The accompanying notes are an integral part of these combined financial statements
T2 Group
(Limited Liabilities Companies)
Notes to the Combined Financial Statements
December 31, 2008 and 2007
1. | Principles of Combination |
The combined financial statements include the accounts of the T2 Group, which includes T2 Communications, L.L.C. and T2TV, L.L.C. These Companies are affiliated through the ownership and control of Ned Timmer and will be collectively referred to as the “T2 Group”. All material intercompany balances and transactions have been eliminated.
The T2 Group provides all IP-based phone, television and internet services via fiber optics to residential and commercial customers in Holland, Michigan. The T2 Group is currently pursuing opportunities to expand its service availability to selected areas throughout Michigan.
3. | Summary of Significant Accounting Policies |
Cash and Cash Equivalents
For purposes of the statements of cash flows, cash includes all highly liquid investments with original maturities of three months or less.
The T2 Group occasionally has cash balances in excess of federally insured limits. This risk is managed by maintaining deposits with high quality financial institutions.
Trade Receivables
Trade receivables are carried at their net realizable value, less an estimated allowance for uncollectible accounts based on management’s assessment of economic conditions, collection history and other relevant factors. Specific customer accounts are written-off when management believes that collection is unlikely. Collections on accounts previously written-off are recorded as income during the period of recovery. There was no allowance for doubtful accounts as of December 31, 2008 and 2007.
Property and Equipment
Property and equipment are carried at cost. Expenditures for maintenance and repairs are charged to income as incurred. Depreciation is provided over the estimated useful lives of the assets using the straight-line method for financial reporting and accelerated methods for tax purposes. The cost of assets sold or otherwise disposed of and the related accumulated depreciation are eliminated from the accounts with the resulting gain or loss reflected in income. In accordance with SFAS 144, Accounting for the Impairment of Long-Lived Assets, long-lived assets held and used by the T2 Group are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
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6
T2 Group
(Limited Liabilities Companies)
Notes to the Combined Financial Statements
December 31, 2008 and 2007
3. | Summary of Significant Accounting Policies (Continued) |
Property and equipment are recorded at cost and depreciated over their estimates useful lives using the straight-line method as follows:
Equipment | 5 years |
Furniture and fixtures | 7 years |
Software | 3 years |
Vehicles | 5 years |
Income Taxes
The owner of the T2 Group has elected to be taxed directly on the T2 Group’s taxable income. These elections were valid at December 31, 2008, and therefore, the T2 Group does not have any federal tax liability for the year then ended.
Revenue Recognition
The majority of the T2 Group’s revenue is derived from month-to-month, bundled service contracts for the phone, television and internet services used by each customer. Revenue is recognized as the services are provided.
Advertising
Advertising costs are expensed as incurred. Advertising costs were $16,000 and $ 0 for the years ended December 31, 2008 and 2007.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from those estimates.
The T2 Group leases its office space from an affiliated entity under a five-year arrangement expiring in December 2013. The lease requires monthly payments of $4,000. The T2 Group also leases additional office space and furnishings from an affiliated entity under a three-year arrangement requiring monthly payments of $400 until expiration in December 2011. The T2 Group had an agreement to lease equipment from an affiliated entity over a 15-year term ending in January 2020. That lease was terminated in December 2007, and the lease was converted into a month-to-month arrangement.
In addition, the T2 Group routinely leases facilities and equipment from affiliated entities on an as needed basis under short-term arrangements (see Note 6). Total rent expense was $48,000 and $ 87,756 for the years ended December 31, 2008 and 2007, respectively.
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7
T2 Group
(Limited Liabilities Companies)
Notes to the Combined Financial Statements
December 31, 2008 and 2007
4. | Operating Leases (Continued) |
Future minimum payments under operating leases with terms in excess of one year are as follows for the years ending June 30:
2009 | $ 53,000 |
2010 | 53,000 |
2011 | 53,000 |
2012 | 50,000 |
2013 | 48,000 |
Thereafter | 24,000 |
5. | Related Party Transactions |
The T2 Group has various transactions with affiliated companies owned and controlled by the T2 Group’s shareholder and his wife. The actual expenses may vary from allocation of expenses on separate unrelated T2 Group basis. The following is a summary of related party revenues and expenses for the years ending Decemb er 31, 2008 and 2007:
| | 2008 | | 2007 | |
| | | | | |
Expense reimbursements | | $ | 112,700 | | $ | 145,400 | |
Management fee revenue | | | 12,500 | | | 152,200 | |
Total related party revenue | | $ | 125,200 | | $ | 297,600 | |
| | | | | | | |
Rent expense | | $ | 48,000 | | $ | 130,000 | |
Consulting fees | | | 5,625 | | | 137,700 | |
Leased employee and expense reimbursements | | | 627,400 | | | 1,170,000 | |
Total related party expenses | | $ | 681,025 | | $ | 1,437,700 | |
Included in the fiber service/usage charges is a $35 per customer fee paid by the T2 Group to the affiliated entity that owns the fiber.
6. | Simple IRA Retirement Plan |
The T2 Group has a simple IRA retirement plan through an affiliated entity that is available to all eligible employees. The IRA retirement plan provides for an employee match of up to 3% of gross annual compensation. Contributions for T2 Group employees were $14,000 and $ 11,000 for the years ended December 31, 2008 and 2007.
The T2 Group is pursuing legal action in two unrelated disputes with a customer and a vendor. The maximum potential gain resulting from these claims is approximately $1.0 million. No losses are anticipated, other than ongoing legal fees. The ultimate outcome of this matter cannot presently be determined.
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8
T2 Group
(Limited Liabilities Companies)
Notes to the Combined Financial Statements
December 31, 2008 and 2007
On February 23, 2009, T2 TV, L.L.C. was acquired by Cornerworld Corporation. In addition, Cornerworld Corporation acquired the following affiliates of the T2 Group: (i) Woodland Wireless Solutions, Ltd., (ii) S Squared LLC, doing business as Ranger Wireless LLC and (iii) West Michigan Co-Location Services, L.L.C. and also agreed to purchase all of the outstanding voting member units of each of T2 Communications, L.L.C. and, another affiliate of the T2 Group, Phone Services and More, L.L.C., doing business as Visitatel for an aggregate purchase price of $300,000. Final consummation of this transaction is subject to certain regulatory approvals.
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