrealized gains of $4 and $2 (unaudited) for the years ended December 31, 2001 and 2000, respectively. All of these contracts mature in 2002. Gains and losses on these contracts are recorded in earnings in other income (expense), net and offset gains and losses from the revaluation of the underlying assets and liabilities recorded in currencies other than the Company's functional currency. 29 -----END PRIVACY-ENHANCED MESSAGE-----