0000950123-11-094700.txt : 20111103 0000950123-11-094700.hdr.sgml : 20111103 20111103122609 ACCESSION NUMBER: 0000950123-11-094700 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20111103 ITEM INFORMATION: Regulation FD Disclosure ITEM INFORMATION: Financial Statements and Exhibits FILED AS OF DATE: 20111103 DATE AS OF CHANGE: 20111103 FILER: COMPANY DATA: COMPANY CONFORMED NAME: Zayo Group LLC CENTRAL INDEX KEY: 0001502756 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE COMMUNICATIONS (NO RADIO TELEPHONE) [4813] IRS NUMBER: 262012549 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 8-K SEC ACT: 1934 Act SEC FILE NUMBER: 333-169979 FILM NUMBER: 111176733 BUSINESS ADDRESS: STREET 1: 400 CENTENNIAL PARKWAY STREET 2: SUITE 200 CITY: LOUISVILLE STATE: CO ZIP: 80027 BUSINESS PHONE: 303-381-4662 MAIL ADDRESS: STREET 1: 400 CENTENNIAL PARKWAY STREET 2: SUITE 200 CITY: LOUISVILLE STATE: CO ZIP: 80027 8-K 1 c24178e8vk.htm FORM 8-K Form 8-K
 
 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 8-K

CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Date of Report (Date of earliest event reported): November 3, 2011

ZAYO GROUP, LLC
(Exact name of registrant as specified in its charter)
         
Delaware   333-169979   26-201259
(State or other Jurisdiction of Incorporation)   (Commission File Number)   (IRS Employer Identification No.)
     
400 Centennial Parkway, Suite 200, Louisville, CO
  80027
(Address of Principal Executive Offices)   (Zip Code)

Registrant’s telephone number, including area code: (303) 381-4683
 
 
(Former name or former address if changed since last report.)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

o Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

o Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

o Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

o Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

 
 

 

1


 

Section 7 — Regulation FD
Item 7.01   Regulation FD Disclosure
On October 7, 2011, Zayo Group, LLC (“Zayo,” the ”Company” or “we”) issued a filing on Form 8-K announcing its entrance into a Stock Purchase Agreement (the “Agreement”) to acquire 100 percent of the outstanding capital stock of 360networks Holdings (USA) Inc. (“360networks”). In conjunction with the Agreement, the Company has obtained a commitment from lenders to fund a $295.0 million senior secured credit facility (the “Facility”) to partially fund the $345.0 million acquisition. RBC Capital Markets, Barclays Capital, Inc. and SunTrust Bank, Inc. (collectively the “Lead Arrangers”), in their capacity as Lead Arrangers of the Facility, anticipate distributing marketing materials to potentials investors in the Facility. The Lead Arrangers intend to communicate to potential investors certain financial data of 360networks which has not been made publically available. The Company is issuing this filing on Form 8-K in order to make publically available the financial information of 360networks which may be used by the Lead Arrangers in their marketing material for purposes of soliciting potential investors in the Facility.
The consolidated financial statements of 360networks Corporation are attached to this filing as exhibit 99.1. The Agreement is to acquire 100 percent of the outstanding capital stock of 360networks which is a subsidiary of 360networks Corporation. Upon the closing of the acquisition, the Company would acquire substantially all of the operating assets of 360networks Corporation, however, there are certain non-operating assets which are included in the attached consolidated financial statements of 360networks Corporation which will not be acquired by the Company. These non-operating assets include, but are not limited, to the $58.4 million restricted and non-restricted investment balance held by 360networks Corporation as of December 31, 2010. Additionally, 360networks Corporation’s historical results include the operating results generated by its Voice over Internet Protocol (“VoIP”) product offerings. Upon the closing of the acquisition, Zayo intends to spin-off the components of 360networks which support the VoIP business to the Company’s parent — Zayo Group Holdings, Inc. For these and other reasons, the historical operating results of 360networks Corporation are not indicative of expected future results of operations which the Company would realize subsequent to closing the acquisition.
The consolidated financial statements of 360networks Corporation as of and for the years ended December 31, 2011 and 2010, attached as exhibit 99.1, were prepared by management of 360networks as of July 13, 2011 and the litigation and subsequent event disclosures as addressed in footnote 15 — Commitments and Contingencies and footnote 16 — Subsequent Events, have not been updated for events that has occurred from that date to the date of this filing on Form 8-K. The following discussion acts as an update to these footnote disclosures.
As further discussed in exhibit 99.1 under footnote 15 — Commitments and Contingencies — Contingent Liability —Preference Recoveries, as of December 31, 2010, 360networks Corporation had a contingent liability related to two adversary proceedings filed against 360networks (USA) inc. (“360USA”). The first adversary proceeding captioned Steven J. Reisman, As Post Confirmation Representative of the Chapter 11 Estates of 360networks (USA) inc. vs. 360networks (USA) inc., Bankr. S.D.N.Y Adv. Pro. No. 10-02792 (ALG) (the “Reisman Action”) was filed on February 1, 2010, seeking restitution to recover $16.1 million in payments made to 360USA. A second adversary proceeding captioned Gowan v. 360networks (USA) inc., Bankr. S.D.N.Y. Adv. Pro. No. 10-03904 (SMB) (the “DLLP Action”) was filed October 18, 2010, and sought to recover $11.9 million in alleged preference payments from 360USA. Both the Reisman Action and DLLP Action were settled pursuant to a tripartite settlement agreement (the “Settlement”) dated August 4, 2011, that was subsequently approved by the courts in both the Reisman Action and the DLLP Preference Action. Pursuant to the Settlement, on October 25, 2011, 360USA paid $5,325,000 to the representative in the Reisman Action and $2,875,000 to the trustee in the DLLP Action. The Reisman Action was then dismissed with prejudice on October 31, 2011 and dismissal with prejudice of the DLLP Action is expected within the next 10 days of the date of this filing on Form 8-k. 360networks recognized other income of $3.02M in October as a result of these settlements.
This filing is not intended to fulfill the Company’s requirements to file with the SEC the financial statements of businesses acquired or to be acquired under Article 3-05 of Regulation S-X. The Company intends to file the pre-acquisition audited financial statements required by Article 3-05 of Regulation S-X and any required pro-forma financial information required by Article 11 of Regulation S-X at a later date.

 

 


 

Select financial information of 360networks Corporation covering the six months ended June 30, 2011 has been attached to this filing as exhibit 99.2. The information in exhibit 99.2 is unaudited and un-reviewed and as such is subject to change and is not indicative of expected future results of operations of the Company subsequent to the closing of the acquisition for the reasons described above.
Item 9.01.   Financial Statements and Exhibits.
(d) Exhibits. The following exhibit is furnished with this Form 8-K:
         
Exhibit No.   Description
  99.1    
Consolidated Financial Statements of 360networks Corporation as of and for the years ended December 31, 2010 and 2009.
  99.2    
Select financial information of 360networks Corporation as of and for the six months ended June 30, 2011.
The information contained under Item 7.01 and 9.01 of this filing on Form 8-K shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, and shall not be deemed incorporated by reference in any filing with the Securities and Exchange Commission under the Securities Exchange Act of 1934 or the Securities Act of 1933, whether made before or after the date hereof and irrespective of any general incorporation language in any filings.
Portions of this report may constitute “forward-looking statements” as defined by federal law. Although the Company believes any such statements are based on reasonable assumptions, there is no assurance that actual outcomes will not be materially different. Additional information about issues that could lead to material changes in the Company’s performance is contained in the Company’s filings with the Securities and Exchange Commission. The Company undertakes no obligation to publicly update or revise any forward-looking statements to reflect events or circumstances after the date hereof.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
         
  ZAYO GROUP, LLC
 
 
  By:   /s/ Ken desGarennes    
    Ken desGarennes   
    Chief Financial Officer   
 
DATED: November 3, 2011

 

 


 

EXHIBIT INDEX
         
Exhibit No.   Description
  99.1    
Consolidated Financial Statements of 360networks Corporation as of and for the year ended December 31, 2010 and 2009.
  99.2    
Select financial information of 360networks Corporation as of and for the six months ended June 30, 2011.

 

 

EX-99.1 2 c24178exv99w1.htm EXHIBIT 99.1 Exhibit 99.1
Exhibit 99.1
(NETWORKS LOGO)
360networks Corporation
CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2010 and 2009

 

 


 

360networks Corporation
Consolidated Statements of Income
                 
    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  
 
           
 
               
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
                 
    Year ended December 31  
    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  
 
           
 
               
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
                 
    Year ended December 31,  
    2010     2009  
 
   
ASSETS
               
 
               
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  
 
           
 
               
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
                                                 
    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 Company’s 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 Company’s 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 Company’s 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 account’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s estimates of future cash flows and the Company’s 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 Company’s 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 Company’s 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 Company’s 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 360’s 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 Company’s 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 Company’s 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 management’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s 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 management’s 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.
                                 
    December 31, 2010     December 31, 2009  
    Carrying value     Fair Value     Carrying value     Fair Value  
 
   
Available for sale securities
  $ 58,450,488     $ 58,450,488     $ 8,185,209     $ 8,185,209  

 

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 Company’s 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).
                                         
Year ended December 31   2011     2012     2013     2014     2015  
 
                                       
Future minimum payments
                                       
 
   
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 Debtor’s 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 Creditor’s 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 Company’s 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 Company’s 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 Trustee’s demand.
360networks (USA)inc recognized other income of $3.02M in October as a results of these settlements.

 

360networks F-33

EX-99.2 3 c24178exv99w2.htm EXHIBIT 99.2 Exhibit 99.2
Exhibit 99.2
360networks Corporation
Consolidated Statement of Income
For the Six Months Ended June 30, 2011
(UNAUDITED)
         
    6 months ended  
    June 30, 2011  
Revenue
  $ 44,047,712  
 
       
Operating Costs
    17,522,341  
 
       
Selling, general and administrative
    13,830,532  
Stock based compensation
    1,169,232  
Provision for bad debts
    128,489  
Depreciation expense
    6,017,650  
Accretion expense
    127,244  
Restructuring expense
    41,439  
 
     
Operating income
    5,210,786  
 
     
 
       
Net gain on sale of assets
    7,946  
Interest expense
    (29,205 )
Interest and dividend income
    1,059,776  
Investment Income
    4  
Other income
    33,850  
 
     
Income before income taxes
    6,283,156  
 
     
 
       
Provision for income taxes
    58,046  
 
     
 
       
Net income for the year
  $ 6,225,109  
 
     

 

 


 

Consolidated Balance Sheet
As of June 30, 2011
(UNAUDITED)
         
    As of  
    June 30, 2011  
ASSETS
       
Current Assets:
       
Cash and cash equivalents
  $ 9,262,081  
Accounts receivable, net
    3,372,637  
Note receivable-current
    178,180  
Other
    1,833,608  
 
     
Total Current Assets
    14,646,506  
 
     
 
       
Restricted Cash
    357,500  
Investments
    98,411,226  
Property and equipment, net
    76,681,710  
Intangibles assets, net
    250,400  
Deferred Charges
    25,235,094  
 
     
Total Assets
  $ 215,582,437  
 
     
 
       
LIABILITIES
       
Current liabilities:
       
Accounts payable
  $ 3,748,721  
Wages payable
    3,993,778  
Leases payable
    32,496  
Income taxes payable
    303,723  
Other accrued liabilities
    18,056,899  
Deferred revenue
    3,328,637  
 
     
Total Current Liabilities
    29,464,253  
 
     
 
       
Deferred revenue, non-current
    44,758,863  
Other long-term liabilities
    298,174  
 
     
Total Liabilities
  $ 74,521,290  
 
     
 
       
STOCKHOLDERS’ EQUITY/(DEFICIT)
       
Capital stock
  $ 75,725,497  
Other capital accounts
    100,017,812  
Accumulated deficit
    (34,682,163 )
 
     
Total Stockholders’ Equity/(Deficit)
    141,061,146  
 
     
 
       
 
     
Total Liabilities and Stockholders Equity/(Deficit)
  $ 215,582,437  
 
     

 

 

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