EXHIBIT 99.5
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