Earthlink 2006 Annual Report Download - page 86

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EARTHLINK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
$43.0 million of cash and contributed non-cash assets valued at $40.0 million, including 27,000 wireless customers, contractual arrangements
and agreements to prospectively market HELIO’s services. The non-cash assets contributed were recorded by the Company as an additional
investment of $0.5 million based on the Company’s carrying value of the assets. The Company recorded its initial investment at $43.5 million,
reflecting the cash invested plus the carrying value of assets contributed. In addition, the Company paid HELIO to assume $0.9 million of net
liabilities associated with wireless customers and related operations. The Company recorded no gain or loss in March 2005 associated with the
contribution of non-cash assets, the transfer of net liabilities, or the associated payment to HELIO to assume the net liabilities upon completing
the formation of HELIO.
Pursuant to the HELIO Contribution and Formation Agreement, the Company contributed $122.0 million of cash and noncash assets
during 2005, $78.5 million during 2006 and is committed to invest an additional $19.5 million of cash in HELIO during 2007, which includes
$13.5 million that was contributed in February 2007. During 2006, HELIO received minority investments, which reduced EarthLink’s and SK
Telecom’s economic ownership interest in HELIO from 50 percent at formation to approximately 48 percent as of December 31,
2006. However, EarthLink’s and SK Telecom’s voting interest remains the same.
The Company accounts for its investment in HELIO under the equity method of accounting because the Company can exert significant
influence over HELIO’s operating and financial policies. As a result, the Company records its proportionate share of HELIO’s net loss in its
Consolidated Statement of Operations. The Company is amortizing the difference between the book value and fair value of non-cash assets
contributed to HELIO over their estimated useful lives. The amortization increases the carrying value of the Company’s investment and
decreases the net losses of equity affiliate included in the Consolidated Statement of Operations. During the years ended December 31, 2005
and 2006, the Company recorded $15.6 million and $84.8 million, respectively, of net losses of equity affiliate related to its HELIO investment,
which is net of amortization of basis differences and certain other equity method accounting adjustments.
The following is summarized statement of operations information of HELIO for the years ended December 31, 2005 and 2006:
The following is summarized balance sheet information of HELIO as of December 31, 2005 and 2006:
85
Year Ended December 31,
2005
2006
(in thousands)
Revenues
$ 16,365
$ 46,580
Operating loss
(45,658
)
(201,266
)
Net loss
(42,023
)
(191,755
)
As of December 31,
2005
2006
(in thousands)
Current assets
$ 164,377
$ 189,661
Long
-
term assets
59,570
75,309
Current liabilities
17,912
78,889
Long
-
term liabilities
2,394
4,853