<PAGE> 1
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 NOVEMBER 9, 1995
PHOENIX NETWORK, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 0-17909 84-0881154
Name or other jurisdiction (Commission File (IRS Employer
of incorporation) Number) Identification No.)
550 CALIFORNIA STREET, 11TH FLOOR, SAN FRANCISCO, CA 94104
(Address of principal executive offices) (Zip Code)
Registrant's telephone no. including area code (415) 399-3300
(Former address, if changed since last report)
<PAGE> 2
[PHOENIXNETWORK LOGO]
November 13, 1995
Securities and Exchange Commission
450 Fifth Street, N.W.
Judiciary Plaza
Washington, D.C. 20001
re: Phoenix Network, Inc. (Commission File No. 0-17909)
The following Form 8-K is submitted electronically for filing on behalf of
Phoenix Network, Inc. This filing inlcudes historical and pro forma financial
statements as required by Item 7. This information was not available when the
Form 8-K was submitted on September 12, 1995.
Very truly yours,
/s/ Jeffrey L. Bailey
Jeffrey L. Bailey
Chief Financial Officer
<PAGE> 3
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
Item 7.(a) Financial statements of business acquired. See enclosed exhibit
1 for the consolidated financial statements of Tele-Trend
Communications LLC.
Item 7.(b) Pro forma financial information.
The following unaudited pro forma balance sheet of the Company as of
June 30, 1995 adjusts the historical consolidated balance sheet as of June 30,
1995 to give effect to the August 29, 1995 acquisition of the assets of
Tele-Trend Communications LLC. The following unaudited pro forma statements of
operations of the Company adjust the historical consolidated statement of
operations for the six months ended June 30, 1995 and the historical
consolidated statement of operations for the year ended December 31, 1994 to
give effect to the August 29, 1995 acquisition of the assets of Tele-Trend
Communications LLC. The pro forma financial data should be read in conjunction
with the historical financial statements of the Company, Tele-Trend
Communications LLC and are not necessarily indicative of the results of
operations that might have occurred if the transaction had taken place at
January 1, 1994, or at January 1, 1995, or of the Company's results of
operations for any future period.
PHOENIX NETWORK, INC.
PRO FORMA - CONDENSED CONSOLIDATED BALANCE SHEETS
As of June 30, 1995
<TABLE>
<CAPTION>
Phoenix Tele-Trend
Network, Communications Pro Forma
Inc. (1) LLC (2) Adjustments (3) Pro Forma
-------- -------------- --------------- ---------
ASSETS
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 960,219 $ (40,724) $ 4,474,179 $ 5,393,674
Accounts receivable, net
of allowance for doubtful
accounts 9,106,590 1,742,448 (112,537) 10,736,501
Deferred commissions 895,018 - - 895,018
Other current assets 605,859 40,781 - 646,640
----------- ----------- ------------ -----------
Total current assets 11,567,686 1,742,505 4,361,642 17,671,833
Investments - 183,784 (183,784) -
Furniture, equipment and data
processing systems, at cost
less accumulated depreciation 1,499,171 208,655 (53,486) 1,654,340
Deferred commissions 822,931 - - 822,931
Customer acquisitions costs,
less accumulated amortization 199,347 - 681,308 880,655
Goodwill, less accumulated
amortization - - 3,747,193 3,747,193
Other assets 134,922 64,708 - 199,630
----------- ----------- ------------ -----------
$14,224,057 $ 2,199,652 $ 8,552,873 $24,976,582
=========== =========== ============ ===========
</TABLE>
- -------------------------------
See Notes to Pro Forma
<PAGE> 4
PHOENIX NETWORK, INC.
PRO FORMA - CONDENSED CONSOLIDATED BALANCE SHEETS
As of June 30, 1995
<TABLE>
<CAPTION>
Phoenix Tele-Trend
Network, Communications Pro Forma
Inc. (1) LLC (2) Adjustments (3) Pro Forma
-------- -------------- --------------- ---------
<S> <C> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities:
Notes payable $ 1,800,315 $ 31,040 $ (1,831,355) $ -
Accounts payable 7,860,789 1,211,994 - 9,072,783
Accrued liabilities 395,122 108,293 - 503,415
Current portion of long-
term debt - 165,553 - 165,553
------------ ---------- ------------ ------------
Total current liabilities 10,056,226 1,516,880 (1,831,355) 9,741,751
Long-term debt - 330,835 (330,835) -
Stockholders' equity
Preferred stock, $.001 par value;
authorized, 5,000,000 shares;
issued and outstanding,
2,723,926 shares at June 30,
1995 1,617 - 1,107 2,724
Common stock, $.001 par value
authorized, 20,000,000 shares;
issued and outstanding,
11,872,105 shares at June 30,
1995 11,872 - - 11,872
Additional paid-in capital 11,393,004 - 11,065,893 22,458,897
Treasury stock - 1,300 shares
at cost (2,522) - - (2,522)
Accumulated deficit from May 1,
1989 (7,236,140) 351,937 (351,937) (7,236,140)
------------ ---------- ------------ ------------
Total stockholders' equity 4,167,831 351,937 10,715,063 15,234,831
------------ ---------- ------------ ------------
$ 14,224,057 $2,199,652 $ 8,552,873 $ 24,976,582
============ ========== ============ ============
</TABLE>
- -------------------------------
See Notes to Pro Forma
<PAGE> 5
PHOENIX NETWORK, INC.
PRO FORMA - CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the six months ended June 30, 1995
<TABLE>
<CAPTION>
Phoenix Tele-Trend
Network, Communications Pro Forma
Inc. (1) LLC (2) Adjustments (3) Pro Forma
-------- -------------- --------------- ---------
<S> <C> <C> <C> <C>
Revenues $ 27,683,463 $ 4,230,113 $ - $ 31,913,576
Cost of revenues 19,060,850 3,437,858 (99,010) 22,399,698
------------ ------------ --------- ------------
Gross profit 8,622,613 792,255 99,010 9,513,878
Selling, general and
administrative expenses 8,189,725 731,193 85,583 9,006,501
------------ ------------ --------- ------------
Income (loss) from operations 432,888 61,062 13,427 507,377
Other income (expense) (158,181) (24,864) 382,136 199,091
------------ ------------ --------- ------------
Pre-tax income 274,707 36,198 395,563 706,468
Income tax - 3,217 (3,217) -
------------ ------------ --------- ------------
Net income (loss) 274,707 32,981 398,780 706,468
Preferred stock dividends (126,891) - (498,015) (624,906)
------------ ------------ --------- ------------
Net income (loss) attributable
to common shares $ 147,816 $ 32,981 $ (99,235) $ 81,562
============ ============ ========= ============
Net income (loss) per common
share $ 0.01 $ 0.01
============ ============
Weighted average number of
shares outstanding 12,788,101 12,788,101
------------ ------------
</TABLE>
- -------------------------------
See Notes to Pro Forma
<PAGE> 6
PHOENIX NETWORK, INC.
PRO FORMA - CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the year ended December 31, 1994
<TABLE>
<CAPTION>
Phoenix Tele-Trend
Network, Communications Pro Forma
Inc. (4) LLC (5) Adjustments (3) Pro Forma
-------- -------------- --------------- ---------
<S> <C> <C> <C> <C>
Revenues $ 57,420,484 $ 7,021,063 $ - $ 64,441,547
Cost of revenues 40,007,052 5,120,584 (147,481) 44,980,155
------------ ------------ --------- ------------
Gross profit 17,413,432 1,900,479 147,481 19,461,392
Selling, general and
administrative expenses 17,796,208 1,814,260 187,735 19,798,203
------------ ------------ --------- ------------
Income (loss) from operations (382,776) 86,219 (40,254) (336,811)
Other income (expense) (398,944) (58,700) 855,826 398,182
------------ ------------ --------- ------------
Loss before cumulative effect
of accounting change (781,720) 27,519 815,572 61,371
Cumulative effect of change
in amortization of deferred
commission (123,224) - - (123,224)
------------ ------------ --------- ------------
Net income (loss) (904,944) 27,519 815,572 (61,853)
Preferred stock dividends (231,255) - (996,030) (1,227,285)
------------ ------------ --------- ------------
Net income (loss) attributable
to common shares $ (1,136,199) $ 27,519 $(180,458) $ (1,289,138)
============ ============ ========= ============
Net income (loss) per common $ (0.10)
share ------------ $ (0.12)
------------
Weighted average number of
shares outstanding 11,100,958 11,100,958
------------ ------------
</TABLE>
- -------------------------------
See Notes to Pro Forma
<PAGE> 7
PHOENIX NETWORK, INC.
NOTES TO PRO FORMA
(1) Represents the historical unaudited consolidated financial statements of
Phoenix Network, Inc. as included in Form 10-Q for the quarterly period
ended June 30, 1995.
(2) Represents the historical, unaudited financial statements of Tele-Trend
Communications LLC as of and for the six months ended June 30, 1995.
(3) Adjustments reflect the August 29, 1995 acquisition of the net assets of
Tele-Trend Communications LLC by Phoenix Network, Inc. The adjustments
reflect the purchase price of $4,430,631 in cash and the allocation of
that purchase price to the net assets acquired. The customer base
acquired is being amortized over a four year life using the
sum-of-the-years digits method. Goodwill is being amortized over 20
years using the straight-line method.
The acquisition was financed by the Company through the issuance of
$1,106,700 shares of Convertible Series F preferred shares at $10 per
share. The Company also used the net proceeds received to retire all of
its outstanding debt. These shares carry a cumulative 9% dividend.
Adjustments also reflect the effect of additional carrier discounts
available under the Company's current agreements which reduces the cost
of revenues acquired from Tele-Trend Communications LLC. The Company
also reduced selling, general and administrative expenses due to the
elimination of certain positions at Tele-Trend Communications LLC as a
direct result of the acquisition.
(4) Represents the historical, consolidated statement of operations of
Phoenix Network, Inc. for the year ended December 31,1994.
(5) Represents the historical, statement of operations of Tele-Trend
Communications, LLC for the year ended December 31, 1994.
<PAGE> 8
SIGNATURES
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.
PHOENIX NETWORK, INC.
(Registrant)
Date: NOVEMBER 8, 1995 /S/ JEFFREY L. BAILEY
---------------------- -------------------------
Jeffrey L. Bailey
Chief Financial Officer
<PAGE> 9
EXHIBIT ONE
TELE-TREND COMMUNICATIONS PARTNERS, LTD.
AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1993 AND 1994
WITH
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
<PAGE> 10
CAUSEY DEMGEN & MOORE INC.
Certified Public Accountants and Consultants
- --------------------------------------------------------------------------------
Suite 4650
1801 California Street
Denver, Colorado 80202
Telephone: (303) 296-2229
Facsimile: (303) 296-3731
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Partners
Tele-Trend Communications Partners, Ltd.
We have audited the consolidated balance sheet of Tele-Trend Communications
Partners, Ltd. and subsidiary as of December 31, 1993 and 1994, and the related
consolidated statements of operations, changes in partners' equity (deficit)
and cash flows for the years then ended. These financial statements are the
responsibility of the general partner. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Tele-Trend
Communications Partners, Ltd. and subsidiary as of December 31, 1993 and 1994,
and the results of their operations and their cash flows for the years then
ended in conformity with generally accepted accounting principles.
As discussed in Note 8 to the financial statements, the Partnership has
significant loans to an affiliate at December 31, 1994. The collectability of
these loans is dependent upon the affiliate obtaining funding sources outside
of the Partnership as well as developing future sustained operations in order
to maintain its operations independent of outside financing. The ultimate
outcome of this uncertainty is not presently determinable. Accordingly, no
provision for amounts, if any, that may ultimately prove uncollectible has been
made in the accompanying financial statements.
Denver, Colorado
March 11, 1995, except for
Note 7 as to which the /s/ Causey Demgen & Moore Inc.
date is March 15, 1995
<PAGE> 11
TELE-TREND COMMUNICATIONS PARTNERS, LTD.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1993 AND 1994
<TABLE>
<CAPTION>
ASSETS
1993 1994
---- ----
<S> <C> <C>
Current assets:
Cash $ 42,364 $ 114,370
Money Market account - restricted (Note 2) 460,000 --
Certificate of deposit - restricted (Note 6) 50,803 --
Accounts receivable:
Limited partners (Note 2) 140,000 --
Trade, net of allowance for doubtful accounts
of $14,000 (1993) and $13,500 (1994) 857,293 1,352,380
Related parties (Note 4) 28,164 40,747
Other 2,018 11,048
Prepaid expenses 9,568 11,626
---------- ----------
Total current assets 1,590,210 1,530,171
Property and equipment:
Computers 75,608 112,900
Computer software 89,314 177,874
Office equipment 41,594 63,583
Leasehold improvements 6,415 6,415
---------- ----------
212,931 360,772
Less accumulated depreciation
and amortization (61,517) (118,939)
---------- ----------
Net property and equipment 151,414 241,833
Other assets:
Loans to Infaxamation, LLC (Notes 5, 7 and 8) -- 100,000
Organization costs 7,396 18,955
Project development costs 20,000 20,000
Network installation costs 15,000 --
Deposits 3,813 1,753
Syndication costs 40,553 41,238
---------- ----------
86,762 181,946
Less accumulated amortization (23,982) (26,248)
---------- ----------
Total other assets 62,780 155,698
---------- ----------
$1,804,404 $1,927,702
========== ==========
</TABLE>
See accompanying notes.
<PAGE> 12
TELE-TREND COMMUNICATIONS PARTNERS, LTD.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1993 AND 1994
<TABLE>
<CAPTION>
LIABILITIES AND PARTNERS' EQUITY (DEFICIT)
1993 1994
---- ----
<S> <C> <C>
Current liabilities:
Note payable - related party (Note 4) $ 50,000 $ --
Accounts payable 904,125 1,036,228
Accrued expenses:
Interest - limited partners (Note 3) 42,921 49,797
Interest - related parties (Note 4) 17,074 --
Wages and payroll taxes 14,636 16,087
Property taxes 2,832 2,393
Current portion of capital lease
obligation (Note 6) 1,351 6,724
Current portion of notes payable -
limited partners (Note 3) 83,556 206,501
---------- ----------
Total current liabilities 1,116,495 1,317,730
Long-term debt:
Notes payable - limited partners (Note 3) 397,444 272,111
Notes payable - related parties (Note 4) 300,000 --
Capital lease obligation (Note 6) 7,875 18,661
---------- ----------
Total long-term debt 705,319 290,772
Commitments and contingencies
(Notes 1 and 6)
Partners' equity (deficit):
General partner (85,719) (76,353)
Limited partners (531,691) 395,553
Limited partnership units subscribed 600,000 --
(Note 2)
---------- ----------
Total partners' equity (deficit) (17,410) 319,200
---------- ----------
$1,804,404 $1,927,702
========== ==========
</TABLE>
See accompanying notes.
<PAGE> 13
TELE-TREND COMMUNICATIONS PARTNERS, LTD.
AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
For the Years Ended December 31, 1993 and 1994
<TABLE>
<CAPTION>
1993 1994
---------- ----------
<S> <C> <C>
Revenues:
AT&T network service $1,809,453 $ 915,108
Switched and dedicated access services 1,691,229 5,958,326
Interest 7,861 9,310
Other 48,888 138,319
---------- ----------
3,557,431 7,021,063
Costs and expenses:
Network operating:
AT&T network service 1,642,310 1,003,901
Non-distributed network service 121,236 11,213
Switched and dedicated access services 1,283,735 4,008,932
Other telecommunications service 34,613 96,538
Depreciation and amortization 61,422 76,187
General and administrative (Note 4) 1,247,021 1,615,032
Provision for doubtful accounts 39,222 123,041
Interest (Notes 3 and 4) 49,396 58,700
---------- ----------
4,478,955 6,993,544
---------- ----------
Net income (loss) $ (921,524) $ 27,519
========== ==========
</TABLE>
See accompanying notes.
<PAGE> 14
TELE-TREND COMMUNICATIONS PARTNERS, LTD.
AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN PARTNERS' EQUITY (DEFICIT)
For the Years Ended December 31, 1993 and 1994
<TABLE>
<CAPTION>
General Limited
Partner Partners
--------- --------
<S> <C> <C>
Balances, December 31, 1992 $(76,503) $ 380,617
Net loss allocation for the year
ended December 31, 1993 (9,216) (912,308)
-------- ---------
Balances, December 31, 1993 (85,719) (531,691)
Capital contributions (Note 2) 9,091 900,000
Net income allocation for the year
ended December 31, 1994 275 27,244
-------- ---------
Balances, December 31, 1994 $(76,353) $ 395,553
======== =========
</TABLE>
See accompanying notes.
<PAGE> 15
TELE-TREND COMMUNICATIONS PARTNERS, LTD.
AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Years Ended December 31, 1993 and 1994
<TABLE>
<CAPTION>
1993 1994
------------ -----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $(921,524) $ 27,519
Adjustments to reconcile net income (loss)
to net cash used by operating activities:
Depreciation and amortization 61,422 76,187
Increase in accounts receivable (676,542) (504,116)
Increase in prepaid expenses (9,036) (2,058)
Increase in accounts payable and
accrued expenses 708,077 122,918
--------- ---------
Total adjustments 83,921 (307,069)
--------- ---------
Net cash used in operating activities (837,603) (279,550)
Cash flows from investing activities:
Loans to Infaxamation, LLC -- (100,000)
(Increase) decrease in certificates of
deposit purchased with maturity of
greater than three months (803) 50,803
Purchase of property and equipment (50,138) (129,928)
Increase in network installation
costs -- net (2,000) 1,768
Decrease in deposits -- net 21,837 2,060
Increase in organization and syndication
costs (24,213) (15,512)
--------- ---------
Net cash used in investing activities (55,317) (190,809)
Cash flows from financing activities:
Limited partner contributions -- 600,000
General partner contributions -- 9,091
Increase in accounts receivable --
related parties (10,128) (12,583)
Payments on capital lease obligations -- (1,755)
Increase (decrease) in notes payable --
limited partners 376,000 (2,388)
Increase (decrease) in notes payable --
related parties 350,000 (50,000)
--------- ---------
Net cash provided by financing
activities 715,872 542,365
--------- ----------
Increase (decrease) in cash (177,048) 72,006
Cash at beginning of year 219,412 42,364
--------- ----------
Cash at end of year $ 42,364 $ 114,370
========= ==========
</TABLE>
(Continued on following page)
See accompanying notes.
<PAGE> 16
TELE-TREND COMMUNICATIONS PARTNERS, LTD.
AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Years Ended December 31, 1993 and 1994
(Continued from preceding page)
Supplemental disclosure of cash flow information:
<TABLE>
<CAPTION>
1993 1994
-------- --------
<S> <C> <C>
Cash paid during the year for interest $ 856 $ 68,898
======= ========
</TABLE>
Supplemental schedule of non-cash financing activities:
During the years ending December 31, 1993 and 1994, the Company entered
into non-cash financing activities as follows:
<TABLE>
<CAPTION>
1993 1994
-------- --------
<S> <C> <C>
Capitalized lease obligation $ 9,226 $ 17,914
Partnership interests subscribed 600,000 -
Conversion of note payable -- related
parties to limited partnership interest - 300,000
</TABLE>
See accompanying notes.
<PAGE> 17
TELE-TREND COMMUNICATIONS PARTNERS, LTD.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1993 and 1994
1. Organization and summary of significant accounting policies
Organization:
Tele-Trend Communications Partners, Ltd. (the Partnership) was organized on
June 3, 1991, pursuant to the Colorado Uniform Limited Partnership Act of
1981 as amended, for the purpose of engaging in all aspects of the
telecommunications industry, primarily the reselling of long distance
services which the Partnership has committed to use, through various
providers. Tele-Trend Communications, Inc. (TTCI), a Colorado corporation,
is the general partner.
Basis of presentation and management's plans:
The Partnership's consolidated financial statements have been presented on a
going concern basis which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. As shown in
the accompanying financial statements, the liquidity of the Partnership has
been adversely affected as the Partnership had experienced significant
losses from inception to December 31, 1993. The Partnership's continued
existence is dependent upon its ability to continue the profitable
operations achieved in 1994.
Management believes that its current aggressive marketing plans will help
provide sufficient profitability for the Partnership to continue as a going
concern in its present form. Accordingly, the financial statements do not
include any adjustment relating to the recoverability and classification of
recorded asset amounts or the amount and classification of liabilities or
other adjustments that might be necessary should the Partnership be unable
to continue as a going concern in its present form.
Consolidation:
The consolidated financial statements include the Partnership and Tele-Trend
Communications, LLC, a Colorado Limited Liability Company formed by the
Partnership on December 28, 1994. The Partnership contributed all of the
Partnership assets to the LLC in exchange for 100% of the rights to profits,
losses and distributions of the LLC. All significant intercompany balances
and transactions have been eliminated in consolidation.
Basis of accounting:
The accompanying consolidated financial statements have been prepared using
the accrual method of accounting.
<PAGE> 18
TELE-TREND COMMUNICATIONS PARTNERS, LTD.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1993 and 1994
1. Organization and summary of significant accounting policies (continued)
Allocation of income, losses and distributions:
All income and losses for financial accounting and tax purposes are
allocated annually. The limited partners will be allocated ninety-nine
percent (99%) of the Partnership's profits and losses and will receive the
same percentage of distributions until payout. The general partner will
receive the remaining one percent (1%) of profits, losses and distributions
until payout. Payout as defined in the Partnership Agreement, is the point
when the limited partners have received cash distributions from the
Partnership equal to their aggregate capital contributions (excluding any
loans made pursuant to mandatory additional assessments) plus a ten percent
(10%) simple interest cumulative annual return thereon. The general partner
is solely responsible for determining the amount, if any, available to be
distributed to the limited partners.
Income taxes:
No provision for income taxes has been provided since the partners report
their distributive share of partnership income or loss in their personal
capacities.
Property and equipment:
Property and equipment are stated at cost and are depreciated using the
straight-line method over the estimated useful lives of the assets of five
to seven years. Improvements to leased premises are amortized using the
straight-line method over the life of the related lease.
Intangible assets:
Intangible assets are being amortized using the straight-line method over
the following lives:
Organization costs -- 5 years
Project development costs -- 5 years
Network installation costs -- 3 years
Syndication costs -- 5 years
The project development costs, paid to the general partner, relate to the
investigation, negotiation and implementation of the initial phases of the
Partnership's activities.
<PAGE> 19
TELE-TREND COMMUNICATIONS PARTNERS, LTD.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1993 AND 1994
1. Organization and summary of significant accounting policies (continued)
Cash equivalents:
For purposes of the consolidated statement of cash flows, the
Partnership considers all highly liquid debt instruments purchased with
a maturity of three months or less to be cash equivalents.
Concentrations of credit risk:
Financial instruments which potentially subject the Partnership to
concentration of credit risk consist principally of temporary cash
investments and trade receivables. The Partnership places its
temporary cash investments with high credit quality financial
institutions. Concentrations of credit risk with respect to trade
receivables are limited due to the large number of customers comprising
the Partnership's customer base, and their dispersion across many
different industries and geographies. At times, the Partnership's cash
demand deposits may be in excess of the Federal Deposit Insurance
Corporation insurance limit of $100,000.
Reclassifications:
Certain reclassifications have been made to the prior year's financial
statements to conform to the 1994 presentation.
2. Capital contributions and distributions
On January 7, 1994 the Partnership successfully completed a third
private placement of nine additional Partnership units at $100,000
per unit, resulting in gross cash proceeds of $600,000 and the
conversion of $300,000 in loans from officers/shareholders of the
general partner to Partnership units (Note 4). In connection with the
third offering, the general partner was required to make a capital
contribution of $9,091 representing 1% of the total proceeds, as
defined in the Partnership Agreement. Syndication costs of $24,898 were
incurred in connection with the private placement.
As of December 31, 1993, the Partnership had received subscriptions for
the sale of six of the additional Partnership units, of which $460,000
in cash was received and deposited as of that date. Accordingly, the
Partnership included Partnership units receivable ($140,000) and
subscribed ($460,000) on its balance sheet at December 31, 1993. The
escrowed funds were restricted until the offering closed on January 7,
1994.
<PAGE> 20
TELE-TREND COMMUNICATIONS PARTNERS, LTD.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1993 and 1994
3. Notes payable -- limited partners
In March of 1992, the general partner obtained mandatory additional
assessments from the initial limited partners, as provided for in the
Partnership Agreement, representing 15% of the limited partners' initial
capital contributions ($105,000 in the aggregate). The assessments as
defined in the Partnership Agreement bear interest at the rate of 15% per
annum, are unsecured and have no specified maturity date. The assessments
are payable from cash flow and are not callable by the limited partners,
accordingly they are presented as long-term debt in the accompanying
consolidated financial statements. Accrued interest payable to the limited
partners at December 31, 1993 and 1994, was $42,921 and $49,797,
respectively.
In July of 1993, the Partnership obtained an aggregate of $376,000 in loan
proceeds from limited partners. The notes are due in 36 equal principal
payments plus interest at 10% per annum, commencing May 1, 1994 and
continuing on the first day of the month thereafter until April 1, 1997. At
December 31, 1994, the Partnership was delinquent on payments due in 1994
totaling $81,168 and has accrued interest at the 12% default rate.
Following is a schedule of aggregate annual maturities of long-term debt to
limited partners for the years subsequent to December 31, 1994:
1995 $ 206,501
1996 125,333
1997 41,778
---------
Notes payable 373,612
Assessment obligations payable 105,000
---------
478,612
Due within one year (206,501)
---------
Due after one year $ 272,111
=========
4. Related party transactions
Due from related parties:
At December 31, 1993, amounts due from related parties include $5,450 due
from the general partner, TTCI, and an aggregate of $22,714 due from certain
officers and directors of TTCI. At December 31, 1994, amounts due from
related parties include $11,901 due from TTCI, and an aggregate of $28,846
from certain officers and directors of TTCI.
<PAGE> 21
TELE-TREND COMMUNICATIONS PARTNERS, LTD.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1993 and 1994
4. Related party transactions (continued)
Office space leases:
The Partnership currently shares its office space with two
officers/directors of TTCI under two non-cancelable office leases, one of
which is the obligation of the President of TTCI. The Partnership pays both
leases and charges back 10% to TTCI, which approximates the value of the
actual space used by the TTCI principals. Rent expense reflects only the 90%
allocated to the Partnership. Rents due from the TTCI principals at December
31, 1993 and 1994 amounted to $15,812 and $24,460, respectively.
Equipment rent:
During the years ending December 31, 1993 and 1994, the Partnership leased
certain furniture and equipment from the general partner, TTCI. Rents
incurred pursuant to this operating agreement were $2,640 for each year.
Notes payable - related parties:
On March 22, 1993 and April 29, 1993, two officers/directors of the general
partner made unsecured loans totaling $300,000 to the Partnership. The loans
were originally payable on demand plus accrued interest at 8% per annum,
however, in connection with the January, 1994 private placement discussed
more fully in Note 2, the loans were converted to three partnership units
($300,000). Accrued interest totaling $17,074 was paid to these individuals
on February 24, 1994.
In addition, on December 30, 1993, an officer of the general partner made a
$50,000 10% unsecured loan to the Partnership. The loan was repaid from
private placement proceeds on January 7, 1994.
5. Loans to Infaxamation, LLC
In January of 1994 the Partnership purchased a $50,000 convertible debenture
of a Colorado Limited Liability Company engaging in facsimile (FAX)
services, for cash consideration of $32,000 and an agreement to provide
$18,000 of telecommunications services. The note bears interest at 6% per
annum and is due on December 31, 2000 if not previously converted into
approximately 63 membership units of the limited liability company. The
Partnership may exercise its conversion option commencing June 1, 1994 and
on the first day of any month, thereafter. During 1994, the Partnership made
an additional $50,000 loan to Infaxamation (see Notes 7 and 8).
<PAGE> 22
TELE-TREND COMMUNICATIONS PARTNERS, LTD.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1993 AND 1994
6. Commitments and contingencies
AT&T agreements:
The Partnership entered into certain telecommunications and billing services
usage commitment agreements with AT&T and its subsidiary, AT&T College and
University Systems (ACUS) as of December 31, 1992, related to its
Distributed Network Services (DNS) and Software Defined Network Services
(SDN) whereby the Partnership agreed to maintain minimum volume usage.
During 1992, the Partnership was unable to meet the minimum billing
commitment and a tariff was issued whereby they were able to continue the
DNS services without penalty and minimum usage requirement, contingent upon
using the services for the duration of the 36 month term.
In October of 1993 the Partnership terminated its agreements with AT&T and
also with ACUS. In connection with this, previously capitalized AT&T/DNS
installation costs of $20,000 were written off, as of December 31, 1993. At
that time the Partnership entered into agreement with Tel-Save, Inc. as
discussed more fully, below.
Wiltel agreement:
Effective December 15, 1992, the Partnership entered into a 36 month
"switched services rebiller agreement" with Wiltel, Inc., a provider of long
distance telephone services. In order to secure this commitment, the
Partnership provided Wiltel with a $50,000 irrevocable letter of credit,
secured by a certificate of deposit. The letter of credit requirement was
subsequently waived by WilTel in March of 1994, and the outstanding $50,000
certificate of deposit was returned to the Partnership. On March 4, 1994 the
Partnership entered into a revised agreement with WilTel to reduce certain
costs for providing international, in-state and state to state calling. In
addition, on March 30, 1994, the Partnership negotiated an increase to the
discount percentage received from WilTel, which is based on a volume
commitment of $500,000 per month. The discount percentage increase is
effective in March, 1994, however the monthly commitment is $425,000 January
through March 1995, $500,000 April through September 1995 and $575,000
October 1995 through March 1998.
Partition agreement:
In August of 1993 the Partnership entered into an agreement with Tel-Save,
Inc. (Tel-Save) to acquire the use of an authorized partition for certain
AT&T telecommunications services previously provided directly by AT&T, as
discussed above. Through Tel-Save's "Contract Tariff 54", the Partnership is
able to sell telecommunications services and to receive substantial
discounts arranged by Tel-Save in accordance with the volume of service
usage. The agreement continues through December 9, 1995, the expiration date
of the contract tariff. Billing is done by ACUS
<PAGE> 23
TELE-TREND COMMUNICATIONS PARTNERS, LTD.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1993 AND 1994
6. Commitments and contingencies (continued)
through Tel-Save and customer payments go to a lockbox account at
Comerica Bank which is in Tel-Save's name. Tel-Save advanced a
total of $117,000 to the Partnership in October of 1993, which was
non-interest bearing and personally guaranteed by the general
partner's president. The advances were paid in full in 1993. In
connection with these advances and also with routine billing,
Tel-Save has the right to take payments directly from the lockbox.
Profitec agreement:
In September of 1993 the Partnership entered into an agreement for
billing services with Profitec, Inc. The agreement will automatically
be extended for successive twelve month periods unless terminated by
written notification at least 60 days prior to the expiration date of
the term. Customers utilizing the Wiltel services are billed through
Profitec and payments are primarily sent to a lockbox controlled by
the Partnership. Minimum monthly processing and customer inquiry fees
are $2,000.
Office space lease:
Future minimum rentals due under non-cancelable operating leases for
office space are as follows at December 31, 1994:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER AMOUNT
------------------- ------
<S> <C>
1995 $78,485
1996 $65,404
</TABLE>
Rent expense for the years ending 1993 and 1994 was $78,327 and
$75,616, respectively.
Capital lease obligations:
As of December 31, 1994, the Partnership has capital lease obligations
under three equipment leases. The future minimum lease payments under
the capital leases as of December 31, 1994 are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------
<S> <C>
1995 $ 9,421
1996 9,422
1997 8,980
1998 3,338
-------
Total minimum lease payments 31,161
Less amount representing interest 5,776
-------
Present value of future minimum lease payments 25,385
Less due within one year 6,724
-------
Amounts due after one year $18,661
=======
</TABLE>
<PAGE> 24
TELE-TREND COMMUNICATIONS PARTNERS, LTD.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1993 and 1994
7. Subsequent event
On March 15, 1995, the Partnership reclassified a portion of its account
receivable from Infaxamation in the amount of $83,784 as evidenced by a
promissory note receivable bearing interest at 12% per annum due January 1,
2000. In connection with this transaction, Infaxamation also paid $100,000
to the Partnership, towards its then remaining account payable of $122,878.
8. Realization of assets
At December 31, 1994 the Partnership has substantial loans to Infaxamation,
as described more fully in Note 5. As described above, subsequent
reclassification in March 1995 of accounts payable resulted in aggregate
loans to Infaxamation of $183,784. Infaxamation has incurred substantial
losses since inception and has a negative members' equity of $(322,026) at
December 31, 1994. Collectability of the loans to Infaxamation is dependent
upon the future ability of Infaxamation to obtain funding from sources
outside the company in order to carry out its planned operations and the
development of sustained future operations. The impact on the
Partnership's financial position and results of operations cannot be
determined at this time, therefore no provision for any possible revaluation
of these assets has been made in the financial statements.
