Earthlink 2008 Annual Report Download - page 270

HELIO, INC. and HELIO LLC
NOTES TO COMBINED FINANCIAL STATEMENTS
1. Description of Business and Basis of Presentation (continued)
of $0.5 million into 23,492,592 preferred membership units at an exchange rate of $3.00 per unit (the “November 2007 Exchange”).
In December 2007 and in accordance with the terms of the Amended Joint Venture Agreement, SKT provided written notice to the
Company and EarthLink, whereby SKT committed to contribute $80.0 million of its remaining $270.0 million commitment by June 2008 (the
“Trigger Event”). As a result of the Trigger Event, EarthLink forfeited 9,090,909 of its then outstanding preferred membership units (which
were immediately cancelled by the Company). Through December 2007, aggregate cash contributions under the Amended Joint Venture
Agreement totaled $100.0 million, which included the November 2007 Exchange and additional cash contributions of $30.0 million in
December 2007. As of December 31, 2007, SKT and EarthLink owned approximately 65% and 31% of the Company, respectively.
Through December 31, 2007, the Company’s primary source of liquidity was funding received from its Partners and outside investors.
The Company will need additional capital to meet its operating requirements. Since the Company’s inception, cumulative cash flow used from
combined operating and investing activities, excluding marketable securities activities, was approximately $523.0 million and cumulative cash
funding received from its Partners and outside investors was $568.2 million. At December 31, 2007, unrestricted cash and cash equivalents
available to the Company was approximately $45.1 million and working capital was approximately $3.5 million. To date, the Company has
been operating at an operating loss. Over the next twelve months, management anticipates that it will continue to incur substantial losses from
its operating and investing activities, and the Company may or may not have sufficient working capital and or outside financings available to
meet its planned operating activities over the same period. To address future planned working capital deficiencies in fiscal 2008, management
plans on securing sufficient cash financing from its Partners, and/or potential outside investors; however, management cannot be certain as to the
likelihood of generating sufficient cash flows to meet planned working capital requirements during this period. These combined factors raise
doubt as to the ability of the Company to continue as a going concern. The financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or the amount and classification of liabilities that might be necessary should the
Company be unable to continue as a going concern.
The combined financial statements include the accounts of HELIO, Inc. and HELIO LLC, both of which are jointly controlled by the
Partners and are under common management. The Partners have the unilateral ability to implement major operating and financial policies for
HELIO, Inc. and HELIO LLC. All significant intercompany transactions are eliminated in the combination process. The combined financial
statements include certain expenses from SKT and EarthLink pursuant to various related party agreements. As more fully discussed in Note 17,
these expenses are considered to be a reasonable reflection of the value of services provided for and/or the benefits received by the Company.
2. Summary of Significant Accounting Policies
Use of Estimates in Preparation of Financial Statements
The preparation of the financial statements in conformity with U.S. generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reflected in the combined financial statements and accompanying notes. The Company
bases its estimates on experience, where applicable, and other assumptions that management believes are reasonable under the circumstances.
Actual results could differ from those estimates. Estimates are generally used when accounting for certain accrued expenses and deferred
revenues, allowance for doubtful accounts, useful lives of property and equipment, inventory return reserves, amortization periods of intangible
assets, legal and tax contingencies, fair value of intangible assets, goodwill and investments, stock compensation expense, asset impairment
charges and the recording of fair value of assets upon formation of the joint venture.
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