Exhibit 99.1
Exhibit 99.1
360networks Corporation
CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2010 and 2009
360networks Corporation
Consolidated Statements of Income
|
|
|
|
|
|
|
|
|
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|
Year ended December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
76,128,419 |
|
|
$ |
67,114,601 |
|
|
|
|
|
|
|
|
|
|
Direct operating costs |
|
|
31,225,855 |
|
|
|
28,454,938 |
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative |
|
|
26,624,095 |
|
|
|
24,592,162 |
|
Stock based compensation |
|
|
514,177 |
|
|
|
1,159,751 |
|
Provision for bad debt |
|
|
191,250 |
|
|
|
311,970 |
|
|
|
|
|
|
|
|
|
|
Depreciation and accretion |
|
|
7,765,411 |
|
|
|
7,879,165 |
|
|
|
|
|
|
|
|
|
|
Restructuring expense |
|
|
216,303 |
|
|
|
88,870 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
9,591,328 |
|
|
|
4,627,745 |
|
|
|
|
|
|
|
|
|
|
Net gain on settlements |
|
|
37,000 |
|
|
|
9,725,000 |
|
|
|
|
|
|
|
|
|
|
Net gain on sale or transfer of assets |
|
|
23,401,172 |
|
|
|
23,126 |
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
(79,415 |
) |
|
|
(80,645 |
) |
|
|
|
|
|
|
|
|
|
Interest and dividend income |
|
|
1,911,078 |
|
|
|
262,675 |
|
|
|
|
|
|
|
|
|
|
Other income |
|
|
3,256,065 |
|
|
|
1,075,515 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Income before income taxes |
|
|
38,117,228 |
|
|
|
15,633,416 |
|
|
|
|
|
|
|
|
|
|
Provision for income taxes |
|
|
531,760 |
|
|
|
77,240 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
37,585,468 |
|
|
$ |
15,556,176 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share |
|
|
|
|
|
|
|
|
Basic |
|
$ |
3.63 |
|
|
$ |
1.54 |
|
Diluted |
|
$ |
3.18 |
|
|
$ |
1.34 |
|
See accompanying notes
360networks F-2
360networks Corporation
Consolidated Statements of Cash Flows
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Year ended December 31 |
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|
|
2010 |
|
|
2009 |
|
Operating activities |
|
|
|
|
|
|
|
|
Net income for the period |
|
$ |
37,585,468 |
|
|
$ |
15,556,176 |
|
Add (deduct) items to reconcile to net cash
from operating activities |
|
|
|
|
|
|
|
|
Stock based compensation |
|
|
514,177 |
|
|
|
1,159,751 |
|
Provision for bad debts |
|
|
145,896 |
|
|
|
285,612 |
|
Depreciation and accretion |
|
|
7,765,411 |
|
|
|
7,879,165 |
|
Net gain on settlements |
|
|
(37,000 |
) |
|
|
(9,725,000 |
) |
Net gain on sale of assets |
|
|
(23,401,172 |
) |
|
|
(23,126 |
) |
Net gain on extinguishment of liabilities |
|
|
(4,551,623 |
) |
|
|
|
|
Loss on unsecured creditor settlement |
|
|
1,475,691 |
|
|
|
|
|
Loss on sale of investments |
|
|
21,622 |
|
|
|
3,216 |
|
|
|
|
Changes in operating working capital items |
|
|
10,803,853 |
|
|
|
(5,302,452 |
) |
|
|
|
|
|
|
|
Cash provided by operating activities |
|
|
30,322,323 |
|
|
|
9,833,342 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Investing activities |
|
|
|
|
|
|
|
|
Additions to property and equipment |
|
|
(23,067,713 |
) |
|
|
(9,064,413 |
) |
Purchase of investments |
|
|
(11,044,905 |
) |
|
|
(8,000,000 |
) |
Proceeds from sale of investments |
|
|
|
|
|
|
324,293 |
|
Proceeds from sale of assets |
|
|
907,746 |
|
|
|
23,126 |
|
Change in restricted cash |
|
|
109,275 |
|
|
|
193,225 |
|
Payments on note receivable |
|
|
160,689 |
|
|
|
149,856 |
|
|
|
|
|
|
|
|
Cash used by investing activities |
|
|
(32,934,908 |
) |
|
|
(16,373,913 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities |
|
|
|
|
|
|
|
|
Payment on capital leases |
|
|
(79,358 |
) |
|
|
(43,658 |
) |
Repurchase of issued and outstanding stock |
|
|
(492,425 |
) |
|
|
(330,138 |
) |
Exercise of stock options |
|
|
1,786 |
|
|
|
92,970 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash used by financing activities |
|
|
(569,997 |
) |
|
|
(280,826 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents |
|
|
(3,182,582 |
) |
|
|
(6,821,397 |
) |
Cash and cash equivalents-beginning of period |
|
|
12,404,949 |
|
|
|
19,226,346 |
|
|
|
|
|
|
|
|
Cash and cash equivalents-end of period |
|
$ |
9,222,367 |
|
|
$ |
12,404,949 |
|
|
|
|
|
|
|
|
See accompanying notes
360networks F-3
360networks Corporation
Consolidated Balance Sheets
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|
Year ended December 31, |
|
|
|
2010 |
|
|
2009 |
|
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|
ASSETS |
|
|
|
|
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|
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|
|
|
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|
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Current assets |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
9,222,367 |
|
|
$ |
12,404,949 |
|
Accounts receivable |
|
|
4,142,024 |
|
|
|
14,269,888 |
|
Note receivable, current portion |
|
|
172,305 |
|
|
|
160,689 |
|
Other |
|
|
1,860,552 |
|
|
|
1,491,906 |
|
|
|
|
|
|
|
|
|
|
|
15,397,248 |
|
|
|
28,327,432 |
|
|
|
|
|
|
|
|
|
|
Restricted cash |
|
|
357,500 |
|
|
|
466,775 |
|
Investments |
|
|
43,533,302 |
|
|
|
8,185,209 |
|
Restricted investments |
|
|
14,917,186 |
|
|
|
|
|
Note receivable |
|
|
997,634 |
|
|
|
1,169,939 |
|
Property and equipment |
|
|
73,855,994 |
|
|
|
61,682,009 |
|
Intangible assets |
|
|
260,817 |
|
|
|
281,655 |
|
Deferred charge |
|
|
4,236,037 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
153,555,718 |
|
|
$ |
100,113,019 |
|
|
|
|
|
|
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|
LIABILITIES |
|
|
|
|
|
|
|
|
Current liabilities |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
10,531,507 |
|
|
$ |
6,210,542 |
|
Wages payable |
|
|
5,177,391 |
|
|
|
3,952,322 |
|
Leases payable, current portion |
|
|
35,699 |
|
|
|
43,658 |
|
Income tax payable |
|
|
525,161 |
|
|
|
28,190 |
|
Other accrued liabilities |
|
|
17,176,009 |
|
|
|
22,251,707 |
|
Deferred revenue, current portion |
|
|
3,279,361 |
|
|
|
2,935,786 |
|
|
|
|
|
|
|
|
|
|
|
36,725,128 |
|
|
|
35,422,205 |
|
|
|
|
|
|
|
|
|
|
Deferred revenue |
|
|
35,873,832 |
|
|
|
36,365,739 |
|
Other long-term liabilities |
|
|
288,951 |
|
|
|
3,657,680 |
|
|
|
|
|
|
|
|
|
|
|
72,887,911 |
|
|
|
75,445,624 |
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
Capital stock |
|
|
75,709,898 |
|
|
|
75,708,112 |
|
Other capital accounts |
|
|
45,865,178 |
|
|
|
27,452,020 |
|
Retained deficit |
|
|
(40,907,269 |
) |
|
|
(78,492,737 |
) |
|
|
|
|
|
|
|
|
|
|
80,667,807 |
|
|
|
24,667,395 |
|
|
|
|
|
|
|
|
|
|
$ |
153,555,718 |
|
|
$ |
100,113,019 |
|
|
|
|
|
|
|
|
See accompanying notes
360networks F-4
360networks Corporation
Consolidated Changes in Stockholders Equity
|
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|
|
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|
|
|
|
|
|
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|
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|
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|
|
|
|
|
|
Common Shares |
|
|
Other Capital Accounts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
other |
|
|
|
|
|
|
|
|
|
Number of |
|
|
|
|
|
|
Additional paid in |
|
|
comprehensive |
|
|
|
|
|
|
|
|
|
shares |
|
|
Amount |
|
|
Capital |
|
|
income |
|
|
Retained Deficit |
|
|
Total |
|
Balance, December 31, 2008 |
|
|
10,661,730 |
|
|
$ |
75,636,404 |
|
|
$ |
25,144,980 |
|
|
$ |
1,555,405 |
|
|
$ |
(94,048,913 |
) |
|
$ |
8,287,876 |
|
Share options exercised |
|
|
39,836 |
|
|
|
92,970 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
92,970 |
|
Repurchase of issued and outstanding common stock |
|
|
(21,680 |
) |
|
|
(21,262 |
) |
|
|
(308,876 |
) |
|
|
|
|
|
|
|
|
|
|
(330,138 |
) |
Issuance of restricted stock |
|
|
237,500 |
|
|
|
|
|
|
|
225,058 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of deferred stock based compensation |
|
|
|
|
|
|
|
|
|
|
407,488 |
|
|
|
|
|
|
|
|
|
|
|
1,159,751 |
|
Other stock based compensation |
|
|
|
|
|
|
|
|
|
|
527,205 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income for the 12 months ended December 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,556,176 |
|
|
|
15,556,176 |
|
Other comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss on available-for-sale equity securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(167,387 |
) |
|
|
|
|
|
|
(167,387 |
) |
Foreign currency translation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
68,147 |
|
|
|
|
|
|
|
68,147 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,556,176 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2009 |
|
|
10,917,386 |
|
|
|
75,708,112 |
|
|
|
25,995,855 |
|
|
|
1,456,165 |
|
|
|
(78,492,737 |
) |
|
$ |
24,667,395 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share options exercised |
|
|
3,207 |
|
|
|
1,786 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,786 |
|
Repurchase of vested stock options |
|
|
|
|
|
|
|
|
|
|
(492,425 |
) |
|
|
|
|
|
|
|
|
|
|
(492,425 |
) |
Issuance of restricted stock |
|
|
104,283 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of deferred stock based compensation |
|
|
|
|
|
|
|
|
|
|
514,177 |
|
|
|
|
|
|
|
|
|
|
|
514,177 |
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income for the 12 months ended December 31, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37,585,468 |
|
|
|
37,585,468 |
|
Other comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification of realized gain on available-for-sale securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
105,147 |
|
|
|
|
|
|
|
105,147 |
|
Unrealized gain on available-for-sale equity securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,525,867 |
|
|
|
|
|
|
|
15,525,867 |
|
Foreign currency translation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,760,392 |
|
|
|
|
|
|
|
2,760,392 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
55,976,874 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2010 |
|
|
11,024,876 |
|
|
$ |
75,709,898 |
|
|
$ |
26,017,607 |
|
|
$ |
19,847,571 |
|
|
$ |
(40,907,269 |
) |
|
$ |
80,667,807 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes
360networks F-5
360networks Corporation
Notes to Consolidated Financial Statements
1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company
360networks Corporation and its subsidiaries (the Company) provide fiber optic network
communications products and related services to both telecommunication carriers and commercial
enterprises. The Company provides these services primarily in the western United States and prior
to November 19, 2004, in Canada.
In June 2001, the Companys former parent company, 360networks, Inc., and certain of its
subsidiaries voluntarily filed for creditors protection under the Companies Creditors Arrangement
Act (Canada) (CCAA) in the Supreme Court of British Columbia, Canada, or under Chapter 11 of the
U.S. Bankruptcy Code. In November 2002, the Company and certain of its subsidiaries successfully
completed their financial restructuring in Canada and the United States and emerged from creditor
protection.
As of November 12, 2002, the Company adopted fresh-start reporting pursuant to the guidance
provided by the American Institute of Certified Public Accountants. In connection with the
adoption of fresh-start reporting, a new entity was created for financial reporting purposes. The
effective date of the Companys emergence from bankruptcy protection is considered to be the close
of business on November 11, 2002, for financial reporting purposes.
Basis of presentation
The accompanying consolidated financial statements have been prepared in accordance with accounting
principles generally accepted in the United States (U.S. GAAP) and include the accounts of the
Company and its wholly-owned subsidiaries. These consolidated financial statements also include all
adjustments that, in the opinion of management, are necessary to present fairly the Companys
financial position at December 31, 2010 and 2009, and its results of operations and cash flows for
the years ended December 31, 2010 and 2009. All significant inter-company transactions and
balances have been eliminated on consolidation.
Use of estimates
The preparation of consolidated financial statements in conformity with GAAP requires management to
make estimates and assumptions which affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the consolidated financial
statements and revenues and expenses for the periods reported. Actual results could differ from
those estimates.
Examples of significant estimates and assumptions are the estimated useful lives of assets, the
recoverability of tangible assets, the composition of deferred income tax assets and deferred
income tax liabilities, the accruals for payroll and other employee-related liabilities, the
accruals for restructuring and workforce reduction costs, the fair values applicable to asset
retirement obligations and the fair values used to allocate the acquisition costs applicable to the
assets and liabilities acquired.
360networks F-6
360networks Corporation
Notes to Consolidated Financial Statements
Cash and cash equivalents
Cash and cash equivalents consist of cash on deposit and highly liquid short-term interest bearing
securities with terms at the date of purchase of three months or less, which are generally held to
maturity.
Accounts receivable
Accounts receivable are stated at the amount management expects to collect on outstanding balances.
Receivables from customers are due 30 days after issuance of the invoice. Delinquent accounts are
charged to the receivable provision when it is determined that the account will not be collected
and the account is sent to collection. The final determination of the accounts status is made at a
minimum of 45 days past due. Management provides for probable uncollectible amounts through a
provision for bad debts and an allowance for doubtful accounts based on its assessment of the
current status of the accounts.
Restricted cash
Restricted cash represents cash applicable to letters of credit, cash held in escrow, and other
deposits.
Investments
The Companys policy for investment securities is as follows:
Securities available for sale: Securities not classified as held to maturity or trading are
classified as available for sale. Available for sale securities are stated at fair value, with any
unrealized gains and losses reported as a separate component of stockholders equity.
Trading securities: Trading securities consist of debt and equity securities that are bought and
held principally for the purpose of selling in the near term and are reported at fair value, with
unrealized gains and losses included in earnings. The Company did not hold any trading securities
during 2010 or 2009.
Securities held to maturity: Debt securities for which the Company has the positive intent and
ability to hold to maturity are classified as held to maturity. Held to maturity securities are
stated at amortized cost. The Company did not hold any held to maturity securities during 2010 or
2009.
Property and equipment
Fiber optic network assets constructed for the Companys own use are recorded at cost, which
includes direct expenditures on materials and labor and an allocation of indirect costs and
interest. Acquired network assets, including the use of dark fiber and conduit under
indefeasible rights of use (IRU), are recorded at cost. Other property and equipment is
recorded at cost.
Property and equipment are depreciated using the following rates and methods:
|
|
|
Fiber optic network assets straight-line basis ranging from 20 to 25 years. |
|
|
|
Operating equipment straight-line basis ranging from 2 to 10 years. |
|
|
|
Buildings straight-line basis ranging from 15 to 20 years. |
|
|
|
Leasehold improvements straight-line basis over the term of the lease. |
Network assets under construction and land are not subject to depreciation.
360networks F-7
360networks Corporation
Notes to Consolidated Financial Statements
Fiber optic network assets include rights of way, conduit, fiber, shelters, and point of presence
racks. Operating equipment includes network equipment, other equipment necessary to operate the
network, and furniture, fixtures and office equipment. Repairs and maintenance costs are charged to
operations when incurred.
The Companys policy is to depreciate and amortize its long-lived assets over their remaining
useful lives and to write down such assets if the net carrying value is not recoverable from future
cash flows. The assessment as to whether a write down is required is based on the Companys
estimates of future cash flows and the Companys assumptions about the use of the assets. When the
Company determines the carrying value is not recoverable, the assets are written down to their
estimated fair value.
Intangible assets
As-built drawings are being amortized on a straight-line basis over 20 years. This amortization
period is based on the expected life of the intangible asset.
The Company reviews the carrying amount of intangible assets annually for impairment. The
determination of impairments is based on a comparison of undiscounted estimated future cash flows
anticipated to be generated during the remaining life of the asset to the net carrying value of the
asset. If impairment is determined, the intangible asset is written down to estimated fair value.
Asset retirement obligations
The Company recognizes a liability for asset retirement obligations in the period in which the
obligation is incurred if a reasonable estimate of fair value can be made. The associated
retirement costs are capitalized as part of the carrying value of the long-lived assets and
amortized over the period of the useful life of the asset. The obligation is increased annually by
accretion that is charged to the statement of operations and reduced to reflect assets that have
been disposed of during the year.
Revenue recognition network and communication services
Network services revenue primarily includes revenue from network capacity leased to others and
related network and maintenance services. Revenue from communication services is derived from
private line, data and local telecommunication services. Revenues from these services are
recognized based either on customer usage as measured by the Companys switches or by contractual
agreements.
360networks F-8
360networks Corporation
Notes to Consolidated Financial Statements
Revenues are recognized monthly as services are provided. Advance payments on maintenance contracts
are included in deferred revenue.
Certain IRUs of dark fiber and other assets are accounted for as operating leases or service
arrangements depending on the whether the customer has the exclusive right to use the assets.
Revenue is recognized on both operating leases and service arrangements on a straight-line basis
over the term of the contract. The Company also leases facilities to customers for placement of
equipment. Revenues on these facilities are recognized on a straight-line basis over the term of
the lease arrangement. Payments received in advance of revenue recognition are included in deferred
revenue.
Under dark fiber and capacity contracts, the Company is required to operate and maintain the
network in accordance with industry standards. Under these contracts, customers are charged for
certain operating and maintenance fees for the term of each contract. This revenue is recognized
over the life of the contract. These contracts require the Company to provide certain service
level commitments. If the Company does not meet the required service levels, it may be obligated to
provide credits, usually in the form of free service for a short period of time. Services provided
under these credits are not included in revenue.
Revenue recognition infrastructure
Infrastructure revenue includes revenue from construction, operations and maintenance contracts,
and sales or leases of dark fiber and related assets when the customer retains title of the assets
after the transaction is complete. Advances received on contracts in excess of billings are
reflected as deferred revenue. The Company does not recognize any revenue on joint-build
construction projects where the Company and the counterparty share in the risks and rewards of the
project. Cash received applicable to joint-build construction projects is recorded as a recovery of
the construction costs incurred by the Company. Construction related revenue was not material
during 2010 and 2009.
Sales of dark fiber and/or conduit and grants of IRU where the customer obtains title to specific
assets are accounted for as a sale when acceptance has occurred, title has passed to the customer,
collection is reasonably assured, and the Company has no continuing involvement with the assets,
other than providing operating and maintenance services for a fee. When there is a continuing
involvement with the assets, the transaction is accounted for as a service arrangement and the
revenue is recognized over the expected life of the assets unless the contracted term is shorter.
Advances received on such contracts are reflected as deferred revenue.
Accounting practices and guidance with respect to IRU revenue recognition has evolved over the
years. Any future changes in the accounting treatment may affect the current recognition of
revenues and related costs.
360networks F-9
360networks Corporation
Notes to Consolidated Financial Statements
Gains and losses on settlements, terminations or modifications of contracts
The Company recognizes a gain on a termination of a contract when the customer or supplier and the
Company have reached a settlement/termination agreement, the Company has received the consideration
required under the settlement/termination agreement or the Company is no longer obligated to
provide additional products or services to the counterparty under the original agreement. Gains on
settlement and/or termination of contracts are recognized as nonoperating income.
The Company recognizes a loss on a termination of a contract when it is probable that the customer
or supplier and the Company will reach an agreement and the amount of the loss can be reasonably
estimated. Subsequent adjustments may be made when the Company has entered into a contract
termination or settlement agreement. In general, these transactions are entered into in order to
reduce costs in future periods. These losses are accounted for as losses on settlements.
Transactions that are generally of an ongoing operating nature are not accounted for as losses on
settlements. Examples of such transactions are:
|
|
|
Settlements applicable to the granting of current price adjustments, concession and/or
rebates under the original revenue contract are accounted for as a reduction of revenue. |
|
|
|
Assets returned by customers to whom they were originally sold to or constructed for are
accounted for as a reduction in revenue and an increase in assets at the lower of cost or
fair value at the date the assets are returned. |
|
|
|
Cost incurred in situations where the Company is obligated to provide additional product
and services for no further consideration are accounted for as operating costs. |
|
|
|
Uncollectable customer receivables when a customer has entered creditor protection or
similar financial restructuring proceedings are accounted for as a bad debt expense. |
Operating costs
Costs applicable to network infrastructure sales and sales-type leases, particularly dark fiber and
conduit, consist of direct costs such as the conduit, fiber optic cable, construction of
regeneration facilities, labor and an allocation of indirect costs such as rights-of-way, site
restoration, equipment costs, insurance and interest charges. These costs are allocated
proportionately to individual fiber strands based on the number of fiber strands installed on a
particular route.
Operating costs applicable to providing network services include only the direct costs of
operating, provisioning and maintaining the network. These costs also include lease costs,
rights-of-way costs, access charges, and other third party circuit costs directly attributable to
the network.
360networks F-10
360networks Corporation
Notes to Consolidated Financial Statements
Nonmonetary exchange transactions
The Company is a party to nonmonetary exchange transactions when the Company sells fiber assets,
IRUs, capacity, or services or enters into operating leases with a counter party from which the
Company receives assets or services in order to complete and complement its network. The Company
accounts for such exchanges of telecommunications capacity irrespective of the form of the
transaction based on the fair value of the assets given up. When these exchanges result in the
Company paying net monetary consideration, such consideration is recorded as an additional cost of
the fiber assets. When these exchanges result in the Company receiving net monetary consideration
that is significant, the monetary portion is recognized as revenue, and the related cost of the
assets disposed of is recorded as cost of sales.
Stock based compensation
The Company accounts for its stock based compensation using the fair value method. The Company
recognizes an expense over the term of each vesting period.
Foreign currency translation and transactions
Transactions in currencies other than the U.S. dollar are recorded at the exchange rate at the
transaction date. Changes in exchange rates applicable to foreign currency denominated assets and
liabilities result in gains and losses, which are included in the statement of operations.
Assets and liabilities of the Companys subsidiaries and operations that have a functional currency
other than the U.S. dollar are translated into U.S. dollars at the year end exchange rate. Revenues
and expenses for these businesses are translated at average exchange rates effective during the
year. Gains and losses resulting from foreign currency translations are included in other capital.
Although the Company no longer has foreign operations, it maintains bank accounts, holds
investments, and incurs professional service costs that result in translation adjustments.
Income taxes
Income taxes are accounted for using the liability method, which requires the recognition of taxes
payable or refundable for the current period and deferred tax liabilities and assets for future tax
consequences of events that have been recognized in the Companys financial statements or tax
returns. The measurement of current and deferred tax liabilities and assets is based on provisions
of enacted tax laws; the effects of future changes in tax laws or rates are not anticipated. The
measurement of deferred tax assets is reduced, if necessary, by a valuation allowance, where, based
on available evidence, the probability of realization of the deferred tax asset does not meet a
more likely than not criterion.
The Company records uncertain tax positions if the outcome was considered probable and could
reasonably be estimated. As of December 31, 2010 and 2009, the Company had no accrued amounts
related to uncertain tax positions.
360networks F-11
360networks Corporation
Notes to Consolidated Financial Statements
Earnings per share
Basic earnings per share is computed using the weighted-average number of shares outstanding during
each period. Diluted earnings per share is computed by using the treasury stock method to include
the dilutive effect of common stock that would be issued assuming the exercise of outstanding stock
options, stock based compensation awards, warrants and other dilutive securities, unless the result
would be antidilutive. The treasury stock method assumes that proceeds from in-the-money stock
options are used to repurchase outstanding common shares.
Accumulated other comprehensive income
Accumulated other comprehensive income consists of net income, foreign currency translation
adjustments and unrealized gains and losses arising from available for sale equity securities as
follows:
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
Foreign currency translation adjustment |
|
|
4,321,704 |
|
|
|
1,561,312 |
|
Unrealized gains (losses) from
available for sale securities |
|
|
15,525,867 |
|
|
|
(105,147 |
) |
|
|
|
|
|
|
|
|
|
|
19,847,571 |
|
|
|
1,456,165 |
|
|
|
|
|
|
|
|
Net gain on transfer of assets
During 2010, the Company entered into a transaction with Trilogy Energy Trust (Trilogy) wherein the
Company received shares of Trilogy in exchange for restructuring 360s wholly-owned subsidiary,
360networks (CDN fiber) ltd. This transaction is described in detail in note 5 (a) and resulted in
a nonoperating gain of $23,450,076 being recorded in the consolidated statement of income.
Subsequent events:
Subsequent events are events or transactions that occur after the balance sheet date but before
financial statements are available to be issued. The Company recognizes in the financial
statements the effects of all subsequent events that provide additional evidence about conditions
that existed at the date of the balance sheet, including the estimates inherent in the process of
preparing financial statements. The Companys financial statements do not recognize subsequent
events that provide evidence about conditions that did not exist at the date of the balance sheet
but arose after the balance sheet date and before financial statements are available to be issued.
Note 16 provides disclosure of certain subsequent events that did not result in recognition in the
financial statements.
The Company has evaluated subsequent events through July 13, 2011, which is the date the financial
statements are available to be issued.
360networks F-12
360networks Corporation
Notes to Consolidated Financial Statements
2 RESTRUCTURING LIABILITIES
The Company has liabilities related primarily to operating lease commitments that do not provide
economic benefit to the Company and have not been terminated. The Company continues to incur costs
in the form of monthly payments. A liability is recognized and measured at fair value in the year
the lease ceases to be used in operations. The initial recognition of the liability and subsequent
adjustment to the fair value of the lease obligation are charged to restructuring expense. The
detail of the Companys restructuring liability accruals are:
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
|
|
Balance beginning of period |
|
$ |
3,284,706 |
|
|
$ |
3,977,012 |
|
Accrual for total anticipated restructuring expenses |
|
|
216,304 |
|
|
|
88,870 |
|
Less payments and settlements completed in the year |
|
|
(670,951 |
) |
|
|
(781,176 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance end of period |
|
$ |
2,830,059 |
|
|
$ |
3,284,706 |
|
|
|
|
|
|
|
|
3 SETTLEMENTS
The Company reached a settlement agreement in December 2009 on its bankruptcy claim against Asia
Global Crossing for $11,750,000. Historically, this claim had been reviewed annually for impairment
and due to the uncertain outcome of the claim and adverse rulings in similar cases the carrying
value of the asset had been written down to $2,000,000 in 2008.
The Company recorded income from this claim settlement of $9,725,000 and recorded a receivable of
$11,750,000 in 2009. This receivable was paid in full in February 2010.
360networks F-13
360networks Corporation
Notes to Consolidated Financial Statements
4 ASSET RETIREMENT OBLIGATIONS
The Company has asset retirement obligations related to certain fiber, conduit and other facilities
that are primarily included in fiber optic network assets. Under certain rights-of-way
arrangements, the Company is required to remove the fiber and conduit upon termination of the
arrangement. Other rights-of-way arrangements permit the Company to abandon its underground assets
upon termination of the arrangement if permission is obtained from the counter party to the
arrangement. In addition, under certain lease agreements for facilities, the Company is required to
remove equipment and other assets and restore the leased property to its original condition.
Management determined no additional obligations arose in 2010 and 2009 related to plant additions.
Management reviews the assumptions that create the asset retirement obligation estimate on an
annual basis for reasonableness and applicability. Based upon prevailing industry practice and
knowledge, the Company reduced their estimate regarding the future probability in 2010 to remove
equipment, fiber and other assets upon termination of leases and right-of-ways.
The Company has estimated the fair value of asset retirement obligations on expected future cash
outlays and an imputed interest rate from 11.00% to 13.10%.
These obligations are not secured by any assets of the Company.
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
|
|
Balance beginning of period |
|
$ |
3,594,196 |
|
|
$ |
3,191,400 |
|
Changes due to: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretion and other adjustments |
|
|
(3,333,029 |
) |
|
|
402,796 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance end of period |
|
$ |
261,167 |
|
|
$ |
3,594,196 |
|
|
|
|
|
|
|
|
360networks F-14
360networks Corporation
Notes to Consolidated Financial Statements
5 STATEMENT OF OPERATIONS COMPONENTS
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
|
|
Revenue |
|
|
|
|
|
|
|
|
Network and communication services |
|
$ |
62,160,754 |
|
|
$ |
53,655,717 |
|
|
|
|
|
|
|
|
|
|
Infrastructure |
|
|
13,967,665 |
|
|
|
13,458,884 |
|
|
|
|
|
|
|
|
|
|
$ |
76,128,419 |
|
|
$ |
67,114,601 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs |
|
|
|
|
|
|
|
|
(excluding depreciation) |
|
|
|
|
|
|
|
|
Network services |
|
$ |
31,136,128 |
|
|
$ |
28,351,172 |
|
|
|
|
|
|
|
|
|
|
Infrastructure |
|
|
89,727 |
|
|
|
103,766 |
|
|
|
|
|
|
|
|
|
|
$ |
31,225,855 |
|
|
$ |
28,454,938 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation, accretion and restructuring expense |
|
|
|
|
|
|
|
|
Depreciation and accretion |
|
$ |
7,765,411 |
|
|
$ |
7,879,165 |
|
|
|
|
|
|
|
|
|
|
Restructuring expense |
|
|
249,607 |
|
|
|
377,345 |
|
|
|
|
|
|
|
|
|
|
$ |
8,015,018 |
|
|
$ |
8,256,510 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net gain on settlements |
|
|
|
|
|
|
|
|
Proceeds |
|
|
|
|
|
|
|
|
Receivables settlements award |
|
$ |
37,000 |
|
|
$ |
11,750,000 |
|
Disposals |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued liabilities incurred |
|
|
|
|
|
|
(25,000 |
) |
Property, plant, and equipment |
|
|
|
|
|
|
(2,000,000 |
) |
|
|
|
|
|
|
|
|
|
$ |
37,000 |
|
|
$ |
9,725,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net gain (loss) on sale of assets |
|
|
|
|
|
|
|
|
Proceeds (a) |
|
$ |
23,646,230 |
|
|
$ |
23,126 |
|
|
|
|
|
|
|
|
|
|
Carrying value |
|
|
(245,058 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
23,401,172 |
|
|
$ |
23,126 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense) |
|
|
|
|
|
|
|
|
Accrual releases (b) |
|
$ |
4,551,623 |
|
|
$ |
1,016,988 |
|
Realized gains |
|
|
|
|
|
|
15,393 |
|
|
|
|
|
|
|
|
|
|
Other (c) |
|
|
(1,295,558 |
) |
|
|
43,134 |
|
|
|
|
|
|
|
|
|
|
$ |
3,256,065 |
|
|
$ |
1,075,515 |
|
|
|
|
|
|
|
|
360networks F-15
360networks Corporation
Notes to Consolidated Financial Statements
(a) During the respective periods, the Company sold certain investment securities and
surplus assets that were either held for sale or were no longer in service.
On February 5, 2010, 360networks (fiber holdco) ltd. completed the restructure of 360networks (CDN
fiber) ltd., a Canadian Limited Liability Corporation. The restructure involved an exchange of
100% of the shares of 360networks (CDN fiber) ltd. with outstanding stock of Trilogy Energy Trust
(Trilogy), a publicly traded energy trust based in Canada not previously affiliated with
360networks. The provisions of the transaction include 360networks receiving 4,165,653 shares of
the new entity (Trilogy) and holdback of 2,185,884 shares of Trilogy stock as a contingency for
possible changes in the value of the 360networks (CDN fiber) ltd stock occuring after 2010. The
remaining 1,979,769 shares were released during 2010 and have been recognized as income in the
statement of operations.
The value of the 360networks (CDN fiber) ltd stock to Trilogy was attributed to approximately $730
million of tax loss pools that could be available to offset future Trilogy income under applicable
Canadian tax law. The net value of the Trilogy shares at the date of the transaction was
$30,081,390. Given the complex and contingent nature of the transition, 360networks has estimated
that $22,493,426 of the Trilogy stock proceeds is recognizable in 2010 based on managements
estimate of fulfillment of the conditions outlined the final arrangement agreement. The remaining
value of the Trilogy shares will be recognized in the statement of operations in the years after
2012 when provisions of the arrangement agreement requiring the holdback have been met.
(b) Historically, the Company has recognized disputed and/or estimated liabilities, and as updated
information becomes available the Company adjusts their accruals. These accruals were evaluated and
reduced during 2010 and 2009.
(c) During 2010, the Company has recognized nonoperating expenses due to the payment of unsecured
creditor claims allowed under the First Amended Joint Plan of Reorganization (the Plan) filed by
360networks (USA) inc. and certain affiliates (Debtors), in November 2002.
360networks F-16
360networks Corporation
Notes to Consolidated Financial Statements
6 EARNINGS PER SHARE
For the years ended December 31, 2010, and December 31, 2009, the weighted average number of common
shares includes 365,545 reserved shares that were not yet issued.
At December 31, 2010, and December 31, 2009, certain outstanding stock options were dilutive. For
the years ended December 31, 2010 and December 31, 2009, the weighted-average number of common
shares has been adjusted for dilutive outstanding stock options and unvested stock issued to
employees.
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
|
|
Basic earnings per share |
|
|
|
|
|
|
|
|
Net income for the period |
|
$ |
37,585,468 |
|
|
$ |
15,556,176 |
|
|
|
|
|
|
|
|
Weighted average number of common shares |
|
|
10,351,336 |
|
|
|
10,124,030 |
|
|
|
|
|
|
|
|
Basic earnings per common share |
|
$ |
3.63 |
|
|
$ |
1.54 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share |
|
|
|
|
|
|
|
|
Net income for the period |
|
$ |
37,585,468 |
|
|
$ |
15,556,176 |
|
|
|
|
|
|
|
|
Weighted average number of common shares |
|
|
11,817,099 |
|
|
|
11,649,104 |
|
|
|
|
|
|
|
|
Diluted earnings per common share |
|
$ |
3.18 |
|
|
$ |
1.34 |
|
|
|
|
|
|
|
|
360networks F-17
360networks Corporation
Notes to Consolidated Financial Statements
7 SUPPLEMENTAL CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
|
|
Changes in operating working capital items |
|
|
|
|
|
|
|
|
Accounts receivable |
|
$ |
10,048,120 |
|
|
$ |
(2,017,932 |
) |
Prepaid expenses and other assets |
|
|
(368,646 |
) |
|
|
(243,845 |
) |
Accounts payable and other accrued liabilities |
|
|
775,742 |
|
|
|
(2,303,446 |
) |
Income taxes payable |
|
|
496,970 |
|
|
|
160,085 |
|
Deferred revenue |
|
|
(148,333 |
) |
|
|
(897,314 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
10,803,853 |
|
|
$ |
(5,302,452 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for income taxes |
|
$ |
552,712 |
|
|
$ |
48,112 |
|
Cash paid for interest |
|
|
79,415 |
|
|
|
80,645 |
|
|
|
|
|
|
|
|
|
|
Noncash investing activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in unrealized gain (loss) on securities
available for sale |
|
$ |
15,631,015 |
|
|
$ |
(167,387 |
) |
Change in unrealized foreign currency translation |
|
|
2,760,392 |
|
|
|
68,147 |
|
Reduction in fixed assets due to changes in ARO
assumptions |
|
|
(1,863,746 |
) |
|
|
|
|
Reconciliation of activities from Trilogy stock exchange: |
|
|
|
|
|
|
|
|
Value of shares received |
|
|
32,703,742 |
|
|
|
|
|
Valuation allowance |
|
|
(7,587,963 |
) |
|
|
|
|
Closing costs |
|
|
(2,622,352 |
) |
|
|
|
|
Proceeds from sale of fiber |
|
|
1,200,000 |
|
|
|
|
|
Net book value of fiber |
|
|
(243,351 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net gain |
|
|
23,450,076 |
|
|
|
|
|
360networks F-18
360networks Corporation
Notes to Consolidated Financial Statements
8 BALANCE SHEET COMPONENTS
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
|
|
Accounts receivable |
|
|
|
|
|
|
|
|
Trade |
|
$ |
4,937,056 |
|
|
$ |
3,982,403 |
|
Other |
|
|
847,111 |
|
|
|
11,726,380 |
|
Allowance for doubtful accounts |
|
|
(1,642,143 |
) |
|
|
(1,438,895 |
) |
|
|
|
|
|
|
|
|
|
$ |
4,142,024 |
|
|
$ |
14,269,888 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted cash |
|
|
|
|
|
|
|
|
Deposits |
|
$ |
357,500 |
|
|
$ |
466,775 |
|
|
|
|
|
|
|
|
|
|
$ |
357,500 |
|
|
$ |
466,775 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note receivable |
|
|
|
|
|
|
|
|
Note receivable (a) |
|
$ |
1,169,939 |
|
|
$ |
1,330,628 |
|
Less current portion |
|
|
(172,305 |
) |
|
|
(160,689 |
) |
|
|
|
|
|
|
|
|
|
$ |
997,634 |
|
|
$ |
1,169,939 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments |
|
|
|
|
|
|
|
|
Securities available for sale (b) |
|
$ |
43,533,302 |
|
|
$ |
8,185,209 |
|
Securities Available for sale-restricted (b) |
|
|
14,917,186 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
58,450,488 |
|
|
$ |
8,185,209 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment |
|
|
|
|
|
|
|
|
Fiber optic network assets (c) |
|
|
|
|
|
|
|
|
Assets in service |
|
$ |
77,756,487 |
|
|
$ |
58,716,223 |
|
Assets under lease to customers (d) |
|
|
14,903,027 |
|
|
|
14,903,027 |
|
Assets not in service (e) |
|
|
|
|
|
|
409,603 |
|
Land building and leasehold improvements |
|
|
7,147,656 |
|
|
|
6,057,488 |
|
Equipment |
|
|
8,840,663 |
|
|
|
10,282,345 |
|
Network assets under construction |
|
|
7,840,134 |
|
|
|
5,107,023 |
|
|
|
|
|
|
|
|
|
|
|
116,487,967 |
|
|
|
95,475,709 |
|
Less: accumulated depreciation (f) |
|
|
(42,631,973 |
) |
|
|
(33,793,700 |
) |
|
|
|
|
|
|
|
Property and equipment net |
|
$ |
73,855,994 |
|
|
$ |
61,682,009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets |
|
|
|
|
|
|
|
|
Trademark |
|
$ |
11,754 |
|
|
$ |
13,433 |
|
As-built drawing |
|
|
249,063 |
|
|
|
268,222 |
|
|
|
|
|
|
|
|
|
|
$ |
260,817 |
|
|
$ |
281,655 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred charge |
|
|
|
|
|
|
|
|
Deferred charge-net (g) |
|
$ |
4,236,037 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
$ |
4,236,037 |
|
|
$ |
|
|
|
|
|
|
|
|
|
360networks F-19
360networks Corporation
Notes to Consolidated Financial Statements
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
|
|
Accounts payable |
|
|
|
|
|
|
|
|
Accounts payable |
|
|
|
|
|
|
|
|
Trade |
|
$ |
7,041,327 |
|
|
$ |
3,399,988 |
|
Other |
|
|
3,490,180 |
|
|
|
2,810,554 |
|
|
|
|
|
|
|
|
|
|
$ |
10,531,507 |
|
|
$ |
6,210,542 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other accrued liabilities |
|
|
|
|
|
|
|
|
Property and capital taxes |
|
$ |
697,325 |
|
|
$ |
1,562,801 |
|
Restructuring |
|
|
2,830,059 |
|
|
|
3,284,706 |
|
Pre-petition (h) |
|
|
173,376 |
|
|
|
1,588,731 |
|
Rights of way and other (i) |
|
|
13,475,249 |
|
|
|
15,815,469 |
|
|
|
|
|
|
|
|
|
|
$ |
17,176,009 |
|
|
$ |
22,251,707 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred revenue |
|
|
|
|
|
|
|
|
Deferred revenue (j) |
|
$ |
39,153,193 |
|
|
$ |
39,301,525 |
|
Less current portion |
|
|
(3,279,361 |
) |
|
|
(2,935,786 |
) |
|
|
|
|
|
|
|
|
|
$ |
35,873,832 |
|
|
$ |
36,365,739 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other long-term liabilities |
|
|
|
|
|
|
|
|
Long term lease obligation |
|
$ |
27,785 |
|
|
$ |
63,484 |
|
Asset retirement obligations |
|
|
261,166 |
|
|
|
3,594,196 |
|
|
|
|
|
|
|
|
|
|
$ |
288,951 |
|
|
$ |
3,657,680 |
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
On September 7, 2006 the Company entered into a 20 year IRU agreement and related
note receivable to lease four fibers from Seattle, Washington to Klamath Falls, Oregon and
6 fibers from Merrill, Oregon to Klamath Falls, Oregon. The IRU fee was $1,785,000 and the
term of the IRU ends May 31, 2026. The IRU fee is payable in 120 consecutive months over 10
years with an annual interest rate of 7%. |
|
(b) |
|
Investment in securities available for sale includes the fair value of the Trilogy
stock retained by the Company pursuant to the February 5, 2010, transaction discussed in
Note 5 (a). Investment in securities available for sale restricted, represents the value
of the Trilogy stock held in escrow pursuant to the provisions of the arrangement
agreement. |
|
(c) |
|
Certain of the Companys network assets leased from third parties are capitalized and
included in fiber optic network assets. The carrying amount of such assets at December 31,
2010, is $1,269,962, net of accumulated depreciation of $637,195 (December 31, 2009 -
$1,365,320, net of accumulated depreciation of $541,837). |
|
(d) |
|
Certain of the Companys network assets are leased to other parties under operating
leases. At December 31, 2010, the carrying amount of such assets included in fiber optic
network assets is
$9,244,855, net of accumulated depreciation of $5,546,527 (December 31, 2009 $10,116,654,
net of accumulated depreciation of $4,786,373). |
360networks F-20
360networks Corporation
Notes to Consolidated Financial Statements
|
|
|
(e) |
|
Fiber optic network assets not in service represent network assets that the Company
owns or holds under capital leases that are not currently utilized in providing network
services. These assets are classified as held for sale and not depreciated at the same
rates as assets in service. |
|
(f) |
|
Depreciation expense for the year ended December 31, 2010, was $9,050,821 (for the year
ended December 2009 $7,099,024). |
|
(g) |
|
The deferred charge represents the increase in the fair market value of the restricted
Trilogy stock that was not recognized in the statement of operations when the Trilogy
transaction was finalized during 2010. |
|
(h) |
|
Pre-petition liabilities are comprised of accrued expenses and settlements that
occurred prior to bankruptcy that were not dismissed by the court. |
|
(i) |
|
The Company has elected to defer nonoperating income recognition on a portion of the
preference recoveries due to litigation uncertainty regarding the final settlement amount.
See Note 15. |
|
(j) |
|
The deferred revenue will be recognized in varying amounts between one and twenty years
and is based on the contractual terms of each agreement. |
360networks F-21
360networks Corporation
Notes to Consolidated Financial Statements
9 INCOME TAXES
The components of income before income taxes are:
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
|
|
United States |
|
$ |
16,238,895 |
|
|
$ |
7,500,714 |
|
Canada |
|
|
21,878,333 |
|
|
|
8,132,702 |
|
|
|
|
|
|
|
|
|
|
$ |
38,117,228 |
|
|
$ |
15,633,416 |
|
|
|
|
|
|
|
|
The components of the expense for current income taxes are:
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
|
|
United States |
|
$ |
40,618 |
|
|
$ |
77,240 |
|
Canada |
|
|
491,142 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
531,760 |
|
|
$ |
77,240 |
|
|
|
|
|
|
|
|
The components of the provision for deferred income taxes are:
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
|
|
United States |
|
$ |
|
|
|
$ |
|
|
Canada |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
360networks F-22
360networks Corporation
Notes to Consolidated Financial Statements
The provision for income taxes differs from the amount computed by applying the statutory
income tax rate to net income (loss) before taxes due to nondeductible items, foreign tax rate
differences, and the effect of the valuation allowance.
Significant components of the Companys deferred tax asset and liability are estimated below.
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
|
|
Current |
|
|
|
|
|
|
|
|
Deferred tax assets |
|
|
|
|
|
|
|
|
Expenses not deducted for tax in current year |
|
$ |
1,250,924 |
|
|
$ |
1,332,540 |
|
Capital loss carryforward |
|
|
3,205,313 |
|
|
|
|
|
Valuation allowance |
|
|
(1,250,924 |
) |
|
|
(1,332,540 |
) |
|
|
|
|
|
|
|
|
|
|
3,205,313 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities |
|
|
|
|
|
|
|
|
Investment basis difference |
|
|
(3,205,313 |
) |
|
|
(1,332,540 |
) |
|
|
|
|
|
|
|
|
|
|
Total current |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
Long-term |
|
|
|
|
|
|
|
|
Deferred tax assets |
|
|
|
|
|
|
|
|
Tax loss carry forwards |
|
|
185,527,606 |
|
|
|
182,577,159 |
|
Property and equipment |
|
|
94,535,613 |
|
|
|
271,899,229 |
|
Capital loss carry forwards |
|
|
21,083,253 |
|
|
|
4,829,412 |
|
Deferred revenue |
|
|
15,598,463 |
|
|
|
36,284,123 |
|
Suspended capital losses |
|
|
72,879,576 |
|
|
|
113,085,044 |
|
Investments and other |
|
|
241,869 |
|
|
|
475,632 |
|
Valuation allowance |
|
|
(356,517,685 |
) |
|
|
(609,150,599 |
) |
|
|
|
|
|
|
|
|
|
|
33,348,695 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities |
|
|
|
|
|
|
|
|
Intercompany debt basis |
|
|
(33,348,695 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
360networks F-23
360networks Corporation
Notes to Consolidated Financial Statements
At December 31, 2010, the Company has operating loss carryforwards applicable to Canada and
the United States available to reduce taxable income of $466,724,807 that expire as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
2011 |
|
|
2012 |
|
|
2013 |
|
|
2014 |
|
|
2015 |
|
|
Thereafter |
|
|
|
|
Canada |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
2,818,253 |
|
|
$ |
|
|
|
$ |
7,288,854 |
|
United States |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
456,617,700 |
|
Of the $456,617,700 of U.S. loss carry forwards beyond 2014, $228,000,000 is subject to
certain restrictions.
Due to uncertainty regarding the ability to utilize the deferred tax assets, a full valuation
allowance has been provided against the Companys net deferred tax assets in the financial
statements.
As a result of the adopting fresh start reporting, any reversal in future periods of the valuation
allowances established upon emergence will be first applied to reduce the carrying amount of
intangible assets and secondly as an adjustment to shareholders equity.
10 401(k) RETIREMENT AND SAVINGS PLAN
The Company sponsors a qualified 401(k) plan covering all employees who have reached 21 years of
age and two or more months of service. The 401(k) plan provides for discretionary employer
contributions and a mandatory matching of 50% of employees contributions limited to 6% of basic
annual compensation. Participants interest become fully vested after three years and may be
withdrawn upon termination or upon attaining age 65, whichever occurs first. The Companys
matching and discretionary contributions totaled $341,971 and $309,982 for the years ended December
31, 2010 and 2009, respectively.
360networks F-24
360networks Corporation
Notes to Consolidated Financial Statements
11 CAPITAL STOCK
The Company is authorized to issue an unlimited number of common voting shares and an unlimited
number of preferred nonvoting shares, issuable in series.
The Company issued 3,207 and 39,836 common shares upon the exercise of stock options in 2010 and
2009 respectively. In 2010, the Company issued 104,283 (237,500 in 2009) restricted common shares
for distribution to certain employees.
During 2009, the Company purchased and cancelled 21,680 issued and outstanding common shares at a
price of $8.20.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued and |
|
|
|
|
|
|
|
Common Shares |
|
outstanding |
|
|
Reserved |
|
|
Total |
|
Balance December 31, 2008 |
|
|
10,296,185 |
|
|
|
365,545 |
|
|
|
10,661,730 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares repurchased |
|
|
(21,680 |
) |
|
|
|
|
|
|
(21,680 |
) |
Restricted shares issued to certain employees |
|
|
237,500 |
|
|
|
|
|
|
|
237,500 |
|
Shares issued upon exercise of stock options |
|
|
39,836 |
|
|
|
|
|
|
|
39,836 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2009 |
|
|
10,551,841 |
|
|
|
365,545 |
|
|
|
10,917,386 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted shares issued to certain employees |
|
|
104,283 |
|
|
|
|
|
|
|
104,283 |
|
Shares issued upon exercise of stock options |
|
|
3,207 |
|
|
|
|
|
|
|
3,207 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2010 |
|
|
10,659,331 |
|
|
|
365,545 |
|
|
|
11,024,876 |
|
|
|
|
|
|
|
|
|
|
|
360networks F-25
360networks Corporation
Notes to Consolidated Financial Statements
12 STOCK BASED COMPENSATION
The Company has a Long-Term Incentive and Share Award Plan that permits the grant of share based
awards including stock options, share appreciation rights, restricted shares, performance shares,
performance units, dividend equivalents and other share based awards to employees and directors. At
December 31, 2008, 393,458 common shares were reserved for awards under the plan. The Company elected to issue
restricted shares in lieu of stock options in 2010 and 2009. Stock awards and stock options that
have been granted vest over a period of two to four years and have terms ranging from eight to ten
years.
Stock options
During 2010, 3,625 of these options were forfeited (2009 17,500 options) resulting in a
reduction in stock-based compensation expense that was immaterial.
360networks F-26
360networks Corporation
Notes to Consolidated Financial Statements
The following table summarizes stock option activity for the years ended December 31, 2010 and
December 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
average |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Weighted |
|
|
minimum |
|
|
|
|
|
|
Weighed |
|
|
|
Number of |
|
|
average |
|
|
average |
|
|
value of |
|
|
Number of |
|
|
average |
|
|
|
options |
|
|
remaining |
|
|
exercise |
|
|
options |
|
|
options |
|
|
exercise |
|
|
|
outstanding |
|
|
option life |
|
|
price |
|
|
granted |
|
|
exercisable |
|
|
price |
|
Balance December 31, 2008 |
|
|
2,324,546 |
|
|
|
7.2 |
|
|
$ |
4.18 |
|
|
$ |
0.92 |
|
|
|
1,623,718 |
|
|
$ |
3.12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option granted |
|
|
|
|
|
|
|
|
|
$ |
0.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Options forfeited |
|
|
(17,500 |
) |
|
|
|
|
|
$ |
7.36 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Options purchased |
|
|
(37,885 |
) |
|
|
|
|
|
$ |
3.84 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercised |
|
|
(39,836 |
) |
|
|
|
|
|
$ |
2.33 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2009 |
|
|
2,229,325 |
|
|
|
6.2 |
|
|
$ |
4.19 |
|
|
$ |
0.88 |
|
|
|
1,884,701 |
|
|
$ |
3.64 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option granted |
|
|
|
|
|
|
|
|
|
$ |
0.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Options forfeited |
|
|
(3,625 |
) |
|
|
|
|
|
$ |
3.02 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Options purchased |
|
|
(84,547 |
) |
|
|
|
|
|
$ |
5.82 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercised |
|
|
(3,207 |
) |
|
|
|
|
|
$ |
0.56 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2010 |
|
|
2,137,944 |
|
|
|
5.2 |
|
|
$ |
4.22 |
|
|
$ |
0.86 |
|
|
|
2,014,345 |
|
|
$ |
3.99 |
|
The following tables summarize information about stock options outstanding at December 31,
2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding |
|
|
Exercisable Options |
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
Number |
|
|
Average |
|
|
Weighted- |
|
|
Number |
|
|
Average |
|
|
Weighted- |
|
|
|
Outstanding |
|
|
Remaining |
|
|
Average |
|
|
Exercisable |
|
|
Remaining |
|
|
Average |
|
|
|
at End of |
|
|
Contractual |
|
|
Exercise |
|
|
at End of |
|
|
Contractual |
|
|
Exercise |
|
|
|
Year |
|
|
Life |
|
|
Price |
|
|
Year |
|
|
Life |
|
|
Price |
|
Option exercise
price |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$1.04 |
|
|
479,810 |
|
|
|
3.5 |
|
|
$ |
1.04 |
|
|
|
479,810 |
|
|
|
3.5 |
|
|
$ |
1.04 |
|
$3.00 |
|
|
513,009 |
|
|
|
4.5 |
|
|
$ |
3.00 |
|
|
|
513,759 |
|
|
|
4.5 |
|
|
$ |
3.00 |
|
$3.75 |
|
|
472,150 |
|
|
|
5.5 |
|
|
$ |
3.75 |
|
|
|
472,150 |
|
|
|
5.5 |
|
|
$ |
3.75 |
|
$7.50 |
|
|
449,475 |
|
|
|
6.5 |
|
|
$ |
7.50 |
|
|
|
399,564 |
|
|
|
6.5 |
|
|
$ |
7.50 |
|
$8.20 |
|
|
223,500 |
|
|
|
7.5 |
|
|
$ |
8.20 |
|
|
|
149,063 |
|
|
|
7.5 |
|
|
$ |
8.20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end
of year |
|
|
2,137,944 |
|
|
|
5.2 |
|
|
$ |
4.22 |
|
|
|
2,014,346 |
|
|
|
5.1 |
|
|
$ |
3.99 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
360networks F-27
360networks Corporation
Notes to Consolidated Financial Statements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise |
|
|
Contractual |
|
|
|
|
|
|
Price |
|
|
Term (Yrs) |
|
|
Intrinsic Value (1) |
|
|
|
|
Weighted average options
outstanding at December
31, 2010 |
|
$ |
4.22 |
|
|
|
5.23 |
|
|
$ |
11,298,114 |
|
Weighted average options
exercisable at December
31, 2010 |
|
|
3.99 |
|
|
|
5.11 |
|
|
|
11,106,399 |
|
Options exercised in 2010 |
|
|
|
|
|
|
|
|
|
|
(3,207 |
) |
Options exercised in 2009 |
|
|
|
|
|
|
|
|
|
|
(39,836 |
) |
|
|
|
(1) |
|
Market value of options assuming they were vested and exercised as of December 31, 2010. |
The following table summarizes the Companys unvested stock option activity with respect to
the years ended December 31, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average |
|
|
|
Shares |
|
|
Grant-Date Fair Value |
|
Unvested at December 31, 2008 |
|
|
701,028 |
|
|
|
1.51 |
|
Vested |
|
|
(337,932 |
) |
|
|
1.38 |
|
Forfeited |
|
|
(17,500 |
) |
|
|
1.71 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested at December 31, 2009 |
|
|
345,596 |
|
|
$ |
1.38 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested |
|
|
(217,623 |
) |
|
|
1.69 |
|
Forfeited |
|
|
(3,625 |
) |
|
|
0.33 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested at December 31, 2010 |
|
|
124,348 |
|
|
$ |
1.69 |
|
|
|
|
|
|
|
|
Options for 99,403 shares granted from 2007 to 2008 will vest during 2011.
Restricted Shares
During 2010, the Company issued 104,283 (2009-237,500) restricted shares under the terms of the
Long-Term Incentive and Share Award Plan. The following tables summarize information about the
restricted shares outstanding at December 31, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining |
|
|
|
Number of shares |
|
|
Shares subject to |
|
|
vesting |
|
Shares issued subject to vesting |
|
outstanding |
|
|
vesting |
|
|
period |
|
Balance December 31, 2008 |
|
|
120,250 |
|
|
|
115,875 |
|
|
|
3.4 |
|
Shares issued during the year |
|
|
237,500 |
|
|
|
237,500 |
|
|
|
|
|
Shares vested during the year |
|
|
|
|
|
|
(30,063 |
) |
|
|
|
|
Balance December 31, 2009 |
|
|
357,250 |
|
|
|
322,813 |
|
|
|
3.1 |
|
Shares issued during the year |
|
|
104,283 |
|
|
|
104,283 |
|
|
|
|
|
Shares vested during the year |
|
|
|
|
|
|
(115,946 |
) |
|
|
|
|
Balance December 31, 20010 |
|
|
461,533 |
|
|
|
311,150 |
|
|
|
2.6 |
|
360networks F-28
360networks Corporation
Notes to Consolidated Financial Statements
Stock based compensation expense
The deferred stock-based compensation amortization and charge to income applicable to both stock
options and other stock awards for the year ended December 31, 2010, was $514,177 (for the year
ended December 31, 2009 $1,159,751). The stock based compensation expense for 2010 was comprised
of the following: stock options-$196,156; restricted stock-$318,021.
The following table summarizes stock based compensation expense to be recognized in each of the
following years related to unvested options:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
2011 |
|
|
2012 |
|
|
2013 |
|
|
2014 |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock based compensation expense |
|
$ |
1,742,846 |
|
|
$ |
775,539 |
|
|
$ |
238,542 |
|
|
$ |
36,620 |
|
|
$ |
2,973,547 |
|
Stock-based compensation costs are based on the estimated fair value of grants calculated as
of the grant date using the Black-Scholes option-pricing model. The fair value of the grants is
amortized as compensation expense on a straight-line basis over the vesting period of the options.
Compensation expense recognized is shown in the operating activities section of the statement of
cash flows.
The value of the outstanding stock options and restricted shares was estimated using the
Black-Scholes option-pricing model assuming no dividend yield and the following weighted average
assumptions for options granted in 2010: expected volatility in 2010 of 27.00%, risk free interest
rate in 2010 of 2.94%, expected life 4 years (2009:expected volatility of 28.01%; risk free
interest rate of 2.59%; expected life of fouryears).
Calculation of the expected volatility used in the Black-Scholes model is based on the volatility
of the Dow Jones Telecom Index. The expected term for use in the model was calculated based in part
on an analysis of historical exercises of stock options. The Company based the estimated risk-free
rate on the U.S. treasury yield curve in effect at the time of grant. The Company has not paid nor
does it currently have any plans to pay cash dividends, thus a 0% dividend yield has been assumed
for the model.
The Company estimates potential forfeitures of stock options and adjusts compensation accordingly.
The Company has a limited number of option holders and historically low employee turnover with no
anticipated changes. Therefore, the best estimate of forfeitures is zero and will be adjusted over
the requisite service period to the extent that actual forfeitures differ, or are expected to
differ from such estimates. Changes in the estimated forfeitures will be recognized through a
cumulative catch-up adjustment in the period of change and will likely impact the amount of stock
compensation to be recognized in future periods.
It should be noted that the Black-Scholes model is only one of the methods available for estimating
the value of stock options and the Companys use of the model should not be interpreted as a
prediction as to the actual value that may be realized on the exercise of options. The actual value
of the options may be significantly different, and the value actually realized, if any, will depend
upon the excess of the market value of the Companys common stock over the option exercise price at
the time of exercise.
360networks F-29
360networks Corporation
Notes to Consolidated Financial Statements
13 INVESTMENTS IN DEBT AND MARKETABLE SECURITIES
The following is a summary of the Companys investment in available for sale securities at December
31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010 |
|
|
|
|
|
|
|
Fair Market |
|
|
Unrealized Gain |
|
Investment Summary |
|
Cost |
|
|
Value |
|
|
(Loss) |
|
Corporate bonds |
|
$ |
15,305,306 |
|
|
$ |
15,305,306 |
|
|
$ |
|
|
Government securities |
|
|
4,008,333 |
|
|
|
4,008,333 |
|
|
|
|
|
Trilogy stock |
|
|
32,703,742 |
|
|
|
46,724,812 |
|
|
|
14,021,070 |
|
Trilogy stock valuation allowance |
|
|
(7,587,963 |
) |
|
|
(7,587,963 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
44,429,418 |
|
|
$ |
58,450,488 |
|
|
$ |
14,021,070 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds |
|
$ |
236,449 |
|
|
$ |
152,924 |
|
|
$ |
(83,525 |
) |
Government securities |
|
|
8,032,285 |
|
|
|
8,032,285 |
|
|
|
|
|
Stocks |
|
|
21,622 |
|
|
|
|
|
|
|
(21,622 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
8,290,356 |
|
|
$ |
8,185,209 |
|
|
$ |
(105,147 |
) |
|
|
|
|
|
|
|
|
|
|
Half of the Trilogy shares are held in escrow to be used to reimburse Trilogy for any losses
that are incurred in audits conducted by Revenue Canada. A quarter of the shares will be released
annually beginning in 2013. A valuation allowance has been recorded to reflect managements
estimate of the fair value of the securities that have not been earned pursuant to the Arrangement
Agreement at the date the transaction closed (February 5, 2010).
An unrealized gain (loss) on investment securities during the years ended December 31, 2010 and
2009 was reported as a separate component of stockholders equity and consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
Unrealized holding gains (loss) |
|
$ |
14,021,070 |
|
|
$ |
(105,147 |
) |
A summary of investment earnings recognized in income during the years ended December 31,
2010 and 2009 is as follows:
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
Available for sale securities |
|
|
|
|
|
|
|
|
Realized losses |
|
$ |
(8,822 |
) |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
Interest earned |
|
|
303,971 |
|
|
|
63,008 |
|
Dividends earned |
|
|
1,473,572 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,768,721 |
|
|
$ |
63,008 |
|
|
|
|
|
|
|
|
360networks F-30
360networks Corporation
Notes to Consolidated Financial Statements
14 FINANCIAL INSTRUMENTS
Concentration of credit risk
The Company is subject to credit risks applicable to cash and cash equivalents, short-term
investments, and accounts receivable. The Company limits its exposure to credit loss by placing its
cash and cash equivalents and short-term investments with various financial institutions. The
Company limits its exposure to concentrations of credit risk with respect to accounts receivable by
performing ongoing evaluations of the credit quality of its customers, and obtains advance
payments, collateral or guarantees as considered necessary.
Fair value of Assets
The Company measures certain assets at fair value based on generally accepted accounting
principles.
Fair value is defined as the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at the measurement date. The method
employed by the company also establishes a fair value hierarchy which requires an entity to
maximize the use of observable inputs and minimize the use of unobservable inputs when measuring
fair value. The standard describes three levels of inputs that may be used to measure fair value:
|
|
|
Level 1 Quoted prices in active markets for identical assets or liabilities |
|
|
|
Level 2 Observable inputs other than Level 1 prices, such as quoted prices for
similar assets or liabilities; quoted prices in markets that are not active; or other
inputs that are observable or can be corroborated by observable market data for
substantially the full term of the assets or liabilities |
|
|
|
Level 3 Unobservable inputs that are supported by little or no market activity
and that are significant to the fair value of the assets or liabilities |
Following is a description of the valuation methodologies used for instruments measured at fair
value on a recurring basis and recognized in the accompanying balance sheet, as well as the general
classification of such instruments pursuant to the valuation hierarchy.
Available for sale Securities
Where quoted market prices are available in an active market, securities are classified within
Level 1 of the valuation hierarchy. Level 1 securities include institutional money market funds,
asset backed securities and stock in publicly traded entities. The following fair values are
provided solely to comply with financial instrument disclosure requirements.
The fair values are based on quoted market prices.
|
|
|
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December 31, 2010 |
|
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December 31, 2009 |
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Carrying value |
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Fair Value |
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Carrying value |
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|
Fair Value |
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|
|
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Available for sale securities |
|
$ |
58,450,488 |
|
|
$ |
58,450,488 |
|
|
$ |
8,185,209 |
|
|
$ |
8,185,209 |
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360networks F-31
360networks Corporation
Notes to Consolidated Financial Statements
15 COMMITMENTS AND CONTINGENCIES
Operating leases, rights-of-way, and other periodic commitments
The Company has various operating leases relating to land, network assets, equipment and other
assets. In addition to lease payments, certain of these leases also include payments for insurance,
operating and maintenance, property taxes and other related costs. The Company also has entered
into various agreements to secure the rights-of-way along its network routes. In general, most
agreements have an option renewal clause stating that grantors cannot unjustly withhold their
acceptance of a renewal. Other periodic commitments are primarily related to operating and
maintenance services applicable to operating the Companys fiber optic network.
Rental expenses, net of amounts capitalized under lease agreements were $5,565,751 for the year
ended December 31, 2010 (for the year ended December 31, 2009 $5,548,225).
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Year ended December 31 |
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2011 |
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2012 |
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2013 |
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2014 |
|
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2015 |
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|
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|
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Future minimum payments |
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Lease and rights-of-way |
|
$ |
6,887,888 |
|
|
$ |
6,547,835 |
|
|
$ |
5,936,449 |
|
|
$ |
5,558,535 |
|
|
$ |
5,059,815 |
|
|
|
|
Other |
|
|
2,985,379 |
|
|
|
3,000,556 |
|
|
|
3,036,706 |
|
|
|
3,073,854 |
|
|
|
3,112,030 |
|
Contingent liability-preference recoveries
Pursuant to the First Amended Joint Plan of Reorganization (the Plan) filed by 360networks (USA)
inc. and certain affiliates (Debtors), between 2003 and 2008, Dreier LLP, counsel for the Official
Committee of Unsecured Creditors (the Creditors), recovered approximately $74 million as a result
of recovering preference payments that the Debtors had made to its creditors in the ninety days
prior to its chapter 11 bankruptcy filing in 2001 (Preference Recoveries). Based on a formula in
the Plan, the Preference Recoveries were then to be distributed to the Creditors (Creditor
Distribution) and to the Company (Debtor Distribution). In addition, as part of a settlement with
a third party creditor, an allowed unsecured claim in the Debtors own bankruptcy was assigned to
the Company entitling it to a portion of the Creditor Distribution as well (the Claim
Distribution). The Claim Distribution and Debtor Distribution were expected to total $17.4
million. Accordingly, on September 6, 2008, the Company requested and received a distribution of
$4.5 million from the Preference Recoveries and then a second distribution of $11.9 million on
November 17, 2008, leaving approximately $1 million yet to be distributed on its Claim
Distribution. On or about December 3, 2008, the Company learned that the managing partner of
Dreier LLP, Marc Dreier, had stolen approximately $38.6 million from the attorney escrow account
which represented the balance of the Preference Recoveries that were to be distributed to the
Creditors and the Company. Shortly thereafter, Dreier was arrested and plead guilty to a number of
securities and wire fraud charges arising from his sale of approximately $670 million in fictitious
securities. Subsequently, a postconfirmation representative was appointed to represent the
Creditors and investigate the $38.6 million stolen by Dreier and to pursue claims relating to those
funds. The postconfirmation representative has stated that he is still considering the extent to
which the distributions to the Company may be recovered for the benefit of the Creditors. In
addition, Dreier LLC has filed bankruptcy and the trustee in that case may try to recover some or
all of the distributions that were made to the Company. The Company believes that it has a variety
of substantive legal defenses to any claims by the Creditors postconfirmation representative or
the trustee of the Dreier LLC estate for the return of the $16.4 million in distributions
previously received by the Company. The Company believes that the amount of the final recovery can
not be reasonably estimated at this time and as a result, has deferred recognition of a portion of
the income related to distributions.
360networks F-32
360networks Corporation
Notes to Consolidated Financial Statements
Litigation
The Company is a party to certain legal actions arising in the normal course of its business. The
Company is neither involved in, nor threatened by, proceedings for which the Company believes it is
not adequately insured or indemnified or which, if determined adversely, would have a material
adverse effect on the financial position, results of operations, or cash flows.
The case styled 360networks Tennessee L.L.C., et. al. v. Illinois Central Railroad Company pending
in the United States District Court for the Northern District of Illinois was tried before a jury
in the second week of June 2010. This case concerns responsibility for relocating 360networks
fibers on the Chicago-New Orleans route in the vicinity of certain specified wooden bridges being
replaced by Illinois Central. The jury returned a verdict awarding Illinois Central damages in the
amount of $232,996. In response to this verdict, 360networks filed a motion with the court
seeking judgment as a matter of law, or in the alternative, a new trial. The court has delayed
ruling on this motion while the Parties discuss settlement. These settlement discussions are
ongoing.
16 SUBSEQUENT EVENTS
In relation to the theft of funds by Marc Dreier (see Note 15), on February 1, 2010, a complaint
was filed by Steven Reisman, As Post Confirmation Representative of the Chapter 11 Estates of
360networks (USA) inc. against 360networks (USA) inc. seeking the return of $16.1 million (the
Distribution) paid to 360networks (USA) inc. in November, 2008, by Dreier, LLP, counsel for the
Official Committee of Unsecured Creditors (the Committee) from the Companys Chapter 11
reorganization in 2001. The Committee is seeking the return of the Distribution based on various
equitable theories so that it can be distributed pro-rata to all of the Companys creditors and the
Company, in which event, the Company would retain approximately $4 million, in addition to any
other pro-rata distribution of recoveries by the Committee from other sources. The Parties are
continuing to pursue settlement negotiations; however, if a settlement is not reached, motions for
summary judgment and trial will occur in late July, 2011.
In addition, the Trustee in the Dreier LLC bankruptcy filed a complaint on October 18, 2010 against
the Company demanding the return of $11.9 million based on those funds being paid to the Company
within the 90 day preference period of the Dreier LLC bankruptcy filing. The Parties are
continuing to pursue settlement negotiations; however, if a settlement is not reached, the Company
believes it has a number of meritorious defenses to the Trustees demand.
360networks (USA)inc recognized other income of $3.02M in October as a results of these
settlements.
360networks F-33